Nucor_Case

Nucor case study Executive summary Nucor has grown up from being the first producer of the Oldsmobile 100 years ago, to being one of the biggest steel producers in the US. After dropping all unprofitable departments from the early years, only to focus on joist production and steel mills, Nucor has done well and achieved high profits over time. In 2007 net profits totaled $1,471,947,000, and the employee- body counted 18,000. Right now Nucor’s main problem is an excess of steel in the market. Foreign steel is being dumped in US, the market is flooded and supply exceeds demand. This decreases the steel companies’ profits and puts pressure on them, forcing some of them into bankruptcy. To analyze Nucor’s external and internal environment, we have used the 5-forces model and VRIO. The steel industry has seen a vast change in the last forty years. Steel has encountered competition from other materials in a number of applications over the past few decades. Internally, the most important success-factors are an employee benefit system, a flat and lean organizational structure with direct feedback and little bureaucracy, and lastly a corporate mindset geared towards always acquiring and using new technology. Our proposal is to strategically investigate their current joint venture suppliers. It is feasible to believe that there are now cheaper suppliers on a global scale. In order for Nucor Corp. to reduce their production costs, they must find a way to decrease the cost of their raw material. Background The history about Nucor started in 1897, when the company made the first Oldsmobile, under the name “Reo Truck Company”. The firm almost went out of business after the Second World War, but was saved through a merger and renamed Nuclear Corp. of America. The company could not really find its niche, before Ken Iverson was put in charge in 1966. Iverson turned the ship around, through getting rid of all unprofitable departments, only to focus on joist- production and then later steel production. Nucor now started building joist-plants and steel mills, and by 1984, six plants and four mills were up and running. Nucor enjoyed great success based on a couple of crucial factors. First of all, the company used a decentralized set up with little bureaucracy, where most decisions were made on the plant or mill itself. Every plant general manager, was also a Nucor vice-president. There were no job descriptions on the plants, and feedback would go both ways, communicated directly and effectively. The focus was on the earnings, and the plant had to earn a 25% return on total assets. Another success-factor was an incentive system for the employees and the management. The un-unionized workers were on average earning much more than workers in others plants, through bonuses based on their performance. Nucor was also operating with a corporate mind-set, aimed towards being a leader in the industry in terms of acquiring and implementing new technology. Because of this, Nucor went from being the seventh-largest, to the second largest US steel manufacturer, in 20 years. By 2005, Nucor had 16 steel facilities, as well as a number of bar mills, sheet mills, structural mills and plate mills. The total output for ’05 was 20 million metric tons, and 2007’s annual report shows $1,471,947,000 (Nucor 2008) in net earnings, and a total of 18,000 employees. There are a lot of companies in the steel industry. As in other industries, there has been dramatic both ups and downs, but Nucor has kept it going, often operating with better margins than a lot of their competitions. The company has survived different business cycles, dumping of cheap foreign steel in the US market, and changes in the management Strategy Identification Nucor’s mission or objective is to be a low cost provider of steel to the U.S. They wish to maintain there dominant status in the steel industry worldwide. They state in their company mission that they are striving to be the safest, highest quality, lowest cost, most productive and profitable steel and steel products company in the world. (Nucor.com) The main problem that has faced the company over the last decade or so has been the influx of imported steel. There have been demands to put a ban on so-called dumping into the market from import steel companies, once denied by President Clinton, and another passed by President Bush, only to be removed shortly there after due to threats of retaliation. Another problem facing the company has been their minimal management system. They operated for many years on a four tier system that worked beautifully for them, and have recently changed to a five tier system that has as many critics as it does proponents. One final problem that has faced the company is the regulation of pollutants created by their mills. They have had one major incident with the E.P.A. and as a steel mill, have to continuously watch their carbon footprint. Strategy Evaluation The firm must be willing to change; there are some key factors that will help this process. One is that the employees must be convinced of the personal and professional benefit to each individual as well as the organization. There is not going to be a silver bullet, fix all, and thus organizational change will take some practice and re-working. Commitment is mandatory at the highest levels of Nucor. Nucor has a set mission that has yet to be achieved and thus is a good starting point for their strategy. Management must remain approachable during the process. As stated in the case there was resistance to bringing in a new level of management which created turmoil within the company. Nucor already has a fantastic rewards system from what the case mentioned, and this should continue, satisfied employees will do their best to help out the company they work for. One thing Nucor must do is keep all their mills involved with their strategy. It seems that for most of their existence, there has been a sense of individualism within each mill and thus can cause problems when a company as a whole is unsuccessful (i.e. –the blame game, pointing fingers, or lack of ownership to the problem). Position Map 5 Entry Barriers The steel industry has seen a vast change in the last forty years. What was once an industry controlled by mostly the U.S. and Western Europe has seen entrants from Japan, Brazil, China, and Korea. With freer play of market forces, the gigantic, oligopolistic industry, once a favorite sector of governments for transforming economies is now under competitive pressure. (D’Costa, 2). Organizations are forced to look lean in their strategies, often forcing into joint ventures with more than eager foreign partners. There has been an absolute decline in the U.S. steel making capacity. New investment and market opportunities have been opened up, challenging the traditional large scale, integrated producers with alternative, smaller, and more flexible minimills. (Barney, Hesterly, PC 1-54). The production of U.S. steel has been revived; in the meantime entry barriers for the entrepreneur internationally have been lowed. This has created a very large capacity of steel in the U.S. Supplier Bargaining Power A producing industry requires raw materials - labor, components, and other supplies. This requirement leads to buyer-supplier relationships between the industry and the firms that provide it the raw materials used to create products. Suppliers, if powerful, can exert an influence on the producing industry, such as selling raw materials at a high price to capture some of the industry's profits. The following tables outline some factors that determine supplier power. The supplier in the steel industry ranges from iron ore distributers, to scrap steel dealers. Iron ore is used for larger, integrated steel mills. Scrap steel, such as junk auto parts, is typically utilized by the mini mill. Other suppliers include technology companies that are hedged to create competitive advantage for steel companies. These suppliers also help steel manufacturers control their green house gas emissions with energy policies that improve energy efficiency, and develop low carbon emitting energy source technologies. Suppliers to the steel industry also include product ranges such as, operating services, operating supplies, machinery and equipment, raw materials, and consultants and engineers. With international tariffs affecting domestic steel corporations, the domestic steel suppliers feel the negative impact on revenues. Some of the largest suppliers in the United States are based out of Pittsburgh Pennsylvania. Buyer Bargaining Power The bargaining power of buyers has greatly increased since the restructuring of the steel industry. With the industry operating at a capacity much greater than demand, the price for steel has been dramatically affected. U.S. companies have struggled with foreign competitors dumping their steel into the U.S. market at drastically lower prices than their own. The industrialization of foreign countries, coupled with the lack or regulations in foreign countries allows for the organizations of those countries to capitalize on a market with excess capacity. Buyers possess a credible backward integration threat, in other words, they can easily purchase from a competitive producer or firm. Threat of Substitutes Steel has encountered competition from other materials in a number of applications over the past few decades. The principal materials that are being substituted for steel are plastics, aluminum, cement, and ceramics. The areas affected include the automotive industry, construction, the container industry, and appliances. The threat in the automotive industry is due to the regulations to make the automobile lighter. Plastics and aluminum are much lighter than steel, and to compete in the industry still, steel manufacturers have improved their product by reducing the weight and thickness of their steel, while at the same time maintaining its safety qualities. Since steel shipments to the automotive industry are so vital to the health and profits of the steel industry, any intrusion of significant proportions by another material poses a serious threat. (Hogan, 122). Threat of Rivalry In the traditional economic model, competition among rival firms drives profits to zero. But competition is not perfect and firms are not unsophisticated passive price takers. Rather, firms strive for a competitive advantage over their rivals. The intensity of rivalry among firms in the steel industry is considered to be cutthroat and considered rather intense. Firms both domestic and foreign compete to supply their steel globally. With so many manufacturers producing steel, the market has achieved higher capacity creating price wars and product dumping. The U.S. has moved from producing 37.74% of the global steel production in 1960, to only 20.65% in 1996 (D”Costa, Table 1.1) Conclusion The key to survival in the steel industry is to stake out a position that is less vulnerable to attack from outside opponents, whether they are new entrants to the market, or if they are established organizations. In order to be beneficial an organization must also be less vulnerable to the breakdown by buyers, suppliers, and substitute products. There are a few ways that an organization may be able to do this in the steel industry. They include, but are not limited to: strengthening existing relationships with customers, differentiating their product either objectively or psychologically through marketing. A final major way to separate a firm in the steel industry is to be on top of technological engineering advances. The company with the most updated technology will most often be able to produce steel at the lowest cost, at higher outputs, and for greater profit. Internal Analysis VRIO Analysis: “VRIO” is a mechanism that integrates two existing theoretical frameworks to identify a firm’s internal strengths and weaknesses. The frameworks focus on is the resources and capabilities controlled by a firm as sources of competitive advantage (Barney, Hesterly, 2008). VRIO is the primary tool for accomplishing internal analysis of an individual company. It aims to address four questions a firm must evaluate about a resource or capability to determine its competitive potential: value, rarity, imitability and organization. Resources and capabilities (R&C) are considered of value when they are able to take advantage of external opportunities and neutralize threats. In order to assess the rarity of a company’s R&C, the number of competing companies that also possess the same R&C need to be measured. Imitability determines if a company will face a cost disadvantage in acquiring new technology that is currently absent. A company is considered organized if their procedures are able to support the development and utilization of their value, rarity, and imitability resources Resources & Capabilitie s Value Rarity Imitability Organization Competitive Implications Mini-mill X Competitive Parity Incentive system X X X Temporary CA Flat Organization structure X X X Temporary CA Operations technology X X Competitive Parity Problem Statement Nucor faces a problem with excess capacity of steel production on a global scale. The high capacity has created a price war for steel, as well as steel dumping into the U.S. market which has diminished profit over the last couple of decades. Another problem they face is lack of innovation of technology. In order for Nucor to maintain, and continue to post profits in the future they must identify areas to increase technology to lower production costs and increase throughput. A. With such high capacity in the market Nucor corporation will have a difficult time selling steel at their current prices. Our first proposal is to strategically investigate their current joint venture suppliers. It is feasible to believe that there are now cheaper suppliers on a global scale. In order for Nucor Corp. to reduce their production costs, they must find a way to decrease the cost of their raw material. Nucor has been in a joint venture with suppliers since the 1980’s. When this relationship was initially created they were able to grow at such a vast rate due to cheap supplies. With countries like China, and Korea becoming industrialized the opportunity for Nucor Corp. to capitalize on lower supply costs is grand. Without investigating the possibility that Nucor’s current joint ventures are not giving them the best deal on steel, Nucor might miss a vital step in catapulting them into the next decade. B. Establishing technological leadership has always been a key role in the success of Nucor Corp. In order for them to continue to compete in a market that has such excess capacity they must become more competitive technologically. They must invest in technology that will either lower their current production costs, or greatly increase their current throughput. If they are able to lower their production costs, this will dramatically help their profitability. Improving their throughput will allow them to maintain current levels of cost, while bringing more steel into the market place. With more volume they will be able to absorb the price war and excess capacity of the current market. Option A Option B Benfits Lower production costs, Better relationships with foreign nations, Increased Profits, Potential for innovative methods, Break into “brick” countries Lower production costs, Increase throughput, Hedge company for growth, Could move Nucor into top position in U.S. market, Would create competitive advantage for Nucor on many levels Negatives Damaging current relationships with joint ventures, Could make supplier bargaining power stronger Extremely high costs of new technology, May not achieve desired results, Could be difficult to implement in old mills Recommendation As an outside analyst, we feel that for Nucor, the strategic option A would provide them with the fastest and most effective way to create separation in the revolutionized steel industry. Costs would be minimal in obtaining information and visiting with potential new suppliers. The gains from obtaining cheaper raw materials would include lower production costs, they will be able to increase their global reach potentially by partnering with a foreign company of a rapidly developing nation, they would see an increase in bottom line net income, and there is a potential for discovery of new avenues to supply of raw materials for Nucor Corp. Competitive Advantage With lower production costs, Nucor Corp. will combine that with their already infamous hierarchy, positive work force, and already solid brand in the industry to compete at the top level. Nucor posted sales last year of 16.5 billion dollars, with expected sales to be right around 18 billion this year. With an entrance into a new market it would be possible to Nucor to develop their brand in a new nation and increase their sales by a minimum of 10% in 2009. Their gross profit which saw a drop of over 3 million from 2006 to 2007 is expected to see an increase for 2008, but Nucor Corp. needs to understand that a strategic move such as the one we are recommending would impact bottom line profits greater than a minimal increase. Managerial Implications It was interesting to see the impact that a highly profitable industry can have on new entrants. Nucor Corp. which has been at the forefront of the steel industry since 1966 when Iverson turned the company from nearly bankrupt into a perennial powerhouse, has had numerous innovative tactics which have kept them strong. Since the revolutionizing of the steel industry in the late 1980’s there has been extremely rigid competition in the steel industry. A company such as Nucor shows how with innovation, creativity, and a strong autonomy it’s not hard to survive. Survival, however, is not guaranteed and without continuously reshaping one’s position it is easy to see how a giant can quickly become obsolete.