Wednesday, July 23, 2008

Nucor Analysis

Executive Summary

This report primarily discusses the challenges that Nucor is facing or going to face in the wake of steel industry evolution and general social and economic climate changes. Industry standard analysis tools and methods have been used to basically understand what is happening at the macro economy and industry level, where Nucor's strengths and weaknesses are, and how they can continue to strive in this challenging environment.

The financial analysis shows that Nucor has been doing very well in the past 5 years by developing the right strategy and executing them well. However, in the face of economic boom in emerging countries, globalization, scarcity of raw materials, increasing concerns for environmental well being and worsening energy crisis, Nucor is presented with new threats and opportunities. It should capitalize on its key strengths especially the people, manufacturing excellence and lean organizational structure to face these threats and capitalize on the opportunities.


Introduction

Nucor’s goal is to “Take Care of Our Customers.” - by being the safest, highest quality, lowest cost, most productive and most profitable steel and steel products company in the world while at the same time being cultural and environmental stewards in our communities where it exists.


External Analysis


PEST Analysis

Government(s) plays a very important role in steel industry by two ways. First, it imposes tariffs and trade barriers when local manufacturers need protection. However, with Free Trade Agreements signed, this role is reduced. Government(s) also provides tax breaks (and subsidies in some countries) to support industry growth. Second, it enforces international and local environmental laws to reduce pollution and protect the environment.

High population or economic growth especially in India, China, Brazil and Russia has increased demand for new buildings, vehicles and other infrastructures which in turn increases the overall demand for steel and steel based products.

Steel industries are intensive energy users and the ever increasing fuel price is pushing the manufacturers to keep on finding for and adopting a more efficient steel manufacturing technology and process. Technology is also used to produce higher quality steel products.

Mergers and acquisitions are taking place especially in the past few years as a growth strategy as well as to capitalize on economics of scale during purchasing and production thus becoming more cost competitive in this industry where there is not much differentiation and competition is basically based on price.

Recycling plays an important part in this industry and with scrap metals prices increasing manufacturers are working on joint ventures to source for cheaper sources.

Porter's Five Forces Analysis

The bargaining power of buyers is high due to various factors. First, there is low level of product differentiation thus low switching cost for buyers. Competition is basically on price. Second, there are many manufacturers in the market thus buyers have many choices. Third, due to cyclical demand for steel, there tend to be (sometimes) oversupply and this gives additional bargaining power to buyers. Bargaining power of suppliers is also high due to scarcity of raw materials especially scrap metals whereby suppliers are raising the price.

There are a number of substitutes for steel. Some buyers are sourcing for lighter materials to replace the “heavy” steel. This is due to, as an example, end-users demand to have a more fuel efficient automobiles and train wagons. One way is to build smaller and lighter automobiles. However, these substitutes are still costlier. So their threat can be considered medium for now.

The threat of new entrant is low as it is capital intensive to start and run the business as well as environmental laws and enforcement are getting stricter.

In summary, the rivalry is high in the steel industry. However, government(s) through its laws plays an important part in increasing or lowering the rivalry.

Internal Analysis
Value Chain Analysis

Strengths, Weaknesses, Opportunities and Threats (SWOT) Analysis

Nucor’s key strength is our people. The lean organization structure has created strong leadership at all levels by being able to make quick decisions and be accountable for it as well as share their success and failures with each other. The egalitarian approach towards employee benefit and welfare, compensation based on group performance and production quality, training and job rotation to ensure all employees know all areas of work and an approachable management which practices open communication as well as top to bottom risk taking and innovative culture complemented each other to have created a highly motivated, productive, flexible and innovative workforce. Close relationship with major customers who have co-located with them results in lower shipping cost and lower price for customers. By practicing risk-taking and being innovative Nucor is able to provide superior quality products. Nucor’s superior financial performance is the best in the industry in United States. It is also North America’s largest recycler.

There are weaknesses as well. Almost all of Nucor’s plants are in US making it difficult to compete with Asian manufacturers with lower production costs. Production is energy intensive (20% of total cost). Nucor is dependent on scrap metal (getting scarce and costlier as well as volatile). No internal R&D performed makes it dependent on suppliers or partners to bring in new technology. Being a decentralized organization, there is no coordination between divisions during purchasing or sales which results in duplication of sales and marketing effort and not capitalizing on economies of scale for purchasing.

There are a lot of opportunities for Nucor to expand through mergers and acquisitions, to perform market research to understand existing customers’ product or business roadmaps, to perform R&D to find new steel products, better manufacturing technology and improved process as well as to capture and process waste energy & products into electricity or some useful product for another industry. There is also further opportunity to improve inbound and outbound logistics with the recent purchase of DJJ and also to export steel to emerging markets such as India, China, Brazil and Russia where the demand is growing.

The major threats that Nucor are facing are increased competition due to globalization, scarcity & rising raw material and energy costs, tougher environmental laws and free trade agreements which allows foreign players who have cheaper labor force, reduced regulation and unfair subsidies to have the cost advantage, being bought over by larger competitor and cyclical demand for steel products. Additionally, substitutes which are lighter but stronger are slowly getting more prominence.


Strategy Formulation
TOWS Strategic Alternatives Matrix


Four Actions Framework of Blue Ocean Strategy


Recommendation

The following strategies are recommended in order to address challenges and to continue achieving high growth and profitability.

1. To continue with current human resource strategy of egalitarian, performance based compensation and risk-taking oriented culture building to maintain the strong leadership at all level and the highly motivated, productive, flexible and innovative workforce. This becomes more critical now with globalization and mergers & acquisitions which are making steel industry more competitive.

2. To continue with lean and decentralized organization but streamline/coordinate purchasing, sales and marketing activities. This is to reduce duplication of efforts, overall costs and benefit from economies of scale and be more consistent to customers.

3. To build long term relationship with customers by understanding their product and business roadmaps. This will help to :-

a. Reduce the impact of cyclical demand and reduce the chances of customers switching to other suppliers (manufacturers).

b. Determine products to be eliminated from our offering.

c. Tailor our pre- and after sales services based on customers’ need and expectation

4. To start and grow internal research and development (R&D) capability in order to continuously :-

a. Streamline manufacturing technology and process to be more environmental friendly, productive and cost effective.

b. To find ways to turn waste or by-products into energy that can be re-used by Nucor or into something valuable that can be sold to other industries. This is to reduce energy costs or generate supplementary income for Nucor.

c. Identify new products (that matches customer future and current needs). Offering what customer wants at a cheaper cost, higher quality and timely manner will make them stay with Nucor. For example, pre-fabricated building and lighter automotive components.

d. Identify alternative raw materials. This is to reduce dependability on scrap metal.

5. To expand internationally especially to emerging regions which includes India, China, Brazil and Russia through mergers & acquisitions and joint-ventures with local partners. This is to take advantage of low production cost and at the same time be closer to growing markets.

6. To fully utilize newly acquired inbound and outbound logistics capability (JCC) to further reduce shipping costs to customers.


Key Success Factors

The key success factors for these strategies are:-

1. Successful proliferation and implementation of current human resource strategy (and policies) to newer plants especially those outside of US. Different regions have their own history, work culture and political agendas that may hinder the implementation exact Nucor’s human resource strategy.

2. Sufficient allocation of financial and human resources for expansion and also for research and development activities. Formal R&D will bring Nucor’s existing risk-and innovation taking culture to a new level. Nucor must be willing to spend considerable amount of money and resources to make this effort successful.

3. Involvement or willingness of customers to share their product or business roadmap with Nucor. Product or business roadmap may be a strategic advantage that customers will choose not to divulge to others. Nucor must convince our customers to share their roadmap to create a win-win situation for both parties.




5 comments:

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Fredao said...

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Knightryder said...

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