Porter Five Forces Model

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For both the hot-rolled sheets and the cold-rolled sheets, the total operating costs favor the thin-slab minimill. Nucor’s consultants are fairly confident about the estimates. The majority of the cost savings can be attributed to Nucor’s lower labor cost per ton of steel produced. Nucor’s revenue per ton shipped is less efficient than modernized integrated mills. Because Nucor has a business model that requires the purchaser to absorb the shipping costs (Nucor charges to freight the steel not ship it), This may be less of an issue for the final purchasor. In addition, Nucor’s plants have been strategically built to be located near the end-user thus potentially reducing the shipment costs. The chart below shows the breakout of labor costs:

Comparing Labor Costs per Ton

Thin-Slab Minimill

Modernized Integrated Mill

Thin-Slab V. Modernized

Unmodernized Integrated Mill

Thin-Slab V. Unmodernized

Hot-Rolled Sheets

$35

$67

91% More Efficient

$91.5

161% More Efficient

Cold Rolled Sheets

$53

$105.50

99% More Efficient

$141

166% More Efficient

While Nucor’s new process will reduce labor costs to a more competitive rate per ton, Nucor must also pay for scrap material. 36%-44% of Nucor’s cost lies in the price of scrap.

Other Considerations: Because Nucor would be the first company to adopt such a process, there are many costs that may be incurred that would be extremely difficult to anticipate. These pioneering costs must also factor into the decision making process and should be a part of the unit cost analysis. One important variable that is estimated in the cost assumption is the price of scrap. Should the price of scrap increase by more than 36%, the total operating cost per ton would shift favorability from thin-slab casting in minimills to modernized integrated mills. It is important to note that Nucor’s cost estimates are focused on estimates and comparisons against the best alternatives that are available today. Sustainability of these potential competitive advantages must also be considered.

4. Is thin-slab casting likely to afford Nucor a sustainable competitive advantage in flat rolled products? Discuss in terms of imitation/substitution/holdup and slack.

A competitive advantage is eroded by competition. Many factors can play into the length of time a company can hold a competitive advantage. Imitation is the most direct form of competition and barriers to imitation must exist to sustain a competitive advantage. As described in the case, SMS owned the technology of CSP and Nucor would not be able to prevent them from diffusing the technology to other companies. In addition Nucor believes that SMS would insist on the rights to observe process improvements at Nucor’s plant and to show them off to prospective customers. Since these conditions exist, imitation would be an imminent threat to Nucor’s competitive advantage in rolled products.

Substitution is another threat to competitive advantage that Nucor must consider when deciding to move forward with CSP technology. Several substitutions to the CSP exist. The less efficient but proven Hazelett Caster acts as a substitution to CSP. In addition, attempts were already underway to cast even thinner slabs by SMS’s leading competitor.

Holdup exists in this scenario due to the fact that SMS owns the technology of CSP. Since they own the technology it will be difficult for Nucor to negotiate a contract that would allow them to sustain a competitive advantage with the technology. Slack also exists in this scenario since the total profit Nucor could obtain from CSP will not be realized since all of their improvements will be shared with their competitors.

Taking all these aspects into account is very unlikely that Nucor would be able to gain a sustainable competitive advantage in thin slab casting.

5. How should Nucor think about the uncertainties surrounding thin-slab casting? What

should it do? Discuss key uncertainties/risks facing Nucor (such as risks involving

technologies, procurement, marketing, finance and strategic uncertainties) and what Nucor

should do or whether Nucor possessed distinctive/core competences to deal with such

uncertainties and risks.

Becoming the first user of this new technology, Nucor would have to address several issues around “unknown unknowns.” What are the pioneering costs of incorporating the new technology, and would profits offset costs? The company would only gain a few years head start if other companies decided to adopt the technology. The cost of scrap might increase with the entrance of additional competitors. In terms of operations, Nucor poses the risk of being outpaced by competitors with the already integrated mills. Another risk the company faces is resource constraints. Implementing the thin-slab project would occur simultaneously with the company’s joint venture with Yamato Kogyo, posing a strain on Nucor’s resources with management and financials. The final uncertainty Nucor faces is technological leapfrogging. The process of thin slab casting would potentially become obsolete in 10-12 years with a transition to direct casting.

All things considered, Nucor does not possess the core competencies to deal with such uncertainties. Implementing this new technology incurs financial constraints that consume nearly as much as the entire company’s net worth. Nucor is unable to contain the market and establish barriers to competitor entry. Although the opportunity is present for Nucor to get ahead of the game contrary to historical behavior, thin-slab technology favors integrated mills outside of the company’s present real estate. The accumulation of costs and risks would not be beneficial for a technology that would potentially become obsolete in the near future.