Nucor Steel Case Study Essay

Percentage use of Production Capacity Nucor steel has the largest production capacity capability in North America. However, they have some deficiencies in this area in that in 2010 they utilized just 70 percent of capacity, though it increased in 2011 it was still just 74 percent. Gaining greater production efficiency will reduce costs and in turn increase the profitability of the company. Issue #2 Rising Scrap Metal Prices Nucor maintains its competitive advantage through its low cost production, and their use of electric arc furnaces and recycled scrap metals to produce steel. Prices for scrap steel was not higher than $137 until 2004, and reached a peak of $438 in 2008 before the economic recession hit. In 2009 and 2010 prices were $303 and $351 respectively, and then in 2011 hit an all-time high of $439. With their per unit cost structure relying heavily on these scrap steel prices, their ability to achieve greater profitability is reduced. Nucor needs to find a way to off-set these rising prices in order to maintain its low cost strategy. Issue #3 International Competition and Foreign Subsidies US producers of steel and steel products have fallen victim to aggressively competitive pricing from international firms. In 1999 the US government determined that six countries were indeed dumping stainless steel into the US market. Half of those countries governments were facilitating this process by providing unfair subsidies to offset the firm’s losses from selling at below market prices. In 2001, the Bush administration installed a 30 percent tariff on those countries found guilty of illegal dumping. This same issue is still prevalent today as China has been accused of doing the same thing. They have significantly lower prices than American firms due to the fact that China has been devaluing their currency in order to make exports unfairly cheaper. The US government must intervene and install another tariff on Chinese steel products in order to protect its domestic producers from unfair foreign competition. Recommendation Nucor Corporation should install an aggressive international expansion strategy to achieve several goals. It should be aimed at regaining its premier profitability that it had in 2007 and 2008 mainly by reducing costs. It should strive for gaining an increased market share in developing international markets that were not as effected by the recession in regions of Asia and the Middle East. With that increased demand for steel and steel products, Nucor should not acquire additional capacity, instead they should make more efficient use of its current capacity with the goal of reaching 90 percent usage of capacity. In an effort to reduce costs, Nucor should increase its efforts of reverse-integration in order to provide itself with cheaper raw materials and lower it’s per unit production costs. International market expansion, increased raw material production, and increasing plant capacity efficiency should be the main focus moving forward as Nucor attempts to create a more cost efficient production process, increase revenues, grow its profitability, and continue to provide its stockholders with quarterly dividends and increased yearly dividends as it has for the past 40 years. Appendix A: Dominant Economic Characteristics Market Size and Growth Rate How large is the industry and how fast is it growing? The worldwide industry of crude steel production reached all-time highs with total production equaling 1,559 million tons in 2010 and 1,680 million tons in 2011. Worldwide production capacity was approximately 2,090 million tons in 2011, which resulted in a utilization rate of 80 percent in 2011. The worldwide production of crude steel has grown consistently since 2000 despite two significant periods of economic downturn and decreased demand. According to the World Steel Association, the crude steel production growth rates were 6.2 percent from 2000-2005, 4.4 percent from 2005-2010, and 4.4 percent from 2010-2011. Scope of Competitive Rivalry Is the geographic region over which most companies compete local, regional,  national, multinational, or global? A combination of both national and global Primary National Competitors US Steel ArcelorMittal USA Top Worldwide Competitors ArcelorMittal Worldwide (Luxembourg) Baosteel (China) POSCO (South Korea) Nippon Steel (Japan) JFE (Japan) Jiangsu Shagang (China) Tata Steel (India) Ansteel (China) Gerdau (Brazil) Severstal (Russia) Wuhan (China) ThyssenKrupp (Germany) Evraz (Russia) Is having a presence in foreign markets becoming more important to a company’s long-term competitive success? Yes, especially in times of domestic economic downturn. In the recession of 2009-2011, steel demand in developed countries such as the US and Japan was greatly diminished. However, demand for steel in developing regions such as India, China and the Middle East was exceeding local producer’s capacities. Thus, there is significant opportunity to expand internationally and better utilize current production capacities. Specifically for Nucor, in 2007 they decided that international growth was a necessity, and their strategy hinged on two elements: Opening foreign sales offices: 60 percent of Nucor’s current steel plants were located on deep water access areas which allowed for easy access to international shipping areas without a significant increase in cost. Joint Ventures: Nucor began developing partnerships with reputable and successful foreign firms in an attempt to greater utilize their mutual competencies as well as allow Nucor to establish itself in international markets. Product Innovation Is the industry categorized by rapid product innovation and short product life cycles? Not for the steel industry Innovation is important but with the typical size of projects, it is in no way rapid The steel industry is categorized by long product life cycles, only methods of manufacturing have been changed in the lengthy history of the industry How important is R&D and product innovation? R&D and innovation are extremely important Most major advancements in the past 60 years have resulted in industry breakthroughs that have cut costs and environmental impact dramatically Are there any opportunities to overtake key rivals by being first-to-market with next generation products? Yes, any new technology that will reduce costs and/or increase productivity will almost certainly add to a company’s competitive advantage Being first-to-market with new innovative production methods will absolutely provide an opportunity to overtake rivals This is evident in Nucor’s rise to being one of the top steel producers in North America, their use of electric arc furnaces, thin slab casting process, and strip casting technology gave them a significant boost when attempting to catch US Steel and the US’s largest steel producer Economies of Scale Is the industry characterized by economies of scale in purchasing, manufacturing, advertising, shipping, or other activities? Yes, especially in manufacturing as a company can reduce its per unit fixed costs with greater production capacity Do companies with large†scale operations have an important cost advantage over small†scale firms Yes, smaller firms are few and far between and during the 2000’s many were bought by larger firms in an attempt to increase their total plant capacity, gain market share, and gain a stronger position in specific geographic areas Learning/Experience Curve Effects Are certain industry activities characterized by strong learning and experience effects (â€Å"learning by doing†) such that unit costs decline as a company’s experience in performing the activity builds? Yes, as the firm’s plants operate, their line workers become more and more capable of executing the job, fixing potential problems, and generating ideas to improve  production As the workers become more knowledgeable and experienced, they become more efficient and productive which in turn lowers labor costs and increases total product available for sale and revenues Do any companies have significant cost advantages because of their learning/experience in performing particular activities? Nucor has an advantage in this particular area because of their egalitarian company culture where managers and hourly employees discuss potential improvements and changes on a regular basis They are also very decentralized and are open to new ideas, Nucor truly believes that t heir best source of knowledge for potential improvements in manufacturing is from the employees that are on the front line of the manufacturing process Appendix B: PESTEL Analysis Political Factors The main political factor that is affecting the steel industry pertains to the US market and foreign competition Nucor and many other American steel companies have appealed to the US government that they have been facing unfair competition from foreign firms, they believed that several foreign steel producers were practicing illegal dumping of steel and steel products into the US market In March of 1999, the US Department of Commerce concluded that steel companies in six countries had illegally dumped stainless steel in the US: Canada South Korea Taiwan Italy Belgium South Africa The governments in Belgium, Italy, and South Africa further facilitated this practice by providing subsidies that would cover revenue losses for firms selling steel at below market prices This is still an issue today as US steel producers are facing similar competition from China, where most steel companies are government owned and operated, China has also devalued its own currency in order to provide significantly lower prices Economic Conditions The steel industry is relatively affected by economic conditions Since prices and percentage use of capacity are determined by market supply and demand forces, when the economy is healthy, then demand is strong and steel companies can be profitable. On the other hand, when the economy enters a recession, then demand is reduced greatly and most firms cannot be profitable This is evident with the economic downturns that occurred in the early 2000’s as well as in 2009-2011 when most firms saw revenues and profits decrease dramatically Nucor saw sales drop from 25,187,000 tons in 2008 to 17,576,000 tons in 2009; and accordingly saw net profits drop from $1.8 billion in 2008 to a loss of $293 million in 2009 Sociocultural Forces There is a limited effect of sociocultural forces with respect to the steel industry There will be minor influence based on the growth rate of the population, as with a faster growing population, the need for schools, hospitals, roads, and other public buildings will increase which will in turn increase demand for steel and steel products Technological Factors The technological advances in the steel industry have been revolutionary over the years and have provided other industries with valuable information on how to improve their own production facilities and capabilities However, in recent years it hasn’t provided for the emergence of many new industries stemming from those innovations, nor has it provided significant value to society Environmental Forces Rising fuel prices are hurting steel companies bottom line in that they cannot generate the same amount of power as they could in previous years without increasing expenditures and raising their per unit costs each quarter Plant emission requirements are strictly enforced by the EPA and the US government In the past 50 years, the steel production industry has made great strides in becoming more environmentally conscious and efficient Nucor has developed new techniques and technologies that allow for a more environmentally responsible production process Especially their steel production efforts in Brazil where they use a eucalyptus farm for the fuel in their blast furnace rather than coal, and the eucalyptus farm absorbs more carbon dioxide from the atmosphere than the plant emits and completely  neutralizes the effect of global warming Legal and Regulatory Factors Labor laws greatly affect the steel industry, Nucor has few issues with these as they compensate their employees well over federal requirements and industry averages Safety regulations are also a major factor as compliance with OSHA and other safety organizations in a requirement Appendix C: Five Forces Analysis Threat of New Entrants Weak The costs associated with entering the steel industry are excessive and the threat of a company doing so is very limited Competition from Substitutes Weak Companies in industries that require steel and steel products, can only use steel and steel products, as other metals don’t possess the same metallurgical qualities like strength and durability required There is some potential that other metals like aluminum, titanium, tungsten and many others could pose a threat, but the majority of Nucor’s customers need steel Buyer Power Moderate Customers have the availability to shop different companies as price is the main determining factor in the industry Since prices and competitive advantage is mainly determined by cost and market supply and demand forces, then customers have a moderate ability to leverage another company’s, or even another country’s, price against a particular supplier Supplier Power Moderate In previous years, Nucor had been at the mercy of rising raw materials prices But in recent years they have begun an aggressive backward-integration strategy to begin producing 6 million to 7 million tons of steel for use in its steel product manufacturing plants Their move to provide their own raw materials has greatly reduced their reliance on raw steel suppliers in the midst of ever-increasing prices Rivalry Strong Domestic competition from US Steel and ArcelorMittal USA is extremely fierce Foreign competition from both European and Asian firms is incredibly stout as well Since advantage is determined mostly by low costs and low prices, competition is a constant price war Appendix D: Drivers of Change in the Industry Innovation of new production techniques Production efficiency Efficiency of capacity usage Ability to reduce costs and therefore lower prices Globalization New marketing strategies Resiliency to changing economic and market conditions Diffusion of technological know-how across companies and countries Consolidation of companies Regulatory influences and government policy changes Appendix E: Current Strategy In 2000, Nucor began a five-part growth strategy that involved: New acquisitions New plant construction Continued plant upgrades and cost reduction efforts International growth through joint ventures Greater control over raw materials Their overall strategy includes all of the above as well as being a low-cost producer and low-price market leader in the steel industry Appendix F: Competitor Analysis Competitor Analysis Framework Current Strategy US Steel Positioned as the long-time industry leader Its competitive advantage, if any is based in brand strength ArcelorMittal USA Positioned alongside US Steel and Nucor in production capacity and serves many of the same industries Competitive Advantage lies in its sales volume and earnings Objectives US Steel Due to significant losses both domestically and in Serbia, strategic financial changes should be expected ArcelorMittal USA Currently experiencing profitable operations, only minor changes should take place in the future Capabilities US Steel Strengths: Brand awareness Years of experience Weaknesses: Unionized workforce Net losses in recent years ArcelorMittal USA Strengths: International subsidiary of ArcelorMittal, thus have knowledge beyond US market Production capacity, sales revenues, and profits Weaknesses: Lack of brand awareness Assumptions US Steel As the old guard, have operated in the red in several years, and assume that they aren’t going anywhere and that the market will turn in their favor ArcelorMittal USA With their overwhelming knowledge from international operations, and being a subsidiary of the largest single steel producer in the world, they assume that their market share and drive for low costs will eventually prevail Strategic Group Map The above chart displays the market positioning of the main three competitors in the US steel production industry. The size of each circle is determined by the volume of steel products shipped. All statistical data used is from 2011. Volume of steel products shipped is very comparable, and the total  number of production plants in the US is also very similar between the three. The largest disparity is on the net profit axis where ArcelorMittal USA led with $2.3 billion in profit, Nucor earned $778 million, and US Steel shows losses of $53 million. Weighted Competitor Strength Analysis and Key Success Factors This chart details the strengths and weaknesses of each of the major three companies in the US steel market based on four key success factors Appendix G: SWOT Analysis Appendix H: Financial Analysis Net Profit Margin Net profit margin shows the percentage of after-tax profit of sales, the chart above shows the true effects of the economic recession that hit in the fourth quarter of 2008, and the slow recovery of the market since then. The market is expected to gain strength in 2012 and Nucor and its stockholders are hoping that forecast is true as they strive to reach their peak performance levels that they obtained in 2007-2008. Return on Invested Capital Return on invested capital is a measure of the return that shareholders are earning on long-term invested monetary capital. This particular measure shows how the economic recession effected Nucor’s shareholders and their overall return on invested capital. 2011 provided a significant rebound in ROIC and Nucor will need to continue to trend this measure upward to meet investor expectations. Internal Cash Flow Internal cash flow is a rough estimate of how much cash a company’s business is producing and would have for potential dividend payments or capital expenditures. The internal cash flow measure is yet another representation of how much the global recession of 2009 and 2010 effected Nucor and its ability to continue its operations as it had in previous years. Despite the drastic reduction in its internal cash flow, Nucor still managed to pay its  shareholders a dividend as it had for 156 consecutive quarters while also increasing the dividend payment paid to stockholders every year since 1973.