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Nucor SWOT Analysis: Recommended Strategic Options For Firms

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Published: Mon, 5 Dec 2016

Strength(i) – Unique Management Philosophy. One of Nucor key strength lies in its unique management philosophy that is focused on bringing out the best in their people. Nucor empowers their people by allowing them to make decision in the work they do. Workers also have their wages pegged to their productivity and as a result, received far higher wages than the average in the states which they work in. Nucor avoided laying off their workers as much as possible and seek alternative means to control labor cost and these measures have helped to foster loyalty among its people. It is no wonder that Nucor possess one of the most productive workforces in the industry this management philosophy of theirs remain one of their key strength.

Strength(ii) – Cost control In a product market with little room for differentiation, Nucor expertise in keeping cost low is of a great advantage. Starting out as a joist manufacturer, it went down the value chain in order to obtain its raw materials cheaply and was later so successful in manufacturing steel that most of its steel production were sold externally. Nucor keep itself abreast of the latest technological advances and adopts them in order to continually keep product cost low. Their cost of producing every ton of steel is significantly lower than their domestic competitors. This expertise will serve them well in the evolving steel industry.

Strength(iii) – Innovation. The last of Nucor’s key strength is that it is innovative and constantly adjusts itself to stay ahead of changes in the industry. They stood at the forefront of the mini mill technology which revolutionized the industry and new technology is constantly studied to ensure that the company stays ahead of the technological race. Old patterns established in then the industry is constantly challenged. The experience of the organization in innovation will be a key strength in an industry in transition.

Weakness(i) – Exposure to fluctuation in price of scrap steel. The main raw material in the manufacturing of steel in the mini-mills is scrap steel. The rapid adoption of the twin shell arc furnace technology by the industry is rapidly reducing the availability of scrap steel to Nucor. As a result, prices surged and this threatens the profitability of Nucor. Their exposure to fluctuation in the price of scrap steel presents a major weakness in their business model.

Weakness( iii) – Lack of market diversification. There is a lack of market diversification as it derives most of its revenue from the US. This exposes them to the fluctuation in the US economy as demand for steel will decrease when the economy slacken and they would not have alternative avenue to derive their revenue.

Opportunities (i) – Expansion through acquisition of failing steel makers. The onslaught of cheap steel imports is driving many inefficient US steel makers into bankruptcy. This represents an opportunity for Nucor to expand through acquisition. This will help Nucor to increase its market share and also enjoy further cost advantages through increase economies of scale.

Opportunities(ii) – Political support in the enforcement of trade law. One of the main reasons in the decrease in profit margin of Nucor is due to the dumping of cheap foreign steel by its foreign competitors. After failing to impose tariffs on them, the Bush administration was then still seeking ways to limit dumping through legal means. These trade laws against dumping, if successfully enforced, will help to protect the profit margin of Nucor in the US market.

Threats(i) – Increase foreign competition in its local markets. Steel prices in the states have been battered by the increase competition from imports. The slowing of demand in China in the end of 2004 threatens to escalate this problem as China becomes a net exporter of steel. These developments are quickly eroding the market share and profit margin of Nucor in the US. In addition, global steel makers are consolidating and improving their cost structure through improves economies of scale. Mittal Steel in particular, has entered the US markets with its acquisition of ISG.

Threats(ii) – Technological advancement. Technological advancement in steel making poses a threat to the low cost strategy of Nucor. The development of a new technology by Posco Steelworks is able to reduce production cost by 1/5 and cut harmful emissions by 90%. These technologies may provide a competitive advantage to its competitors and threaten the cost leadership position of Nucor.

Threats(iii) – Aging baby boomers. – Aging baby boomers in the US represent a threat to Nucor as it may reduce the pool of workers available to Nucor and increase its labor cost. Working in the factory is often an unattractive option for the younger generation. The ability to have a constant supply of new workers as their experience workers ages post a threat to the long term future of Nucor as it may erode their cost position relative to their foreign competitors.

Strategic Option

Among the four strategic options generated by the Ansoff model, only two options stood out as viable alternatives. The developments of new product for either the local or international markets may not be viable options. Although they provide opportunities for potential product diversification, it requires the development of a new core competency. In addition, it may also divert attention from the immediate market pressures that Nucor was facing in competing in its local market.

Recommendation

In the final analysis, I will recommend that the firm pursue the strategy of Market Development in the Ansoff Matrix by expanding into the international markets. Nucor can utilize their strength in controlling cost in the international market and strive for a cost leadership position, as what they have achieved in the domestic market. Further justifications are as follows.

Saturation of local market – The local market has become saturated and has become less attractive for Nucor to operate in. In a product market with little room for differentiation, excess capacity is likely to lead to further price competition and the availability of cheap foreign steel will depress sales and profit margins further. Even if Nucor do achieve further cost advantages though technological innovation, the dumping of steel by their foreign competitors will erode the cost advantages that they may temporarily enjoy. Although the Bush administration has been trying to enforce international trade laws against dumping, it will only provide temporary protection for the domestic steel makers and the reality is that the rapid pace of globalization will make the US steel market increasingly competitive.

Spreading of risk through market diversification – As previously mentioned, one of the weakness of Nucor is that is highly dependent on the US economy due to the lack of market diversification. Going overseas will help to mitigate this risk and provide them with a more balanced market portfolio.

Access to labor – Expanding overseas is likely to give them better access to labor and thus reduce labor cost associated in the production of steel. As aforementioned, Nucor faces a threat of shortage of labor due to the aging of the baby boomer generation as blue collar work seldom attracts the younger generation. They are unlikely to face such problems in developing countries and their unique management philosophy of introducing very attractive incentives and HR policies to motivate workers are likely to be well received by the people.

Strategy implementation

I recommend that Nucor expand by acquiring a steel maker with significance presence in India. This is due to its proximity to Middle East, the center of a construction boom due to profit from oil sales. This has led to a huge demand in steel. Direct investment in ME is avoided due to the political complexity of investing in this region and also the higher cost of labor relative to India. Nucor should continue to leverage on its strength cost control in its international expansion and gain advantage over its competitor based on cost. The new technology in manufacturing steel, the Finex method, should be studied and implemented so that their exposure to price of scrap steel can be reduced.


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