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

Download Nucor Corporation - Company and Industry Analysis - Case Analysis I | BUSA 499 and more Exams Introduction to Business Management in PDF only on Docsity! Johnson 1 Case Analysis 1 Nucor Corporation Company and Industry Analysis Ben Johnson March 7, 2008 BUSA 499: Capstone Dr. Pham Johnson 2 Strategic Profile and Case Analysis Purpose Case 23: Nucor in 2005 deals with a leading steel manufacturer, the steel industry, and the trends that face each. Steel manufacturing is an old business, but is currently facing the fast changes associated with new technologies and the rise of globalization. The cyclical economic effect in the industry has proved challenging for many steel businesses. Nucor has unequivocally maneuvered this business cycle to maintain a positive profit margin in every quarter since 1966. The company’s philosophy of decentralized structure in the 1960’s and 1970’s was imperative, but has since required change due to current international challenges. 1 This case analysis will take into account the many great aspects of Nucor’s historic business model, but will primarily focus on the need for a clear strategy to expand internationally. Section I Situation Analysis External Analysis: P.E.S.T. Analysis Political Factors From state to federal to international, businesses are heavily regulated. These laws provide the basis for successful profit margins, but also challenge the ease to which these margins are gained. Many local laws are meant to support their local businesses; thus, a business must face the local protectionist laws of another business when trying to compete in a foreign territory. In no greater circumstance than at the global level does this hold true. For Nucor Corporation (Nucor), ever growing international competition requires addressing many different types of laws, mainly taxation. In every country with a centralized government, taxation is unavoidable. Variation amongst countries’ laws provides favorable and unfavorable circumstances for a large company to do business in that country. Nucor deals heavily with tax policy in the United States paying federal, state, and local taxes. Each heavily affects their bottom line. Additionally, Nucor must understand the taxes of other countries in which they plan to implement contracts. Taxes do not always negatively impact a business, especially when they are protectionist. In 2002, the Bush administration implemented a tariff on all imported steel to decrease foreign dumping.2 Many multinational steel companies were selling their products at below market cost to undercut domestic competition. These types of taxes are implemented to protect the domestic industry. This is especially important when competition is high and a push for cost leadership exists. Nucor, as with any large company that has a global presence, is subject to international trade agreements from the WTO, NAFTA, and the EU. It is financially imperative for a company to understand the costs associated to all regulations and tariffs on importation and exportation, especially as competition and globalization is required to maintain profits in the future. 1 2007 SEC Nucor Co. 10-K Filing (source: http://media.corporate-ir.net/media_files/irol/10/107115/2006AnnualReport.pdf) 2 Free Trade Bulletin 25, Daniel Ikenson, Nov 27, 2006 (source: http://www.freetrade.org/node/545) Johnson 5 marketing, order fulfillment and management ensure focus on core competencies and future target goals. Many of the other global steel industry competitors: Posco, Tenaris SA, Mechel, Gerdau S A, and others, use the later of the two methods.14 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. “Shutting down a 10,000- person plant could require a firm to hold a cash reserve of $100 million to fund health, pension, and insurance liabilities.”15 Extremely high exit barriers are a major risk to competitive competition. Threat of new entrants Entry into any industry depends directly on the associated costs. With globalization rapidly growing and the merging of many competitors to form major conglomerates, the barriers to entry have increased. Economies of scale and capital requirements are the greatest barriers in 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. Case in point: Over 25% of United States steel companies entered bankruptcy protection in the 1980’s economic downturn.16 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. Bargaining Power of Suppliers Supply of raw materials: steel shreds, iron ore, or recycled steel, can make or break a cost strategy. Most of the steel used in domestic manufacturing in the United States is imported.17 On a large scale there are relatively few suppliers that can meet the 14 http://money.cnn.com/quote/competitors/competitors.html?symb 15 Hitt et. al. Strategic Management: Competitiveness and Globalization. 7th Ed: p262. Case 23 16 Hitt et. al. Strategic Management: Competitiveness and Globalization. 7th Ed: p262. Case 23 17 US Steel Industry Outlook 2007, (source: http://www.prlog.org/10026639-us-steel-industry-outlook-2007.html) Johnson 6 constant demands of companies such as Nucor. For this reason, it is common for joint ventures to be established between suppliers and manufacturers. The over all goal is to ensure decreased costs of supplies. In some cases the manufacturer even may acquire the supplier. The greatest threat is when large suppliers want into the market through elimination of a third party manufacturer. The current trend is for consolidation of the steel industry; therefore, whatever the direction is, supplier purchase manufacturer or manufacturer purchase supplier, there is a major threat of take over.18 The goal is to incorporate more stages in their value chain and bring those stages closer to raw materials production. Bargaining Power of Buyers Buyers pose arguably the greatest threat. Price competition stems from buyers having low switching costs and low product differentiation. Buyers have the power to negotiate down a deal to their terms due to these factors. Many buyers purchase in large quantities, thus creating economies of scale. To ensure these types of actions are still profitable it is important many contract are set in place many month if not years in advance of delivery. The ultimate goal of the buyer is to get the best product at the most efficient cost. The goal of the seller, Nucor for example, is to gain the most financial return 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 buyers market. Threat of product substitutes The solution to understand latent substitutes to steel is to find alternatives. Due to product variation of steel products this threat will be higher for some than others. In reality, there are few substitutes for the use of steel. From auto manufacturing, to structural supports, to fasteners, there are relatively few products availably with the strength, durability, and cost efficiencies of steel. The largest alternative to steel would be use of another material. Plastics are gaining ground, 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. Industry Analysis Interpreted 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. “The worldwide steel industry is heading for sunny days,” said John Surma – CEO for U.S. Steel Corp.19 The increased demands for steel from developing countries supply this view. 18 US Steel Industry Outlook 2007, (source: http://www.prlog.org/10026639-us-steel-industry-outlook-2007.html) 19 US Steel Industry Outlook 2007, (source: http://www.prlog.org/10026639-us-steel-industry-outlook-2007.html) Johnson 7 Section III Internal Analysis Value-Chain Analysis Primary Activities Inbound Logistics “Nucor has established a raw materials strategy to control directly and indirectly through joint ventures with various partners, the production of 6,000,000 to 7,000,000 tons per year of high quality metals for consumption at its steel mills.”20 Material acquisition is imperative to meet buyer demand for manufactured steel goods. The goal is to maintain minimal levels of raw materials in inventory, but to ensure those materials are present in suppliers’ inventories. Inventory costs are thus associated with the suppliers’ balance sheet rather than Nucor’s balance sheet. The following graph represents Total Steel Production for 2006:21 Operations Historically, Nucor has been decentralized with control at the factory level over operational decisions and processes. As new corporate goals for growth through acquisition and international growth become present, this strategy is being replaced by a corporate centered approach. Still though, because Nucor has a wide array of products, many factories hold basic operational control. From bar mills to sheet metal, fasteners, and cold finishes, each product must go through a different operations cycle. This can be looked at positively due to efficiency of each unit or negatively as a barrier to a focused corporate strategy and decreased spotlight on core competencies. Outbound Logistics Nucor possess a 150-truck fleet to deliver their products. The company states they are able to deliver a shipment any where in United States in less than 1.5 days.22 In an industry where there are very few possibilities to gain competitive advantages, this is one 20 2007 SEC Nucor Co. 10-K Filing (source: http://media.corporate-ir.net/media_files/irol/10/107115/2006AnnualReport.pdf) 21 http://media.corporate-ir.net/media_files/irol/10/107115/2006AnnualReport.pdf 22 Hitt et. al. Strategic Management: Competitiveness and Globalization. 7th Ed: p262. Case 23 Johnson 10 Financial Analysis27 The year 2007 was a hard year for Nucor. The company saw an 8% decrease in ROA and ROE. Though still very profitable, it was one of their roughest years since the 2001 economic downturn. Inventory turnover and total asset turnover were positive and closely in-line with past results. Nucor maintains the ability to draw class AA investors with its relatively strong financial performance, though down a bit from previous years. 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. 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 $1.4B, which will directly aid a globalization and expansionistic approach. Nucor Corporation Financial Ratios 2006 – 2007: 28 Profitability Ratios 2007 2006 Return on Total Assets 0.1498 0.222574 Return on Equity 0.287888 0.361675 Operations Profit Margin 0.179584 0.219515 Net Profit Margin 0.088709 0.119093 Liquidity Ratios Current Ratio 3.206777 3.293483 Quick Ratio 2.194414 2.490914 Inventory to Net Working Capital 0.458752 0.349935 Leverage Ratios Debt to Assets 0.23134 0.11685 Debt to Equity 0.444593 0.189877 Long Term Debt to Equity 0.444593 0.189877 Activity Ratios Inventory Turnover ALL 24.85806 Fixed Asset Turnover 2.320804 2.307244 Total Asset Turnover 1.68866 1.868901 27 http://money.cnn.com/quote/financials/financials.html?symb=NUE&sid=3470&report=2&period=1 28http://money.cnn.com/quote/financials/financials.html?symb=NUE&sid=3470&report=2&period=1 Johnson 11 Section IV Identification of Environmental Opportunities and Threats and Firm Strengths and Weaknesses (SWOT Analysis)29 Strengths Weaknesses Strong market position –historically based Increased production capacity Strong technological focus Geographical concentration Mature Industry Opportunities Threats Joint ventures Inorganic Growth Cyclical nature of the industry Consolidation in the global steel industry Overcapacity in the global steel industry Increasing raw material costs Nucor Corporation has many different competencies that allow them to hold a strong position in the steel industry. The company has marvelous industry position and positive financial results for the past 40 years, but as with any company in a mature industry, times are always changing. Globalization is a major threat to the steady profits and financial returns from an acquisition policy. This policy will allow increased capacity and will also enhance efficiencies. Additional efficiencies will be felt through a strong centralized push towards technological integration and advances. Technology will be extremely important; as, a major weakness for Nucor is its geographic concentration in the United States. The United States steel industry is very mature and has to look internationally for profits and growth. Nucor boasts one plant in Trinidad, but will need to think about further international operations for the future. Joint ventures are one route Nucor has established to accomplish international growth. There are numerous more opportunities in this area especially as government protectionism surges. The dramatic growth that will overtake the steel industry in the coming years is just one phase of the cyclical nature of the industry. This is always a major threat and should be accounted for with cash reserves and other financial measures. Other threats are the rush to economies of scale through industry consolidation. Huge conglomerates are buying out the small competitors due to overcapacity caused bankruptcies. Not only does this limit the extent to which competition will drive costs down, but also it increases the cost of raw materials. The threat of diseconomies of scale for small firms not tied to the major conglomerates could bring about major bottom line hits. The steel industry does not compete on quality, service, or location of manufacturing in an international industry. Simply put, price is everything in the steel industry, especially in a time of mass globalization. 29 Data Monitor: Nucor Corporation Johnson 12 Section V Bibliography CNN Money. 2007. Retrieved March 7, 2008, from http://money.cnn.com/quote/financials/financials.html?symb=NUE&sid=3470&re port=2&period=2 Data Monitor, 2007. Nucor Corporation Dr. Pham: February 14, 2008 Lecture Hitt et. al. Strategic Management: Competitiveness and Globalization. 7th Ed: p262. Case 23 Ikenson, D. Free Trade Bulletin 25. Nov 27, 2006 Retrieved March 7, 2008, from http://www.freetrade.org/node/545 International Iron and Steel Institute Report, 2006, Retrieved March 7, 2008, from http://www.worldsteel.org/pictures/newsfiles/WSIF06.pdf Nucore Corporation. 2008. Homepage Nucore website. Retrieved March 7, 2008, from http://www.nucor.com/ SEC, 2007. Nucor Co. 10-K Filing. Retrieved March 7, 2008, from http://media.corporate-ir.net/media_files/irol/10/107115/2006AnnualReport.pdf U.S. Department of Commerce. Retrieved March 7, 2008, from http://www.bea.gov/national/index.htm#gdp U.S. Steel Industry Outlook 2007, Retrieved March 7, 2008, from http://www.prlog.org/10026639-us-steel-industry-outlook-2007.html Unknown, 2007. Quick MBA. Retrieved March 7, 2008, from http://www.quickmba.com/strategy/porter.shtml