F. KENNETH IVERSON

NUCOR

Ken Iverson’s legacy is the remarkable performance of an American steel firm – Nucor. Iverson transformed the company from an unwieldy and unprofitable small conglomerate into a highly focused and highly profitable large steel company. This occurred during a time in American history when the steel industry in general was struggling to remain profitable ( 1965 to 1998). Iverson’s success was achieved by means of a balanced combination of investment strategy, technology policy, personnel management policies, and market niche strategy.The following profile focuses on Iverson’s career up to 1986.

IVERSON’S BACKGROUND

Ken Iverson was born on September 18, 1925 and grew up in the rural Chicago suburb of Downers Grove, Illinois. There, ” Iverson learned…to respect those who worked with their hands as well as their heads.” (Fortney, 1985). He also developed a love of machinery and of the creative act of making things work. It was logical, therefore, that after finishing high school he would enter college and study engineering. In 1943 he joined the U.S. Navy and was sent to Cornell University where he earned a degree in aeronautical engineering. Then he went to Purdue University where he earned a master’s degree in metallurgy.

Iverson’s first job after college was in the Research Physics Department at the International Harvester Company in Chicago. He worked there as an assistant to the chief research physicist for five years. Then, concluding that his future at International Harvester was limited, he resigned and joined the Illium Corporation as chief engineer. Next he took a temporary job with Indiana Steel Products. His assignment was to establish a spectographic laboratory. A year later, with the assignment completed, he joined Cannon Muskegon as chief metallurgist.

Iverson remained with Cannon for seven years, eventually assuming responsibility for all of the company’s sales. His work brought him into contact with the president of Coast Metals Company and in 1960 that firm invited him to become its executive vice president.

In 1961 a company called Nuclear Corporation of America made an unsuccessful bid to acquire Coast Metals. Nuclear’s management met Ken Iverson in the process and subsequently hired him to do some part-time consulting with the objective of identifying promising acquisition candidates in metals industries. Iverson soon found and recommended a South Carolina firm named Vulcraft. Vulcraft manufactured steel joists (beams used to construct buildings) and was located in a geographic area experiencing substantial construction activity. Nuclear Corporation made the acquisition and offered Iverson the job of running its new subsidiary. Iverson accepted and joined the company as a vice president in 1962.

NUCOR’S BACKGROUND

Nuclear Corporation of America ( later renamed Nucor) was a sick company with a history of mediocrity.Founded by R.E. Olds to manufacture the REO automobile, the company was originally called the Reo Motor Car Company. It went bankrupt in the 1930s, reorganized, and became a profitable defense contractor during World War II. After the war if filed for bankruptcy again. In 1955 it was acquired by a group that renamed it Nuclear Corporation of America and focused its activities on the manufacture of nuclear instruments. The renamed company posted losses until 1960 when control was purchased by a New York investment banker. The new owner tried to turn the company into a profitable conglomerate with operations not only in nuclear instruments but also in such field as rare earths, steel joists and contracting and leasing. But most of what was acquired turned out to be unprofitable. By 1965 only one of Nucor’s eight divisions was profitable and the owners concluded that drastic change was in order.

The one profitable division at Nucor was Ken Iverson’s Vulcraft Division. Impressed by Iverson’s success, the owner’s invited him to become the company’s president with a mandate to earn a profit.Iverson accepted. He immediately arranged to cut costs by reducing corporate staff from twelve persons to two and moving headquarters from Phoenix, Arizona to Charlotte, North Carolina. The headquarters move was accomplished with two vans and put Iverson’s office close to the profitable joist plant.

IVERSON’S STRATEGY AND PLAN

In Charlotte Iverson fashioned and implemented what turned out to be a high successful business plan. His basic strategy was to focus the company’s activities on its one profitable area, steel joists, and to become the low cost manufacturer serving the joist market. As quickly as possible he wold off or shut down the unprofitable divisions while at the same time investing in the continued modernization of the joist factory.

Iverson’s strategy for becoming the low cost producer involved related plans for technology and human resources. On the technology front the plan was to invest heavily in on-going research and development. A high level of capital spending would quickly put the promising new ideas into practice. In later years analysts would regularly pinpoint this area as one of Nucor’s outstanding strengths. As Wall Street Journal reporter Douglas Sease once put it, ” (M)odern technology is Nucor’s long suit.” (Sease, 1981).

The research and development program relied significantly on ideas generated on the plant floor. In fact Iverson once commented that, “(M)ost of the small improvements that are really the key to our productivity have originated with the (work) group itself.” (McManus, 1980).

The human relations plan was designed to lower costs by increasing labor productivity. The plan started with Iverson’s belief that, “With everything you read about job enrichment and group participation, I think there are probably two things that are very important to most people and certainly to hourly workers. One is what am I going to get paid and the second is am I going to have a job tomorrow?” (McManus, 1980).Given that view of the psychology of his employees, Iverson developed a plan which was expected to give the worker an opportunity for good pay and stable employment. This could be done by raising the level of labor productivity to the point where Nucor could underprise the competition (thereby maintaining production and employment) whyile at the same time paying better wages and salaries than found at comparable companies.

To achieve that high level of labor productivity Iverson decided to employ a compensation system that relied heavily on performance bonuses. But, unlike older bonus plans, Iverson’s system would be administered in a manner that promoted teamwork and a feeling of long term loyalty to the company. In addition to production workers, all levels of management were included in the bonus payment system, including Iverson.

Additional techniques were used to create a team spirit and culture of loyalty. Most of the potentially divisive signs of status found in many other companies were eliminated. At Nucor executives would have to eat in the company cafeteria with all of the other workers; no fringe benefits would be given to managers unless the same benefits were received by the hourly workers; executives would be expected to chosse the least expansive way of doing things (E.g. air travel would be by coach, not first class). And any hourly worker who had a problem with a manager could take the complaint directly to Iverson (Years later Iverson would comment, ” I probably get 10 to 20 of these (complaints) a year. In some cases they are right and we do reverse (the manager’s) decision.” (McManus, 1980).

On final noteworthy element of Iverson’s labor productivity strategy was the decision to locate facilities in areas free of labor union influence. In his view the union mentality and inevitable work ruls demand by unions would make it impossible for Nucor to implement its low cost strategy.

BACKWARD INTEGRATION INTO STEEL

Within t wo years Iverson transformed Nucor into a profitable company that was a leader in the joist manufacturing business. By the end of 1968 the company had opened two additional joist plants, one in Norfolk, Nebraska (1966) and another in Jewett, Texas (1968).

The original growth plan called for increasing sales and earnings by continued specialization in joists. Iversen was convinced that there was much room to grow both by increased penetration of the markets served by the South Carolina plant and the construction of new joist factories in other geographic areas. But in 1968 a new opportunity for growth became apparent. At that time Nucor was spending 56 cents out of every sales dollar on steel. The steel was bought from European producers whose prices were significantly lower than American prices. Iverson suspected that the European advantage was not due to factors unique to Europe but rather was a reflection of lethargy on the part of the American firms. And so he investigated the feasibility of Nucor manufacturing steel.

That investigation convinced Iverson that an American firm could make a profit in steel by using the mini-mill technology employed by the Europeans.Mini-mills achieved their cost advantages by melting scrap steel instead of refining iron ore. They used two critical technologies. One was the electric furnace which melted the scrap. The other was continuous casting which made it possible to transform molten steel into finished shapes without first cooling the steel as was being done by the large American steel companies. The mini-mill technology was not applicable to all types of steel products but it did work for the kinds of steel bought by Nucor.

In addition to the inherent advantages of the mini-mill, Iverson saw two other reasons for Nucor to get into the steel business.One was his belief that Nucor’s highly productive labor force could build a new mill at a sharply lower cost than any competitor. Second was his belief that once in operation a Nucor mini-mill would achieve operating cost reductions because of the company’s productivity-enhancing labor policies. In the jargon of the 1970s, Iverson counted on reducing costs by moving down the “experience curve.” Experience curve theory claimed that a company’s unit costs of production would fall as the firm accumulated production experience.

In June of 1969 Nucor opened its first mini-mill in Darlington, South Carolina. That mill’s primary mission was to supply the nearby Nucor joist plant with raw steel. But Nucor’s low production costs quickly opened up markets with outside buyers. The company was on its way to becoming a profitable steel-maker.

SIXTEEN YEARS OF RAPID GROWTH IN A DECLINING INDUSTRY

For the next sixteen years Nucor’s sales and earnings grew so rapidly that the company was occasionally cited as a symbol of what was still right about American industry. In part that was because Nucor operated in an industry that was declining. In part the public praise was due to the fact that Nucor’s methods made a good story. And in part the company’s positive image was due to the sheer magnitude of the numbers – annual growth rates of 16.8 percent for sales and 20.2 percent for earnings, not to mention a return on equity of 18 percent for most of the period (return on stockholder’s equity ranged from a low of 9.2 percent in 1970 to a high of 37.5 percent in 1979).

Nucor did have a few down years such as 1975 and 1982. But even on those occasions the company earned a profit and avoided layoffs while the major steel companies were showing huge losses and laying off workers.

All of Nucor’s growth during that time was generated internally. There were no mergers or acquisitions. But there was geographical expansion through the building of new plants. Joist plants were opened in Bay City, Indiana (1972) and Brigham City, Utah (1982), while steel mills were opened in Grapeland, Texas (1975); Norfolk, Nebraska (1977); and Plymouth, Utah (1982). In all cases the plants were located in labor markets with an abundant supply of non-union labor. And in all cases the company’s productivity-driven compensation policy worked effectively.

By 1986 Nucor’s growth had slowed significantly. But the company continued to stand out in its industry. As Value Line put it, “The company’s markets are increasingly mature. And future start-up headaches cannot be ruled out. Nevertheless, unlike some of the larger mills, Nucor is making dramatic market share inroads while its finances, labor cost ratios and plant efficiency grow ever stronger.” (Value Line Investment Survey, 1986).

A CLOSER LOOK AT MANAGEMENT AND LABOR INCENTIVES

Perhaps Nucor’s most significant accomplishment as a participant in the steel industry was its consistent ability to minimize labor costs. In part that was due to locating in low labor cost geographic areas and avoiding unionization. In part it was due to capital spending that increased labor productivity. As one analyst put it in 1977,” Nucor can produce a ton of steel for about $175 which is $50 to $100 cheaper than most other domestic producers. One reason is that Nucor’s three mills were all built after 1968 and incorporated the latest technology: electric furnaces and continuous casting. Using scrap instead of iron ore, Nucor’s mills are essentially recycling plants with a 90% yield (the ratio of molten metal to finished product). The average industry yield is 72% to 75% .” (Business Week, 1977). But the most significant source of reduced labor costs appears to have been the package of incentives that made Nucor workers exceptionally productive. Because of its significance that package warrants a closer look.

For production workers the basic incentive was a weekly bonus tied to measurable output. In the 1970s the plan grouped production workers into teams of 25 to 30 employees. Each team was given a production goal based on 90 percent of the output historically produced during a full week of work. At the end of the week actual output was compared with the 90 percent quota. To the extent that actual output exceed the quota a bonus was paid. The bonus was proportional to the amount by which output actually exceeded the goal. That made it possible for a group to earn a bonus equal to 100 percent or more of the base wage. In 1980, for example, the standard for melting and casting was 10 tons an hour (the same as ten years earlier). Workers were paid a 4 percent bonus for every ton over that. During a six month stretch of time that year Nucor workers averaged 30 tons an hour. As result the were paid wages equal to 180 percent of their base wage. And those bonuese were pad on a weekly basis, thus providing immediate reinforcement for the superior performance.

In good years production workers at Nucor were able to earn outstanding wages. In 1979, for example, Nucor hourly workers at the Darlington steel plant earned an average $22,000 annual income. That figure was about the same as the hourly workers at the unionized big steel companies ( Kirkland, 1981). In 1980 the average Nucor steel worker in South Carolilna, “earned some $5,000 more than the $24,000 averaged by his (United Steel Worker) counterpart — and a lot more than the $ 11,700 peryear paid to the average hourly production worker in the state.” (Kirkland, 1981). And in 1985 a Reader’s Digest article reported that, ” Nucor’s hourly employees average over $40,000 annually, about $5,000 more than their unionized counter-parts at big steel mills — when they can get work. In the rural areas where Nucor builds its plants, the average factory worker makes less than half that amount.” ( Fortney, 1985).

Management personnel were also motivated by incentive systems. For department managers, for example, there was a system based on the plant’s return on assets.The bonus started when the return exceeded 15.5 percent and ranged up to 51 percent of base pay. (McManus, 1980). For division managers there was a bonus representing 15 percent of pre-tax earnings after deduction of hourly and department head bonuses. For officers there was a bonus based on pre-tax earnings. And for all employees except officers there was an additional pool consisting of 10 percent of pre-tax earnings.(McManus, 1980). In 1980 over one-half of the annual income of the officers came from compensation based directly on the company’s earnings. (McManus, 1980).

The Nucor incentive system was implemented on a lean and mean basis. Lean in this case meant minimal staffing. As a result, the company had a surprisingly small number of layers. Only three management layers intervened between Iverson and the production workers. Directly below him were the plant managers. Reporting to them were department heads. Below them were foremen and then the production workers. Not only did this system economize on labor costs and paperwork, but it also created an atmosphere of a “hands-on” company where top management was in close touch with field operations.

The “mean”side of the Nucor incentive system was a tough stand on absences and tardiness. As Iverson once described it, ” If you are more than 15 minutes late, you lose the bonus for the day. If you are more than 30 minutes late, you lose the bonus for the week.And if you are out all day for any reason, including sickness, you lose the bonus for the week.” ( McManus, 1980).

Not everyone can put up with that much discipline. As a result, Nucor experienced a high rate of turnover among first year employees. But those who stayed subsequently showed a low turnover rate according to Iverson. He attributed the observed pattern to a self selection process. In his view, ” The psychology behind (our system) is to make a type of position that appeals to the performance-oriented individual. When we start a plant we will have a turnover of 100 percent the first year because not everyone is performance oriented. There is a lot of peer pressure. It’s a group system.” ( McManus, 1980).

THE JOB SECURITY MECHANISM IN 1982

The deep double dip recession of 1980-82 provided a rare opportunity to observe Iverson’s job security mechanism under conditions of extreme stress. A huge drop in demand for domestic steel caused the major companies to eliminate thousands of jobs. The crisis made its deepest impact on Nucor in 1982 when the company had to cut production in half. This was done by reducing the work week to four days. As a result the average Nucor worker’s earnings fell by 25 percent while department heads took a 40 percent cut and general managers and officers had their earnings reduced by 56 to 60 percent. In other words, in stark contrast to the competition, Nucor maintained employment and asked all employees to share the pain by accepting temporary pay cuts.

THE THIN SLAB REVOLUTION

The mini-mill was one of two major technological revolutions pioneered by Ken Iverson in the American steel industry. The other was a technology for creating sheet steel by a casting process that produced 2-inch slabs.German innovators had developed a process which no other steel company was willing to try. Iverson decided to gamble on the process and Nucor successfully introduced the technology in a plant built in Crawfordsville, Indiana in the 1980s.While the gamble paid off, there was some negative fallout resulting from a tragic accident at the new plant. The drama involved in the thin slab gamble became the subject of a popular book by author Richard Preston (American Steel).

CONCLUSION

Ken Iverson retired in 1996. By then Nucor had become the benchmark company in the American steel industry and Iverson had become a living management legend for American industry in general.The numbers alone qualified him for icon status. Nucor’s compound annual rate of growth during his thirty year tenure was 17 percent. But it was the way that growth was achieved that made Ken Iverson a widely admired and closely studied business leader. In 1998 Iverson gave the general public a post retirement gift in the form of a short book highlighting his experiences and leadership philosophy ( Plain Talk: Lessons from a Business Maverick,1998).On April 14, 2002 he died.

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This article was written by Dr. Richard Hattwick.

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REFERENCES

Fortney, David L. , ” The Little Steel Mill that Could,” Readers Digest, August, 1985, pp. 110-111.

Iverson, Kenneth F. Plain Talk: Lessons from a Business Maverick. New York: John Wiley and Sons, 1998.

Kirkland, Richard I, Jr., “Pilgrim’s Progress at Nucor,” Fortune, April 6,1981, p.44.

McManus, George J., “Everybody Shares the Pie at Nucor,” Iron Age, October 15,1986.

“Metals,” Forbes, January 14, 1985, p. 170.

“Nucor: One Winner in Troubled Steel,” Business Week, Bivenber 21,1977, p. 104.

Nucor Corporation. 1979 Annual Report. p.4.

“Nucor Corporation.” Value Line Investment Survey. October 17,1986, p.61.

Preston, Richard. American Steel. New York: Avon, 1990.

Sease, Douglas R., “Mini-Mill Steelmakers, No Longer Very Small, Outperform Big Ones, ” Wall Street Journal, January 12, 1981, p. 10.