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Porter Five Forces Model

Essay by   •  October 5, 2015  •  Case Study  •  1,883 Words (8 Pages)  •  1,349 Views

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1. Discuss the attractiveness of the U.S. Steel industry using the Porter’s five forces model.

Porter’s Five Forces of Competition Framework identifies 4 structural variables that influence competition and profitability that all come together and form rivalry among existing firms. Below we will give a brief description of each of these and how they come into play in the U.S. steel industry.

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Threat of Substitute Products or Services- The price that people are willing to pay for a product depends on the availability of substitute products. For the U.S. steel industry a wide variety of materials that perform better than steel are now available that weren’t available in the past. Materials such as aluminum, composite materials, various plastics, and ceramics have degraded the demand for steel recently. The threat of substitutes does not make the U.S. steel industry very attractive for anyone looking at entering the industry with new materials and technology being developed daily.

Threat of New Entrants- Many barriers come into play when deciding if someone is going to enter an industry. Capital requirements, economies of scale, access to channels of distribution, and government and legal barriers are a few of the principal sources that cause threat of entry into a new industry. For the U.S. steel industry the large amount of capital investment that is needed for entry into this market would make entry less than appealing for new entrants. Other deterrents for entry into the U.S. steel market is the difficulty to access raw materials and reach economies of scale to make the venture not attractive to new competition.

Bargaining Power of Buyers- The U.S. steel industry is in the market of outputs, that means that they sell their goods and services to customers. The buyers in this industry can affect a company greatly due to the sheer volume that they normally buy steel. With relative minimal differentiation in products from one company to another and the availability of imported steel make the U.S. steel industry unattractive from this perspective to someone who may be entering this market.

Bargaining Power of Suppliers- This is considered the market of inputs. Raw materials, services, and components that are needed to run the business are controlled, in part, by the suppliers of the business. The U.S. steel industry has high threat from the bargaining power of suppliers since the amount of raw materials is limited. This makes the U.S. Steel industry less attractive to new entrants into this industry.

Rivalry Among Existing Competitors- The threat of rivalry in the U.S. steel industry is high because it is a mature industry, they produce the same products with little differentiation, and the recent introduction of foreign steel has cause rivals to lower prices and margins in this industry. This makes the U.S. steel industry unattractive to new entrants.                                                                        

2. Why has Nucor performed so well in the past? Explain Nucor’s success in terms of Nucor’s internal firm-specific effects and organization.

                                                   

Nucor is able to perform extraordinary in the past because of a number of factors. Flat hierarchy of Nucor, lower attrition rates, equality, and empowerment of employees play the most important factors of extraordinary performance of Nucor in the past. Moreover, continuous adoption of contemporary technologies also enabled its top management to keep up with the swift changes in their market. However, the most prominent internal factor that enabled Nucor to perform extraordinary in past was its highly trained and commendable workforce who worked enormously to ensure that their organization was working at its maximum capacity.

3. How attractive do the economics of thin-slab casting look? (use the data in Exhibits 12A and 12B). Explain.

Thin-slab casting is extremely attractive when performing a unit-cost comparison between thin-slab minimill production and integrated mill production. This analysis is based on a comparison of both initial construction costs allocated per ton of steel shipped, as well as based on a comparison of hypothetical operating costs.  

Construction Cost: The table below shows the construction costs allocated on a per ton of steel shipped as a unit cost comparison. The cost breakout consolidates the three stages for construction costs (Melting, Casting, and Rolling).  

Construction Cost per Ton Shipped

Thin-Slab Minimill

Modernized Integrated Mill

Thin Slab Cost Savings

Hot-Rolled Sheet

$236

$451

$215

Cold-Rolled Sheet

$450

$675

$225

Because this is a new project that has yet be implemented in other settings, the construction costs were estimated by a consultant. Nucor’s internal team was less confident about the construction costs as they were in regards to the operating costs. Although Nucor’s internal team may be less confident about the construction costs than they are with the operating costs, the difference between predicted costs and actual costs would have to be drastically different in order to change the preference for thin-slab casting. Nucor’s actual construction cost for hot rolled sheets would have to increase by more than 90% of the consultant’s estimate and Nucor’s actual construction cost for cold-rolled sheets would have to increase by 50% to change the preference towards thin-slab minimill construction over a modernized integrated mill.

Operating Cost: The tables below shows the operating costs and revenues for the operation of thin-slab casting compared to integrated mills (Both modernized and unmodernized).

Hot Rolled Sheets

Thin-Slab Minimill

Modernized Integrated Mill

Thin-Slab V. Modernized

Unmodernized Integrated Mill

Thin-Slab V. Unmodernized

Total Costs

$225

$261.50

16.2% More Efficient

$300

33.3% More Efficient

Total Revenue Per Ton

$306.50

$390.50

27.4% Less Efficient

$325

6.0% Less Efficient

Cold Rolled Sheets

Thin-Slab Minimill

Modernized Integrated Mill

Thin-Slab V. Modernized

Unmodernized Integrated Mill

Thin-Slab V. Unmodernized

Total Costs

$283

$349

23.3% More Efficient

$403

42.4% More Efficient

Total Revenue Per Ton

$390.50

$454.50

16.4% Less Efficient

$453

47.8% Less Efficient

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