Steelmaking is a tough, capital-intensive business in an industry characterised by booms and busts. Barriers to entry are low, foreign competition can be intense and you're a price taker - it's a commodity product. When looking at a business, Warren Buffett has long espoused pricing power as the most important determinant, which coincidentally is something steel companies don't have.
“You really want something where, if they don’t have it in stock, you want to go across the street to get it. Nobody cares what kind of steel goes into a car. Have you ever gone into a car dealership to buy a Cadillac and said “I’d like a Cadillac with steel that came from the South Works of US Steel.” It just doesn’t work that way; so that when General Motors buys, they call in all the steel companies and say, “Here’s the best price we’ve got so far, and you’ve got to decide if you want to beat their price, or have your plant sit idle.” Warren Buffett
So how does a small US steel company rise from obscurity to eventually dominate steelmaking in the United States? In large part, the answer to that question resides at the feet of Ken Iverson. The late Ken Iverson took Nucor Steel from its origins as a small-town steel business in the 1960's, to America's third largest steel player in 2002. Today, with the legacy culture instilled by him, Nucor is America's largest steel company.
So what was their secret to success? Interestingly, they had no secret formulas and no intricate management models that others lacked; basically, they simply changed the steel-industry paradigm on how to do business. They became a company that paid its workers more than anyone in the industry, yet was the lowest cost producer; a company that never laid off a worker or shut down a facility for lack of work, and a company that never lost money in any business quarter for more than thirty consecutive years! These simple changes to culture created an organisation that provided sustained returns over long periods and a business that was incredibly difficult to compete against.
I came across Nucor's enviable track record a while back when reading James Heskett's excellent book 'The Culture Cycle'. The book includes a few case studies on companies, Nucor being one of them. More recently, I stumbled across Ken Iverson's book 'Plain Talk' after it was recommended by one of the Investment Masters.
'Plain Talk' is an easy read, I finished it in a few days. Its a no-nonsense, simple guide to business success by one of America's greatest corporate leaders.
It's fascinating how many of the mental models, thought processes and approaches of successful business leaders like Ken Iverson parallel with the Investment Masters' mindsets. It's little wonder that Buffett encourages investors to think like business people when acquiring stocks and for business people to think like investors when running businesses.
Let's hear from Ken Iverson on the keys to Nucor's success..
"It's helpful to think of corporate culture as all the things that shape interactions among the people in your company, it's customers and suppliers."
"I'm often asked; "How do your explain Nucor's success?" My stock reply: "It is 70% culture and 30% technology." The truth is, I'm not sure if it is 80 to 20 or 60 to 40, but I'm certain our culture accounts for more than half of our success as a business. Equality, freedom, and mutual respect promote motivation, initiative, and continuous improvement."
"Without a doubt, Nucor's culture is its most important source of competitive advantage, and always will be."
"Don't think, though, maintaining such a culture is easy. It demands daily attention to combat our worst human tendencies to divide ourselves into camps of "We vs They."
"Egalitarian business culture is an extraordinary practical way to sustain employee motivation."
"We at Nucor so often chose paths different from those followed by most corporations"
"Simplicity is what makes Nucor successful."
"Mainly we try and focus on what really matters - bottom-line performance and long-term survival."
"Our competitive strategy is to build manufacturing facilities economically, and to operate them efficiently. Period."
"Basically, we ask our employees to produce more product for less money. Then we reward them for doing that well. Simple."
"Nucor is founded on principles so basic, they sound corny. We believe in treating people the way you'd want to be treated."
Long Term Perspective
"Managing with a long term-perspective is just common sense to us. But I'll admit, not everybody sees things as we do. And, like managers in most large businesses, we must sometimes answer to those who froth at the mouth, pound on tables, and yell at us to do whatever it takes to maximise earnings right now! I'm referring, of course to stock analysts."
"Over a three-to-five year period, the success and growth in equity in a business will be reflected in its stock price, rewarding the investor."
"We're not dogs on a leash, doing tricks to manage the stock price or maximise dividend quarter by quarter. We're eagles. We soar. If investors want to soar, they'll invest with us. The speculators, we don't need."
"Every decision we make as managers is rooted in long-term perspective."
"A focus on long-term survival over shorter-term consideration can change every aspect of your business because it drives fundamentally different priorities."
"What we did was push aside the notion that management and employees have inherently separate interests. We've joined with our employees to pursue a goal we can all believe in; long term survival."
PainSharing [everyone took a cut in 1982 downturn]
"Department heads had taken pay cuts of up to 40%, and the general managers and other officers were earning 50-60% less than we had made in preceding years. My own pay dropped that year to about $110,000 from about $450,000 the year before. We not only shared the pain, we doled out the lion's share to people at the top."
"Painsharing" has helped us get through the tough times without ever laying off a single employee or closing a single facility for lack of work, even when the industry was shedding thousands of jobs."
Employment Policy and MBA's
"We're not hung up on recruiting from big, prestigious universities."
"Job descriptions are pretty much the same for everyone here: "Come to work and be productive as heck for twelve hours."
"We haven't had much luck with the MBA's we've hired out of the top business schools."
"Business school curricula should begin with developing managers' ability to understand people and to effectively relate to them."
"The fact is, few business school professors have ever managed anything, and their lack of hands-on experience shows in their students."
Decentralisation and Smallness
"Nucor has consistently required its general managers to generate a return of at least 25% on the assets we place under their control."
"All the other decisions [outside minimum 25% return on assets employed and ethical standards of the company and a few general policies] are left to managers and employees of each division."
"We've tried to keep our divisions small. When a business grows beyond 400 or 500 people, it's hard for management and employees to stay connected."
"Decentralisation isn't good, Centralisation isn't bad. Each is a sound option under the right circumstances."
"Each division operates its one or two plants as an independent enterprise. They procure their own raw materials; craft their own marketing strategies; find their own customers; set their own production quotas; hire, train and manage their own workforce;create and administer their own safety program. In short, all the important decisions are made right there at the division."
"You have to pursue the virtues of smallness, starting from the top of the business down."
"Our headquarters staff, including the clerical personnel, numbers just twenty-two."
"Communicate all the time, with everyone. That's what people in small businesses do. In fact, communication is probably the single greatest virtue of smallness."
"Fortune 500 executives visiting Nucor are intrigued to find that a major business can be so lean, simple and rational - in other words, so much like a small business."
"We prefer small towns. Labour in rural areas is a great untapped resource."
"Delegation without information is suicide."
"Too much information puts you in the same position as too little information - you don't know whats going on."
"The key is to identify the fraction of information that is truly useful to you, so you can concentrate on it."
"Try to focus on the information that tells you what you need to know under ordinary circumstances, and that will give you early warning when something extraordinary is going on."
"Sharing information is another key to treating people as equals, building trust, and destroying the hierarchy."
"At Nucor, our official information policy is to "share everything."
"Managers don't need or deserve special treatment. We're not more important than anyone else. We just have a different job to do."
"Management's authority comes from the employees."
"You must attack hierarchy. You have to destroy it."
"We think you get a heck of a lot by minimising the distinction between management and any other employee in the company."
"Our executives get the same group insurance, same holidays, and same vacations as everybody else. They eat in the same cafeterias. They fly economy class on regular commercial flights. We have no executive suits and no executive cars. At headquarters, our 'corporate dining room' is the deli across the street."
"No one in the company is more than four promotions away from having my job!"
"Adding more layers of management would wreck one of the great strengths of our business - very short lines of communication."
"Strip out a half-dozen or so layers of the management's hierarchy, and employees' information and ideas will find their own way to wherever they need to go."
"When you have power, real power, as Nucor's general managers do, you need to stay humble."
"Be a part of your company. Never set yourself above it."
"You should also try to be genuinely open to the ideas people bring to you."
"I can't stand it when there are no strange new ideas floating around the company."
"Don't study an idea to death with experts and committees. Get on with it and see if it works."
"You should never let someone else - even a so-called expert - tell you if a risk is worth taking. You have to decide for yourself."
"You can become a proponent of spreading more information to employees, giving them more responsibility for generating ideas, and increasing their decision-making powers."
"I worry when sparks don't fly [at general manager meetings held three times a year]. These meetings are designed to let each of us tap into the collective wisdom of all us. That wisdom won't come out if we're worried about stepping on one another's toes."
"Our general managers say what they think, even if they know I won't like it."
"It's a heck of a lot easier to listen to someone tear down your position when you know the disagreement is honest, objective, and motivated by what they truly believe is good for the company."
"Open debate also safeguards against little problems getting tucked away in some dark corner, where they can grow into big problems."
Take Risks and Accept Failure
"People won't try to accomplish extraordinary things if their managers won't tolerate failure. You should take care never to criticise when things turn out badly. That's a surefire way to stop people taking prudent risks."
"Don't wallow in the failure. Learn from it. Look forward not back. Urge them to try again."
"I have no desire to be perfect. In fact, none of the people I've seen do impressive things in life are perfect. They never settle for latching onto one approach or mastering one way of doing things. They experiment. And they will often fail. But they gain something from every failure. That's what it takes to achieve, I think, in business as well as in life."
"Probably half of the new technologies, approaches, and other ideas we try fail."
"Some risks, even big ones, are worth taking once you've weighted them against appropriate criteria."
"Don't fall into the trap of ruling out failure. Risk, by definition, carries the possibility of failure. See that possibility. Study it, but never, ever hide from it."
"Aversion to risk is deadly in business, especially in industries marked by rapid advances in technology."
"Managers who avoid risk and fear failure spend their entire careers cheating themselves, their people, and their companies."
"You have to know yourself. You have to realise the fears and ambitions are the lenses through which you view and assess risks, and that the image those lenses convey may not always be true."
Trust, Value and Empower your People
"I believe people are our company's most valuable resource."
"I can't imagine staking my success on a group of people and not knowing them."
"Employees - not managers - are the engines of progress."
"If you want to manage autonomously, you'd better stay connected with your people."
"[We list] every Nucor employee, in alphabetical order, on the cover of our annual report. In a lot of companies, that would be seen (justifiably) as a hollow gesture. In ours, it's an expression of what we truly believe, that each and every one of those people is equally important."
"If you really want answers you can use to make the business perform better, ask the people who are doing the actual work of the business. It's that simple. Front-line employees continually amaze me with the capacity to make improvements."
"We built Nucor under the assumption that most of the "genius" in our organisation would be found among the people doing the work."
"Every manager should be something of a psychologist."
"I've found that, as employees, many people want first and foremost to be appreciated for who they are."
The Right Incentives
"People earn according to what they produce, and those earnings are determined simply and objectively."
"Base pay is just a fraction of what our people have the opportunity to earn."
"What must employees do to earn their weekly bonus? Two things; a) work in teams; b) produce!"
"Our employment cost in 1996 was roughly half the total employment cost per ton produced by the big steel companies. Our people earn more because they're more efficient and more productive. We didn't make it that way. We just structured compensation to give them a clear incentive and turned them loose."
"Nucor officers receive a base salary that is typically just 75% of that earned by executives in comparable positions across manufacturing. The remainder of their compensation is variable and entirely at risk, just like the production bonus. At the officer level, Nucor ties bonus compensation to return on shareholder equity."
"Nucor's approach to compensation.. I think is one of the most critical elements of our company's success."
"At a minimum, pay systems should drive specific behaviours that make your business competitive. So much of what other businesses admire in Nucor - our teamwork, extraordinary productivity, low costs, applied innovation, high morale, low turnover - is rooted in how we pay people. More than that, our pay and benefit program tie each employee's fate to the fate of the business."
Cyclicality and Debt
"Steel making is a cyclical business - a business of booms and busts. Supermarkets offer a classic contrast. People have to buy groceries every week, even when the economy is down. Since grocery store revenues experience relatively mild fluctuations, supermarkets can carry substantial debt most of the time. On the other hand, people can go months or years without steel. Sink a steel company too deep into debt before the industry plunges into a long "bust" cycle, and you may not come out the other side, especially if the technology you invest in flops."
"We have a history of conservative financing, so we won't be too vulnerable to down cycles."
"Good managers are supposed to ponder possibilities beyond their areas of immediate authority. They are supposed to be students of the business."
"A lot of corporations jump into new businesses, make acquisitions, and even decide to merge based on very questionable criteria like 'favourable ratios', 'minimal redundancy' and (my personal favourite) "Strategic synergism." Perhaps that's why more than half of such moves eventually fail - "strategic synergism" often turns out to be what I'd call "BS synergism". Ratios or no ratios, the people of the company have no idea how to make the new business or the newly merged organisation work."
"Weigh mergers and acquisitions from an employees' perspective."
"We have made very few acquisitions. We tend to build businesses from the ground up."
It's no coincidence that Nucor's incredible achievements come down to just a few critical traits that all Investment Masters deem fundamental to success in any company - Culture, Humility, Reward, Innovation, Simplicity and the ability to Learn from past Mistakes. They weren't reliant on complicated models or academic theories, they didn't hire the best qualified people or have a proprietary product differentiator, nor did they seek perfection in anything they did. Indeed, they made mistakes like many other businesses, and were able to succeed using rural talent pools. What paid off for them was firstly getting their culture right. The people were efficient and productive because the business allowed them to be.
There's no loyalty in the steel business, but there is steel in the business of loyalty. How does your company compare?