Nucor Case Analysis - Strategic Management

Strategic Management Case solution

Nucor March 7, 2008 Nile TecleMariam Business 499

By Pankaj Agarwal Praxis Business School

Table of Content

I.

Strategic Profile and Case Analysis

II.

Situation Analysis A. B. C. D.

III.

SWOT A. B. C. D.

IV.

General Environmental Analysis Industry Analysis Competitor Analysis Internal Analysis

Strengths Weaknesses Opportunities Threats

Conclusion

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Strategic Profile and Case Analysis Steel is the backbone of many industries. Steel goes into thousands of products, which could be grouped, in the broad sense, into a few groups. The semi-finished products that are at least eight to ten inches thick and require more processing is one group. Another group is the flat-rolling, which yield plates (more than 0.25 inches in thickness) and sheets or strips. Another group is one where bars and thins rods are made. The United States in the 1960s produced most of the steel used in the world. By the 1980s, the United States lost the role of world’s steel produced and imported more than what it exports. Nucor Corporation is the second-largest steel producer in the United States and had net sales of $4.6 billion in the year 2000. Nucor recycles approximately ten million tons of scrap steel a year. It operates in nine states and produces carbon and alloy steel in bars, beams, sheet, and plate; steel joists and joist girder; steel deck; cold finished steel; steel fasteners; metal building systems; and light gauge steel framing. Nucor was started by an auto manufacturer Ransom E. Olds, who founded Olds Motor Vehicle Company in 1897. Ransom sold the manufacturing operation. A group of shareholders challenged the liquidation Ransom was trying to do and forced Ransom to take over a tiny nuclear service company called Nuclear Consultants, Inc. Nuclear Consultants was not very successful; however, it was able to purchase the Vulcraft Corporation, a steel joist manufacturer located in Florence, South Carolina from the founder’s widow. Kenneth Iverson was hired as general manager for Vulcraft == the only business division making money. The board of directors made Iverson President and Samuel Siegel as Vice President of Finance. Iverson moved the corporate headquarters from Phoenix to Charlotte, North Carolina. All the other business not related to steel were either sold or liquidated. The company decided to integrate backwards into steel making by building its first steel bar mill in Darlington, South Carolina in 1968. The company was rename Nucor Corporation in 1972 and expanded steadily through 1986, thus starting the Nucor Era. Situation Analysis A. General Environmental analysis Nucor over took US Steel to become the second-largest steel producer. The corporate strategy is focused on being the lowest cost provider of steel by finding opportunities to reduce cost. It emphasizes technological leadership by aggressive pursuit of innovation and technical excellence. In addition, employee relations with fair compensation and egalitarian benefits were just as important as technological advances. The simple, streamlined organization structure to allow employees to innovate and make quick decisions works very well for Nucor. The company is highly decentralized, which makes them able to make uncompromising quality, responsive service, and competitive pricing. The standard unwritten practice of equalizing freight was stopped by Nucor which was unheard of in the steel industry. The production cost is the most important if the company is going to be profitable and survive.

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B. Industry Analysis The steel industry is undergoing consolidation and there are many companies filing for bankruptcy. Among them are Bethlehem Steel Corporation and LTV, who were the country’s third- and fourth-largest steel producers, respectively. The imported steel in many cases were subsided by their governments, foreign steel producers were dumping steel in the US market at cut-rate prices with no restriction from the US government. Nucor was able to use this situation to grow in size by identifying and acquiring some of the US companies that aligned with their strategic vision. . C. Competitor Analysis Most steel companies in the US were only utilizing 75 percent capacity resulting in production inefficiencies, which made them, operate in the red. Three European companies decided to merge to from the world’s largest steel producer. Two Japanese companies did the same to form the second-largest steel producer. The competitive pressure is very high since there is huge excess capacity and orders are huge. The product is standard and not much can be done to create differentiation, so the basis of competition is cost. D. Internal Analysis Nucor mission statement: Nucor Corporation is made up of 17,300 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. Nucor believes that bigger is not better. They took great effort to make sure that they were using the latest technology to reduce the size of their mills. Their technological advances allowed production to shift from the mill to the mini-mill, and finally to the micro-mill. The smaller the mill sizes became, the more the company grew. Nucor is one of the leanest corporate organizations in the nation. A typical Fortune 500 company has a triple-digit corporate staff. Nucor ranks 189 on the list in 2005 with 75 corporate employees. Employees are valued as a critical asset for the corporation. Research and development is another asset greatly valued. Nucor strives to put plants where there is the least amount of cost overhead and where transportation costs to their customers can be minimized. SWOT A. Strengths One of the greatest threats to the US Steel industry is the importing of steel. High costs of US steel were driving consumers to import steel. If Nucor was going to survive against the imported steel, they would have to make sure that their costs were as low as possible. In 1987, Nucor was the first steel company in the world to build a mini-mill to manufacture steel, uses electric arc furnaces to melt scrap into steel. This was a very risky

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business decision made by Nucor President Inverson. It would take all the companies assets and a huge loan to build the mini-mill, which had only been built at pilot plant sizes before Nucor. Minimills took advantage of the declines in the use of scrap metal. Switching to basic oxygen furnaces help increase the capacity of the mill. Impurities in the scrap metal at first limited the use of the material generated by the minimill to lowend products such as bars for reinforced concrete, wire rod and small structural shapes. The minimill labor cost is only $35 to $70 per ton compared to $100 to $150 per ton with integrated mills.1 The minimill is designed to last only 10 years where the integrated mill has a 25 – 30 year design life. Economics still favored the minimill, with the shorted life, over the integrated mill. The minimill technology improved very fast and soon Nucor was able to expand its market place with new product (Higher quality products for larger structures, pipes and tubes). This opened up another 50 percent of the total steel market. Nucor now has eight mills that sell 80 percent of their output to outside customers and the balance to other Nucor divisions. 2 The mini-mill utilized scrap steel, such as junk auto parts, instead of iron ore, which is used in the integrated mills. The typical annual capacity of a minimill is 200,000 to 600,000 tons compared with 7 million tons from an integrated mill. Nucor strong market position with production capacity of more than 25 million per year and sales of more than 22 million tons in 2006 makes Nucor very strong. Each year Nucor has increased its production capacity which improves its competitive position. Another strength Nucor has over other US steel manufactures is its “Nucor Culture”. The Nucor culture can be summaries in five areas: decentralized management philosophy, performance based compensation, egalitarian benefits, customer service and quality, and technological leadership. In Iverson’s word, “The fewer you have, the more effective it is to communicate with employees and the better it is to make rapid and effective decisions.”3 In decentralized management, Nucor has five layers of management (supervisor/professional, department manger, division manager, executive vice president and president) where most steel companies have many times the layer of management. Nucor decentralized as many decisions as the next layer down could manage. Most decisions were made at the plant level except for things like capital expenditures, plant organization, hiring and firing division managers and prices. Even the hourly employees are encouraged to think of ways to improve the plant and bring them to their supervisor. Each plant general manager administered a psychological test to prospective employees that sought to identify goal-oriented, self-reliant people. Most of the promotions on the shop floor are made from within based on performance and peer evaluations. There are only 70 employees at the corporate office, which makes it one of the smallest corporate offices among a Fortune 500 company. Each division manager had a business target to accomplish, which made each division a profit. Failure to meet the target could lead to firing of the division manager. Corporate would take a share of each division’s profits. To compare the performance of its plants, headquarters received monthly operating reports, weekly tonnage reports, and monthly cash management reports. The top managers of Nucor believed that “the best motivation is green”, they had performance incentives. These performance incentives were given to everyone in the plant. There would be caps for the production workers and none for the professional employees. This means that even though the workers get paid lower base pay than other

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steel workers when the performance incentive was added, they made more than any steel worker in the US due to their performance. The bonuses are based on productivity of their work group and are given out weekly. The rate is calculated based on the capabilities of the equipment employed and no bonus is paid if the equipment is not operating. The employee can earn an average from 80 to 150 percent of the employee’s base pay. Increasing production means increase in profit for everyone in the company. Nucor reinforces these rewards with stiff penalties, for example anyone late for a shift lost a day’s bonus and anyone who misses a day’s work missed that week’s bonus. If the group fell short of its productivity goal, its entire member’s lost their bonuses for the week. There is a giant board at the entrance of every plant that informs people of each department’s goals, the bonus percentage, the plant’s performance relative to the target of 25% return on assets, the company’s return on equity for the month and the latest stock price. Department managers earn annual incentive bonuses based primarily on the percentage of net income to dollars of assets employed for their division. The bonus can be no more than 80 percent of the employee’s base pay. Professional and Clerical staff gets bonuses based on the division’s net income return on assets. Senior officers are based on Nucor’s annual overall percentage of the net income to stockholder’s equity and are paid out in cash and stock. Other incentives programs were things like profit sharing, bonus and college education allowance for their children and stock in the company. The employee turnover at Nucor is about 1- 5 percent per year. Nor did they lay off any employee when times were very slow in the 1980’s, the employee’s hours were shortened but the production bonus program stayed intact. The company called it the “Share the Pain” program, other US steel companies during this time either just closed or lay people off. This is a very smart way of reducing the threat of closure and minimizes the losses. Nucor benefits are the same for all employees. There are no company cars and everyone wears a green spark-proof jacket and hard hat in the plant. The year’s annual report lists all employees on its cover in alphabetical order. This philosophy has helped to retain employees. Labor costs are very steady and help keep the company competitive. Openness and risk-taking is emphasized rather than denying the possibility of managerial mistakes. Nucor President Inverson believes that an average person makes good decisions 50 percent of the time and a good manager will make good decisions 60 percent of the time. The other 40 percent of the time, he feels it is the workers responsibility to inform the manger how they could make those poor decisions better. The open door policy is for everyone who works for Nucor. The ability to react to the plant operation or special orders quickly is one of Nucor’s strength and the credit goes to the community of Nucor employees. Nucor went against the business norm by not giving any price adjustment for raw material and finished products. Nucor pays a straight commission per ton of scrap at all the plants. Nucor does check what the market price and quality of the material all the time and makes adjustments as needed. The price of the finished product is sent based on a computer program at each plant. One of the best opportunities and strengths Nucor has to improve profit is by improving their technology. Nucor spent millions of dollars researching better ways to make steel. Sometimes it turned out to be a waste of money, but when something was found to work, it was shown to save the company millions of dollars. Iverson heard about a German company with some promising new technology. The top executives of Nucor

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flew to German to meet with SMS Schoemann-Siemag AG to see the novel pilot plant. In December of that same year, the Germans came to Charlotte for a meeting to hammer out a deal. Iverson decided that this technology was going to run their new plant before the Charlotte visit and announced at the meeting that the deal was complete. Nucor does not meet all three of the core competencies parts. It does provide consumer benefits and the material can be widely used in many products and markets. It is easy for the competitors to imitate as there are standards for the finished product. When the VIRO test is used on the Nucor Company, it gets high marks. Other steel industries would have a hard time imitating the company. They could use the mini-mill but the ability to reduce raw material cost, administration and employee value would be hard to do. The customer values the product coming out of Nucor as good quality and reliable. B. Weaknesses One of the weaknesses of Nucor is that by having a decentralized profit center with all the functions, including marketing and sales, being done at the division level is that the divisions start to compete against each other. There is duplication and redundancy in company that has led to many salespersons calling the same customer to get their business. Moreover, sales, general and administrative expenses have increased every year with the redundancy. Another weakness is that by having so much power in each division, there was no long-term strategic vision of plan for Nucor. After Iverson retired, the new board of directors realized this problem and is starting to develop a plan. Another weakness in Nucor is that no one was watching the environmental issues enough. Many believed that the environmental issues would be less by locating the plants in the rural areas, this was not true. The Environment Protection Agency cited the mill in Crawfordsville for alleged violations of the Federal and State clean air rules. Later their other plants in Alabama, Arkansas, Indiana, Nebraska, Texas, and Utah were sited. The $98 million result was “the largest and most comprehensive environmental settlement ever with a steel manufacturer.” The University of Massachusetts ranks Nucor as the fourteenth-largest contributor to the US air pollution. The company has made moves to improve its environmental requirements. The fact that Nucor is in the US is a weakness for them since it relays on the US economic to drive its customers business. C. Opportunities There are numerous opportunities available for Nucor to expand its businesses in the US steel industry. The first avenue of growth, which Nucor has successfully used in the past, could come from the acquisition of other companies that specialize in steel or other services that complement Nucor’s business divisions. The David J. Joseph Company (DJJ) is one of the leading U.S. scrap companies, which sells to Nucor. The acquisition of DJJ will bring a variety of benefits to Nucor. In addition to DJJ's scrap processing operations and expertise, its extensive brokerage operations provide Nucor with global sourcing of many key steelmaking raw materials. DJJ's rail services and logistics capabilities will allow Nucor to leverage the largest private railcar fleet in North America dedicated to scrap transportation. The industrial scrap programs of DJJ will also provide improved channels of raw materials to Nucor.5 Nucor selection of the site for the new plants is always in different areas around the country. The plant is near a distribution site in order to keep down shipping cost. The

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customer would see the plant as a way of promising supply for them and would become a steady customer. It is always in a small town where land, electricity and water would be cheap. Nucor quickly becomes one of, if not the highest paying job in the area. They would locate along major highways, rivers or railroad sites so that transportation would be cheap. Most steel companies in the US are in major cities and much higher operating costs. This is strength and opportunity for Nucor. Based on Porter’s five forces: Competition is fierce and foreign competitors are dumping steel. Steel requires large amount of money and expertise to enter the industry, plus the industry is not growing but consolidating. Plastics and other components have taken market share from steel and will continue to do so. There is heavy competition in the industry with excess capacity. It is a buyers market and Nucor is heavily reliant on the producers of iron ore and scrap. Another opportunity that Nucor can take advantage of is the use of joint ventures. In the past, Nucor has had success with partnering with other companies. The first one was with Yamato Kogyo Ltd, where they would build a mill on the Mississippi River together. This venture turned out to be very successful. The second joint venture was with Brazil’s Companhia Siderurgica National to build a $700 million steel mill in the state of Ceara. Nucor’s plan was to ship iron from Brazil and processes it in Trinidad. Trinidad proven to be more expensive than originally expected and was deemed unsuccessful then closed. This is one of Nucor’s strength in that with its computer program, plants are easily determined to be success or failures quickly and then the company takes action. D. Threats The economy after the September 11th terrorist attacks fell into a recession and the demand for steel dramatically reduced. Nucor was one of the few steel companies in the US that was able during this time to expand and show a profit. Each division within the company was evaluated every month and purchase and building of other plants were evaluated based on demand in that area. Foreign steel coming into the market and under cutting cost is always present. Sometimes US steel quality is an issue, but not often. Nucor was able to keep their cost low so that they were able to compete with the foreign steel industry. There is still an overcapacity in the global steel industry. Raw material availability and cost are always a threat to Nucor’s survival. Nucor answered the raw material issue by purchasing it’s supplier of scrap material. IV. Conclusion Nucor has close to $1 billion in cash on its balance sheet. While earning outlooks are still good, they should continue to raise dividends and consider share buybacks. They should consider scaling back acquisition strategy and pay down long term debt. The percentage of debt to capital ratio has been steadily increasing each year and is currently over fifteen percent. The purchasing of bankrupted companies may not always fit because to make that plant cost-effective would require massive amounts of money with a long-term pay out. The backward and forward integration in the steel market as worked for Nucor and should be continued. Nucor has successfully integrated into steel products and backwardly integrated into scrap/recycling. Decentralizing management is working for Nucor but it does not help its cost structure. They should consider only decentralizing parts of management and putting others under one group for the company. An example would be to keep operating cost and human relations separate

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for every division but centralize purchasing, sales and information technology. They should continue to invest heavily in research and development as this industry is about being the lowest cost producer. Technical innovations ultimately lower the cost of producing steel. The tangible resource that Nucor has is technology and its employees. The intangible resource is the loyalty the employees feel to the firm. Another intangible resource is its US competition as they go into bankruptcy.

Bibliography

Barnes Frank C and Tyler Beverly B., Nucor in 2005, Strategic Management, 2007 Knowledge Management’s Social Dimension: Lessons From Nucor Steel, Sloan Management Review, Fall 2006 Nucor, www.nucor.com/aboutus.htm Nucor, http://www.en wikipedia.org/wiki/Nucor Nucor at a Crossroads, Harvard Business School, 9-793-039, January 20, 1998 Nucor Company, http://www.nucor.com/indexinner.aspx?finpage=aboutus Nucor Corporation, www. Datatmonitor/companyprofile/Nucor Nucor press release, http://biz.yahoo.com/prnews/080208/clf027.html?.v=101, Friday February 8, 9:00 am ET

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