The story of how Nucor went from scraps to daps! - Innovator's Dilemma Part III

Hey there, my friend!

Trust me the Innovator’s Dilemma is a dense book. Clayton goes deep into the case studies. Now, I know you don’t have time for that. So we are just hitting the Nucor story a higher level.

estimated read: 4 minutes

• How good managers end up making the wrong decisions about projects to fund.

• How Nucor stole the steel markets from under the big dogs

Picture this: You're the manager of a successful firm, and two of your employees just came to you with new product ideas.

One of them is a marketer who wants to pitch a high-capacity, high-speed product, while the other is an engineer who wants to pitch a cheaper, smaller, slower, lower-capacity product. But, it is rugged and has simple design that could be used in many products since it is so small.

Let's start with the marketer's idea. They did their research and found out that there's a whole segment in the workstation industry that spends over $600 million on drives each year. They've even talked to potential customers who want prototypes, and there's a design window opening up in nine months. Plus, they think they can get a gross margin of 35%!

Now, let's move on to the engineer's idea. They're not quite sure who will buy their product but given it’s smaller size and simpler design it could be used in a variety of ways.

So, which idea are you going to back?

It's pretty clear, my friend! You gotta go with the marketer's idea. They've already identified a clear market and talked to potential customers. They have a clear path to profitability.

On the other hand, the engineer's idea is less likely to be successful since there isn't a clear market demand and potential customers are skeptical. As a manager, it's crucial to back projects that have a clear path to success and profitability. While it's tempting to invest in new, innovative ideas, it's essential to focus on projects that have a market demand and potential customers lined up.

This issue is at the heart of this book. This is the exact reason why the steam shovel guys from yesterday just couldn’t jump into hydraulics.

So, consider this when evaluating new product ideas and deciding where to allocate your resources.

Back the projects that have the highest potential for success and profitability, and you'll be on your way to success, my friend!

But here's the thing - sometimes even the smartest managers can be wrong. In fact, one manager Clayton spoke to insisted that there was no market for a certain type of drive, even though there was one.

He had a 1.8-inch disk drive in his catalog for 18 months, but none of his EXISTING CUSTOMERS wanted it.

Then one day Clayton was leading a case discussion in a Harvard MBA program about the development of a new car when one of the students who previously worked at Honda mentioned that they used a 1.8-inch disk drive in their dashboard mapping and navigation systems. But get this - they couldn't buy them from any of the big disk drive companies. They had to get them from a little startup! I guess that engineer was right!

Speaking of being right, let's take a look at the story of Nucor. They started out as a little-known company turning scrap metal into low-quality rebar. Not exactly a recipe for success, right? But they were built different. They became the nightmares of all the existing steel manufacturers. (RIP Bethlehem Steel 1857-2003)

They had different cost structures than those of the integrated mills: little depreciation and no research and development costs, low sales expenses, and minimal general managerial overhead. They could sell virtually all the steel they could make by telephone and still make a profit. At first their technology was only good enough to make rebar.

Once they had established themselves in the rebar market, the most aggressive minimills like Nucor and Chaparral saw that opportunities for greater profits and expanded sales were all above them. They worked to improve the metallurgical quality and consistency of their products and invested in equipment to make larger shapes.

The traditional mills were actually fine with the mini-mills making the rebar. It freed up capacity for the traditional mills to make more of the higher-margin products demanded by their best customers.

But, over time the mini-mill technology improved and they were then able to attack the markets for larger bars, rods, and angle irons immediately above them. By 1980, they had captured 90% of the rebar market and held about 30% of the markets for bars, rods, and angle irons. They continued their march upmarket, this time toward structural beams.

There you have it! Nucor was able to dominate the steel industry by turning trash to cash!

We just learned how disruptive technology can kill the market leaders. Tomorrow, we will start Part II of the book. We will see how existing companies can use the concepts.

Till then. I’m out!

Camillo