Nucor Questions

Nucor Questions

1. What are the primary competitive forces impacting U.S. steel producers in general and the producers like Nucor that make new steel products via recycling scrap steel in particular? Please do a five-forces analysis to support your answer.

Steel producers and mini-mill companies are situated in the midst of a very competitive environment in both domestic and global scale which adversely affects their profitability. This competition among steelmakers is to capture a significant portion of the steel market in light of the fact that, the global supply of steel far exceeds the demand for steel products. The first competitive forces impacting steelmakers is the force to drive down the profitability of steel industry, steelmakers are primarily affected by the abundant steel supply versus demand, which depresses the market price of steel as a commodity.

Competition among steelmakers is to lower product prices in order to capture a significant portion of potential customers. Secondly steel producers are adversely impacted by the entry of foreign players into the domestic steel market that are able to advantage of lower labor costs in the country. The influx of cheap imports from foreign steelmakers stiffens the existing price competition among rival steel producers hence lowering prices of steel imports; dragging down steel market prices. Lastly, steel producers are more vulnerable to the increasing cost of raw materials. This rising cost of materials has led to increase in the cost of production making it difficult for them to be price competitive. The difficult in product differentiation in the steel commodity market makes it necessary for min-mills to be able to compete with their rivals based on price, that is; pricing and market niche.

2. What driving forces do you see at work in this industry? Are they likely to impact the industry’s competitive structure favorably or unfavorably?

The driving forces in the steel industry; the technology evolution which is a change in the steel making technology has revolutionized the world’s steel industry. The use of COREX technology in the production of steel has increased profit and its more environmental friendly. Market growth has a huge impact in the development of the steel industry, profitability, strategies and efficiencies. The current unknown surrounding the US economy and crisis in the Euro zone may affect the performance of steel industry in the short run. Market and competition is a factor to consider in the long run of the industry. New innovative areas such as advanced computer systems, extensive use of sensors, physical models and artificial intelligence have been designed and incorporated at all stages of the manufacturing process. The use of renewable energy has brought high profits due to the low cost of production as opposed to when using fossil fuel source. The economy greatly affects the steel industry, where it my either be favorable or unfavorable. The steel prices are in general very sensitive to changes in global and local demand, which in turn governed by worldwide and country economy.

3. How attractive are the prospects for future profitability of U.S. steelmakers? Should Nucor consider expanding in this type of industry environment? Why or why not?

High cost steelmakers are in a precarious position, earning profits in 2005-2006 because of short supplies and historically high market prices, but facing a dark future when demand weakens and the market prices for steel products go higher or lower. A low cost producer like Nucor is poised to succed, gain sales and market share at the expense of high cost producers, although it must certainly fight off low cost international suppliers opting to sell in the US to achive this result.

This is why we think that this Company should definitively consider expanding its capacity via both additional acquisistions and the construction of new plants facilities. Also they should probably adapt an agresive strategy to act, since it has proven expertise in operating plants eficiently and profitable.

The problem is taht in this industry many national steel producers will be cautious about expanding in the present environment, unless they have the skills and expertise to be a low cost operator of any new facilities that are constructed. There may be some tendency for local steel producers ansious to expand so they can aquire existing steel mills rather than construct new ones, so they can avoid overcapacity and price cutting.

4. What type of strategy has Nucor followed? Which of the five generic strategies discussed in Chapter 5 is Nucor employing? Is there any reason to believe that Nucor has achieved a sustainable competitive advantage over many of its steel industry rivals? If so, what type of competitive advantage does Nucor enjoy?

Nucor is pursuing a low-cost leadership strategy. Such a competitive approach often is the best strategy in a commodity product industry.

This company has been successful in achieving relatively low production costs. Nucor builds plants inexpensively and operates them efficiently. Nucor’s record of profitability—even during hard times in the domestic steel industry—is strong evidence that Nucor has low costs relative to most other domestic steel producers and probably is quite cost competitive with many foreign steel producers selling products in the U.S.

Nucor’s cost competitiveness is longstanding, not something that it achieved just recently or temporarily. No domestic competitors appear to have costs as low as Nucor—and this has been the case for many, many years. Nucor management seems to miss no opportunities to drive costs out of its business. As a consequence, it is fair to say that Nucor has a sustainable low-cost advantage over domestic steel producers and that it seems able to hold its own in competing against low-cost foreign steelmakers that are selling steel products to customers in the U.S.

5. What are the specific policies and operating practices that Nucor has employed to implement and execute its chosen strategy?

 The aggressive pursuit and implementation of cost-saving technological improvements at its plants.

 Nucor’s incentive compensation system for both plant employees and senior managers—the compensation scheme is highly effective in generating continuous gains in labor productivity and motivating employees to seek out and implement cost-saving ways of operating (see case Exhibit 4).

 Nucor’s HR practices and policies (apart from its incentive compensation)—such as its no-layoff policy and its empowerment of plant employees to implement

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