Case 1-1 and case 3-2

NUCOR CORPORATION (A & B)

As of 1999, Nucor Corporation had been the most innovative and fastest-growing steel company of the last three decades. As an example of how a knowledge machine works, we see Nucor as a far more interesting company than, say, Andersen Consulting or McKinsey, because unlike professional service firms whose only output is knowledge, Nucors end product is steel, a tangible non-differentiable commodity. Yet, as we describe below, for much of the three decades from 1970 onward, Nucor had been a knowledge machine par excellence. Since the late 1960s the U. S. steel industry has faced numerous problems, such as substitution from other materials, foreign competition, slowing of steel demand, and strained labor relations and has reported one of the poorest profitability and growth records in the American economy. Yet, despite operating in a fundamentally troubled industry, during this time period, Nucor enjoyed an annual compounded sales growth rate of 17%, all generated organically. Furthermore, the companys profit margins were consistently well above industry medians, and average annual return to shareholders exceeded 20% (see Box 1 for a business profile of Nucor Corporation). Nucor achieved this phenomenal and sustained success by excelling at a single task: creating and mobilizing knowledge in order to become, and remain, the most efficient steel producer in the world. It did so by developing and constantly upgrading three competencies that were both strategic and proprietary: plant construction and start-up know-how, manufacturing process know-how, and ability to adopt breakthrough technologies earlier and more effectively than competitors. We present below an analysis of why Nucor has been a phenomenal knowledge machine. This analysis is organized into two parts (i) how Nucors social ecology enabled it to excel at the task of knowledge accumulation, and (ii) how the companys social ecology enabled it to excel at the task of knowledge sharing and mobilization
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Knowledge Accumulation at Nucor

Knowledge creation. Nucors success at knowledge creation derived from three elements of its social ecology: superior human capital, extremely high powered incentives; and a very high degree of empowerment, coupled with a high tolerance for failure as well as high accountability. At Nucors accessing superior human capital began with the companys policy of locating plants in rural areas, which tended to have an abundance of hard-working mechanically inclined people. Nucor was a leading employer in these locations and offered a top-of-the-line compensation package, enabling it to attract an unusually large pool of applicants for every job opening (e.g., 1200 applicants for 8 job openings at the Darlington, South Carolina plant). As a consequence, the company was able to use stringent selection criteria to hire conscientious, dedicated, goaloriented, self-reliant people. Furthermore, Nucor built on the foundation of superior human capital by investing in continuous on-the-job multifunction training. Superior human capital ensures that people have the intrinsic ability to excel at tasks assigned to them. By itself, however, it does not ensure that people will be inclined to keep pushing the boundaries of knowledge rather than merely executing their current routines, albeit flawlessly. Nucor cultivated hunger for new knowledge through its extremely high powered incentive system for every employee, from the production worker to the corporate CEO (see Box 4 for a synopsis of Nucors incentive systems). As summarized in Box 4, there was no upper cap on the magnitude of the incentive payouts. In the 1990s, payouts for production employees had averaged 80-150% of base wage, making them the best-paid workers in the steel industry. The extremely high-powered incentives motivated Nucors employees to push the boundaries of manufacturing process know-how in several ways. First, because incentives were a function of production output, employees could earn higher bonuses only by discovering or inventing new ways to boost productivity. Second, because the incentive payouts depended only on output that met quality standards, employees were motivated to develop process
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Taken from: The Quest for Global Dominance by Vijay Govindarajan and April K. Gupta, 2000.

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innovations which would help them do things right the first time. Finally, because the magnitude of the bonus payouts was not limited and employees discovery of new process innovations had no adverse impact on resetting the standards, people were stretched to keep pushing the frontiers of manufacturing process know-how. Attracting and recruiting superior human capital and offering them high-powered incentives helps ensure that people are able and eager to innovate. However, creating an effectively functioning social ecology for knowledge creation also requires that they have the necessary freedom to experiment- and even fail- with new ideas. Nucor created such freedom by regularly pushing the limits to which its organizational structure could be made and kept flat. Its organization consisted of only four management layers, which, for a company with $4.1 billion in sales and 6800 employees, was radically flat. In addition, Nucor had only 22 people, including executives as well as clerical and other staff, located at the corporate head office. All other employees worked for and were responsible to one of the companys 25 business units. The flatness of Nucors structure implied that the 25 business unit general managers reported directly to corporate headquarters without any intervening layer such as group vice-presidents. Similarly, the typical production supervisor was responsible for a production team of 25 to 40 people. The following observation by a division general manager vividly illustrates the ideology behind this pursuit of flatness: We are honest-to-God autonomous. That means we duplicate efforts made in other parts of Nucor. The company might develop the same computer program six times. But, the advantages of local autonomy are so great, we think it is worth it. Whenever employees are encouraged to experiment, there is always the possibility of failure. A company that does not tolerate failure will severely inhibit experimentation. On the other hand, a company that only has failures will not survive. Thus, a knowledge creation ecology requires high tolerance for failure within a context of very high accountability. The following observation by Ken Iverson, Nucors architect and, until recently, its chairman, illustrates how Nucor cultivated a culture of experimentation within a context of accountability: We try to impress upon our employees that we are not King Solomon. We use an expression that I really like, and that is good managers make bad decisions. We believe that if you take an average person and put him in a management position, hell make 50% good decisions and 50% bad decisions. A good manager makes 60% good decisions. That means 40% of those decisions could have been better. We continually tell our employees that it is their responsibility to the company to let the managers know when they make those 40% decisions that could have been betterEvery Nucor plant has its little storehouse of equipment that was bought, tried, and discarded. The knowledge we gather from our so-called failures may lead us to spectacular success. Knowledge Acquisition. Nucor was consistently been the first-mover in the steel industry in acquiring and adopting and breakthrough technologies. Not only was it the first American company to adopt the minimill technology, it was also the first company in the world to make flat rolled steel in a minimill and to commercialize thin slab casting. Being a first mover in adopting breakthrough process technologies is always risky, and particularly so in an extremely capital-intensive industry such as steel. Despite these risks, Nucor not only pioneered technology adoption within its industry but also succeeded in commercializing these technologies earlier and faster than competitors. The companys extraordinary success in technology acquisition over three decades can be traced back to various aspects of its abilities, mindset, and behavior. Specifically, Nucor had its operating personnel deeply involved in the assessment of emerging technology options, and had a unique and proprietary ability to remove the bugs in absorbing, implementing, and commercializing the acquired technologies. As described earlier, Nucors social ecology drove every employee to search for better and more efficient ways to make steel and steel-related products, so that, relative to other steel companies, Nucors operating personnel had a deeper mastery of this industrys manufacturing processes. Nucor built on this foundation by employing a unique approach to technology adoption decisions. Whereas other steel companies sent senior executives and staff engineers to analyze emerging technologies being developed by equipment suppliers, Nucors technology adoption decisions were made by teams composed not only of managers and engineers but also of operators. As a result, Nucors technology assessment teams came to the equipment suppliers with a significantly deeper knowledge of technology as well as operational issues. Further, given an effectively functioning social ecology for knowledge creation, they also had greater confidence in the companys ability to resolve unknown bugs that would inevitably appear during the process of implementing and commercializing the new technology. In short, when assessing new technology options, Nucor not only understood the associated risks and returns more clearly than other companies, it

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also had justifiable greater confidence in its ability to reduce the risks and/or increase the returns during the process of technology absorption. Nucors ability to excel at knowledge acquisition is illustrated well by the companys lead in the adoption of thinslab casting technology. Until the mid-1980s, minimills could not product high-end flat steel products serving the needs of automotive and appliance customers; the flat steel market was the monopoly of integrated steel producers. Nucor made history in 1987 by building the first minimill in Crawfordsville, Indiana that could make flat steel, an innovation that moved the company into the premium segment of the steel industry. In the Crawfordsville plant, Nucor gambled on the thin-slab casting technology developed by SMS Schloemann-Siemag, a German company which had demonstrated this technology in a small pilot plant but had not yet proven it commercially. According to our interviews with an SMS executive, technical staff from over 100 steel companies had visited SMS to explore the technology. Yet, in a seemingly bet-the-company move, it was Nucor that first adopted the thin-slab casting technology. Nucors investment in the Crawfordsville plant almost equalled stockholders equity for that year and represented approximately five times the companys net earnings. Despite some initial hiccups, Nucor succeeded and, by 1997, had built two more minimills using the thin-slab casting process. Despite the fact that Nucor obtained this technology from SMS by signing a non-exclusive contract with an additional technology flow-back clause, the first plant built by a competitor using this technology appeared in 1995, fully eight years after Nucors pioneering effort. Knowledge retention. Companies often lose sizeable chunks of the knowledge they have created and/or acquired through the voluntary or involuntary departure of people possessing such knowledge. Nucor orchestrated an ecology to protect itself against such loss of knowledge by successfully implementing a policy of no layoffs during recessions and by cultivating very high loyalty and commitment among its personnel thereby reducing voluntary turnover. Nucor maintained a policy of not laying off or furloughing people during business downturns. Unlike other companies, when recession hits, Nucor reduced the work-week rather than the work-force. Given the companys rural locations and its role as the leading employer in these locations, employees regarded a reduced work-week and the correspondingly lower wages as a relatively attractive option. Notwithstanding the no layoffs policy, reductions in work-week did cause a reduction in wages and could potentially have weakened the fabric of loyalty and commitment between the employees and the company. To counter this threat, Nucors work-week reductions were always accompanies by a Share the Pain program. Under this program, any reduction in a workers compensation due to work-week reduction was accompanied by a disproportionately greater reduction in managers compensation and an even greater cut in the CEOs pay (by as much as 70%). In this way, Nucors response to recessions ended up strengthening the mutual sense of trust and respect within the company. It further cemented this loyalty and commitment through policies such as college scholarships for employees children, a profit-sharing plan, and a stock purchase plan. The net result of the high loyalty was that Nucor enjoyed the lowest turnover rate of any company in its industry. Moreover, Nucors very low personnel turnover provided additional benefits in its efforts towards knowledge accumulation. First, the layoffs policy motivated employees to pursue process improvements vigorously without the fear of eliminating ones own or a colleagues job. Second, the prospect of a long-term relationship between the employee and the company strengthened mutual incentives to invest in the building of human and organizational capital.

Knowledge Sharing at Nucor

Knowledge identification. As described earlier, in every company, different units typically have different levels and areas of competence. Given this disparity across units, a companys success in creating value through knowledge sharing depends first on its ability to identify best practices. Nucor was fervently systematic in measuring the performance of every work group, every department, and every plant, and in making these performance data visible inside the company. With this routinized measurement and distribution of performance data, the units themselves, as well as corporate headquarters, could uncover the myriad opportunities to share best practices.

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Creating willingness to share knowledge. Nucors social ecology was fashioned to encourage eagerness on the part of every work unit proactively share best practices with each other. The genesis of this ecology lay in Nucors reliance on group-based incentives at every level in the organization: from shop-floor workers to plant general managers. More concretely, the bonus of shop-floor workers depended not on their own performance but on the performance of the entire 25-40 person workgroup to which they belonged and which was responsible for a particular stage of production. Similarly, within every plant, department managers earned an annual incentive bonus on the basis of the performance of the entire plant, rather than just their own department. For plant general managers as well, incentive bonuses, depended on the performance of the whole company rather than on their individual plants. These group-based incentives, in the context of their large magnitude, implied that any individuals (or units) superior competence would have a minimal impact on his/her bonus amount if the performance of other individuals (or units) in the bonus group remained sub-par. Thus, there existed strong motivation to share ones own best practices with peer units in order boost the performance of the entire bonus group. Constructing effective and efficient transmission channels. As discussed earlier, a companys knowledge base encompasses a wide spectrum of different types of knowledge, from highly structured, codified, and thus mobile forms of knowledge (e.g., monthly financial data) at one end, too highly unstructured, tacit, embedded forms of knowledge (e.g., plant start-up know-how) at the other. Generally, information technology is a highly effective and efficient mechanism for the transfer of codified knowledge, and Nucor, like many organizations, exploited the power of information technology. Unlike many organizations, however, Nucor also excelled at the sharing on nonrountine and unstructured forms of knowledge a key driver for building and leveraging core competencies. The ability to transfer these forms of knowledge requires much richer transmission channels (e.g., face-to-face communication and transfer of people). We describe below, in some detail, Nucors approach to constructing these knowledge transmission channels within each plant as well as across plants. Intra-Plant Knowledge Transfers. Nucors goal within each plant was to build a social community that promoted mutual trust and open communication, where each person knew everyone else personally and had ample opportunity to interact with each other. Achieving this goal began with the companys policy of keeping the number of employees in each plant between 250 and 300. This small number, coupled with employees long tenure, fostered the development of very high interpersonal familiarity. To minimize the debilitating effects of hierarchy on open communication, Nucor was fervent about establishing an egalitarian and open culture. The corporate head office was located in an unassuming office building across from a shopping mall. Senior executives did not enjoy traditional prerequisites such as company cars, corporate jets, executive dining rooms, or executive parking places. All employees used economy class for their air travel and had the same holidays, vacation schedules, and insurance programs. Also, unlike the normal practice in the U. S. steel industry, all employees, including the CEO wore the same color (green) hard hats. Every annual report listed the name of every employee alphabetically on the front cover. Nucors emphasis on egalitarianism combined with reduction of work-week rather than the work-force during recessions and the share the pain program reinforced the high degree of trust and mutual respect within this social community. In another gesture of community-building, each plant general manager routinely held annual dinner meetings for groups of 25 to 100 at a time so that every employee could be invited. Like traditional New England town meetings, the format was free and open, but there were ground rules. All comments were to remain business-related and not be aimed at specific individuals. Management guaranteed that it would carefully consider and respond to every criticism and suggestion. Inter-Plant Knowledge Transfers. Here too, Nucor made use of a multiplicity of transmission channels. First, detailed performance data on each mill were regularly distributed to all plant managers. Second, all plant general managers met as a group with headquarters management three times a year (in February, May and November) to review each facilitys performance and to develop formal plans for the transfer of best practices. Third, not only plant general managers but supervisors and machine operators as well periodically visited each others mills. These visits enabled operations personnel who were the true holders of process knowledge to go beyond performance data and to understand firsthand the factors that make particular practices superior or inferior. Fourth, recognizing the special difficulties inherent in the transfer of complex know-how, Nucor engaged in the selective assignment of people from one plant to another, detailing them on the basis of their expertise.

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In addition to sharing best practices across existing plants, Nucor strove to be systematic in recycling its process innovations from existing plans to new plant start-ups. The companys philosophy was to build or rebuild one or more mills a year. Rather than rely on outside contractors to build mills, Nucor put together a small group of engineers from their existing mills. This internal group was responsible for designing and managing the construction of new build or rebuild projects. To top this off, the actual construction on these projects was done by workers hired from the local area, who were informed that they were likely to be recruited to subsequently operate the mills. Nucors unique approach to building or rebuilding mills yielded a handful of benefits. First, the existing process knowledge was recycled into new plant design and construction. Second, the construction workers knew that they were building the plant for themselves and had a natural incentive to build it well. Third, knowledge of the underlying process technology embedded in the plant design was carried over in the workers minds from the construction phase to the operations phase. Fourth, the company was able to accumulate an additional core competence in plant start-up know-how. Creating willingness to receive knowledge. Earlier, we discussed how the not invented here syndrome and the reluctance to acknowledge the superiority of others often inhibit units from seeking or welcoming knowledge from peer units. Nucors social ecology countered such tendencies in two ways. One, both the high magnitude and the steepness of the incentives signaled strongly to people that relying solely on ones own efforts at knowledge creation (and, thus, slower competence development) was likely be very costly in terms of foregone compensation. Two, by making every units performance highly visible to others in the company, Nucor made the workplace somewhat of a fishbowl. Strong performers were showcased while weak performers were exposed and were likely to feel the intense heat of peer pressure.

At the end of 1986, Nucor is an U. S. company with $750 million in sales that focuses on making and fabricating steel products. Nucor has grown very rapidly and profitably despite its focus on a stagnant, capital-intensive sector with by far the lowest average profitability of any within U. S. manufacturing. F. Kenneth Iverson, Nucors CEO for more than two decades, must now decide whether the company should, at considerable cost and risk to itself, pioneer the commercialization of a new process technology that may allow it to enter the flat-rolled segment, about half the total U. S. market for steel and hitherto preserve of integrated steelmakers. Case Objectives Nucor is meant to be an overview case and is therefore optimally positioned toward the beginning or the end of a course strategy.) I have historically preferred the latter option.) The case facilitates discussion of four important topics: 1. 2. 3. 4. Explanations of above-average performance. The Nucor case hints at the limits of aggregated explanations of above-average performance, and does so in a way that covers aggregation at the industry, intraindustry (strategic group) and country levels. The links between competitive strategy and internal organization. The Nucor case contains extensive information about the companys organizational policies that can be related to its low-cost strategy, spanning the traditional distinction between strategy formulation and implementation. Comprehensive and analysis of major commitment. The information in the case sorts positioning, sustainability, and flexibility analyses of Nucors decision about a new process technology that places it at a potential crossroads. The role of managerial judgment is making major commitments. In a video that is meant to be shown toward the end of the case discussion, Nucors CEO, Iverson, emphasizes that top managers must integrate casespecific analysis with judgments based on experience in making such decisions.

Questions 1. Why has Nucor performed so well in the past? Is Nucors industry the answer?

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 Pedagogy

Is it Nucors strategic group (minimills)? Is it Nucors home-base (United States)? Is it Nucors choice of a low-cost strategic? What are the most unusual attributes of Nucors organization? How are they related to its low cost-strategy? To each other? Would you like to work for Nucor? How does Nucor coordinate across its plants? What role does investment in physical capital play in Nucors competitive advantage? What is the logic of Nucors financial policies? Why havent Nucors Organizational arrangements been more widely imitated?

1. Nucors Superior Performance A. Nonexplanations I introduce the Nucor case by emphasizing its stellar stock price performance (Exhibit B). I then lead the discussants relatively quickly through several nonexplanations of Nucors superior performance. The average profitability of the U. S. steel industry has been poor, and while minimills have managed to outperform integrated steelmakers by a significant margin, that still leaves most of Nucors superior performance unexplained (Exhibit 7). It may also be worth pointing out that in terms of Porters [1990] prominent framework for analyzing home-base effects, the United States appears to have been a bad, rather than merely mediocre, base for internationally competitive steelmakers: conservative buyers resisted the introduction of new process technologies, large, sluggish incumbents focused on propping up prices, rapacious suppliers of labor expropriated most of the proceeds from capital investment, domestic suppliers of steelmaking equipment withered away and trade restrictions didnt help. By implication, country-level effects do not explain aspects of Nucors success such as its ranking as the second most productive steelmaker in the work (p.9 of the case.

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B. Nucors Internal Organization By a process of elimination (explanations in terms of market power are also implausible in light of Nucors limited market share), Nucors superior performance must be explained in terms of firm-specific efficiency effects. Discussants often couch such explanations in terms of Nucors superior strategy implementation, as opposed to its formulation of a superior strategy. It is important to get them to realize that the formulation-implementation dichotomy is not a very fruitful one: that Nucor prospered because of the fit between its organizational arrangements for administering its key resources (implementation) and its low-cost competitive strategy (formulation). Another other major challenge in this segment of the discussion is to impose some structure on what might otherwise end up simply being a long list of Nucors organizational policies with no implication more specific than the advice to get everything right. I have found that it works well, boardwise at least, to organize the discussion in terms of People and Plants since that covers the two types of resources, human and physical capital, that appear to have been the most crucial to Nucors success. The ways in which Nucor coordinates across its plants can be bundled into the first category and its financial policies and governance structure into the second one. Arrows between the two categories can be used to highlight people-plant complementarities and arrows can be drawn between each of them and Nucors low-cost strategy. There is, in addition scope for an interesting discussion of why Nucors apparently superior organizational policies havent been more widely imitated. In this teaching note, I treat Nucors organizational policies relatively briefly. My 1993 paper, which was cited above as a teaching aid, provides much more detail. Exhibit C is a schematic that can be used to summarize (most of) the class discussion. People Nucors low cost strategy and the high utilization levels that it implied enabled human resource management policies that yielded (additional) operating efficiencies. Production incentives: Production workers accounted for most of Nucors employees and most of its compensation costs. The high-powered, explicit, output-based linear compensation formula applied to them is a staple of macroeconomic models of principal-agent problems. This formula appears to have tied into Nucors choice of a lowcost strategy as well: Nucor would probably have been less successful with quantitative incentives if it had been following a differentiated strategy instead since quality tends to be harder to meter than quantity. (Nucors most progressive minimill competitor, Chaparral, paid its workers straight salaries instead of offering them production incentives for precisely this reason.) Low costs also implied high capacity utilization, narrowing the scope for divergence between worker interest in output-maximization and managerial interest in profit-maximization. To enhance the effectiveness of its production incentive plan, Nucor offered its workers some insurance against macroeconomic downturns by shrinking bonus targets in proportion to the number of days a plant was deliberately idled by management. It relied, in addition, on self-selection by exceptionally able, motivated production workers and on peer pressure, which was fueled by group-level incentives. Other incentives: Exhibit 8 indicates and salary data confirm that incentive intensities were significantly lower for salaried workers and department heads than production workers, but significantly higher for officers (corporate managers and plant general managers). Limited incentive-intensity for department heads, and, especially, salaried employees such as accountants and secretaries, can be rationalized in terms of their limited impact on performance. The high incentive-intensity for top managers can be rationalized on the opposite grounds. Top managers did not, however, appear to be looting the corporate coffers. CEO compensation, for instance, appears to have averaged a smaller multiple of worker compensation at Nucor than at integrated steelmakers (and, it turns out, at large U. S. companies in general), and to have been significantly more risky in terms of volatility. In addition, the fact that these incentives tied individual compensation to performance at some higher level of aggregation encouraged lateral communication, particularly across plants. Even though plant managers were compensated on the basis of corporate

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performance, they were held accountable for achieving a 25% pretax return on assets at their respective plants. Participatory management: The efficacy of the sorts of monetary incentives described above appears to depend on employee participation in decision making. Nucors top managers promoted such participation by flattening the companys hierarchy, decentralizing decision making, disclosing information widely, limiting status as well as income-related differentials among employees, guaranteeing worker rights (particularly through policies that guaranteed just-cause dismissal and no layoffs), and cultivating a reputation for considering employees as well as shareholders interests in the formulation of company policies. Nucors competitive advantage and the rapid expansion that is permitted played a key role as well: it encouraged suggestions in win-win terms. In competitively disadvantaged, shrinking firms such as the integrated steelmakers, in contrast, the substitution of capital for labor was more likely to be seen by workers as inimical to their interests (a complementary between human and capital resource management). That was also true, to a lesser extent of minimills that had constrained their own growth by restricting their geographic or product scope. Coordination: Nucor coordinated across its multiple sites in ways that facilitated information transfer across plants. Plant managers were compensated on the basis of corporate ROE rather than absolute or relative plant ROA and were kept posted, by the corporate office, on each others financial and operating performance. In addition, the corporate office regularly arranged formal interplant meetings and encouraged informal communication among them as well. It probably also intervened to make sure that employees with plant construction and start-up skills (a scarce resource for Nucor) were released from old plants to new ones. But with these exceptions, it tried to stay out of the loop in order to avoid becoming, because of its leanness, the bottleneck in information transfer. It instead placed its trust in incentives and norms. Plants Nucors low costs and the rapid expansion that they permitted also, led in conjunction with appropriate capital resource management policies, to investment efficiencies. Financing/Goverance: Nucor restricted its debt to less than 30% of its total financial capital and had a policy of not issuing additional equity shares to the public, indicating a preference for financing most investment out of retained earnings. Nucors low level of debt afforded it flexibility in exploiting investment opportunities, particularly lumpy ones involving entire plants, that turned up as a result of its competitive advantage. It probably wouldnt even have been in a position to consider pioneering thin-slab casting if it had been as leveraged as most of its rivals. Nucors competitive advantage expanded its internal supply of funds as well as increasing effective demand for them. Financial self-sufficiency also helped buffer Nucors managers from capital suppliers in a way that promoted participatory management (another complementarity between capital and human resource management). Fears of managerial opportunism on the part of shareholders appear to have been restrained by the reputation Nucors top managers had cultivated for doing well by them.

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Investment criteria: In deciding whether to invest in a new plant, Nucor did not systematically discount cash flows. It relied, instead, on the principle that new plants had to achieve a 25% return on assets within five years of start-up. This focused ex ante investment analysis on the same measure that was used ex post to audit operating performance (another complementarity between capital and human resources). Nucors ability to devise an effective principle of this sort appears to have been related to the characteristics of steelmaking (tangible, relatively measurable capital resources and continuous technical progress) and its strategy (which had been stable and which involved continuously building or rebuilding plants, as discussed below). It is useful to point out that the 25% ROA target typically implied an investment benefit-to-cost hurdle greater than 1. Nucors competitive advantage made this high hurdle practical; its rationale was related to the way in which Nucor implemented its investments. Investment implementation: Nucor invested more steadily than its competitors and placed more emphasis on building or rebuilding entire sites. This approach allowed coherence in site design and prevented the logic of Nucors human resource management policies from breaking down at older sites because of dated technology. Its most important effect, however, was to build up Nucors experience at plant construction and start-up in a way that was evident in a number of the companys investment implementation policies: it designed its plants as they were being build, speeding up construction; it had learnt to configure them in ways that anticipated expansion and to minimize supplier holdup by locating them in rural areas where it had access to at least two railroads, low electricity rates and plentiful water, and it acted as the general contractor for each of its construction projects instead of relying, more expensively, on a turnkey contractor. Each construction project was managed by a tiger team of engineers experienced at plant construction and start-up, a scarce resource that accounted for Nucors policy of effectively setting its investment benefit-to-cost hurdle higher than 1. Many of the construction workers that they supervised were retained as the production workforce for new plants (yet another complementarity between capital and human resource management). These policies helped reduce operating as well as investment costs in obvious ways. Lack of Imitation Explanations of why the sources of Nucors competitive advantage werent more widely imitated by its competitors can be grouped in terms of three types of factors: input factors that Nucor or its competitors obtained from others, organizational factors that were specific to Nucor, and precommitments by other competitors. The second and third categories turn out to have more explanatory power than the first one. Input factors: Transferable input factors to which Nucor might have tried to tie up superior access include scrap, technology, workers and sites. None of these is a very plausible explanation of the sustainability of Nucors advantage. Nucor coordinated its plants purchases of scrap through an independent purchasing agent who pooled its demands with its competitors. For technology, it relied on suppliers who licensed their equipment and processes nonexclusively and with flow-back clauses (as SMS was insisting in the context of thin-slab casting). While Nucor did seem to attract superior workers, the success of Japanese manufacturers investing in the United States, particularly auto makers, in recruiting rurally suggests that Nucor was in no position to tie up the supply of farm boys (the phrase is due to Nucors COO, John Correnti) in a way that would lock out its direct competitors. The value of spatial preemption was undercut by the low minimal efficient scales at which minimills operate and their steady expansion at the expense of integrated steelmakers. Organizational factors: Nontradeable factors accumulated internally by Nucor suggest more plausible explanations of non-imitation. First, Nucor may have seized such a lead at accumulating plant construction and start-up experience that imitation of its investment policies, and their organizational concomitants, may have become unprofitable for its competitors. Second, the sort of reputation that Nucors top managers had cultivated since the mid-1960s for not abusing the companys workers or its shareholders takes time to build, delaying imitation and perhaps even tipping the scales against it. Third, the complementarities among Nucors organizational arrangements made in inappropriate to imitate them piecemeal, elevating the fixed costs and difficulty of imitation.

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Competitors precommitments: At least some of Nucors competitors had precommitted themselves in ways that discouraged imitation of Nucors organizational arrangements. Thus, Chaparral, Nucors most capable minimill competitor (which is discussed in the technology and operations management course in Harvards MBA program), was precommitted to a differentiation strategy that precluded it from offering production incentives, and to a single site that prevented it from accumulating experience at (re)building and starting up entire sites. Integrated steelmakers were even more precommitted in ways incompatible with imitating Nucor, as the case on USX, which is meant to follow this one, indicates. Update The video of Iverson updates the situation through fall of 1990: it describes Nucors decision to go ahead, the problems it encountered with its first plant at Crawfordsville, Indiana that its process capabilities could not prevent but did help overcome, and its decision to build a second plant, at Hickman, Arkansasa process that has involved significantly lower start-up costs than did the first one. By the end of 1992, Nucor had decided to from joint ventures in Trinidad and the Pacific Northwest to make, respectively, direct-reduced iron (a substitute for scrap input) and flat-rolled sheet. The site in Trinidad would take advantage of cheap natural gas, labor and Brazilian iron ore and the flat-rolled mill in the Pacific Northwest of the captive demand of the local partner, another minimills Oregon Steel, for flat-rolled sheet. The move into the Pacific Northwest, while critical to Nucors continued growth, poses two locational problems. The first is that it will have to compete there with low-cost Asian imports as well as some relatively efficient U. S. suppliers of flat-rolled sheet. Second, scrap inputs are not available in the Pacific Northwest in quite the same quality and quantity as in the regions in which Nucors first two flat-rolled plants are located. Success in West Coast markets therefore depends, to an important extend, on the success of the venture for making directly-reduced iron in Trinidad. The Trinidad plant attempts to take advantage of a relatively cheap, small-scale process for making directly-reduced iron that has never been commercialized before. Its first stage is projected, in early 1993, to cost $60 million and to have the capacity to produce 320,000 tons of iron carbides (a substitute for scrap) per year. The plant is being built so that its capacity can be doubled or eve redoubled it works wellan interesting example of the use of modularity to create flexibility value. If the Trinidad plant doesnt work well, limits to the supply of scrap may place a brake on minimill growth in general and Nucors in particular. If it does work, Nucor may be able to achieve its target of becoming the largest steelmaker in the United States within a decade. The stock markets assessment of these developments has, as of this writing been quite favorable: adjusted for splits, Nucors stock price surges from $15 at the end of 1986 to $70 by the end of 1992. Meanwhile, domestic competitors continue to talk of imitating Nucor by using thin-slab casting to enter new product segments but have yet to do so. The reasons individual minimill competitors havent yet imitated Nucors moves reflect, to varying degrees, capital constraints, lower operating efficiency, lack of experience constructing and starting up greenfield sites, and divergent beliefs about how the U. S. steel industry is likely to evolve. The hesitations of an integrated steelmaker about thin-slab casting are described in the case (and teaching note) on USX that ideally follows this one.

11 Instructors Manual to Accompany Management Control Systems