Competing Against Low Cost Steel Imports

Nucor is the second largest steel producer in North America on total production capacity in the end of 2006, with 18 plants. With the year 2006 Nucor was the most profitable steel producer by having the capacity to produce 25 million tons of steel with revenues of $14.8 billion and net profits of $ 1.8 billion. In the late 1960s Nucor established the steel mini-mill industry and since that time, mini-mills have become broadly exist in the large incorporated steel companies out of most niche markets. Nucor in the late 1980s made a brave entry into the flat-rolled steel market, afield of big steel. Nucor follow low-cost leadership strategy, product development by using innovation and technologies, quality systems, strong relationship between employees and productivity, corporate culture and using focus diffrenation, in order to reduce and achieve low costs per ton produced. The market share of Nucor increased by 17% in both years 2005 and 2006. According to the four generic competitive strategies Nucor follow low-coast provider strategy as their strategic direction. They are determined to attain lower overall costs then rivals and tempting to a wide range of consumers. Nucor followed growth strategies which are new acquisitions, new plants construction, continued plant upgrades and cost reduction efforts, and joint ventures. Nucor internally has established a raw materials strategy to control directly and indirectly through global growth with joint ventures, the production of 6 to 7million tons of iron of high quality metals for consumption of its steel mills. Such acquisition is imperative to meet buyer demand for manufactured steel goods. Nucor has a wide array of products and each product must go through a different operations cycle. This is an implication to the efficiency of each unit. Nucor externally has the ability to deliver shipments anywhere in USA. This is a profitable competitive advantage that ensures quick and on-time delivery of products. Nucor adopts successful marketing and sales strategies. In line with its goals of becoming a global player, it continues to build long-term relationships with contract customers who purchase value added products, 92% of the production of Nucor’s steel mills was sold to outside customers in 2005-2006. It shows how Nucor is maintaining long- term contracts, and maintaining profitable value-added products. Nucor is known for developing and commercializing new efficient product technologies for the steel manufacturing business. The same enables it to reduce its operating costs and compete effectively in the market. Considering Nucor infrastructure, centralization at the company in the early 2000’s has supported the current success and supported the various units. Solid training and employee relation building contributes to the continuous growth. As for services and quality, Nucor focuses on fast delivery and increased customer integrated technologies. Quality control is considered important to maintain the durability and exact specifications of the manufactured product. Considering political factors, variations amongst countries’ laws provides favorable and unfavorable circumstances for a large company to do business in that country. Nucor deals with tax policy in USA paying federal, state, and local taxes, affecting its bottom line. Nucor has to understand the taxes of other countries planned for contracts implementation. As for economic factors, exchange rate fluctuations and interest rate changes are considered by Nucor as bases for decisions on expansion, and competition. Markets are attractive for steel company’s entrance when the currency is week, and interest rates low. No greater advancement has had more impact on the steel industry than the recent technological improvements. While many industries are outsourcing much of their manufacturing, Nucor has been able to undertake the opposite approach and expand in the domestic market. Technology increases efficiency of factories, decreases inventory, and enhances product quality. The efficient mini-mill is an example of this.

Strategic Issue

Given the internal and external factors, that steel situations in the world had been improved by 2005-2006. The prices were higher in the U.S by 50% in 2000 as well as Nucor’s Sales. However foreign steel companies, dumping in home domestic market and U.S market below market prices that leads to over capacity and more supply than demand. Inside US and Outside US market. The Demand increased by 6% should Nucor continue focusing on the U.S steel market or begin to expand into another foreign markets? Or should they have to deal with budding volume of low priced foreign imports in the US market and how to compete with foreign steel producers? Do they need to expand the capacity of the company steel-making and start building new plants, new acquisitions, and new joint ventures?

External Environment

External factors include those influences cut side the industry in the macroeconomic that should be considered in shaping the company’s strategies in long-term direction are legislative factors, economic, socioeconomic, and technological factors.

Political and Legislative

Businesses are heavily regulated, from state to federal to international. These regulations challenge the ease of achieving profit margins. A business must deal with the local laws and regulations of another business when attempting to compete in a foreign territory. For Nucor Corporation, the growing international competition requires addressing and dealing with various types of laws, mainly taxation. Nucor deals heavily with the tax policy and regulations in the United States paying federal, state, and local taxes. Each imposes heavy effects on their bottom line.

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Taxes however do not always negatively impact a business. Many international steel companies were selling their products at below market cost to undercut domestic competition. Taxes imposed protect the domestic industry. The same is important when competition is high. Nucor is a large company that is subject to international trade agreements. It is financially essential for a company to understand the costs associated to all regulations and tariffs on import and export processes, especially that competition ad globalization are required to maintain profits in the future.

Economic factors

As Nucor’s strategy has always been to become a market leader, much of its growth comes from international markets, especially developing ones. Thus, it is always exposed to exchange rate fluctuations. Markets become attractive when their currency is weak. This was the situation of the steel industry during the economic downturn in 2001. When markets become attractive due to weak currency, the demand for steel would increase and consequently the supply to meet the increasing demand.

To finance the large expenditures, loans are very common. As interest rates decrease, corporate loans increase to create an expansionary economy. The same will create positive effects on corporate spending of major steel buyers, and consequently suppliers. Hence, steel demand and supply would increase.

Socioeconomic factor

Steel industry operates on a business to business model. The same allows for greater efficiency and protects from the risk impact of negative social factors. These factors include consumer behavior, fashions, geographic location, consumer thoughts, ect…A company like Nucor must understand the sub-cultures of each market segment where it exists, and concentrate on the most profitable.

Nucor considers expansion through acquisition. This carries along the risk of mixing two distinct cultures. Nucor must be able to preserve and embrace new knowledge employees, skilled labor, and other valuable assets. Moreover, the existing individual cultures can be a source of risk, so assuring adequate safety environment should be a priority. Nucor differentiates itself by high wages, incentive based pay, and a flat organization. Each of these has a positive impact on the existing Nucor organizational structure. The existing challenge and risk would be to create equilibrium between preserving a positive culture, and an increased profit strategy of which lower wages is somehow a must.

Nucor Corporation recognizes its role in protecting the environment. It gives attention to the environment of the communities in which it operates and recognizes its importance to the employees. Protecting the environment is critical to its operations and long-term success. To illustrate, Environmental compliance is a priority for Nucor management equal with all other business functions.

Technological factors

While many competitors within the steel industry are outsourcing many of their manufacturing due to increased technology, Nucor is able to take the opposite approach and expand in domestic market. Technology increases efficiency, decreases inventory, and improves the product quality. Nucor, for example was able through the new technology used to efficiently use the small factory production “mini mill” to increase its capacity utilization. The mini-mill simplifies the process when compared to the more tradition integrated mill. It cuts many corners in the production cycle and also uses larger percentage of scrap metal. This in return reduced the amount of pollution from making steel significantly by eliminating the several elements of the old blast furnace process.

Technology also provides greater enhancement for engineering and sales. The products have detailed computerized models with test statistics, and efficiency attributes. The sales department is able to directly deal with customers through the internet. Transactions are seamless and process quickly. Technology has enhanced the steel industry processes but it has its draw backs that need to be considered. For example, computer failure, database errors, and any simple user error can affect the business. Having specialists and IT managers will have its positive impact on controlling these risks.

Industry Analysis

There have been two major factors influencing the steel industry- consolidation of global companies, and revolutionary technological changes among competitors affecting prices, production, and consumer satisfaction. National boundaries have melted to encompass an ever increasing world market.

Since, the beginning of the 21st century, the industry has been hovering around 75% capacity utilization, a level too low for many companies, thus, forcing them to globally consolidate. Examples of these consolidations are the three European companies who merged to form the world’s largest steel producer and the two Japanese companies who did the same to form the second-largest steel producer.

Driving Forces

The defining characteristics of the industry are increasing globalization of the industry, and technological changes. As for globalization, it is a driving force as it will have an effect on the overall industry growth. When considered, globalization will pave the way for consolidation between companies allowing them to be strong players in the industry where their success or failure will have an impact on the overall industry growth. Technological changes can have great impact on the industry. When more improved technologies are used, production and prices will be affecting the industry growth. The global steel market grew by 8.2% in 2007 to reach a value of $529.7 billion. In 2012, the global steel market is forecast to have a value of $759.1 billion, an increase of 43.3% from 2007.

Key Success Factors

The Key success factors (or KSFs) are competitive factors most affecting every industry member’s ability to prosper. KSFs include;

Necessary resources, competencies, and capabilities (organizational style)

Competitive capabilities

Expertise in a particular technology

Scale economies or experience curve benefits

Strong network of wholesale distributors, and suppliers

Nucor was established in 1966 and continues to grow strongly according to a number of key success factors and strategic organizational strengths. The company’s organizational style is remarkable and features a number of factors that contribute to Nucor’s success. First, the company employs a decentralized business style. In 1966, Iverson assumed the role of president to be decentralized manner has been used and been very successful. A decentralized business style distributes the administrative responsibilities or powers among several authorities rather than a large number (“Decentralization”). This style has permitted Nucor to empower their managers and employees. By Improving the level of empowerment allows each division manger control over day-to-day decisions and transactions that will increase profitability. Nucor’s decentralized business style also helps the Co. to be lean. Lean manufacturing incorporates the production of goods using less waste, less human effort, manufacturing, tools, inventory, and less time. Equivalent to their lean business style, Nucor is continually seeking for improvement. Stable aim to decrease production cost is always a priority and ultimately helps to lower costs of steel to buyers. Moreover, a focus on dealing with employees helps in reducing employee turnover and increase productivity. Safety is an important consideration for Nucor and is consistently monitored and improved. Employee surveys are conducted every 3 years which helps to give an insight on employee attitudes and concerns. Management then compares the surveys across plants and divisions to control potential problems areas and increase employee satisfaction.

Finally, Nucor focuses on creating strong relationships with outside parties. This enables it to establish long-term sustainability with these parties. Furthermore, structure and supply cost will often be decreased which allows for lower costs for buyers. Strong relationships established ensure long-term sustainability and lowered prices for Nucor.

The booming business structure of Nucor along with the management styles implanted has allowed the Co. to become a leader in the industry. The Company has established a reputable brand and has created brand awareness both domestically and internationally. It currently has a significant market share of the U.S. market and is budding as a global leader in tough industry. Moreover, their increase in size has helped them increase production capacity. Last but not least, Nucor has a strong technological focus and is works at all times to boost manufacturing and production pace. Innovation also is always considered and helps the company remain a leader.

Being the largest steel manufacturer, Nucor remains a profitable company in one of the most cyclical industries in the economy. Nucor enjoys this success for several reasons, employee relations, quality, productivity, and aggressive focus on innovation and technical excellence. Nucor’s strategy low cost providing, they know they are selling a commodity for which the competitive edge in the industry is lowering prices through innovation and productivity.

Firms in other Industries Offering Substitute ProductsPorter’s five forces analysis

Suppliers of Raw Materials, Parts, Components, or Other Resource

Inputs

Rivalry among competing Sellers

Competitive pressures created by the jockeying of rival sellers for better market position and competitive advantage

Buyers

Potential New Entrants

They five competitive forces affecting industries attractiveness are:

Competitive rivalry: (High Threat)

The global competition in the steel industry faces Nucor and the vast array of competitors that fill the industry. Intense competition among competitors in the domestic market of Nucor causes a cyclical effect within the industry. Each competitor strives to win bids of contracts, causing a stiff price war in the market. As price is the main factor for differentiation among competitors and it is the bases of the industry, the company with the lowest fixed costs will survive the longer, and be the most profitable. Nucor’s use of both base pay and incentive pay ensure output is relative to pay and, therefore, decreases its fixed costs.

The business model differentiation is also primary means of competition. Nucor has a decentralized structure with control being at the factory level. This advantage allows for focused decision making, and efficient use of profits.

Extremely high exit barriers are a major risk to competitive competition. During times of economic downturn or overproduction, inefficiencies are weeded out. The United States boasts one of the strongest protections for businesses with its bankruptcy laws to ensure they can make it through these tough times. Counter this though, the U.S. also has some of the toughest laws against closing inefficient plants. Extremely high exit barriers are a major risk to competitive competition.

Competition from Substitutes: (Low to moderate Threat)

This threat is considered low as there are few substitutes for the use of steel. From auto manufacturing, to structural supports, to fasteners, there are relatively few products available with the strength, durability, and cost efficiencies of steel. The largest alternative to steel would be use of another material. Plastics are on the top of the list, but have not found the same durability as steel. Wood may have aesthetic appeal but cannot combat with steels’ robustness. Alternatives increase market presence at times of economic downturn and times of increase in steel material cost. To hedge this threat many manufacturers maintain inventories of steel reserves. Large companies also trade steel futures to ensure stability of price and guaranteed supply for a future specified time. The goal is to maintain low costs and market share during times of economic fluctuation.

Bargaining Power of Buyers: (High Threat)

The buyers impose the greatest; they are the bases for price competition by influencing the demand. The ultimate goal of the buyer is to get the best quality product at the lowest price. The ultimate goal of the seller (Nucor) is to get most attainable profit for the least cost. Because the market is filled with numerous suppliers and taking into account the two different goals of suppliers and buyers, the steel industry is commonly a buyer’s market.

Bargaining power of Suppliers: (High to moderate Threat)

The supply of raw materials, steel shreds, iron ore, or recycled steel can have a great effect on the cost strategy. Most of the steel used for manufacturing in US is imported. Due to the difficulty in suppliers’ ability to constantly meet the demands of the companies such as Nucor, joint ventures between suppliers and manufacturers are established. The same ensures low costs for manufacturers. Acquisition of the supplier might also be undertaken by the manufacturer. Also, the power of unions labor and unionized labor, could affect the labor costs for steel produces in placing weak competitive force and on cost disadvantage vis-à-vis firms with nonunion labor.

The Threat of Entry: (Moderately Strong Threat)

The main determinate for an entry into an industry is the costs associated. Barriers to entry have increased due to merging and globalization growing of many competitors. Economies of scale and capital requirements are the greatest barriers I the steel industry. Larger quantity orders of raw materials are usually discounted. Higher production volumes directly discount the associated costs. During times of strong growth, such as the 1960’s-1980, economies of scale are very good. During stagnation or recession, these approaches often cause diseconomies due to under utilization of capacity.

Product differentiation is also a major barrier to entry. Steel is not sold on its overall difference, but more commonly on price. Many manufacturers utilize the same technologies and process. Price wars are seen in minimization of fixed costs as stated earlier. Directly with this, there are few switching costs from one manufacturer to another. Little brand loyalty is recognized in an industry that does not appeal to consumer loyalty or brand image. Entrants must find a way to compete based on lower costs.

Access to raw materials is additionally a barrier. Many times raw materials must be bought in large quantities (economies of scale). The cost disadvantages associated with small material purchases can be huge and directly increase overall manufacturing costs; this make competition challenging in a market where margins are already slim. Government policy is not a major threat to entry on the domestic level, but at the international level the barriers are enormous. Well established relationships by large steel manufactures with governments allow for easy creation of contracts in a foreign territory.

The creation of these contacts takes time, executive work hours, and vast amounts of money. As most steel manufacturers must be globally competitive to maintain profits, government policy is threatening entry barrier. At first glance it may seem the mature steel industry would not be very attractive. This may be true to a new entry on a small scale, but with the advance of globalization the steel industry is again becoming very attractive.

Industry Profile and Attractiveness

The Industry position and competitive structure future for a low-cost steel producer such as Nucor is attractive due to the good shape of their financial situation to gain sales and market share however the industry market environment maybe un attractive to some rivals but for some other rivals it may indicate some opportunities. The demand for steel globally has been rising strongly in recent years, and this is likely to continue. The industry has become attractive for new entrants from the international market since these companies are not burdened by union contracts and since governments may provide special incentives in order to help them establish a customer base in steel, which can help in forming an important part of a nation’s economic infrastructure. Although the U.S is already dumped with outsider steel products, it is still considered to be a reliable and potential market for other global companies.

As summary of the Nucor case gives many insights into the company and the industry. In general, the steel industry is a very strong industry to compete in successfully. The question here is the steel industry an attractive one? The answer would yes, if the entering company is already in the industry and well set up and highly regarded. Moreover, it’s very important that the company is in a position to acquire other companies and/or form joint ventures. Nucor currently has done an amazing job moving itself up from near bankruptcy to an industry leader. Major numbers of challenges have been met and overcome throughout the company’s life. However, this does not mean that there will not be more major challenges for Nucor. Nucor is nowadays is facing growing competition from both domestic and international rivalries. It’s critical that Nucor continues to grow and increase global market share. Current management must continue to specialize in Nucor’s core product and capitalize on a proven successful organizational structure. Can Nucor continue to succeed as a global steel company into the future? This is the main concern.

Nucor is capable of continuing its entrepreneurial spirit as it grows larger because it’s marketing and management techniques. Since Nucor has been an innovative and risk-taking company, their profits will continue to expand. Nucor has embodied techniques that have been profitable to the company. An example of these techniques is the fact that Nucor managers would set standards for quality and output for groups of 25 to 30 employees and reward them with weekly bonuses. By emphasizing quality and efficiency in employees and then rewarding them for it, Nucor only increases its own profits.

Company Situation

Nucor Situation Introduction

Nucor deals with key specific issues in the steel industry including the fast growth of steel producers in the world reflecting as an increased capacity in steel production creating prices war, and the competition in an industry where technology usage has been a way for saving costs. Despite their specialization into steel, Nucor Corp. has become a benchmark for both the U.S. steel industry and U.S. industry in general. Nucor is one of the fastest growing and most efficient steel producers in the world. Despite the declining demand for steel, Nucor’s growth has been phenomenal, from pouring its first batch of steel in the 1960s to support in-house operations; the company has become one of the top five producers of steel in the U.S.

Nucor has repeatedly achieved technological feats other steel producers thought impossible. Their hourly pay is among the lowest in the industry, yet they have the highest productivity per worker of any steel producer in the U.S. But can it continue to do so?

Financial Analysis

According to Nucor Corporation Financial Ratios data for 2005 – 2006 provided in Table 2

Profitability [1] : Profitability ratios are used to assess a business’s ability to generate earnings as compared to its expenses and other relevant costs incurred during a specific period of time. For most of these ratios, having a higher value relative to a competitor’s ratio or the same ratio from a previous period is indicative that the company is doing well.

Gross profit margin FYE [2] 12/06 increased by 14% reflecting an increase in sales for 2006.

Liquidity ratios remained almost the same reflecting the continuous ability of the company to meet its obligations and invest further in the new technologies adoption strategy.

Activity [3] : Are ratios that measure a firm’s ability to convert different accounts within their balance sheets into cash or sales Inventory turnover and total asset turnover were positive and closely in-line with past results. Nucor maintains the ability to draw class investors with its relatively strong financial performance, though down a bit from previous years. The increase in activity ratios is affected by the increase in sales FYE 12/06.

Leverage [4] : Ratios used to calculate the financial leverage of a company to get an idea of the company’s methods of financing or to measure its ability to meet financial obligations. There are several different ratios, but the main factors looked at include debt, equity, assets and interest expenses. Leverage ratios decreased by 1% FYE’12/06 as compared to year 2005. The same reflects the ability of the company to meet its obligations and the reduction in reliance on leverage to meet its strategic plans.

As globalization and acquisition is the focus, the leverage ratios are important. Debt has remained relatively low as compared to assets and equity, 23% and 44%respectively.

Liquidity [5] : Are ratios used to determine a company’s ability to pay off its short-terms debts obligations. Generally, the higher the value of the ratio, the larger the margin of safety that the company possesses to cover short-term debts. The current strategies may require short-term loans to finance acquisition. With these ratio levels, Nucor is in the position to shop for good interest rates. Total cash reserves for 2007 were roughly $1.4Billion, which will directly aid a globalization and expansionistic approach.

As conclusion, at the end of year 2006 Nucor was in very good shape financially and the financial performance is strong for the 2004-2006. The date in table 1 shows how Nucor increased tons sold during the year 2000- 20006 with increasing in sales and market share of their products.

SOWT Analysis

In this part which is simply but powerful tool for sizing up a company’s resource strengths and competitive efficiencies’, its market opportunities, and the external threats to Nucor future well-being of Nucor Table 2.

Nucor’s strengths

Technology & Innovation: Is one of Nucor’s key strengths due to the amount of resources they can save because of it. Nucor also has established plants with low pollution levels. The ability for Nucor to use this to its advantage allows them to be more competitive with the market by substantially lowering their production cost. It also allows them to be environmentally friendly, which is a huge worldwide social concern these days.

Continuous Innovations allows Nucor to hold its technological edge on the competition. Nucor is always moving and always improving its business cycle through the use of continuing innovation. Nucor is an industry leader when it comes to innovation.

Strong market position: Nucor Corporation has many different competencies that allow it to hold a strong position in the steel industry. These include its adopted new technologies, successful management structure, strong established market relations, and the long successful existence in the market. The company has marvelous industry position and positive financial results for the past over 40 years.

Corporate Philosophy: One of Nucor’s strategic strengths is its philosophy of empowering its workers and reducing the inefficient layers that plagues corporate. Company structure is decentralized with minimal management layers.

Cost control: Nucor focuses on cost control. To be competitive in a market with little product differentiation, price is the main competitive factor. One of Nucor’s core competencies is that its expertise in keeping costs low. The same is maintained by adopting technological innovation that helps increase production at lower costs.

Nucor’s Weaknesses

A weakness is something a firm lacks, does poorly, or a condition placing it at a disadvantage in the marketplace and these are; [6] 

Missing capabilities in key areas leading to dependence on a volatile market location: Nucor faces some significant weaknesses with its location. Nucor has plants, all of which are located within the US. The problem is that Nucor cannot effectively serve international markets as good as competitors having plants worldwide. The shipping of steel to overseas countries is extremely expensive. Nucor is not in a great market position. Customers can go some place closer to buy their steel essentially knocking off a large shipping cost. Nucor also does not give deals on quantities purchased. Nucor’s most significant weakness lies with its domestic market. With the US Market being its primary customer base, Nucor is not able to offset losses because of a diversified location worldwide. Nucor is currently in a Market where growth is declining significantly.

Deficiencies in competitively important physical, organizational, or intangible assets through high expansion and technology costs: The expansion policy accompanied with dependency on scrap steel and energy prices and the vol