Question

Please help with Case study 16 question, in Crafting & Executing Strategy The Quest for Competitive Advantage page (C-197-223) on Telsa Motors in 2016: Will it Strategy Be Defeated by Low Gasoline Prices and Mounting Competition?

How attractive are the prospects for future profitability of U.S. steelmakers? Should Nucor consider expanding in this type of industry environment? Why or why not?

Answer 1

Ans: The point of this line of questioning is to get students to recognize that all U.S. steelmakers are not necessarily in the same boat. High-cost steelmakers are in a precarious position, earning profits in 2005-2006 because of short supplies and historically high market prices, but facing a dimmer future when demand weakens and the market prices for steel products slip. A low-cost producer like Nucor is poised to succeed—gain sales and market share—at the expense of high-cost producers, although it must certainly fight off low-cost foreign suppliers opting to sell in the U.S. to achieve this result. Hence, we think Nucor should certainly consider expanding its capacity via both additional acquisitions and the construction of new plant capacity. And Nucor should probably be somewhat aggressive in doing so since it has proven expertise in operating plants efficiently and profitably. But we suspect that many domestic steel producers will be cautious about expanding in the present environment—unless they have the skills and expertise to be a low-cost operator of any new facilities that are constructed. There may be some tendency for domestic steel producers desirous of expanding to acquire existing steel mills rather than to construct new ones, so as to avoid overcapacity and the price-cutting that occurs in times of excess supply.