HBS-Nucor-in-a-Crossroad-(9-793-039)

DONOTCOPYHarvardBusinessSchool9-793-039Rev.January20,1998ProfessorPankajGhemawatandResearchAssociateHenricusJ.StanderIIIpreparedthiscaseasthebasisforclassdiscussionratherthantoillustrateeithereffectiveorineffectivehandlingofanadministrativesituation.ItisbasedinpartonafieldstudybySarahHall,TakashiNawaandSeijiYasubuchi,allMBAs1990.Copyright©1992bythePresidentandFellowsofHarvardCollege.Toordercopiesorrequestpermissiontoreproducematerials,call1-800-545-7685orwriteHarvardBusinessSchoolPublishing,Boston,MA02163.Nopartofthispublicationmaybereproduced,storedinaretrievalsystem,usedinaspreadsheet,ortransmittedinanyformorbyanymeans—electronic,mechanical,photocopying,recording,orotherwise—withoutthepermissionofHarvardBusinessSchool.1NucorataCrossroadsOnDecember7,1986,F.KennethIverson,chairmanandchiefexecutiveofficer(CEO)ofNucorCorporation,awaitedadelegationfromSMSSchloemann-Siemag,aleadingWestGermansupplierofsteelmakingequipment,athiscompany’sheadquartersinCharlotte,NorthCarolina.IversonhadtodecidewhethertocommitNucortoanewsteelmillthatwouldcommercializethin-slabcastingtechnologydevelopedbySMS.Preliminaryestimatesindicatedthatthemillwouldcost$280million,andthatstart-upexpensesandworkingcapitalof$30millioneachwouldpushthetotalcostto$340million,ornearlyasmuchasNucor’snetworth.Successfulcommercializationofthin-slabcastingwouldletNucorentertheflatsheetsegmentthataccountedforhalftheU.S.marketforsteel.SMS’scompactstripproduction(CSP)processwas,however,justoneofseveralcompeting,commerciallyunproventhin-slabcastingtechnologies,allofwhichmightbeleapfroggedbytheturnofthecentury.AsIversonwrestledwiththesetrade-offs,hereviewedthestateofcompetitionintheU.S.steelindustryingeneralandNucor’spositionwithinitinparticular.TheU.S.MarketforSteelIn1986,U.S.producersshipped70milliontonsofsteelmillproducts.Subtractingexportsofonemilliontonsandaddingimportsof21milliontonsimplied90milliontonsofdomesticconsumptionofsteelthatyear.Relativetothemostrecentpeakyear,1979,domesticshipmentshaddecreasedby30%anddomesticdemandby22%(seeExhibit1).Thedeclineindemandderivedfromthestagnationofmanysteel-intensiveindustries,particularlyautomobilemanufacture,effortstousesteelmoreefficientlyandtheemergenceofsubstitutematerialssuchasaluminum,plasticsandadvancedcomposites.Therewasgeneralagreementin1986,however,thatthemarketwouldnotdeclinefurtherinthenearterm.Althoughthemarketforsteelcomprisedseveralthousanddistinctproducts,theycouldlargelybegroupedintoafewbroadsegments.Semifinishedproductswereatleast8-10inchesthickandrequiredfurtherprocessing.Flat-rollingthemyieldedplates(morethan0.25inchesthick),orsheetandstrip,thinnerproductsthatcouldbeshippedincoils.1Otherkindsofproductsthatcould1Sheetandstripweresupposedtobeofdifferentwidths,butwereoftenlumpedtogether.DONOTCOPY793-039NucorataCrossroads2beformedfromsemifinishedsteelincludedbars,whichweretypicallylessthanoneinchthick;wirerods,whichwereeventhinner;awidevarietyofstructuralshapesthatwereusedprimarilyinconstructionandhollowpipesandtubes.Flatsheetwasbyfarthemostimportantofthesesegments:itaccountedforabouthalfofdomesticshipmentsin1986(seeExhibit2).Shipmentscouldalsobeclassifiedbycustomergroup.Thefourmostimportantones,rankedbyvolume,wereservicecentersanddistributors,theautomotivesector,construction,andtheapplianceandequipmentindustries.Servicecentersanddistributorswereintermediariesthathadincreasedtheirshareoftotaldomesticshipmentstoone-quarterby1986,largelyonthebasisofsecondaryprocessingabilitiesthatletthemcustomizesteelmillproductstoend-users’specificationsandtherebytakeoveradownstreamprocessingnichevacatedbyintegratedsteelmakers.Asignificantpercentageofthesteelsoldtoservicecentersfounditswaytoend-usersintheautomotivesectorandtheapplianceandequipmentindustries.Takentogether,thesethreecustomergroupsaccountedforhalfoftotaldomesticshipmentsandthree-quartersoftheshipmentsofflatsheet.Servicecentersemphasizedthemostbasicformofflatsheet,hot-rolledsheet,whereastheothers’directpurchaseswereweightedtowardcold-rolledandcoatedsheetthathadbeensubjectedtofurtherprimaryprocessing.Constructionaccountedforanotherone-tenthofshipmentsofallsteelmillproductsandofflatsheet.Price,qualityanddependabilitywerethethreemostimportantbuyerpurchasingcriteria.UncompetitivepricingwasprobablythemajorreasonU.S.steelmakershadlostgroundtoimports.Integratedsteelmakershadbeencriticized,inparticular,forchargingexcessivepremiainperiodsoftightsupply,pressingbuyerstopurchasehigher-gradesteelthantheyneeded,requiringminimumordersthatweretoolargeformanybuyersandarbitrarilyfavoringsomebuyersoverothers.Qualityhadseveraldimensions:internalquality,asdeterminedbymetallurgicalstructureandphysicalstrength,whichmatteredmostwhendurabilitywasimportant;surfacequality,whichwasamajorconcerninusessuchassheetmetalforautomobileexteriorsandelectricalappliancecasings;andconsistencyfromoneshipmenttothenext.Dependabledeliverywasanadditionalrequisitefordoingbusinesswithcertainbuyers,particularlylargeonessuchasGeneralMotorsandGeneralElectric.Whilesuchbuyersweresometimeswillingtopayhighe