Nucor 2005 Case

1. How attractive was the U.S. steel industry during the 1980s & 1990s? (25 points)

To analyse the attractiveness of U.S. steel industry, we utilise the Porter’s Five Forces Model presented below:

Threat of Rivalry | High | Threat of New Entrants | Low |

* Homogenous product * High price competition * Many marginal competitors * High industry concentration * The Big Three: U.S. Steel, Armco, Bethlehem * Strong competition from imports * Accounts for 20% of market * Very cost-competitive imports * Shift from domestic to global markets, i.e. Japan to U.S. * Over-capacity with declining demand * High barriers to exit * Liabilities and costs associated with planned shutdown and filed bankruptcy, i.e. accounting rules, tax laws, cash reserves for health, pension and insurance liabilities * Bankruptcy-law protection delayed and prevented exits | * High economies of scale * High fixed costs but low marginal costs * Fixed costs backed by collaterals * Licensing rights to technology * Brand identity of the Big Three * Aggressive retaliation to competition * Price reduction * Filing of unfair trade complaints * Government protectionism * Government interventions * Unrealistic depreciation schedules * High corporate taxes * Excessive regulation * Jaw-boning for lower steel prices * Shift from domestic to global markets * Free trade agreements * Joint ventures |

Buyers’ Bargaining Power | High | Suppliers’ Bargaining Power | High |

* Low buyer concentration * Availability of substitutes * Iron, brass, carbon fibre, etc. * Price sensitive * Steel as an input adds to final costs * Easy backward integration (by buyer) * Derived demand * E.g. Nucor Corp into mini-mills * Easy forward integration (by firm) * E.g. Nucor Corp into buildings | * Suppliers of machinery – Low * Labour – High * Unionised: United...