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
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.
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
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.
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
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.
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."
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,
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
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
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
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
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,
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
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,
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.
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,
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
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).
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.
Fortney, David L.
, " The Little Steel Mill that Could," Readers
Digest, August, 1985, pp. 110-111.
F. Plain Talk: Lessons from a Business Maverick.
New York: John Wiley and Sons, 1998.
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.
Forbes, January 14, 1985, p. 170.
Winner in Troubled Steel," Business Week,
Bivenber 21,1977, p. 104.
1979 Annual Report. p.4.
Value Line Investment Survey. October 17,1986,
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.