Nucor Corporation

Nucor Corporation

Decision: Nucor should not be the first adopter of the thin-slab technology being offered by SMS. Even though the NPV is positive, due to existing industry conditions and considering the high Debt-to-equity ratio, it is recommended that Nucor invests in this technology after the technology has been proven by a competitor.

Barriers of entry vis-à-vis Threat of new entry

• Nucor accounts for 11.4% (page 117, paragraph 3) of the domestic minimill steel-making capacity therefore they are not large enough to influence suppliers and deter new entrants.
• Since thin slab steel is also produced by integrated steel mills as well as other minimills, Nucor does not have significant influence over buyers enough to deter new entrants.
• No customer switching costs since the end product consumed (thin slab) does not change.
• High capital requirements – new entrants will require large capital expenditure which will act as a deterrent.
• Nucor does not have incumbency advantages because SMS owns the proprietary technology and wants to diffuse the technology to other minimills that are also interested in CSP technology.
• Nucor does not control over distribution channels that will deter new entrants.
• There is no known government involvement in the form of patents or trade practice restrictions that will create barriers for new entrants.

Even though barrier of entries are low (other than capital expenditure), we feel that the threat of new entry is low due to the following factors:

• Market for low end structural products was beginning to reach saturation
• Profits in minimill steel-making industry are shrinking and year-on-year volume growth has already tapered into single digits by 1980's (page 117, paragraph 3)
• 25 minimills were closed or sold between 1975 & 1986
• Integrated steel mills continued to dominate specialty and flat rolled products and minimills continued to shutout of these product markets in 1986.
• Since the competition in minimill industry is quite high, profit margins are not lucrative for new entrants.

Threat of substitute products: Since there are several competing alternatives from companies like Mannesman-Demag, the threat of substitute products is high.

Supplier bargaining power: Since there is a limited supply of premium scrap, bargaining power of suppliers is high. Since the cost of switching from scrap to reduced iron is high, suppliers have a higher advantage.

Buyer bargaining power: The key factor that influences buyer behavior is price. Since minimills are price-sensitive, the buyer bargaining power can be countered by lower price offered by new technology and therefore the buyer bargaining power is low.