1. business and industrial

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Case Study—Nucor Corporation: Competing Against Low-Cost Steel Imports
A. Executive Summary
After ventures in the 1950s & 60s within the nuclear instrument industry led executives
to believe that they were in a losing battle for sales & market share, President and CEO F.
Kenneth Iverson came to the conclusion that the way towards profitability and a secure future
for the company was to abandon the industry and instead refocus & reorganize the company
around its profitable Vulcraft subsidiary, “which was in the steel joist business.” The risk
paid off. Newly renamed as the Nucor Corporation in 1972, executive management led the
company towards great success: within 13 years it was the 7th largest steel company in the
United States and by the mid-2000s it emerged at the industry leader for a brief time. Its stay
at the top was brief, however, (mainly due to a European rival’s acquisition ambitions, which
allowed it to collect market share with each new company buy) and it had slid back to the
number two position by 2006.
However, Nucor was still highly successful: it owned 18 plants, had the capacity to
produce 25 million tons of steel, and realized net profits of $1.8 billion from revenues
totaling $14.8 billion. In fact, success and Nucor was such a strong partnership that during
both the 2005 and 2006 fiscal years, it was the most profitable steel producer in North
America. That said, a series of market conditions have presented challenges that Nucor must
face in order to maintain its number two market share position. That is the crux of this
case—is Nucor up to the challenge?
Over the course of this case study write-up, I will accomplish the following:
1. Provide a brief overview of the steel industry,
2. Provide a brief overview of Nucor Corporation, its business practices and its strategy,
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3. Present an identification of the issues and
4. Offer my summary recommendations.
We turn now to the first item on the agenda—a brief overview of the steel industry.
B. Brief Overview of the Steel Industry
The steel industry is most accurately described as a mature market space. By this, I mean
that the industry typically realizes minimal (if any) year-to-year growth. Several factors have
contributed to the industry being one that is driven by price (for the most part). Slow growth
has led to oversupply, which in classical economic terms, translates to lower prices. Further,
steel is typically viewed a commodity, with little to differentiate one supplier from another.
In addition, the industry is highly cyclical. When demand is high—prices raise. When
demand is lower, prices fall. Essentially, there is no “set price” for steel and steel products.
It’s nearly entirely driven by a market looking for supply/demand efficiencies in equilibrium.
This has the net effect of causing competitors to rely on price as their chief point of
differentiation.
In short:
the manufacturer that can realize the lowest cost of doing
business/manufacturing will (most likely) win consumers’ business.
As should be obvious with such market conditions, competition is fierce. So fierce, in
fact, that starting with the economic crisis of 1998 (which by 2001 had reached the United
States) numerous manufacturers was forced into bankruptcy. Why? Lost market share,
stolen by companies that had lower costs, which resulted in diminished sales.
Still, not all was dark. “Worldwide demand had grown by about 6 percent annually since
2000 (well above the 1.1 percent growth rate from 1975-2000), but there had been periods of
both strong and weak demand during 2001-2006. Worldwide sales of steel products were in
the $770 to $790 billion range in 2004-2005; prior to 2004, global sales had never exceeded
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$500 billion in any one year.” Despite these records sales, there remained an overabundance
of supply relative to demand globally.
In the U.S. however, a slightly market scenario was playing out: strong demand & and
not enough steel to go around. In short—U.S. companies were facing the reality of not only
competing against domestic rivals, but global rivals as well who were entering the market to
meet that excess demand and to take advantage of favorable exchange rates. “In 2005,
foreign steelmakers captures a 22.8 percent share of the U.S. market for steel products (based
on tons); foreign steel makers were expected to achieve close to a 30 percent share of the
U.S. market in 2006.”
Complicating matters (from the U.S. perspective) was that many of these exporters (to
the U.S.) were viewed as dumping product into the U.S. market (artificially at lower-thancost prices) and were often subsidized by their governments, creating a market place that was
not on an even playing field for U.S. manufacturers. The U.S. government, in time, filed
numerous complaints to the World Trade Organization (WTO).
C. Brief Overview of Nucor Corporation, Its Business Practices and Its Strategy
Despite these challenges, Nucor Corporation was thriving in just about every single sense
of the word. Labeled a “model company president” by many, President & CEO Ken Iverson
did everything possible to earn that title. In my opinion, it was very well deserved. From my
perspective, every decision Iverson made found its root in one simple concept: “How can the
company do something in the most cost-effective (and inexpensive way) and still deliver
maximum results?” This is powerful strategic thinking that while simple in concept, is too
often overlooked by senior management.
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Iverson guided the company utilizing a 4-prong strategic approach.
1) Strategic
Acquisitions—With the exception of one offshore acquisition, each acquisition that Nucor
took on contributed something special to the enterprise at large.
In Iverson’s mind,
acquisitions solved many challenges that the company was either currently facing or was
likely to face in the future. Specifically, it strengthened its customer base by adding the
acquisitions’ customers to its list, it expanded its geographic coverage across the U.S., widen
its product line (which had already been both impressive and the most comprehensive in the
domestic industry).
2) Technology – Nucor’s second prong was to be the industry leader with respect to
technology and innovative new products that would benefit its consumers. It also sought to
be aggressive in plant acquisitions and construction, as it was believes that this would give
the company the capacity to realize such innovation—and then meet the demand resulting
from bringing new product to market.
Interestingly, “Nucor management made a conscious
effort to focus on the introduction of disruptive technologies (those that would give Nucor a
commanding market advantage and thus be disruptive to the efforts of competitors in
matching Nucor’s cost competitiveness and/or product quality) and leapfrog technologies
(those that would allow Nucor to overtake competitors in terms of product quality, cost per
ton or market share).” In my opinion, this strategic approach and its resulting heavy R & D
spend led to Nucor’s rise. It forces competitors to continually be playing catch-up.
3) Plant Efficiency/Low Cost – Again, driven by Iverson’s strong focus on cost, he
wisely guided the company to spend heavily in tools, upgrades, etc., that would have the
effect of maximizing plant efficiencies. Greater efficiencies logically lead to a lower cost of
doing business. The two are symbiotic twins.
In fact, he would often spend on the latest
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technology (which, without context, seems a bit liberal with the purse strings)—with the
chief focus on driving costs ever further south. And these were not “cheap” buys. Its
“capital expenditures for new technology, plant improvements and equipment upgrades
totaled $415 million in 2000, $261 million in 2001, $244 million in 2002, $215 million in
2003, $286 million in 2004, $331 million in 2005 and $338 million in 2006”! In short—
Iverson invested not just in R & D/tech improvements, but also in Nucor’s future.
4) Global Growth via Joint Ventures—This fourth and final prong is rather
straightforward: build capabilities and achieve global growth through joint ventures.
D. Identification of the Issues
In the spirit of transparency, I had a difficult time with this section. Why? Because
Nucor seems to be doing everything right in my mind. They are driven by cost efficiencies.
They have a wide product line. They are building up capacity to meet demand and have
supplemented that with innovative products that have resonated with consumers strongly.
Internally, employees are treated so well (unlimited pay based on performance, strong worker
benefits, low degree of hierarchy between senior management and staff, high wages, great
incentive plans, etc.) that turnover is very minimal. This, in combination with a strong
culture, a no lay-off policy and team mindset, has created a working environment that
workers want to be at. Nucor is for all purposes—a very successful company in the eyes of
its workers and in the eyes of its consumers.
So digging a bit deeper—and yes, I realize that this seems odd—but I believe there is
only 1 chief issue at play here. Every other challenge that Nucore faces actually stems from
this one factor, as we shall see in a moment. Solve the challenge, and the rest of Nucore’s
ducks will line up in a row.
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1. Nucore Operated within a Mature Market
Mature Market—For better or worse Nucore operates within a mature market,
specifically, a mature market in which it sells commodities. The text (in chapter 6, pages
185-186) lists 8 considerations of such a market. They are: 1) Slowing growth in buyer
demand generates more head-to-head competition for market share, 2) buyers become more
sophisticated, often driving a harder bargain on repeat purchases, 3) Competition often
produces a greater emphasis on cost and service, 4) Firms have a topping-out problem in
adding new facilities, 5) Product innovation and new end-use applications are harder to come
by, 6) International competition increases, 7) Industry profitability falls temporarily or
permanently and 8) Stiffening competition induces a number of mergers and acquisitions
among former competitors, driving industry consolidation to a smaller number of larger
players.
As shown in previous sections each of these 8 items has been occurring within the steel
industry (with the exception of the fourth item). Thus the issue for Nucore is how does it
best meet (and overcome) the challenges of a mature market?
E. Summary Recommendations
In this section, I will make my recommendations—in the order that I believe that they should
occur (due to importance).
I believe (very strongly) that Nucore seems to be doing everything right at the moment.
Normally, in these case studies, I am able to shred a company for its widespread
mismanagement, bad ideas and poor execution.
Not here.
Instead, my summary
recommendations are not really “fix-its” but rather recommendations on items that I believe
Nucore needs to remain focused on, in order to maintain its market share (and perhaps grow it,
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when further shakes-ups in the industry inevitably happen) and to continue to delight its
consumer base.
1. Continue Acquisitions—As both the text and the case study make clear, mature
markets are ripe for this sort of consolidation. Nucore recognizes this and should
continue to do so, assuming that its acquisitions continue to be strategic in
approach. Each acquisition should be bringing at least two “pluses” to Nucore.
Such offerings could include (but are not limited to): a lower cost of doing
business, additional consumers, innovative technology, quality staff, added
geographic range, added capacity, etc. Through thoughtful acquisitions, Nucore
would be likely to regain its leadership position within the industry—which is a
powerful marketing point of differentiation!
2. Continued Focus on Cost Efficiencies—Again, being the cost leader in a
commodity industry/mature market has been the key to Nucore’s success. It
should continue to invest heavily in R & D that ferret out cost efficiencies and
drive down the cost of doing business. Should this change—Nucore would be in
a much different situation. Executives should everything in its power to keep this
highly useful point of differentiation.
3. Continued Focus on Employees—It may seem silly mentioning this as a
recommendation, but the valuable human capital is much too often overlooked as
a key catalyst of company health and future well-being. The truth is, because
Nucore treats its employees so well (as described above), its staff works hard and
is loyal to the company. This has the effect of increased productivity, which has
allowed it to be most cost effective (most fixed costs spreads over more units…or
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in this case “tons sold”) and minimal employee turnover. Turnover, especially, is
a highly expensive adventure once recruitment, training, etc. are considered. It
has been a great strategy to keep its workforce happy, so that it can retain both its
staff and the accumulated knowledge base and experiences that they provide to
the company. I view this as critical for Nucore to be able to continue to maintain
its cost leadership.