The name "NUCOR" was derived by the Nucor Board of Directors in 1971, about the same time the firm dropped its conglomerate business structure and initiated its singular focus on steel making. Prior to 1971, the firm had been called The Nuclear Corporation of America. Given that they had sold off or closed any business units focused on nuclear power and instead were making profits from a single division that the firm had bought in 1962 (Vulcraft, a maker of steel joists), a name change seemed appropriate.
Since 1971, Nucor has grown via acquisitions and organic expansion. The first steel mill was opened to provide Vulcraft with a cheaper source of raw materials. But Nucor began to supply other processing firms as well, and so was born their steel generation business.
Nucor has acquired roughly a dozen or so firms since 1971. Two of the biggest were the purchase of Harris Steel Group in 2006 and David J. Joseph in 2007. The purchase of Harris Steel Group for $1.07B was a Product Extension Merger, which provided Nucor access to the rebar fabrication market. Nucor has doubled production in this market since the acquisition of Harris Steel. Harris Steel also generates steel mesh and grating.
The purchase of David J Joseph for $1.44B in 2008 was a Vertical Merger as Nucor shored up its supply of scrap metal. The backward integration of DJJ, one of the nation's largest scrap processors and brokers, was instrumental for Nucor because scrap makes up 75-90% of its resource in producing new steel components.
At this time NUE seems very content to continue expanding with organic growth by bringing new plants online and using a variety of new technologies to improve production and reduce costs. NUE has reported any acquisitions targets at this time, but I don't think NUE will entertain any kind of conglomerate mergers, but will instead continue to focus on the challenges of producing steel.
Monday, April 7, 2014
Friday, April 4, 2014
Chapter 13 - Strategic Alliances
As described in earlier posts, Nucor is Limited Diversification firm with Single to Dominant-business setup within the steel industry. Nucor does not currently execute any kind of business activities outside of the steel industry.
That said, Nucor has established strategic alliances within the steel industry. The alliance types are joint ventures, which means that Nucor and the company with which the alliance is formed have created a new independent entity and each of the firms in the alliance own a portion of the new company. In Nucor's case, the joint ventures are 50/50 operations.
The first alliance with Mitsui &Co. created NuMit LLC, which itself owns Steel Technologies LLC. Steel Technologies (http://www.steeltechnologies.com/Pages/Home.aspx) creates products from Nucor supplied flat-rolled steel that Nucor itself does not produce. Via the alliance, Nucor was able to enter a different finished products market without having to invest in the necessary machinery to craft the products - it was low-cost entry into a new market. This alliance also left Nucor open to continue sales to other sheet processing companies.
The second alliance with Duferdofin was again a low-cost entry into new markets, this time into an overseas market.
That said, Nucor has established strategic alliances within the steel industry. The alliance types are joint ventures, which means that Nucor and the company with which the alliance is formed have created a new independent entity and each of the firms in the alliance own a portion of the new company. In Nucor's case, the joint ventures are 50/50 operations.
The second alliance with Duferdofin was again a low-cost entry into new markets, this time into an overseas market.
Wednesday, April 2, 2014
Chapter 12 - Implementing Corporate Diversification
All of the items covered within Chapter 12 are covered in Nucor's investor documentation, which can be found here: http://www.nucor.com/investor/. The URL contains Nucor's Annual Report, Proxy Statement and Sustainability Report. Other information regarding the board of directors and compensation policies can be found in Nucor's 10K filing, which is here: http://www.nucor.com/investor/sec/.
Wednesday, March 26, 2014
Chapter 11 - Diversification Strategies
Nucor is a company focused on making steel. The company has three major segments - Steel Mills, Steel Products and Raw Materials - but operates in no other industry. As expressed in the last blog, Nucor has worked diligently to vertically integrate when applicable and beneficial to the firm, but Nucor has not stepped out of its industry via corporate diversification. At this point in time, Nucor follows a limited corporate diversification strategy and is a single-business firm.
Monday, March 17, 2014
Chapter 10 - Vertical Integration Strategies
Nucor is the largest steel producer in the US, the largest mini-mill in the US and the largest recycler in North America. The firm runs 23 scrap-based steel manufacturing facilities.
Over the last 20 years, Nucor has grown both organically and through acquisition, enabling to now have one of the most diverse steel product portfolios in the world.
Nucor is not, by definition, an integrated steel manufacturer. An integrated steel manufacturer creates steel from its basic metallurgical components via a blast furnace, which melts iron ore to create pig iron. Pig iron is then put through a process of adding and subtracting specific elements to create liquid steel. Liquid steel is then cast into a variety of different shapes. Thus, "integrated" steel manufacturers begin production with mined iron ore and end with a steel product.
Nucor begins its processes where consumer use of existing steel items ends. Instead of iron ore, Nucor's use of a "mini-mill" process melts down existing steel and recasts it into useful materials. Steel can be melted and reused an endless number of times, and this is how Nucor and other mini-mill operations create their products.
In regards to vertical integration as a business strategy, Nucor has taken steps to backward vertically integrate in order to control the cost and supply of its primary resource, scrap metal. The biggest of these integration moves was in 2008 when Nucor bought the David J Joseph company for $1.4 billion. At the time, DJJ was the largest scrap recycler in the US. In making this backward integration decision, Nucor was following the first two propositions of integration based on transaction-cost economics:
1) exchanges subject to high threats of opportunism due to high transaction-specific investments should be vertically integrated
2) exchanges subject to high threats of opportunism due to uncertainty and complexity should be vertically integrated
Over the last 20 years, Nucor has grown both organically and through acquisition, enabling to now have one of the most diverse steel product portfolios in the world.
Nucor is not, by definition, an integrated steel manufacturer. An integrated steel manufacturer creates steel from its basic metallurgical components via a blast furnace, which melts iron ore to create pig iron. Pig iron is then put through a process of adding and subtracting specific elements to create liquid steel. Liquid steel is then cast into a variety of different shapes. Thus, "integrated" steel manufacturers begin production with mined iron ore and end with a steel product.
Nucor begins its processes where consumer use of existing steel items ends. Instead of iron ore, Nucor's use of a "mini-mill" process melts down existing steel and recasts it into useful materials. Steel can be melted and reused an endless number of times, and this is how Nucor and other mini-mill operations create their products.
In regards to vertical integration as a business strategy, Nucor has taken steps to backward vertically integrate in order to control the cost and supply of its primary resource, scrap metal. The biggest of these integration moves was in 2008 when Nucor bought the David J Joseph company for $1.4 billion. At the time, DJJ was the largest scrap recycler in the US. In making this backward integration decision, Nucor was following the first two propositions of integration based on transaction-cost economics:
1) exchanges subject to high threats of opportunism due to high transaction-specific investments should be vertically integrated
2) exchanges subject to high threats of opportunism due to uncertainty and complexity should be vertically integrated
Sunday, March 16, 2014
Chapter 9 - Tacit Collusion
As I am not an insider at Nucor, I cannot with any level of certainty deem Nucor free of any type of tacit collusion activities, but I can make some observations based on its industry and business strategy.
First, within its market, Nucor uses a business strategy of price leadership. Through technology, social ambiguity, experience and management, Nucor stays competitive based on price, as it can't use product differentiation to any kind of advantage. The strategy of price leadership precludes Nucor from using tacit collusion if it wants to be more profitable than other firms based on its pricing strategy.
In reference to Nucor's industry, it does not abide by those characteristics that enable and foster tacit collusion.
Need Small # of Firms: there are quite a number of steel mill firms, both integrated and mini-mill, both domestic and international.
Produce Homogeneity: there may be some of this, as there are only a certain amount of different products that are made of steel and used commercially. This could lead to some tacit collusion.
Cost Homogeneity: Nucor strives on being a price leader, so cost homogeneity is unlikely to exits in this industry.
Price Leader: There does not appear to be a price leader that controls an exceptionally large portion of the steel industry. In the early 1900's, US Steel would have fulfilled this position, but not in today's world.
Industry Social Structure: There is no doubt a specific social structure within the steel industry, as many firms have evolved from one another or been created via mergers and breakups, but given the international flavor of the industry today, social structure is probably not leading to effective collusion.
High Order Frequency & Small Orders: I believe that the steel industry produces all manner of order sizes and quantities. There is also definite bidding for large contracts, which itself hurts attempts at tacit collusion.
Large Inventory & Order Backlogs: The steel industry does keep inventory, though I don't know how accepting of backlogs that customers might be who order product on a continuous basis. One of the tenants that mini-mill plants adhere to is lean processing, which by definition do not a promote large inventories.
Entry Barriers: There are entry barriers to the steel industry, namely the cost of establishing plants and infrastructure; plus, the market for steel is to some degree, limited in its size. That said, with the number of existing steel mills and mini-mills, entry is still possible.
First, within its market, Nucor uses a business strategy of price leadership. Through technology, social ambiguity, experience and management, Nucor stays competitive based on price, as it can't use product differentiation to any kind of advantage. The strategy of price leadership precludes Nucor from using tacit collusion if it wants to be more profitable than other firms based on its pricing strategy.
In reference to Nucor's industry, it does not abide by those characteristics that enable and foster tacit collusion.
Need Small # of Firms: there are quite a number of steel mill firms, both integrated and mini-mill, both domestic and international.
Produce Homogeneity: there may be some of this, as there are only a certain amount of different products that are made of steel and used commercially. This could lead to some tacit collusion.
Cost Homogeneity: Nucor strives on being a price leader, so cost homogeneity is unlikely to exits in this industry.
Price Leader: There does not appear to be a price leader that controls an exceptionally large portion of the steel industry. In the early 1900's, US Steel would have fulfilled this position, but not in today's world.
Industry Social Structure: There is no doubt a specific social structure within the steel industry, as many firms have evolved from one another or been created via mergers and breakups, but given the international flavor of the industry today, social structure is probably not leading to effective collusion.
High Order Frequency & Small Orders: I believe that the steel industry produces all manner of order sizes and quantities. There is also definite bidding for large contracts, which itself hurts attempts at tacit collusion.
Large Inventory & Order Backlogs: The steel industry does keep inventory, though I don't know how accepting of backlogs that customers might be who order product on a continuous basis. One of the tenants that mini-mill plants adhere to is lean processing, which by definition do not a promote large inventories.
Entry Barriers: There are entry barriers to the steel industry, namely the cost of establishing plants and infrastructure; plus, the market for steel is to some degree, limited in its size. That said, with the number of existing steel mills and mini-mills, entry is still possible.
Tuesday, March 4, 2014
Chapter 8 - Flexibility
Nucor is a definitive example of a firm that strives for cost leadership. It creates products in what is essentially a commodity industry and retains its profitability my maintaining very a low cost structure thru the use of advanced technology, a flat organization, lean processes, sustainability measures and a strong corporate history.
Because I do not work for Nucor, and because Nucor is unlikely to expound to the general public its strategic business plans, I can't say if Nucor uses Flexibility as a business strategy. It certainly uses cost leadership strategy and likely has little use for product differentiation, so it is possible that Nucor uses Flexibility as a strategy when forecasting future production needs, i.e., new plant development or plan expansion.
That said, Nucor likely uses traditional NPV and looks to expand on its current offerings, taking on more Enhancement Launches. Based on its technical savvy as a mini mill, Nucor may introduce Positioning Options into its strategy as it understands the market well and pushes technically to enhance its product mix plus reduce costs.
Because I do not work for Nucor, and because Nucor is unlikely to expound to the general public its strategic business plans, I can't say if Nucor uses Flexibility as a business strategy. It certainly uses cost leadership strategy and likely has little use for product differentiation, so it is possible that Nucor uses Flexibility as a strategy when forecasting future production needs, i.e., new plant development or plan expansion.
That said, Nucor likely uses traditional NPV and looks to expand on its current offerings, taking on more Enhancement Launches. Based on its technical savvy as a mini mill, Nucor may introduce Positioning Options into its strategy as it understands the market well and pushes technically to enhance its product mix plus reduce costs.
Friday, February 28, 2014
Chapter 7 - Product Differentiation
Unlike companies that define their business strategy primarily through product differentiation, per the prior blog, Nucor focuses intently on cost leadership.
Nucor's product include the following - steel bars, flat-rolled steel sheets, steel beams and pilings, steel plates, rebar, steel mesh, grates and fasteners, steel joists, girders, steel deck and custom-ordered steel buildings (metal sided sheds, warehouses, etc.). This industry is not particularly focused on product differentiation, as steel is steel, with a variable being size, shape, weight and finish, all of which are fairly standardized for building purposes.
Nucor does invest and innovate in ways to more cost effectively produce these products, but the products themselves are not differentiated from competitors products by product customization unique to each customer or technological advances within the product. The main differentiator for potential buyers is first and foremost, price. After that, assumptions can be made that selection by customers is based on name brand/reputation and likely, availability of the product.
The idea that a company can be both a cost leader and product differentiator may be true, though it seems that the product differentiation must occur before the cost leadership aspect can be added. For Nucor, cost leadership is the key, and the company is organized to that end.
Nucor's product include the following - steel bars, flat-rolled steel sheets, steel beams and pilings, steel plates, rebar, steel mesh, grates and fasteners, steel joists, girders, steel deck and custom-ordered steel buildings (metal sided sheds, warehouses, etc.). This industry is not particularly focused on product differentiation, as steel is steel, with a variable being size, shape, weight and finish, all of which are fairly standardized for building purposes.
Nucor does invest and innovate in ways to more cost effectively produce these products, but the products themselves are not differentiated from competitors products by product customization unique to each customer or technological advances within the product. The main differentiator for potential buyers is first and foremost, price. After that, assumptions can be made that selection by customers is based on name brand/reputation and likely, availability of the product.
The idea that a company can be both a cost leader and product differentiator may be true, though it seems that the product differentiation must occur before the cost leadership aspect can be added. For Nucor, cost leadership is the key, and the company is organized to that end.
Saturday, February 22, 2014
Chapter 6 - Cost Leadership
Nucor has generated a position for itself within the steel industry as a cost leader. Nucor has created this position by focusing on a "mini-mill" strategy, which has given it a cost advantage over the older, larger, integrated steel firms such as USS and Bethlehem Steel. By being a mini-mill, Nucor has used diseconomies of scale imbedded in the integrated steel structure to be competitive on a price basis.
Beyond the diseconomies of scale, some of Nucor's pricing prowess is also based on a learning-curve economies specific to mini-mill processes and also technological processes developed by the mini-mill industry.
Nucor organizes its management structure to focus on its cost leadership position, which means it has a very flat reporting structure, focuses on cost-cutting initiatives and strongly encourages managers and employees to contribute to the companies low-cost processes.
Beyond the diseconomies of scale, some of Nucor's pricing prowess is also based on a learning-curve economies specific to mini-mill processes and also technological processes developed by the mini-mill industry.
Nucor organizes its management structure to focus on its cost leadership position, which means it has a very flat reporting structure, focuses on cost-cutting initiatives and strongly encourages managers and employees to contribute to the companies low-cost processes.
Wednesday, February 12, 2014
Chapter 5 - Eval Firm Strengths & Weaknesses
According to the 2012 Annual Report, CEO Daniel DiMicco did a nice job of summarizing his view of NUE's strengths:
When analyzing specific strengths and weaknesses of firm using the resource-based view and not the SCP industry view, resource categories fall under four areas. Here are my interpretations of NUE's resources within the four areas.
Financial Capital
NUE has a excellent financial capital. According to its financial ratios, it is within the top two quartiles in comparison to other firms in its industry for Current and Quick ratios, its debt is rated A-, and it has a market cap of $16B. At the end of 2013, NUE was sitting on $1.5B in cash and short term investments.
Physical Capital
NUE has more than $10.5 B in Property/Plant/Equipment on its books. It has 23 scrap-based mills and is the largest recycler in North America.
Human Capital
This is where NUE believes it holds a significant advantage over its peers. NUE is an employee friendly company and is deeply concerned with employee enrichment, opportunity and safety. As an example of its focus on employees, the entire front and back cover of its annual report is covered by the names of all 22,000+ employees of the firm. NUE produces a Sustainability report every two years, and in it they promote "The Nucor Way," which is a list of 10 attributes by which they work and live. Some of those attributes include integrity, team work, innovation and risk taking.
Organizational Capital
The organizational capital of NUE seems to be strong. They appear to have a can-do attitude and view themselves as an underdog in a competitive industry where hard work and team work make a real difference. The executive managers all have significant experience within the industry, and the ROE, ROA and ROI illustrate they manage the firm well.
When analyzing specific strengths and weaknesses of firm using the resource-based view and not the SCP industry view, resource categories fall under four areas. Here are my interpretations of NUE's resources within the four areas.
Financial Capital
NUE has a excellent financial capital. According to its financial ratios, it is within the top two quartiles in comparison to other firms in its industry for Current and Quick ratios, its debt is rated A-, and it has a market cap of $16B. At the end of 2013, NUE was sitting on $1.5B in cash and short term investments.
Physical Capital
NUE has more than $10.5 B in Property/Plant/Equipment on its books. It has 23 scrap-based mills and is the largest recycler in North America.
Human Capital
This is where NUE believes it holds a significant advantage over its peers. NUE is an employee friendly company and is deeply concerned with employee enrichment, opportunity and safety. As an example of its focus on employees, the entire front and back cover of its annual report is covered by the names of all 22,000+ employees of the firm. NUE produces a Sustainability report every two years, and in it they promote "The Nucor Way," which is a list of 10 attributes by which they work and live. Some of those attributes include integrity, team work, innovation and risk taking.
Organizational Capital
The organizational capital of NUE seems to be strong. They appear to have a can-do attitude and view themselves as an underdog in a competitive industry where hard work and team work make a real difference. The executive managers all have significant experience within the industry, and the ROE, ROA and ROI illustrate they manage the firm well.
Tuesday, February 4, 2014
Chapter 4 - Environmental Opportunties
Nucor conducts business within the Basic Materials category, specifically the Iron & Steel Industry. As described in the post from the earlier chapter, NUE is in a Oligolopistic industry structure. Based on Chapter 4 definitions, the Iron & Steel industry can be categorized as mixture of Fragmented, Emerging and Mature industry attributes.
The Iron & Steel industry has consolidated within the US over the last ten years, due mainly to mergers and bankruptcies wrought from a period of cutthroat competition ushered in by overcapacity of steel products. The same is not true globally, however, as the largest 10 steelmakers in the world supply roughly 27% of global output. Therefore, the opportunity that fragmentation presents is available on a global scale if NUE wants to adopt a consolidation strategy.
Though one of the earliest of all industries, the steel industry - specifically the mini-mill industry - is still an emerging industry due to new technologies and advances in metal metallurgy. NUE needs to continue its technological leadership strategy in order to maintain its role as a first-mover within the mini-mill sector.
Finally, steel is steel after all, so there is a level of maturity within the industry - how steel is used, what shapes are common, what strength is expected, etc. NUE has seized on this fact through product refinement and a great swath of product line diversity that creates revenue opportunities which other firms within the industry do not have.
The Iron & Steel industry has consolidated within the US over the last ten years, due mainly to mergers and bankruptcies wrought from a period of cutthroat competition ushered in by overcapacity of steel products. The same is not true globally, however, as the largest 10 steelmakers in the world supply roughly 27% of global output. Therefore, the opportunity that fragmentation presents is available on a global scale if NUE wants to adopt a consolidation strategy.
Though one of the earliest of all industries, the steel industry - specifically the mini-mill industry - is still an emerging industry due to new technologies and advances in metal metallurgy. NUE needs to continue its technological leadership strategy in order to maintain its role as a first-mover within the mini-mill sector.
Finally, steel is steel after all, so there is a level of maturity within the industry - how steel is used, what shapes are common, what strength is expected, etc. NUE has seized on this fact through product refinement and a great swath of product line diversity that creates revenue opportunities which other firms within the industry do not have.
Tuesday, January 28, 2014
Chapter 3 - Environmental Threats
Nucor (NUE) is a steel processor and manufacturer of a large array of steel products. Nucor can be considered a mini-mill because of its size, but it makes up for it with technology.
Regarding the industry structure in which NUE operates, it would be classified as an Oligopoly - few competitors, has some of the same but also some different products and is able to generate a profit because it does not deal in perfect competition.
In applying the five forces model of environmental threats, I see the following for NUE:
Threat of Entry: There is a high capital cost for entry into the steel processing business, both in machinery and in experience. This makes the threat of new entry low.
Threat of Rivalry: The threat of rivalry is high, especially when overseas steel manufacturers are included in the assessment. NUE uses technology to gain a competitive advantages where possible, plus it generates steel deliverables within so many commercial areas (flat rolled steel, steel bars, beams, plates, trusses, grating, mesh, re-bar, wire, bolts, etc.) that it has many price points it can use to offset pricing wars in any given area.
Threat of Substitutes: This threat is low, as steel is a necessary component in many products. The use of plastics, aluminum, etc. might transplant steel in a few areas, but not in all.
Threat of powerful Suppliers: NUE uses scrap metal (it is the largest recycler of metal in the western hemisphere) as a primary raw component in its steel production. NUE has facilities to collect scrap, but it also purchases scrap from suppliers. Increases in price by scrap metal suppliers would adversely impact NUE.
Threat of powerful Buyers: This threat is low, as no one company purchases a significant amount of NUE's products.
Regarding the industry structure in which NUE operates, it would be classified as an Oligopoly - few competitors, has some of the same but also some different products and is able to generate a profit because it does not deal in perfect competition.
In applying the five forces model of environmental threats, I see the following for NUE:
Threat of Entry: There is a high capital cost for entry into the steel processing business, both in machinery and in experience. This makes the threat of new entry low.
Threat of Rivalry: The threat of rivalry is high, especially when overseas steel manufacturers are included in the assessment. NUE uses technology to gain a competitive advantages where possible, plus it generates steel deliverables within so many commercial areas (flat rolled steel, steel bars, beams, plates, trusses, grating, mesh, re-bar, wire, bolts, etc.) that it has many price points it can use to offset pricing wars in any given area.
Threat of Substitutes: This threat is low, as steel is a necessary component in many products. The use of plastics, aluminum, etc. might transplant steel in a few areas, but not in all.
Threat of powerful Suppliers: NUE uses scrap metal (it is the largest recycler of metal in the western hemisphere) as a primary raw component in its steel production. NUE has facilities to collect scrap, but it also purchases scrap from suppliers. Increases in price by scrap metal suppliers would adversely impact NUE.
Threat of powerful Buyers: This threat is low, as no one company purchases a significant amount of NUE's products.
Friday, January 24, 2014
Chapter 2 - NUE's accounting measures
According to E*Trade, NUE's simple accounting measures supports a company that is well run and in good financial condition:
I decided to calculate the Adjusted Accounting Measure to further review NUE's performance. E*TRADE calculates the ROIC to be 4.49%. I calculated the WACC using the S&Ps market return rate and determined that NUE's ROIC is lower than its WACC, which I found to be 11.71%, meaning NUE is not exhibiting superior performance because ROIC is greater than WACC. That said, when I used the Iron&Steel industries market return, NUE's ROIC was greater than its WACC, showing NUE does have superior performance in its industry.
I decided to calculate the Adjusted Accounting Measure to further review NUE's performance. E*TRADE calculates the ROIC to be 4.49%. I calculated the WACC using the S&Ps market return rate and determined that NUE's ROIC is lower than its WACC, which I found to be 11.71%, meaning NUE is not exhibiting superior performance because ROIC is greater than WACC. That said, when I used the Iron&Steel industries market return, NUE's ROIC was greater than its WACC, showing NUE does have superior performance in its industry.
Tuesday, January 21, 2014
Company I'm covering this semester
I plan to use Nucor (NU) as the company I will follow and blog about for each chapter of our MGMT 7160 text.
Monday, January 20, 2014
Blog creation
I've created this blog to post my thoughts and ideas during a graduate school course at the University of Memphis. This is my first test entry.
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