What are the primary competitive forces impacting U.S. steel producers in general and Nucor in particular?
Using Porter’s Five Forces Analysis will reveal that U.S. steel producers had to contend with all of the five competitive forces in this framework and as a result, there is a real threat that these companies will be pushed to the edge and bankruptcy if they are not careful with what they are going to do in the next few years. The first primary competitive force that has caused so much havoc is the threat of substitute products coming in from abroad. These products are sold at cut-rate prices. This is made possible by unfair trade practices by companies from Europe and even Asia.
The second competitive force that tried to derail U.S. steel producers is the threat of new entrants. It has been discovered lately that there are better ways to produce steel from scrap metal and this has encouraged businessmen to build independent steel manufacturing plants. This is also seen in the way multinational companies like Mittal are coming in to acquire struggling U.S. companies.
The third competitive force comes from the supplier. In this case, it is a highly unionized steel company. They struggle to pay for retirement benefits etc. The fourth competitive force is buyer power. This type of industry is prone to oversupply and low demand and this means that buyers can force these companies to compete head-on.
The fifth competitive force is the intense rivalry among U.S. steel manufacturers. This can be seen on two levels. The first one is attributed to the ability of each firm to produce relatively high-quality steel. This means that there is no major difference between what Company A can produce as compared to the type of steel produced by Company B. In this regard these manufacturers are only able to compete not in quality but prices. The second level of intense competition between firms is seen in aggressive acquisitions and mergers. As two become one the smaller companies that are left out find it hard to compete against an organization with more production capacity and can leverage economies of scale to develop a more cost-efficient system.
Using once again Porter’s Five Forces and applying it to the situation of Nucor can lead to the argument that there are only four out of five competitive forces that are working against this company. This may explain why Nucor is enjoying a long winning-streak. Nucor is not significantly affected by the bargaining power of suppliers because the firm was able to develop lean manufacturing systems that allow them to use minimal labor force. Furthermore, Nucor is not hampered by labor union problems.
What driving forces do you see at work in this industry? Competitive structure?
The most significant driving force is the entry of cheap imported steel. It is not simply steel sold at lower prices but even at a cost that it is impossible to make a profit. As pointed out in the case study this is made possible by subsidies from foreign governments. It is extremely difficult to deal with this problem because in the first place it is already more expensive to manufacture steel in the United States as compared to China, India, and Russia.
This can negatively affect U.S. steel manufacturers and therefore will initiate a radical transformation of the U.S. steel industry. These changes are already evident since the turn of the 21st century when steel manufacturing firms are merging and acquiring others just so they can float above the water and not be dragged down by massive debts and other financial problems.
The second major driving force is innovation and the use of technology to drive down costs. The pressure to sell steel at low prices can be alleviated by using and adopting new technologies that can allow steel manufacturers to produce high-quality products at a lower cost. One good example is the proliferation of minimills. In the past steel can only be produced using large-scale plants that are capital intensive but today the use of electric arc furnace technology has made it a lot easier and cheaper to produce steel – the companies who use this technology are called minimills (Thompson, 2007. p. C212). In the next few years, the majority of steel mills would have converted to this new technology.
How attractive are the prospects for the future profitability of U.S. steelmakers? Should Nucor consider expanding in this type of industry environment? Why or why not?
When Mittal Steel U.S.A. entered the picture, the future of steel manufacturing in the U.S. no longer seemed so bright for its competitors. For now, Nucor is second behind U.S. Steel but the question remains, for how long can it hold on to that position? Furthermore, Mittal Steel U.S.A. did not merely set up shop in the United States, the company also acquired Inland Steel and Steel Group U.S.A. to become the biggest steel manufacturer in North America (Thompson, 2007, p. C214). It does not require a genius to figure out that by acquiring these two U.S. steel manufacturing companies, Mittal U.S.A. has taken a slice of the market and that slice used to belong to Nucor.
In this regard, Nucor must be very careful when it comes to figuring out its next move. But at the same time, it must be aggressive when it sees an opportunity to develop strategic acquisitions. If there may be a need to merge with U.S. Steel. Nucor can transform this giant company into one lean and efficient steel producing firm.
What type of strategy has Nucor followed? Generic strategies employed? Sustainable competitive advantage over many of its industry rivals? What type of competitive advantage?
Nucor used three generic strategies to maintain its position as one of the top steel-producing companies in the United States. The first strategy employed is by becoming a low-cost leader. It can produce steel at a lower cost as compared to its main rival U.S. Steel. This has been made possible by the use of electric arch furnace technology that in turn allows Nucor to develop a lean system of production that does not require the company to hire a significant number of employees.
The company also used a broad differentiation strategy to create products that will suit the needs of its clients. As a result, the company is well known as a firm that can offer the broadest product lineup in the U.S. steel industry. The company entered this business by simply manufacturing steel joists and steel girders and after some time it began manufacturing steel decking. This has expanded its market because the second type of steel product manufactured can be used for roof and floor support as well as floor support systems for retail stores, shopping centers, warehouses, manufacturing facilities, schools, churches, hospitals, and multistory buildings and apartments (Thompson, 2007, p.C196). Afterward, Nucor began fabricating cold finished steel products. Nucor expanded its product range even more to include light gauge steel framing. If this was not enough Nucor improved their product offering significantly by producing steel fasteners and this includes bolts, nuts, washers, screws, and bolt assemblies (Thompson, 2007, p. C-196). The parent company established a new division of products and this new division was called Nucor Building Systems – it was focused on servicing the needs of those who are building industrial and commercial buildings and this includes distribution centers, automobile dealerships, retail centers, aircraft hangars, churches, office buildings warehouses and manufacturing facilities (Thompson, 2007, p. C196). This is the reason why it was able to sell a higher number of steel products as compared to U.S. Steel even if U.S. Steel has a greater capacity to produce steel products. This means that its competitors can create an oversupply but since Nucor had succeeded in broad differentiation then it can satisfy the needs of a broader market.
What are the specific policies and operating practices that Nucor has employed to implement and execute its chosen strategy?
First of all, it has to be pointed out that the corporate leaders developed a corporate culture of removing and trimming any form of excess. There were no extravagant perks given to CEOs and corporate leaders. There were no corporate jets and other luxurious items that other corporate heads from other companies take for granted. The leaders led by example, for instance, Iverson, the longest-serving CEO insisted that he would fly coach and not first-class when he goes on business trips. The offices of corporate leaders are sparsely furnished. This reinforced the culture and values of operating a lean but effective system.
Aside from that, the company was aggressive in adapting to new technologies. In other words, it was not afraid to try something new to develop an efficient and low-cost system. They were one of the first to adopt the electric arch furnace technology and it revolutionized the way they use raw materials and transform it into high-quality products. The most amazing aspect of this technology is the ability of the company to acquire scrap metal. It is easy to understand the level of the expense required to purchase and deliver scrap metal to their manufacturing facilities and then melt it down to produce new steel. This surely beats the old system of mining iron core, bringing it into blast furnaces, spending a great deal of money on fossil fuel such as coal and then melting it and placing them into big molds and then doing another set of labor and capital intensive process of cutting the steel into useful sizes.
What specific factors account for why Nucor has been so successful over the past several decades? Do these factors have more to do with great strategy, great strategy execution, or great leadership?
Everything that they were accomplished so far could never happen if not for their leaders. Special mention must be given to their first visionary leader, Mr. Iverson who had the foresight to know that staying with nuclear devices and related products will drag the company down to the pits and bankruptcy. He had the vision and the courage to say that it is time to change or perish.
However, vision and goal setting can only carry a company far enough. Iverson had another quality and he can develop strategies that can help the firm outperform its closest competitors. A good example is the aforementioned electric arc furnace technology. When the competition was content with their old techniques Iverson had the determination to try something new and was not afraid to fail. In the process, he was rewarded with a new method of producing steel from scrap metal. This is a common practice today but in the past, it was truly a revolutionary procedure because of the significant amount of money that can be saved just by eliminating the need for integrated steel plants.
What does a SWOT analysis reveal about Nucor’s situation? Does Nucor have any core or distinctive competencies?
The strength of Nucor is its technology and its leadership. It is also their lean management principles that they use to its maximum capacity and that is to produce a high-quality product using minimal resources. The weakness of Nucor, on the other hand, is that it is stuck in the U.S. market and therefore it is dependent on the demand of the U.S. market. This creates pressure when the buyers decide to switch products and instead patronize those cheap imported steel.
The opportunities are also tremendous because of its financial stability Nucor can use strategic acquisitions to continually expand and to create a new conglomerate that can take advantage of economies of scale. It can acquire steel manufacturing companies in China, India, and Russia for instance, and have access to cheap raw materials, cheap labor, and a greater market.
The threat however is looming and it can derail and dismantle Nucor. The impending danger is the threat of cheap imported steel because these foreign companies are subsidized by their respective governments. The only saving grace for Nucor is its effective use of technology and management techniques as well as its broad range of products. In this way, it can remain competitive and profitable in the years to come.
What is your assessment of Nucor’s financial performance over the past several years? How strong is the company’s financial condition?
The company earned more than 1 billion dollars during a time when most companies are declaring bankruptcies and are acquired by foreign competitors. For many years the company was able to make its investors happy and this is a good sign of the positive financial performance of Nucor.
What issues does Nucor management need to address?
The most important issue that needs to be addressed is the formulation of a strategy to defeat the deliberate dumping of cheap steel products on U.S. soil. The company must use its leverage and contacts to make its appeal known to policymakers. It is not right to allow foreign companies to continually use unfair trade practices and in the process endanger the U.S. steel industry and the thousands of American families who depended on it.
Another issue that needs to be addressed is the continuous need to look for strategic acquisitions that can help strengthen the position of the company. This must be done with care but at the same time, corporate leaders must not hesitate. This is because foreign companies are coming in and they are very aggressive in mergers and acquisitions.
What recommendations would you make to Dan DiMicco?
If given the chance to speak to Dan DiMicco I would offer three different types of strategies that Nucor can utilize to prevent from being wiped out by foreign competition. First, there is a need to develop an effective and sustainable strategy to lobby or influence U.S. lawmakers that the survival of the U.S. steel industry must protect it from unfair trade practices.
The second strategy is to study the possibility of acquiring foreign-based companies that possess the following qualities: a) the ability to mine or procure steel at the cheapest cost; b) access to low-cost fuel; and c) access to cheap labor and sell to a huge market. In other words, it is time for Nucor to consider expanding overseas. If sales in the U.S. will plateau and there is no more room for growth then it is time to look at China, India, and Russia if the company can acquire a smaller company from those countries and expand the global reach of Nucor.
The third strategy concerns U.S. Steel. For many decades Nucor is always catching up with this company. Now, if this question was posed in 2005 then I would have a different answer but if the same question is asked in 2010 then the analyst in me will tell that the financial crisis of the past few years had an obvious negative impact on both Nucor and U.S. Steel. Say for instance that U.S. Steel struggled during these years and Nucor maintained its competitiveness in the domestic market then Nucor can make a move. Nucor can succeed where U.S. Steel failed because by this time Nucor had already mastered lean manufacturing systems – specifically the capability to manufacture high-quality steel from scrap metal and then use a minimal number of personnel to complete the job. Nucor can acquire U.S. Steel and remove the excess baggage, introducing a whole new different corporate culture that abhors wastefulness and other excesses.
References
Stahl, M. & Grigsby, D. (1997). Strategic Management: Total Quality and Global Competition. Oxford, UK: Blackwell Publishers, Ltd.
Thompson, A. (2007). Nucor Corporation: Competing Against Low-cost Steel Imports. AL: University of Alabama Press.
Thompson, A. Jr., A. Strickland III, & J. Gamble. (2008). Crafting and Executing Strategy: The Quest for Competitive Advantage, Concepts and Cases. New York: McGrawhill.