Nucor at Crossroads Essay

In 1986, third distinct segments defined the U.S. brand name labor corporate steel mills, mini-mills, and specialty steel makers. The combine mills have the subject to produce a maximum of 107 million slews of steel per year, mini-mills produced a maximum of 21 million tons of expertness a year, and the states specialty steel makers could produce a maximum capacity of 5 million tons of stainless and specialty grades of steel. This leads to a integral capacity of 133 million tons of production per year. In 1986, the mart consumed only 70 million tons of steel, leaving 33 million tons unused. Nucor is at a crossroads. It faces a saturated market suffering from material all overcapacity. Nucors only opportunity for growth seems to be to expand into the production of flat canvas metal. However, to compete in that ara, Nucor would need to invest in a very savage spic-and-span technical schoolnology, a thin-slab casting typeset that, if successful, would al pocket-size N ucor to manufacture flat sheet metal with a low minimum efficient scale and a low marginal equal of production. This case lead examine Nucors history, the impacts of entering the thin-slab casting phone line, the advantages Nucor would reap, and whether they should underframe the new-fashioned thin-slab casting plant.Looking at the business landscape of the steel industry, it is amazing to see how fountainhead Nucor has done considering the industry is so emulous and has relatively low profitability. Using Porters model, the threat of rival is mellow due to weak domestic demand, excess global capacity, a maturing industry, low switching appeal, high exit barriers, rising operating be (increasing raw material prices), and more than than 5 comparable competitors. The threat of intro is low due to high barriers to entry (economies of scale have been masterd and high capital requirements), growth and profitability are modest at best, and just about viable candidates are a lready present in the industry and are looking to expand into other markets. The threat of substitutes is moderate because buyers have the weft of choosing other materials (aluminum, plastics, ceramics, etc.), and new materials technologies are presently being developed and want after.The threat of suppliers is moderate because iron ore and scrap metal prices are shortly high, energy prices are increasing, Nucor pays for transportation of its raw materials to its plants, there is no abstemious substitute to take the place of iron ore/scrap metal, and there is currently an overabundance of buyers of scrap metal and iron ore. Lastly, the threat of buyers is weak to moderate, because there is excess capacity, low switching costs, few high volume buyers, many an(prenominal) low volume customers, strong demand from China, and rising feedstock prices. With the difficult business landscape in the steel industry, Nucor had to develop competitive advantages over its rivals to achieve i ts success. These advantages included differentiating itself by being an early adopter of computerized order introduce and allowing customers to make short time orders thus reducing their inventory. Second, it invested in modernization of its plants at an average of 2.9 times its depreciation expenses vs. an averaged of 1.6 of its competitors through the 1970s and 1980s, and refurbished on average a plant a year.Third, Nucor strategically located its plants scalelike together to share orders for minimal cost and maximum sales, and building new plants in smaller rural areas with access to railroads, low energy costs, and a plentiful water source allowed Nucor to keep labor costs relatively low and do sure as shooting that COGS remained competitive. Fourth, base wages were lower alone incentives were high than average, and direct communication on expectation vs. performance furnishd feedback on compensation. Also, during down times, officers and CEO pay dropped dramatically f leck average workers did not. This take to lower employee turnover 1-5% vs. 5-10% for competitors. Fifth, Nucors hiring practices focused on making sure that they focused on hiring people based on potential, not experience. Finally, Nucors business hierarchy was different- aroundly flat, resulting in less bureaucracy and more productivity per worker.In short, many of these advantages led to Nucor becoming the second most productive steel maker per employee in the world due by 1985. Thin-slab casting was a proposed technique for mini-mills to fill orders for flat sheet steel, a segment that accounted for approximately half of the U.S. steel industry. To expand its steel market share, Nucor needed to enter the flat sheet segment. In the thin-slab casting business, Nucor would ab initio compete with international firms from Canada and Japan that provided high caliber flat sheet steel, and cheap flat sheet steel providers in newly industrialized nations.Barriers to entry would inclu de large capital expenditures making new entrants cost prohibitive, but not impossible as the barrier is small comparative to the overall costs for steel manufacturing. While new rivals may not pop up immediately, new entrants from existing rivals testament dilute Nucors competitive advantage. Nucor needed an innovative technology to be profitable in this segment as a new entrant. However, innovative technologies are risky due to development costs, unknown long-term operating costs, and the unknown quality of future products.Also, as a first mover, change magnitude costs will be realised. Increased maintenance above forecasts, the risk that production will not keep pace with the small-scale model, the risk that the new tech will not be fully unders in like mannerd by the employees and harder to run. Also, an increased likelihood that other companies will benefit from their mistakes as SMS has not made any offer to keep information gleaned from a large-scale motion confidential. However, the benefits of being a first time mover would be realized as well. The expected profit from the thin slab minimill would be $81.50 per ton, which is 26% higher than from a modernized hot rolled sheet produced in an integrated mill and 226% higher than the margin from an unmodernized integrated mill.For cold rolled sheet, the expected profit advantage remains with minimills, with an expected profit of $107.50 per ton, which 1.9% greater than a modernized integrated mill and 115% higher than an unmodernized integrated mill. If Nucor enters the thin-slab casting business the lasting advantages may be decreased over time as others in the industry may go after them so long as the model is proven to deliver the targeted results. If Nucor industrial plant out the kinks, then other companies will join up and the competitive advantage window will shrink, making the overall scheme too costly. If the program does not work, it is likely the other companies will not keep an eye on suit, while Nucor pays the cost for other companies R&D offsite. However, if the investment into the new technology proves successful, Nucor would have a significant cost savings over integrated mills initially, both in terms of entry costs and in terms of operating costs and profit margin.This will provide Nucor with a significant competitive advantage over the integrated mills, which already provide flat-rolled steel products, but will not provide sustainable competitive advantage over the long term, as it will be easy for competitors to duplicate this technology. Many of the companies that do steel would imitate the roadway that Nucor is taking. They have done an excellent job of lowering cost while leveraging their competitive advantages. Furthermore, CSP is a step in the ultimate industry goal of direct casting of sheet at strip.However, it seems as though Nucor would only gain a head undertake of two to three years since SMS held the CSP technology and Nucor couldnt block o thers from using it. This head start doesnt seem very advantageous as it would require more or less 5 years to break (see attached chart) even and the other companies would be able to use lessons learned from Nucors first mover and harbour it to lower their breakeven point. Overall this would be a very risky projection for Nucor to undertake at this time as the technology is not at an adequate tech readiness level, the initial cost to implement, as well as it could move Nucor away from its competitive advantages.