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INTRODUCTION

U.S. steel market comprised of three kinds of steel industries integrated steel

mills, minimills and specialty mills during 1986. In addition to these there were

foreign competitors( mainly Japanese and European) who sold better technology

and cheaper steel during 1986. Nucor was a minimill at the time of its inception in

1972.

In 1986 Nucors CEO K. Iverson was in a dilemma whether to commit Nucor to

a new steel mill that would commercialize thin slab casting (CSP) developed by

SMS that would let it enter flat sheet segment competing with integrated steelmakers.

I have analysed the situation on different tools and reached on the decision

that they should go for CSP(compact strip technology) and enter the integrated

steel segment considering merits and demerits of different tools.

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ANALYSIS

During the year 1986 there were three groups of steelmakers in US Integrated

firms with 107 million tons of capacity, minimills with 21 million tons of capacity

and specialty mills with 5 million tons of capacity. This was the time when Nucor

steel had to enter the integrated segment using thin slab casting (CSP). In addition

to this there were Japanese and European steelmakers who were providing high

quality steel at cheaper rates. There were four important customers according to

volume service centers and distributors, automotive sector, construction

industries and appliance and equipment industries. Price, quality and

dependability were the most important buyer purchasing criteria.

Integrated firms used iron ore as raw material, minimills used scrap metal as

raw material and specialty mills used special grades of steel as raw material.

U.S. companies were losing ground in domestic market due to uncompetitive

pricing and outdated technology. In addition to this union laws were also

stringent. Since the 1950s ROE had exceeded only once the average for US

manufacturing companies.

Nucor used scrap metal to produce steel. Its strengths were few layers of

management which led to less complexity and better communication,

decentralized decision making which led to quick decision making on different

issues, annual tonnage per employee is highest and plants are located in rural

areas which led to less operating cost.

Nucors compensation system was incentive based rather than wage based.

Employees were given less wages as compared to national average. They were

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rewarded according to their performance above national average which led to

higher labor productivity. They rewarded production groups instead of

individuals. This was beneficial to Nucor as during the period when there was less

demand the burden was absorbed by all employees including higher officers.

Nucor in 1986 agreed to form a joint venture with Yamata Kogyo to produce

wide flange beams. This venture was projected to cost 175 million dollars.

At the same time Nucor has to decide whether to enter the flat sheet segment

using CSP technology developed by SMS where integrated steelmakers were its

competitors. CSP design was sensitive to scrap prices.

The minimill segment reached its saturation and during 1983 sales declined for

first time. According to CEO Iverson he didnt see anything about the concept that

was not viable.

Nucor as the first adopter of CSP might be able to secure a 10-20 million dollars

discount off the 90 million dollars from SMS who was providing core machinery

and technical support. It would take a long time for other companies to copy the

design as it was customized for Nucor at its facilities.

This new proposition would cost 340 million dollars including startup cost and

working capital( operating cost ). It would take 2 and a half years to complete and

further 2 years to reach rated production capacity. Minimills life being 10 years

Nucor had 5 and a half years to reap benefits of first mover advantage.

As they were fairly comfortable with operating cost. The cost for operating was

254 dollars per ton and they proposed .8 to 1 million tons of production. So

including most costs this production would cost 594 million dollars. The break

even point is found out to be 4 years but the first mover advantage is for 5 and a

half years so this project is profitable according to break even analysis. The main

reason for US companies lacking behind their Japanese and European

counterparts was in pricing and outdated technology. CSP(compact strip

production) resolved these 2 issues as it was latest but untested and cost

effective as it required less number of steps i.e. four to produce flat sheet as

compared to other processes which required 7 to 10 steps. As the company

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emphasized on risk taking it would neglect or may not consider the fact that the

technology was untested in the market.

Also Nucors average market to book ratio for year 1985 was 2.05 which was

highest as compared to other companies. This means that they had highercustomer loyalty as book price was lower as compared to average market price

and their competitors had less customer loyalty.

Also flat sheet segment accounted for majority of production of steel in US

domestic market i.e. 52 percent.

So considering all these facts Nucor should go for CSP technology and enter

the flat sheet segment competing with integrated steelmakers and foreign

companies.