Case 2-2

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 industrys 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. Nucors 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 Nucors resources and capabilities? 2. How would you assess Nucors resources in terms of heterogeneity and immobility? 3. Using the VRIO model, how would you evaluate Nucors 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 Nucors 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 Nucors 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
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This note was prepared by Shankar Naskar. 1

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company as it enabled Nucor to gain cost leadership in manufacturing and create growth opportunities for itself in the highly competitive steel industry. 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. In this way, these capabilities are a sub set of a firms resources and enable Nucor to take full advantage of its other tangible resources. 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. Physical resources comprise the physical technology of the firm. For Nucor this not only included the companys plant and equipment but also its advantageous location and its access to raw materials and customers. This enabled the company to reduce its costs and be one up on its competitors. The wire rod welding technology that was pioneered at Nucor was a physical resource. In the late 60s for example the company had one of the first computer inventory management systems and design / engineering programs. The company was also very sophisticated in its purchasing, sales and project management functions and Nucor often beat its competition by the speed of its design efforts. The company judiciously used its financial resources to expand its capacity, buy up facilities in a downturn and invest in processes to continuously improve steel making technology. 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. Human resources included the capable people who were recruited by the company and the senior management team led by Ken Iverson. The staff at each division of the company was also very capable. In 1987 Nucor was the first steel company in the world to begin to build a mini-mill to manufacture steel sheet, the raw material for the auto industry and other major manufacturers. This decision by the leadership opened up another 50% of the total steel market for Nucor. Organizational resources played a key role in the superior performance of Nucor. From the very beginning Iverson encouraged risk taking and believed in the old saying that failure to take risks is failure. The culture at Nucor was personified by its founder and then reinforced by Ken Iverson, during his time at the helm. The company owed much of its success to its benchmark organization style and the empowered division managers. The company operated in a highly decentralized manner which was unlike the way other integrated steel companies ran their businesses. Its performance management system was based on a practical and implementable incentive scheme that was extremely successful. 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. Critical Assumptions of the Resource-Based View How would you assess Nucors resources in terms of heterogeneity and immobility?
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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, 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. This reflected the resource heterogeneity, one of the two fundamental assumptions about the resources and capabilities that firms may control. 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. It was clear that other integrated steel plants and mini-mills were not able to imitate the Nucor Model. 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, practical and fair that it promoted a team environment and friendly competition between the various mini-mills within the group. This culture of partnership, innovation, performance orientation, competitiveness and accountability was very difficult for other companies to imitate. 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. The VRIO Framework In this section we analyze the resources and capabilities of Nucor to assess their potential to generate competitive advantage. We assess Nucors internal strengths and its internal weaknesses using the VRIO Framework. We ask four questions about the resource or capability to determine its competitive potential The question of value, rarity, imitability and organization. The Question of Value How valuable are Nucors resources? Nucor has been successful in using its resources and capabilities to reduce costs and improve its revenues. It is also clearly seen that Nucor was able to use its resources and capabilities to exploit opportunities and to neutralize threats. Let us consider each of these valuable resources and capabilities. 1. Nucors Capabilities in the Joist Division

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The joist industry was characterized by high competition among many manufacturers. Competition was based on price and delivery performance. Nucor had developed proprietary computer programs to prepare designs for customers and to compute bids based on current prices and labor standards. 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 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. 2. Nucors 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. The casting machines were continuous casters as opposed to the old batch method. The Nucor method also involved keeping the casters working. 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. In terms of designing the mini-mills, Nucor would have two mills operating side by side. 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. Throughout Nucor each operation was housed in its own separate building with its own staff. Nucor designed business processes and manufacturing practices in a manner to limit work-in-process inventory, conserve space, utilize a pull approach to material usage and to increase flexibility. 3. Nucors Organization Capabilities 1. Organization Structure Iversons policy was to have a decentralized operation with liberal authority delegated to managers in the field. 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, market dynamics and the structural changes that were taking place within the steel industry. 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 divisions did their own manufacturing, selling, accounting, engineering and personnel management. 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. This no-nonsense policy was effective in creating performance expectations and accountability. 2. Management Style and Philosophy

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Case 2-2

Nucor had a stripped down and no-nonsense organization management style. Its corporate offices characterized thriftiness and were Spartan and Modest. There were no corporate perquisites no company cars, no county club memberships and no company planes. This set the tone for the divisions to emulate. The offices at the divisions were like plant offices and were simple, routine and business like and built around manufacturing rather than for public appeal.
3. BoardSenior Management Relationships

Iverson was successful in creating a management relationship framework that was informal, trusting and not bureaucratic. Another aspect of the senior management was the friendly spirit of competition from one plant to the next. The Vice Presidents and General Managers shared the same bonus systems that ensured that though the divisions were operated individually, the bonus was based on a team effort. 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. In this way Iverson was successful in creating individual accountability at the plant level and a spirit of teamwork within the larger company. 4. 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 divisions managed their activities with a minimum of contact with the corporate staff. On a weekly basis the joist divisions reported total quotes, sales cancellations, backlog and cancellations while the steel mills reported tons-rolled, outside shipments, orders, cancellations and backlog. Each month the divisions completed a two page operational analysis and its main purposes were financial consolidation, sharing information amongst divisions and corporate management examination. The summarized information and the performance statistics was then returned to the managers. 5. No Frills Non-Discriminatory Employee Policies 1. Nucor employees had no job descriptions and they created a flexible workforce 2. 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. All employees received the same fringe benefits 4. The entire company had only one group insurance plan 5. Holidays and vacations did not differ by job 6. Every child of a Nucor employee received $1200 / year for four years for higher education 7. No executive dining rooms or restrooms, no fishing lodges, company cars or reserved parking 8. No set limits on what an employee could earn and paid them directly for their productivity 9. Bonus was not at the discretion of the supervisor or the manager measurement was well defined and the process of administering it was fair, unbiased and wellestablished over time
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10. 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. Employees were also given a copy of the Annual Report of the company. 11. GMs would have dinners with their employees at least twice a year and at each dinner about 50-60 employees were invited. This was also an opportunity for the workforce to have discussions with the management. 12. The company conducted attitude and perception surveys to gauge employee feedback 6. Incentive System The incentive system was an important part of the internal organization. The highlights were 1. The company had four incentive programs for production workers, departmental heads, staff people and senior management which included division managers. In the mini-mills the division was organized around the major steel making processes melting and casting, rolling mill and finishing. 2. Work standards were designed based on experience and historical trends and workers knew exactly what they were. 3. At Nucor all incentives are based on measurable on the job performance. 4. The performance expectations were not unrealistic and was based at a 90% historical performance level 5. 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. In lieu of a retirement plan, the company had a profit sharing plan with a deferred trust. Each year 10% of pre-tax earnings were put into the profit sharing for all people below officer level. 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. Employees received quarterly statement of their balance in profit sharing. 7. 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. After each five years of service with the company the employees received a service award of five shares of Nucor stock. 8. The company also had an option that if the profits were better than expectations then extraordinary bonus payments would be made to the employees. For example in 1998 each employee received a $800 payment The average hourly workers pay was over twice the average earnings paid by other manufacturing companies in the states were Nucor plants were located. 7. Nucors Relationship Management Capabilities Alliances with Outside Parties Nucor strengthened its position by developing strong alliances with outside parties. 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
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Case 2-2

and created new technical applications at the earliest dates. The company did not have a corporate advertising department, corporate public relations department, or a corporate legal or environmental department. Nucor had long term relationships with outsiders to provide these services. With respect to raw material purchases, Nucor brought 95% of its scrap steel from an independent broker who followed the market and made recommendations.
Nucors Plant Construction Tie-Ups Nucor had the capability of constructing new facilities at the lowest costs due to an excellent engineering and design team. 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. Nucor had alliances with selected construction companies around the country who were aware of the work that Nucor wanted.

The Question of Rarity How would you assess Nucors resources in terms of rarity? Nucors Steel Making Process and Mini-Mill Technology 1. Nucor possessed a strong and unique understanding and knowledge of mini-mill technology and joist manufacturing processes. Nucor was continuously experimenting with new manufacturing techniques and processes. In fact in 1987 Nucor was the first steel company in the world to manufacture steel sheet for automobiles and other applications. Nucor was able to improve productivity to such an extent that in 2004, the total employment costs were less than $60 per ton compared to $130 per ton for the largest steel manufacturers in the US. 2. Nucor had in fact designed most of its own equipments with inputs from technology innovations worldwide. It was common for a Nucor plant to have internally designed continuous casting unit, reheat furnaces, cooling beds and mill stands. 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. This was nearly ten times the projected costs at Nucor. 3. Nucor had made a number of improvements in the mini-mill technology, especially in the melting and the casting operations. 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. This was a rare and valuable resource and capability for Nucor. 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. The Question of Imitability How difficulty to imitate are Nucors resources?

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Nucor was a strategic innovator in the steel making business. 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. 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). For example, the management control systems, the performance culture, the incentive system and the organization structure would be costly to imitate as they were based on unique historical conditions facing the firm, causal ambiguity of the capabilities and socially complex nature of interdependent relationships. 1. Unique Historical Conditions Between 1964 and 1984 Nucor had become a leading US steel company. It had access to the evolving mini-mill technology and though there were others who started mini-mills like Florida Steel, Chaparral, Georgetown Steel and North Star Steel, Nucor was a pioneer when it came to three things building a business model (proximity to buyers, access to low cost labor markets, trained sales force), 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. 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 1970s and 1980s. During that period the large integrated steel mills were beset with various problems 1. Cheap imports of steel was reducing their captive market in the US 2. US buyers were lobbying for lower steel prices in the US 3. High labor costs 4. High energy costs in mining and processing iron ore 5. Lack of profits and capital to modernize plants 6. Conservative management that hesitated to take risks 7. Plants were operating with outdated technology 8. Unrealistic depreciation schedules made it difficult for the companies to invest in modernization 9. Size was so large that the initial investment would be huge and prohibitive to an extent 10. 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. 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. Later the situation changed, the integrated steel mills were moving to get back into the game, by restructuring, cutting capacity, dropping unprofitable lines, focusing products and trying to be responsive to the market. Older plants were shut, unprofitable lines were eliminated and new installations with improved technology came into play. The integrated steel mills changed their business
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Case 2-2

model by opting for segmentation and focusing on a limited range of product areas and became more competitive. 2. Causal Ambiguity Nucors success story was well documented and competitors may have found it easy to identify the reasons for Nucors success its superior understanding of mini-mill technology, strategic innovation in manufacturing processes, closer proximity and access to markets and buyers, geographic dispersion of operations (to reduce risk), aggressive strategy for cost leadership, use of lower cost raw material, excellent well trained sales force, well thought out incentive schemes, organization structure, management systems and policies, employee policies, management information systems, alliances with external outsourced service providers and technology partnerships, innovative pricing strategies (offering the same reduced discounts to all buyers) and persuading buyers to co-locate near Nucor plants. However, 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. Competitors would not be able to tell what precisely enabled Nucor to gain an advantage and hence this may be difficult to imitate. The team work, commitment within the team and other organization software at work at Nucor played a critical role in the transformation at Nucor. Hence it is difficult to establish which of these resources and capabilities have a causal relationship with competitive advantage and which do not. These resources at Nucor physical, financial, individual and organization formed complex networks of relationships between individuals, groups and technology. They may be costly to imitate as the relationships between the firms resources and capabilities and competitive advantage may be causally ambiguous. 3. Social Complexity The inter-personal relationship between the members of the senior management team and between the management and the workers was socially complex. The same could be said about the companys relationships with external service providers and its customers (customers would actually co-locate close to the Nucor plants). 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. 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. The senior management team was hand picked and had individual skills and capabilities that were rare and matched the needs of the business. The management philosophy to create a cooperative and productive workforce based on the need to be transparent, provide empowerment and be unbiased was a new in the hierarchal and bureaucratic steel industry environment. The operating model of the company depended on alliances for a host of outsourced functions and activities. Even technology, research and development and raw material supplies were driven by inputs from industry sources. Nucor functioned in an
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environment of trust that was based on the managements 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). It would be difficult for competitors to copy and imitate these socially complex relationships that existed within the organization. It would be relatively easy for competitors to copy or reverse engineer the physical technology used by Nucor. However the cost disadvantages associated with replicating the unique and complex social phenomena would limit the gains from imitating the physical technology. 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. It is evident that the firm is organized to exploit the full competitive potential of its resources and capabilities. The main components of Nucor that enabled the firm to do so are outlined below 1. Flat and relatively non-hierarchal organization 2. Informal management philosophy and minimal reporting requirements 3. Management information systems and performance statistics 4. Transparency and sharing of information at all levels of the organization 5. Unique incentive policies and payout policies that were fair, unbiased and created accountability 6. Performance expectations and standards were fair and communicated clearly to all members 7. Empowerment and flexibility was given to employees (no job descriptions in the company) 8. Management compensation policies was aligned with the companys objectives These complementary resources and capabilities enabled the company to leverage its core resources and capabilities. The company was able to realize the full potential of its core resources and capabilities for competitive advantage. 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. 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, relatively rare, costly to imitate and were exploited by the organization to the fullest extent. However it is not clear if the company has access to the resources and capabilities to be competitive in the 21st century. Access to cheap energy, new and cutting edge technologies, consolidation of the steel markets at an international level, weakening domestic demand in the USA, soaring prices of steel scrap and the aggressive moves by China to enter the world market had changed the steel industry environment. The industry was entering another growth phase in which size mattered. With
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an output of 20 million tons only, the chances were high that it would be a likely target for acquisitions. Nucor had international aspirations that were promising but it was likely only to be a source of competitive parity for the company.

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