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Nucor in 20051
Teaching Note Introduction Nucor is a classic case in how a firm can develop sustainable competitive advantages through resources that fit the VRIO criteria. It is worth noting that Nucor has achieved this in an industry that few would describe as attractive. In 2005, Nucor Corporation took first place in the BusinessWeek list of best performers of the S&P 500 companies. The previous three years had been among the worst down cycles in the steel industry’s history. During those years Nucor had acquired failing competitors, increased its steel capacity and achieved a profit in every quarter. However competition was becoming stronger as bankruptcies eliminated excess capacity, global companies were consolidating and suppliers were raising prices on iron ore and scrap that served as critical raw material in the steel making process for Nucor. Buyers were also considering alternatives to steel. Nucor’s new President pondered whether Nucor would be able to take the competition head on and be successful in its quest for excellence in the steel industry. Study Questions 1. What are Nucor’s resources and capabilities? 2. How would you assess Nucor’s resources in terms of heterogeneity and immobility? 3. Using the VRIO model, how would you evaluate Nucor’s resources? 4. What strategic recommendations would you offer to Nucor? Teaching Plan: The Resource-Based View of the Firm We shall use the Resource-Based View of the Firm as a model to understand the performance of Nucor. First we will study and analyze the resources and capabilities that are controlled by Nucor and deliberate on how they provided Nucor with a strategic advantage over time. Then we will assess Nucor’s current strategy to evaluate whether these resources and capabilities will provide Nucor with sustained sources of competitive advantage in the near future. Resources and Capabilities? What are Nucor’s resources and capabilities? Resources can be defined as tangible and intangible assets that are owned by the company. In the case of Nucor, the resources that are controlled by it include financial capital, factories, steel products, manufacturing technology and its human resource. Nucor also has intangible assets like its reputation as an excellent steel producer and the excellent interdepartmental cooperation between its manufacturing, technical and business functions. The new mini-mill technology that Nucor commercialized and pioneered (to a certain extent) and the unique business model that it created around it, was also a critical resource for the
This note was prepared by Shankar Naskar. 1
Copyright ©2010 Pearson Education, Inc. publishing as Prentice Hall
Inc. The company operated in a highly decentralized manner which was unlike the way other integrated steel companies ran their businesses. The company owed much of its success to its benchmark organization style and the empowered division managers. Critical Assumptions of the Resource-Based View How would you assess Nucor’s resources in terms of heterogeneity and immobility? 2 Copyright ©2010 Pearson Education. The high level of cooperation within Nucor and the teamwork and performance culture that is evident in each Nucor plant can be said to be a capability within the company. Organizational resources played a key role in the superior performance of Nucor. Human resources included the capable people who were recruited by the company and the senior management team led by Ken Iverson. Nucor also had a very strong business model – it utilized the innovative mini-mill technology to supply steel to its own joist divisions (reducing costs further) and other outside customers. In 1987 Nucor was the first steel company in the world to begin to build a mini-mill to manufacture steel sheet. The company was also very sophisticated in its purchasing. Physical resources comprise the physical technology of the firm. publishing as Prentice Hall . In the late 60’s for example the company had one of the first computer inventory management systems and design / engineering programs. The staff at each division of the company was also very capable. For Nucor this not only included the company’s plant and equipment but also its advantageous location and its access to raw materials and customers. during his time at the helm. Another example of a capability is the visionary leadership at Nucor that was always quick to sense the evolutionary direction of the steel industry and take competitive stances and decisions based on that understanding.Part II company as it enabled Nucor to gain cost leadership in manufacturing and create growth opportunities for itself in the highly competitive steel industry. The culture at Nucor was personified by its founder and then reinforced by Ken Iverson. The wire rod welding technology that was pioneered at Nucor was a physical resource. In this way. sales and project management functions and Nucor often beat its competition by the speed of its design efforts. the raw material for the auto industry and other major manufacturers. buy up facilities in a downturn and invest in processes to continuously improve steel making technology. From the very beginning Iverson encouraged risk taking and believed in the old saying that “failure to take risks is failure”. This enabled the company to reduce its costs and be one up on its competitors. The company judiciously used its financial resources to expand its capacity. Its performance management system was based on a practical and implementable incentive scheme that was extremely successful. these capabilities are a sub set of a firm’s resources and enable Nucor to take full advantage of its other tangible resources. As the company did not have a single quarter without profit it was financially a strong and viable entity and this enabled it to make investments to improve its competitive position in the industry. This decision by the leadership opened up another 50% of the total steel market for Nucor.
1. practical and fair that it promoted a team environment and friendly competition between the various mini-mills within the group. The Question of Value How valuable are Nucor’s resources? Nucor has been successful in using its resources and capabilities to reduce costs and improve its revenues. Inc. performance orientation. Resource Immobility Resource immobility explains why Nucor was able to attain its leadership position as one of the few consistently profitable steel makers in the US and maintain its lead over its competitors. one of the two fundamental assumptions about the resources and capabilities that firms may control. publishing as Prentice Hall . Let us consider each of these valuable resources and capabilities. These two assumptions of resource heterogeneity and resource immobility explain how Nucor was able to outperform its competitors over a substantial period of time and achieve sustained competitive advantage in the steel industry. This culture of partnership. Nucor was continuously innovating and investing resources in improving its understanding of steel making and it had an entrepreneurial environment that fostered risk taking and creativity – something that the other companies with their hierarchies were not able to do. The organization of the divisions for the purpose of incentive pay and the process of calculating and giving payouts were so transparent. This reflected the resource heterogeneity. competitiveness and accountability was very difficult for other companies to imitate. It was clear that other integrated steel plants and mini-mills were not able to imitate the Nucor Model. It is also clearly seen that Nucor was able to use its resources and capabilities to exploit opportunities and to neutralize threats. Nucor was successful as it was more skilled in manufacturing – making numerous improvements in the melting and casting operations that improved efficiency and reduced cost. rarity.Case 2-2 Resource Heterogeneity While it was true that the mini-mills and the integrated steep producers possessed different bundles of resources and capabilities. innovation. We assess Nucor’s internal strengths and its internal weaknesses using the VRIO Framework. Nucor’s Capabilities in the Joist Division 3 Copyright ©2010 Pearson Education. We ask four questions about the resource or capability to determine its competitive potential – The question of value. The VRIO Framework In this section we analyze the resources and capabilities of Nucor to assess their potential to generate competitive advantage. imitability and organization.
This regularly avoided the reheating of billets and saved the company $10-$12 per ton in fuel usage and losses due to the oxidation of the steel. Nucor had developed proprietary computer programs to prepare designs for customers and to compute bids based on current prices and labor standards. Management Style and Philosophy 4 Copyright ©2010 Pearson Education. market dynamics and the structural changes that were taking place within the steel industry. The steel industry was characterized by large unwieldy organization structures that were not able to move fast and respond to changes in the operating environment. Organization Structure Iverson’s policy was to have a decentralized operation with liberal authority delegated to managers in the field. This no-nonsense policy was effective in creating performance expectations and accountability. conserve space. The casting machines were continuous casters as opposed to the old batch method. Nucor would have two mills operating side by side.Part II The joist industry was characterized by high competition among many manufacturers. engineering and personnel management. Nucor also aggressively sought to be the lowest cost producer in the industry and as materials and freight were two important elements of cost – • Nucor maintained its own fleet of trucks to ensure on time delivery to all of the states • Plants were located in rural areas closer to the markets they served • Further the company moved into steel production (backward integration) to further reduce the cost of steel used by the joist business All these three initiatives by Nucor enabled it to achieve a cost leadership position in the Joist Division. The divisions did their own manufacturing. Nucor’s Organization Capabilities 1. 2. 3. In terms of designing the mini-mills. selling. Throughout Nucor each operation was housed in its own separate building with its own staff. publishing as Prentice Hall . One mill concentrated on the larger bar products which had separate production and customer demands while the other mill concentrated on smaller diameter bar stock. Competition was based on price and delivery performance. Inc. Further each division maintained its own engineering department to help customers with design problems and specifications. Nucor had a strong selling force in the market and utilized national advertising campaigns. Nucor’s Capabilities in Steel Making In the steel making process for example the Nucor system involved preheating the ladles that in turn allowed faster flow of steel into the caster resulted in better control of the steel characteristics. 2. Nucor designed business processes and manufacturing practices in a manner to limit work-in-process inventory. accounting. Each mini-mill at Nucor was a profit center division and the division manager had control over day to day decisions that made that particular division profitable or not profitable. The division was expected to earn 25% return on total assets employed and the performance standard was strictly enforced and many division managers who were unable to deliver the returns were asked to leave the organization. The Nucor method also involved keeping the casters working. utilize a pull approach to material usage and to increase flexibility.
unbiased and wellestablished over time 5 Copyright ©2010 Pearson Education. No executive dining rooms or restrooms. Bonus was not at the discretion of the supervisor or the manager – measurement was well defined and the process of administering it was fair. the bonus was based on a team effort. The Vice Presidents and General Managers shared the same bonus systems that ensured that though the divisions were operated individually. No Frills Non-Discriminatory Employee Policies 1. On a weekly basis the joist divisions reported total quotes. No set limits on what an employee could earn and paid them directly for their productivity 9.Case 2-2 Nucor had a stripped down and no-nonsense organization management style. 3. company cars or reserved parking 8. At the same time if there was a non-performer in the team then that individual would be easily identified if the minimum rate of return on assets employed was not realized for that particular division. Its corporate offices characterized thriftiness and were “Spartan” and “Modest”. 4. The offices at the divisions were like plant offices and were simple. Board–Senior Management Relationships Iverson was successful in creating a management relationship framework that was informal. Each month the divisions completed a two page operational analysis and its main purposes were financial consolidation. There were no corporate perquisites – no company cars. sharing information amongst divisions and corporate management examination. no fishing lodges. Another aspect of the senior management was the friendly spirit of competition from one plant to the next. Management Information System This system provided up to date relevant information that could be used for decision making at the plant level and for monitoring and strategic planning purposes at the corporate level. The summarized information and the performance statistics was then returned to the managers. Every child of a Nucor employee received $1200 / year for four years for higher education 7. There was no formal performance appraisal process as the company felt that it was a waste of time and effort and preferred dealing with these aspects directly with the employee 3. This set the tone for the divisions to emulate. Nucor employees had no job descriptions and they created a flexible workforce 2. 5. publishing as Prentice Hall . routine and business like and built around manufacturing rather than for public appeal. backlog and cancellations while the steel mills reported tons-rolled. sales cancellations. The divisions managed their activities with a minimum of contact with the corporate staff. cancellations and backlog. trusting and not bureaucratic. orders. no county club memberships and no company planes. In this way Iverson was successful in creating individual accountability at the plant level and a spirit of teamwork within the larger company. The entire company had only one group insurance plan 5. Holidays and vacations did not differ by job 6. Inc. outside shipments. All employees received the same fringe benefits 4.
At Nucor all incentives are based on measurable on the job performance. 3. 4. This was also an opportunity for the workforce to have discussions with the management. In lieu of a retirement plan. Nucor’s Relationship Management Capabilities • Alliances with Outside Parties Nucor strengthened its position by developing strong alliances with outside parties. 20% of this was set aside to be paid as a cash bonus and the remainder into a trust for each employee on the basis of the percent of their earnings as a percent of total wages paid within the corporation. Work standards were designed based on experience and historical trends and workers knew exactly what they were. 11. Employee communication was strong at Nucor and all employees were kept informed about the company and charts posting the results and bonus payoff were prominently displayed in the plant. The highlights were – 1. The company had four incentive programs for production workers. 7. In the mini-mills the division was organized around the major steel making processes – melting and casting. For example in 1998 each employee received a $800 payment The average hourly worker’s pay was over twice the average earnings paid by other manufacturing companies in the states were Nucor plants were located. Each year 10% of pre-tax earnings were put into the profit sharing for all people below officer level. departmental heads. The company had an Employer Monthly Stock Investment Plan to which Nucor added 10% to the amount the employee contributed on the purchase of any Nucor stock and paid the commission. staff people and senior management which included division managers. Incentive System The incentive system was an important part of the internal organization. 12. 8. the company had a profit sharing plan with a deferred trust. It did not do any internal research and development but monitored these activities at a global level and when Nucor found any technology interesting and relevant it invested in them 6 Copyright ©2010 Pearson Education. The company conducted attitude and perception surveys to gauge employee feedback 6. rolling mill and finishing. Employees were also given a copy of the Annual Report of the company. GMs would have dinners with their employees at least twice a year and at each dinner about 50-60 employees were invited. publishing as Prentice Hall . The company also had an option that if the profits were better than expectations then extraordinary bonus payments would be made to the employees. After each five years of service with the company the employees received a service award of five shares of Nucor stock. Inc. Incentives were paid out every following week and this immediacy of the payouts created strong employee buy-in and alignment to the goals and motivated them to stretch themselves 6. Employees received quarterly statement of their balance in profit sharing.Part II 10. 7. 2. The performance expectations were not unrealistic and was based at a 90% historical performance level 5.
especially in the melting and the casting operations. Nucor was able to improve productivity to such an extent that in 2004. 2.Case 2-2 and created new technical applications at the earliest dates. reheat furnaces. Nucor had made a number of improvements in the mini-mill technology. In fact in 1987 Nucor was the first steel company in the world to manufacture steel sheet for automobiles and other applications. • Nucor’s Plant Construction Tie-Ups Nucor had the capability of constructing new facilities at the lowest costs due to an excellent engineering and design team. Nucor had alliances with selected construction companies around the country who were aware of the work that Nucor wanted. The team comprised only three individuals and the team did not specify exact equipment parameters but asked the supplier to provide this information and then held the manufacturer accountable. This was nearly ten times the projected costs at Nucor. 3. publishing as Prentice Hall . The system of preheating ladles and having continuous casters saved $10-12 per ton in fuel usage and losses in oxidation of the steel that would be spent in reheating the billets. Nucor brought 95% of its scrap steel from an independent broker who followed the market and made recommendations. It was common for a Nucor plant to have internally designed continuous casting unit. In the steel industry the other competitors were the large integrated steel mills that had outdated costly processes to manufacture steel from iron-ore and underinvested in steel making technology and in improving the efficiency of the steel making process. In fact their size which they felt was their strength became a challenge as capital costs required to make such changes and the downtimes required were prohibitive. Inc. The company did not have a corporate advertising department. cooling beds and mill stands. the total employment costs were less than $60 per ton compared to $130 per ton for the largest steel manufacturers in the US. This was a rare and valuable resource and capability for Nucor. The Question of Rarity How would you assess Nucor’s resources in terms of rarity? Nucor’s Steel Making Process and Mini-Mill Technology 1. corporate public relations department. Nucor was continuously experimenting with new manufacturing techniques and processes. or a corporate legal or environmental department. The Question of Imitability How difficulty to imitate are Nucor’s resources? 7 Copyright ©2010 Pearson Education. Nucor possessed a strong and unique understanding and knowledge of mini-mill technology and joist manufacturing processes. Nucor had long term relationships with outsiders to provide these services. With respect to raw material purchases. In 2004 all these costs would be under $125 per ton of annual capacity compared with projected costs for large integrated mills of $1200-1500 per ton of annual capacity. Nucor had in fact designed most of its own equipments with inputs from technology innovations worldwide.
Inc. by restructuring. the performance culture. Later the situation changed. innovating the mini-mill technology to make it even more efficient (resulting in cost leadership) and in creating an organization that was aligned to the strategic intent of the company. Older plants were shut. causal ambiguity of the capabilities and socially complex nature of interdependent relationships. unprofitable lines were eliminated and new installations with improved technology came into play. 1. Though some of these resources and capabilities were not very costly to imitate other companies could not imitate them as they did not possess the complementary organization capabilities that Nucor possessed (that have been outlined in an earlier section). dropping unprofitable lines. trained sales force). focusing products and trying to be responsive to the market. Lack of profits and capital to modernize plants 6. Conservative management that hesitated to take risks 7. For example. cutting capacity. US buyers were lobbying for lower steel prices in the US 3. High labor costs 4. the management control systems. Chaparral. the integrated steel mills were moving to get back into the game. It had access to the evolving mini-mill technology and though there were others who started mini-mills like Florida Steel. Its decision to develop minimills with the latest technology and processes and locate them in rural markets where the labor force would not be so expensive and persuade buyers to co-locate near their facilities provided the company with a source of competitive advantage. Size was so large that the initial investment would be huge and prohibitive to an extent 10. the incentive system and the organization structure would be costly to imitate as they were based on unique historical conditions facing the firm. Nucor was able to do better than the other mini-mills as it had the complementary capabilities and a business model that was more robust. Nucor was a pioneer when it came to three things – building a business model (proximity to buyers. Difficult to layoff people & shut down unprofitable plants due to employee related liabilities The mini-mills with their lower cost structure were able to compete and gain market share from the integrated steel plants as they went through with their restructuring processes. Unique Historical Conditions Between 1964 and 1984 Nucor had become a leading US steel company. High energy costs in mining and processing iron ore 5. Nucor was able to acquire and develop its resources and capabilities in a low cost manner because of the unique historical conditions that were prevalent in the late 1970’s and 1980’s. During that period the large integrated steel mills were beset with various problems – 1. Unrealistic depreciation schedules made it difficult for the companies to invest in modernization 9. access to low cost labor markets. The integrated steel mills changed their business 8 Copyright ©2010 Pearson Education. publishing as Prentice Hall .Part II Nucor was a strategic innovator in the steel making business. Georgetown Steel and North Star Steel. Plants were operating with outdated technology 8. Cheap imports of steel was reducing their captive market in the US 2.
Though the industry would know that these socially complex phenomena enabled Nucor to achieve leadership position in the steel business in the USA it would be difficult for them to imitate and recreate them through social engineering. it would be difficult for competitors to identify the complex sets of relationships between the resources and capabilities that provided Nucor with a competitive advantage. Even technology. Such recreated social engineering is likely to be much more costly than it would be if socially complex resources evolved naturally within the firm as in the case of Nucor. Social Complexity The inter-personal relationship between the members of the senior management team and between the management and the workers was socially complex. Nucor functioned in an 9 Copyright ©2010 Pearson Education. 2. The senior management team was hand picked and had individual skills and capabilities that were rare and matched the needs of the business. Causal Ambiguity Nucor’s success story was well documented and competitors may have found it easy to identify the reasons for Nucor’s success – its superior understanding of mini-mill technology. individual and organization formed complex networks of relationships between individuals. commitment within the team and other organization software at work at Nucor played a critical role in the transformation at Nucor. geographic dispersion of operations (to reduce risk). use of lower cost raw material. innovative pricing strategies (offering the same reduced discounts to all buyers) and persuading buyers to co-locate near Nucor plants. They may be costly to imitate as the relationships between the firms resources and capabilities and competitive advantage may be causally ambiguous. closer proximity and access to markets and buyers. 3. The management philosophy to create a cooperative and productive workforce based on the need to be transparent. Inc. Hence it is difficult to establish which of these resources and capabilities have a causal relationship with competitive advantage and which do not. management information systems. financial. groups and technology. aggressive strategy for cost leadership. The operating model of the company depended on alliances for a host of outsourced functions and activities. employee policies. excellent well trained sales force.Case 2-2 model by opting for segmentation and focusing on a limited range of product areas and became more competitive. These resources at Nucor – physical. management systems and policies. provide empowerment and be unbiased was a new in the hierarchal and bureaucratic steel industry environment. well thought out incentive schemes. Competitors would not be able to tell what precisely enabled Nucor to gain an advantage and hence this may be difficult to imitate. However. strategic innovation in manufacturing processes. The team work. organization structure. research and development and raw material supplies were driven by inputs from industry sources. publishing as Prentice Hall . The same could be said about the company’s relationships with external service providers and its customers (customers would actually co-locate close to the Nucor plants). alliances with external outsourced service providers and technology partnerships.
It is evident that the firm is organized to exploit the full competitive potential of its resources and capabilities. The industry was entering another growth phase in which size mattered. Empowerment and flexibility was given to employees (no job descriptions in the company) 8. relatively rare. unbiased and created accountability 6. Flat and relatively non-hierarchal organization 2. publishing as Prentice Hall . The internal policies and the organization software created incentives for managers and workers to behave in ways to reduce costs and make the company more productive and competitive. new and cutting edge technologies. The company was able to realize the full potential of its core resources and capabilities for competitive advantage. soaring prices of steel scrap and the aggressive moves by China to enter the world market had changed the steel industry environment. Transparency and sharing of information at all levels of the organization 5. Management compensation policies was aligned with the company’s objectives These complementary resources and capabilities enabled the company to leverage its core resources and capabilities. Access to cheap energy. With 10 Copyright ©2010 Pearson Education. Informal management philosophy and minimal reporting requirements 3. costly to imitate and were exploited by the organization to the fullest extent. It would be difficult for competitors to copy and imitate these socially complex relationships that existed within the organization. However it is not clear if the company has access to the resources and capabilities to be competitive in the 21st century. However the cost disadvantages associated with replicating the unique and complex social phenomena would limit the gains from imitating the physical technology. The main components of Nucor that enabled the firm to do so are outlined below – 1. Performance expectations and standards were fair and communicated clearly to all members 7. What strategic recommendations would you offer to Nucor? If we apply the framework to the earlier period 1990-2004 it is clear that the resources and capabilities at Nucor were valuable. It would be relatively easy for competitors to copy or reverse engineer the physical technology used by Nucor. The Question of Organization Is Nucor sufficiently organized to capture value from its resources? This has been covered in detail in the Organization Capabilities of Nucor. Inc. consolidation of the steel markets at an international level. Management information systems and performance statistics 4.Part II environment of trust that was based on the management’s philosophy and the interdependent relationships it had developed over a period of time (some of them based on unique historical conditions in which the company had found itself). weakening domestic demand in the USA. Unique incentive policies and payout policies that were fair.
Inc. publishing as Prentice Hall . Nucor had international aspirations that were promising but it was likely only to be a source of competitive parity for the company.Case 2-2 an output of 20 million tons only. 11 Copyright ©2010 Pearson Education. the chances were high that it would be a likely target for acquisitions.
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