CASE 3: FROM REO TO NUCLEAR TO NUCOR

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By Steven L. McShane, Curtin University (Australia) and University of Victoria (Canada)

In 1904, Ransom E. Olds founded REO Motor Car Company in Lansing, Michigan. He also launched several subsidiaries—Atlas Drop Forge Company, National Coil Company, and Michigan Screw Company, among others—to ensure a reliable supply of parts for REO’s main business. Olds left Olds Motor Vehicle Company, a business he had founded eight years earlier, after fighting a losing battle against company president Samuel Smith and Smith’s son over their decision to build luxury cars. Olds believed the company’s success lay in low-cost vehicles, but Smith held most shares in the company, so his decision to build luxury cars was implemented. In 1908, cash-strapped Olds Motors was sold to General Motors, which produced Olds mobiles until 2004.

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Less than one year after Ransom Olds left Olds Motors, his new company (REO) launched a 7.5-horsepower one cylinder runabout, similar to the wildly popular “Curved Dash” car Olds had designed at his previous company. REO’s other initial offering was a 16-hp two-cylinder touring car. The quality of the REO touring car was famously demonstrated through long test drives and endurance competitions, such as the Mt. Washington Climb to the Clouds competition in Vermont in 1905 and a historic 6,700-km trip across Canada in 1912. With soaring sales during the first few years, REO became the third-ranked automobile manufacturer by sales in the United States by 1907. Olds continued to develop his touring car and, by 1912, declared that it was “perfected.” He stepped down as general manager in 1915 and retired from the company in 1923 to pursue an ill-fated real estate project in Florida.

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REO Motors boasted efficient production methods. Ransom Olds introduced the world’s first automobile production assembly line at Olds Motor Vehicle Company in 1901. These practices were incorporated into REO’s production facilities in 1905, allowing the company to initially sell cars at a low price. Olds was also recognized as a leader in quality control practices. However, even with ongoing innovations to its cars, REO quickly lost market share to Ford Motor Company and others. In particular, Henry Ford mechanized the assembly line process (conveyor belts moved the product along the assembly line) and made much higher production demands on workers. As a result, Ford was able to price his Model-T far below REO’s entry-level offering.

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By the 1920s, REO was a small, yet profitable, player in the automobile industry. During its peak in the late 1920s, REO employed about 5,500 workers who annually produced almost 50,000 trucks and cars. (By comparison, in 1920 Ford Motor Company produced one million Model-T cars alone.) Over time, REO became more dependent on sales of its trucks than its cars. REO’s first truck, the REO Delivery Wagon, was introduced around 1910 with the advertising claim that it would allow one person to do “the work of three horses and three men” for about the same cost “as one horse and wagon and man.” Five years later, the company launched the REO Speed Wagon, so-named for its reported top speed of 40 miles per hour. REO began manufacturing buses in the 1930s.

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REO’S CULTURE AND WORK PRACTICES

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REO had a distinctive “family feel” culture and was an early practitioner of welfare capitalism. Welfare capitalism involved building employee loyalty (and staving off unionization) through the development of human relations and personnel practices. REO tried to provide (and at times promised) job security, respect for seniority, and opportunities for career development. REO built an employee clubhouse (known as the “Temple of Leisure”) where workers and their families could watch movies, attend dances, and listen to concerts by REO’s in-house band. The company’s employee handbook in 1915 stated that the Welfare (Personnel) Department would investigate and seek a “square deal” for those with a legitimate grievance. During the Great Depression, REO management reduced work hours and increased job sharing to minimize layoffs. (Even so, REO’s employment fell precipitously during these times.) REO also apparently assisted workers who could not pay their bills.

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From its founding to the 1930s, REO emphasized values and expectations regarding how employees should be treated by management, and how employees should behave at work and as community citizens. The company encouraged company sports teams, partly in the belief that these activities developed team skills, built allegiance to the company, and identified those who lived up to REO’s values of competition, cooperation within the team, and fair play. REO didn’t pay the highest wages, but its welfare capitalism had the desired effect. The company enjoyed one of the lowest rates of employee turnover in the industry. When unionization gripped the industry in the 1930s, REO’s transition was generally smoother than elsewhere. In addition, the older employees felt tremendous pride in REO’s products and the firm’s contribution to the community.

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REO was a profitable company throughout the 1920s. Unfortunately, REO’s management invested these profits in an expanded line of cars, particularly in the higher price range. These investments were made just prior to the Great Depression, when car sales in general—and luxury vehicles in particular—plummeted. In 1933, REO’s president was removed and Ransom Olds was brought back as company chairman for one year. He launched several projects, including a light version of the Mack truck, a concept delivery van, and a new line of buses. None of these initiatives were profitable. In 1936, REO suspended car production and, in 1938, filed for bankruptcy protection. The company reorganized as a truck and bus manufacturer. REO survived over the next 15 years mainly through military contracts for its trucks and buses. It also expanded into the manufacture of lawn mowers and children’s swing sets.

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REO GOES NUCLEAR

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When the Korean War ended in 1953, REO’s military contracts diminished, leaving the company in a difficult financial situation. REO’s board sold off its vehicle manufacturing operations and, with only $16 million in cash and no operating business, decided to liquidate the company. A dissident group of shareholders had different plans, however. The shareholder group forced REO’s board to acquire Nuclear Consultants, Inc., a tiny nuclear services company. In 1955, REO Motor Company changed its name to Nuclear Corporation of America Inc., becoming the first publicly traded nuclear company.

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Nuclear’s stock soared based on the popularity of the word nuclear as well as various “publicity stunts” to leverage the company’s name. The company’s actual business activities in nuclear instrumentation (geiger counters), nuclear energy, chemicals, and electronics were much less spectacular, however. (One source reports that they “bordered on the illusory.”) Able to sell stock relatively easily, Nuclear went on a buying spree to become a conglomerate of several independent businesses. By the early 1960s, Nuclear was involved in nuclear services, prefabricated housing, graphic arts, leasing, contracting, and steel joist businesses. Unfortunately, most of these ventures were unprofitable. In 1965, Nuclear’s board filed for bankruptcy protection, ousted its president, and promoted Ken Iverson as the new president and CEO. Iverson had been hired in 1962 as general manager of Vulcraft Corporation, a joist manufacturer in South Carolina that Nuclear had acquired at that time. Vulcraft was Nuclear’s only profitable division, and Iverson had been promoted to group vice president prior to taking the top job.

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Iverson quickly sold off or closed four of Nuclear’s eight divisions, slashed the number of management positions from 12 to just 2 people, and decided to focus the company’s growth through Vulcraft. Vulcraft enjoyed 20 percent market share of the joist business, but it was entirely dependent on the price of steel, which was considered too expensive and sourced from unreliable sources (80 percent came from foreign steel plants). So Iverson, who was trained as a metallurgical engineer, made the historic and risky decision in 1968 to produce bar steel for Nuclear’s joist business. The company borrowed heavily to build a steel mini-mill using electric arc furnaces that melted scrap steel. Nuclear’s mini-mill experienced delays and “catastrophes” during its first couple of years, but eventually produced steel bars far below prevailing costs of traditional coke-and-iron steel mills. In response to Nuclear’s new steel plant, American steel companies canceled their contracts with the company.

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NUCOR’S NEW ERA

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With no nuclear business activity, the company changed its name for a third time in 1972 from Nuclear Corporation of America to Nucor Corporation. In 1977, Nucor expanded its business to steel decking. It also built more mini-mills, becoming the 20th largest steel producer by 1980. Other companies also built electric arc steel mini-mills, which threatened Bethlehem, Republic, and other traditional steel mills. Many of these traditional plants went bankrupt by the 1990s. In 1986, Nucor took its biggest gamble by building the first thin slab sheet steel mini-mill at a cost of one-third the company’s total annual revenues. The experimental plant in Crawfordsville, Indiana, experienced setbacks and one tragic fatality. But within four years the plant was operating near capacity, producing flat-rolled steel in one quarter of the time of its competitors and at a significantly lower cost.

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Nucor’s expansion in steelmaking continued unabated through acquisitions and construction of new plants. Today, with $20 billion in sales and more than 200 operating facilities (most in North America), Nucor is the largest steelmaker and the largest recycler of any material in the United States. (Nucor recycles the equivalent of one SUV vehicle every five seconds.) Except for 2009, it has been profitable every year since the late 1960s and, unusual for the steel industry, has never laid off any employees.

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NUCOR’S CULTURE AND WORK PRACTICES

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Nucor’s success under Iverson’s leadership was due in part to investment in risky technological innovations, such as building one of America’s first electric arc steel mills and developing the first flat-rolled sheet steel mini-mill. However, much credit also goes to Nucor’s productive and innovative culture and work practices that Iverson nurtured and which remain to this day. Beginning with the 1965 reorganization, Nucor has maintained an extremely lean head office, decentralizing most decisions to the local mills.

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Only 100 people out of a workforce of 22,000 are employed at headquarters.

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Nucor also has an egalitarian culture with one of the flattest organizational hierarchies for a company of its size. Initially, Iverson demanded that Nucor would have only four layers of management: CEO, vice president/plant manager, department manager, and supervisor. A fifth layer (five executive vice presidents) was reluctantly added a few years ago to reduce the CEO’s span of control, thereby freeing up time to address government and industry policy issues. Nucor’s egalitarian culture is also apparent by the lack of special executive perks (no company cars, executive dining room, etc.) and lower executive pay than in many other companies. When Nucor bought a corporate jet a few years ago, the CEO wrote to employees explaining how the purchase was cost-effective compared with previous charter jet rentals.

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A third feature of Nucor’s culture is its strong emphasis on performance-based rewards around team and organizational performance. Nucor mill workers, all of whom are nonunion, earn only about $10 an hour in base pay, but their total compensation is the highest in the industry (about $80,000 annually in good years) due to generous performance-based bonuses around team and organizational outcomes. Teams of 12 to 20 employees earn a generous bonus for each batch of steel produced. If employees produce a bad batch of steel before it leaves the mini-mill, they lose their bonus for that shipment. But if a bad batch makes its way to the customer, the team loses three times its usual bonus. Employees also earn a profit-sharing bonus, which is about $15,000 annually in recent years.

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The performance system not only encourages innovation and quality control in the mill plants; it also encourages a strong team-orientation in the work process. For instance, two days after one manager became head of a Nucor Vulcraft plant, every other general manager in the Vulcraft division called with offers to help him in his new job. Their offer wasn’t idle politeness because, as the new manager pointed out, “My performance impacted their paycheck.”

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Empowerment is a fourth cultural feature of Nucor. Employees have considerable freedom and job flexibility to experiment with innovations and to adjust their work to fit demands. This empowered culture is apparent in many ways. For instance, when the electrical grid failed at one Nucor mini-mill, three Nucor employees immediately drove or flew there without any requests from management and had the mini-mill back in business within three days. And when tornados knocked out power for almost one month at Nucor’s plant in Decatur, Alabama, staff at other plants responded by shifting Decatur’s work to other Nucor sheet mills so the orders could be completed on time. Nucor Chairman Emeritus Daniel DiMicco summarizes the company’s empowerment culture: “If you see something that needs to be fixed, you fix it. You don’t need to get approval from three supervisors because your supervisors know you have integrity, and they trust that you’ll do the right thing. That’s a huge competitive advantage for us.”

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Although Nucor has excelled in its work practices, until a few years ago, it was far from a role model in environmentalism. A dozen years ago, Nucor paid the largest environmental settlement by a steel company in the United States for allegedly failing to control the emission of toxic chemicals in several U.S. states. It was also identified as the 14th highest contributor to air pollution in the United States. Nucor responded to these concerns by hiring environmental staff and introducing new technologies, with the result that its emissions and energy use have fallen dramatically. For example, the company’s new ultra-thin cast strip process consumes 85 percent less energy than a conventional mill with a 75 percent reduction in greenhouse gas emissions.

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Sources: “22 Years under One Management,” Barron’s, May 9, 1927, 19; M. Donsky, “Man of Steel Talks Nuts and Bolts,” Business North Carolina 9 (May 1989): 38; L.M. Fine, “Our Big Factory Family: Masculinity and Paternalism at the REO Motor Car Company of Lansing, Michigan,” Labor History34, no. 2 (1993): 274–91; N. Padgett, “1905–1910 REO,” AutoWeek, October 6, 1997, 35; M. Mueller, The American Pickup Truck (St. Paul, MN: MBI Publishing, 1999); A.K. Gupta and V. Govindarajan, “Knowledge Management’s Social Dimension: Lessons from Nucor Steel,” Sloan Management Review 42, no. 1 (2000): 71–80; “How Nucor Upgrades Governance While Preserving a Unique Corporate Culture,” Directorship 28, no. 3 (March 2002): 1–2; C.R. James, “Designing Learning Organizations,” Organization Dynamics 32, no. 1 (2002): 46–61; N. Byrnes and M. Arndt, “The Art of Motivation,” BusinessWeek, April 30, 2006, 56; M. Bolch, “Rewarding the Team,” HR Magazine, February 2007, 91–93; Nucor 2011 Sustainability Report (Charlotte, NC: 2012); Nucor 2012 Annual Report(Charlotte, NC: March 2013); J. Stein, “Legends and Heroes; Ransom E. Olds,” Edmonton Journal, July 30, 2013, D10; “Our Story,” www.nucor.com (accessed August 22, 2013).