Nucor Corporation: Pursuing Growth in 2001

Nucor Corporation: Pursuing Growth in 2001

BUS470, Business Policy & Strategy
Submitted to: Dr. Desmarais
December 14, 2008

1. Executive Summary

The North American steel industry is in decline, for the first time two decades. Macro-environmental and industry forces have caused steel prices to drop while costs of production and labor wages are rising. Many companies have filed for bankruptcy and there is significant industry consolidation occurring, primarily in Europe and Asia; the threat of these huge conglomerates entering the US or other profitable markets is inevitable and in progress. The current industry climate provides financially-healthy companies an excellent opportunity to enter into a phase of acquisition. As “Greenfield growth” is only limited for large domestic steel producers, taking advantage of purchasing opportunities of bankrupt and undervalued companies seems to be a increasingly worthwhile activity.

Thus far, Nucor has been a leader in the industry due to their organizational culture and management values. Nucor has also made switching costs for buyers high and they are a first mover in implementing new technology.

An analysis of the industry, its opportunities and threats, Nucor’s competitive capabilities, and Nucor’s strengths and weaknesses has led us to suggest the following recommendations. Each recommendation presents information about the current environment, its context, and how we recommend Nucor proceeds. Each also contains the tools needed to measure their success.

We recommend that Nucor:

1. Maintain current domestic business and functional level strategies
2. Return to lean management structure: The present management structure that Nucor has acquired is a weakness for the company. In addition, stock prices fell by ten percent in 1999 once the management configuration changed from its original design. With that, Nucor should restore its management back to its original composition. This will leave Nucor less susceptible to losing stakeholders’ interest in the company.
3. Implement strip casting technology in its mini-mills: Nucor should use their strength of continuously staying ahead of their domestic rivals in implementing new technologies to pursue the opportunity of using new strip casting technology within their production. Strip casting is a process which produces a much thinner strip of steel while also reducing the firm’s costs. After implementation, Nucor should closely monitor the costs involved in strip casting and be sure there are actual savings to the firm.
4. Integrate DRI into production: Nucor’s dependence upon scrap steel is a weakness and they are susceptible to market trends. There is presently nothing to defend against the threat of high scrap prices. DRI provides a consistent alternative that produces superior quality products while cutting costs. After implementation, Nucor should compare their success to rivals and analyze DRI products’ profit margin.
5. Acquires domestic rivals: Nucor is a very liquid company which helps the company pursue the opportunity of acquiring cheap property, plants, and equipment. Nucor should find a suitable company with the proper technology and location. Once a company is acquired, Nucor should implement their management values and culture in order to turn the plants successful. To determine if the acquired plant is successful, Nucor should compare the acquired plants financials to Nucor’s past successful acquired plants.
6. Enters India through M&A: Acquisitions of companies with mills capable of facilitating strip-casting, established or easy-to-establish distribution channels, and located near a target city in India are the primary prospects. Due to its growing infrastructure and relatively stable macro-economic future, India proves to be the best location for the next phase of Nucor’s growth. Joint-ventures may be acceptable under the conditions that the joining company is subservient in strategic and tactical decision-making and that Nucor has control over the re-investment of earnings from the venture.

1. Macro-environment

In 2001 the US ended a phase of tremendous growth, created largely by the increased retail consumption, increased activity in commercial and residential real estate markets, and a booming technology sector. The sharp drop in equity prices that occurred post-9/11, and a tightening of credit markets, caused the Federal Reserve to loosen monetary policies and induce spending. This was reflected in the discount rate being dropped to as low as 1%. Also during year, unemployment saw an increase of 1.8%, which ended a long period of decreasing unemployment in the US. There was a slowing of the global economy in 2001, as growth decreased from 4.7% to 2.4%. Imports and exports, particularly between the US and developed Asian countries, also saw a significant decrease after the terrorist attacks of 9/11. India, the second-fastest growing Asian economy behind China, also saw a decrease in production due to increase energy prices. Also, the country withstood several shocks during the year, including a severe agricultural drought and a large earthquake in Gujarat.

A political concern is the unionization of the workforce that has taken place over the last several decades. It has allowed the workforce for more bargaining power, and subsequently, increased wages and benefits per capita of unionized workers. Those workers who do not enter the union are at a disadvantage in terms or bargaining power, however can take advantage of job offerings at non-union shops.

US steel companies benefit from generous government subsidies that protect help protect their businesses from the threat of new entrants. Also, the US has a fairly lenient taxation of corporations when compared to most other developed nations; the corporate tax rate is roughly 35%.

Complex enterprise software is helping to reduce costs of production among many industries. The better management of supply-chain has in some cases been a distinctive competency that has lead to their domination of an industry; Toyota, Walmart, and Dell are all examples. Enterprise software has a variety of uses and provides tremendous value to the steel industry. Steel-casting is decidedly the future of steel production technology, and has been implemented in 11 companies in Europe. The improvement in the quality and finish of the product, along with the savings in cost per unit of production, shows great promise in reducing profit margin and creating entry into new markets for finished steel.

Please refer to Appendix A for a thorough analysis of the stakeholders.

1. Industry analysis

The North American steel industry is currently in a period of decline. Foreign companies are dumping cheap product in American markets due to a lack of import tariffs. This is driving domestic steel prices down despite high production costs. Energy costs are also rising. Coupled with a recent economic recession, this is causing many companies to go bankrupt. Furthermore, growth of the steel industry in China and other global economies is producing high materials prices. It is increasingly difficult to find consistent suppliers of these materials as well. Demand is becoming stagnant. Markets are ordering products that meet increasingly specific customer specifications. Finally, growing environmental concern is forcing companies to review their practices to ensure compliance.

There are fewer rivals in the industry, and due to industry consolidation their individual size is growing. U.S. Steel, International Steel, Mittal and Nucor are the main competitors in the United States. There is not much differentiation as they contend with similar products and sell to similar markets. They also use similar materials so they must compete over suppliers. The rivals in the industry all recognize the need to have a technological advantage to produce stronger and lighter products more efficiently, and the race to be technologically advanced is a main point of competition in the industry.

There is low threat of entry into the North American steel industry. The industry is in decline and there is capacity surplus. There are high costs and a significant learning curve associated with entry. Exit barriers are also high which causes companies to compete despite low or negative return on investments.

Substitutes for steel such as plastic, wood, concrete and other metals threaten the industry. Steel remains the most important industrial material, however. Consumers prefer it as long as it remains cost efficient to use. They prefer it because it is formable, reparable, paintable, energy efficient to produce and fire resistant. Furthermore, steel companies have adjusted their products to meet such market needs as corrosion resistance and weight limits.

Suppliers to the industry provide iron ore, limestone, metallurgical coal, and scrap iron and steel. Scrap steel is becoming more inconsistent in both availability and price. It is very expensive for a company to switch suppliers, as they would have to build new plants to use the new material, so they are unlikely to do so. Raw materials are a large part of company’s costs, and small fluctuations in prices resound dramatically among competitors. Many companies use backwards-vertical integration. Direct reduced iron (DRI) is a possible substitute to raw materials that has seen a growth in use worldwide.

Buyers have bargaining power due to oversupply and decreased demand in the domestic market. The largest buyers are transportation, construction and oil and gas industries. They are massive buyers and have constant need of product. They also have good knowledge of the product. The buyers do not use backward integration. Buyers’ switching costs are low, but they are unlikely to switch to other products because steel provides better quality and performance.

The five forces create intense rivalry in the market. Mini-mills are continually emergent and can be found in 50% of the states. Steel mills have +/- 10% overcapacity. Additional mini-mills coming on line will create an additional 10% capacity. This growth is despite an expected decline in demand. Current conditions foreshadow possible price wars and may cause many unprofitable rivals to stay in business. An unprecedented number of steel producers have filed for bankruptcy. Among them are Bethlehem Steel Corporation and LTV, who were the country's third- and fourth-largest steel producers respectively. Many of the world's economies were in recession in the late nineties, causing a surge in the import of steel to the U.S.’s strong market. With unfair subsidies from their governments, foreign steel producers were dumping steel in the U.S. market at cut-rate prices. In 1999, the United States rejected a proposal to put restrictions on imports. A 75% capacity utilization caused three European companies to merge to form the world's largest steel producer. Two Japanese companies did the same to form the second-largest steel producer. These new mega-steelmakers have greater capital and market share than U.S. competitors, imposing a large threat. Terrorist attacks on September 11, 2001 reduced the demand for steel even further as the construction and transportation industries slowed. Efforts were underway to negotiate a worldwide reduction in steel production. In addition to cheap imports, U.S. steel producers were facing higher energy prices, higher material prices and decreased availability, increasingly tough environmental rules and a changing cost structure among producers. Steelmakers around the world were watching the development of continuous strip casting technology, which was believed to be the next leap forward for the industry. This would eliminate the slab-casting stage and all of the rolling in the hot mills. Strip casting was already being adopted around the world outside the U.S.

Rivals in the steel industry are very liquid, and have capital to spend. This is one of their competitive capabilities. Another is that rivals have high amounts of vertical integration, and significant amounts of horizontal integration. They also are able to use economies of scale in almost all aspects of the business.

Companies in the steel industry must keep their costs low in order to remain successful. While doing so, however, they must also retain the high quality and high performance of their product in order to remain preferable to substitutes. Low costs and quality product will also help companies remain competitive in an industry which is being flooded with subsidized imports, another key success factor. The steel industry is also becoming more global, and rivals must grow in a global market. Finally, it is essential to develop the latest technological advances in production to be successful.

1. Critical issues facing the steel industry

In a struggling domestic economy the United States steel industry faces multiple critical issues. In the late 1990’s a foreign reign of steel imports flooded the market at a greatly discounted rate. Foreign competition, subsidized imports, and major foreign merges between large steel companies are a major threat to the domestic steel industry. Nucor and other U.S. companies reduced prices to compete against the sudden surge of import steel. The U.S. secretary of Commerce, William Daley, stated, “I will not stand by and allow U.S. workers, communities and companies to bear the brunt of nations’ problematic policies and practices. We are the most open economy of the world. But we are not the world’s dumpster.” The commerce department concluded in March 1999 that steel companies in six countries had illegally dumped stainless steel in the United States at prices below production costs or home market prices. In June of 1999, The Wall Street Journal reported that the U.S. Senate decisively shut off an attempt to restrict imports of foreign steel despite the complaints of U.S. steel companies that a flood of cheap imports was driving them out of business.

The fluctuating scrap and commodity price is another critical issue that the industry faces. Electric arc furnace mini-mills that used scrap steel as their basic raw material emerged in the United States during the 1970’s. As mini-mill technology advanced throughout the 1970’s and 1980’s they were averaging a 14 percent return on equity while integrated steel companies were only averaging 7 percent. Some mini-mill firms, such as Nucor, were achieving returns on equity investment in the 25 percent range. In the 1990’s mini-mills tripled their output, driving the market share of integrated mini-mills down to around 40 percent. Over the past three years the price of scrap has gone from $150 per ton, to $100 per ton, and currently back to $120 per ton. With the most profitable divisions within the steel industry, mini-mill production, relying on such an unstable commodity as scrap steel, new forms of steel production need to be designed and implemented.

The impending recession in the U.S. is another major critical issue the steel industry faces. The demand for steel rapidly slows as new car sales fall and budgets for maintaining and building infrastructure shrink. The impending recession combined with the imports of foreign steel into the U.S. market led to substantial excess production capacity and net income losses of nearly $4 billion dollars in 2001. Between October 2000 and October 2001, 29 steel companies in the United States, including Bethlehem Steel Corporation and LTV Corporation, the nation’s third- and fourth- largest steel producers, filed for bankruptcy protection. Since 1997, nearly 47,000 jobs in the U.S. steel industry have vanished.

The increasing environmental concerns are the last critical issues facing the steel industry. The four major environmental issues are air emissions, wastewater, over production of solid waste, and large energy consumption. Air emissions include contributions from every stage of the steel making process. Particles are generated at virtually every stage, but most heavily by coke making and blast furnace operations. Wastewater from coke making has high contaminant levels, requiring extensive removal and treatment before disposal. The production of solid waste from the steel industry presents problems due more to the volume of the waste generated rather than the hazard present in the waste. The steel industry sector is also a very large consumer of energy and as such, is a major contributor to green house gas emissions. According to data collected by the U.S. Department of Energy, and from green house gas inventory data from the EPA, “The iron and steel sector was the second biggest contributor to green house gas emissions of all industry sectors, second only to petroleum refining.

1. Nucor’s competitive capabilities

i. Business strategies

Nucor follows a low-cost provider strategy, as it primarily aims to provide a somewhat generic product to customers, at the lowest price available in the industry. Price sensitivity is high in the steel industry, as price is the key differentiator to a product with such indistinguishable features.

ii. Functional strategies

All functional level strategies are linked directly to its broader strategy of being the lowest cost producer. It achieves this by committing to tried-and-proven value chain components, which allows them to not only compete on price, but generate better profits margins, and grow at a faster rate than its main competitors.