Nucor Corporation, Company and Industry Analysis - Case Analysis I | BUSA 499, Assignments of Introduction to Business Management

Download Nucor Corporation, Company and Industry Analysis - Case Analysis I | BUSA 499 and more Assignments Introduction to Business Management in PDF only on Docsity! Case Analysis 1: Nucor Corporation Company and Industry Analysis Presented By: Tia Belisle To: Professor Pham For: BUSA 499 – Strategic Management On: March 8th, 2008 Strategic Profile and Case Purpose Nucor Historical and Critical Facts In 1905, Ransom E. Olds founded Oldsmobile, which has become one of the largest auto manufacturers to date. From the beginning the company was known for its technological advances and innovative style. Oldsmobile autos become the first with luxuries such as electrical starters and headlights, as well as advanced technology wheels and tires. During this time, these features were considered to be at the top of technology and innovation. Sadly, during the postwar years, the company’s innovative ways were no match for a declining economy. Oldsmobile slowly reached a bankruptcy stage, forcing the company to take drastic survival steps in the industry. In 1955, Oldsmobile merged and created Nuclear Corporation of America. Nuclear Corp. became one of the largest producers of nuclear instruments and electronics. Soon after, the company started acquiring business involved in high-tech operations such as semi-conductors and air-conditioning equipment producers. However, even with these advances, the company was losing money, once again facing bankruptcy in 1965. Nuclear Corporation of America realized it needed to take the steps into rebuilding the company by bringing in new individuals with new ideas to ensure the company’s survival. Ken Iverson, a graduate from Cornell with a degree in Aeronautical and Mechanical Engineering, was hired by Nuclear Corp. as a consultant. His primary duties were to research new metal business and make suggestions as to the next buying and acquisitions steps the company needed to take. In the relatively short period of time that Iverson was with the company he had headed the only profitable and successful division of the company, later being named President in 1966. Each acquirement and segment of Nuclear Corp. became its own division under the parent Nuclear Corp. His first management duties, as President, included eliminating the unprofitable, high-tech divisions that were acquired during the Oldsmobile- Nuclear Corp. merger. Iverson focused the company on their steel joist divisions; these were the most profitable. With prices of raw materials rising, as well as operation costs increasing, Nucor relied on their technological innovation to take the company to the next level. In the late 1960s, the world was bursting with scrap yards filled with endless amounts of rusting materials such as junked automobiles, building demolition materials, and household appliances. In order to capitalize on the vast amounts of these materials, Nucor enveloped a process from Germany. The Electric Arc Furnace was a way to take this excess scrap, melt the materials with electrical and chemical energy, and form carbon steel products. Nucor opened its first ‘mini-mill’ in 1968 which took advantage of this recycling technology. By the mid 1980s the company had six joist plants and four steel mills, which were all using the ‘mini-mill’ recycling processes. As of 1984, Iverson stepped up as Chief Executive Officer and Chair. Replacing him as president was Dave Aycock. Aycock was part of the management team for one of the companies that Nucor acquired during the late 1950s. He and Sam Siegal had been named vice- presidents under Iverson and had contributed much to the success of joist operations and mini- mills. Aycock believed that in order to succeed, on must be willing to take risk, “failure to take risk is failure” (Hitt, 247). This became the backbone of Nucor; the company has and always will look for the next best advances in innovation and technology. Technological Through technological research and development, steel manufacturers will be able to meet the requirements of the environmental changes occurring in the United States. Technology and innovation has been at the forefront for all advances in the steel industry. With steel companies having to increase technological processes, they will not only improve their own operation process to be more environmentally friendly, but they will also be able increase customer satisfaction and quality of their products and processes. New technological processes are allowing companies to continue their expansion and producing capacity which could lead to a strategic advantage not only in the domestic market, but also in the global steel industry. Industry Analysis (Porters Five Forces of Competition) Industry Summary/Facts  Market Value (2007): $66.6 billion  Market Value Forecast (2012): $62.1 billion Steel Market Value: $ billion, 2003-200 7  Production Volume (2007): 102.2 million metric tons  Production Volume Forecast (2012): 119.7 billion metric tons  Global Market Share: 11.2% held by U.S. Steel Manufacturers  U.S. Market Share: 22.4% held by Nucor, the largest in the U.S. (DataMonitor, Industry Profile) Bargaining Power of Buyers When looking at the bargaining power of buyers, several factors increase the buyers bargaining power, while other factors help to decrease the bargaining power. As a whole, the steel industry is extremely sensitive to changes in the economy. If the economy is in a downturn, buyers bargaining power will increase substantially. Steel companies’ industry costs, such as operations and raw materials, will increase. In order to compensate for the increased costs, most industries would increase selling prices to consumers. However, companies such as Nucor and U.S. Steel have limited ability to increase prices. A large percentage of their buyers are big corporate construction and building companies; with a decreased economy these industries are affected in the similar manner as the steel industry. Their operating costs are increasing, and are unable to afford the increasing prices for steel, which may cause them to look for other options within the industry or outside of the steel industry. There are two factors that tend to decrease the bargaining power of buyers. With the majority of the industry’s buyers as large-volume, corporate, direct buyers, there are those smaller-volume buyers that increase the number of customers for the companies which decreases the bargaining power of those large-volume buyers. The second factor decreasing buyer bargaining bower is the fact that steel is seen as a commodity, as a finite product with limitations. Steel companies realize that its products are a necessity in some of the largest manufacturing industries in the world, i.e. auto manufacturing and construction. These industries have few other options when it comes to processing their products. Overall, with the factors increasing and decreasing the bargaining power of buyers tend to balance out each other. Looking at these two aspects, the buyer’s power would be midrange. Bargaining Power of Suppliers There are three main forces leading to an increase in suppliers bargaining power. The first involves the natural resources required in the steel production processes. Two of the main components involved with manufacturing of steel are Iron Ore and Coal. These natural resources have prices that are set based on market values. They are also, like the steel industry, sensitive to changes in market values from economic changes. Steel companies are reliant on these resources and do not very little other choices. This is the second factor leading to increased supplier strength. For primary steel production, there are no substitutes for raw materials in the manufacturing process; which gives suppliers a huge upper hand in negotiations in business deals. Thirdly, generally contracts between steel manufacturers and its suppliers are long-term, several years. Steel companies are bound by the terms of these contracts regardless of economic or industry change in costs. In general, there are really no factors that give steel companies leverage when it comes to dealing with their suppliers. For this reason, the bargaining power of suppliers is extremely strong within the steel manufacturing industry. Rivalry Among Competitors Within the United States there are very few steel manufacturing companies. The two largest domestic producers are Nucor and U.S. Steel, with a combined market share of approximately 37%. There are several foreign producers exporting to the U.S., but the largest is Arcelor Mittal, a company from Luxemburg, which holds 20% of the U.S. market share. The majority of the steel industry ‘market players’ are large corporations. The steel industry is characterized as having a cyclical market which allows for expansionary periods followed easily by growth or a downturn in the cycle moving toward a major slump in the market. This provides a variant of uncertainty and reliability, once again, on changes in an economy and here within the market as a whole. During slumps in the market cycle it would seem that companies would want to get out before it hit rock bottom. However, the costs of exiting the industry are so high that most companies will stick it out through these rough times. Costs mainly involve the extreme amount invested in capital assets such as manufacturing equipment and facilities. With the major players being large corporations, there is a substantial risk of overcapacity. These companies may produce, produce and produce, but the market may not be able to handle it and steel manufactures will end up with excess products and materials. Foreign competitors have recently become extreme competitors in the steel industry. These companies are able to produce steel products at higher profit margins because they have the ability and the resources to have decreased operating costs, allowing their products to be sold at lower prices. This could lead to domestic steel consumers to take a good look at foreign competitors before purchasing steel products from domestic manufacturers. With all of these factors involving the market and the competitors involved, the rivalry is very high. Depending on economic changes, this could easily increase or decrease at anytime. Threat of New Entrants Inbound Logistics: little inventory held, steel fasteners and finished steel inventories kept, vendors supply raw materials, rely o n 3rd party energy providers.Operations: raw mat rials – iron ore goes through sin r process, coal goes through coke process – into blast fur ace, slab and continuous casting molds for final products.Outb und Logistics: no unsold orders are m intained, i tribution is based on custo r ers.Mktg & Sales: custom orders, focus on prices a d se vice, in rease d m stic awareness and attractiveness. Procurement: raw materials (iron ore, coal & scrap metal), over 35 manufacturing facilities, consume large amounts of electricity and natural gas, optimize on acquiring existing operations. Technology: Electrical Arc Furnace, Mini-mills, Research and Development offices, Pellet and Sinter Plants, Coke Plants, Blast Furnaces, Continuous Casting, Hot and Cold Rolling, Finished Coating. HR Management – employees are allowed to make quick decisions and grow with their innovative ideas, incentive programs – pay for performance, employees ideas are important. Firm Infrastructure: support organizations promoting free trade, continued acquisition and join-venture business operations, new Greenfield projects – “specialty bar quality”, plan for cyclical market. Servic s: se vices e ters, pri cipal competitive force, provide quality order and customer services. In 2007, the company reported $105.2 billion in revenues and produced over 115 million metric tons of steel products. With ArcelorMittal’s technology research and innovation, they have become a serious threat to Nucor. If the company continues to reach higher levels, they may be able to increase their market share in the U.S. overtaking Nucor’s strong market position. (Arcelor) Internal Analysis (Value-Chain) SWOT Analysis Strengths Throughout this analysis there are several strengths that contribute to Nucor’s success and will help the company strive with the future coming straight for them. There are three main strengths that stand out as the most important, including technical and innovative styles, market position, and the ability of the company to increase its production capacity. From the beginning of the Nucor’s history, even when it was just the auto manufacturer Oldsmobile have the first commercial vehicle with electric headlights and starters, the company has been a major leader for technological advances. After becoming Nucor through mergers and acquisitions, the company was the first to introduce the Electrical Arc Furnace technology to transform scrap metals from the junk yard into thin pieces of carbon steel. This was the beginning of the mini-mill craze in the U.S. With the use of EAFs and mini-mills, Nucor was the first and is now the largest steel recycling corporation in the world. They have been at the forefront of numerous technological advances in the industry. With the success of their technological innovations, Nucor has secured its place within the market. Holding more than 22% of the U.S. steel market share and having the ability to produce over 25 million tons of steel products per year, the company has a very strong market position. Through mergers and acquisitions they have been able to increase their output each year. Acquisitions and Joint-ventures have allowed Nucor’s production capacity to increase substantially. They have acquired whole companies, signed joint-ventures with other companies and have collected assets from failing countries. This increase capacity will ensure that Nucor will be able to keep up with economic growth and the demand for new steel products. Weaknesses Along with Nucor’s many strengths and successes, all companies have weaknesses in one way or another. According to Datamonitor’s industry analysis, Nucor has two main and very significant weaknesses. The first is that of increasing Sales, General and Administrative (SG&A) costs. As an overall percentage of revenues SG&A have risen significantly in the last decade. It is getting difficult reach consumers and the company has had to increase spending in order to attract business. With the increase in inflation and the failing housing market, demand is decreasing for steel products. Profit margins are decreasing from year to year with this increase in SG&A. Nucor’s other weakness is affected by its location of business operations. The corporation business operations and manufacturing facilities are based in the United States. Nucor relies on domestic consumers with in the U.S. With this, the company is at significant risk of change economic factors within America. They do not have other countries manufacturing resources to rely on, which could potentially harm the country if foreign competition continues to increase. Opportunities Nucor has been extremely successful, as mentioned before, with its advances in technology. Their success can only continue with new opportunities waiting. First and foremost would be for Nucor to continue its trend of acquiring whole companies or at least assets from suffering companies. This only creates a larger production capacity for the company and would further strengthen the company’s market position. There has been certain discussion of a joint-venture possibility with a pig iron company from Brazil. The use of pig iron would help to decrease the company’s dependence on scrap metal as raw materials. With the part ownership in a pig iron company and the decreased dependence on scrap metal suppliers, Nucor’s production costs would decrease. Lastly, the new HIsmelt technology could potentially be huge advantage for Nucor. This technological process eliminates several steps in the melting of iron ore and coal process. HIsmelt technology allows for these raw materials to be directly melted into liquid metal. Threats Economic factors would definitely be considered one of the biggest threats to Nucor, as well as all other companies within the steel industry. The industry has a cyclical market and product cycle; where economic growth allows companies to prosper and economic downturns can create detrimental effects on companies. Changes in market values, interest rates, inflation rates, employment and unemployment rates, can all contribute to significant economic factors. One other threat is the increasing competitive global market. As assessed in Porters Five Forces, the Rivalry among Competitors is extremely high. There are only a few U.S. domestic competitors, but the foreign competitor scene is growing rapidly. Nucor is concentrated only in America, while other companies are starting to outsource operations to other countries. It is already apparent that the foreign market has entered the U.S. and is now a significant player in the industry. Arcelor Mittal, the world’s largest steel producer based out of Luxemburg, has gained over 20% of the domestic market share.