This case analysis has considered all facets of Nucor Company’s operating results and financial position. This type of analysis is modified for the analysis perspective and provides valuable information for business decisions. While the data and information from the analysis are indispensable, it is not sufficient in arriving at final decisions. This is because other qualitative and quantitative factors should be brought to bear on decisions. An equity investor would be interested in earning power and other earnings-based analyses before making an investment decision. Accounting and financial analysis give us insight into what earnings are and are likely to be.
The company began as a nuclear energy company, before entering into the steel manufacturing business in 1968. When F. Kenneth Iverson became President and CEO of the company in 1964, the company was facing bankruptcy. Iverson felt that the company would survive if it focused on its South Carolina-based Vulcraft subsidiary that was producing steel joists and he expanded the steel joists business with new operations in Texas and Alabama. In 1968, it was decided that the company would integrate backward into steelmaking so that it can supply the steel that it needs for its products, and Iverson sensed an opportunity in the new technologies of producing steel affordably. The company changed its name to Nucor Corporation in 1972 and under the leadership of Iverson, Nucor in 1985, became the seventh-largest steel company in America. In 1979, Nucor improvised on this business by manufacturing cold finished steel products such as steel bars or rods of various shapes made according to customer specifications or user requirements (Thompson, 162). Cold finished steel was in high demand and Nucor was able to sell it directly to customers in the automotive, farm machinery, hydraulic, appliance, and electric motor industries and to steel service centers. Electric arc furnace technology was introduced to reduce labor and capital requirements to melt steel scrap and produce crude steel. With this technology, Nucor set a new trend in the steel industry, – making steel with recycled scrap steel. Nucor was recognized by NBC for being successful in competing against low-cost foreign manufacturers. By 1981, there were four-bar mills making carbon and alloy steels in bars, angles, and light structural shapes. In 2006, Nucor had 10 such plants and the products were widely used in metal buildings, farm equipment, automotive products, furniture, etc. In 2006, Nucor Cold Finish was the largest producer of cold finished bars in the country (Thompson, 88). Nucor’s steel products also included metal building systems, light gauge steel framing, and steel fasteners such as bolts, nuts, etc. Nucor Building Systems in 1987 began making complete metal building packages that could be used along with other materials such as glass, wood, and masonry to construct aesthetic buildings affordably. As there was a huge demand for steel fasteners, and most of the demand was met by foreign imported steel fasteners, Nucor began a fastener division in 1986 and another one in 1995. Soon Nucor was supplying about 20% of the U.S. market for steel fasteners. In the late 1980s, Nucor produces sheet steel at its new plant in Indiana. Sheet steel was needed to manufacture motor vehicles, appliances, steel pipes, and tubes, and others. The thin slab casting method that Nucor used to make these steel sheets was very innovative. In the late 1980s, Nucor started manufacturing a wide range of structural steel products such as beams, pilings, etc. In 2000, Nucor started producing custom specified steel plates for manufacturers of heavy equipment, ships, barges, rail cars, etc. The wide range of its steel products made Nucor the most diversified steel producer in North America and by 2000, Nucor became the second-largest steel producer in the United States after U.S. Steel Company (Thompson, 92). After a few more years, Nucor became the number one steel producer in the country but it fell back to second place again in 2006 when a global steel company in Europe made a series of acquisitions in the U.S. to create a subsidiary known as Mittal steel USA with overall greater production capacity than Nucor. However, Nucor has continued to remain a hugely successful steel producing company, generating profits every year since 1966, and its success is attributed to the leadership of its President Ken Iverson (Thompson, 78) and his skill at adapting the company strategy to changing trends in the demand for steel (Nucor Corporation,30).
Looking at the company financial statement one will note that the company is performing very well in terms of profitability, efficiency, and many factors. The financial statement shows a constant growth in sales from the year 2004 to the year 2008. For the five years, sales doubled as well as earnings before income taxes. Although there was an economic downturn in the year 2008 – 2009 which started the year 2007 as a subprime crisis that is most people were given mortgages and were unable to service them. The company has been a supplier of low construction material we expected to have a poor performance starting the year 2007 but from the information, we realized that this company has been growing. From the consulted financial statement of the year 2006 – 2008, it will be noted that net earnings available to shareholders changed by a small margin.
The assessment of Nucor’s short-term liquidity is a mixed one. Both current and acid-test ratios do not compare favorably. Yet Nucor’s cash position is favorable with its industry, and its accounts receivable and inventory turnover ratios are improving from the year 2009. Moreover, Nucor’s conversation period is better than that of the industry, and its cash position is strong, allowing for cash to be used for non-operating activities like acquisitions and retirement of debt.
Nucor has aggressively transformed its capital structure in recent years to a less conservative one. On the positive side, both earnings to fixed charges and cash flow to fixed charges ratios are strong, the exception being earnings coverage ratios for years 2006 to 2008. These strong ratios imply good protection for Nucor’s creditors. The company also has the strength to take on additional debt, and the market continues to assign Nucor a superior credit rating.
Nucor’s assets turnover is relatively stable. While its turnover of cash and cash equivalents fluctuates from 2006 to 2008, Nucor’s accounts receivable and inventory turnovers are improving. These improvements are due mainly to Nucor’s efforts to reduce working capital through, among other activities, fewer receivables and inventories. Nevertheless, asset turnover compares favorably to the industry despite the relatively low cash turnover and fixed assets turnover.
Nucor’s gross profit margin is steadily improving and above the industry average. Yet its net profit margin is not as solid. This is due primarily to increased operating expenses and the inability of Nucor’s management in controlling these expenses.
Nucor Company’s strategy was impacted by global trends in the steel industry at various points in its growth period. In 2000, Nucor sought to grow through new acquisitions, new plant construction, continued plant upgrades, cost reduction efforts, and joint ventures. Nucor’s acquisition efforts did not take off easily till 2000-2001. The terrorist attacks of September 11, 2001, weakened steel purchases by major steel-consuming industries. Moreover, an increase in imports of low-priced steel from foreign countries added to the distressed market conditions. Between October 2000- October 2001, 29 steel companies in the U.S. filed for bankruptcy.
The current management control systems where chief executives are compensated based on the result are helping the company is moving on the year 2010 business environment. Now that the management knows that they will be only be compensated based on the result they will be forced to work hard to increase the performance of the company. However, this may create a conflict of interest with the shareholder of the company. The management will be forced if not properly checked, to cookbooks of accounts to show a high result for compensation. The company shareholder should be very careful about the type of compensation strategy they adopt in compensating their senior management. This compensation where executive pays is matched with a result at times have backfired in any organization. Therefore the company should adopt a strategy that matches the organizational strategies and employees’ goals. The four compensations which are given to the management that is base salary, annual incentives, long-term incentives, and benefits are of great help in retaining the best employee in the market. The management structure and philosophy of compensation are very good for compensating senior staff.
Nucor has a very simple organizational structure that facilitated innovation, participation of employees, and decentralization. General Managers and staff were given the power to take operating decisions daily. A group manager was the head of three building systems plants and four cold-rolled products plants but each plant operated as an independent profit center and had a general manager, also known as vice president. The organization structure had three management levels – General Manager, Department Manager, and Supervisor/Professional/Hourly Employee. The management philosophy was that corporate headquarters should be made up of very few executives to guide the decentralized operation while a great deal of authority was granted to managers in the field. There was minimum paperwork and bureaucratic systems. Each group plant was expected to reach a target return of 25% on total assets. As long as managers achieved their targets, there was no interference from the top management. Underperforming group or plant managers were replaced by the top management. Employees were allotted one of four basic compensation plans; – production incentive plan, department manager incentive plan, professional and clerical bonus plan, and senior officers’ incentive plan (Nucor Corporation, NOTICE). The compensation plans were so designed that would be no bias or discrimination. Workers were excellently compensated. Employee relations were based on four principles: employees will earn according to their productivity; there will be job security; employees will be treated fairly and they will have a way to appeal if they are treated unfairly. Nucor also ensured that workers were not laid off. Nucor ensured that all employees were treated equally and had an equal share of benefits that included profit sharing, 401 K plan, Medical, and dental plan, tuition reimbursement, employee stock purchase plan, service awards, scholarship, and others. There were no job descriptions at Nucor plants and there were no formal performance appraisal systems. Employees were kept well informed regarding the performance of the company. All of these practices helped keep the employees highly motivated. New employees were carefully recruited and given proper orientation and guidance ( Anthony, Dearden, and Vancil, 72).
The compensation structure of the company is aimed at attracting and retaining the best management staff and discoursing poor performers. This type of incentive plan is most usually associated with the results and helps the company from paying out bonuses even there are losses. Market factors beyond the control of management, such as pending legislation, can keep a firm’s share price repressed even though a top executive is exceeding the performance expectations of the board. In this situation, a highly performing executive loses bonus compensation due to the undervalued stock.
Traditional accounting measures, such as net income, earnings per share, return on equity and return on assets, are used because they are easily understood, are familiar to senior management, and are already tracked by firm data systems. Nucor company bases annual bonus payments on such performance criteria, given an executive’s business unit and level with the firm. The measures used by Nucor include return on equity, revenue growth, net sales growth, and profit growth.
These methods adopted by Nucor have been criticized in the past by vapors critiques. Critics argue that due to inherent flaws in accounting systems, basing compensation on these figures may not result in an accurate gauge of managerial performance. Return on equity estimates; for example, are skewed by inflation distortions and arbitrary cost allocations. Accounting measures are also subject to manipulation by firm personnel to artificially inflate key performance figures. Firm performance schemes, critics believe, need to be based on a financial measure that has a true link to shareholder value creation. This issue led to the creation of the Balanced Scorecard, which emphasizes not only financial measures, but also such measures as new product development, market share, and safety.
Possible Improvements to the Strategy
While the strategy was generally a good one, there was a need to consider a few other issues to ensure maximum effectiveness. One of these related to the suppliers. While the transition process mainly affects the employees, there is also a need to ensure that contracts and relations with suppliers are not interfered with during the merger. The policies that governed the relations between the two companies with their suppliers need to be harmonized.
Continuous effort should be placed on ensuring that Nucor employees maintain their confidence and trust in management. This is because they are newcomers to the system. There should be the assurance that the co-workers and facilities are still friendly, and this is achieved through the building of trust, commitment, open communication, and teamwork.
From the perception of human capital, it becomes more important than before to employ a workforce that is higher performing and more engaged. Nucor should have begun to compete for talent in all levels of their functioning and have to be cautious in devising compensation and rewards programs that draw, motivate and retain a workforce that is more competent, productive, and efficient. They need to manage and devise rewards and compensations schemes that benefit workers for the better financial performance of Nucor in an environment that has become extremely challenging. Simultaneously Nucor has to adopt efficient strategies of recruitment, motivation, and retaining the necessary talent that is vital for their functions and success. A compact rewards and incentive program that proves to be successful should essentially be designed in balancing the needs of the organization with that of the workforce. Devising an efficient compensation program is quite challenging but it is not necessarily a daunting task.
Staff should recognize that their performance is being measured and scored. The number of categories in the scorecards should be managed in a way that they include only the most significant sales actions and service behaviors. If the goals are excessively aggressive and sensed to be unattainable all sales activities will be discouraged. Rewards should be paid at regular intervals so that bank employees sense the direct association between the rewards that they get and the efforts that they make. Only those measures should be included that are directly controllable by superiors.
If Nucor can adopt a compensation philosophy by clearly defining the compensation strategy, a strong foundation can be formed that will become the basis of all compensation programs. The right mix of the compensation package has to be devised in ascertaining whether it fully supports the business strategy and is effectively aligned with the interests of shareholders and stakeholders. Each aspect of the compensation programs including salaries, bonuses, incentives, rewards, and recognition plans has to be considered so that employee aspirations are met in the context of opportunities to prove their worth to the organization. The fact remains that workers would wish to be valued, compensated fairly, rewarded distinctly, and given due recognition for the contribution they make towards the organization.
It is essential to review the effectiveness and efficacy of the prevailing pay for performance programs. The issue of whether employees are getting the desired results and experiencing the expected behaviors has to be considered and the management has to review the existing incentive plans. The objectives of the rewards plans in terms of short-term and long-term performance have to be ascertained in confirming if they are aligned with Nucor’s business and strategic objectives. Internal and external influences have to be identified and the kind of performances to be rewarded has to be identified. How performance will be assessed and the right measures that will be adopted should be identified and put in place. The performance evaluation process of the organization has to be reviewed and ensured that it is compliant with the entire organization and is objective and accurate. The entire idea is to make employees feel that they are valued and given fair treatment.
All compensation programs must be well communicated and understood by employees and plans demystified so that employees have a thorough understanding of how the compensation program has been devised. It must be kept in mind that employees are much concerned with how their payments are determined and what the constituents of their pays and benefits are. When compensation plans are transparent and easily communicated employees will sense that they are being compensated fairly. More specific to pay for performance programs employees and managers must have a thorough grasp of how the different programs work. The developed goals must be clear and there should be a clear line of sight in this regard. Employees must feel empowered in achieving the given goals and there should be ample opportunities for meeting individual and departmental goals. They should be able to understand the relationship between their efforts and their contribution to the bank’s accomplishments. There should be a system in place that tracks results and enables feedback about employee performance regularly.
Diversification and organizational structure issues
Related diversification refers to new investments that involve similar products, vertical integration of complementary activities, adding operations in foreign markets involving similar products, sharing of intangible assets such as marketing knowledge, patent-protected technology. Diversification is unrelated when the organization enters new industries. Nucor achieved 20% growth over about four decades (1966-2004) by focusing exclusively on the steel industry; – in other words, the company survived and grew by adopting a related diversification strategy. The company used its core competencies such as manufacturing knowledge, technology adoption, and implementation knowledge to achieve this. It is best recommended that Nucor sticks to this strategy of related diversification. There are plenty of opportunities for Nucor to diversify in a related manner as more new industries depend on steel – such as computer hardware and wireless technologies. Moreover, research shows that related diversified firms perform the best and unrelated diversified firms do not perform well over the long term. This is because corporate headquarters, in a related diversified firm can easily transfer its core competencies from one business unit to another. Moreover, the related diversified firm can exploit operating synergies across its business units while in the case of unrelated diversified firms, there are no such operating synergies. If Nucor continues its related diversification strategy, there will be no need to change its organizational structure as it has already handled numerous related diversifications for the past four decades.
The very survival of any organization depends on how well it responds to change. Nucor is continuously changing both externally and internally. Some of the major external changing forces are globalization, relentless technological advances, unprecedented competition, political upheaval, and the opening of new markets and changes within an organization include integration of departments, or organizations, establishing different cultures, or implementing technological changes. There are five keys to effective change management: good communication, clarity regarding the benefits, clear leadership, participative decision-making, and open-mindedness. Other interventions for change management may include assisting employees with balancing work and family responsibilities, offering wellness programs, organizing communication improvement activities with management and employees, providing training opportunities, and providing a participative environment.
In the context of performance appraisals, Nucor has only informal performance appraisals within the organization. It is important to measure and evaluate performance at periodic intervals because performance appraisals help in ensuring that the recruiting and selection processes are adequate, that training programs are relevant, and help in effectively linking performance with rewards. Moreover, these appraisals justify employment-related decisions and promotions, thereby providing motivation and development to the employees.
Nucor is an innovative organization and that swiftly adopts new technology. In the future, organizations that focus on training and development-related problems will be the only ones that succeed.
Anthony, Robert, Dearden, John & Vancil, Richard. Management control systems: text, cases and readings. New York: Tata McGraw-Hill Publishers, 1972
Nucor Corporation. Notice of 2009 Annual Meeting Of Stockholders And Proxy Statement. Web.
Nucor Corporation. Nucor Annual report 200. Web.
Thompson, Arthur. Crafting & Executive Strategy – The Quest for Competitive Advantage. New York: Tata McGraw-Hill Publishers, 2008.