The_Innovators_Dilemma__Clayton

more than 93,000 in 1980 to fewer than 23,000 in 1991, and by investing more than $2 billion in
modernizing its plant and equipment. Yet all of this managerial aggressiveness was targeted at
conventional ways of making steel. How can this be?
Minimill steelmaking is a disruptive technology. When it emerged in the 1960s, because it used scrap
steel, it produced steel of marginal quality. The properties of its products varied according to the
metallurgical composition and impurities of the scrap. Hence, about the only market that minimill
producers could address was that for steel reinforcing bars (rebars)—right at the bottom of the market
in terms of quality, cost, and margins. This market was the least attractive of those served by
established steel makers. And not only were margins low, but customers were the least loyal: They
would switch suppliers at will, dealing with whoever offered the lowest price. The integrated steel
makers were almost relieved to be rid of the rebar business.
The minimills, however, saw the rebar market quite differently. They had very different cost structures
than those of the integrated mills: little depreciation and no research and development costs, low sales
expenses (mostly telephone bills), and minimal general managerial overhead. They could sell by
telephone virtually all the steel they could make—and sell it profitably.
Once they had established themselves in the rebar market, the most aggressive minimills, especially
Nucor and Chaparral, developed a very different view of the overall steel market than the view that the
integrated mills held. Whereas the downmarket rebar territory they seized had looked singularly
unattractive to their integrated competitors, the minimills’ view upmarket showed that opportunities for
greater profits and expanded sales were all above them. With such incentive, they worked to improve
the metallurgical quality and consistency of their products and invested in equipment to make larger
shapes.
As the trajectory map in Figure 4.3 indicates, the minimills next attacked the markets for larger bars,
rods, and angle irons immediately above them. By 1980, they had captured 90 percent of the rebar
market and held about 30 percent of the markets for bars, rods, and angle irons. At the time of the
minimills’ attack, the bar, rod, and angle iron shapes brought the lowest margins in the integrated mills’
product lines. As a consequence, the integrated steel makers were, again, almost relieved to be rid of
the business, and by the mid-1980s this market belonged to the minimills.
Figure 4.3 The Progress of Disruptive Minimill Steel Technology
81