Nucor Case Notes

Problem Statement:

While Nucor has been very successful with its existing steel minimills, achieving consistent profits and maintaining enviable worker productivity, it has encountered a saturated market.

* Entire steel industry is suffering from significant overcapacity

Nucor's Opportunities:

* Current operates for low-end structural products such as re-bar and wire rod  especially saturated with numerous small minimills competing against each other for a stagnant or shrinking market

* Expand into flat sheet metal?  large economies of scale required with current technology, and the very high excess capacity by the existing producers, would seem to eliminate this opportunity

* Thin-slab case plant  Very risky investment in new technology.

o If successful, will allow it to enter the market for flat sheet steel with a low minimum efficient scale and a low marginal cost of production

The critical issue in this case is loss in sales coupled by rising costs and falling net earnings for Nucor.

* Rising costs involved for Nucor in its processes

* Exhibit 6  COGS for Nucor started with 55% of sales and has grown at an increasing rate and grown to 81% of sales by the end of 1986. This indicates that Nucor has not been able to garner effective sales growth and in contrast has shown rising COGS over its lifespan. This leads to loss of earnings and hence decreased ROA for Nucor

* Investment (Yamato Kogyo) and thin flat sheet segment (SMS) involves high risk. The total investment in these 2 ventures total $410 million and Nucor only had $185 million and few securities on hand

* Nucor has not been able to invest into new plans from 1981. Prior to 1981, Nucor was known for its investment into new plants and continuous reformation of technology. But Nucor has been stagnant in terms for developing new technologies since 1981 and this has also contributed to its loss in sales over time

* Nucor has spent $6M in the Hazelett Caster but it was not as efficient as it had planned to be. It had led to more complex problems such as expensive conveyor belts, which required continuous replacement and led to considerable down time and also led to some quality issues, which eventually led to increasing costs over time

Porter's 5 Forces Analysis:

* Supplier Power - Moderate Low

o Eventual exit of integrated steel companies from buying scrap, options available with suppliers to sell is reduced

o Nucor started several small plants that were close to suppliers and customers, thereby reducing transportation costs

o Sites chosen had inexpensive electricity

o Employee-centric policies resulted in lowest attrition levels and steady supply of new employees.

* Buyer Power - Moderate

o In steel market product classification, brand identity and marketing are not treated as important factors. Factors that states the health of any steel