Analysis of Nucor's Performance in the Steel Industry - Essay Example

? ANALYSIS OF NUCOR’S PERFOMANCE IN THE STEEL INDUSTRY Competitive Forces in US Steel industry In a liberal market economy where the forces of demand and supply are the major determinants of price and terms of trade, businesses have to formulate strategies that are aimed at positioning it for competitive advantage. Competition exists in the steel industry both in the US market and globally. The competitive forces affect all the companies in the industry and how best a firm’s strategies will influence its success. In the US steel industries, players like Nucor are faced with various elements of competition. To begin with, there is competition for the inputs that are required in the production of steel. The industry core input is from recycling of scrap metal. The many firms in the industry thus compete for these metals used in production. There is also competition for market share between the players. Market share determines the level and volume of sales that a firm makes and therefore influence e the profits to a firm (Porter, 1998). The foreign suppliers further tighten competition for market share in the steel industry. Firms in this industry as well are faced by the threat of entry by new firms as this may influence negatively on the performance of the already existing firms. Michael Porter five forces model can be applied to explain the competitive forces in this market. According to porter, the five factors that influence the performance of firms are the threat of entry of new firms, threat of substitute products, bargaining power of suppliers, bargaining power of customers, and the rivalry among firms (Porter, 1998). These five forces will affect operations and determine the policies to be adopted by firms to ensure that the competitive edge against competitors is attained. In this market for instance, there is high bargaining power of customers. Customers in the steel industry are very sensitive to price changes and are concerned about the quality of the products. This therefore makes the firms in this industry to produce at the lowest cost possible without compromising on the quality. The second element of the porter’s model is the threat of new entrants. New entrants will compete for the same customers and will fight for a control on the market share (Nilsson & Rapp, 2005). The fight for market share is a zero sum game where if one firm increases its market share then the others will lose their share. In the US industry, there is threat of entry of very new firms or formation of partnership, alliances, or mergers that will make the competition stiffer. Nucor Corporation has therefore increased its acquisition of new firms and reduced the bureaucracy to ensure flexibility and better performance. The industry is thus highly competitive. The bargaining power of suppliers also exists in the industry because of the many firms in the industry. In this industry, firms have to look for scrap metals that are molted and used in producing steel products. The companies must therefore offer good prices for input for them to have continued supply of raw materials and reliable suppliers. The third force is the threat of substitute products. Substitute products have similar uses and satisfy the same need, therefore becoming important for competition. Industries that are characterized by the existence of closer substitutes are highly competitive and must ensure quality production and good pricing. Continuous restructuring and strategies are also important for the success of the firms. Presence of substitute products in the steel industry, together with the imports from china, turkey and other foreign countries have made competition stiff in this industry (Thompson, 2010). The four forces together with the rivalry among firms are the component of the five forces model. The rivalry among firms is determined by the ease of exit, branding, product identity, product difference and switching cost. The low cost of switching and the ease of exit makes the steel industry in US and globally be highly competitive. Driving forces There are various driving forces in the steel industry, which influences the competitiveness of the industry. The first driving force is the technology that is adopted in the production and in the recycling of steel. The technological changes determine the production efficiency and reduce the cost of production. Firms’ that will adopt the most modern technologies in this industry will have a competitive edge against the competitors (Hill & Jones, 2007). The steel industry is also driven by the market demand and supply. The price determination in this industry is based on the forces of demand and supply and firms must compete appropriately to gain competitive edge for them to survive. The demand for steel products will result in the need for steel production. The supply of steel is also essential in the price and production by the steel industries. The third driving force in the industry is the level of competition arising from the formation of strategic alliances and acquisitions. In this industry, the alliances and competitiveness is increased when firms restructure by acquiring other firms with poor performance to increase their operations and market growth. This makes the companies become strategically fit for competition and to realize more turnovers on sales. The foreign competition together with the government policies regulating imports and exports are also key driving forces. Future profitability of steelmakers The increase in the demand for steel products for the development projects makes the industry to be profitable. The competitive forces will also be on the rise given the entry of new firms and the attractiveness of the industry. A trend analysis into the company’s financial performance shows an increase in the earnings posted by the firms in the industry. For example, the profit of Nucor increased from $ 310.9 million in 2000 to $1757.7 in 2006 (Thompson, 2010). This increase in the net earnings has been propelled by the high demand for steel and the strategies formulated to achieve market growth. Nucor must therefore expand in the market if it has to realize better performance. Through acquiring more firms and expanding in new markets, the company will increase the sales turnover and enjoy economy of scale production. It will also compete favorably with other firms in the steel industry from within and outside the US economy. Expansion will also assist in the increase of their market share and help in reducing the variations in the returns to the firm. Nucor is also likely to increase their supply base and enjoy better technology that will enhance efficiency in production. Expanding their operations is therefore called for if the company has to benefit from the better result. Nucor strategy Nucor has adopted the growth orientation strategy where the company aim at increasing their market share through acquisition of new firms and the expansion of the existing ones. A growth strategy increases the share in the market and result into the increase in sales and profits (Nilsson & Rapp, 2005). The strategy is evident from the company’s increased acquisition, upgrading of the existing plants and the formation of joint ventures. Joint ventures enable the company to enter into new markets quickly and to reduce the cost of entrance. New plant construction and the use of better methods of production are all elements that Nucor has adopted a growth strategy. The strategy has made the company realize increase in profits and a corresponding increase in the number of their customers. The generic strategy that has been adopted by Nucor is the cost leadership strategy. This strategy targets a broader market and promotes low cost of production (Porter, 1998). To gain a competitive advantage in an industry, the firm must show to its customers that they will get value for their money. The cost leadership strategy is adopted in cases where there are many competitor and the customers are very sensitive to prices. Nucor has achieved this strategy by keeping their cost of production low and at the same time producing a wide range of products. Through this, the company has become one of the largest steel companies and was at one time the biggest in US steel market. The strategy has also seen the company compete favorably with the foreign firms that imports steel at a lower cost in the US market. The cost leadership strategy has made the company survive in the highly competitive and turbulent market that is characterized with the bankruptcy and financial distress of many competitors. The strategy was difficult to implement given the subsidies imports from other foreign companies in China, Turkey and Brazil (Thompson, 2010). Irrespective of their urge to reduce the prices of their products, Nucor also ensured that the qualities of their products were not compromised to make the customers become loyal. Policies implemented to achieve strategy The use of modern technology in production through the modernization of their operations is as well aimed at reducing the cost of production. For example, the modernization of bar mill and addition of vacuum degassers to its four-sheet street mills were all aimed at cost reduction. The company also earned ISO 14001 on environmental conservation system (Thompson, 2010). Acquisition of a plant in Louisiana and relocation of some of their operations to Trinidad where there was cost attractiveness of the supply of natural gas. This ensured that the company acquired steel at cheaper cost and that the cost of fuel required in the production process was low (Thompson, 2010). Because of the low cost of production, the company was able to sell at a low cost thereby making it pursue the cost leadership strategy. The use of joint venture in the expansion of their operation further reduced their cost of operation hence cost leadership strategy (Hill & Jones, 2007). Moreover, the company adopted a decentralized organization structure where decisions were not vested at the top management. This ensured innovation and quick decision-making that resulted in efficiency. There was also competition among the different plants that was aimed at improving the output and reduces the wastage to minimize costs. The company further ensured low cost production by introducing compensation scheme that was very dependent on the level of output. The management also motivated the work force by giving employees bonuses where they exceeded the targets. This reduced significantly the cost of production and increased their profit margin of the firm. Nucor Corporation also sourced their raw materials from cheaper sources to make their final products affordable and achieve their cost leadership strategy. Factors for success of Nucor corporations The good performance that has been continuously posted by Nucor in a highly volatile and competitive market has been attributed to several factors. Some of these factors relate to the strategies that the company pursued and others relates to the stewardship by the management of the company. The first success factor is the decision by the company to increase the products line. Nucor Corporation decision to engage in the production of a wide variety of products has made it increase its revenues and earn from a wide number of markets (Thompson, 2010). Diversification is one core way of increasing sales and reducing the risk exposure of a firm. The second reason for the success of Nucor is the strategic acquisition whereby the company acquired ownership of other firms to increase market control. Through this acquisition, the company was in a position to increase their geographical coverage, increase their product line, and expand their customer base. The strategic acquisitions were also a faster way of penetrating the market and reducing the cost of operation (Thompson, 2010). Another reason as to why the company succeeded in the highly competitive industry is because of the maintenance of quality for their products while ensuring that the cost was reduces. The cost of production was also low to avoid losing customers. This strategy was achieved because of the good management where there was a lean staff and better remuneration for the workers. The expansion strategy where Nucor ventured in the global economy made it increase the returns and realize profits. Moreover, the use of modern technology ensured quality and reduced cost. In addition, the survival can be attributed to the flexibility of the company towards the needs of the market ad customers (Thompson, 2010). I can therefore conclude that the success factors are because of the great leadership of CEO’s like Kennedy Iverson who managed the company during turbulent economic conditions. Due to the good leadership the company was also able to implement their strategies and have a good strategic fit. Nucor SWOT analysis SWOT analysis is one of the tools that are applied when evaluating a company’s performance. A SWOT analysis reveals the strengths, weaknesses, opportunities, and threats that face a company (Nilsson & Rapp, 2005). A SWOT analysis of Nucor reveals that the company’s strengths and opportunities overweigh the weaknesses and the threats to the company. The company derives its strength from the good financial performance, quality management, the low cost of production and the modern technology used in production. At the same time, the company has opportunity of increasing their investment in the global market, opportunity to acquire the bankrupt firms and an opportunity to increase their lines of products. The opportunities and strengths are instrumental in the ensuring of positive financial results. On the other hand, Nucor is faced by weaknesses in the fluctuation in prices of steel and the lack of control on the supply of scrap metals. Threats that face the company is the stiff competition from the foreign steel company, the entry of new firms and the threats of internationalization. The threats that face the firm must be encountered through formulation of policies and strategies to ensure the survival. The good leadership and the strategic policies instituted by the company have made Nucor Corporation realize growth and succeed in the market. Nucor therefore has a strong SWOT and is likely to continue surviving in the competitive market. The company has core competency in the remuneration of its employees and the way in which the profits are shared with the employees and management. The bonuses that are earned when good financial results have been achieved makes the company achieve a targeted production level and good profits. Nucor’s financial performance Nucor’s financial performance is commended and shows strong financial performance. The results show an increase in sales over time and an increase in the net returns over time. The good financial performance has also made the company successfully expand its operations in other countries. The basic EPS was 0.95 in 2000 to 5.73 in 2006 showing that the return to the owners is improving (Thompson, 2010). The financial performance of the company also reveals an increase in the total assets of the company over time and a corresponding increase in the liability of the company. The company’s financial performance is good and is likely to improve further if the strategies are implemented successfully. Issues to be addressed by Nucor’s Management The management of Nucor Corporation needs to come up with the strategic map that shows how the acquisitions should be made and the cost the company is willing to incur during their acquisition strategies. The management also needs to address the areas that the company must venture in during their journey to grow global. Other areas that the management must address include the terms of service of employees. The employees need to have job security and their jobs defined to motivate them further. An employee who is well motivated through fair terms of jobs and whose roles are clearly defined performs best and increases their productivity. The management must also address the manner in which it will acquire scrap metal and raw materials at a lower cost and to ensure that the cost of their products remain low. They should therefore liaise with the suppliers to ensure that they do not run of the materials used in the manufacture of their markets. The management should also hedge against the foreign exchange risk that is likely to negatively affect the company returns and reduce their margin. Recommendations to Dan DiMicco After a scrutiny into the management of Nucor, it can be recommended that the CEO needs to take the following actions: The Company should ensure that they continue to ensure reduction in the cost of production to ensure a corresponding decline in the final price of their price. The quality of the products must not be compromised to ensure that the customers prefer them. The value for the customers’ money will therefore be upheld in this manner. The company need to expand their operation should be carried out while taking into account the economic factors and the demand of steel in the targeted countries. Foreign operations should only be made in areas where there are prospects for having good returns. The operations be in countries where the regulations support the growth of industries and are not discriminatory. To ensure that the acquisitions and the mergers are beneficial to the company, they should be evaluated and only viable mergers should be pursued. The management should also strive to improve the relation with the employees and their grievances should be addressed in ways that result into amicable solutions. Employees whose interest and plight are satisfied will work towards achieving the overall organizational objectives. The organizational structure of the company should remain simpler and one that promotes innovation and quick decision-making. Reference List Hill, C. W., & Jones, G. R. (2007). Strategic Management: An Integrated Approach. London: Cengage Learning. Nilsson, F., & Rapp, B. (2005). Understanding competitive advantage: the importance of strategic congruence and integrated control. London: Springer. Porter, M. E. (1998). Competitive advantage:creating and sustaining superior performance : with a new introduction. New York: Simon and Schuster. Thompson, A. A. (2010). Nucor Corporation: Competing Against Low-Cost Steel Imports. New York: McGraw Hill. Read More