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Case 1-1 and case 3-2

NUCOR CORPORATION (A & B) As of 1999, Nucor Corporation*had been the most innovative and fastest-growing s teel 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 Consu lting or McKinsey, because unlike professional service firms whose only output i s knowledge, Nucor s end product is steel, a tangible non-differentiable commodity . Yet, as we describe below, for much of the three decades from 1970 onward, Nuc or 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 dema nd, and strained labor relations and has reported one of the poorest profitabili ty and growth records in the American economy. Yet, despite operating in a funda mentally troubled industry, during this time period, Nucor enjoyed an annual com pounded sales growth rate of 17%, all generated organically. Furthermore, the co mpany s 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 exce lling at a single task: creating and mobilizing knowledge in order to become, an d remain, the most efficient steel producer in the world. It did so by developin g and constantly upgrading three competencies that were both strategic and propr ietary: plant construction and start-up know-how, manufacturing process know-how , and ability to adopt breakthrough technologies earlier and more effectively th an competitors. We present below an analysis of why Nucor has been a phenomenal knowledge machin e. This analysis is organized into two parts (i) how Nucor s social ecology enable d it to excel at the task of knowledge accumulation, and (ii) how the company s so cial ecology enabled it to excel at the task of knowledge sharing and mobilizati on

Knowledge Accumulation at Nucor Knowledge creation. Nucor s success at knowledge creation derived from three eleme nts of its social ecology: superior human capital, extremely high powered incent ives; and a very high degree of empowerment, coupled with a high tolerance for f ailure as well as high accountability. At Nucor s accessing superior human capital began with the company s policy of locat ing plants in rural areas, which tended to have an abundance of hard-working mec hanically inclined people. Nucor was a leading employer in these locations and o ffered a top-of-the-line compensation package, enabling it to attract an unusual ly large pool of applicants for every job opening (e.g., 1200 applicants for 8 j ob openings at the Darlington, South Carolina plant). As a consequence, the comp any was able to use stringent selection criteria to hire conscientious, dedicate d, goal-oriented, self-reliant people. Furthermore, Nucor built on the foundatio n 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 a t tasks assigned to them. By itself, however, it does not ensure that people wil l be inclined to keep pushing the boundaries of knowledge rather than merely exe cuting their current routines, albeit flawlessly. Nucor cultivated hunger for ne w knowledge through its extremely high powered incentive system for every employ ee, from the production worker to the corporate CEO (see Box 4 for a synopsis of Nucor s 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 employ ees had averaged 80-150% of base wage, making them the best-paid workers in the steel industry. The extremely high-powered incentives motivated Nucor s employees to push the boun daries of manufacturing process know-how in several ways. First, because incenti ves were a function of production output, employees could earn higher bonuses on ly by discovering or inventing new ways to boost productivity. Second, because t he incentive payouts depended only on output that met quality standards, employe es were motivated to develop process 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, cre ating an effectively functioning social ecology for knowledge creation also requ ires 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 corpora te head office. All other employees worked for and were responsible to one of th e company s 25 business units. The flatness of Nucor s structure implied that the 25 business unit general managers reported directly to corporate headquarters with out 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 m eans we duplicate efforts made in other parts of Nucor. The company might develo p 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 expe rimentation. On the other hand, a company that only has failures will not surviv e. Thus, a knowledge creation ecology requires high tolerance for failure within a context of very high accountability. The following observation by Ken Iverson , Nucor s architect and, until recently, its chairman, illustrates how Nucor culti vated 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 th at 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, he ll 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 o ur employees that it is their responsibility to the company to let the managers

know when they make those 40% decisions that could have been better Every Nucor pl ant 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 s uccess. Knowledge Acquisition. Nucor was consistently been the first-mover in industry in acquiring and adopting and breakthrough technologies. Not t the first American company to adopt the minimill technology, it was irst company in the world to make flat rolled steel in a minimill and ialize thin slab casting. the steel only was i also the f to commerc

Being a first mover in adopting breakthrough process technologies is always risk y, and particularly so in an extremely capital-intensive industry such as steel. Despite these risks, Nucor not only pioneered technology adoption within its in dustry but also succeeded in commercializing these technologies earlier and fast er than competitors. The company s extraordinary success in technology acquisition over three decades can be traced back to various aspects of its abilities, mind set, and behavior. Specifically, Nucor had its operating personnel deeply involv ed in the assessment of emerging technology options, and had a unique and propri etary ability to remove the bugs in absorbing, implementing, and commercializing the acquired technologies. As described earlier, Nucor s social ecology drove every employee to search for be tter and more efficient ways to make steel and steel-related products, so that, relative to other steel companies, Nucor s operating personnel had a deeper master y of this industry s manufacturing processes. Nucor built on this foundation by em ploying a unique approach to technology adoption decisions. Whereas other steel companies sent senior executives and staff engineers to analyze emerging technol ogies being developed by equipment suppliers, Nucor s technology adoption decision s were made by teams composed not only of managers and engineers but also of ope rators. As a result, Nucor s technology assessment teams came to the equipment sup pliers with a significantly deeper knowledge of technology as well as operationa l issues. Further, given an effectively functioning social ecology for knowledge creation, they also had greater confidence in the company s ability to resolve un known bugs that would inevitably appear during the process of implementing and c ommercializing the new technology. In short, when assessing new technology optio ns, Nucor not only understood the associated risks and returns more clearly than other companies, it also had justifiable greater confidence in its ability to r educe the risks and/or increase the returns during the process of technology abs orption. Nucor s ability to excel at knowledge acquisition is illustrated well by the compa ny s lead in the adoption of thin-slab casting technology. Until the mid-1980s, mi nimills could not product high-end flat steel products serving the needs of auto motive and appliance customers; the flat steel market was the monopoly of integr ated 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 Crawfordsvill e plant, Nucor gambled on the thin-slab casting technology developed by SMS Schl oemann-Siemag, a German company which had demonstrated this technology in a smal l pilot plant but had not yet proven it commercially. According to our interview s with an SMS executive, technical staff from over 100 steel companies had visit ed SMS to explore the technology. Yet, in a seemingly bet-the-company move, it w as Nucor that first adopted the thin-slab casting technology. Nucor s investment i n the Crawfordsville plant almost equalled stockholders equity for that year and represented approximately five times the company s net earnings. Despite some init

ial hiccups, Nucor succeeded and, by 1997, had built two more minimills using th e thin-slab casting process. Despite the fact that Nucor obtained this technolog y from SMS by signing a non-exclusive contract with an additional technology flo w-back clause, the first plant built by a competitor using this technology appea red in 1995, fully eight years after Nucor s 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 p eople possessing such knowledge. Nucor orchestrated an ecology to protect itself against such loss of knowledge by successfully implementing a policy of no layo ffs 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 busines s downturns. Unlike other companies, when recession hits, Nucor reduced the work -week rather than the work-force. Given the company s rural locations and its role as the leading employer in these locations, employees regarded a reduced work-w eek and the correspondingly lower wages as a relatively attractive option. Notwithstanding the no layoffs policy, reductions in work-week did cause a reduc tion in wages and could potentially have weakened the fabric of loyalty and comm itment between the employees and the company. To counter this threat, Nucor s work -week reductions were always accompanies by a Share the Pain program. Under this p rogram, any reduction in a worker s compensation due to work-week reduction was ac companied by a disproportionately greater reduction in managers compensation and an even greater cut in the CEO s pay (by as much as 70%). In this way, Nucor s resp onse to recessions ended up strengthening the mutual sense of trust and respect within the company. It further cemented this loyalty and commitment through poli cies 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 enj oyed the lowest turnover rate of any company in its industry. Moreover, Nucor s very low personnel turnover provided additional benefits in its efforts towards knowledge accumulation. First, the layoffs policy motivated empl oyees to pursue process improvements vigorously without the fear of eliminating one s own or a colleague s job. Second, the prospect of a long-term relationship bet ween the employee and the company strengthened mutual incentives to invest in th e building of human and organizational capital. Knowledge Sharing at Nucor Knowledge identification. As described earlier, in every company, different unit s typically have different levels and areas of competence. Given this disparity across units, a company s success in creating value through knowledge sharing depe nds first on its ability to identify best practices. Nucor was fervently systema tic in measuring the performance of every work group, every department, and ever y plant, and in making these performance data visible inside the company. With t his routinized measurement and distribution of performance data, the units thems elves, as well as corporate headquarters, could uncover the myriad opportunities to share best practices. Creating willingness to share knowledge. Nucor s social ecology was fashioned to encourage eagerness on the part of every work unit proactively share best practi

ces with each other. The genesis of this ecology lay in Nucor s reliance on groupbased incentives at every level in the organization: from shop-floor workers to plant general managers. More concretely, the bonus of shop-floor workers depende d 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 sta ge of production. Similarly, within every plant, department managers earned an a nnual incentive bonus on the basis of the performance of the entire plant, rathe r 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 i ndividual plants. These group-based incentives, in the context of their large ma gnitude, implied that any individual s (or unit s) 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 motiv ation to share one s own best practices with peer units in order boost the perform ance of the entire bonus group. Constructing effective and efficient transmission channels. As discussed earlie r, a company s knowledge base encompasses a wide spectrum of different types of kn owledge, from highly structured, codified, and thus mobile forms of knowledge (e .g., monthly financial data) at one end, too highly unstructured, tacit, embedde d forms of knowledge (e.g., plant start-up know-how) at the other. Generally, in formation technology is a highly effective and efficient mechanism for the trans fer of codified knowledge, and Nucor, like many organizations, exploited the pow er of information technology. Unlike many organizations, however, Nucor also exc elled at the sharing on nonrountine and unstructured forms of knowledge a key dr iver for building and leveraging core competencies. The ability to transfer thes e forms of knowledge requires much richer transmission channels (e.g., face-to-f ace communication and transfer of people). We describe below, in some detail, Nu cor s approach to constructing these knowledge transmission channels within each p lant as well as across plants. Intra-Plant Knowledge Transfers. Nucor s goal within each plant was to build a soc ial community that promoted mutual trust and open communication, where each pers on knew everyone else personally and had ample opportunity to interact with each other. Achieving this goal began with the company s 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 famili arity. To minimize the debilitating effects of hierarchy on open communication, Nucor was fervent about establishing an egalitarian and open culture. The corpor ate head office was located in an unassuming office building across from a shopp ing mall. Senior executives did not enjoy traditional prerequisites such as comp any cars, corporate jets, executive dining rooms, or executive parking places. A ll 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 alphabet ically on the front cover. Nucor s emphasis on egalitarianism combined with reduct ion of work-week rather than the work-force during recessions and the share the p ain program reinforced the high degree of trust and mutual respect within this so cial community. In another gesture of community-building, each plant general manager routinely h eld annual dinner meetings for groups of 25 to 100 at a time so that every emplo yee 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 busines s-related and not be aimed at specific individuals. Management guaranteed that i t would carefully consider and respond to every criticism and suggestion.

Inter-Plant Knowledge Transfers. Here too, Nucor made use of a multiplicity of t ransmission channels. First, detailed performance data on each mill were regular ly 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 No vember) to review each facility s performance and to develop formal plans for the transfer of best practices. Third, not only plant general managers but superviso rs and machine operators as well periodically visited each other s mills. These vi sits 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 diff iculties inherent in the transfer of complex know-how, Nucor engaged in the sele ctive assignment of people from one plant to another, detailing them on the basis of their expertise. In addition to sharing best practices across existing plants, Nucor strove to be systematic in recycling its process innovations from existing plans to new plan t start-ups. The company s 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 r esponsible for designing and managing the construction of new build or rebuild p rojects. 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. Nucor s unique approach to building or rebuilding mills yielded a handful of benef its. First, the existing process knowledge was recycled into new plant design an d construction. Second, the construction workers knew that they were building th e plant for themselves and had a natural incentive to build it well. Third, know ledge of the underlying process technology embedded in the plant design was carr ied 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 pl ant start-up know-how. Creating willingness to receive knowledge. Earlier, we discussed how the not inve nted here syndrome and the reluctance to acknowledge the superiority of others of ten inhibit units from seeking or welcoming knowledge from peer units. Nucor s soc ial ecology countered such tendencies in two ways. One, both the high magnitude and the steepness of the incentives signaled strongly to people that relying sol ely on one s own efforts at knowledge creation (and, thus, slower competence devel opment) was likely be very costly in terms of foregone compensation. Two, by mak ing every unit s performance highly visible to others in the company, Nucor made t he workplace somewhat of a fishbowl. Strong performers were showcased while weak performers were exposed and were likely to feel the intense heat of peer pressu re. At the end of 1986, Nucor is an U. S. company with $750 million in sales that fo cuses on making and fabricating steel products. Nucor has grown very rapidly and profitably despite its focus on a stagnant, capital-intensive sector with by fa r the lowest average profitability of any within U. S. manufacturing. F. Kenneth Iverson, Nucor s CEO for more than two decades, must now decide whether the compa ny should, at considerable cost and risk to itself, pioneer the commercializatio n 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 integrate d steelmakers.

Case Objectives Nucor is meant to be an overview case and is therefore optimally positioned towa rd 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. 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) an d country levels. 2. The links between competitive strategy and internal organization. The N ucor case contains extensive information about the company s organizational polici es that can be related to its low-cost strategy, spanning the traditional distin ction between strategy formulation and implementation. 3. Comprehensive and analysis of major commitment. The information in the case sorts positioning, sustainability, and flexibility analyses of Nucor s decisi on about a new process technology that places it at a potential crossroads. 4. 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, Nucor s CEO, Ive rson, emphasizes that top managers must integrate case-specific analysis with ju dgments based on experience in making such decisions. Questions 1. Why has Nucor performed so well in the past? Is Nucor s industry the answer? Is it Nucor s strategic group (minimills)? Is it Nucor s home-base (United States)? Is it Nucor s choice of a low-cost strategic? What are the most unusual attributes of Nucor s 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 Nucor s competitive advantage? Pedagogy 1. Nucor s Superior Performance A. Nonexplanations I introduce the Nucor case by emphasizing its stellar stock price performance (E xhibit B). I then lead the discussants relatively quickly through several nonexp What is the logic of Nucor s financial policies? Why haven t Nucor s Organizational arrangements been more widely imitated?

lanations of Nucor s superior performance. The average profitability of the U. S. steel industry has been poor, and while minimills have managed to outperform int egrated steelmakers by a significant margin, that still leaves most of Nucor s sup erior performance unexplained (Exhibit 7). It may also be worth pointing out that in terms of Porter s [1990] prominent frame work for analyzing home-base effects, the United States appears to have been a b ad, rather than merely mediocre, base for internationally competitive steelmaker s: conservative buyers resisted the introduction of new process technologies, l arge, sluggish incumbents focused on propping up prices, rapacious suppliers of labor expropriated most of the proceeds from capital investment, domestic suppli ers of steelmaking equipment withered away and trade restrictions didn t help. By implication, country-level effects do not explain aspects of Nucor s success such as its ranking as the second most productive steelmaker in the work (p.9 of the case.

B. Nucor s Internal Organization By a process of elimination (explanations in terms of market power are also impl ausible in light of Nucor s limited market share), Nucor s superior performance must be explained in terms of firm-specific efficiency effects. Discussants often co uch such explanations in terms of Nucor s superior strategy implementation, as opp osed to its formulation of a superior strategy. It is important to get them to r ealize 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 som e structure on what might otherwise end up simply being a long list of Nucor s org anizational policies with no implication more specific than the advice to get ev erything 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 re sources, human and physical capital, that appear to have been the most crucial t o Nucor s success. The ways in which Nucor coordinates across its plants can be bu ndled into the first category and its financial policies and governance structur e into the second one. Arrows between the two categories can be used to highligh t people-plant complementarities and arrows can be drawn between each of them an d Nucor s low-cost strategy. There is, in addition scope for an interesting discus sion of why Nucor s apparently superior organizational policies haven t been more wi dely imitated. In this teaching note, I treat Nucor s organizational policies relatively briefly. My 1993 paper, which was cited above as a teaching aid, provides much more deta il. Exhibit C is a schematic that can be used to summarize (most of) the class d iscussion. People Nucor s low cost strategy and the high utilization levels that it implied enabled human resource management policies that yielded (additional) operating efficienc ies.

Production incentives: Production workers accounted for most of Nucor s employees and most of its compensation costs. The high-powered, explicit, output-based lin ear compensation formula applied to them is a staple of macroeconomic models of principal-agent problems. This formula appears to have tied into Nucor s choice of a low-cost strategy as well: Nucor would probably have been less successful wit h quantitative incentives if it had been following a differentiated strategy ins tead since quality tends to be harder to meter than quantity. (Nucor s most progres sive minimill competitor, Chaparral, paid its workers straight salaries instead o f offering them production incentives for precisely this reason.) Low costs also implied high capacity utilization, narrowing the scope for divergence between w orker interest in output-maximization and managerial interest in profit-maximiza tion. To enhance the effectiveness of its production incentive plan, Nucor offer ed its workers some insurance against macroeconomic downturns by shrinking bonus targets in proportion to the number of days a plant was deliberately idled by m anagement. It relied, in addition, on self-selection by exceptionally able, moti vated production workers and on peer pressure, which was fueled by group-level i ncentives. Other incentives: Exhibit 8 indicates and salary data confirm that incentive int ensities were significantly lower for salaried workers and department heads than production workers, but significantly higher for officers (corporate managers a nd plant general managers). Limited incentive-intensity for department heads, an d, especially, salaried employees such as accountants and secretaries, can be ra tionalized in terms of their limited impact on performance. The high incentive-i ntensity for top managers can be rationalized on the opposite grounds. Top manag ers did not, however, appear to be looting the corporate coffers. CEO compensati on, for instance, appears to have averaged a smaller multiple of worker compensa tion 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 vol atility. In addition, the fact that these incentives tied individual compensatio n to performance at some higher level of aggregation encouraged lateral communic ation, particularly across plants. Even though plant managers were compensated o n the basis of corporate performance, they were held accountable for achieving a 25% pretax return on ass ets at their respective plants. Participatory management:The efficacy of the sorts of monetary incentives descri bed above appears to depend on employee participation in decision making. Nucor s top managers promoted such participation by flattening the company s hierarchy, de centralizing 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 layo ffs), and cultivating a reputation for considering employees as well as sharehold ers interests in the formulation of company policies. Nucor s competitive advantage and the rapid expansion that is permitted played a key role as well: it encoura ged suggestions in win-win terms. In competitively disadvantaged, shrinking firm s such as the integrated steelmakers, in contrast, the substitution of capital f or 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 tru e, to a lesser extent of minimills that had constrained their own growth by rest ricting their geographic or product scope. Coordination: Nucor coordinated across its multiple sites in ways that facilitat

ed information transfer across plants. Plant managers were compensated on the ba sis of corporate ROE rather than absolute or relative plant ROA and were kept po sted, by the corporate office, on each other s financial and operating performance . In addition, the corporate office regularly arranged formal interplant meeting s and encouraged informal communication among them as well. It probably also int ervened 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 wit h 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 pla ced its trust in incentives and norms. Plants Nucor s low costs and the rapid expansion that they permitted also, led in conjunc tion with appropriate capital resource management policies, to investment effici encies. Financing/Goverance: Nucor restricted its debt to less than 30% of its total fin ancial capital and had a policy of not issuing additional equity shares to the p ublic, indicating a preference for financing most investment out of retained ear nings. Nucor s low level of debt afforded it flexibility in exploiting investment opportunities, particularly lumpy ones involving entire plants, that turned up a s a result of its competitive advantage. It probably wouldn t even have been in a position to consider pioneering thin-slab casting if it had been as leveraged as most of its rivals. Nucor s competitive advantage expanded its internal supply of funds as well as increasing effective demand for them. Financial self-sufficien cy also helped buffer Nucor s managers from capital suppliers in a way that promot ed participatory management (another complementarity between capital and human r esource management). Fears of managerial opportunism on the part of shareholders appear to have been restrained by the reputation Nucor s top managers had cultiva ted for doing well by them.

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 n ew plants had to achieve a 25% return on assets within five years of start-up. T his focused ex ante investment analysis on the same measure that was used ex pos t to audit operating performance (another complementarity between capital and hu man resources). Nucor s ability to devise an effective principle of this sort appe ars to have been related to the characteristics of steelmaking (tangible, relati vely measurable capital resources and continuous technical progress) and its str ategy (which had been stable and which involved continuously building or rebuild ing plants, as discussed below). It is useful to point out that the 25% ROA targ et typically implied an investment benefit-to-cost hurdle greater than 1. Nucor s 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 allow ed coherence in site design and prevented the logic of Nucor s human resource mana gement policies from breaking down at older sites because of dated technology. I ts most important effect, however, was to build up Nucor s experience at plant con struction and start-up in a way that was evident in a number of the company s inve stment implementation policies: it designed its plants as they were being build, speeding up construction; it had learnt to configure them in ways that anticipa

ted expansion and to minimize supplier holdup by locating them in rural areas wh ere 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 proj ects instead of relying, more expensively, on a turnkey contractor. Each constru ction project was managed by a tiger team of engineers experienced at plant constr uction and start-up, a scarce resource that accounted for Nucor s policy of effect ively setting its investment benefit-to-cost hurdle higher than 1. Many of the c onstruction workers that they supervised were retained as the production workfor ce for new plants (yet another complementarity between capital and human resourc e management). These policies helped reduce operating as well as investment cost s in obvious ways. Lack of Imitation Explanations of why the sources of Nucor s competitive advantage weren t 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. T he 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 i s a very plausible explanation of the sustainability of Nucor s advantage. Nucor c oordinated its plants purchases of scrap through an independent purchasing agent who pooled its demands with its competitors . For technology, it relied on supplie rs 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 inve sting in the United States, particularly auto makers, in recruiting rurally sugg ests that Nucor was in no position to tie up the supply of farm boys (the phrase i s due to Nucor s COO, John Correnti) in a way that would lock out its direct compe titors. The value of spatial preemption was undercut by the low minimal efficien t scales at which minimills operate and their steady expansion at the expense of integrated steelmakers. Organizational factors:Nontradeable factors accumulated internally by Nucor sugg est more plausible explanations of non-imitation. First, Nucor may have seized s uch a lead at accumulating plant construction and start-up experience that imita tion of its investment policies, and their organizational concomitants, may have become unprofitable for its competitors. Second, the sort of reputation that Nu cor s top managers had cultivated since the mid-1960s for not abusing the company s workers or its shareholders takes time to build, delaying imitation and perhaps even tipping the scales against it. Third, the complementarities among Nucor s org anizational arrangements made in inappropriate to imitate them piecemeal, elevat ing the fixed costs and difficulty of imitation.

Competitors precommitments: At least some of Nucor s competitors had precommitted t hemselves in ways that discouraged imitation of Nucor s organizational arrangement s. Thus, Chaparral, Nucor s most capable minimill competitor (which is discussed i n the technology and operations management course in Harvard s MBA program), was p recommitted to a differentiation strategy that precluded it from offering produc tion incentives, and to a single site that prevented it from accumulating experi ence at (re)building and starting up entire sites. Integrated steelmakers were e

ven 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 Nu cor s decision to go ahead, the problems it encountered with its first plant at Cr awfordsville, Indiana that its process capabilities could not prevent but did he lp overcome, and its decision to build a second plant, at Hickman, Arkansas a proc ess 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 th e Pacific Northwest to make, respectively, direct-reduced iron (a substitute for scrap input) and flat-rolled sheet. The site in Trinidad would take advantage o f cheap natural gas, labor and Brazilian iron ore and the flat-rolled mill in th e Pacific Northwest of the captive demand of the local partner, another minimill s Oregon Steel, for flat-rolled sheet. The move into the Pacific Northwest, while critical to Nucor s continued growth, p oses two locational problems. The first is that it will have to compete there wi th low-cost Asian imports as well as some relatively efficient U. S. suppliers o f flat-rolled sheet. Second, scrap inputs are not available in the Pacific North west in quite the same quality and quantity as in the regions in which Nucor s fir st two flat-rolled plants are located. Success in West Coast markets therefore d epends, to an important extend, on the success of the venture for making directl y-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 bef ore. Its first stage is projected, in early 1993, to cost $60 million and to hav e 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 r edoubled it works well an interesting example of the use of modularity to create f lexibility value. If the Trinidad plant doesn t work well, limits to the supply of scrap may place a brake on minimill growth in general and Nucor s 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 market s assessment of these developments has, as of this writing been q uite favorable: adjusted for splits, Nucor s stock price surges from $15 at the en d 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 segment s but have yet to do so. The reasons individual minimill competitors haven t yet i mitated Nucor s moves reflect, to varying degrees, capital constraints, lower oper ating efficiency, lack of experience constructing and starting up greenfield sit es, 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 descri bed in the case (and teaching note) on USX that ideally follows this one.