Copying Culture - Nucor's Fraternal Twin

culture

#1

Culture and leadership matter.

A strong leader and the right culture will turn ordinary ingredients into fantastic results. A strong culture can best adapt to changes and sustain profits. Both can create an impenetrable moat that competitors with the same resources always will have a problem defeating or catching up to.

This begs the question, is it possible to copy a successful culture and leadership style in the same industry? Yes, but the copiers have to understand the cultural why. Mindless copying (regardless of activity) always misses the why and ultimately fails.

It’s well known that Ken Iverson revolutionized the United States’s steel industry with mini-mills and other innovations. Nucor’s egalitarian culture, long-term vision and wise incentive programs allowed the company to buck industry trends and produce a profit throughout decades of cycles. There were no furloughs or mass firings at Nucor. No other steel producer had done that in the U.S.

So was Ken Iverson and Nucor’s culture a one-off? Well, in 1993 a few of Nucor’s top talents, Keith Busse, Mark Millet and Dick Teets left the company. Industry observers didn’t believe anyone could create a brand-new steel producer and succeed. The partners would prove the doubters wrong.

The company is Steel Dynamics (TIK: STLD). From its first mill’s opening in 1996 to today, Steel Dynamics has gone from zero to one of the top steel producers in the U.S. The company grew revenues from $32.2 million in its first year of production in 1996 to $7.7 billion in revenues in 2016.

How did they do it?

At Nucor

Keith Busse had joined Nucor in 1972 at the age of 29. Under the mentorship of Ken Iverson, Busse would rise through the ranks of Nucor. In the early 1980s, Keith helped his division stay afloat during the recession and still turned a minute profit. He also played an instrumental role in Nucor’s innovative move to flat-rolled steel production in mini mills (highlighted in our book).

After helping with the construction of Nucor’s first flat-rolled steel mini mill in Crawfordsville, Keith Busse got an idea. Flat-rolled steel production would be a revolution for steel making and he and his close colleagues would be hot commodities in the industry. They had already received a slew of new job offers. Instead of working for someone else, where the working environment might not be as good as Nucor, Busse proposed he, Millet and Teets should stick together and create their own flat-rolled steel production mini mill. In an interview, Busse said, “This was an opportunity of a lifetime, as we saw it.”

Over weekends the men would draw up plans. Since all three men had been long time Nucor employees, they knew how well the culture and company worked. Their plan copied almost everything from Nucor. The men successfully raised $400 million in capital, $110k of the partner’s own money. They strategically located the plant in Butler, Indiana, a location with excellent transportation arteries, access to railroads, energy and raw materials. The results were better than they had ever dreamed. Busse recounted the start of their first mill:

“In 14 months we built a steel mill that typically takes 2 years to build. We knew we had to be quick to be successful. In an industry where it is unusual to start a new steel mill that rapidly, it’s even more unusual to make a profit in less than 2 years. Steel Dynamics was profitable in only 6 months.”

Like at Nucor, Steel Dynamics’s culture is the force behind the results. Busse reported, “The engine that drives our success is our culture. We have a family environment producing superior results. Thousands of people are deeply invested in the company, and the company is dedicated to both the people and the communities in which they live.” And in Steel Dynamics’s 2017 investor presentation they expanded further:

Culture-Steel-Dynamics

Steel Dynamics has gone onto expanding into metal recycling, steel fabrication plants and steel coating facilities. The company has succeeded in stealing the best parts of Nucor’s culture and added their own unique flair.

The results of successfully copying Nucor’s culture? Steel Dynamics has outperformed Nucor, in terms of share price, since November 1, 1996 when the stock began trading on the market. Other steel makers have been left in the dust, too. STLD is also among the most profitable American steel companies in terms of profit margins and operating profit per ton. Steel Dynamics is only second to Nucor in terms of return on invested capital.

From STLD’s inception in 1993, the company has turned an initial $400 million investment into an $8 billion company. Excluding dividends, that would have been a 13.3% compounded annual return. In contrast the S&P 500, with dividends reinvested, returned only a 9.3% compounded annual return.

With the right people and understanding (the why), it is possible to steal the great components of a company’s cultural competitive advantage. Still it doesn’t mean that copying cultures is an easy task, especially for anything other than a start-up. The right structure and organizational culture needs to be set on day one of a business’s life. Otherwise, it will be too late.

Steel Dynamics is also a good reminder that companies with quality cultures should do everything they can to retain their talent as long as possible.

And for sharing a cultural edge? Even if you share them, competitors will likely ever get the why.


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Resources:
Nucor 2017 investor presentation

Keith Busse built SDI by taking risks

Steel Dynamics 2017 investor presentation