Nucor Revolutionizes the Steel Industry
Nucor Steel disrupted and overhauled the steel industry with innovative technology, forever changing how steel is manufactured around the world. In doing so, it built a culture that proved the potential of well-executed pay-for-performance systems.
Nucor Evolves Into the Steel Industry Leader
On the heels of bankruptcy in the 1960s, Nucor Corporation divested itself of many of its businesses and shifted its focus to its profitable steel joist business. In 1968, recently appointed CEO Ken Iverson made a radical decision to invest in radical steel-making technology from Europe called the electric arc furnace (EAF). Traditional steelmaking had relied upon the Bessemer process in which iron ore reacted with oxygen from atmospheric air – a time consuming process that was costly to start up or shut down. In contrast, the EAF melts recycled scrap metal using massive quantities of direct and alternating current electricity passed through huge graphite electrodes. At the time, electricity was relatively cheap and scrap metal was a fraction of the cost of iron ore as a raw material.
Around this innovative technological advantage, Iverson developed a business model of saturating the market with low-cost steel and undercut their competition. Competitors like U.S. Steel scoffed at the idea of this young, up-start company being able to produce meaningful quantities of steel with a relatively unproven, radical technology. Yet by the 1980s, Nucor had proven itself domestically as the lowest-cost producer of steel through the EAF process. With steel being a commodity used in other heavy industries, price primarily motivated customers rather than customer service, high product quality, or glossy advertising. Many of Nucor’s senior managers can recall being in a price war with traditional competitors who would lower their price by $1-$2 per ton, only to be undercut by Nucor by $10-$15 per ton while still maintaining a larger gross margins than their competitors. Doing this allowed Nucor to steal market share, build brand recognition, and become the dominant player domestically. Today, Nucor is a Fortune 150 Company, the largest producer of steel products in the United States, and has a market capitalization of $13.3 billion.
Nucor’s Pay-for-Performance, Team-based Culture
Iverson recognized that Nucor possessed a superior technology which enabled them to produce far larger quantities of lower-cost steel than their competitors. Around this principal,he built a culture of teamwork within a dangerous, dirty, and physically demanding industry. Nearly all of Nucor’s steel mills are located in the rural Deep South and Midwest – areas known for historically agricultural populations with lower income and less education. Yet workers have the opportunity to make huge salaries through the pay-for-performance system. They earn a lower base wage than in a traditional, union steel mill, but are also paid a production bonus weekly for the number of steel tons they produce according to customer specifications. In practice, this means that an employee making $20/hour will actually make $40-60/hour depending on the production bonus; a typical production bonus is 150-200% on top of the base wage, with employees also being paid 1.5x for every hour over 40. Entry-level employees with only a high-school education in rural areas can easily earn $80-90k per year, while production supervisors can make in excess of $150k – well above their industry peers. In addition, all employees are awarded profit-sharing bonuses and historically Nucor’s executive management is some of the least compensated relative to the market capitalization of the company.
The pay-for-performance system has incredible implications on team dynamics within production crews. At all times, employees are cognizant of the ticker calculating their production bonus for that shift. When the process is shut down for a mechanical or electrical failure, workers rush to help in order to get the process running again, as all of their collective bonuses are linked to the tons produced. Employees, called “teammates”, share knowledge and best practices and are quick to hold each other accountable, knowing that the collective performance of the team determines their shared outcome. Additionally, teammates are constantly watching out for each others’ safety and “treat each other like family” in accordance with Iverson’s vision. All of this allows for a lean management structure and flat hierarchy, enabling operational decisions to be made at the lowest level possible.
Nucor’s evolution has included many acquisitions, expansion, and vertical integration of raw material sourcing and downstream processing. Nucor continues to invest in new technologies, but has had questionable results such as with their $750mm direct-reduced iron facility in Louisiana. Although the company remains committed to its vision, it remains to be seen whether they can maintain their competitive edge in the face of adoption of their best practices by competitors and a surge in international imports of steel from China.
Note: the author of this post is a former Nucor employee and drew extensively on personal experience in addition to the sources below.
Sources:
AIST SteelWorks’ Basic Oxygen Steelmaking Process
I am surprised that the EAF technology provided a defensible point of differentiation for Nucor compared to other domestic steel manufacturers. Perhaps incumbent players in the market were unable to stomach the investment in new capital equipment or the process itself required a different work flow configuration? Or perhaps they able to secure an exclusive license to the technology? Either way, it is fascinating that they were able to successfully mount a race for the bottom business strategy that still allowed them to maintain high gross margins. I liked the way that Iverson used his gross margin advantage to offer large production volume incentives to his employees that supported his business strategy of saturating the market with low cost steel.
I also get the impression from the video that Iverson is using his compensation and organization strategies to ward off unionization of his labor. As long as he can keep his employees employees well compensated and provide them with the sense that their concerns can be easily voiced to top management then there is little incentive to unionize. Given that these jobs seem relatively dangerous it seems like this is a good place for machines to take over many manual tasks. I wonder what the fate of manual labor is for this industry. It seems like they will need to pursue increasing levels of mechanization and process control to achieve their low cost production strategy.
I remember reading about Nucor in “Innovator’s Solution.” I’m curious if you think he captured what happened accurately. Did you get the sense Nucor was targeting a market the incumbents didn’t feel like defending or did they simply just flat out out-compete their peers?
Gavin,
Great observation/connection. I wasn’t able to explain this (or many other things) given the limited word count. Essentially, Nucor was paying steel companies (e.g. US Steel) to supply their steel joist business, called Vulcraft. Producing steel internally was initially a vertical integration move to supply their Vulcraft business. In using the EAF technology, Iverson and Nucor recognized that they could produce steel at a much lower cost than traditional steel producers and began selling their excess supply (in contrast to trying to serve an under-served market). From there they grew into out-competing their peers as they expanded rapidly in their highly profitable steel production business.
In a previous job, I had the opportunity to work with Nucor’s management team on an M&A deal and was really impressed with their understanding of the market and their investment discipline. I am a big fan of this business, and I think the way Nucor has maneuvered the current steel cycle is a testament to the power and flexibility of the low-cost operating model that you explained very well. What is also really amazing is the way they are taking the EAF process, which has historically been associated with lower-quality “construction” steel, and have used a series of operational improvements to begin producing high-end automotive steel. Also worth reading (if you haven’t already) is the chapter about Nucor in Jim Collins’ “Good to Great,” which hits on a lot of the themes you have talked about and how they stand in stark contrast to the approach taken by its competitors.
Hey, thank you for your comment – those are great observations. I actually was the process engineer for our EAF at Nucor Steel Memphis, which is where Nucor is specifically attempting to high-end “engineered” steel products for automotive applications. I saw many distinct differences between our operational processes at the EAF versus other Nucor steel mills, where the focus might only be on overall performance, cost savings, efficiency, etc. rather than quality starting at the EAF.
Good to Great is definitely a worthwhile read. Having worked at Nucor and seeing the “man behind the curtain” so to speak, I can’t help but to wonder if Nucor will not become an example of one of the giants that is actually surpassed in the next few decades in the same way they did to US Steel. Although they make significant capital investments on innovative technology, it is often done in a haphazard manner without thorough financial analysis and lacking in adequate engineering due diligence.