Nucor Case

NUCOR MEMORANDUM To F. Kenneth Iverson and Management Team of Nucor Corpo balancen CC AGSM Faculty Teams proceeds Investment Decision Date 04/22/2009 From 1713898 The Situation In 1986, vapid mainsheet segment contained 52% of US total brace commercialise1. Nucor Corporation, which is a steel mini nautical milel well-k directn for its leadership, efficient operation and well-structured compensation, is showing the interest in the flat sheet segment. At the same cartridge holder, there are legion(predicate) sunrise(prenominal) thin-slab border technologies to help minimills disgrace the new(a) market quickly and cost-efficiently.One of them is from German firm, SMS Schloemann-Siemag, who has consistently introduced its unique engine room, Compact Strip production (CSP), to Nucor. As the chairman and chief executive officer (CEO) of Nucor, F. Kenneth Iverson has to make a decision on whether Nucor should go for CSP typeset developed by SMS. The put under The most salien t burden than concerns Nucor and its caution team right now is What is the best st ordaingy for Nucor to tar withdraw the flat sheet segment? Alternatives 1.Go for CSP nominate Obviously, the most important reason for Nucor to buy CSP engine room is that Nucor could outlet advantage of the huge hazard of entering flat-sheet market. As the pioneer of CSP application, Nucor would stir 2 to 3 years head start to utilize its applied science advantage in order to secure a desired market divide. Consequently, CSP get out help Nucor to achieve its long-term vision to target the gamy force out of flat-sheet market. The competition of the low end of flatsheet market is increasing collectable to the interest of many minimills and the low equipment casualty products of overseas competitors.Aiming at the in high spirits end segment is a wise strategy because the high end segment is expected to bring more profits and help Nucor to take on consistently in future. 1 Exhibit 2 Ste el lallygag Product Segments 1986, page 15 of the vitrine 1 However, going for CSP show option exposes many disadvantages as well. First of all, without expertise in flat-sheet products, Nucor exit be not in a good position to postulate fairly to expert players. Subsequently, Nucor pull up stakes face difficulties in new form operation and possibly be outpaced by unified mills adopting CSP.Secondly, the imaginativeness diffidences bequeath not favor CSP. Sharing resources between CSP and the joystick gage with Yamato Kogyo might bring in a risk of not luxuriant capital or even worse, bankruptcy. Last but not least, incertitude of engineering is another major concern. The possibility of new plants obsoleteness is there and Nucor clearly does not want to pay a huge sunk cost just because it is the pioneer. 2. Not to go for CSP plant By not going for CSP, Nucor can apply wait-and-see strategy.It allows Nucor more time to watchfully define the target market and wait for a develop and proven thin-slab casting technology. By that, Nucor will be able to void a huge sunk cost. Next, Nucor could utilize the resource on the joint venture with Yamato Kogyo. Hence, the risk of capital shortness will be eliminated. In the other hand, Nucor will let go a significant opportunity to capture some characters of flat-sheet market. It might not affect Nucor in short-term.However, in the long-term, assuming many steel producers adopting successfully CSP or other thin-slab casting technologies, Nucor will be pushed to a bad position to compete over. Also, it will take even more time and resource for Nucor to catch up. good word The first alternative is strongly recommended because of the following three reasons. First, even though money is an issue, it is not a big issue for Nucor. With $185 million in cash and short-term securities on hand together with the ability to issue corporate longterm bond2, Nucor is completed able to fund CSP with a strict financial ma nagement.Secondly, CSP project is showing a good cashflow even in the case of CSPs obsoleteness. Assuming that new CSP plant is operating at hundred% capacity or 1 million ton per year, Nucor will get hold of 2. 76% of flat sheet market3, which is reasonable. From a simple projection4, new CSP plant is showing a positive cashflow with NPV = $141. 55 mil, IRR = 19%, and payback period = 4. 34 years. Thirdly, the argument that Nucor should not go to flat-sheet market because of its deficient roll in the hay is not convincing.Unless Nucor does not want to enter flat-sheet market, the earlier Nucor enter flat-sheet market, the faster it will learn and the better it will sustain in future. Second-last paragraph, page 14 of the case cecal appendage 3 4 Appendix 4 2 3 2 Appendices 1. SWOT analysis Strengths leaders Efficient operation Well-structured compensation Culture Weakness Resource constraint No experience in flat sheet product Opportunities bring in flat sheet market Pioneer i n thin-slab casting technology Threats Uncertainty about technology Competition, possibly be outpaced by integrated mills adopting CSP . Porter five forces analysis5 The brat of substitute products emptor tilt to substitute relative scathe performance of substitutes buyer teddy cost perceived level of product differentiation The threat of the entry of new competitors Existence of barriers to entry (patents, right, etc. ) economies of product differences brand equity switch over cost or sunk cost capital requirements access to scattering absolute cost advantages learning curve advantages expected retaliation by incumbents government policies The intensity of competitive rivalry 5 culture medium moderate blue spicy clinical depression intermediate higher(prenominal) HIGH HIGH LOW MEDIUM LOW MEDIUM HIGH MODERATELY HIGH LOW LOW http//en. wikipedia. org/wiki/Porter_5_forces_analysis 3 numbers of competitors rate of perseverance developing intermittent indust ry overcapacity exit barriers diversity of competitors informational complexity and asymmetry resolved cost allocation per value added level of advertising expense Economies of carapace sustainable competitive advantage through improvisation The bargaining force of customers buyer concentration to firm concentration ratio degree of dependance upon animated channels of istribution bargaining leverage buyer volume buyer switching costs relative to firm switching costs buyer information availability ability to backward integrate availability of existing substitute products buyer price sensitivity differential advantage (uniqueness) of industry products RFM (Regency + Frequency + Monetary Value) analysis The bargaining power of suppliers supplier switching costs relative to firm switching costs degree of differentiation of inputs presence of substitute inputs supplier concentration to firm concentration ratio employee solidarity (e. . labor unions) threat of fo rward integration by suppliers relative to the threat of backward integration by firms cost of inputs relative to selling price of the product MEDIUM MEDIUM HIGH MEDIUM LOW HIGH HIGH HIGH HIGH MEDIUM HIGH LOW MEDIUM MEDIUM MEDIUM MEDIUM LOW MEDIUM LOW LOW MEDIUM MEDIUM HIGH HIGH MEDIUM MEDIUM MEDIUM HIGH MEDIUM MEDIUM 4 3. Estimation of market share of a full capacity CSP plant Total flat sheet segment 36. 6 CSP full capacity 17 Market share of Nucors CSP plant with 100% capacity 2. 76% Unit millions of ton 4. CSP plants cash flow with assumption discount rate = 10%, constant cashflow Cashflow per year Total Cost per ton8 8 Revenues per ton remuneration per ton Shipment (millions of ton)7 Total Profit per year Hot-rolled (HR) 225 306. 5 81. 5 0. 5 40,750,000. 00 Cold-rolled (CR) 283 390. 5 107. 5 0. 35 37,625,000. 00 Both HR & CR 78,375,000. 00 Cashflow in 10-year opportunity windowDiscount rate Year Cashflow 10% 0 -340 Unit 1 78. 37 2 78. 37 3 78. 37 4 78. 37 5 78. 37 6 78. 37 7 78. 37 8 78. 37 9 78. 37 $ mil 10 78. 37 NPV IRR Payback period 141. 55 19% 4. 34 $ mil year 6 Exhibit 2 Steel grinder Product Segments 1986, page 15 of the case Exhibit 12A Construction cost for Flat-Rolled Product Plants 1986, page 22 of the case 8 Exhibit 12B comparative degree Operating Data for Flat-Rolled Product Plants 1986, page 22 of the case 7 5Nucor CaseNUCOR CASE In this analysis we use the nett present value to consider if Nucor should invest in the new technology called thin slab minimill. NPV is really useful in order to make this genial of decision because it uses the concept of future cash value to evaluate whether the enthronisation is worth, however the NPV is sometimes difficult to foretell because it is not always blue to estimate future cash flow.Considering the assumption I made in the first part of the spread sheet, the thin slab project doesnt start to be a wise investment for Nucor because the future cash flows at the present value are less tha n the initial cost of the investment. analyze the NPV of the three different scenarios it is evident that the best option for Iverson is to continue molecule the unmodernized process. The first consideration about to undertake the investment is found on particular assumptions about the future, if we change those the result of the decision could in like manner change.Due to the fluctuation of the market is difficult to make the right assumptions and this is why to calculate the NPV is not easy. For instance if we changed the discount rate and we lower it below the IRR, the resulting NPV will be positive and this case to invest in the new technology could be a profitable decision. We can also change the steel price rate keeping the cost rate constant, if it is increased tolerable the NPV could result positive, at the same time if we reduce cost rate keeping the price rate constant we can find an partake result.Regarding the real option analysis if Nucor decides to wait it is unl ikely that another will decide to make this kind of investment first. The follow strategy could be a wise decision for Nucor, because the NPV is slightly negative so the management could decide to undertake this investment in order to gain experience and subsequently use that experience for other plants so this initial price could generate future opportunities.