Strategic Management

Case solution

Nucor
March 7, 2008
Nile TecleMariam
Business 499

By
Pankaj Agarwal
Praxis Business School
 Table of Content

I. Strategic Profile and Case Analysis

II. Situation Analysis

A. General Environmental Analysis

B. Industry Analysis
C. Competitor Analysis
D. Internal Analysis

III. SWOT

A. Strengths
B. Weaknesses
C. Opportunities
D. Threats

IV. Conclusion

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Strategic Profile and Case Analysis
Steel is the backbone of many industries. Steel goes into thousands of products,
which could be grouped, in the broad sense, into a few groups. The semi-finished
products that are at least eight to ten inches thick and require more processing is one
group. Another group is the flat-rolling, which yield plates (more than 0.25 inches in
thickness) and sheets or strips. Another group is one where bars and thins rods are made.
The United States in the 1960s produced most of the steel used in the world. By
the 1980s, the United States lost the role of world’s steel produced and imported more
than what it exports. Nucor Corporation is the second-largest steel producer in the United
States and had net sales of $4.6 billion in the year 2000. Nucor recycles approximately
ten million tons of scrap steel a year. It operates in nine states and produces carbon and
alloy steel in bars, beams, sheet, and plate; steel joists and joist girder; steel deck; cold
finished steel; steel fasteners; metal building systems; and light gauge steel framing.
Nucor was started by an auto manufacturer Ransom E. Olds, who founded Olds Motor
Vehicle Company in 1897. Ransom sold the manufacturing operation. A group of
shareholders challenged the liquidation Ransom was trying to do and forced Ransom to
take over a tiny nuclear service company called Nuclear Consultants, Inc. Nuclear
Consultants was not very successful; however, it was able to purchase the Vulcraft
Corporation, a steel joist manufacturer located in Florence, South Carolina from the
founder’s widow. Kenneth Iverson was hired as general manager for Vulcraft == the only
business division making money. The board of directors made Iverson President and
Samuel Siegel as Vice President of Finance. Iverson moved the corporate headquarters
from Phoenix to Charlotte, North Carolina. All the other business not related to steel were
either sold or liquidated. The company decided to integrate backwards into steel making
by building its first steel bar mill in Darlington, South Carolina in 1968. The company
was rename Nucor Corporation in 1972 and expanded steadily through 1986, thus
starting the Nucor Era.

Situation Analysis
A. General Environmental analysis
Nucor over took US Steel to become the second-largest steel producer. The
corporate strategy is focused on being the lowest cost provider of steel by finding
opportunities to reduce cost. It emphasizes technological leadership by aggressive pursuit
of innovation and technical excellence. In addition, employee relations with fair
compensation and egalitarian benefits were just as important as technological advances.
The simple, streamlined organization structure to allow employees to innovate and make
quick decisions works very well for Nucor. The company is highly decentralized, which
makes them able to make uncompromising quality, responsive service, and competitive
pricing. The standard unwritten practice of equalizing freight was stopped by Nucor
which was unheard of in the steel industry. The production cost is the most important if
the company is going to be profitable and survive.

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B. Industry Analysis
The steel industry is undergoing consolidation and there are many companies
filing for bankruptcy. Among them are Bethlehem Steel Corporation and LTV, who were
the country’s third- and fourth-largest steel producers, respectively. The imported steel in
many cases were subsided by their governments, foreign steel producers were dumping
steel in the US market at cut-rate prices with no restriction from the US government.
Nucor was able to use this situation to grow in size by identifying and acquiring some of
the US companies that aligned with their strategic vision.
.
C. Competitor Analysis
Most steel companies in the US were only utilizing 75 percent capacity resulting
in production inefficiencies, which made them, operate in the red. Three European
companies decided to merge to from the world’s largest steel producer. Two Japanese
companies did the same to form the second-largest steel producer. The competitive
pressure is very high since there is huge excess capacity and orders are huge. The product
is standard and not much can be done to create differentiation, so the basis of competition
is cost.

D. Internal Analysis
Nucor mission statement:
Nucor Corporation is made up of 17,300 teammates whose goal is to
"Take Care of Our Customers." We are accomplishing this by being the safest,
highest quality, lowest cost, most productive and most profitable steel and steel
products company in the world. We are committed to doing this while being
cultural and environmental stewards in our communities where we live and work.
We are succeeding by working together.

Nucor believes that bigger is not better. They took great effort to make sure that they
were using the latest technology to reduce the size of their mills. Their technological
advances allowed production to shift from the mill to the mini-mill, and finally to the
micro-mill. The smaller the mill sizes became, the more the company grew.
Nucor is one of the leanest corporate organizations in the nation. A typical Fortune 500
company has a triple-digit corporate staff. Nucor ranks 189 on the list in 2005 with 75
corporate employees. Employees are valued as a critical asset for the corporation.
Research and development is another asset greatly valued. Nucor strives to put plants
where there is the least amount of cost overhead and where transportation costs to their
customers can be minimized.

SWOT
A. Strengths
One of the greatest threats to the US Steel industry is the importing of steel. High
costs of US steel were driving consumers to import steel. If Nucor was going to survive
against the imported steel, they would have to make sure that their costs were as low as
possible. In 1987, Nucor was the first steel company in the world to build a mini-mill to
manufacture steel, uses electric arc furnaces to melt scrap into steel. This was a very risky

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business decision made by Nucor President Inverson. It would take all the companies
assets and a huge loan to build the mini-mill, which had only been built at pilot plant
sizes before Nucor. Minimills took advantage of the declines in the use of scrap metal.
Switching to basic oxygen furnaces help increase the capacity of the mill. Impurities in
the scrap metal at first limited the use of the material generated by the minimill to low-
end products such as bars for reinforced concrete, wire rod and small structural shapes.
The minimill labor cost is only $35 to $70 per ton compared to $100 to $150 per ton with
integrated mills.1 The minimill is designed to last only 10 years where the integrated mill
has a 25 – 30 year design life. Economics still favored the minimill, with the shorted life,
over the integrated mill. The minimill technology improved very fast and soon Nucor was
able to expand its market place with new product (Higher quality products for larger
structures, pipes and tubes). This opened up another 50 percent of the total steel market.
Nucor now has eight mills that sell 80 percent of their output to outside customers and the
balance to other Nucor divisions. 2 The mini-mill utilized scrap steel, such as junk auto
parts, instead of iron ore, which is used in the integrated mills. The typical annual
capacity of a minimill is 200,000 to 600,000 tons compared with 7 million tons from an
integrated mill.
Nucor strong market position with production capacity of more than 25 million
per year and sales of more than 22 million tons in 2006 makes Nucor very strong. Each
year Nucor has increased its production capacity which improves its competitive position.
Another strength Nucor has over other US steel manufactures is its “Nucor
Culture”. The Nucor culture can be summaries in five areas: decentralized management
philosophy, performance based compensation, egalitarian benefits, customer service and
quality, and technological leadership. In Iverson’s word, “The fewer you have, the more
effective it is to communicate with employees and the better it is to make rapid and
effective decisions.”3
In decentralized management, Nucor has five layers of management
(supervisor/professional, department manger, division manager, executive vice president
and president) where most steel companies have many times the layer of management.
Nucor decentralized as many decisions as the next layer down could manage. Most
decisions were made at the plant level except for things like capital expenditures, plant
organization, hiring and firing division managers and prices. Even the hourly employees
are encouraged to think of ways to improve the plant and bring them to their supervisor.
Each plant general manager administered a psychological test to prospective employees
that sought to identify goal-oriented, self-reliant people. Most of the promotions on the
shop floor are made from within based on performance and peer evaluations. There are
only 70 employees at the corporate office, which makes it one of the smallest corporate
offices among a Fortune 500 company. Each division manager had a business target to
accomplish, which made each division a profit. Failure to meet the target could lead to
firing of the division manager. Corporate would take a share of each division’s profits. To
compare the performance of its plants, headquarters received monthly operating reports,
weekly tonnage reports, and monthly cash management reports.
The top managers of Nucor believed that “the best motivation is green”, they had
performance incentives. These performance incentives were given to everyone in the
plant. There would be caps for the production workers and none for the professional
employees. This means that even though the workers get paid lower base pay than other

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steel workers when the performance incentive was added, they made more than any steel
worker in the US due to their performance. The bonuses are based on productivity of
their work group and are given out weekly. The rate is calculated based on the
capabilities of the equipment employed and no bonus is paid if the equipment is not
operating. The employee can earn an average from 80 to 150 percent of the employee’s
base pay. Increasing production means increase in profit for everyone in the company.
Nucor reinforces these rewards with stiff penalties, for example anyone late for a shift
lost a day’s bonus and anyone who misses a day’s work missed that week’s bonus. If the
group fell short of its productivity goal, its entire member’s lost their bonuses for the
week. There is a giant board at the entrance of every plant that informs people of each
department’s goals, the bonus percentage, the plant’s performance relative to the target of
25% return on assets, the company’s return on equity for the month and the latest stock
price. Department managers earn annual incentive bonuses based primarily on the
percentage of net income to dollars of assets employed for their division. The bonus can
be no more than 80 percent of the employee’s base pay. Professional and Clerical staff
gets bonuses based on the division’s net income return on assets. Senior officers are
based on Nucor’s annual overall percentage of the net income to stockholder’s equity and
are paid out in cash and stock. Other incentives programs were things like profit sharing,
bonus and college education allowance for their children and stock in the company. The
employee turnover at Nucor is about 1- 5 percent per year. Nor did they lay off any
employee when times were very slow in the 1980’s, the employee’s hours were shortened
but the production bonus program stayed intact. The company called it the “Share the
Pain” program, other US steel companies during this time either just closed or lay people
off. This is a very smart way of reducing the threat of closure and minimizes the losses.
Nucor benefits are the same for all employees. There are no company cars and
everyone wears a green spark-proof jacket and hard hat in the plant. The year’s annual
report lists all employees on its cover in alphabetical order. This philosophy has helped to
retain employees. Labor costs are very steady and help keep the company competitive.
Openness and risk-taking is emphasized rather than denying the possibility of
managerial mistakes. Nucor President Inverson believes that an average person makes
good decisions 50 percent of the time and a good manager will make good decisions 60
percent of the time. The other 40 percent of the time, he feels it is the workers
responsibility to inform the manger how they could make those poor decisions better. The
open door policy is for everyone who works for Nucor. The ability to react to the plant
operation or special orders quickly is one of Nucor’s strength and the credit goes to the
community of Nucor employees.
Nucor went against the business norm by not giving any price adjustment for raw
material and finished products. Nucor pays a straight commission per ton of scrap at all
the plants. Nucor does check what the market price and quality of the material all the
time and makes adjustments as needed. The price of the finished product is sent based on
a computer program at each plant.
One of the best opportunities and strengths Nucor has to improve profit is by
improving their technology. Nucor spent millions of dollars researching better ways to
make steel. Sometimes it turned out to be a waste of money, but when something was
found to work, it was shown to save the company millions of dollars. Iverson heard about
a German company with some promising new technology. The top executives of Nucor

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flew to German to meet with SMS Schoemann-Siemag AG to see the novel pilot plant. In
December of that same year, the Germans came to Charlotte for a meeting to hammer out
a deal. Iverson decided that this technology was going to run their new plant before the
Charlotte visit and announced at the meeting that the deal was complete.
Nucor does not meet all three of the core competencies parts. It does provide consumer
benefits and the material can be widely used in many products and markets. It is easy for
the competitors to imitate as there are standards for the finished product. When the VIRO
test is used on the Nucor Company, it gets high marks. Other steel industries would have
a hard time imitating the company. They could use the mini-mill but the ability to reduce
raw material cost, administration and employee value would be hard to do. The customer
values the product coming out of Nucor as good quality and reliable.
B. Weaknesses
One of the weaknesses of Nucor is that by having a decentralized profit center
with all the functions, including marketing and sales, being done at the division level is
that the divisions start to compete against each other. There is duplication and
redundancy in company that has led to many salespersons calling the same customer to
get their business. Moreover, sales, general and administrative expenses have increased
every year with the redundancy.
Another weakness is that by having so much power in each division, there was no
long-term strategic vision of plan for Nucor. After Iverson retired, the new board of
directors realized this problem and is starting to develop a plan.
Another weakness in Nucor is that no one was watching the environmental issues
enough. Many believed that the environmental issues would be less by locating the plants
in the rural areas, this was not true. The Environment Protection Agency cited the mill in
Crawfordsville for alleged violations of the Federal and State clean air rules. Later their
other plants in Alabama, Arkansas, Indiana, Nebraska, Texas, and Utah were sited. The
$98 million result was “the largest and most comprehensive environmental settlement
ever with a steel manufacturer.” The University of Massachusetts ranks Nucor as the
fourteenth-largest contributor to the US air pollution. The company has made moves to
improve its environmental requirements.
The fact that Nucor is in the US is a weakness for them since it relays on the US
economic to drive its customers business.
C. Opportunities
There are numerous opportunities available for Nucor to expand its
businesses in the US steel industry. The first avenue of growth, which Nucor has
successfully used in the past, could come from the acquisition of other companies that
specialize in steel or other services that complement Nucor’s business divisions. The
David J. Joseph Company (DJJ) is one of the leading U.S. scrap companies, which sells
to Nucor. The acquisition of DJJ will bring a variety of benefits to Nucor. In addition to
DJJ's scrap processing operations and expertise, its extensive brokerage operations
provide Nucor with global sourcing of many key steelmaking raw materials. DJJ's rail
services and logistics capabilities will allow Nucor to leverage the largest private railcar
fleet in North America dedicated to scrap transportation. The industrial scrap programs of
DJJ will also provide improved channels of raw materials to Nucor.5
Nucor selection of the site for the new plants is always in different areas around
the country. The plant is near a distribution site in order to keep down shipping cost. The

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customer would see the plant as a way of promising supply for them and would become a
steady customer. It is always in a small town where land, electricity and water would be
cheap. Nucor quickly becomes one of, if not the highest paying job in the area. They
would locate along major highways, rivers or railroad sites so that transportation would
be cheap. Most steel companies in the US are in major cities and much higher operating
costs. This is strength and opportunity for Nucor.
Based on Porter’s five forces: Competition is fierce and foreign competitors are
dumping steel. Steel requires large amount of money and expertise to enter the industry,
plus the industry is not growing but consolidating. Plastics and other components have
taken market share from steel and will continue to do so. There is heavy competition in
the industry with excess capacity. It is a buyers market and Nucor is heavily reliant on the
producers of iron ore and scrap.
Another opportunity that Nucor can take advantage of is the use of joint ventures.
In the past, Nucor has had success with partnering with other companies. The first one
was with Yamato Kogyo Ltd, where they would build a mill on the Mississippi River
together. This venture turned out to be very successful. The second joint venture was with
Brazil’s Companhia Siderurgica National to build a $700 million steel mill in the state of
Ceara. Nucor’s plan was to ship iron from Brazil and processes it in Trinidad. Trinidad
proven to be more expensive than originally expected and was deemed unsuccessful then
closed. This is one of Nucor’s strength in that with its computer program, plants are
easily determined to be success or failures quickly and then the company takes action.
D. Threats
The economy after the September 11th terrorist attacks fell into a recession and the
demand for steel dramatically reduced. Nucor was one of the few steel companies in the
US that was able during this time to expand and show a profit. Each division within the
company was evaluated every month and purchase and building of other plants were
evaluated based on demand in that area.
Foreign steel coming into the market and under cutting cost is always present.
Sometimes US steel quality is an issue, but not often. Nucor was able to keep their cost
low so that they were able to compete with the foreign steel industry. There is still an
overcapacity in the global steel industry.
Raw material availability and cost are always a threat to Nucor’s survival. Nucor
answered the raw material issue by purchasing it’s supplier of scrap material.
IV. Conclusion
Nucor has close to $1 billion in cash on its balance sheet. While earning
outlooks are still good, they should continue to raise dividends and consider share
buybacks. They should consider scaling back acquisition strategy and pay down long
term debt. The percentage of debt to capital ratio has been steadily increasing each year
and is currently over fifteen percent. The purchasing of bankrupted companies may not
always fit because to make that plant cost-effective would require massive amounts of
money with a long-term pay out. The backward and forward integration in the steel
market as worked for Nucor and should be continued. Nucor has successfully integrated
into steel products and backwardly integrated into scrap/recycling. Decentralizing
management is working for Nucor but it does not help its cost structure. They should
consider only decentralizing parts of management and putting others under one group for
the company. An example would be to keep operating cost and human relations separate

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for every division but centralize purchasing, sales and information technology. They
should continue to invest heavily in research and development as this industry is about
being the lowest cost producer. Technical innovations ultimately lower the cost of
producing steel. The tangible resource that Nucor has is technology and its employees.
The intangible resource is the loyalty the employees feel to the firm. Another intangible
resource is its US competition as they go into bankruptcy.

Bibliography

Barnes Frank C and Tyler Beverly B., Nucor in 2005, Strategic Management, 2007

Knowledge Management’s Social Dimension: Lessons From Nucor Steel,

Sloan Management Review, Fall 2006

Nucor, www.nucor.com/aboutus.htm

Nucor, http://www.en wikipedia.org/wiki/Nucor

Nucor at a Crossroads, Harvard Business School, 9-793-039, January 20, 1998

Nucor Company, http://www.nucor.com/indexinner.aspx?finpage=aboutus

Nucor Corporation, www. Datatmonitor/companyprofile/Nucor

Nucor press release, http://biz.yahoo.com/prnews/080208/clf027.html?.v=101, Friday

February 8, 9:00 am ET