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MGMT 498--Nucor

Spring 2013

Meena Lee

on 25 March 2013

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Transcript of MGMT 498--Nucor

Background for Case
Financial Analysis
VRIO Framework
Porter's 5 Forces
Competitive Position
What are Nucor's resources & capabilities?
How would you assess Nucor's resources in terms of heterogeneity & immobility?
Using the VRIO model, how would you evaluate Nucor's resources?
What strategic recommendations would you offer to Nucor?
Conclusions & Recommendations
Fast Forward HISTORY of FIRM 1897- Nucor manufactures the first Oldsmobile
1950- Nucor goes Bankrupt
1955- Merger creates Nuclear Co. of America yet continuously loses money
1966- Company is on the verge of bankruptcy again and falls under new management
New Manager Ken Iverson
Begins getting rid of unprofitable branches of Nucor
Focuses mainly on steel joist businesses
1968- Builds first steel mill so Nucor doesn’t have to buy from foreign importers. (Backwards vertical integration)
1984- Had 6 joist pants and 4 steel mills using new “mini mill” technology
The 1980’s were the worst years for the steel industry
Economy in a slump mainly due to slacking auto sales
Large integrated Steel firms hit hard by the decline
Imports from overseas accounts for over 20% of U.S. steel consumption. Up from 12% in the 70’s
During this time Nucor becomes the 7th largest producer of steel in the United States 1990- Foreign steel imports continue to increase as the economic slump continues in the steel industry
1995- Best market in 20 years for the steel industry
Many other steel companies follow Nucor’s Mini Mill type of production
1997- Steel capacity in America is up 40%
Demand for steel drops which forces Nucor and competitors to make price cuts
At the end of the 90’s Nucor is the 2nd largest steel producer in the United States
2000- Nucor remains profitable while competitors face bankruptcy 2001- Over 20 steel companies file for bankruptcy
Fall of 2001- Over 25% of steel companies were in bankruptcy proceedings
2013-New CEO: John Ferriola HISTORY of FIRM (cont'd) BACKGROUND of CASE FINANCIAL ANALYSIS 2010 Nucor Financial Report ROA=Profit After Tax/Total Asset=206.32/13,291.91=1.48%

ROE=Profit After Tax/Total Stockholder's Equity=1.8%

Gross Margin=(Sales-COGS)/Sales=($15,844.63-$15,000.96)/$15,844.63=5.32%

Current Ratio=Current Assets/Current Liabilities=3.9

Quick Ratio=(Current Assets-Inventory)/Current Liabilities=2.86 FINANCIAL ANALYSIS Nucor's ROA Exceeded the Steel Industry Average Until 2008 Recession FINANCIAL ANALYSIS Nucor's ROE was also hurt by the Recession FINANCIAL ANALYSIS Gross Margin started to turn around in 2010 FINANCIAL ANALYSIS Current Ratio is above the recommended range of 2-3 FINANCIAL ANALYSIS Sales & Earnings were hurt by the Recession VRIO FRAMEWORK Resource/Capability Valuable? Rare? Imitability? Organization? Ken Iverson-President Competitive Implication PORTER'S FIVE FORCES LEVEL OF THREAT IN THE INDUSTRY: THREAT OF RIVALRY THREAT OF BUYERS THREAT OF SUBSTITUTES THREAT OF
SUPPLIERS THREAT OF ENTRY QUESTIONS WHAT ARE NUCOR'S RESOURCES & CAPABILITIES? RESOURCES: Strong financial capital, a decentralized management (corporate culture), manufacturing facilities/ technology (electric arc furnaces), low cost production, acquisitions (Harris Steel & David J. Joseph), employee loyalty and customer service.
CAPABILITIES: Optimization of current operations, growth in the “Green Field projects”, increase diversification with more acquisitions, and international expansion through acquisitions. HOW WOULD YOU ASSESS NUCOR'S RESOURCES IN TERMS OF HETEROGENEITY & IMMOBILITY? HETEROGENEOUS: Structure (decentralized & employee autonomy), competitive pricing (lower costs than competitors)
IMMOBILITY: Not an issue (mini-mill technology)--only temporary competitive advantage USING THE VRIO MODEL, HOW WOULD YOU EVALUATE NUCOR'S RESOURCES? TEMPORARY COMPETITIVE ADVANTAGE: Will naturally prosper & suffer due to fluctuating economy

Performance-based bonus system
Performance based bonus systems can increase productivity. Nucor has set up their bonus system with four separate bonus structures (production workers, department heads, staff, and senior management), each one being straight forward and performance based. Their bonus system has the potential to be a lucrative opportunity for employees, up to as much as 190 percent of base salaries in some cases. This system motivates employees to be as productive as possible, and when employees are more productive the entire company becomes more profitable.
Opportunity to lower production costs and differentiate product
Nucor is currently the second largest steel producer in the United States, growth via mergers and acquisitions will eventually slow. Investing in R&D has the potential to lower production costs through technological advances as well as the opportunity to differentiate their product from their competitors. RECOMMENDATIONS FAST FORWARD QUESTIONS? Yes Yes Yes Yes Sustained Competitive Advantage Organizational Style Yes Yes No Yes Temporary Competitive Advantage 2 Basic Lines of Business Yes No No Yes Competitive Parity Outside Alliances Yes Yes No Yes Temporary Competitive Advantage Outside Consulting Yes Yes No Yes Temporary Competitive Advantage Pricing Strategy Yes Yes Yes Yes Sustained Competitive Advantage Conservative Company Yes Yes No Yes Temporary Competitive Advantage Transparency Yes No Yes Yes Competitive Parity Owned Transportation Line Yes Yes Yes Yes Sustained Competitive Advantage Employee Quality Control Yes Yes Yes Yes Sustained Competitive Advantage Workstation Responsibility Yes Yes Yes Yes Sustained Competitive Advantage Employee Knowledge Yes Yes Yes Yes Sustained Competitive Advantage Labor Costs Yes Yes Yes Yes Sustained Competitive Advantage Mini Mill Technology Yes Yes No Yes Temporary Competitive Advantage INCREASE MARKETING EFFORTS:
America's largest recycler
“We are more than just a steel maker, we are North America’s largest recycler.”- Nucor.com. The steel industry tends to have a reputation for high pollution. Using “North America’s largest recycler”, Nucor can position itself as a responsible steel manufacturer. Increasing marketing focus, and positioning themselves in this manner, would increase brand awareness and exhibits Nucor’s environmental responsibility to stakeholders.
Market R&D efforts
Increased R&D efforts will position Nucor as a front-runner in technology and innovation in the steel industry. By including aspects of their R&D efforts in their marketing strategy Nucor will be seen as a producer of high quality materials. RECOMMENDATIONS SLOW MERGERS & ACQUISITIONS:
Nucor has been aggressive in mergers & acquisitions over the last decade
Although Nucor’s mergers and acquisitions of other companies has been a successful strategy through the recession, this may prove to be a volatile strategy in the future. Often times mergers and acquisitions simply don’t work, Nucor has been fortunate to have been successful with them in recent times. Keeping vertical integration in mind, Nucor has backward integrated themselves all the way to recycling, leaving little to no room for further backward integration. Forward integration is not a viable option for Nucor, as it would diverge from their core competency. RECOMMENDATIONS Low product differentiation
Low switching costs
Buyers who buy in bulk have strong buying power Substitutes include aluminum, plastics, ceramics, etc.
New materials and technology can increase substitute pressure Low bargaining power--raw materials are from foreign producers Low access to raw materials
Difficult to achieve economies of scale
Large investment to enter the steel industry Maturing industry
Similar products--no differentiation
Mergers among foreign companies in the 2000's Incentive System Yes Yes No Yes Temporary Competitive Advantage Customer/Supplier Relationship Yes Yes Yes Yes Sustained Competitive Advantage Threat of Buyers: HIGH
Threat of Suppliers: HIGH
Threat of Rivalry: HIGH
Threat of Substitutes: LOW
Threat of New Entrants: LOW

Expected Average Firm Performance: MIXED Company People & Culture Yes Yes Yes Yes Sustained Competitive Advantage *millions of dollars Quick Ratio is higher than recommended value of 1 – Steel Industry is Better FINANCIAL ANALYSIS “'Nucor has a long history of turning economic downturns into opportunities’ and expected ‘to emerge stronger leaving the recession.'” -Dan DiMicco (2nd successor to Ken Iverson) -Nucor is a Fortune 500 Company
-Located in Charlotte, NC
-Largest mini-mill steel makers in the world
-Recycle more than 1 ton of steel every 2 seconds
-Company's steel-making capacity is approximately 25 million tons per year
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