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Nucor Corporation
NUCOR CORPORATION
SEMINAR IN STRATEGIC MANAGEMENT
MGT 6359
FALL 2006
Dr. Jifu Wang
University of Houston, Victoria
Prepared By:
Christopher Gonazales, Trang Ho-Dawson, Vincent Yicheng Liang, David Taylor
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Nucor Corporation
TABLE OF CONTENTS
1
EXECUTIVE SUMMARY ......................................................................................................... 6
2
COMPANY HISTORY.............................................................................................................. 7
2.1 Overview ........................................................................................................................... 7
2.2 The REO era ..................................................................................................................... 7
2.3 The Nuclear Corporation Era ............................................................................................ 7
2.4 The Nucor Era ................................................................................................................... 8
2.5 Present Day Nucor ............................................................................................................ 9
3
EXTERNAL ENVIRONMENTAL ANALYSIS ........................................................................ 10
3.1 General Environment Analysis........................................................................................ 10
3.1.1 Demographic ....................................................................................................... 10
3.1.2 Economic ............................................................................................................. 20
3.1.3 Political/Legal ...................................................................................................... 23
3.1.4 Socio-cultural ....................................................................................................... 25
3.1.5 Technological ...................................................................................................... 26
3.1.6 Global .................................................................................................................. 29
3.1.7 Summary of General Environmental Analysis..................................................... 32
3.2 Driving Forces ................................................................................................................. 32
3.3 Industry Analysis ............................................................................................................. 33
3.3.1 Industry Dominant Economic Features ............................................................... 35
3.3.2 Geography ........................................................................................................... 38
3.3.3 The U.S. Industry Structure ................................................................................. 40
3.3.4 The U.S. Industry Position in World Markets....................................................... 44
3.3.5 Market Growth Rate ............................................................................................ 48
3.3.6 Industry Trends.................................................................................................... 49
3.4 Five Forces Competitive Analysis ................................................................................... 50
3.4.1 Threat of New Entrants........................................................................................ 50
3.4.2 Power of Suppliers .............................................................................................. 51
3.4.3 Power of Buyers .................................................................................................. 53
3.4.4 Threat of Substitute Products .............................................................................. 54
3.4.5 Intensity of Rivalry ............................................................................................... 55
3.4.6 Summary of Industry Analysis ............................................................................. 55
3.5 Competitor Analysis ........................................................................................................ 56
3.5.1 Industry Competitors ........................................................................................... 56
3.5.2 Rivals Anticipated Strategic Moves ..................................................................... 63
3.5.3 Summary of External Environment Analysis ....................................................... 63
3.6 Key Success Factors....................................................................................................... 65
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4
INTERNAL ANALYSIS.......................................................................................................... 66
4.1 Organizational Analysis................................................................................................... 66
4.1.1 Corporate Mission ............................................................................................... 67
4.1.2 Products and Services......................................................................................... 67
4.1.3 Leadership ........................................................................................................... 68
4.1.4 Corporate Structure ............................................................................................. 69
4.1.5 Organizational Culture......................................................................................... 70
4.1.6 Summary of Organizational Analysis .................................................................. 73
4.2 Analysis of Firm Resources ............................................................................................ 73
4.2.1 Tangible Resources............................................................................................. 74
4.2.3 Capabilities .......................................................................................................... 76
4.2.4 Core Competencies............................................................................................. 76
4.2.5 Summary of Firm Resources............................................................................... 77
4.3 Analysis of Objectives ..................................................................................................... 77
4.3.1 Short-Term Objectives......................................................................................... 77
4.3.2 Long Term Objective ........................................................................................... 78
4.3.3 Financial Objectives ............................................................................................ 79
4.4 Financial Analysis............................................................................................................ 80
4.4.1 Valuation Analysis ............................................................................................... 80
4.4.2 Growth Analysis................................................................................................... 82
4.4.3 Profitability Analysis............................................................................................. 85
4.4.5 Dividend Analysis ................................................................................................ 88
4.4.6 Management Efficiency Ratios ............................................................................ 90
4.4.7 Stock Price Analysis ............................................................................................ 91
4.4.8 Investment Return ............................................................................................... 92
4.4.9 Summary of Financial Analysis ........................................................................... 93
4.5 Strategic Analysis............................................................................................................ 94
4.5.1 Corporate-Level Strategy .................................................................................... 94
4.5.2 BusinessLevel Strategy ..................................................................................... 95
4.5.3 Value Chain Analysis........................................................................................... 95
4.5.3.1 Primary Activities........................................................................................... 96
4.5.3.2 Support Activities .......................................................................................... 98
4.5.3.3 Value Chain Summary ................................................................................ 100
4.5.4 Summary of Strategic Analysis ......................................................................... 100
4.6 SWOT Analysis ............................................................................................................. 100
4.6.1 Strengths ........................................................................................................... 100
4.6.2 W eaknesses ...................................................................................................... 101
4.6.3 Opportunities ..................................................................................................... 101
4.6.4 Threats............................................................................................................... 102
5
STRATEGIC FIT ANALYSIS............................................................................................... 104
5.1 Strategic Issues............................................................................................................. 105
5.2 Market Outlook .............................................................................................................. 106
5.3 Current Strategy and Alternatives ................................................................................. 109
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5.3.1
6
TOWS Matrix ..................................................................................................... 109
RECOMMENDATIONS........................................................................................................ 112
6.1 Recommendation I: Implement the Balanced Scorecard system to align the organization
with its strategic objectives ..................................................................................... 112
6.1.1 Objectives .......................................................................................................... 112
6.1.2 Justification ........................................................................................................ 112
6.1.3 Implementation and Deliverables ...................................................................... 112
6.1.4 Milestones.......................................................................................................... 115
6.1.5 Measurables ...................................................................................................... 116
6.1.6 Risk Assessment ............................................................................................... 117
6.1.7 Long Term Benefits ........................................................................................... 118
6.1.7.1 Long-term Stakeholder Consequences ...................................................... 118
6.2 Recommendation II: Improve Nucors business information system ............................ 119
6.2.1 Objectives .......................................................................................................... 119
6.2.2 Justification ........................................................................................................ 119
6.2.3 Deliverables ....................................................................................................... 120
6.2.4 Implementation .................................................................................................. 124
6.2.5 Milestones.......................................................................................................... 129
6.2.6 Measurables ...................................................................................................... 129
6.2.7 Risk Analysis ..................................................................................................... 131
6.2.8 Long Term Benefits ........................................................................................... 132
6.2.8.1 Long Term Stakeholder Consequences ..................................................... 132
7
REFERENCES..................................................................................................................... 134
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1
Executive Summary
Nucor is the largest, most diversified and most profitable steel producer in
North America. The purpose of this study is to provide a detailed strategic
analysis of Nucor Corporation. The prologue of this project study will begin
with the company history, mission, and vision of Nucor Corporation. A
detailed external and internal environmental analysis will be conducted. In
the external analysis, the general environment will be closely examined to
determine the driving forces affecting the U.S. steel industry; the following
industry analysis will discuss the current industry situation and major players
competing in the industry, follow by a conclusion to summarize the key
factors that Nucor must employ to be successful. The internal analysis will
start by examining Nucors organization; and follow by an analysis on the
companys resources, capabilities and core competencies, an objective
analysis, an overview of Nucors financials, value chain analysis, and an
analysis on Nucors strategies. A SWOT analysis will be performed to
summarize the external as well as internal analysis. Next, a strategic fit and
issues analysis will be performed to identify and highlight Nucors
competitive position and critical concerns based on the previous analyses.
Lastly, recommendations will be provided and implementation strategies
reviewed as potential solutions to current Nucor strategic issues. Overall,
the comprehensive details within this project analyses will shed more light
into the strategic health of Nucor resulting in a clear competitive synthesis
outlook of the firms strategic management initiatives.
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Nucor Corporation
2
Company History
2.1
Overview
Nucor originally started with auto manufacturer Ransom E. Olds, who
founded Oldsmobile. Through a series of transactions, the company
became Nuclear Corporation of America. In the 1950s and 60s, Nuclear
Corporation was involved in the nuclear instrument and electronics
business. In 1964, the company was facing bankruptcy. Kenneth Iverson
was appointed President and Samuel Siegel as Vice President of Finance.
The company, with the change in leadership, restructured and made a
decision to rebuild around the major profitable operations, the steel joist
businesses in Florence, South Carolina and Vulcraft in Norfolk, Nebraska.
The company, in 1966, moved it headquarters from Phoenix, Arizona to
Charlotte, North Carolina (www.nucor.com). Management then decided to
integrate backwards into steel making by building its first steel bar mill in
Darlington, South Carolina in 1968. In 1972 the company adopted the name
Nucor Corporation.
2.2
The REO era
Nucors origins are with auto manufacturer Ransom E. Olds, who founded
Oldsmobile (later part of General Motors) and then Reo Motor Cars, the
predecessor to Nucor, in Lansing, Michigan. While Olds cars were popular,
they were not profitable, and the company truck business (featuring the
famous Reo Speed-Wagon) was not sufficiently profitable to avoid a trip to
bankruptcy court in 1938. Reo exited the car business, concentrated on
trucks, attempted to diversify into lawn mowers, and eventually in December
1954 sold off its entire manufacturing operations (suffering a $3 million loss
on the sale) (1,2)
2.3 The Nuclear Corporation Era
After the sale, Reo ended up with $16 million in cash and no businesses. So
it attempted to liquidate itself out of business. However, a group of dissident
shareholders noticed the tax loss and successfully challenged the
liquidation in a proxy fight in September 1955. Ultimately Reo emerged as
Nuclear Corporation of America, and relocated to the Empire State Building
in New York City. Nuclears attempts to emerge as a nuclear based
company were no more successful than Olds was in making money on his
cars and trucks. Thus, it then followed the conglomerate of the period and
once again moved its headquarters, this time to Phoenix, Arizona. Among
the many businesses purchased by Nuclear during this period was Vulcraft,
a steel joist manufacturer located in Florence, South Carolina. Nuclear
purchased Vulcraft in 1962 and hired F. Kenneth Iverson as general
manager (1, 2)
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Even through the advancement into Nuclear Corporation of America, the
company still struggled with profitability concerns. Facing new bankruptcy
fears due to multiple years of declining profitability, the Nuclear Corporation
of America through the management of Ken Iverson began its rejuvenation
by focusing on its star and sole money making company Vulcraft. In 1966,
the company installed Iverson as president and Samuel Siegel as vice
president of finance. The company moved its headquarters yet again, this
time to Charlotte, North Carolina, to be closer to its main Vulcraft plant (1, 2)
2.4 The Nucor Era
Iverson and Siegel quickly reorganized Nuclear around its only profitable
business, Vulcraft. All other Nuclears businesses were either sold or
liquidated. Unable to get favorable prices from American steel
manufacturers, and unhappy with the imported steel available at the time,
Iverson decided to integrate Nuclear backwards into steel making by
building its first steel bar mill in Darlington, South Carolina in 1968. The
company chose to purchase an electric arc furnace, which was far cheaper
than the traditional steel blast furnace, courtesy of a $5,000,000 bank loan
from Wachovia. Though the early days were difficult (the American steel
manufacturers cancelled their contracts after they learned Nuclear was
operating its own mill), Nuclear was finally able to achieve the financial
success that had eluded the company from its beginning (1,2). In 1972, the
company (recognizing that there was nothing nuclear about making steel
or steel products) adopted its current name. Between 1973 and 1981, Nucor
built three more bar mills and their accompanying rolling mills to convert the
billets into bars, flats, rounds, channels, and other products to supply its
existing Vulcraft facilities. In 1987, Nucor was the first steel company in the
world to build a mini-mill in Crawfordsville, Indiana, to manufacture steel
sheet, the raw material for the auto industry and other manufacturers. In the
1980' at Crawfordsville, Indiana, Nucor revolutionized the sheet steel
s
industry by pioneering thin slab casting technology. Thin slab casting was a
revolutionary process that substantially reduced the capital investment and
costs to produce sheet steel. Forbes magazine described this
accomplishment as the most substantial, technological, industrial innovation
in the past 50 years. Nucor continued to enter into new markets and
products. Nucor continued to grow its core businesses by building more
sheet mills (88).
Three additional sheets mills were constructed between 1989 and 1990.
Nucor continued to develop new markets and products by building and
commissioning its first structural beam plant through a joint venture with
Yamato Kogyo in Japan. In the 1990s, Nucor expanded its Nucor-Yamato
facility by adding a second mill on its site which made Nucor-Yamato the
largest structural beam facility in the Western Hemisphere. Nucor continued
to grow its core businesses by building sheet mills in Hickman, Arkansas
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and Berkeley County, South Carolina, and an additional beam mill on its
Berkeley County site which led to the Berkeley County facility becoming the
largest mini-mill in the world producing over 3 million tons annually (2)
2.5 Present Day Nucor
Today, Nucor is the largest steel producer in the United States with net
sales of 12.7 billion in 2005. Nucor has 49 operating facilities in 17 states
and 11,300 employees. The corporate staff is only 66 people. Nucor is also
the largest recycler in the United States. In 2004, the company recycled
approximately 17 million tons of scrap steel, with 5 million of those tons
being automobiles. Products produced are: carbon and alloy steel in bars,
beams, sheet, and plate; steel joists and joist girders; steel deck; cold
finished steel; steel fasteners; metal building systems; and light gauge steel
framing (88).
Nucor continues to electrify the steel industry with a simple concept: The
mini-mill is mighty. At its various mini-mills, Nucor produces steel and steel
products, including hot-rolled steel, cold-rolled steel, steel joists, and metal
buildings. A major recycler of scrap metal, Nucor produces steel by melting
scrap metal in electric arc furnaces. The majority of the steel Nucor
produces at its mini-mills is sold to steel service centers, manufacturers, and
fabricators. Company divisions such as Vulcraft, one of the US' largest
s
producers of steel joists and girders, use the balance of the steel (52).
Nucor face many challenges in its industry to stay competitive. Nucor
management has managed to improve the company performance despite
tough market conditions. The company is positioning well to achieve its
goals. Due to good economic conditions and being able to pass along price
surcharges for raw material and high energy prices to it customers, the
company has experienced strong results over the last few years. These
strong results have greatly improved the balance sheets of the company.
Nucor has made significant improvements over the past few years in it
margins and total profitability. Nucor aggressively seek to improve
operational efficiencies and innovative technology to remain competitive.
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3
External Environmental Analysis
3.1 General Environment Analysis
The general environment is comprised of dimensions of a broader society. It
influences any industry and all the firms within it. Because these elements
are beyond the direct control of the firm, it is more important for a firm to
understand these segments in order to have a better assessment of today
and a more accurate prediction of tomorrow. There are six dimensions in
the general environment: demographic, economic, political /legal, socio
cultural, technological and global. Because a firm generally has no control
over these dimensions, the general environment should be constantly
reviewed for the implication/affect they may have on the firm.
Businesses must be prepared to address each component of the general
external environment to protect itself from deleterious volatility and inoculate
the firm against any uncertainty (91). With a detailed analysis of the general
external environment, businesses will be able to identify potential
opportunities and threats, gain awareness of the competitive environment,
forecast market trends, sustain profitability, make proactive instead of
reactive strategic decisions. Business persons should understand intimately
these six components, because business inputs, internal processes, and
outputs are directly influenced by the general external environment (94). In
the following sections, we will evaluate the general external environment
surrounding Nucor.
3.1.1 Demographic
The demographic segments consist of population size, age structure,
geographic distribution, ethic mix, and income distribution.
Population size
This is perhaps the single most important factor in the demographic
segment that impacts the steel industry. As the population grows, the
demand for construction, transportation and other goods also increases,
and the consumption of steel in manufacturing will also increase. Between
1990 and 2000, the U.S. population grew by 13% from 248 million to 281
million. In 2005, the population is 296 million and it is expected to continue
rising (3). One of the reasons that the U.S. has one of the highest
population growth rates in any industrialized countries in the world is due to
significant immigration. The immigration rate contributes over one million
people annually (59). It provides a larger, and younger, labor pool, and it
puts the United States in a better competitive position than Japan and other
European nations. The world population continues to increase. The
United States alone is predicted to have over 419,000,000 people by 2050.
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The current U.S. population is 299,656,017 and the world population is
6,542,140,442 (59)
U.S. Population by Region, 19902005
Population
Area
Change, 19902000
April 1, 1990
April 1, 2000
July 1, 2005
Number
Percent
248,709,873
281,421,906
296,410,404
32,712,033
13.2%
Northeast
50,809,229
53,594,378
54,641,895
2,785,149
5.5
Midwest
59,668,632
64,392,776
65,971,974
4,724,144
7.9
South
85,445,930
100,236,820
107,505,413
14,790,890
17.3
W est
52,786,082
63,197,932
68,291,122
10,411,850
19.7
United
States
1
Region
The Northeast region includes Conn., Maine, Mass., N.H., N.J., N.Y., Pa., R.I., and Vt. The Midwest includes Ill., Ind., Iowa, Kans.,
Mich., Minn., Mo., Neb., N.D., Ohio, S.D., and Wis. The South includes Ala., Ark., Del., D.C., Fla., Ga., Ky., La., Md., Miss., N.C.,
Okla., S.C., Tenn., Tex., Va., and W.Va.. The West includes Alaska, Ariz., Calif., Colo., Hawaii, Idaho, Mont., Nev., N.M., Ore.,
Utah, Wash., and Wyo.
(Source: U.S. Census Bureau, Census 2000; 1990 Census. Web: www.census.gov)
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U.S. POPULATION PROJECTIONS
Year
Projected
population
Percent change
from population in
2000
2010
308,936,000
10%
2020
335,805,000
19%
2030
363,584,000
29%
2040
391,946,000
39%
2050
419,854,000
49%
Source: U.S. Census Bureau (59)
The expansion of the world though is significant when domestic customers
export the steel. There has already been a 3.9% increase in 10 months of
2006. 51% of the population was females (64). The large increase in the
U.S. population is from fertility and immigration. The U.S. average fertility
rate is 2.1335 births per female. Population data indicate that the country
will have a sufficient workforce, increase consumption, and need more
infrastructures to support a larger population.
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Table 1a. Projected Population of the United States, by Race and Hispanic Origin: 2000 to 2050
(In thousands except as indicated. As of July 1. Resident population.)
Population or percent and race or
Hispanic origin
2000
2010
2020
2030
2040
2050
POPULATION
.TOTAL
.White alone
.Black alone
.Asian Alone
.All other races
.Hispanic (of any race)
.White alone, not Hispanic
419,854
302,626
61,361
33,430
22,437
102,560
210,283
282,125
228,548
35,818
10,684
7,075
35,622
195,729
308,936
244,995
40,454
14,241
9,246
47,756
201,112
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335,805
260,629
45,365
17,988
11,822
59,756
205,936
363,584
275,731
50,442
22,580
14,831
73,055
209,176
391,946
289,690
55,876
27,992
18,388
87,585
210,331
The world population is increasing at a significant rate as well. It reached
6.5 billion in early 2006 (4) and is estimated to be 7.2 billion by 2015, and
8.8 billion by 2045, a 37.5% growth from current population. China and
India are, and should remain to be, the most populous countries in the
world (6).
(6)
Each addition of persons equates to greater dependency, steady demand,
and use of steel through automobile purchases, increased construction
needs, and widespread use of electronics. In addition to the increase in
demand for steel production from the increasing population size, the
increased usage of steel also equates to environmental impacts due to
increased production and use of natural resources (raw materials) and
increased waste after the useful life of the end products has expired.
Age Structure
The age structure in the U.S. in 2005 is the following: 014 years: 20.6%
(male 31,095,725; female 29,703,997); 1564 years: 67.0% (male
98,914,382; female 99,324,126); and 65 years and over: 12.4% (male
15,298,676; female 21,397,228). Average life expectancy is 77.85 years;
birth rate 14.14 birthsll,000 population; death rate 8.25 deaths/1,000
population (5,6) The long life expectancy and low birth rate means an aging
population. The same phenomenon is even more evident in other
developed region such as Japan and Western Europe. The shift in age
structure can potentially impact the steel industry in ways such as the
reduction of available workforce, consumption behavior change, etc.
The U.S. population is rapidly aging and putting a strain not only on the
workforce but on the future of retirement benefits. 90 million baby boomers
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are approaching retirement. This will put a strain on the economy because
the number of workers paying social security and other taxes will drop
significantly.
Here is a prediction of the aging workforce:
(www.census.gov)
The population age 65 and older is predicted to grow from 12.4 percent in
2000 to 20.7 percent by 2050. Below is a age distribution of people in the
U.S. in 2005 (64)
The age shifting is being slowed by the large immigration rate and the high
fertility in the U.S.
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The United States ranked fourth among all countries with 3 percent of the
world' under-15 population and third among all countries with 8 percent of
s
the world' elderly population. There will be a shift in age structures in the
s
United States and other developed countries. For example, the population
of children under age 5 in many developed countries declined in the late
1990s. Low-fertility countries will be confronted in the coming decades with
growing elderly populations and fewer workers entering the labor force (1).
During the 1990s, the U.S. population, which represents less than 5 percent
of the world' people, grew five times the percentage increase of all other
s
industrialized countries combined (1). Base on census reports and studies,
the data would indicate that the diversity in age will result with the following:
less competition will come from industrialized counties as these they
struggle to provide labor due to shrinking populations, less cost competitive
due to higher labor cost due to labor shortages and increase pension and
health cost due to older populations/workforces. Competitors located the
United States that have pension plan will have increase costs/expenses
due to the retirement benefits of the workforce.
Population percent by
age
2000
2010
2020
2030
2040
PERCENT OF TOTAL
100.0
100.0
100.0
100.0
100.0
..0-4
6.8
6.9
6.8
6.7
6.7
..5-19
21.7
20.0
19.6
19.5
19.2
..20-44
36.9
33.8
32.3
31.6
31.0
..45-64
22.1
26.2
24.9
22.6
22.6
..65-84
10.9
11.0
14.1
17.0
16.5
..85+
1.5
2.0
2.2
2.6
3.9
Source: U.S. Census Bureau, 2004, "U.S. Interim Projections by Age, Sex, Race,
and Hispanic Origin
The average age of an American steel worker is 46 years old (98). The
retirements of the Baby Boomers in the steel industry will open up many
employment opportunities for American steel workers. Although, there is a
growing trend in the youth of America perceiving the production of steel as
an antiquated industry and dying business (98). This has resulted in an
overall reduction of engineer graduates as new blood to rejuvenate the
steel industry. This characteristic is problematic for Nucor because each
year results in a reduction in workforce due to an increase in retirements,
but also the dilemma of hiring less qualified blue collar employees in lieu of
white collar engineers as the replacement new talent. This option is
detrimental because it can ultimately result with decreased quality of steel
product. To prevent this decrease in product quality from happening due to
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2050
100.0
6.7
19.3
31.2
22.2
15.7
5.0
Nucor Corporation
a decline in quality of the workforce, one option that Nucor can implement is
the development of an internship program (98).
Ethnic Mix
The population of the United States will become more diverse. Census
projections indicate that minorities/foreign born persons will make up half of
the U.S population by 2050. All regions of the country experienced
increases in the foreign-born population by nearly 90 percent in the
South, 65 percent in the Midwest, 50 percent in the West and nearly 40
percent in the Northeast according to the 2000 census (2). The largest
increase will be in the Hispanic population (4). The affect for Nucor is that it
should expect a more diverse workforce in the future and especially in its
location in the west and south regions of the United States.
PERCENT OF TOTAL POPULATION
Year
2000 2010 2020 2030 2040 2050
TOTAL
100.0 100.0 100.0 100.0 100.0 100.0
White alone
81.0 79.3 77.6 75.8 73.9 72.1
Black alone
12.7 13.1 13.5 13.9 14.3 14.6
Asian Alone
3.8
4.6
5.4
6.2
7.1
8.0
All other races
2.5
3.0
3.5
4.1
4.7
5.3
Hispanic (of any race)
12.6 15.5 17.8 20.1 22.3 24.4
White alone, not Hispanic 69.4 65.1 61.3 57.5 53.7 50.1
Source: U.S. Census Bureau, 2004, "U.S. Interim Projections by Age, Sex,
Race, and Hispanic Origin," (63)
Immigration has become a big factor in changing the ethnic mix of the U.S.
The Hispanic and Asian population will continue to grow while the white
percentage will drop. By 2050, the white percentage is expected to around
50 % down from 74% in 1995 (65).
The ethnic mix in the United States is expected to change significantly over
the next half century. The non-Hispanic white population is projected to
decline to 53% while minorities are projected to rise to almost one in every
two. The Hispanic population will exceed the black population and become
the largest minority group in the country in 2010. The ethnic diversity in
workforce presents a challenge for a firm. It can be difficult to manage, but
at the same time, it can also produce innovation and creativity (3)
Population of the United States by Race and Hispanic/Latino Origin,
Census 2000 and July 1, 2005
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Population of the United States by Race and Hispanic/Latino Origin, Census 2000
and July 1, 2005
Race and Hispanic/Latino origin
July 1,
2005,
1
population
Percent of
population
Census
2000,
population
Percent of
population
Total Population
296,410,404
100.0%
281,421,906
100.0%
W hite
237,854,954
80.2
211,460,626
75.1
Black or African American
37,909,341
12.8
34,658,190
12.3
American Indian and Alaska Native
2,863,001
1.0
2,475,956
0.9
Asian
12,687,472
4.3
10,242,998
3.6
Native Hawaiian and other Pacific
Islander
516,612
0.2
398,835
0.1
Two or more races
4,579,024
1.5
6,826,228
2.4
n.a.
15,359,073
5.5
14.4
35,305,818
12.5
Single race
2
Some other race
n.a.
Hispanic or Latino
42,687,224
NOTE: Percentages do not add up to 100% due to rounding and because Hispanics may be of any race and are
therefore counted under more than one category.
1. May 10, 2006, estimate.
2. Those answering other have been allocated to one of the recognized race categories.
Source: U.S. Census Bureau, National Population Estimates.
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Non-Hispanic whites this was the least mobile
group as only 43 percent changed residences
between 1995 and 2000; the South and the West
had net domestic migration gains while the Midwest
and the Northeast had net losses.
Blacks African-Americans were more mobile
than non-Hispanic whites as almost half (49
percent) changed residences during the five-year
period; two blacks moved to the South for every
one who left it for other regions. Each of the other
regions experienced a net out-migration of blacks.
Asians More than half (54 percent) changed
residences from 1995 to 2000; the South
experienced a net increase while the Northeast and
Midwest had net declines and the West saw similar
numbers of those who came and those who went.
Hispanics this ethnic group was the most mobile
of the four discussed here as 56 percent changed
residence during the five-year period; the South and
the Midwest recorded net gains while the West and
the Northeast showed net losses. The federal government treats Hispanic
origin and race as distinct concepts.
Geographic Distribution
The population of the United States has been shifting to the south and west
regions of the country. The south was the only region of the four in the
country to show a migration increase according to census data. More nonHispanic whites, blacks, Asians and Hispanics moved to the South between
1995 and 2000 than left that region for other parts of the country, according
to a Census 2000 report. Meanwhile, the other three regions registered a
net domestic migration loss for some or all of these groups. The net
migration gains for these groups in the South were concentrated in the
Atlantic coastal states.
The Northeast, on the other hand, experienced a net loss in domestic
migration for each of the four groups, though the specific flows varied by
portions of the region. However, the population in the Northeast grew from
1995 to 2000 because arrivals from abroad that offset the regions domestic
net migration loss. While the Midwest experienced a net domestic migration
gain of Hispanics from other regions, it had a net loss of non-Hispanic
whites, blacks and Asians. Among states, New York and California had the
largest net losses for each of the four groups.
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The shifting population trends should benefit steel facilities located in the
South and Texas locations, as the population continues to increase in these
regions. Population increases trend to occur in economically growing
communities/regions. Due to strong projected population growth,
infrastructure growth looks strong in the south to support an ever-increasing
population that should benefit Nucor, which has a strong southern presents.
The geographic distribution of the steel industry originally primarily
centralized around northern cities (95). Geographically, many steel firms
due to the consolidation of resources have moved their primary
manufacturing plants to the Midwest and South instead of the northern
parts of the United States (98).
This shift in geographic locations has forced many unemployed steel
employees to also move to the new firm locations. The majority of steel
facilities are already centralized in the South closest to its natural
resources. Steel firms may need to offer relocation incentives to potential
future employees was have previously lived in the previous steel industry
job hotbeds in addition to the compensation packages workers who may
decide that they are unable to relocate.
3.1.2 Economic
The U.S. and global economies affects the health of individuals and
businesses. Businesses should review their economic environment to be
proactive of factors that may affect them. The review involves scanning,
monitoring, forecasting, and assessing the economies environment affecting
the business. The economic environment refers to the nature and direction
of the economy in which a firm competes or may compete (5). The scope of
this report is limited to the United States economy.
Key economic indicators are the following:
Inflation rates - The Chained Consumer Price Index for All Urban
Consumers (C-CPI-U) increased 0.3 percent in August on a not seasonally
adjusted basis. The August level of 117.9 (December 1999=100) was 3.4
percent higher than in August 2005. The Consumer Price Index (CPI) is a
measure of the average change in prices over time of goods and services
purchased by households. The Bureau of Labor Statistics publishes CPIs
for the Chained CPI for All Urban Consumers (C-CPI-U), which cover
approximately 87 percent of the total population and include in addition to
wage earners and clerical worker households, groups such as professional,
managerial, and technical workers, the self-employed, short-term workers,
the unemployed, and retirees and others not in the labor force. The CPIs
are based on prices of food, clothing, shelter, and fuels, transportation fares,
charges for doctors'
and dentists'
services, drugs, and other goods and
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services that people buy for day-to-day living (8). Energy was the biggest
driver of inflation in the index. Nucor should be concern about the volatility
of energy prices and take proactive steps to hedge these expenses for it
and customers. Nucor has many advantages over its competitors on energy
expenses, such as partners located next to its facilities, regional location of
its production facilities close markets, and higher energy cost make it more
competitive against domestic and foreign rivals that have much higher
energy costs to bring product to the United States.
Interest rates The federal fund rate has been increasing since June 30,
2004. As of October 5 the rate was 5.25. A keynote is that the FOMC chose
not to increase the rate at it meeting on September 20, 2006 and this may
signal a shift at the Federal Reserve. The Fed Fund rate is the interest rate
at which banks and other depository institutions lend money to each other,
usually on an overnight basis. This rate affects the prime rate or the lending
rate in which businesses and consumer borrow money for purchases.
Gross domestic product The economy grew at 2.6 in the second quarter
of 2006. This was a decrease of 3.0% form the first quarter. GDP has had
growth rate of about 3.0 percent since the second quarter of 2003. Over the
last thirteen quarter GDP has shown relative modest growth (11). There has
positive business investment & solid economic growth for the last 12
straight quarters and capital investment growth averaging 9% of GDP (6).
Corporate Profits grew 18.5% from the same quarter a year ago (11). The
data indicate that Nucor should expect U.S. economy to perform at a
modest pace for the 2007. Capital investment is exceeding GDP growth
over the last 12 quarter and should continue to do so due to strong
corporate profits over the last year. Nucor should continue to have steady
sales as long corporate profits are strong to allow for capital investment and
GDP is around three percent. Lower GDP could indicate a weakness in
consumer spending and a slowing of the economy.
The American economy outlook is positive. The unemployment rate is 4.6%
which is equal to its five year low. The GDP, though, did slow to 2.6% in Q2
of 2006 (47). The current inflation rate is 3.82% according to the Consumer
Price Index. The stock market is also at its all time high. A healthy and
positive economy increases consumer, business, and government
spending. This spending increases buying and projects which increase the
need for steel and other metals.
The U.S. has the largest and most technologically powerful economy in the
world, with a per capita GDP of $42,000 (5) The unemployment rate
continued to decline since 2004 and stayed close at 4.7% in August of
2006.
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Unemployment rate, seasonally adjusted, October 2004 September 2006
Real GDP in the second quarter of 2006 was 2.6%. The deceleration in
second-quarter GDP growth primarily reflected downturns in consumer
spending on durable goods, in investment in equipment and software, and
in Federal government spending. However, second-quarter corporate
profits grew 18.5 percent from the same quarter a year ago. Profits of
financial corporations increased 29.6 percent and profits of non-financial
corporations increased 10.7 percent.
With the U.S. economy shifting into a slower gear and inflation apparently
retreating, the Federal Reserve left the current interest rate at 5.25% in
August after 17 consecutive rate hikes. The current inflation rate remains
fairly low at 3.8%. In general, the U.S. economy is in a fairly good shape;
this is critical to the steel industry as the demand for steel is highly cyclical
and dependent on the macro economic conditions (7)
Steel is an energy-intensive industry. Nearly half of the industrys energy is
derived from coal, but there is an increasing trend in the industry to use
natural gas and electricity over the past twenty years. The energy costs
escalation in 2006 due to crude oil price hike presents a potential threat to
the world and U.S. economy (8,9)
Since the birth of the United States, the steel industry has been of
significant importance to the American economy. The steel industry has
direct influence to the nations economy historically hand in hand being a
highly essential partner through wars, the development of transportation,
and technological progression. Steel is the integral component of our
bridges, transportation (automobiles, airplanes, and railroads), skyscrapers,
military, and utility system (104). Today, the steel industry sustains
approximately 5% of the total U.S. manufacturing GDP (92). In the United
States, steel manufacturers supply 80% of the steel market. U.S. steel
manufacturers produce 112 million tons and $50 billion of steel annually
(104). The health of the American economy is highly dependent on the
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steel industry. The steel industry is one of the last bastions delivering
Made in American products ensuring employment of approximately
150,000 of American workers nationwide (92). The steel industry is cyclical
in nature and has experienced many booms and bust recessions. As seen
in the following figure, steel production has shown many years of
inconsistency with many peaks and valleys.
U.S. Steel Production 1984-1994 (82)
1980 was an especially challenging era for the steel industry (95). During
that time period, demand for steel was suffering from continued decline until
some recovery during the 1990 years. Demand of steel has historically
waxed and waned in parallel to economic stability, expansion, and decline.
Even recently, steel prices have been troublesome near twenty year
historical lows (92).
3.1.3 Political/Legal
The political/legal segment is the arena in which organization and interest
groups compete for attention, resources, and a voice in overseeing the body of
laws and regulations guiding the interactions among nations. Essentially, this
segment represents how organizations try to influence government and how
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government influences them (5). Firms must carefully analyze a new political
administrations business related policies and philosophies. Antitrust, taxation
laws, industries chosen for deregulation, labor training laws and the degree of
commitment to educational institutions are area in which administrations
polices can affect the operation and profitability of industries and individual firms
(5).
Two major political/legal issues are world trade and environment issues. The
scope of this report is limited to the United States; however world trade issues
are too paramount to be omitted from review. In 2001 steel firms supported
protective tariffs, which was a departure from a policy of supporting no
government intervention. This was due to the recent surge in import and poor
economic conditions in the United States. Recent years have seen a rise in
trade conflicts between the EU, China, and the U.S., over issues ranging from
beef and bananas to U.S. tax subsidies. In 2002, President Bush imposed antidumping tariffs as recommended by the International trade commission, under
the Trade Act of 1974 (5). The EU responded with the threat of $2.2 billion
worth of retaliatory tariffs on U.S. goods. China responded with import duties as
well. In 2003 the Bush Administration withdrew the tariffs. New trade agreement
such Free Trade Area of the Americas (FTAA) in 34 countries of the Western
Hemisphere, excluding Cuba continue to add to the uncertainly of World Trade
Issues.
Another challenge facing the steel industry in the United States today is
compliance with environmental regulations. The Clean Air Act, Clean Water Act
and the Resource Conservation and Recovery Act have had significant impact
on the industry.
A Clean Air Act describes one of a number of pieces of legislation relating to the
reduction of smog and atmospheric pollution in general. The United States
Congress passed the Clean Air Act in 1963, the Clean Air Act Amendment in
1966, the Clean Air Act Extension in 1970, and Clean Air Act Amendments in
1977 and 1990. This act dealt with reducing air pollution by setting emissions
standards for stationary sources such as power plants and steel mills as well as
mobile sources of air pollution which had become the largest source of many
dangerous pollutants. Numerous state governments and local governments
have enacted similar legislation, either implementing federal programs or filling
in locally important gaps in federal programs
The Clean Water Act (CWA) is the primary federal law in the United States
governing water pollution. Commonly abbreviated as the CWA, the act
established the symbolic goals of eliminating releases to water of toxic amounts
of toxic substances, eliminating additional water pollution by 1985, and ensuring
that surface waters would meet standards necessary for human sports and
recreation by 1983.
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The Resource Conservation and Recovery Act (RCRA), enacted in 1976, is a
Federal law of the United States. The Environmental Protection Agency (EPA)
states that RCRAs goals are: to protect the public from harm caused by waste
disposal; to encourage reuse, reduction, and recycling; and to clean up spilled
or improperly stored wastes. Since 1970, the industry has invested more than
$5 billion in air pollution control systems. In a typical year, 15% of the industrys
capital went to environmental projects (16). Additionally, the industry has made
steel the most recycled material in North America, with an overall recycling rate
of 67%. In all, the discharge of air and water pollutants has been reduced by
more than 90% 17). In spite of these achievements, environmental issues will
continue to be the focus of debates, legislation, and regulation in the future (15).
Environmental issues are important because they affect plant production,
recycling, and safety. The U.S. typically has very stringent regulations in
regards to labor laws, safety, and environmental protection. This at times
puts U.S. steelmakers at a disadvantageous position competing against
foreign firms.
In addition, politically and legally, historically the steel industry has been a
powder keg of many regulations and controversies. During the early 1900s,
U.S. Steel was a major leader in the industry accounting for 60-70% of the steel
market share (92). To diffuse U.S. Steels growth, influence, and power, the
federal government used antitrust regulation against the firm. Ironically, the
governments attempt failed to breakup U.S. Steel and the firm is still in
existence today; although the caliber and strength of U.S steel does not equal
to the same original levels with now greatly reduced market share and power of
less than 10% (95). During the later years, U.S. Steel and other steel industry
firms have been faced with a slow market decline within the past few years due
to increasing competition, extensive capital and labor requirements, and
increasing globalization of the steel market. For many steel firms within the past
ten years, bankruptcies were becoming the norm. These bankruptcies resulted
with further employee layoffs. In response to the increasing amount of layoffs
within the steel industry, unions became the norm.
3.1.4 Socio-cultural
The socio-cultural segment is concerned with a societys attitudes and cultural
values. Because attitudes and values form the cornerstone of a society, they
often drive demographic, economic, political/legal, and technological conditions
and changes (5).
The United States of America is highly diverse, urban centers and regional
areas of the country might adhere to an entirely different cultural attitude than
the next urban center or region. Americans widely believed that the individual
pursuit of self-interest leads to the best result both for the individual and for
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society as a whole. The end result is that the U.S. economy has become the
largest on earth, with most of its citizens enjoying comparatively high living
standards (12). The American tradition of free-market capitalism has led the
populace (and their leaders) to generally accept the vicissitudes of the free
market and the continuous alterations to society that a changing economy
implies, although social and economic displacements are common (12).
However, in many parts of the country outsourcing and displacement are
become major political and social issues.
.
The United States has traditionally been known as a melting pot, but recent
academic opinion is tending towards cultural diversity, pluralism and the image
of a salad bowl rather than a melting pot. Another primary influence on
American culture is the constant stream of new immigrants, many of whom
have fled persecution or oppression in their home countries, and are seeking
freedom and economic opportunity, leading them to reject totalitarian practices
(12).
Traditional gender roles of male and female have been increasingly become
blurred. Today, there are far fewer roles that are legally restricted by one'
s
sex. Most social roles are not gender-restricted by law, though there are still
cultural inhibitions surrounding certain roles. Women in the year 2000 made
up 46.6% of the labor force (12).
Since World War I and World War II, there has been an increase in women
working in the steel industry even though the industry has been primarily
dominated by men (98). Steel firms must accommodate the importance of
family for its women employees by offering flexible schedules and work from
home options allowing them more time to spend with their families without a
reduction in the 40 hour work week. Nucors social environment
encourages experimentation for new knowledge development, shared
learning, and knowledge transfer (90).
Society has become more and more aware of environmental issues and
demanding cleaner sources of production and energy. A significantly
growing concern in the U.S. is the fear of increased air and water pollution.
People have become extremely environmentally and health conscious.
3.1.5 Technological
The Technological segment includes the institutions and activities involved with
creating new knowledge and translating that knowledge into new outputs,
products, processes, and materials. Findings indicate that early adopters of new
technology often achieve higher market shares and earn higher returns.
Executives must verify that their firm is continuously scanning the external
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environment to identify potential substitutes for technologies that are in current
use, as well as to spot newly emerging technologies from which their firm could
derive competitive advantages.
Technology is one of the major driving factors for competitive advantage in the
industry. Todays most productive steelmaking facilities incorporate advance
metallurgical practices, sophisticated process control sensors and the latest
refinements in continuous casting and rolling mill technology (5). There are
many rivals that may be able to attract investors before Nucor. The result is
Nucor has left itself with little control of what been the most one the important
factor in the building of the company. Technology need to be a sustainable core
competency of Nucor. Nucor addition of R&D officer/steel technology is a step
in the right direction; however more human resources need to be devoted along
with research capabilities.
Technology changes rapidly and it is very important to choose the
technology that will continue to aid in the production of ones product. An
unsuitable choice of technology can severely limit a companies production
capabilities and cost position.
Steel is an alloy of iron and carbon. It is produced in a two stage process.
First, the iron ore is reduced or smelted with coke and limestone in a blast
furnace, producing molten iron which is either cast into pig iron or carried to
the next stage as molten iron. In the second stage, known as steelmaking,
impurities such as sulfur, phosphorus, and excess carbon are removed and
alloying elements such as manganese, nickel, chromium and vanadium
added to produce the exact steel required. This segment has always been
in the core of the steel industry. The steelmaking technology has undergone
many changes in the 20th century based on the political, social and
economic atmosphere. In the 1950s and 1960s, demand for high quality
steel encouraged the steelmaking industry to produce large quantities.
Large, integrated steel mills with high capital costs and limited flexibility
were built in the U.S. (18). Integrated steel plants produce steel by refining
iron ore in several steps and produce very high quality steel with well
controlled chemical compositions to meet all product quality requirements.
The energy crisis of the 1 970s made thermal efficiency in steel mills a
priority. The furnaces used in integrated plants were very efficient; however,
the common production practices needed to be improved. The large
integrated plants of the 1950s and 1 960s tended to produce steel in
batches where iron ore was taken from start to finish. This causes some
equipment to be idle while other equipment was in use. To help reduce
energy use, continuous casting methods were developed. By keeping blast
furnaces continually feed with iron ore, heat is used more efficiently. Since
1975, the industry has reduced its process intensity by 45% (19). As
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environmental concerns have gained importance in the 1980s and 1990s,
regulations have become more stringent, again changing the steelmaking
industry. In 1995, compliance with environmental requirements was
estimated to make up 20-30% of the capital costs in new steel plants (8).
Competition has also increased during the period due to decreasing
markets and increasing foreign steel production plants. The competition has
forced steelmaking facilities to reduce expenses and increase quality.
To meet these changing needs, just-in-time technology has become more
prominent and integrated steel plants are being replaced with smaller plants
called mini-mills that rely on steel scrap as a base material rather than ore.
Since the electric arc furnace can be easily started and stopped on a regular
basis, mini-mills can follow the market demand for their products easily,
operating on 24 hour schedules when demand is high and cutting back
production when sales are lower. A new, continuous steelmaking process
known as strip casting technology has been receiving close attention by
the steelmakers around the world. Strip casting has great potential to
reduce energy, process steps, manpower, investment and operating cost
while increasing productivity and quality in current produced steel grades.
The same technology can also be used to create new grades that were
previously not available as sheets (88).
Technology development brings opportunities as well as threats to this
industry. For instance, growing competition and the increasing availability of
alternative materials has slowed steel industry growth. Since 1970 there has
been a 350% increase by weight in the use of plastics in cars with the
average European and Australian car now containing approximately 14.5%
and 8.5% plastic by weight respectively. Plastics in automotive application
included fuel tanks and engine mounts, seat shells, back rests, headlamp
lenses with radiator grilles, instrument panel carriers, bumpers, interior and
wheel trims. As the economic, political/legal and socio-cultural segments
continue to evolve, the technology segment will react to these changes and
transform the U.S. steel industry. Steel production has made numerous
technological advances within the past few years. For example, there have
been continued improvements in the grade level and the quality of the steel
each year (104). 80% of the quality level of steel used today did not exist
less than 10 years ago (104). Steel is highly energy intensive. As seen
within the following figure, the steel industry has made progressive
improvements over the years due to increased efficiencies drastically
lowering the amount of energy requirements to produce steel.
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Energy Usage of the Steel Industry
(82)
The firms that are the first to discover technological advances will become
the industry leader reaping the early advantages in increased efficiency and
reduced cost. Therefore, awareness of the technological advances is of
great importance because it helps the firm to obtain sustained profitability
and competitive advantage.
3.1.6 Global
The global segment includes relevant new global markets, existing markets
that are changing, important international political events, and critical
cultural and institutional chrematistic of global markets. Globalization of
business markets creates both opportunities and challenges for firms. The
spread of steel making to newly industrializing countries such as Brazil,
South Korea, China, Russia, and Eastern Europe has led to an overcapacity
of steel production and the addition of many low cost producers. The last
two decades have therefore seen a continual restructuring of the steel
industry worldwide, with older producers in the U.S. and Europe shutting
down many outdated mills at the cost of hundreds of thousands of jobs (13).
The United States relationship with many countries/cultures has been
gradually eroded. This erosion could be the results of conflicts and policies
of the United States. Perhaps as a result of being such a large single
market / culture, some believe that Americans are relatively insulated and
uninterested in the culture or political developments of other countries. The
United States is generally skeptical or hostile toward communist and
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socialist ideologies. Global trading alliances continue to form, especially
with countries that do have good relationship with the United States.
Nucor should continue to build alliances on a Global scale and in all major
trading blocs such as the European Union and China. This course of action
should allow Nucor to hedge against ay economic isolation against the
United States and allow access to foreign markets and technology.
Globalization affects all companies in some manner. The advent of the
internet and email has greatly affected communication and the speed of
doing business globally. Businesses can easily form joint ventures and
alliances with other companies to share resources and aid in research and
development. Supply chain management can be accomplished
simultaneously and tracking of supplies and products instantaneously.
In addition, for the past 15 years, many events in the world have affected
the world steel industry. The collapse of the Eastern Bloc trading system in
particular brought to an end the steel trade flows among these countries.
The difficult conditions encountered by the former Soviet countries in the
initial stage of their transition to market economies prompted them to search
for new outlets for their steel in order to secure hard currency for their
structural adjustment and modernization programs. The tariffs and quotas
imposed by the European Community (EC) have led to a surge of imports of
semi-finished and plate products from Russia and Ukraine. The entry of
Eastem Bloc steel producers had an adverse impact on established trade
flows that combined with sluggish world markets, led to a dramatic decline
in steel prices for all producers. The period also saw the emergence of
dynamic new market economies with rapidly expanding steel-making
capacity and output level in countries like Brazil, China and South Korea;
this development distorted the pattern of trade flows, not only because by
coming near or achieving self-sufficiency these countries imported less
steel, but also because they became steel exporters in their own right first at
the regional level but ultimately at the world level.
In 1997 and 1998, major structural economic meltdownsand
corresponding drops in steel demandin Asia, the Commonwealth of
Independent States (CIS), and elsewhere greatly exacerbated world steel
overcapacity. This resulted in more than 300 million ton (one-third of total
world capacity) in distress and desperately seeking market and the U.S.
experienced unprecedented levels of steel imports and the domestic
producers were hurt severely. In March of 1999, the U.S. House of
Representatives passed House Bill 975 which gives relief to the domestic
industry by imposing limits on steel imports and strong monitoring systems.
In June of 1999, a coalition of domestic companies filed trade cases against
12 countries accused of illegally pricing their cold-rolled steels sold in the
U.S. Also in June, the International Trade Administration (ITA) determined
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that Korea was selling stainless steel sheets and strip at less than fair value
(23).
A worldwide recession in 1989 negatively affected every major producer
except China due to Chinas own strong internal demand. This recession
lasted until 1993 when the U.S. steel producers experienced a positive
turnaround. The recession intensified problems in the international steel
trade, promoting a series trade disputes that reduced both steel imports and
exports. China is a wild card in the supply-demand balance of global steel
trade. China has been the worlds growth engine since the early 1990s; it is
a major steel producing country but its rapid internal growth requires more
steel than it can produce. The vast Chinese market has attracted many
foreign companies in search of growth, but the treacherous business
environment made it very difficult for companies to operate in an unknown
market. China joined WTO in December of 2001. Its influence over global
economy will continue to increase (24).
In March 2002, President George W. Bush imposed anti-dumping tariffs
under section 201 of the Trade Act of 1974 after an investigation and
recommendation by the International Trade Commission (ITC). The
European Union immediately threatened reprisals and appealed to the
World Trade Organization (WTO). In November 2003 the WTO ruled
against the tariffs, and under increasing pressure of retaliation. Bush
withdrew the tariffs (45).
Imports will always represent a competitive threat to U.S. producers
because basic steel is a commodity. Quality is important to some
customers, but for most, price is the deciding factor. For this reason,
exchange rates will continue to have a major impact on the relative
importance of imports in the U.S. market. Another problem troubling the
U.S. producers is dumping of steel on the market at below-production cost
or by producers which receives large subsidies. With the ever-intensifying
foreign competition, the U.S. steel industry is going to face a tough battle
down the road. Such trade disputes should be expected to occur frequently
among competing nations. Although the demand for steel fluctuated
domestically, the hunger for steel has also widened globally. Today, global
steel makers account for 20% of the U.S. supply of steel (92). Besides the
United States, Canada, Japan, and Germany are global leaders in the steel
market (92). Globally, there exists an over supply of steel. In response to
the over supply to increase demand, global competitors have participated in
price reduction wars to reduce prices to attract market share away from
industry stalwarts. In response to these price reductions in order to prevent
further degradation of the industry, the steel industry has been carefully kept
watch and regulated by federal quotas, subsidies, and tariffs (92). In 2002,
in order to protect the U.S. manufacturers, tariffs of 8%-30% were placed on
all foreign steel imports. To the dismay of many steel industry firms, these
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tariffs were recently lifted in 2003. In order to stay competitive in the steel
industry, Nucor must be willing to reap the benefits of such sanctuary
measures no matter how large or small.
3.1.7 Summary of General Environmental Analysis
The general environment has enormous impacts on every firm in the U.S.
steel industry, including Nucor. The industry is highly dynamic because the
economic, socio-cultural, political/legal, technological, and global segments
are intimately interconnected.
The socio-cultural segment strongly influences the political/legal segment
which leads to evolution in the technological segment. The industrys boom
and bust is closely connected to the economic segment, while majority
growth opportunity is in the global segments.
The socio-cultural and political/legal analysis presents a negative outlook,
as the public sentiment shifts toward a clean environment, the regulations
will becomes more stringent, and impose more constraint on the industry.
The technological outlook is mixed. The industry has made great
improvement over the years by increasing its efficiency facing the evertightening regulations and rising energy cost; however, alternative materials
are slowing down the industry growth.
The demographic segment has the least influence on the industry. The
demand for steel generally increases with the population, but the change in
age structure and ethnic mix can potentially influence the industry positively
as well as negatively.
Last but certainly not least, the economic segment and global segment
presents perhaps the most complex outlook. Steel is highly cyclical and
energy-intensive, so it will follow the rise and fall of economy and energy
price, and in the world of globalization today, there is no stand-alone
economy; the U.S. economy is directly tied to the world economy. While the
developed nations are still major players in the world steel market, majority
growth opportunities are in the newly industrialized countries. The fight for
the market share is fierce, and the overcapacity during the economic
downturn creates havocs in the global market.
3.2
Driving Forces
There are four major driving forces in the general environment:
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Foreign competition
The U.S. steel industry has been influenced adversely by the foreign
competition for the past 15 years. Steel is a basic commodity material, and
the business is highly cyclical in nature. Global economy is becoming more
and more integrated; and international organizations such as the WTO aim
to encourage international free trade by promoting lower trade barriers;
without a doubt the U.S. steel producers will be increasingly threatened by
their foreign counterparts.
Economic Cycles
The steel industry will continue to expand and contract periodically following
the economic cycles. The demand for basic materials, including steel, is
always joined with the health of the economy. During the previous downturn
between 2001 and 2002, the U.S. steel industry was hit hard; but as the
economy gradually picked up in 2004 and 2005, the industrys profitability
was also greatly improved.
Compliance with environmental regulations
The growing public opinion for environmental protection will continue to lead
to more rigorous regulations on emission and recycling, and this certainly
will adding more restriction to the U.S. steel producers. The industry has
been making serious investment over the years in air and water pollution
control system; and with an overall recycling rate of 67%, Steel is the most
recyclable and recycled material in North America. The increasingly tough
environmental rules have weakened the competitiveness of the U.S. steel
producers in the international marketplace.
Energy Costs
Energy costs have an enormous effect on every aspects of the economy.
Steel is energy-intensive. The industry consumes 2 to 3% of total U.S.
energy. Energy costs typically account for roughly 15% to 20% of the
manufacturing cost of steel. Confronted by the rising energy cost, stringent
environmental regulations and foreign competition, the industry is continuing
improve it energy performance. The amount of energy required to produce
one ton of steel has decreased by 45% since the mid 1970s. However, the
capital available to invest in new technologies for energy efficiency
improvement is declining because of rising cost for environment control.
3.3
Industry Analysis
Description of the Industry
The U.S. steel industry is a $60 billion enterprise and additional
downstream processing pushes the value close to $80 billion, it is vital to
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both economic competitiveness and national security. Steel is the backbone
of the nations infrastructure and production of durable goods.
The steel industry is basically the business of processing iron ore into steel.
In 1997, the Office of Management and Budget (OMB) reclassified all U.S.
industries under a new code - the North American Industry Classification
System, or NAICS The steel industry is segmented into the following NAICS
codes based on the type of processing route used and the final products
generated.
Major Steel Industry NAICS
NAICS
(25)
Major Products
3311 Iron and Steel Mills and Ferroalloy Manufacturing
331111 Iron and Steel Mills
Steel works, blast furnaces (including
coke ovens), and rolling mills
331112 Electrometallurgical
Ferroalloy Product Manufacturing
Electrometallurgical products, except
steel
3312 Steel Product Manufacturing from Purchased Steel
33121 Iron & Steel Pipe & Tube
Manufacturing from Purchased Steel
W elded, riveted, or seamless steel pipe
and tube
33122 Rolling & Drawing of
Purchased Steel
Steel plate, sheet, strip, rod, and bar
331221 Rolled Steel Shape
Manufacturing
Cold-rolled steel sheet, strip, and bars
331222 Steel Wire Drawing
Steel wiredrawing and steel nails,
spikes and paper clips
The steel industry provides about 5% of the total U.S. manufacturing GDP.
The industry has undergone a major transformation since its recession of
the late 1980s, investing in new process and product technologies and
closing older mills. Todays steel industry is technologically sophisticated,
employing over 189,000 American production workers in jobs paying about
55% above the average for all U.S. manufacturing (26).
The steel industry is the third largest commodity market with a value in
excess of $700 billion. The industry, in recent years, has undergone radical
restructuring and has become more global, more efficient and more
financially viable. (55).
2006 has been an active year for steel mills. U.S. mills produced over 50.7
million tons in the first half of 2006, up 8% year over year (54).
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3.3.1 Industry Dominant Economic Features
The United States is one of the largest steel producers in the world. The
industry has recently experienced large levels of imports because of world
steel overcapacity resulting from economic downturns in Asia and the CIS.
The industrys return on sales for 2000 was -2.8% (27). The steel industry
spends hundreds of millions of dollars annually on R&D. The steel industry
(including iron production) is one of the largest energy consumers in the
manufacturing sector.
Industry Economic and Trade Statistics 1999
Value of Shipments
$60.6 billion
Employment
189,343
Average Hourly Wages
(Production Workers)
$21.49
Capital Expenditures
$1.79 billion
R&D Expenditures (1997)
$414 million
Pollution Abatement Expenditures (1994)
Captial
Operating
$226.4 million
$1.2 million
Trade
Imports
Exports
Balance
$13.7 billion
$5.1 billion
-$8.6 billion
The steel industry is a major contributor to the U.S. economy, with
shipments increasing steadily since the downturn of the early 1990s.
Industry downsizing and consolidation have reduced U.S. raw steel
production capability by about 30% since 1980. At the same time, capability
utilization has risen to 86.1% in 2000 (27).
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Value of Shipments (1992-2001)
Billion Dollars (Constant Dollars 1998=100) (27, 32,33)
The steel industry produced 112 million tons of raw steel in 2000. Almost
sixty million tons were produced in basic oxygen furnaces and 53 million
tons in electric arc furnaces. This included 100 million tons of carbon steel,
5 million tons of alloy steel, and about 2 million tons of stainless steel. Major
steel mill products are sheet, bars, rods, plate, structural shapes, and strip
(27).
Annual Production
Raw Steel Grade
(27)
2000 Production
Carbon
101.5 million tons
Alloy
5.4 million tons
Stainless
2.1 million tons
Total
109.0 million tons
Huge investments in new process and product technologies, facilities,
employee training, and product development have reduced the number of
man-hours required to produce a ton of steel from 10 to less than 4 a
60% drop in merely 15 years. Todays production processes are
technologically sophisticated, requiring more highly developed skills and
workers with better training and education. To help meet this need, unskilled
workers are being trained to develop new skills. The average hourly earning
in the steel industry was $24.87 in 2000; with benefits, the total employment
cost per hour was $36.33 (34).
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Labor Productivity SIC 331
(35, 36)
(Labor output per hour, indexed to 1987)
Over the last 25 years, the industry has invested nearly $8 billion in
environmental control equipment. The industry' value of shipments
s
amounts to $70 billion annually. Steel is the most recyclable and recycled
material in North America, with an overall recycling rate of 68 percent (14).
About 109 million tons of raw steel was produced in 2000.
Market conditions continue to change in the Iron and Steel industry. They
can have significant effects on the industry and the strategies that must be
developed.
Increasing Energy Costs
Fuel costs have been a major problem to firms in the U.S. and around the
world. Recently, a barrel of oil has fallen below $60 a barrel but from
January 5, 2004 to April 18, 2006 rose from $33.78 to $71.35 a barrel. One
gallon of heating oil produces 139,000 BTUs, while one gallon of gasoline
produces 124,000 BTUs. It takes about 9100 BTUs to make one pound of
steel. This equates to about 13.6 pounds of steel per gallon of gasoline. A
fluctuation of a dollar on the price of gasoline can greatly affect the price per
ton of steel (82).
Recycling
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Recycling has become a growing trend in the U.S. Recycling not only saves
money but reduces energy and raw material taken from the environment.
Every pound of steel recycled says 5,400 BTUs of energy. When one ton of
steel is recycled, 2,500 pounds of iron ore, 1,400 pounds of coal and 120
pounds of limestone are conserved (56). Nucor is the largest recycler in
the U.S.
Changing import and export leaders
The U.S. market is struggling to keep up with an increase in imports while a
non-existent export market.
(http://www.issb.co.uk/)
The large volume of exports competes heavily with the U.S. Steel
companies.
Race to consolidation
The steel industry is racing to consolidate. The following shows the size of
some of the consolidation:
The newly merged Arcelor-Mittal will produce more than 110 million tons a
year - about 10% of world steel. In comparison, the next largest group of
steelmakers - Nippon, Posco and JFE - make 30 million tons of steel per
year. Together these companies would be producing nearly one-third of the
world' steel. (54).
s
3.3.2 Geography
As a result of industry consolidation, the number of steelmaking facilities
has decreased significantly over the last few decades. Large integrated mills
have been the hardest hit, mainly due to loss of market share to other
materials, competition, and the high cost of pension liabilities. Many of these
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mills have closed, and those that are still operating have reduced their work
forces while making process improvements to remain competitive.
Additional closures and an estimated 10,000 layoffs have resulted from the
1998-1999 crisis (23).
As of 2002, 90 companies were producing raw steel at almost 140 locations.
The number of integrated mills which produce steel in basic oxygen
furnaces has always been relatively small and is currently at around 20. The
highest geographic concentration of mills is in the Great Lakes region,
including Indiana, Illinois, Ohio, Pennsylvania, Michigan, and New York.
Approximately 80% of U.S. steelmaking capacity is in these states. The
industry employs more than 100,000 people nationwide. Although the
number of fully integrated mills is small, they employ nearly half of the
industrys workforce (23).
The highest geographic concentration of mills is in the Great Lakes region
including Indiana, Illinois, Ohio, Pennsylvania, Michigan, and New York (26)
Approximately 80% of U.S. steelmaking capacity is in these states. The
proximity of these regions to resources such water, iron ore, and coal has
been the major attraction for steelmaking operations. The South is the nextlargest steel producing region, and a few mills are sited in the West. Minimill facilities may be built wherever electricity and scrap are reasonably
priced and there is a local market for the steel product.
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Value of Shipments for Top Five States 2000
(37, 38)
Value of Shipments
(billion dollars)
Employment
(thousands)
Percentage of Total
Gross State Product
Ohio
12.8
35.7
1.14%
Indiana
12.0
32.0
1.75%
Pennsylvania
9.8
31.6
0.63%
Illinois
5.0
14.9
0.27%
Michigan
3.7
11.2
0.39%
State
3.3.3 The U.S. Industry Structure
The basic steel industry in the United States is composed of integrated
producers and electric arc furnace (EAF) producers, both of which produce
flat-rolled, structural, and tubular products (the companies in the following
are used as surrogates for the U.S. basic steel industry).
Sample Steel Firms (1994, $ Million) (39)
Integrated Plants
Integrated producers tend to be firms that have long history in the industry.
They have not only integrated the steelmaking process, but to a great extent
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have integrated the other downstream functions and requirements of the
industry. For example, their maintenance tends to be done internally by
workers with specific job classifications. An integrated producer is one that
makes steel starting with iron ore and coal. An integrated steel plant has all
the functions for primary steel production:
Iron making (conversion of ore to liquid iron)
Steelmaking (conversion of pig iron to steel)
Bloom casting (production of large blocks of steel)
Roughing rolling/billet rolling (reducing size of blocks)
Product rolling (finished shapes)
The principle raw materials for an integrated plant are iron ore, limestone, and
coal (or coke). These materials are charged in batches into a blast furnace
where the iron compounds in the ore give up excess oxygen and become
liquid iron. At intervals of a few hours, the accumulated liquid iron is tapped
from the blast furnace and either cast into pig iron or directed to other vessels
for further steelmaking operations. Historically the Bessemer process was a
major advancement in the steel production, but it has now been completely
replaced by other processes such as the basic oxygen furnace (BOF) (40).
Molten steel is cast into large blocks called blooms. During the casting
process various methods are used, such as addition of aluminum, so that
impurities in the steel float to the surface where they can be cut off the
finished bloom.
Because of the energy cost and structural stress associated with heating and
cooling a blast furnace, typically these primary steelmaking vessels will
operate on a continuous production campaign of several years duration. Even
during periods of low steel demand, it may not be feasible to let the blast
furnace grow cold, though some adjustment of the production rate is possible.
Integrated plants are sizeable facilities, and they are normally only
economical to build in 2,000,000 ton per year annual capacity and up. Final
products made by an integrated plant are usually large structural sections,
heavy plate, strip, wire rod, railway rails, and occasionally long products such
as bars and pipe (40).
A major environmental hazard associated with integrated steel mills is the
pollution produced in the manufacture of coke, which is an essential
intermediate product in the reduction of iron ore in a blast furnace.
World integrated steel production capacity is at or close to world demand, so
competition between suppliers results in only the most efficient producers
remaining viable. However, due to the large employment of integrated plants,
often governments will financially assist an obsolescent facility rather than
take the risk of having thousands of workers thrown out of jobs (This may lack
specific facts and thus be unverifiable). Such measures result in products
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then sold in international trade lead to allegations of dumping (This may lack
specific facts and thus be unverifiable) (40).
Mini Mills
A mini-mill is traditionally a secondary steel producer. However, Nucor uses
mini-mills exclusively. Usually it obtains most of its iron from scrap steel,
recycled from used automobiles and equipment or byproducts of
manufacturing. When using 100% scrap, EAF steelmaking cannot produce
the highest quality sheet products because of the impurity in scrap; the tight
control over chemical composition cannot be maintained. Direct reduced iron
(DRI) is can be used with scrap to maintain desired chemistry of the steel,
though typically DRI is not an economical choice as the primary raw
steelmaking material (40 A typical mini- mill will have an electric arc furnace
(EAF) for scrap melting, a ladle furnace or vacuum furnace for precision
control of chemistry, a strip or billet continuous caster for converting molten
steel to solid form, a reheat furnace and a rolling mill.
Originally the mini-mill concept was adapted to production of bar products
only, such as concrete reinforcing bar, flats, angles, channels, pipe, and light
rails. Mini-mill plants may focus, for example, producing coils of rod for wiredrawing use, or pipe, or in special sections for transportation and agriculture.
But mini-mills will never completely replace integrated steel plants. Mini-mills
have a narrower product line and cannot produce the specialty products
manufactured by integrated plants.
Capacities of mini-mills vary; some plants may make as much as 3,000,000
tons per year, a typical size is in the range 200,000 to 400,000 tons per year,
and some old or specialty plants may make as little as 50,000 tons per year of
finished product. Nucor, for example, annually produces around 9,100,000
tons of sheet steel from its 4 sheet mills, 6,700,000 tons of bar steel from its
10 bar mills and 2,100,000 tons of plate steel from its 2 plate mills (40).
Electric arc furnace steelmaking is only about half as energy intensive as the
blast furnace- basic oxygen furnace route because EAFs use a higher
percentage of scrap in the charge. Using scrap eliminates the most energyintensive step of the steelmaking process, the conversion of iron ore to iron in
the blast furnace. BOFs are limited in their use of scrap in the charge
because of the heat balance in the process.
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U.S. Steel Industry Average Energy Intensity, 1978-98 (23)
In 2000, the U.S. steel industry produced 112 million tons of raw steel.
Almost sixty million tons were produced in basic oxygen furnaces and 53
million tons in electric arc furnaces. This included 100 million tons of carbon
steel, 5 million tons of alloy steel and about 2 million tons of stainless steel.
Major steel mill products are sheet, bars, rods, plate, structural shapes, and
strip (27).
U.S. Raw Steel Production, 1984-1999 (23)
The steel industrys products are widely used in every sector of the
economy. In 1998, the U.S. steel industry shipped over 102 million tons of
steel, whose main uses are depicted in the table below.
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Shipments of U.S. Steel Mill Products by Market Classification 1998 (1,000
net tons) (23)
The health of the automotive and construction sectors plays an important
role in determining the health of the steel industry. Much of the steel sold to
U.S. automakers is covered by long-term contracts, with the remainder sold
on the spot market.
Steel represents about 55% of the material used by weight in the average
family car. Much of the decline in this value over the past 20 years (it
represented closer to 60% of the weight in 1975) has been due to the
expanding use of high-strength steels to save weight. New and expanding
applications of steel may also lead to increased demand for steel products.
The residential construction sector also represents a major market for steel;
increased adoption of steel framing for houses would further boost steel
sales.
3.3.4 The U.S. Industry Position in World Markets
After World War II, the U.S. steel industry faced increased competition from
Japanese and European producers, who rebuilt and modernized their
industries. Later, many Third World countries, such as Brazil, South Korea
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and China, built their own steel industries. The U.S. produced about half of
the worlds steel in 1945; in 2005 it was the third largest producer, with 13%
of the world market, behind China and Japan but ahead of Russia. Although
the United States is still a major player, it is not nearly as dominant as it
once was
World Crude Steel Production 1950-2005
Million Metric Tons
1200
1000
800
600
400
200
0
5
19
0
19
55
6
19
0
19
65
7
19
0
19
75
8
19
0
Year
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8
19
5
90
19
19
95
20
00
20
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In recent years, the American steel industry, especially the integrated
producers, has increased its efficiency significantly. Sagging demand and
international competition have resulted in a tremendous restructuring of the
integrated producers. Many inefficient plants have been closed, workers
have been laid off, and the workforce has been reduced permanently.
Despite low profits during the past ten years, the industry has managed to
invest, primarily in continuous casters and secondarily in refining. Because
of the increased capital/worker ratio, productivity has also increased
significantly (23).
While the United States consumes more steel than any other country, it is
not home to the worlds largest producers. This following table lists the
largest steel-producing companies (in volumes) in the world according to
the International Iron & Steel Institute. Only two U.S. companies (U.S. Steel
and Nucor) are in the top 30 producers. Japan, South Korea, and France
have concentrated their industries, and thus have steel producers that are
twice the size of any other countries producers.
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Top Steel-Producing Companies 2004 and 2005
(43)
(Million metric tons crude steel output)
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3.3.5 Market Growth Rate
Exceptional growth continues to be seen in the steel industry. The global
consumption rate continues to grow as seen below:
Global steel production continues to increase and is predicted to grow at a
rate of approximately 4% per year. This is large considering from 1990 to
2000 the growth rate was only 1.6% per year.
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3.3.6 Industry Trends
The industry has undergone a major transformation since its recession of
the late 1980s, investing in new process and product technologies and
closing older mills. Today' steel industry is technologically sophisticated
s
(15).
The industry continues to experienced large levels of imports because of
world steel overcapacity resulting from economic downturns in Asia and the
CIS. In 2000, the industry' return on sales was -2.8% (15).
s
The steel industry spends hundreds of millions of dollars annually on R&D.
Over the last 25 years, the industry has invested nearly $8 billion in
environmental control equipment.
The industry has is now heavy user of Energy-Management Activities to
improve the efficiency of energy use. In the steel industry, the top four
reported activities in 1998 included the purchase of electricity under special
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rate schedules (e.g., time-of-use rates), electricity load control, energy
audits, and power factor correction or improvement. Overall, about 53.3% of
the steel industry population reported engaging in at least one energymanagement activity (15).
The industry has many major trends. First is consolidation. Companies
continue to merge, buy, and establish joint ventures with each other
continually reducing the amount of companies. Another is reduced labor
force. Steel is not as labor intensive as it was in the past. Steel is the
material for war and development. As wars continue and countries develop,
there is a large demand for the strength of steel. Steel continues to be a
very unique material. It is easily recycled and new and stronger grades
continually are developed. (6)
3.4 Five Forces Competitive Analysis
Michael Porters Five Forces model provides a very useful tool in the
arsenal of strategic analysis of any industry. There are five aspects for
evaluation as described in his model:
A) Buyer Power; B) Supplier Power;
C) Rivalry among Existing Firms; D)
Threat of New Entrants; and E)
Threat of Substitutes (102). We will
be evaluating each aspect of
Porters Five Forces Model to
interpret the generic strategies,
market influences, and how
competitive advantage is gained,
maintained, and deployed within the
steel industry.
3.4.1 Threat of New Entrants
The threat of new entrants is low in the steel industry. This is primarily due
to the high capital requirement for entry. The industry is obviously extremely
capital-intensive. Firms requires huge amount of funds to achieve
economies of scope; there is greater risk leading to the failure to gain
positive returns quickly. It takes years for potentially new companies to be
able to get out of the red. In order to comply with the government
regulations and to maintain competitive advantages, significant investments
on environmental control systems and manufacturing technology upgrades
must be made continuously. For this reason, capital requirement is a
deterrent to new entrants in the steel industry.
New entrants frequently bring additional capacity to an industry. Thus it is
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possible that prices will be bid down and industry profits diminished. This
has occurred in the 1990s and early 2000s. Barriers to entry include
economies of scale and capital requirements. If high barriers to entry exist,
then the threat of new entrants is diminished. Other barriers to entry include
switching cost, access to distribution and product differentiation (16). Even
those the number of steel makers has been decreasing, there is still
significant threat of new entrants. These new entrant most likely will be
existing rivals that have consolidated and or merged. This results in a new
bigger entity and tougher rival. In addition, consolidation by foreign steel
makers will also bring more competitors to the United States. There also
exists unique skill sets to successfully produce the various products and
grades.
3.4.2 Power of Suppliers
Depending on the type of input, the power of suppliers is generally high in
the steel industry. Steel is energy-intensive; the industrys profitability is
greatly dependent on the energy costs. There are four types of fuels used in
the industry: coal, natural gas, electricity and petroleum. Fluctuations in fuel
prices can have devastating impact on a companys bottom line, and many
factors that can influence the fuel costs are beyond the companys control.
Most companies have no choice but to take whatever prices offered by the
suppliers; energy suppliers have tremendous influence on the steel
producers. Energy suppliers have tremendous influence on the steel
producers.
For raw materials such as scrap or iron ore, the suppliers power is relatively
lower; large firms particularly are in a more favorable position to negotiate
prices. Scraps used to be considered as low-cost, but as more and more
mini-mills are built, the growing demand for scrap is driving its price to
escalate. There is a very limited number of scrap metal suppliers in the
industry. Prices of scrap steel tend to dramatically fluctuate during certain
time periods of peaks and valleys.
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Nucor Steel Making Process (Source: http://www.nucor.com)
Scrap Steel Price Per Ton (Source: http://www.grede.com/)
P
r
i
c
e
P
e
r
T
o
n
Month
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In order to offset the strength of supplier power, steel industry firms must
incorporate new avenues for innovation and vertical integration to reduce
the dependency on scrap steel metal. Nucor has implemented iron carbide
as an additive to use instead of scrap steel to make the end product just as
durable without a reduction in product quality. This type of innovation will
further decrease supplier power within the steel industry.
In general, suppliers are powerful and exert a threat on an industry when
suppliers are an oligopoly, when substitutes are not a major factor and when
the product of the suppliers is very important to the buyers. In some
industries suppliers can be quite powerful as a result of the implicit problem
of switching costs (16). Supplies in the steel industry do hold consider
powers as raw materials have continued to increase, especially scrap iron
that is used by mini-mills. The power of supplies will continue as long there
over capacity in the industry, many buyers in the industry, and few
substitutes.
3.4.3 Power of Buyers
The power of buyers is high in the steel industry. Basic steel is a
commodity; price is usually the deciding factor. With the availability of cheap
import, the company has very little pricing power. For this reason, buyer
power in the steel industry is high. Buyers compete with their suppliers by
demanding price concessions, playing suppliers off against each other and
implicitly bargaining for enhanced quality and services. The net result of
these buyer actions is to reduce industry profitability. Additionally, buyer
power is strong when purchases are made in large volume, switching costs
are low, products are undifferentiated and the possibility of backward
vertical integration is high. Steel producer have only been able to raise
prices with enforcement of limited imports. There are still many sources for
buyers to purchase steel. Nucor is not a specialty steel producer and so
most of its products are not much different than its rivals. In addition there is
still over capacity in the industry causing excess supply that drives down
prices. For the moment buyers still consider influence in the industry, as
producers continue to consolidate this situation may change. However
Nucor has managed to increase prices per ton over the last 2-3 years.
There are many companies supplying product and a lot of competition from
foreign firms. Buyers have the power to choose who to buy this commodity
from.
The buyers of the steel industry are primarily composed of various the
following various consumer markets: transportation, construction, military,
and utility system. In order to determine the bargaining power of consumers
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in the steel industry, we will perform a detailed analysis of the following
buyer characteristics: buyer volume in relation to industry volume,
bargaining leverage, price sensitivity, brand identity, and product
differentiation.
Currently buyer volume is declining similar to the reduction in the steel
industry producer volume. Within the past few years, many firms within the
steel industry have been desperately struggling to survive with some firms
already declaring bankruptcy. Competition is fierce with the limited market
avenues. The steel industry is a mature commodity industry with very little
differentiated product. With the development of innovative technology,
buyers have more alternative solutions to steel such as aluminum, titanium,
and new alloys. Steel is a universal commodity where quality is highly
similar and generic across firms. Because steel is a commodity product,
there is little brand identity with steel industry firms. Additionally, as the
United States gradually becomes further a service based economy instead
of a production based economy, so too does the number of buyers in the
industry fall. A decline in demand with overabundant supply will result in
lower prices. The culmination of decline in customer volume, greater
bargaining leverage, lower price sensitivity, and no brand identity or product
differentiation will result in very strong and increasing buyer power.
3.4.4 Threat of Substitute Products
Substitutes are products or services that are able to perform the function of
the original product or service at a considerable price reduction. The threat
of substitute products is high in the steel industry for the same reason the
buyer power is high. For the same basic grade of steel, there is no
difference between company As product and company Bs product; buyer
can substitute suppliers easily with little or no costs. For this reason, the
threat of substitutes is high.
Historically, steel was the major backbone and essential component input to
the transportation, military, and utility industries. As modernization and
innovative technology increases with time, demand for steel will slowly
decline as buyers are looking for alternatives that are more lightweight with
the same durability and sturdiness similar to the characteristics of steel. For
example, the military has slowly moved towards an investment into carbon
fiber in lieu of steel. Newer automobiles have greater percentage of plastics
instead of steel where the frame is now the only primary steel component.
The saving grace for steel is that steel is still the most cost effective with
greatest amount of strength, quality, and reliability (95).
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3.4.5 Intensity of Rivalry
The rivalry among existing firms is high within the steel industry. Currently,
there exists a glut of domestic and global steel manufacturers within the
industry. Price wars with dramatic reductions in prices between global
versus domestic steel companies have been the norm. High demand
historically within the steel industry has been a rare. Many firms like Nucor
are focusing on mini-mill initiatives instead of the old paradigm of standard
integrated mills to obtain greater market share. Because steel is a generic
commodity product, most steel firms have developed their own core
competency specialty product to differentiate themselves from one another.
There are a large amount of firms and with new technology firms are
continually cutting costs and reducing prices.
Rivalry among existing competitors is, in many industries, one of the
principal determinants of growth and success for firms in the industry. An
industry, or a strategic group within an industry, may best be thought of as
an integrated system. Thus, moves of one competitor in terms of pricing,
promotion, new product introductions and major changes in terms and
conditions of sale can generate immediate competitor responses (16).
Stronger players in the industry are increasing market share and gaining
economies of scale when possible by constantly buying up marginal
producers. Firms that can keep cost down, developed new technology, and
have significant financial resources will be the only survivors in the industry.
There are still many competitors in the industry even after considerable
industry consolidation, and the industry capacity often exceeds the actual
utilization. The intermittent industry overcapacity, particularly during
economic downturn, intensifies the rivalry. For these reasons, the rivalry
intensity is high in the steel industry.
3.4.6 Summary of Industry Analysis
The U.S. steel industry is vital to both economic competitiveness and
national security of the country. It is a major contributor to the U.S.
economy, accounts for 5% of the nations manufacturing GDP. The industry
has undergone a major transformation since the 1970s due to numerous
factors including rising energy costs, increasing environment regulations,
and intense foreign competition. The number of EAF producers grew over
the years because of its energy efficiency while the number of integrated
producers declined. Automotive and construction industries remain the two
major sectors for the steel industry.
The United States is still a major player in the global steel market, but it has
lost its dominance. The collapse of former Soviet Union and the rise of
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newly industrialized countries such as South Korea and China have
reshaped the competitive landscape of the steel industry. The global steel
industry is extremely competitive and subject to many forces. Firms in the
industry face many challenges to remain competitive. The steel market is
very volatile due to imports, technology developments and cost pressures.
There number of independent steelmakers is declining as consolidation
continues to sweep over the industry. The steel industry still shows
tremendous growth potential in developing regions.
The five-force analysis indicates a quite unfavorable overall domestic
market as the threat of substitute products, the power of suppliers and
buyers, and the industry rivalry are high. With this in mind, it is important to
evaluate the key players in the industry in order to identify critical success
factors that determine the competitive advantage in the market. The overall
market is favorable only to those firms that have the resources to develop
new technology, make acquisitions, and keep cost low.
3.5
Competitor Analysis
The competitor environment is the final part of the external environment
study. This section will focus on several primary competitors within the U.S.
steel industry, including their profiles and most recent financial results.
Several major international steel producers are also included in the section.
Due to the recent economic downturn, numerous Nucors domestic
competitors filed for bankruptcy protection, consequently Nucor is in a very
dominant position domestically; it is the international competitors that will
pose major threats to the company.
The steel industry is continuing to grow. With a strong global growth
predicted, it is important to know and monitor your competitors. Competitor
analysis focuses on each company against which a firm directly competes.
The firm need to been interested in understanding each others objective,
strategies, assumption, and capabilities. This helps to formulate a strategy
for the future.
3.5.1 Industry Competitors
The section will introduce the several major competitors of Nucor in the
domestic as well as international steel industry.
Mittal Steel Company
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Mittal is the world' largest steel company, with shipments of 49.2 million
s
tons and revenues of over $28.1 billion in 2005. Mittal own steel-making
facilities in 16 countries, spanning four continents, employs 224,000 people
spanning 49 different nationalities. Shares are listed on the New York and
Amsterdam stock exchanges (18).
Mittal Steel has set the pace for the consolidation and globalization of the
world steel industry. In the process they have spread best practice and
modern production techniques throughout their plants. Mittal capital
investment program is unmatched in the industry (18).
Mittal Steel is also among the most efficient steel producers in the world.
They encompass all aspects of modern steel making, combining both
integrated and mini-mill facilities and producing much of the iron ore and
coking coal used in their furnaces. Mittal is among the most advanced steel
makers, operating a range of modern technologies. They have pioneered
the use of direct reduced iron (DRI) as a raw material source and are now
the worlds biggest producer of DRI. With two technical research facilities,
their development teams are ready to meet the needs of the most
demanding customers (18).
Mittal Steel Company has 31 integrated, mini-mill and integrated mini-mill,
steel-making facilities. It produces a range of finished and semi-finished
carbon steel products, encompassing the main categories of steel products
(flat products, long products and pipes and tubes). The Company produces
hot-rolled and cold-rolled sheets, plates, electro-galvanized and coated
steel, bars, wire rods, wire products, pipes, billets, blooms, slabs, tinplate,
structural sections and rails. Mittal Steel sells these products in local
markets and through its centralized marketing organization to customers in
over 150 countries. The companys products are used in a range of endmarkets, including the automotive, appliance, engineering, construction and
machinery industries.
Mittal Steel USA is a subsidiary of Mittal Steel Company. In 2004, US. Mittal
Steel became the world' largest steel company with the merger of Ispat
s
International and LNM Holdings. The following year the company
dominated the US market with the acquisition of International Steel Group.
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Mittal Steel USA ranks as the nation' top steel producer, ahead of U.S.
s
Steel and Nucor, and maintains manufacturing and processing facilities in
12 states, mostly in the Midwest. Upon the completion of the ISG
acquisition, Mittal merged ISG' operations with those of its own North
s
American subsidiary, Ispat Inland (68).
United States Steel Corporation:
United States Steel Corporation (U. S. Steel. NYSE: X) is an integrated
steel producer with production operations in the United States and Central
Europe. The Company has domestic annual raw steel production capability
of 19.4 million net tons (tons) and Central European annual raw steel
production capability of 7.4 million tons. U. S. Steel is also engaged in
several other business activities, most of which are related to steel
manufacturing. These include the production of iron ore pellets from
taconite (rock containing iron) in the United States, the production of coke in
the United States and Central Europe, transportation services (railroad and
barge operations) and real estate operations. During the year ended
December 31, 2005, the Company had three operating segments: Flatrolled Products (Flat-rolled), U. S. Steel Europe (USSE) and Tubular
Products (Tubular).
Headquartered in Pittsburgh, Pa., manufactures a wide variety of steel
sheet, tubular and tin products; coke, and taconite pellets. U. S. Steel'
s
domestic primary steel operations are: Gary Works in Gary, Ind.; Great
Lakes Works in Ecorse and River Rouge, Mich.; Mon Valley Works, which
includes the Edgar Thomson and Irvin plants, near Pittsburgh and Fairless
Works near Philadelphia, Pa.; Granite City Works in Granite City, Ill.;
Fairfield Works near Birmingham, Ala.; Midwest Plant in Portage, Ind.; and
East Chicago Tin in East Chicago, Ind. The company also operates two
seamless tubular mills, Lorain Tubular Operations in Lorain, Ohio; and
Fairfield Tubular Operations near Birmingham, Ala (17).
U. S. Steel produces coke at Clairton Works near Pittsburgh, at Gary Works
and Granite City Works. On Northern Minnesota' Mesabi Iron Range, U. S.
s
Steel' iron ore mining and taconite pellet operations, Minnesota Taconite
s
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(Minntac) and Keewatin Taconite (Keetac), support the steel making effort,
and its subsidiary ProCoil Company provides steel distribution and
processing services (17). Internationally, U. S. Steel has steel making
subsidiaries in Kosice, Slovakia, in Sabac and Smederevo, Serbia (17).
In addition to primary steel operations, U. S. Steel participates in several
joint ventures: USS-POSCO Industries, Pittsburg, Ca; PRO-TEC Coating
Company, Leipsic, Ohio; Worthington Specialty Processing, Jackson, Mich.;
Double Eagle Steel Coating Company, Dearborn, Mich.; Double G Coating
Company, Jackson, Miss.; and Acero Prime, San Luis Potosi, Mexico (17).
U. S. Steel is also involved in a number of other businesses, among them
transport, real estate development, and leasing and financial services.
Guided by a new Vision for its second century of business, U. S. Steel
remains committed to Making Steel, its core focus for more than 100 years;
strengthening its position in the global marketplace to remain World
Competitive; and Building Value for its stakeholders (17).
U.S. Steel Corporation is the nations number two integrated steelmaker
behind Mittal Steel U.S.A. U.S. Steel Corporation produces integrated
steel products in the United States and central Europe. The company
operates in three segments: Flat-rolled Products, U.S. Steel Europe, and
Tubular Products. The Flat-rolled Products segment produces sheet, tin mill
products, and strip mill plate, as well as domestic coke. This segment
primarily serves customers in the service center, conversion, transportation,
container, construction, and appliance markets in the United States. The
U.S. Steel Europe segment produces and sells sheet, strip mill plate, tin
mill, tubular, precision tube, and specialty steel products. This segment
primarily serves customers in the central and western European
construction, conversion, service centers, appliance, containers,
transportation, and oil, gas, and petrochemicals markets. The Tubular
Products segment produces and sells seamless and electric resistance
weld tubular products. The company also engages in the production and
sale of iron ore pellets. In addition, it provides rail and barge transportation
services to the U.S. steels facilities, as well as customers in the steel, coal,
chemicals, oil refining, and forest production industries. Further, the
company owns and develops various real estate assets, which include
approximately 200,000 acres of surface rights primarily in Alabama,
Maryland, Michigan, Minnesota, and Pennsylvania. United States Steel was
founded in 1901 (68).
Commercial Metals
Commercial Metals Company engages in the manufacture, recycle,
marketing, and distribution of steel and metal products, and related
materials and services in the United States and internationally. The
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company operates four steel mini-mills that produce reinforcing bar, angles,
flats, rounds, fence-post sections, and other shapes located in Texas,
Alabama, South Carolina, and Arkansas; scrap processing facilities that
directly support these steel mini-mills; and a copper tube mini-mill in
Virginia. It also manufactures rebar, wire rod, and merchant bar in central
Europe; and sells rebar primarily to fabricators, distributors, and
construction companies, as well as wire rod to meshmakers, end users, and
distributors. In addition, Commercial Metals Company operates steel
reinforcing bar fabrication and construction-related product facilities from 11
locations in Texas, Arkansas, Louisiana, Oklahoma, New Mexico, and
Mississippi. These facilities provide fabricating joists and special beams for
floor and ceiling support, and steel fence posts. The company processes
secondary metals or scrap metals; and sells recycled metals to steel mills
and foundries, aluminum sheet and ingot manufacturers, brass and bronze
ingot makers, copper refineries and mills, secondary lead smelters,
specialty steel mills, high temperature alloy manufacturers, and other
consumers. Further, it buys and sells primary and secondary metals,
fabricated metals, and other industrial products to the manufacturers in the
steel, nonferrous metals, metal fabrication, chemical, refractory, and
transportation businesses. Commercial Metals Company was founded in
1915 and is headquartered in Irving, Texas (68).
AK Steel Holding Corporation
AK Steel Holding Corporation (AK Holding. NYSE: AKS), through its wholly
owned subsidiary, AK Steel Corporation, is a producer of flat-rolled carbon,
stainless and electrical steels, and tubular products. The company
operations consist of seven steel making and finishing plants located in
Indiana, Kentucky, Ohio and Pennsylvania that produce flat-rolled carbon
steels, including coated, cold-rolled and hot-rolled products, and specialty
stainless and electrical steels that are sold in slab, hot band, and sheet and
strip form. Its operations also include AK Tube LLC, which further finishes
flat-rolled carbon and stainless steel at two tube plants located in Ohio and
Indiana into welded steel tubing used in the automotive, large truck and
construction markets, and European trading companies that buy and sell
steel and steel products.
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Arcelor Company
In Arcelors case it may be said that three heads are better than one. Arcelor
was formed by the merger of steel giants Usinor (France), ARBED
(Luxembourg), and Aceralia (Spain). Arcelor was the worlds leading
steelmaker until 2004, when the formation of Mittal Steel pushed it into the
No. 2 spot. Arcelor manufactures 50 million metric tons of crude steel per
year, including carbon steel (coated steel sheet, cold and hot coils), long
carbon steel (beams, sheet piling, and rails), and stainless steel for the
appliance, automotive, and construction industries. In 2006 Mittal agreed to
acquire Arcelor for $34 billion, creating Arcelor Mittal, a steel company three
times as large as closest rival Nippon Steel. Arcelor is listed in the
Euronext.
Nippon Steel
When it comes to steel, Nippon Steel rates as Japans heavy lifter. The
company, the worlds third-largest steel maker after Mittal Steel and Arcelor,
manufactures pig iron and ingots, steel bars, plates, sheets, pipes, and
tubes, as well as specialty, processed, and fabricated steel products.
Nippon Steel is an integrated steel maker; its annual crude steel output is
roughly 33 million tons. The companys operations include engineering,
construction, chemicals, nonferrous metals, ceramics, electricity supply,
information and communications, and urban development (theme parks and
condominiums). Nippon Steel also provides energy, finance, and insurance
services. Nippon Steel is listed on the Tokyo Stock Exchange.
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POSCO
POSCO operates as an integrated steel producer in Korea. The Company
manufactures and sells a line of steel products, including hot-rolled
products, plates, wire rods, cold- rolled products, silicon steel sheets and
stainless steel products. During the year ended December 31, 2005, the
Company produced over 30.5 million tons of crude steel substantially at its
Pohang Steel Works (Pohang Works) and Owangyang Steel Works
(Owangyang Works) production facilities. As of December 31, 2005,
Pohang Works had 13.3 million tons of annual crude steel and stainless
steel production capacity, and Owangyang Works had an annual crude
steel production capacity of 16.7 million tons. POSCO sells primarily to the
Korean market. Its major export market is Asia, including China and Japan.
JFE Holdings
JEF Holdings is a corporation headquartered in Tokyo, Japan. It was
formed in 2002 by the merger of NKK (Nihon Kokan Kabushiki-gaisha) and
Kawasaki Steel Corporation (Kawasaki Seitetsu Kabushiki-giasha). JFEs
main business is steel production, although it also engages in engineering,
construction, logistics, and chemicals. The company also operates several
overseas subsidiaries, including California Steel in the United States, Fujian
Sino-Japan Metal in China, and Minas da Serra Geral in Brazil. NKK is part
of Techint since 1999. JEF is listed on the Tokyo Stock Exchange.
Shanghai Baosteel Group Corporation
Shanghai Baosteel Group Corporation, formerly Baoshan Iron & Steel, is
Chinas largest iron and steel maker. (China is the worlds leading steel
producer.) Baosteel makes steel formed as billets, tubes, pipes, bars, and
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plates, and iron and tin products. Its markets include the appliance, auto,
construction, oil, and shipbuilding industries, both in China and abroad.
Baosteel has the capacity to produce more than 20 million tons of crude
steel annually. Its metallurgical activities are supported by around 45 wholly
owned subsidiaries and affiliated companies, including operations in
construction, finance, information technology, international trade, real
estate, and transportation. Baosteel is state-owned.
(Source: MSN Money)
Corus Group
Corus Group Plc is a producer of steel and primary aluminum. The
Company produces carbon steel by the basic oxygen steelmaking method
at three integrated steelworks in the United Kingdom at Port Talbot,
Scunthorpe and Teesside, and at one in the Netherlands at IJmuiden.
Corus produces primary aluminum in two smelters at Delfzijl in the
Netherlands and Voerde in Germany. Principal end markets for the
Companys steel products are the construction, automotive, packaging,
mechanical and electrical engineering, metal goods, and oil and gas
industries. Principal products and markets of its aluminum rolled products
business are aircraft plate, automotive body sheet, specialty sheet,
commercial plate for the transport and engineering sectors, and clad sheet
and fins for the heat exchanger industry (mainly automotive). Corus has
four main operating divisions; Strip Products, Long Products, Distribution &
Building Systems and Aluminum.
3.5.2
Rivals Anticipated Strategic Moves
The formation of Arcelor in Europe and JEF in Japan created two megasteelmakers in the world, they can out-muscle U.S. competitors which are
less efficient, smaller and financially weaker than their rivals in Asia and
Europe. The United States is the largest importer of steel in the world but
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the U.S. steelmakers represent a rather frail threat to the import. Such
mergers are expected to continue for foreign companies so they can build
up economies of scope in order to take advantages of the relatively open
U.S. market and weak competition.
Domestically, consolidation in the industry will remain and the number of
steel producers will continue to reduce. By 2001, more than 20 steel
companies in the United States, including Bethlehem Steel Corp. and LTV
Corp., the nations third and fourth largest steel producers respectively, filed
for bankruptcy protection. Those relatively small, unproductive and
financially-ill companies will have to either improve it productivity and
performance, consolidate to form a bigger entity, or go out of business. The
weaken U.S. steel industry may also petition for government intervention to
impose protective tariff
The trends in the industry continue to be consolidation. This is from buying
companies, merging, and joint ventures. This helps cuts down on costs
from redundancy. The other move would be toward recycling. This helps
provide the material for the production and helps cut energy costs. I can
see some vertical integration by buying recyclers. This would allow the
producers to lock in a fixed amount of scrap supply. The other trend is
technology enhancements. These enhancements will be in the form of new
ways to make product to further reduce costs.
Rivals primary strategic moves will be acquisition of weaker competitors
and the implementation of best practices on the acquired competitors. The
American steel industry, haunted by 21 bankruptcies in recent years, is
boiling down to a few huge companies that hope size can guarantee
survival. Now the survivors, mostly big companies like United States Steel
Corp and Mittal are scavenging the remains of their competitors, buying
blast furnaces and rolling mills at deep discounts. The consolidation gives
the producers more clout with customers, cuts administrative costs and
increases their capacity at little cost. Several factors are driving the
consolidation. For one, consolidation offers steelmakers more clout in
dealing with their biggest customers such as the big three automakers and
appliance makers. Consolidation does not cost much because, at least for
now, there is a glut of steelmaking capacity. The Laclede steel mill near St.
Louis, for example, was sold to investors for just $1 million. Bethlehem
Steel Corp., one of the nation' largest steelmakers, is being sold for $1.5
s
billion, small change when its 11 million-ton capacity is considered.
Consolidation has also gotten a push from the federal government. The
federal Pension Benefit Guaranty Corp. has taken over the under funded
pension plans of defunct steelmakers, saving huge sums for acquirers. The
pension funds at LTV Steel Co., Bethlehem and National Steel could
potentially cost the PBGC $7 billion or more. Those under funded pensions
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were a huge barrier to acquirers, in many cases making the sale of a steel
mill impossible.
3.5.3. Summary of External Environment Analysis
The U.S. steel industry is crucial to the nations economic competitiveness
and national security. It is a major contributor to the U.S. economy,
accounts for 5% of the nations manufacturing GDP. The United States is
still a main player in the global steel market, but it has lost the dominance it
once had.
The general environment has huge influence on every firm in the U.S. steel
industry. The three driving forces of the general environment: foreign
competition, compliance with the environmental regulations, and energy
cost, will continue to threaten the U.S. steel producers ability to survive. As
the result of these driving forces, the industry has undergone a major
transformation since the 1970s.
The five-force analysis signifies a relatively adverse overall market as the
threat of substitute products, the power of suppliers and buyers, and the
industry rivalry are high. On a global scale, merger activities have created
several mega-steel makers in Europe and Asia. Facing the cheap import,
the U.S. steel industry is expected to improve its competitiveness through
consolidation, closing down underperformed facilities, and improving its
efficiency.
The major players in this industry are quite large. Mittal is the largest steel
producer in the world. U.S. Steel is ranked 158th in the Fortune 500; Nucor
is ranked 177th; Commercial Metals is ranked 329th. This industry seems
very difficult for small companies to gain a foothold without being overrun or
bought.
Nucor is smaller than many of its major competitors in the industry. Its
competitors are primary integrated mill producers. The primary growth of it
competitors has been though acquisition. Both competitors are global
producers; however, Mittal has a stronger global/multinational presence.
Both competitors will continue to make acquisition and become bigger
producers of steel.
3.6 Key Success Factors
There are several critical factors that firms must respond to in the external
environment in order to be successful in the future. These include lean and
efficient operation, compliance with environmental regulations, and
technological innovation.
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Lean and Efficient Operation
Basic steel is a commodity. To succeed in the steel business, a company
must be able to maintain a lean and efficient operation. Firms must further
their effort to control the costs and increase productivity.
Compliance with Environmental Regulations
One additional hurdle the U.S. industry has to deal with is the evertightening environmental rules. How to comply with the government
regulations, and manage the relationship with an increasingly
environmental conscious general public, is a challenge every U.S. firm has
to learn to cope with in the future.
Technological Innovation
Technology is, at least in part, the solution to the previous two factors for
success. Implementation of technology can improve productivity, reduce
costs, and help the environment.
Although steel is an old and mature industry, it is still a high-tech industry.
Not every steel company has to be big to be successful; there are many
niche markets that may be too small for major steel producers to partake
but ideal for the smaller specialty grade producers. These markets do not
only focus on costs but more on quality. And new technology can always
create new market opportunities. Innovation is probably the ultimate key
success factor.
4
Internal Analysis
This section focuses on the firm itself. By analyzing its internal environment,
a firm can determine its unique resources, capabilities and core
competences. By matching its ability with the opportunities and threats in
the external environment, a firm can develop its vision, pursue its mission,
and select and implement its strategies.
The analysis of a firm internal environment requires the examining of the
firm portfolio of resources and the bundle of resources and capabilities
managers have created. This perspective suggest that individual firms
possess at least some resources and capabilities that other companies do
not. Understanding how to leverage the firm unique bundle of resources and
capabilities is key outcome when analyzing the internal environment (5).
4.1
Organizational Analysis
Nucor Corporation is the largest steel producer in the United States and had
net sales of $12.7 billion in 2005. Nucor is also the nations largest recycler.
In 2004, Nucor recycled approximately 17 million tons of scrap steel, with 5
million of those tons being automobiles.
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This section evaluates Nucors organizational structure, resources,
strategies, objectives and financial performance.
4.1.1 Corporate Mission
Nucor mission statement is the following:
Nucor Corporation is made up of 11,500 teammates whose goal is to
"Take Care of Our Customers." We are accomplishing this by being the
safest, highest quality, lowest cost, most productive and most profitable
steel and steel products company in the world. We are committed to
doing this while being cultural and environmental stewards in our
communities where we live and work. We are succeeding by working
together (www.nucor.com).
As described by the above mission, Nucor Corporation supports a corporate
culture focused on initiatives that promote team work with decentralization,
pay per performance, lean manufacturing practices, and social
responsibility. Nucors vision sets a goal in being the most profitable leading
steel production company in the world. By integrating environmentalism into
its mission statement, Nucor has nurtured a corporate culture that is
concerned and highly of aware the environment. The mission and vision of
Nucor defines a clear pathway and expectations to the strategic goals of the
organization.
The company is committed to making a product that in the past has been
hard on the environment. Nucor is committed to taking care of the
customers and at the same time continually producing quality, low cost
products while helping and maintaining the environment.
4.1.2 Products and Services
Nucor products can be broken into five main categories with subcategories
(www.nucor.com):
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4.1.3 Leadership
The current senior officers of Nucor are:
Daniel R. DiMicco - President and Chief Executive Officer since
2000.
Terry S. Lisenby - Chief Financial Officer, Treasurer and Executive
Vice President since January 2000.
John J. Ferriola - Executive Vice President since January 2002.
Hamilton Lott, Jr. - Executive Vice President since September
1999.
D. Michael. Parrish - Executive Vice President since November
1998.
Joseph A. Rutkowski - Executive Vice President since November
1998.
All six members have spent many years of their careers at Nucor before
they were promoted to their current positions.
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The Board presently consists of seven directors. The Boards responsibility
includes meeting as frequently as required to review and discuss reports by
management on the performance of the company, its plans and prospects,
as well as immediate issues facing the company. Directors are expected to
participate in board meetings, review relevant materials, serve on Board
committees and adequately prepare for meetings and discussions with
management. Directors are expected to attend all meetings, including the
annual meeting of stockholders. A majority of the directors must be
independent under the listing standards of the New York Stock Exchange.
In addition to the above independence criteria, other qualifications for the
Directors include their business or professional experience, integrity and
judgment, records of public service, ability to devote sufficient time to the
affairs of the Company, and so on. All nominees should be individuals of
substantial accomplishment with demonstrated leadership capabilities.
They should represent all stockholders and not any special interest group or
constituency.
4.1.4 Corporate Structure
Nucors corporate offices have been located in the SouthPark area of
Charlotte, North Carolina since 1991. There are currently 49 Nucor facilities
in 17 states around the country.
Nucors corporate structure has remained flat for many years (see the
following organization chart in 2000).
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Another level of executive vice presidents was added very recently to
oversee four areas of businesses (see the following organization chart in
2004). Two new positions in strategic planning and steel technology were
also added. Currently only 66 of its 11,500 employees work in the
companys executive office in Charlotte, which may possibly be the smallest
number of corporate office employees among major corporations.
4.1.5 Organizational Culture
The CEO, Dan DiMicco, of Nucor described the company with the following
quote:
Other companies can buy similar equipment to us, but the culture is
ours. Daniel Dimicco, 2001
Ted Kuster a Newsteel Reporter made the following quote in December
1995:
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"What Nucor management has been able to do is get workers to identify
their own interests fundamentally with those of management, something
managers have been attempting to do, not very successfully, since the
dawn of industry."
The Nucor Culture can be summarized in five areas: decentralized
management philosophy, performance based compensation, egalitarian
benefits, customer service and quality, and technological leadership.
Underlying these elements is the fact that none of Nucors plants, whether
built from scratch or acquired, are unionized. Nucor is opposed to unions,
believing them to be a destructive force in the US steel industry.
Decentralized Management Philosophy
Nucor is highly decentralized in its operations; there are only four
employee levels at Nucor locations (hourly employee,
supervisor/professional, department manager and division general
manager). Most operating decisions are made at the division level. Each
division does its own manufacturing, selling, accounting, engineering and
personnel management.
General Manager
Department Manager
Supervisor/Professional
Hourly Employee
Managers at each Nucor division experience a bare bones and lean
organizational structure that encourages innovation, freedom, and
sovereignty. Nucor encourages motivation of the individual at many levels.
Nucor divisions experience little to no fear of corporate redundancy,
executive mandates, or organizational layoffs.
Performance Based Compensation
All Nucor employees, from senior officers to hourly employees, are
covered under one of four basic compensation plans (in addition to base
pay) which reward employees for meeting certain incentive specific goals
and targets:
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Production Incentive Plan: Operating and maintenance employees and
supervisors at the facilities are paid weekly bonuses based on the
productivity of their work group. The rate is calculated based on the
capabilities of the equipment employed, and no bonus is paid if the
equipment is not operating. In general, the Production Incentive bonus
can average from 80 to 150 percent of an employees base pay.
Department Manager Incentive Plan: Department Managers earn
annual incentive bonuses based primarily on the percentage of net
income to dollars of assets employed for their division. These bonuses
can be as much as 80 percent of a department managers base pay.
Professional and Clerical Bonus Plan: This bonus is paid to employees
that are not on the production or department manager plan and is
based on the divisions net income return on assets.
Senior Officers Incentive Plan: Nucors senior officers do not have
employment contracts. They do not participate in any pension or
retirement plans. Their base salaries are set lower than what
executives receive in comparable companies. The remainder of their
compensation is based on Nucors annual overall percentage of net
income to stockholders equity and is paid out in cash and stock.
In addition to these established bonus plans, Nucor has periodically
issued an extraordinary bonus to all employees, except officers, in years
of particularly strong company performance.
Egalitarian Benefits
Traditional perks for senior officers such as company cars, executive
parking spaces, or executive dining rooms doe not exist at Nucor. As a
matter of fact, various programs (such as Nucors Profit Sharing,
Scholarship Program, Employee Stock Purchase Plan, Extraordinary
Bonus, and Service Awards Program) are available only to lower-level
employees. As a symbol of Nucors egalitarian culture, the annual report
has the names of every employee printed on the cover (2005 annual
report).
Customer Service and Quality
Nucor is committed to uncompromising quality, responsive service, and
competitive pricing. Many of Nucors facilities are ISO 9000 certified.
Technological Leadership
Nucor was among the first steel companies in the United States to use
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electric arc furnaces to melt recycled steel (primarily from junked
automobiles).
Currently, Nucor operates a facility in Crawfordsville, Indiana that
produces sheet steel directly from molten steel without the need for heavy,
expensive, and energy-consuming rollers. This process (known as
Castrip), would allow an entire mill to be built more economically and more
environmentally friendly.
Also, Nucor has two pilot projects, one in western Australia and one in
Brazil, which are developing low-cost sources of iron for use in its mills.
The cover of Nucors annual report puts the name of all their employees on
the front and back cover pages; Nucor has not lay off a single employee or
shut down any of its plants. This success has been contributed to its culture.
Nucor strives to recruit employees with the right frame of mind rather than
people with relevant skill sets. (53).
4.1.6 Summary of Organizational Analysis
Nucors corporate mission is Take Care of Our Customers. The company
focuses its effort on quality, customer service, and technology innovation to
achieve its objectives. The company is committed to a lean and simple
organizational structure; its culture is committed to performance, innovation
and no frills operations. Nucor has a decentralized organizational structure;
each division is autonomous in its own operation. Employees are at the
center Nucors human resources policy; the personnel incentive systems
are based on performances; senior management or hourly employee enjoy
the same insurance programs, vacation schedules, or holidays. The
intention is to retain highly talented and productive people in the
organization.
4.2 Analysis of Firm Resources
Resources, capabilities and core competencies provide the basis of
competitive advantage for an organization, and they vary by firms.
Resources, both tangible and intangible, are the origin of an organizations
capabilities; subsequently, capabilities are the root of an organizations core
competencies, and core competencies are the foundation of an
organizations competitive advantages. To understand an organizations
competitive advantages, we must analyze its resources, capabilities and
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core competencies.
The following are current resources and capabilities of Nucor. Nucor is
comprised of 49 Operating Facilities in 17 states; over 15,000 employees;
$12.7 billion in sales and 20.7 million tons of steel shipments ("Investor
Presentation Annual Meeting 2006,"). Nucors product mix is well diversified
comprising of both low end and high end products such as sheet steel, bar
steel, structural steel, plate steel, steel joists, steel deck, and cold finished
steel (103). Nucor has underneath its arsenal through acquisitions like
Vulcraft over 30 production divisions and 9 business units (103). Each
business unit is specialized focusing on each Nucor product.
4.2.1 Tangible Resources
Tangible resources are physical assets that can be quantified. Financial
resources, organizational resources, physical resources and technological
resources are the four areas of tangible resources.
Financial
Nucor has strong financial resource, in fact, the company probably has
the strongest financial strength among all steel companies in the U.S.
Nucor has been profitable every year and every quarter since 1966; this is
a remarkable achievement considering many of Nucor s competitors are
no longer in the business. Nucor has increased sales over the last three
years. Sales grew from $3.5 billion in 1995 to $12.7 billion in 2005; steel
shipment grew from 7.7 million tons in 1995 to 20.7 million tons in 2005.
Cash generated from operations was over $2.1 billion in 2005. Working
capital has increase by 34% over last year and long term debt remain the
same form the previous year. Net earning before taxes has increased
16%. Nucors debt rating is A+ by Standard & Poors and Al by Moodys
which is the highest in North America metals/mining debt ratings.
Undoubtedly Nucors financial strength is strong.
Organizational
Nucor has moderately strong organizational resources. Its flat and
decentralized structure has worked very well for the company for many
years. However, as the company continued to expand, the deficiencies of
the structure, such as redundancy in sales effort, are gradually exposed.
Nucor was aware of this fact, and it started making changes to its
corporate structure added strategic planning and technology development
officers at the corporate level. These changes are necessary for Nucor to
adjust to the increasingly competitive market environment.
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Physical
Nucor has strong physical resources. It has 49 operating facilities in 17
states; Nucor maintain very modern and efficient production facilities.
Many facilities have high automation and productivity. Nucor continue to
pursue a very aggressive capital investment program to maintain its
facilities in the most modern form using the most current technology
available; its Nu-Iron project in Trinidad which benefits from very costattractive and long 60 term supply of natural gas. The logistics are also
very favorable to receive iron ore and shipping direct reduced iron (DRI) to
Nucors sheet mills. Nucor is the largest producer of structural steel, steel
bars, joists, decks, and cold finished bars in the United States. Nucors
physical resources are definitely strong.
Technological
Nucor also has very strong technological resources. Technology is
always at the center of Nucors strategy. Nucor was one of the first steel
makers adopting the mini-mill technology. It is also the first firm to
commercialize thin-slab casting. Several new technologies, such as
Castrip and Hlsmelt, are in the pipeline. Nucor is also quick to implement
new technology. Nucors technological resources are strong.
4.2.2. Intangible Resources
Intangible resources may be more difficult to measure than tangible
resources, but they are a greater and more powerful source of core
competencies than tangible resources, and they are increasingly more
important in the business capital. Human resources, Innovation resources
and reputation resources are the three forms of intangible resources.
Human Resources
Nucor has strong human resources. The no-frill HR policies are able to
retain quality employees in the organization. Employees are informed and
empowered to foster entrepreneurial spirit, and they are well
compensated. Nucors hard driving team system is able to rid of
unproductive workers. The company also has a no-layoff practice.
Consequently, Nucor has a very well trained and motivated workforce.
Innovation Resources
Nucor is the technology leader in the U.S. steel industry. It pioneered the
mini- mill technology in the 1970s. The company continues to upgrade its
product quality through technological improvement. The firm has kept an
open mind toward risk taking and trying new ideas. Plant managers and
employee are given empowerment to make changes and improve the
performance of the company. Innovation resources are strong at Nucor.
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Reputational Resources
Nucor has strong reputation of being a low cost/high qualities and
innovative producer. The company has history of solid performance even
in tough market and economic conditions. Nucors reputational resources
are strong.
4.2.3 Capabilities
Capabilities exist when resources have been purposely integrated to
achieve a specific task or set of tasks. Nucor is in the steel and steel
products business; it has integrated an incentive pay system that has
produced a highly productive workforce and a capital investment program
with new technologies to develop highly productive low cost production
facilities across many segment of the steel industry. Judging for its longterm profitability, Nucor, without a doubt, has excellent capabilities in its
chosen business areas. Nucor has a wide range of strong resources, from
human resources to financial strength, and this enables the company to
achieve its success.
4.2.4 Core Competencies
Core competencies are capabilities that serve as a source of competitive
advantage for a firm over its rivals. It is stated in Nucors corporate mission,
Nucors goal is to Take Care of Our Customers. We are accomplishing
this by being the safest, highest quality, lowest cost, most productive and
most profitable steel and steel products company in the world. This
statement also perfectly describes Nucors core competency.
For a capability to become a core competency, it has to be able to provide
sustainable competitive advantage. There are four specific criteria: valuable,
rare, costly to imitate and non-substitutable. Only those capabilities that
meet the standards can be considered as core competencies.
Valuable
Valuable capabilities help a firm neutralize threats or exploit
opportunities in its external environment. Nucors capabilities meet this
criterion. Its efficient steel mills manufacture high-quality, low-cost
products which not only bring great values to the customer but also allow
Nucor to stay competitive facing cheap imports.
Rare
Rare capabilities are capabilities that few, if any, competitors possess.
Basic steel is a commodity. Many of Nucors rivals, especially those in
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Europe and Asia, are also capable of producing steel products at
competitive cost. Nucors capabilities do not meet the rare criterion.
Costly to Imitate
Costly-to-imitate capabilities are capabilities not easily developed by
other firms. Nucors most successful core competency can be attributed
to its Culture. The former president, Ken Iverson, described Nucors
success as 70% culture and 30% technology. Because of the causal
ambiguity and social complexity characteristics of its organizational
culture (e.g. commitment to the employees and decentralized structure),
Nucors capabilities are difficult for rivals to emulate, and hence qualify
as core competencies
Non-Substitutable
Non-substitutable capabilities are capabilities that have no strategic
equivalents available to the rivals. The combination of Nucors resources
(e.g. financial strength, technological know-how, reputation, and human
resources) makes Nucors capabilities non-substitutable, in particular
among the U.S. steel producers.
4.2.5 Summary of Firm Resources
Nucor has a wide-range of resources which complement its capabilities to
achieve it goals. Because these capabilities are valuable, costly to imitate
and have no strategic equivalents available, Nucors capabilities meet the
criteria for core competencies because they provide sustainable competitive
advantage. Nucors cost leadership, workforce, culture, efficiently and
technology are all source of the firm competitive strength; itss record of
earning above-average returns over three decades is the proof.
4.3
Analysis of Objectives
Nucors mission is to serve its customers by being the safest, highest
quality, lowest cost, most productive and most profitable steel and steel
products company in the world, at the same time, Nucor is also dedicated to
be cultural and environmental stewards in the communities. Consequently,
the companys short-term, long-term and financial objectives are skillfully
articulated around its mission statement.
4.3.1 Short-Term Objectives
Nucors short-term objective is to optimize its existing operations, including
Continual improvement in quality & cost
Nucor BEST marking
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Bar mill group capital projects program
Improve sheet mill groups volume and profitability - continue focus on
supplying value-appreciative customers with value-added products
The fight for free and fair trade
Raw materials strategy to develop supplies of high quality scrap
substitutes
Nucor has carried out this strategy by completing a three-year bar mill
modernization program adding vacuum degassers to its sheet mills and
additional capital expenditures at each of its other divisions. To improve on
environmental performance, the company is having ISO 14001 certified
Environmental Management Systems installed in all operations by 2007
(19). To improve optimize existing operations and technologies, Nucor must
refine all new technology in place in its current operation to realize the
competitive advantages that can be achieved.
The raw material strategy is driven by Nucors ongoing expansion of sheet
steel product portfolio into higher quality grades. Nucor plans to develop
supplies of high quality scrap substitutes and obtain control approximately
one-third of its iron units annual consumption. As part of this effort Nucor
initiated the Nu-Iron project by acquiring an idled DRI plant in Louisiana in
September 2004 and move the plant to Trinidad in order to take advantage
the cost-attractive supply of natural gas and favorable logistics
transportation of material. Nucor has begun using derivative financial
instruments to hedge against price risk related to natural gases purchases.
4.3.2 Long Term Objective
Nucors long-term objective is to utilize its strength to take advantage of
marketplace opportunities and continue Nucors successful tradition as a
cyclical growth company. There are three areas of focus:
Pursue strategic acquisitions
Continue Greenfield growth - opportunities to capitalize on new
technologies
Grow globally through joint ventures leveraging new technologies
Between 2001 and 2006, Nucor made a series acquisition including Auburn
Steel Companys steel bar facility in Auburn, New York; ITEC Steel Inc. and
its wholly owned subsidiary, Steel Truss and Frame Corp.; Birmingham
Steel Corporation with its four bar mills in Alabama, Illinois, Washington,
and Mississippi; Trico Steel Company in Decatur, Alabama; Corus
Tuscaloosa in Tuscaloosa, Alabama; Fort Howard Steels operations in Oak
Creek, Wisconsin; Marion Steel Company in Marion, Ohio; and Connecticut
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Steel Corporation.
In the technology area, Nucor has successfully commercialized the Castrip
process at its Crawfordsville facility. Castrip is the worlds first production
installation with a direct strip casting of carbon sheet steel into final shape
and thickness without further hot or cold rolling. This process allows lower
investment and operating costs, reduced energy consumption and smaller
scale plants (1/6th the space of a mini-mill and at 1/10th the cost of a
traditional integrated mill) than can be economically built with current
technology. This process also generates significantly lower emissions.
Nucor started building its second Castrip facility at the Nucor-Yamato beam
facility in Blytheville, Arkansas since 2005. Nucor holds exclusive rights to
Castrip in the United States and Brazil.
Nucor is currently executing on the global growth strategy in Australia by
partnering with The Rio Tinto Group, Mitsubishi Corporation, and Chinese
steel maker Shougang Corporation on a Hlsmelt plant located in Kwinana,
Western Australia. Production started in January 2006. The Hlsmelt
process converts iron ore fines and coal fines to liquid metal, eliminating the
need for a blast furnace, sinter/pellet plants and coke ovens which reduces
the impact on the environment. Nucor has also entered a joint venture with
Companhia Vale do Rio Doce (CVRD) to construct and operate an
environmentally friendly pig iron project in northern Brazil. Production of pig
iron at this facility, Ferro Gusa Carajas S.A. (FGC), began in the fourth
quarter of 2005. The FGC project, together with the Nu-Iron and Hlsmelt
projects represent the initial steps in Nucor s raw materials strategy to
control 6,000,000 to 7,000,000 tons per year of its iron consumption. Nucor
continues to look for other opportunities globally.
4.3.3 Financial Objectives
Nucors financial objective is to generate higher profits on both the high and
low periods of a cyclical industry while maintain conservative practices. The
plan includes average annual earning growth of 10 to 15 % over the next 10
years, average return on equity 14%, and return of sales of 8 to10 %. The
guidelines for its financial practices include:
Financial reporting in plain language and easy-to-understand format
Simple capital structure
No off-balance sheet financing arrangements
No pro forma earnings reporting
Strong balance sheet
No pension liability
Superior financial flexibility
Disciplined acquisitions strategy
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To support the financial object, Nucor must generate sufficient profits from
all segment of the company. To generate these profits, Nucor must have or
capture a large part of the market share. To meet the financial objectives,
the company must use acquisitions, technology, financial ability and efficient
operation.
4.4 Financial Analysis
The financial analysis on Nucor is presented in this section. The financial
analysis of the firm is very important in assessing the health and stability of
the firm. The data is mainly obtained from MSN Money,
www.finance.yahoo.com and www.morningstar.com, or calculated directly
from each companys financial statements. The focus of the analysis is to
examine Nucors performance against its competitors for a three-year
period from 2003 to 2005. A comparison of Nucors results with the industry
average on a one-year and five-year basis is also conducted. The analysis
includes eight categories: growth rate, price ratios, profit margins, financial
condition, investment returns, dividend analysis, management efficiency and
stock price analysis.
4.4.1 Valuation Analysis
The price to earning ratio is one of the most important ratios to investors.
This value is the price investors are willing to pay for every dollar of the
company earnings (61).
Valuation
Ratios
Price/Earnings
Price/Sales
Price/Book
U.S. Steel
2005
Commercial Metals
9.4
0.5
2.0
9.0
0.4
2.3
Nucor
11.3
1.2
3.5
Industry
10.3
2.0
3.7
The financial analysis presented below was complied base on three year of
past data, 2003, 2004, and 2005. The calculations are from yahoo finance.
Nucor biggest two rival are also included in the analysis. The financial
analysis will cover seven segments; valuation, growth, profitability, financial
strength, dividend, management efficiency and stock price.
Valuation is an attempt to estimate the market value of a firm or its financial
assets. This valuation will used price to earning, which divides per share by
earning per share, Price to sales ratios, and price to book. The definitions
are listed below are from yahoo, finance. Com
Price to earning is determined by dividing current stock price by current
earnings per share (adjusted for stock splits). Earnings per share for the P/E
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ratio are determined by dividing earnings for past 12 months by the number
of common shares outstanding. Higher multiple means investors have
higher expectations for future growth, and have bid up the stock' price.
s
Price-sales ratio is determined by dividing current stock price by revenue
per share (adjusted for stock splits). Revenue per share for the P/S ratio is
determined by dividing revenue for past 12 months by number of shares
outstanding. The lower the ratio numbers the better.
Price-book ratio compares a stock' market value to the value of total assets
s
less total liabilities (book value). Price-book ratio is determined by dividing
current stock price by common stockholder equity per share (book value),
adjusted for stock splits. It is also called Market-to-Book. The lower the ratio
the better.
Nucors current PIE rate is basically in line with the industry average. Its
annual average PIE ratio is higher than that of U.S. Steel. Since Nucor is
the more profitable firm between the two, it is reasonable that it enjoys a
higher ratio. AK Holdings, on the other hand, lost money in two out three
years. The price-to-sales ratio is at 1.2, which is lower than the industry
average 2.1. Typically when the P/S ratio is less than 1, the price can be
considered attractive. However, the decision should be made in combination
with other indicators such as the profit margin. The price-to-book value ratio
is also in line with the industry average. The current price-to-cash flow,
however, is significantly lower than the industry average.
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4.4.2 Growth Analysis
Nucor has been performing very well since 2003. All three categories in the
following table showed a significant escalation from 2003 to 2004, and
continued to rise in 2005. Nucor was profitable in all three years while U.S.
Steel and AK Holdings profitability fluctuated significantly.
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Nucor has had tremendous growth in the past three years. They have had
phenomenal growth from 2003 to 2004 and double digit growth from 2004 to
2005.
Nucors sales and income are much higher than the industry average. This
reflects Nucors dominant position in the industry. Nucors one-year net
income growth rate outperforms the industry average by 11.9%; and its fiveyear sales growth also outperforms the industry average by 4.3%. This is a
remarkable achievement considering the number of steel companies went
out of business in the last few years. Nucor exhibits an outstanding growth
rate in comparison to its competitors, on a one-year basis as well as fiveyear average.
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Nucor Corporation
Nucor has continued to grow sales and income over the last three years.
Data from Nucor 2005 annual statement indicates a 12% increase in sales
in 2005 of 12.70 billion, compared to 11.38 billion in 2004, and 6.27 billion in
2003. In 2005, 25% of the sales increase is attributed to higher selling price
and in 2004 75% was due to higher selling price as well as strong demand.
Income has increase with sales, in 2005 income was 2 billion in 2005, 1.73
billion in 2004, and 66.9 million in 2003.
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4.4.3 Profitability Analysis
The profitability analysis shows how well the company performs related to
its income. Nucor has improved each year since 2003 and outperforms its
competitors.
U.S. Steel
Gross
Profit
Margin
Operating
Profit
Margin
Net Profit
Margin
17.4%
2005
Commercial
Metals
2004
2003
Nucor
13.6%
20.6%
19.8%
4.3%
10.3%
7.2%
15.9%
15.4%
1.9%
6.35%
4.33%
10.32%
9.86%
1.00%
Nucors net profit margin fluctuates considerably between 2003 and 2005.
The profit in 2005 is 10.3%, but it was merely 1% only two years ago in
2003. Recall Nucors sales and income from previous section, the sales in
2003 is roughly half the amount in 2005, but the net income in 2003 is less
than one-twentieth of 2005s net income. The high and low net incomes and
profit margins between 2001 and 2005 reflect the cyclicality of Nucors
business. In any case, Nucors profitability is clearly superior to its
competitors between 2003 and 2005.
In general, Nucors profit margin seems to be lower than the industry
average. Nucor chose to be the cost leader in the steel industry; the low
margin is likely due to Nucors strategic choice; and the low price would
stimulate significant sales volume. Nucors economies of scope permit such
a strategy to be implemented successfully.
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4.4.4 Financial Strength Analysis
The ratios show the liquidity of the company and the ability to raise cash.
The other values show the firms ability to cover interest and debt.
Current Ratio
Quick Ratio
Debt to Equity
Financial Leverage
U.S. Steel
1.76
1.12
0.56
2.95
2005
Commercial Metals
1.91
1.06
0.44
2.59
2004
3.24
Nucor
2.98
0.8
0.37
1.67
0.9
0.27
1.77
2003
2.57
0.91
0.39
1.92
The financial Strength analysis will review the liquidity of Nucor and it two
biggest domestic rivals. This analysis will compare and measure the liquidity
and solvency of the firms to determine if a company can meet it short term
financial obligation. Leverage is use of debt financing to fund operations
and or growth. (88) The balance sheet will be the primary financial
statement used. Six ratios or factors will be use in the analysis, current ratio,
total cash, total cash per share, total debt, total debt to equity, book value
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Nucor Corporation
per share. Current ratio is an indicator of short-term debt-paying ability.
Current ratio is determined by dividing current assets by current liabilities.
The higher the Current ratio, the more liquid the company (88). The
Debt/equity ratio is Indicator of financial leverage. Compares assets
provided by creditors to assets provided by shareholders. The Debt/equity
ratio is determined by dividing long-term debt by common stockholder
equity. Book value per share is the ratio of stockholder equity to the average
number of common shares. Book value per share should not be thought of
as an indicator of economic worth, since it reflects accounting valuation (and
not necessarily market valuation) (88).
Nucor
2.15B
USX
1.48B
Mittal
2.13B
Total Cash Per Share (mrq):
Total Debt (mrq):
Total Debt/Equity (mrq):
6.987
923.55M
0.199
12.001
1.57B
0.389
3.028
8.26B
0.715
Current Ratio (mrq):
Book Value Per Share (mrq):
3.101
14.991
1.925
32.73
2.264
16.372
Total Cash (mrq):
mrq = Most Recent Quarter (as of 30-Jun-06)
Nucor financial strength is in good condition. Nucor has the lowest current
ratio and debt to equity ratio compared to it rivals. Nucor also has the
largest amount of total cash on hand.
Long-Term Solvency Risk
Nucor took on significant amount of long-term debts during 2002 and 2003
because of a series of acquisitions and technology investments it made in
the same time period. Acquisition is a part of Nucors growth strategy, and
the company is able to use its strong financial position to take advantage
of the economic downturn and obtain targets at more attractive prices.
Notice that Nucors debt-to-equity ratio remains considerably lower than
the industry average even at its peak during 2002 and 2003. The
comparison of debt-to-equity ratio between Nucor and U.S. Steel and AK
Holdings is even more astonishing.
Nucor cuts its debt-to-equity ratio almost by half from 2003 to 2005; its
interest coverage ratio is more than three times the industry average, at
the same time the leverage is 44% below the industry average. Nucors
long-term solvency risk is low.
Short-Term Liquidity Risk
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Nucor Corporation
The much-higher-than-average current ratio and quick ratio suggests that
Nucors current liabilities with respect to its assets are much lower than
the industry average, and this situation continues to improve since both
ratios increase from 2003 to 2005. Nucors current- and quick ratios are
significantly higher than that of U.S. Steel and AK Holdings. In fact, U.S.
Steel and AK Holdings exhibited serious short-term liquidity risks. Overall,
Nucors short-term liquidity risk is much below the industry average.
4.4.5 Dividend Analysis
Dividend Analysis
Dividend Yield
Dividend/Per
Share
U.S. Steel
0.79%
$0.38
Commercial
Metals
0.64%
$0.12
Nucor
1.27%
$0.93
S&P
500
1.55%
A dividend is a cash payment from a company' earnings and distributed
s
among stockholders. Dividends are an investor' share of a company'
s
s
profits, given to him or her as a part-owner of the company. Aside from
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Nucor Corporation
option strategies, dividends are the only way for investors to profit from
ownership of stock without eliminating their stake in the company (21).
A steadily increasing dividend payout is viewed as a strong indication of a
company' continuing success. Three ratios will be compared, dividend
s
yield, dividends per shares, and payout ratio. Dividend yield represents
annual dividends divided by current stock price. Dividends per share is
dividend paid for the past 12 months divided by the number of common
shares outstanding, as reported by a company. The number of shares
often is determined by a weighted average of shares outstanding over the
reporting term Dividend payout ratio is the percentage of earnings paid out
as dividends (88).
Dividend
Analysis
Dividend
Yield
Dividend
per share
Payout
ratio
Nucor
USX
Mittal
0.75
0.93
1.34
0.4
0.6
0.5
21%
7%
13%
(Sources: MSN Money and Yahoo Finance)
Dividends, of paid, represent part of the return an investor earns by
purchasing a companys stock (the other part is the capital gain). Since
1995, Nucor has been steadily increasing its dividend payment to investors,
even during the 2001-2003 recession. This is just another testament to
Nucors financial strength. AK holding did not pay dividends between 2003
and 2005.
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4.4.6 Management Efficiency Ratios
The management efficiency analysis shows how much money the
managers are able to squeeze out of their assets.
Return on
Total
Assets
Return on
Equity
Receivables
Turnover
Inventory
Turnover
Payables
Period
Fixed Asset
Turnover
Total Asset
Turnover
U.S.
Steel
8.59%
2005
Commercial
Metals
13.23%
2004
Nucor
2003
19.75%
21.11%
1.42%
26.10%
37.06%
33.99%
38.98%
2.69%
8.3
9.2
12.9
14.8
11.9
8.7
8.4
9.2
10.1
10.4
67
33.7
17.6
16.0
17.6
3.7
13.8
4.5
4.0
2.2
1.4
3.1
1.9
2.1
1.4
Nucor has been managing their ROA and ROE quite effectively even though
they slipped slightly in 2005.
Management efficiency ratios include return on assets and return on equity.
These ratios show how well a firm using its assets to generate sales. Return
on assets is determined by dividing net income for the past 12 months by
total average assets. Return on equity is determined by dividing net income
for the past 12 months by common stockholder equity (adjusted for stock
splits). Result is shown as a percentage. Investors use ROE as a measure
of how a company is using its money (88).
Efficiency Ratios
RTN on Assets
RTN on Equity
Nucor
20.94
34.48
USX
7.34
19.86
Mittal
9.71
27.84
Source; finance.yahoo.com
Data indicate the Nucor has the best ratios of it rivals. This indicates that
Nucor is the most efficient user of assets.
In all the following categories, Nucor management performance beats the
industry average by a wide margin. Nucors human resources policies
clearly paid off as the in revenue-per-employee and income-per- employee
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Nucor Corporation
ratios are among the highest in the industry. Nucor also leads in the
receivable turnover, inventory turnover, and asset turnover.
4.4.7 Stock Price Analysis
Nucor maintains positive earnings-per-share since 1996, even during the
recession in early 2000s. Nucors financial performance did not go unnoticed by the investors; Nucors stock price soared above the S&P 500 and
Dow indices in the past five years. Between Nucor and U.S. Steel, Nucor is
clearly a much more attractive option. Nucor has more consistent
profitability and earnings, and its stock price shows less volatility than US
Steels.
In three years, Nucor stock has had an increase of 331.95% compared to
30.38 % of the S&P 500. The Earnings Per Share has increase from 0.2 in
2003 to 4.13 in 2005.
Nucor stock price has gradually increased over the three time period
January 1, 2003 to December 31, 2005. The stock price has followed the
financial performance of the company over the last three years and has
more than triple in price. The company has been buying stock back that has
help to increase share price and has EPS of 4.67 over the last twelve month
as of July 1, 2006.
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4.4.8
Investment Return
The return-on-equity ratio shows the similar pattern as the net income from
1996 to 2005. With the exception of five-year return-on-equity, Nucor
outperforms the industry average in all the categories on both one-year and
five-year bases. The wild swing on the investment returns is due to the
cyclicality of the business. Obviously, Nucor has the best return on
investment. Nucors return-on-equity and return-on-assets clearly
outperforms U.S. Steel and AK Holding.
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4.4.9 Summary of Financial Analysis
Nucor financial analysis looks very good compared to its competitors and
is tracking well with the industry. Nucor is very healthy financially and has
a lot of cash and assets for future growth.
In summary, Nucor is in solid financial shape. In the last three years Nucor
has managed to improve its financial performance in all areas. The
company has improved its stock price, income, margins, and sales.
Nucor has increase sales from 6 billion to over 12 billion in a three year
time span. The increase sales have increased sales volumes that better
utilized production capacity that resulted in overall better margins. This fits
Nucor goal of optimizing existing operations. Net earning increase from
62.7 million in 2003 to 1.3 billion in 2005.
Nucor liquidity and solvency is in good condition. Nucor has the lowest
current ratio and total debt to equity ratio compared to its rivals. The
company has high awareness not to bog the company down in debt
payments, but understand that some debt is needed to fund acquisitions
and has kept total LTD at almost a constant over the last three years. In
addition Nucor has arranged for large line of credit if needed.
Nucor has strong dividend ratios that match or beat it rival in the industry
and tell shareholder that Nucor is profitability and a good investment. This
has boosted the stock price which as triple in price and makes Nucor less
of a takeover target.
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Management Efficiency Ratios Data indicate is the most efficient user of
assets when compare next to it two rival. Management is doing a solid job
of using resource.
4.5 Strategic Analysis
In this segment, Nucor current corporate, business and international
strategies will be analyzed.
4.5.1 Corporate-Level Strategy
Nucor has a four part corporate-level strategy for their operations.
Optimize existing operations
Pursue strategic acquisitions
Continue Greenfield growth via the commercialization of new technologies
Grow globally with joint ventures
This four part strategy has led to an unprecedented amount of growth and
profitability
A corporate level strategy specifies actions a firm takes to gain a
competitive advantage by selecting and managing a group of different
business competing in different products markets. Corporate level strategy
is concerned with two key issues; in what product markets and businesses
the firm should compete and how corporate headquarters should manage
those businesses (5).
Nucor has made the decision to have a diversified product mix in the steel
industry. The company will compete in the following steel product markets;
sheet, bar, structural, plate and downstream steel products. It will operate
business or mills that produce a variety of steel products in each products
market. Nucor is pursuing a high level of diversification with related
constrained. Meaning less than 70% of revenues is from one product
market and share product, technologies, and distribution linkage. The
diversification is to allow the company to transfer core competencies and
reduce the firm dependent on any single product market for profits.
Corporate headquarters will direct the overall strategic grow of the
company, standardized certain function like human resources, branding,
environmental issues, accounting, construction, and improve
communication. Day to day operation will manage by the each production
facilities that reports to an executive vice president.
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Nucors strategy is focused upon strengthening its core competencies of
reducing costs, being the cost leader, increasing efficiency, and widening
productivity. This aspect is especially seen in its lean production methods,
focus on electrical and manufacturing efficiency, recycling of waste,
investment in social capital regardless if it is a customer or employee,
sharing of knowledge, and being the first to introduce revolutionary steel
making techniques to market such as the implementation of iron carbide. In
order to ensure the above strategy, Nucor has implemented metrics such
as incentive programs and a focus on having a lean organizational
management structure.
4.5.2 Business Level Strategy
The business level strategy developed by Nucor is to decentralize and
empower their employees. The district managers at each facility have
complete control of the facility and all decisions about production, sourcing,
and outcomes.
A business level strategy is an integrated and coordinated set of
commitments and actions the firm uses to gain a competitive advantage by
exploiting core competencies in specific product markets (5).
Nucor business level strategy is to become a market leader in every product
market that they compete. Market share will need to be significant improve
in many product markets to meet this strategy. Nucor will accomplish this
with the following action, strategic acquisitions, operational improvement
and technologies. Nucor has core competencies in workforce productivity,
new technologies, management refectories and operational expertise that
can be transferred across the organization. The primary business level
strategy is a cost leadership strategy. Cost leaders must continue to find
ways to lower costs.
4.5.3 Value Chain Analysis
The value chain analysis describes the activities the organization performs
and links them to the organizations competitive position. Below is a
diagram of the model.
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Value chain analysis allows the firm to understand the parts of its operation
that create value and those do not. A firm value chain is segmented into
primary and support activities. Primary activities involved with a products
physical creation, it sale and distribution to buyers, and service after the
sale. Support activities provide the assistance for the primary activities to
take place.
The value chain depicts and categorizes the operations and functions of a
company into primary and support activities. The value chain is a good
analysis tool to assist a firm in identifying cost advantage, differentiation,
competitive advantages, strengths, and weaknesses (The Value Chain).
With the use of a value chain analysis, a firm is able to comprehensively
review all of its activities and focus on eliminating activities that may be
deleterious and developing activities that are beneficial and advantageous.
4.5.3.1 Primary Activities
Primary Activities include inbound logistics, operations, outbound logistics,
marketing and sales, and service. In moving from left to right value is
added by progressing through each primary activity link to ultimately form a
value chain, the linking of all the primary activities. Inbound logistics
evaluates the movement and efficiency of raw materials from suppliers to
mature production. Currently, Nucors inbound logistics revolves around the
availability of its primary raw materials of iron scrap. For many years, steel
producers recycled scrap into their steel making process. Previously, Nucor
has been very highly dependent on a limited number of scrap iron suppliers
(103). In lieu of being overly dependent on the scrap iron suppliers, Nucor
invested in new innovative techniques integrating iron carbide into its steel
making process (103). Iron carbide is the additive to iron that provides the
strength to steel. Due to the use of iron carbide, Nucor was no longer
dependent on its scrap iron suppliers. Nucor evolved and opened new
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plants to produce its own iron carbide. Like the discovery of iron carbide,
Nucor may be able to further enhance its inbound logistics by developing
new innovative techniques for less dependency and reduced utilization of
natural resources.
Operations analysis of the value chain evaluates the processes and
workflows of production such as machining, assembly, and equipment
maintenance (96). Like the way Nucor was able to improve its inbound
logistics, the firm has also found a way to further improve its operations.
Nucor has integrated an innovative thin slab casting which no longer
requires large production facilities to support its operations (103). With this
new technology, Nucor has been able to penetrate into new steel markets.
Operationally, if Nucor is able to become leaner with its innovative new
techniques that allowed Nucor to enter new product markets, Nucor may
consider further investment into expanded facilities or even focus further
into the development of new steel products.
Outbound logistics evaluates the delivery and distribution of products to the
end customers. Currently, Nucor has a very limited number of distribution
centers (103). Having only a handful of distribution centers may become
problematic if these centers for some reason become backlogged due to
continued growth in the production arena and no expansion in distribution.
This imbalance of focus may lead to the inability to fulfill the demand of its
customers.
Marketing and sales evaluates the processes of customer awareness and
product ordering fulfillment. Nucor is very customer oriented. Nucor
provides easy access to pricing, product, grade availability, and delivery
pricing via its multiple online websites. Currently, the ordering process is
very manual and detailed process requiring multiple days. Although Nucor
has made significant gains in automation of work order delivery and status.
During the final distribution process, the information is entered into
NuTruck.Com, Nucors order delivery status website. With Nutruck, Nucor
customers are able to easily retrieve online all the details of the product
order from source to destination and size of the order. Nucor can enhance
and reduce the wait time for its products by further developing an electronic
ordering system with its key customers to fully automate the receipt and
delivery of the customer orders.
Service is good as Nucor strive to meet customers request and meet
delivery request and produce a high quantity product that does need a high
level of service after the sale. Marketing & Sales have been improving by
centralizing sales calls to reduce redundancy. Outbound Logistics are good.
Operations are competitive advantage for Nucor, due to a productive
workforce and modern plants. Inbound logistics is primary good, as many
suppliers locate close to Nucor facilities.
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The primary activities are directly concerned with the creation or delivery of
a product or services. Support activities help improve the effectiveness or
efficiency of the primary activities.
The part of the chain that Nucor has succeeded in and gained market share
was is in service. Nucor won a segment of the industry whose needs were
poorly met by existing suppliers. Nucors lean business design allowed it to
meet rebar customers price requirements and service them (57). Nucor
also was able to maintain long-run supplier relationships without vertically
integrating. Nucor also locates closely to their competitors.
Nucor Steel Price List (Source: http://www.nucor.com)
Service analysis of the value chain focuses on the firm processes to sustain
product value. Nucor ensures product value by requiring high product
quality standards and by abiding to industry performance metrics. Many
Nucor divisions have been certified by ISO 9000 standards.
4.5.3.2 Support Activities
Support Activities include firm infrastructure, human resource management,
technology development, and procurement. Firm infrastructure evaluates
processes such as general management, planning, financing, and
accounting of the organization (96). As described earlier, Nucor is a highly
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decentralized business with currently 49 divisions. Each Nucor division is
very autonomous with only 3 levels of management: 1) general manager, 2)
department manager and 3) supervisor.
Human resource analysis of the value chain evaluates the firm processes of
recruiting, hiring, training and development(96). Nucor is well experienced
in this arena. The firm offers multiple incentive programs and a no layoffs
policies with its employees. These types of social capital investments of
Nucor has resulted in the major benefits of not having to be subjected to
unions and has also resulted with increased productivity and profitability.
Nucor employees are well above industry standards in terms of metric ton
steel productivity per employee.
Technology development analysis of the value chain evaluates the firms
focus to innovate and enhance current production processes. Nucor is also
well versed in this arena as it has been recognized as the industry leader
with regard to innovation with being the first firm to integrate thin slab
casting into its steel making process. Nucor has always been willing to
think outside of the box to enhance its steel making. Nucor is willing to
invest in technology and innovation to increase production efficiencies and
reduce costs. For example, Nucor has integrated the Microsoft SharePoint
application to ensure quicker and easier collaboration between its
employees ("Nucor: About Us,"). Tips and tricks that has resulted in
documented cost reductions and increased production at each Nucor
division can now be easily shared across the organization.
Procurement analysis of the value chain evaluates the processes a firm is
willing to take to purchase inputs (96). Nucor has implemented an
electronic procurement systems via the DataStream information system
product to manage its numerous suppliers ("Nucor Steel Stays Lean,"). Due
to the integration of this electronic procurement system, Nucor is able to
reduce costs and ensure large volume orders resulting in deeper discounts
for the firm.
Procurement is the weak link in the support activities in the value chain.
Uncertainly on energy and raw material prices and supplies of raw material
can significant costs to the product. Nucor has implemented certain controls
to improve this activities, however it competitors can do the same.
Technology development is a competitive advantage for Nucor, it has
several technologies being implemented to reduce costs and improve
production. Human resources management is another competitive
advantage for Nucor, it has little employee turnover, highly productive
workforce, great compensation system and simple benefit structure. Nucor
can rum a large operation with lean management structure.
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4.5.3.3
Value Chain Summary
The final effect of the value chain analysis is the major impact on a firms
profit margin, the effectiveness in performing the primary activities
effectively (The Value Chain). A firm is able to determine value through the
analysis by examining the costs to perform the activities versus how much
the consumer is willing to pay for the product or service (The Value Chain).
4.5.4 Summary of Strategic Analysis
Nucor strategy is to diversity the company products to support profitability.
This will be accomplished though the use of technology, strategic
acquisitions, and operational efficiencies to remain competitive in the
industry.
4.6 SWOT Analysis
A SWOT analysis is used to evaluate the strengths, weaknesses,
opportunities and threats of the firm. The analysis shows things what the
firm is doing well, what it can work on, the opportunities that can help, and
the warnings to the firm.
SWOT Analysis is a powerful tool for identifying internal Strengths and
Weaknesses, and for examining external Opportunities and Threats a firm
may face.
4.6.1 Strengths
Nucors biggest strength is their culture and the productivity that has
developed from this culture. Nucor has 49 facilities in 17 states. Nucor is
the largest U.S. producer for the following products:
Structural steel
Steel bars
Steel joists
Steel deck
Cold finished bar
They have a diversified product mix. The use of mini-mills has made them
very profitable.
Nucor has many strengths. Nucor is in good financial strength, it has
profitable sales and good margins and low long term debt. Nucor has good
technologies such cast striping and the Hlsmelt process. Nucor has great
productivity and operational efficiencies such as incentive pay system, lean
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management structures and good production operations that support these
competitive strengths.
4.6.2 Weaknesses
The big weakness of Nucor is their reliance on the mini-mills. Mini-mills rely
on scrap metal. As the firm grows, this reliance on scraps could cause major
problems. To overcome this shortcoming, Nucor would have to build blast
furnaces (108). The other weakness is the reliability and dependence on
fuel as a major factor of their dependence.
Better implementation of new technologies, there has been delays in
bringing new technology online such as the Hlsmet joint venture and joint
venture with CVRD in Brazil. Nucor need to continue to build it brand as a
growing innovative leader in the steel industry. Continue to improve
environmental performance, in the past environment issues have cost
Nucor million of dollars that be used for capital investment and acquisitions.
Nucor research and development may be inadequate to keep up with
innovations in the in the industry.
Nucor Corporation has found itself primarily depending on the United States
as its principal source of income (92). It has made moves to try and branch
into the world arena via agreements with other companies, but has been
unable to adequately expand its market beyond our borders. This has
hindered the company since they have not been able to take advantage of
lower cost production outside of the U.S. They have chosen instead to
maintain all of their manufacturing units within the U.S. An example of their
hesitancy to move into global markets, they have made only small moves
into China, which is one of the most rapidly expanding markets for steel.
Other steel company competitors sharing the same market space such as
United States Steel, Arcelor, and AK Steel are manufacturing currently in
various foreign countries and have taken advantage of the global markets
such as China, India, and Russia.
4.6.3 Opportunities
With on going wars, developing countries, and growing populations, the
opportunity for Nucor is huge. Nucor has to continue to improve and work
to capture this expanding business.
Due to many marginal competitors in steel industry, there are good
acquisition targets that could help Nucor grow and diversify it products mix.
Development of new technology can give Nucor sustainable competitive
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advantages over it rivals. Joint ventures to open new markets and acquire
new technologies are also key opportunities for Nucor to explore.
Construction of residential and business buildings in the U.S. makes
primary use of the products that Nucor produces. Between 2003 and 2005
there was a compound annual growth rate of 10.1% in the construction
sector. Government sponsored road construction that also requires steel
has seen double digit increases between 2004 and 2005. Governmental
funding for roads is set to increase with the Transportation Equality Act that
will send $286 billion towards highways and related programs (104). The
overall sunny picture of the construction industry is an excellent opportunity
for Nucor in this market.
The following are additional potential opportunities. Due to Nucors
leadership in the U.S. steel industry market, Nucor is looking to expand its
global operations. The easiest option for global expansion is to look into
the neighboring countries of Mexico and Canada. With Mexico and
Canada, Nucor has easy access to a new and growing market. Mexico has
been experiencing a surge in its construction industry. Mortgages in
Mexico market are also anticipated to increase by approximately 30% in
2006 over the number in 2005 (92). The country is also making moves to
improve their roads to the tune of around 12.2 billion dollars between 2004
and 2006 (92). These combined events, plus Nucor having an existing
pipeline of its products into the Mexican construction industry, places the
company in a good position during this time of growth.
Nucor is in the process of collaborating with a number of other companies
to create and market the its innovative steel manufacturing method. This
more efficient, less labor intensive method looks to be able to reduce
operating costs as well as bring in significant revenue through the licensing
of this technology.
4.6.4 Threats
Cyclicality of the Business
Nucor follows a cyclical business and must keep market share when
business is good and capture market share as the business cycles down.
Nucor has to plan ahead to make downturn times pleasant and affable to
their culture.
Volatility of energy and raw material prices and supplies of raw materials
are threat to Nucor. Non domestic rivals that are much larger than Nucor
that continue to grow in size and economies of scale pose threats. Imports
and over capacity in the industry can lower prices and hurt profitability.
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Competitor development of new technology can put Nucor at a
disadvantage in the market place. Nucor poor development or
implementation of new technologies can hurt the company by delaying cost
saving and slowing production. Government invention that support weak
competitors staying in the market place adds to over capacity and allows
these companies to compete unfairly with Nucor.
Government Regulations
Nucor has be diligent in monitoring government regulations and doing their
best to be environmentally friendly which maintaining their economic goals.
Strict regulations could quickly hurt their profit.
Threats of Foreign Competition
Nucor continually will face this problem due to less stringent foreign
regulations and labor costs. Nucor has to continually use new technology
and optimize production to keep costs in check.
Nucor Corporation is in a very good position within the steel industry. In
2005 they were able to generate 25 million tons of steel and sell 20.3 million
tons, making them the biggest steel producer in the United States ("Nucor:
About Us,"). One of its divisions, Vulcraft, tops the US segment for steel
joists and decking. In 2005 Nucor took over Fort Howard Steels plant in
2005, also placing it as biggest manufacturer of cold finished bars in the US
("Nucor: About Us,"). In addition to their product lines, Nucor is the number
one scrap metal recycler of steel and iron in the states (103). They have
taken advantage of technology like the electric arc furnace to achieve
higher speed and a reduced operational expense compared to competitors
that depend on ore and older technology for their steel production. Nucor is
able to take advantage of its size by having large purchasing power,
thereby reducing some of its costs when acquiring materials.
Nucor has done very well financially with its income going up 38.8%
between 2000 and 2005 ("Nucor: About Us,") . There has been positive
growth in their operating margins as well as their net profit over the past
forty years. This ongoing success serves to bolster investor confidence.
The company has expanded its production capacity during the last few
years by obtaining existing companies and facilities. Their purchase of
Auburn Steel and later Birmingham Steel plus buying components of
Marion Steel resulted in a two fold increase in their bar mill capacity during
the last five years ("Nucor: About Us,"). They have also greatly increased
their sheet steel production capacity with the addition of existing mills in
2000, 2002, and 2004 ("Investor Presentation Annual Meeting 2006,").
Through these additions to their company, Nucor has placed themselves in
a good spot to be able to fill the expanding need for steel.
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Nucor has placed great emphasis on technology in their production plans.
They not only make use of new technology, but also create and sell new
methods of steel production. The company was the first to use electric arc
furnace (EAF) to cast steel in one step and not needing to use additional
mechanical methods to shape the slab (103). Adoption of this technology
placed the in a position to go head to head with the more traditional steel
producers that needed larger and more expensive production techniques.
They are also investigating methods to reduce their cost and dependence
on scrap iron by using an iron carbide additive instead. Nucors embracing
of technology has allowed them to bring down expenses and perform better
in the steel market.
Demand for steel in the world market exceeded production by .5 billion tons
in 2005 (104). This separation in demand of 1.6 billion tons compared to
the 1.1 billion tons actually produced sets the stage for the rapidly
increasing price of raw materials. Already ores, coal, and iron alloys have
seen a jump in price (95). There are steps underway by the companies that
supply these goods to grow their production and supply abilities, however,
in the short term it is unlikely that supply will be able to catch up to demand.
Going into 2006, it is projected that there will be a 20% rise in the price of
iron ore and that other raw materials will likely see noticeable gains in price
(104). Nucor Corporation will almost certainly be impacted by these new
costs and it will be reflected in their operating expenses.
Going into 2006 Nucor Corporation has seen a more competitive market
forming as the steel industry has seen some shakeups through mergers
and global expansion. The presence of a new mega-steel company
increases the pressure to perform for Nucor as they face this new opponent
in the marketplace.
Nucor Corporations generation of steel and goods requires a large quantity
of power and fuel (104). Worldwide there has been a jump in the price of
energy. An increase of $15 per barrel of oil was seen in the time between
2004 and 2005 and had continued an additional $19 into 2006 where it hit
$72 in May of that year (104). Due to the correlation between the two, as
fuel costs have increased, so has the expense of energy. As the cost of
making energy has moved higher, governments have been lobbied to
adjust their prices upwards. Higher fuel and energy expenses will impact
the operating costs of the company.
5
Strategic Fit Analysis
A firms strategy is formulated by matching what it can do (i.e. actions
permitted by the firms resources, capacities and core competencies) with
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what it might do (i.e. functions of opportunities and threats in the external
environment); When they match well, a strategy is successful.
5.1 Strategic Issues
Strategic issues are critical challenges that must be addressed by Nucor to
achieve its strategy. The following are six key strategic issues that will need
to be addressed by Nucor:
1) Does Nucor have the research and development infrastructure in place
to support new technologies?
Will Nucor have to sacrifice some of its core competencies in developing
new technologies and sustain its current competitive advantages? If
Nucor begins to sacrifice some of its core competencies, will the change
be deleterious or beneficial and will the organization be the same or will
result in a new Nucor company?
2) Environmental regulations which have a direct negative effect on their
bottom line.
3) Can Nucor hedge itself against cost inefficiencies due to volatile energy,
raw material prices, and supplies?
4) The preservation of leadership, record growth, and profitability.
Because Nucor is the leader within the steel industry, any sort of failure
will greatly impact Nucors operations. Nucor currently does not have a
viable solution to shield against dramatic decline. When failure does
occur, Nucor may not be prepared strategically or have a contingency
plan to easily overcome and recover from injury or threat from disruptive
technologies. If Nucor strategically continues to focus on growth or
sustainability of its current market leadership, will it still have the
resources and capability to continually develop technologies for
competitive advantage, continued process improvements and cost
reductions?
5) Will its current decentralized operations and size become unwieldy and
unmanageable?
Can Nucor continue to sustain its simple and decentralized infrastructure
yet also at the same time stay lean and agile? This question asks if
Nucors size will force Nucor to make strategic changes in order to stay
competitive. Nucor offers many arenas for simplicity and flexibility for its
divisions, but this characteristic can prove to be an Achilles heel.
Flexibility allows Nucor to offer an environment that nurtures learning
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and adaptation. Lack of organizational structure can be deleterious
during times of turmoil.
Will Nucor continue its flexible organizational structure as it continues to
grow or will it also need to sacrifice this key characteristic that has made
the firm so unique?
6) Surviving and overcoming the steel industry challenges of flat demand
and increased competition.
Industry challenges directly effect growth and profitability. Even though
Nucor has been immune from such challenges, the combination of
further steel industry downturn and competitive pressures may also lead
to the firms reevaluation of its strategy. Does Nucor has the right
product mix to generate profits during cyclical period in the industry.
Meaning, are the products in Nucor portfolio diversified enough to
provide profits to the company if other products in the portfolio perform
poorly and are not affected by the same market forces. Profits are crucial
to fund growth and new technologies.
5.2 Market Outlook
From a demand perspective, according to International Iron and Steel
Institute (IISI), 2006 has been a strong year for the steel industry. Reflecting
on the current year, China and Asia again dominated the world market for
steel. With an increasing expenditure on infrastructure and construction in
India, the forecast of steel use in India will grow by 10% in 2006. However,
by far the strongest growth in steel use for 2006 comes from China with a
14% increase. Steel use in the European Union for 2006 has also shown a
strong 8% growth in steel use for the EU (25), with the construction and
engineering industries leading the way. Growth in the tube and pipe sectors
in Russia has contributed to the strong economic growth in the CIS region.
The NAFTA region has also seen strong growth with an 8% increase in
steel use. However, higher interest rates and higher energy prices may
affect steel use in this region later in 2006 and into 2007 (46).
Looking forward to 2007, the strongest growth region will again be China
with an increase in steel use from 374 mmt in 2006 to 413 mmt in 2007.
This figure, however, suggests a more moderate growth in the Chinese use
of steel. Stronger credit control and administrative measures introduced by
the Chinese authorities will cause steel use to grow by 10.4% compared to
14.4% increase in 2006. Contrasting these figures with the rest of the world,
a growth rate in steel use for the whole world is 5.2% in 2007 (46).
Medium Term Forecasts for steel demand have also been developed by the
IISI Economic Committee with forecasts for the period to 2010 and 20102015. Up to 2010 world steel demand is expected to rise 4.9% per year.
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Steel demand in India and China is projected to be 7% per year and 8.4%
per year respectively during this period. The figure for the rest of the world
is 4% annually (46).
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Projections from 2010 to 2015 indicate a 4.2% annual growth in steel
demand for the whole world, with growth in steel demand reaching 7.7% per
year for India and 6.2% per year for China during the same period. There is
a sharp divergence between individual regions; global demand for steel is
particular high in regions where economic modernization processes are
underway; while in the developed countries, by contrast, the industrial base
continues to lose importance (less heavy industry, more service).
Nevertheless, core industries will still play a role in the coming decade as
their know-how edge over Asian suppliers is still significant (e.g. mechanical
engineering, automobile industry and aircraft engineering).
From a supply perspective, global crude steel production reached a new
high in 2004. Asian steelmakers were the
key to this with an increase of about 15%
to nearly 500 million tons, while the
growth in other regions turned out to be
significantly lower. In particular highly
developed economies in Western Europe
and the US face declining specific steel
consumption, i.e. steel consumption is
rising more slowly than GDP. Chinas
share of crude steel output has climbed
from 5% in the early 1980s to around 95%
now; China has already been the worlds
leading steelmaker since 1997. It
currently has a 26% share of the global
steel market (47). Brazil is by far the biggest South American steelmaker,
accounting for 72% of crude steel output from the region. Brazilian
steelmakers plan to beef up their production capacity considerably until
around 2010. Crude steel capacity is to be increased to over 50 million tons
(currently almost 35 million tons) both by expanding existing plant as well as
by constructing new steelworks. About one-third of the projects are already
under construction (47). In the coming years additional steelmaking capacity
will be added to the market around the world. Commodity steel can be
produced at lower cost in emerging markets than in traditional industrial
nations. On the other hand, in the last ten years US crude steel output grew
by only a very meager amount of just under 1% p.a. (global output rose
3.8% p.a.). One reason is that as in Europe the importance of sectors
with heavy demand for steel is waning. Many steelworks in the US are
state-of-the-art facilities. The continuously cast share recently climbed to
97% (global: 89%) and the electric steel share of total crude output was the
worlds highest at 54% (global: 34%) (47).
In the medium term the global steel industry is set to undergo a major
consolidation process, as the imperative in the sector is to go for size.
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Companies are pursuing two main objectives: improving their cost structure
and increasing their market clout. Acquisitions in China, India and South
America appear lucrative at present because of the immense raw material
deposits, lower wages and favorable energy prices. The long-term growth
prospects in these regions are quite favorable. In India, per-capita
consumption of rolled steel, for example, is only around 66 lbcompared
with 947 lb in Germany. The level of concentration in the Chinese steel
industry is also still very low compared with other steelmaking regions; the
Chinese government plans to eventually consolidate the 800-plus
steelmakers into just two or three big groups and they will be among the
worlds biggest steel companies. In October 2006, Britains Corus Group
agreed to an $8 billion takeover offer from Indias Tata Steel in a deal that
extends the consolidation of the worlds steelmaking industry. In 10 to 15
years the world market is expected to be dominated solely by steelmakers
with annual output of 100 million tons or more (47). The recent merger of
Mittal Steel and Arcelor has created the first steel company in the world to
exceed the 100 million tons annual capacity mark.
5.3 Current Strategy and Alternatives
5.3.1 TOWS Matrix
A TOWS matrix was developed based on the previous SWOT analysis. In
applying this technique it is necessary to minimize or avoid both
weaknesses and threats. Weaknesses should be converted into strengths
and threats should be converted into opportunities. Strengths and
opportunities should be matched to optimize the potential of an
organization.
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STRENGTHS (S)
Financial Strength
Market Leadership
Diversified Product Mix
Technological Innovation
Low Cost Position
Human Resources
WEAKNESSES (W)
Dependency on Energy
Decentralized Corporate
Structure
Limitation on Process
capability
OPPORTUNITIES (O)
SO Strategies:
Strategic Acquisition
Global Growth
New Business
Development Through
New Technology
Development
WO Strategies:
Strategy 1: Cyclical growth
through acquisition
Strategy 2:
Maintain/improve low cost
position
Strategy 7: Improve position
against rising energy costs
Strategy 8: Develop supply
of high quality scrap
substitute to overcome
process deficiency
Strategy 9: Develop internal
process to overcome the
decentralization deficiency
Strategy 3: Greenfield
growth from new technology,
high-tech steel for valueappreciate customers
Strategy 4: Global growth
through joint venture
leveraging new technologies
ST Strategies:
THREATS (T)
Foreign Competition
Cyclicality of Steel
Business
Environmental Issues
Disruptive
Technologies
Strategy 1: Cyclical growth
through acquisition
Strategy 2:
Maintain/improve low cost
position
Strategy 3: Greenfield
growth from new technology,
high-tech steel
Strategy 5:
Develop/implement new,
energy-efficient,
environmentally friendly
manufacturing technology
Strategy 6: Working with
government agency to fight
for free and fair trade
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WT Strategies:
Strategy 5:
Develop/implement new,
energy-efficient,
environmentally friendly
manufacturing technology
Nucor Corporation
There are nine strategies identified by the TOWS matrix:
Strategy 1: Cyclical growth through acquisition
Strategy 2: Maintain/improve low cost position
Strategy 3: Greenfield growth from new technology/high-tech steel for valueappreciative customers
Strategy 4: Global growth through joint venture leveraging new technologies
Strategy 5: Develop/implement new, energy-efficient, environmentally
friendly manufacturing technology
Strategy 6: Working with government agency to fight for free and fair trade
Strategy 7: Improve position against rising energy costs
Strategy 8: Develop supply of high quality scrap substitute to overcome
process deficiency
Strategy 9: Develop internal process to overcome the decentralization
deficiency
To Nucors credit, many strategies are already being recognized and
implemented. According to Nucors 2005 presentation to shareholder (44),
the company currently is taking four approaches in pursuing growth
(Section 4.3.1 and 4.3.2)
Optimizing existing operations
Pursue strategic acquisition
Continue Greenfield growthopportunities to capitalize on new
technologies
Grow globally through joint ventures leveraging new technologies
We believe Nucor has already engaged in Strategies 1, 2, 3, 4, 5, 6, and 8.
Combining the market outlook and TOWS analysis, we propose the
following tow alternatives to improve Nucors competitive advantages:
I. Implement the Balanced Scorecard system to align the organization with
its strategic objectives
II. Improve Nucors business information system
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6 Recommendations
6.1 Recommendation I: Implement the Balanced Scorecard system to
align the organization with its strategic objectives
Ken Iverson was Nucors CEO from 1966 to 1996 (and he stayed on board
as the chairman until 1999). During his tenure, he transformed Nucor from
the brink of bankruptcy to the most successful steel company in the North
America. Iversons management philosophy was simple to state and
frequently featured in the companys publicity. He believed in hard work,
loyalty, lean management, innovation and risk-taking. A survey conducted
in 2000 showed that people associated John Wayne with Nucors persona.
However, as the time change, we believe Iversons management legacy
needs to be modernized. For instance, Iverson believed in focusthe firm
did not diversify or grow by acquisition or go abroad. Given the industry
environment today, it is difficult to imagine that Nucor can afford not to
consider these options for growth. Under Iverson, Nucors board had a
small number of directors who are insiders. In 1998, TIAA-CREF placed
increasing pressure on Nucor to diversify its board beyond five white guys.
We believe Nucor needs to break with the past to meet its future. To
prepare for the challenges in the new century, Nucor must update it
corporate culture and structure.
6.1.1 Objectives
Our objective is to implement balanced scorecard (BSC) system and
overcome the deficiencies of a decentralized organization.
6.1.2 Justification
Historically Nucor had a flat and decentralized structure. Although this
structure had numerous advantages, as Nucors growth strategy started to
accelerate domestically and internationally, we believe a more integrated
organizational structure is necessary for Nucor to compete more effectively
in the global steel market in the new century. The reasons for the
continuous industry consolidation are to take advantage of the economies
of scale and to increase market power; Nucors traditional decentralized
structure would prevent the company from fully capitalize on its size.
6.1.3 Implementation and Deliverables
The Balanced Scorecard system consists of four processes:
1. Translating the vision into operational goals
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Managers must build a consensus around the organizations vision and
strategy by expressing them as an integrated set of objectives and
measures which are agreed upon by all senior executives. The scorecard
seeks to measure a business from the following perspectives:
Financial Perspective
Customer Perspective
Business Process Perspective
Learning and Growth Perspective
The following strategic map is developed by our team based on these four
perspectives and Nucors mission statement.
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2. Communicate the vision and link it to individual performance and
compensation
Managers communicate their strategy up and down the organization and
link it to departmental and individual objective.
3. Business planning
Manager can integrate their business and financial plans, and align them
with their strategic goals.
4. Feedback and learning and adjusting the strategy accordingly
A company achieves strategic learning capability; it can monitor short-term
results from the four perspectives and evaluate strategy in the light of
recent performance.
6.1.4 Milestones
The Balanced Scorecard is a continuous process. Our team develops the
following milestones for the initial cycle.
1. A group consists of senior executives, division heads, and the board will
meet and determine the corporate strategy map based on Nucors vision
and mission from the four perspectives of BSC (8 weeks).
2. The corporate strategy goals are communicated to individual division.
Each division will develop its own objectives (8weeks).
3. Divisional strategy objectives are reviewed and approved by the group of
senior executives, division heads, and the board (8weeks).
4. A set of measures, targets and initiatives are developed and approved by
top management and the board and ready for implementation (16 weeks).
5. The system is implemented throughout the company. The feedback is
under review by the group, and revised if necessary. (12 weeks).
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6.1.5 Measurables
Many objectives in learning & growth and Internal business perspectives are
difficult to quantify. A hypothetical example from financial perspective is given
here to illustrate how the improvement in profit margin can lead to Nucors
overall bottom line performance.
Nucor has a net margin for the past 5 years of 7%. Through use of the BSC
we are targeting an improvement on the net margin based on benchmarks of
the rest of the plants. A minimal increase in the net margins can equate to
large gains to the bottom dollar. Each example will use 7% as the average of
3 plants. The top performing of the three will stay constant and the average
will increase by 1%. The low performing plant will increase to the average
benchmark. Nucor has $12.7 billion in sales and 49 factories. This averages
out to roughly $259 million per plant. For this example, we will assume all
three plants are equal and show analysis based on a maximum deviation of
3% between the three plants.
Sales
Net Income %
Net Income
Increase to Net Income %
Increase to Net Income
3% Deviation between Plants
Plant A
Plant B
$259
$259
10%
7%
$25.9
$18.1
10%
$25.9
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8%
$20.7
Plant C
$259
4%
$10.4
Total
$777
$54.4
7%
$18.1
Total Increase
$64.7
$10.3
Nucor Corporation
Sales
Net Income %
Net Income
Increase to Net Income %
Increase to Net Income
Sales
Net Income %
Net Income
Increase to Net Income %
Increase to Net Income
2% Deviation between Plants
Plant A
Plant B
$259
$259
9%
7%
$23.3
$18.1
9%
$23.3
8%
$20.7
Plant C
$259
5%
$13.0
$54.4
7%
$18.1
Total Increase
$62.1
$7.7
1% Deviation between Plants
Plant A
Plant B
$259
$259
8%
7%
$20.7
$18.1
8%
$20.7
8%
$20.7
Total
$777
Plant C
$259
6%
$15.5
Total
$777
$54.4
7%
$18.1
Total Increase
$59.5
$5.1
Based on the lowest deviation of 1%, the increase would produce an
increase of $5.1 million dollars for the three plants. This would equate to
$83.3 million to the bottom line for total 49 plants. At 3% deviation, this
increase would be $168 million.
6.1.6 Risk Assessment
Too many objectives
The inherent risk with the BSC is that a company may end up with too many
factors and lose its concentration. However, we do not believe this is the
case for Nucor. The company is already working on many objectives
identified in the BSC table. As we pointed out in our previously analysis,
Nucor really is a great American company; many objectives such as
innovation, customers services, human resources policies, are already
installed by Iverson. The BSC simply indicated the other missing variables
in the equation for Nucors success in the global economic landscape.
The resistance to integration from long-time employees
Over-aggressive integration can become rigid bureaucracy and potentially
alienate division managers.
The loss of Nucors entrepreneurial spirit
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Much of Nucors success today came from taking risks and gambling on
new technologies which are commercially unproven (i.e. mini-mills,
Crawfordsville steel sheet plant, etc.).
Our recommendation was meant as a complement to improve Nucors
decentralized structure; the goal is to help Nucor to benefit from its growth
strategy while at the same time preserve Nucors existing strengths. By no
means are we suggesting Nucor to overhaul its organization.
The Balanced Scorecard is intended to communicate the multiple linked
objectives that a company must achieve for success; it translates the
mission and the strategies into objectives by measuring four perspectives
(i.e. financial performance, customer satisfaction, internal business process,
and learning and growth) necessary for the firm to obtain long-term success.
Nucors flat structure would facilitate efficient communication within the
organization. We believe the overall risk for Nucor to implement our
recommendation is low.
6.1.7 Long Term Benefits
The implementation of BSC will improve Nucors ability to employ its
strategy effectively and efficiently across the organization. Nucor will
achieve an infrastructure that enables internal growth which in turn supports
and sustains its external growth. Finally, a global mindset can be developed
within the company and it will serve as the foundation for Nucors global
strategy in the 21st century.
6.1.7.1 Long-term Stakeholder Consequences
Shareholders The recommendation holds little risk for these
stakeholders. Due to the relative low cost of the implementation of the
recommendation and potential benefits, shareholders will support the
project. They are moderately important and influential to the process, but
they should stand to benefit the most from the recommendation as the
companys overall performance improves; the shareholders will achieve
better return for their investment.
Supplier of Capital these stakeholders are in a similar situation as the
shareholders; they should also benefit from the success of the
recommendation duo to the improvement of Nucors financials,
Employees (non-managers) these stakeholders are very important to
the project due to their high involvement; and they are also strongly
influenced by the implementation of BSC. A strong support from these
stakeholders will be needed to successful implement the project and attain
any long-term benefits; communication between management and
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employee is critical. Possible benefits include higher profit sharing and new
training and job skill development. The project has moderate amount of risk
for these stakeholders.
Managers these stakeholders are very important to the project, due to the
high amount of manager involvement that will be involved. A strong
relationship with these stakeholders is absolutely necessary to successfully
implement the project and attain any long-term benefits. Rewards include
higher incentive compensation payments, new training, and greater access
to company performance. Effects that maybe viewed as negative are
greater accountability; increasing uncertainty due to organizational change,
and stronger monitoring of performance. The project has moderate amount
of risk for this these stakeholders.
Primary Customers these stakeholders have little influence to the
successful implementation of the project; however they should stand to
benefit from quality improvement, higher value products, improved
relationships and better customer service. The project has little risk for
these stakeholders.
Suppliers - these stakeholders have little influence to the successful
implementation of the project. Some of these stakeholders may lose their
businesses with Nucor as the project shifts the company to use the
suppliers with the best products, cost, and services. The project will
consolidate suppliers that will result in stronger relationships and larger
orders. The project has high amount of risk for these stakeholders, in
particular for those who lack competitive advantages.
Host Communities - these stakeholders have little influence to the
successful implementation of the project, however they should stand to
benefits as well. There is no reason for this stakeholder to oppose the
project. Benefits include better environmental monitoring and economic
improvement for the host communities. The project has little risk for these
stakeholders.
6.2 Recommendation II: Improve Nucors business information system
6.2.1 Objectives
The goal is to implement a business intelligence system to improve Nucors
short- and long-term performance.
6.2.2 Justification
In the previous Balanced Scorecard recommendation, we identify one
objective under learning and growth that Nucor needs to invest in strategic
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technologies and training for competitive advantage. Business intelligence
systems (BIS) are interactive computer based structures and subsystems
intended to help decision makers use communication technologies, data,
documents, knowledge, and analytical models to identify and solve
problems. Implementation of BIS will significantly enhance Nucors bottomline performance as well as its strategic decision-making capability.
By 1998 Nucor and its subsidiaries consisted of nine businesses and 25
plants. Its information system under Iverson was quite simple back then:
every week each plant sent data to headquarters on the following six
operations-related variables: bids, orders, production, backlog, inventory,
and shipments. Taken together, these numbers provided a snapshot of the
plants basic operations. The figures for all 25 plants were pulled together
onto one 8.5 11 sheet of paper. Each plant also submitted a second
weekly report comparing the numbers on the six variables for the current
week with those for the previous week and the numbers for the most recent
13-week period with those for the corresponding period in the previous year.
This second group of data from all 25 plants was compiled in a four-page
report. Thus, all weekly data for the 25 plants were pulled together onto just
five sheets of paper for corporate review. Each plant also submitted a
monthly report comparing actual to budgeted figures for sales revenue,
costs, contribution, and return on assets employed (48).
However, Nucor has grown quite a bit since then. By 2006, Nucor has 45
facilities in 17 states with 11600 employees. We believe such primitive
information system is no longer adequate. The management simply cannot
keep up with everything that goes on. Iverson kept Nucor a domestic
company, but steel is not just a local market anymore; Nucor must go global
to sustain its growth. However, Nucor has grown quite a bit since then. By
2006, Nucor has 45 facilities in 17 states with 11600 employees. We believe
such primitive information system is no longer adequate. The management
simply cannot keep up with everything that goes on. Iverson kept Nucor a
domestic company, but steel is not just a local market anymore; Nucor must
go global to sustain its growth. In order to support Nucors long-term
strategic planning, we believe the implementation of a business information
system is a must to address Nucors primary strategy issues of
decentralization. Once decentralization of the organization is improved
through the implementation of the business intelligence system, the
realization effects will cascade throughout Nucor to improve the firms other
strategic issues of: 1) Cost Efficiencies all product inputs, 2) response to
environmental regulations 3) disruptive technologies, and 4) cyclical nature
of industry.
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6.2.3 Deliverables
Business intelligence integration is not a new technique, but an evolved
formulation of business data management from a primarily manual process
into a 24 / 7 real time solution (Spencer E. Ante, 2006) . In order to address
Nucors primary strategic issue of decentralization, it is essential for Nucors
division to share one data repository instead of the current infrastructure of
isolated islands that occasionally share information. Instead of further
aggravation of the decentralization issue, Nucor must select a business
intelligence solution that offers no requirements for local server hardware
on site, can be accessible anywhere, and supported at anytime. The
recommended company that offers such an integrated solution is
Salesforce.
Currently Salesforce has established customer relationships with over
20,000 companies, servicing over half a million users, with a 97% customer
satisfaction rate. Salesforce has experience with large scale, domestic,
multinational, and well known business firms from all industries such as
Nokia, Time Warner, AMD, AOL, GMAC, Staples, Air Products. The pricing
of Salesforce is subscription based for the Unlimited Enterprise edition
costing $250 per user per month. Saleforces motto is no software. True to
its motto, the Salesforce business intelligence system is completely web
based. Because of it being web based, access to the Salesforce business
intelligence system is not limited to computer workstations, but any
appliance that is Internet capable with a web browser such as PDAs and
cell phones. Besides it being one of the unique business intelligence
systems that is 100% web based, Salesforce also offers many additional
distinctive benefits. The Salesforce business intelligence system has been
successfully integrated with over 400 enterprise financial or accounting
systems such as SAP, Peoplesoft, Oracle, or any customer in-house/third
party applications through its AppExchange API ("Salesforce Integration,").
In addition to the integration at the enterprise level of applications, the
Salesforce solution also includes seamless desktop integration to Microsoft
Outlook, Office, and Microsoft Office Live web conferencing. Users will be
able to send emails, work in Microsoft Word or Excel without having to open
an additional application, and also collaborate remotely through the one
Salesforce application. These standard components are also coupled with
highly customizable one of a kind deliverables such as specialized
applications, dashboards, tabs, and objects tailored to the specific
customer. It is these comprehensive features that will greatly advance
Nucor from being a primarily decentralized firm, into a consolidated, unified,
and efficient organization.
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The following are deliverable components of the Salesforce business
intelligence system:
Included in the Salesforce Unlimited Edition business intelligence solution is
the following:
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Proposed Nucor Business Intelligence System via Salesforce:
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Sample Salesforce Dashboard:
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6.2.4 Implementation
Plan
Planning will be the initial phase of the development of the Nucor business
intelligence system. Like with various major projects, implementation does
not happen overnight and a solution must be carefully planned and scoped.
During the planning stage, an evaluation of Nucors current business
processes will be analyzed to define the scope of the Salesforce
implementation. During this phase, the integration of the Nucors objectives,
targets, initiatives, goals, strategy, business processes, and balanced
scorecard evaluation can be utilized to identify key performance measures
to include within the scope of the project as customizable features.
The most valuable customizable component to the Salesforce business
intelligence system is the dashboard feature. The Salesforce business
dashboard is an all in one tool used by management to easily and
accurately display critical metrics of the firm (Gitlow, 2005). Like the way
Nucor was the first of its kind to utilize the new technology of iron carbide,
integration of a business dashboard will continue Nucors first mover
advantage.
The Nucor Salesforce dashboard must be integrated across the
organization throughout Nucors value chain of primary and support
activities. After the assessment of the previous business processes,
objectives and key indicators must be defined.
Like the way doctors measure a persons pulse as a primary vital sign,
Nucors management using the Salesforce dashboard will be able to quickly
and easily gauge the health and longevity of the firm. The following are
three distinct Nucor achievable results after the implementation of the
business intelligence dashboard system: 1) managing by improving a
process to get results, not managing only for results, 2) managing to
optimize the entire system, not only one component of the system, (3)
managing to promote cooperation (Gitlow, 2005).
There are four aspects to objectives that should be included in the business
intelligence plan: financial, process performance, customer satisfaction, and
employee growth and development. The Salesforce business intelligence
system will dramatically improve process and cost performance strategic
issue through increased efficiencies and productivity, customer satisfaction
by reducing service delivery time, and also enhance Nucors exceptional
expertise in employee growth and development.
The following are example key indicators that should be included in the
Nucor business intelligence dashboard: 1) attribute key indicators 2)
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measurement key indicators 3) binary key indicators 4) list key indicators 5)
Gantt Chart Key indicators, and flag diagrams (Gitlow). These key
indicators are comprised of standard financial, cost, productivity, economic,
or industry measurements.
An example of attribute key indicators is to track inventory levels. The
following are examples of attribute key indicators: 1) percentage of defective
products produced by week, 2) percentage of customer base complaining
per month, 3) percentage of accounts receivables over 90 days by quarter,
4) number of industrial accidents per week, 5) number of customer
complaints per month (Gitlow). Measurement indicators are comprised of
financial data such as inventory levels, revenue, operating margin, assets,
liabilities, and cash levels. Binary key indicators are generic yes or no
indicators primarily tied to compliance or the ability accomplish of project
milestones (Gitlow). For example, binary key indicators can be used to
display whether certain environmental regulations are being met. Binary
indicators can be a tangible solution to the complex Nucor issue of
environmental regulation.
List key indicators are comprised of competitor data and stakeholder
information. The system can be designed to highlight and flag industry
metrics and risks especially from foreign competition. This customization
flag will directly help Nucor to immunize itself against the major issue of the
cyclical nature of the steel industry. Through keen early bird awareness of
the steel industry via the Salesforce business intelligence system, Nucor will
be able to adapt quickly hedging against any industry pressures giving the
firm a distinct advantage against its competitors by allowing the firm to
consistently be the first mover within the industry.
In the development of the business dashboard, key indicators must be
weighted and prioritized. Next, after the selection of key indicators, the plan
must establish the budget constraints for the full implementation of the
project. During this budget evaluation, Nucor must identify the Total Cost of
Ownership for the Salesforce Infrastructure. Currently Salesforce offers two
pricing modules of a per user subscription based license of $250 per use
upgradeable to an enterprise level service agreement. In determining the
total cost of ownership for the business intelligence system development,
Nucor must plan to deliver its business intelligence system to all 66 persons
within its executive corporate staff and also future extension to the rest of its
organization at the lower levels of departmental manager, general manager,
and supervisor. Buy-in of the business intelligence system must be
accepted at the highest level of Nucor in order for it to be fully implemented
across the organization. Therefore the minimum cost to the Nucor
implementation of the business intelligence system to only executive
management will be approximately $16,500 per month.
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The Nucor business intelligence system budget must identify and integrate
the costs of customization, deployment, scalability, upgrades, training,
support, and guard against any financial or organizational cultural
degradation due to the time and focus requirements to learn a new system.
Training will be discussed fully in a subsequent section, with specific
recommendations on how to make the implementation of Nucors business
intelligence system to have minimal effects on employee productivity and
increased buy-in of the new system.
Overall, the plan lays the foundation to the business intelligence, and as
with every systems development life cycle, can be adapted, modified, and
expanded throughout the progression of the project.
Design
The design phase is the development of the plan. Design encompasses the
following four major stages: 1) interface into existing data infrastructure
and/or warehouses 2) building of the business intelligence dashboard, 3)
development of the reports 4) limiting of security access and protocols.
Interface to Existing Data Infrastructure and Warehouses:
The integration of existing data infrastructure and warehouses is especially
important to the Nucor business intelligence dashboard. Failure to integrate
into existing company data will deleteriously result in miscommunication,
stale information, and a slower response time. The accuracy of the current
business environment of Nucor including financials, supplier, and customer
relationships must be in real time available 24 hours a day / 7 days a week.
For example, Nucor currently uses Microsofts Sharepoint application for all
of its business entities to be able to communicate with one another. Nucor
could integrate its current Sharepoint repository into Salesforce. Imagine
the power of a Sharepoint like solution that it not just a repository to store
information, but takes it to the next level as an application that learns and
manages the data automatically by flagging management of key successes
and areas of improvement.
Dashboard Build
During this stage of the design process, Dashboards can be customized to
every management layer of Nucor. Regardless, the core similarity of the
dashboard is the business data. The differences between the dashboards
are the display of the data. Dashboards are highly customizable regardless
if they are an executive, general manager, department manager, or
supervisor. Members throughout the organization will have instant access
to their specific focus. Dashboards can be first defined through
recommended standard Salesforce solutions for Nucors managers to have
a firm understanding of the business intelligence solution to then be later
customized per individual user or group. The main purpose of the
dashboard is to instantly identify the key indicators of Nucor. Indicators are
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further classified with the current, previous, and delta metrics. In addition to
key company indicators, the dashboard must integrate competitor metrics.
Competitor metrics will make Nucor more agile to prevent against the
deleterious effects of any competitor disruptive technology by having rapid
tangible data to respond quickly to any immediate or upcoming competitor
challenge. An executive dashboard may focus at a high level of the
organization, whereas a department manager or general manager will
require more detailed up to date information.
The following is an example dashboard template:
Reports Build
After the building of the business intelligence dashboard, reporting is the
most important aspect of the business intelligence solution. Like the
previous design of the dashboard, standard out of the box reports can be
utilized to provide consistency across the enterprise. Additionally, the
usage of standard reports will promote a keep it simple method to
encourage buy in of the new system. During the design phase of the
business intelligence reporting, Nucor must design a report showing both
current situation and trend analysis projections of the firm. Trend analysis
should identify past 5 year liquidity (current & quick ratios, net working
capital), asset management (cash flow, inventory turnover, asset turnover),
debt management (long term debt to equity, debt to asset ratios), and
profitability (profit margin, return on assets, return on equity). Once buy in
of the new system is obtained, standard reports can be modified and
customized sharing the same header, footer, group, and font with
individualized data elements displayed.
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Security
In addition to standard SSL encryption technology, Salesforce offers
biometric identification into its systems. Salesforce requires passwords to be
changed every 3-6 months custom defined by each client. The combination
of biometric identification and a constant change in password will prevent
loss of confidential data. In addition to authentication security, user access
profiles must be customized by role and responsibility. This strategy will
allow for the customized data views on a per user level regardless of job
role.
QA/Testing
Quality Assurance and testing will compare current existing paper standard
reports to the newly developed Salesforce reports. Resulting data should
be the same with < 1% difference in current financial and statistical data.
This will ensure data accuracy and reliability. All proposed Salesforces
dashboard and reports must pass design specifications acceptance and
simulation testing.
Training
In order to prevent any potential productivity decline due to the
implementation of its business intelligence system, training should follow a
parallel implementation to the dashboard build and reports design process.
In addition, Nucor should identify super users that are well knowledgeable
in the system. The Nucor business intelligence super user has extensive
knowledge of the workflows supported by the firm. The Nucor super user
should be picked from the executive, departmental manager, and general
manager levels. The role of a Super User" is to provide immediate, first
line response to new Salesforce Nucor users and act as the primary contact
to Salesforce support with questions and issues during "go-live." It is
essential that the super user is the first to be trained in the new business
intelligence system.
Maintenance/Support
Support during go live of the business intelligence system will be classified
as critical, medium, or low. A critical system problem prevents workflow
from completion and must be resolved immediately. A medium system
problem does not prevent business workflow, and can be resolved within a
few hours. A low: system issue does not affect workflow, is primarily
cosmetic in nature, and can be resolved within 1-2 business days. Low
system issues can be an end user question or quality issue. Maintenance
should also focus on expansion of the business intelligence infrastructure
and encourage the usage of the business intelligence mandatory across the
enterprise.
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6.2.5 Milestones
Month 0: Start of Project
Month 1-2: Envisioning & Planning
Month 2 8: Design
Month 8-10: Training
Month 10-12: Go Live & Maintenance
Gantt chart of Project Milestones:
Title
Project Start
Project Finish
Salesforce Business Intelligence Project
1/1/2007 8:00:00 AM
12/31/2007 5:00:00 PM
6.2.6 Measurables
The implementation of a business intelligence solution will result in the
following Nucor measureables within 24 months of go live of the new
system:
1) Productivity increases and revenues will increase by 5%. The business
intelligence system will Increase existing processes and decrease
redundancies by half.
Currently there exist many different software packages and processes
across the entire Nucor enterprise. By the implementation of the Salesforce
business intelligence system, all Nucor facilities will be sharing the same
data and processes. The new expense of the implementation of the
Salesforce business intelligence system will cost approximately $198,000 a
year. This new expense will be buffered and offset by the elimination of the
outdated previous legacy SG&A expenses. A 50% reduction of SG&A
expenses of $493,560 will overall result in a decrease of SG&A expenses
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by $50,000 after the implementation of the Salesforce business intelligence
system.
A 5% productivity increase through a 25% efficiency increase in workflow
processes, will increase Nucors production capacity by 865,000 tons of
steel. Currently Nucor requires 6,000,000-7,000,000 scrap substitutes per
year. After the implementation of Salesforce, Nucor will be less dependent
on its scrap suppliers by increasing its recycling capacity to 850,000 tons of
scrap steel. Additionally, increased productivity will increase Nucors
current $998,400 revenue per employee levels to $1,048,3906.
Steel Production
Outside and Inside
Outside Customers
Steel Joist
Steel Deck
Cold Finished
Nucor Production and Sales (TONS)
2006
After Salesforce
17,318,000
18183900
17,286,000
18150300
15,936,000
16732800
433,000
454650
284,000
298200
261,000
274050
Difference
865,900
864,300
796,800
21,650
14,200
13,050
2) With the implementation of the new Salesforce business intelligence
system, Nucor will be able to improve margins with sophisticated inventory
management via the ability to examine accurate inventory levels in real
time. This will result in a projected 10% reduction of inventory
requirements. Currently Nucors days in inventory are approximately 39
days. A 10% gain in inventory would result in a reduction of days in
inventory to 35 days. Additionally, the current level of inventory is $945
million. After the implementation of Salesforce, inventory levels will be
reduced by 94.5 million to $850.5 million. High inventory levels are
unhealthy because they represent an investment with a rate of return of
zero. It also opens the company. This large inventory is a huge financial
burden. Nucors return on assets is 22.76% and return on equity is
38.62%. By reducing this number even slightly by 10% could generate
$20 million in revenue. Reducing this number in half would be over $100
million in revenue.
High inventory levels are unhealthy because they represent an investment
with a rate of return of zero. It also opens the company up to trouble
should prices begin to fall.
Inventory Days
Inventory Assets
Nucor Inventory
2006
After Salesforce
39
35
$945 million
$850.5 million
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Difference
5
94.5 million
Nucor Corporation
2) Increased efficiency in the obtainment of inputs and increase efficiency in
order tracking and freight delivery. Through the implementation of the
Salesforce business intelligence system, Nucor will be able to reduce its
out-of-stock percentage by 50%. Nucor will have up to date data
centralized across the organization instead of numerous delivery tracking
websites under the current decentralized organizational paradigm of
multiple fiefdoms designing its own tools to accomplish the same
solution
3) Expand customer relationships with a singular comprehensive view of the
customer. The Salesfoce business intelligence system will strategically
expand Nucors ability to pursue and sustain global operations. For
example, the integration of the Salesforce business intelligence system
will increase capacity of Nucors Trinidad plant from 1,800,000 metric tons
to 1,890,000 metric tons. Nucor will be able to increase capacity due to
the ability to communicate with both its decentralized domestic and global
operations seamlessly via the Salesforce business intelligence system.
6.2.7 Risk Analysis
The following are the potential risks from the implementation of the
Salesforce business intelligence system: 1) Myopic viewpoint in being too
focus on numbers and data instead of the big picture 2) privacy concerns
for employees, and 3) Impact on morale for low performers.
Business intelligence systems are designed to be detailed and tangible by
nature. A company that is overly dependent on its business intelligence
system will be hindered from creatively developing and nurturing the
intangible aspects of business such as strategy, relationships, trade secrets,
and goodwill.
Privacy concerns are an additional risk to the business information system.
The idea of such a spider like system involving all aspects of the
organization may give a Big Brother type of mentality (Spencer E. Ante,
2006). All business data would now be stored electronically within the
system to be analyzed by the restricted few.
In addition to privacy concerns, the business intelligence system could
result in decreased employee morale. Employees may feel increased
pressure to deliver continued process improvements since they are
continually measured by the business intelligence system. Additionally,
employees who have been identified as underperforming may feel
depression due to strict accountability standards.
Overall, the potential benefits of increased profitability, production, and
efficiency, far outweigh these three risks.
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6.2.8 Long Term Benefits
With extensive knowledge of the key indicators, Nucor will become more
lean and agile to create flexible business processes. No longer are Nucor
personnel paper dependent faxing documents between divisions. In
addition, the implementation of the business intelligence system will
increase employee awareness if each persons individual impact upon the
organization as a whole. Previously, Nucors incentive program was
primarily tied to employee performance. Through the implementation of
the Salesforce business intelligence system, Nucor employees will be able
to not only reactively increase efficiencies, but also proactively design new
processes. Accountability will be further tied together directly to tangible
evidence provided by the Salesforce system. The business intelligence
system will identify successful and effective projects and potential failures
more clearly. Overall, Nucor will be nimble to respond both defensively
and offensively to any external or internal business challenge.
6.2.8.1 Long Term Stakeholder Consequences
The following are the stakeholders which will be impacted by the business
intelligence system 1) customers 2) employee (non-mangers) 3) suppliers
4) shareholders 5) managers and 6) the general surrounding environment.
Employees
Non-managers and managers will be directly impacted by the
implementation of business intelligence system since they will be required
to be trained, learn, and utilize the new system. Employees have the most
to lose with the business intelligence system since Nucor incentive
programs are highly focused on productivity. With a business intelligence
system, there now exists a centralized repository of employee performance.
Business intelligence systems may result in employee reduction in force or
job modifications due to tangible data showing accountability or consistent
decreased performance. Because Nucor does not utilize unions, the affect
on unions is zero.
Managers
Managers are effected with more detail performance metrics and a
comprehensive viewpoint of the firm. With the business intelligence
system, managers have increased awareness and availability flagging of
threats. The business dashboard will allow for real time and up to date
reporting accessible via the web or email comparatively much faster than
the old methodology of faxing or document courier delivery.
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Suppliers
Both suppliers of capital and shareholders will reap the benefits of the
business intelligence system. Nucor will show preference to suppliers that
will easily integrate into the automated business intelligence system.
Suppliers who are still form and paper dependent will be considered as
secondary instead of primary resources.
Shareholders
Shareholders will also reap the benefits of the business intelligence system.
The long term impact of the business intelligence system will result with an
increase in return on investment with an increase of stock price
performance due to further increase in revenue and production levels.
Customers
Customers are impacted by the business intelligence system through
increased quality, increased efficiency, faster service, lower prices, and
higher quality customer service. Customers will have access to centralized
reports showing order status, delivery confirmation, discounts, and account
management. No order must customers rely on individual divisional
websites for order and delivery reporting.
Communities
The business intelligence system will result in a long term increased
community environmental efficiencies through increased recycling
monitoring and capability, and reduce waste generation. This will directly
resolve the major issue of environmental regulation. Nucor with the
business intelligence system will be able to be flexible to account and flag
for its operations that may not be approaching environmental compliance.
In addition, by being able to recycle more waste through increased
efficiency via the business intelligence system, Nucor will reduce its
dependency on its scrap metal suppliers.
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Appendix I
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Appendix II
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Appendix III
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