Business Strategy. Competitive forces impacting the U.S steel industry

Nucor Case Study
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Executive Summary
In 2016, Nucor was ranked as the 13th largest producer of steel with a production capacity of 29 million tons. Behind that success was the low-cost leadership strategy that had reduced the company’s expenses considerably. As a company with diverse products, this strategy was instrumental in pushing the company’s products in the domestic and international markets. This is impressive considering that the U.S steel company is very competitive because all companies involved have the capacity to produce quality products using technological innovations. Porter’s five force model and the SWOT analysis portray an industry that is flooded with excessive products, which reduces the price significantly.
Despite that competition, Nucor has acquired several strategic firms that have turned it into a mega-corporation that enjoys economies of scale. Currently, acquisitions, technological innovation, and search of external markets have driven the industry to what it is today. This is reflected in the company’s financial report that displays a consistent increase in the amount of resources used to acquire and build new firms while undertaking research. The financial report also shows how Nucor’s net sales were not stable from 2011 to 2015. To attain stability, Nucor’s management must address whether to stick with scrap steel as the main raw material and how to deal with foreign competition.
1. Competitive forces impacting the U.S steel industry
Steel production companies in the U.S are located in a very competitive environment; domestically and internationally. The strong competition among the companies is because the supply of steel in the U.S exceeds the demand, which leads to low prices. When the steel industry is subjected to potters five force model, it is identified that there is;
a) Moderate threat of new entrants;
A new company can only be successful if it obtains economies of scale because the steel industry is capital intensive. Existing firms seek new customers in regions where they are not located. For instance, Chinese companies export their products into the US market. This is mainly motivated by the lack of product differentiation in the steel industry (Grossman, 2014). The acquisition of small companies by large companies such as Nucor indicates that there is moderate threat of new entrants.
b) Low threat of substitute
The threat of substitutes is low because only few products have the chance to be substitutes of steel products. Plastics, bricks, and stones can be considered because of their low production cost but they are not strong enough to replace steel products. Fiberglass and aluminum could also be considered but adjusting the production systems to accommodate such products has high switching costs.
c) Strong competition among rival firms
Competition is very strong since the majority of the firms know how to produce quality products. Since it is difficult to differentiate steel products, buyers only go for lower prices. Another factor that intensifies the competition is the use of low-cost scrap steel technology to produce a variety of products. In the case of Nucor, this strategy has enabled it to enter new market segments, thus increasing competition in those segments.
d) Moderate bargaining power of buyers
The service industry, manufacturing industry, automotive industry, and construction industry are the main buyers of steel products. Since there are a large variety of buyers, their buyer power is high in the industry. Low switching cost and low differentiation of products strengthen this power. Nonetheless, since steel products are frequently used, buyers’ bargaining power decreases leading to moderate bargaining power of buyers.
e) Moderate bargaining power of suppliers
From the case study, there is very little to suggest that suppliers have a strong force in the industry. Scrap steel is a key raw material, implying that suppliers have the power to charge higher prices. However, scrap metal are sold on the basis of demand and supply, which eliminates the power to impose higher prices.
2. Driving forces in the steel industry
Like other industries, companies in the steel industries have sort external markets while also adopting efficient and low-cost production systems.
a) Technology
Technology has greatly revolutionized the production processes in the steel industry. In the 1950s, steel production involved melting iron alloys in chimneys that used wood as a source of fuel. This process was inefficient and resulted in low quality steel. However, in the modern world, the steel industry is among the most technologically advanced industries in the U.S. Steel companies have incorporated sensors, advanced computer systems, artificial intelligence, and physical models in all stages of their manufacturing processes (Collard-Wexler, 2015). To differentiate themselves from others, some companies in the industry have adopted processes that use a low amount of energy. COREX technology, which is environmentally friendly, has been adopted by Nucor, United States Steel, and Mittal.
b) Mergers and acquisitions/consolidation
The industry has witnessed a lot of mergers and acquisitions, which has increased competition by creating mega-corporations. In 2006, Mittal and Arcelor merged and became the world’s largest steel company controlling 10% of the world’s steel industry (). With a strong financial backing, Nucor and Arcelor-Mittal have continuously acquired state-of-the-art subsidiaries at bargain prices, hence increasing their competitive advantage.
c) External markets
The supply of steel in the U.S and the world is more than its demand. As a result, companies are actively searching for foreign customers so that they can operate at full capacity. In fact, despite the U.S steel market being flooded, Chinese steel firms are exporting their products into it. By 2020, 30% of steel products in the U.S steel market will be from China (Pauliuk, 2013).
Companies react differently to changes in their environment. Therefore, even though the industry has tough driving factors, they are only harmful to high-cost steel producers. On the other hand, those same tough conditions are favorable to low-cost firms such as Nucor since they can use their financial muscle to exploit the weak competitive edge of high-cost companies.
3. Prospect of future profitability of US steelmakers
As mentioned earlier, each company is affected differently by changes in the trading environment. High-cost companies only generate more profits when the demand is great than the supply and the prices are high. This was the case from 2005 to 2007 when supply was short and market prices were high. However, when the demand weakens, such companies struggle to attract customers because of the high prices of their products. Since such companies have been unable to establish and successfully run low-cost facilities, it is unlikely that they will undertake any expansion strategies.
On the other hand, low-cost companies like Nucor are structured in a way that they can succeed whether the demand is high or low. Therefore, despite the competition from other foreign low-cost companies, Nucor is likely to increase its market share at the expense of high-cost companies. As a result, Nucor should consider expanding by engaging in more mergers, acquisitions, and establishing other plants to increase its production capacity. However, other low-cost firms are likely to do the same if they know what Nucor is planning. Therefore, Nucor managers should adopt aggressive policies and integrate them with their experience of efficient plant operations so that they expand as quickly as possible.
4. Nucor’s strategy
Nucor’s activities such as the use of scrap metals as raw material, building new plants without using a lot of capital and operating them efficiently suggest that the company emphasizes on the importance of reducing operating costs. Therefore, Nucor is pursuing a low-cost leadership strategy that is commonly used in the commodity product industry. Additionally, the company’s ability to generate high profits even during tough times in the domestic steel industry indicates that the company has low costs relative to other firms in the industry. This strategy has enabled the company to compete favorably with foreign steel companies that are selling their products in the U.S market.
Nucor’s low-cost competitiveness is something that the company did not just achieve recently but has been there since Iverson became CEO. As a result, Nucor has a sustainable low-cost advantage over other domestic steel companies. To maintain this strategy, Nucor has invested heavily in technology, established new plants in geographical areas where electricity is not expensive, and adopted a mini-mill to process scrap metal. Nucor’s mini-mill is fitted with advanced technology, which saves a lot of money since the labor and capital requirement to melt steel scrap and produce crude steel are far lower than those conventional integrated steel mills (Thompson, 2016). Therefore, the low-cost competitive advantage enables Nucor to save more money but produce quality products with a higher profit margin.
5. Policies and practices that Nucor has implemented to execute a low-cost leadership strategy
In achieving its low-cost leadership strategy, Nucor has implemented the following policies and practices;
* The adoption and implementation of cost-saving technological improvements that reduce cost and enable the company to successfully enter into new markets.
* The use of scrap metal as the main raw material and outsourcing it from reliable suppliers reduced the overall cost of raw materials as well as expenses attached to secondary activities.
* Aggressive acquisition of other profitable plants changed Nucor to a mega-corporation with a high capacity of production without increasing the associated costs.
* Reducing inventory by linking all manufacturing plants to each other’s production timetable. This policy ensures that the company operates with regards to the just-in-time inventory system. Therefore, steel products produced are transported to the market, reducing the amount of finished goods inventory, which reduces the holding cost.
* Implementation of a no lay off policy and a suitable compensation plan that increases labor productivity because employs are motivated to seek and apply cost-saving practices.
6. Specific factors that account for Nucor’s success
Nucor has a great strategy (low-cost leadership) that has successfully enabled the company to expand, ...