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.
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