Case: LINCOLN ELECTRICBy Team 4: Elizabeth Bugbey, Amy Dhuka, Ksenia Novikova, Adam Prather, & JT VinsonMGT 4360January 26, 2018 IntroductionThis case explores Lincoln Electric’s extensive history and development from their origins in 1985 as a small manufacturer of electric motors and generators into the global manufacturer of welding products, equipment, and consumables that they are today.
We are taken on a journey through Lincoln’s top-managerial decisions, tackling problems largely regarding worker compensation, demand vs. production volume, and the intricacies of international expansion. After being debriefed on Lincoln’s evolution, we are presented with the main decision situation: How should Lincoln approach establishing greater operations in Indonesia, if at all?1. How was Lincoln able to grow and prosper for so long in such a difficult commodity industry that forced out other giants such as GE, Westinghouse, and BOC, i.e.
, what has accounted for Lincoln’s outstanding and enduring success in the U.S.? Based on the facts given in the case, we have concluded that Lincoln Electric’s long held success in the electric part industry is due to the company’s unique incentive system and implementation of their strong innovative management style, which are both clearly derived from their founding philosophy and company values. The incentive system is composed of a “piecework” system which pays workers based on the number of pieces they produced and an annual bonus.
This system was unique and more successful compared to Lincoln’s competitors since all employees felt motivated to work their best and focused on creating more output per hour that was also high in quality.Allowed employees to get bonuses based on “output, cooperation, dependability, quality, and ideas”, which was 82.8% higher than competitors wages. This created more efficient, motivated, and cooperative employees, who produced high quality output fast.
Guaranteed employment kept the best and most qualified employees, who were also trained to do other jobs during recessions. This kept employees intact with company policies and allowed for higher efficiency because workers were able to seamlessly adjust their hours and tasks based on the company’s need during economic downturns.The management style is more participative, rather than hierarchical, which allows for “open communication” and gives employees a sense of ownership value. This style enables trust, respect, equality, and cooperation between all workers.The management style can be seen as the company’s “culture”, which encourages all to produce and innovate. This enables success and creates competitive advantage. With the combination of an innovative management and unique incentive system, Lincoln was able to lead the electric part industry, for quite a long time.
Lincoln’s approach seems to be derived from “Porter’s Five Forces”, since their success is due to bringing and analyzing all five competitive forces together. Lincoln understood how each force can establish competitive advantage and long term profitability, without compromising their quality and service. 2. In spite of their outstanding success, the internationalization thrust of the late 1980s and early 1990s failed. What were the results of this internationalization drive, and what were the primary causes of failure?The company’s early ventures abroad were successful with plants opening in Canada, Australia, and France. However, after 1965 many new international expansions were turned down by the new company lead, William Irrgang , over lack of trust in foreign governments.
With Irrgang’s passing in 1986, George Willis took over as CEO and began to aggressively pursue more international expansions. The results of the new expansions are as follows: Initial Expansion Most of the new international plants were acquisitions. Lincoln retained many of the original management in addition to sending over their own U.S. managers to help implement the incentive system.Many of the acquisitions had unionized workers and they had historically had poor relationships with management.
This lead to resistance to the incentive system that had worked so well in the earlier years. Many workers valued their off time more than additional pay. Also, many foreign regulations made the incentive system either difficult or completely illegal.Financial TroubleRecessions in Europe and Japan caused many of the new plants to be operating in the red. Willis and other executives pointed to success in their incentive system in Mexico as a reason to have faith in their modified systems in other subsidiaries.
However, the new plants continued to drag down the corporation and in 1993 Lincoln lost money for the first time in company history.The international losses were also affecting the success in Cleveland. Eventually the plants in Germany, Japan, Brazil, and Venezuela were closed.These financial troubles caused Lincoln to bring in multiple outside senior executives to help diagnose the problems abroad.
Some of the primary causes of failure are as follows:Lack of adaptation for each new countryThe incentive system was doomed to fail in many countries due to government regulations such as outlawing piecework or making bonuses guaranteed after a certain period of time. Lincoln should have studied these regulations and made appropriate changes to their system for each country.Lincoln should have taken more time to analyze the cultures of their newly acquired subsidiaries. Knowing the previous cultures would have helped in the process of adapting the incentive system, in addition to helping Lincoln know how and when to promote their own organizational culture.
Additionally, Lincoln saw the success of their strategies in Mexico and believed that each other plant would soon follow suit, not accounting for any cultural or governmental differences. Poor resource managementThe cleveland plant seemed to be the main focus of Lincoln. When the European and Japanese recessions hit, Lincoln did little to help the plants in these areas. Instead, they should have used the success they had in Cleveland to contribute capital and help bolster their failing foreign subsidiaries. Other causesSome of the U.S. Managers Lincoln sent overseas had experience with the Cleveland system but lacked actual manufacturing experience. This, along with allowing the subsidiaries to retain their previous managers and production styles turned out to be costly for the company.
Each of the European factories produced nearly a full line of welding products. This kept costs high.Lincoln should have turned these into focused factories where each factory produced a specific product. This would help them to streamline processes within each plant and it would allow them to take advantage of the European Council’s elimination of intra-European tariffs. This would also help with their overcapacity problem.Many of the new acquisitions had small market shares and weak sales organizations.
Lincoln didn’t realize this because their main focus was the quality of the facilities themselves.3. What is your evaluation of the company’s new internationalization strategy under Tony Massaro’s leadership? Is it likely to be more successful than the previous offshore initiatives? If so, why?Tony Massaro was the first CEO with an international experience. We have concluded, his strategy was more successful than the previous initiatives. Tony Massaro’s strategy was particularly focused on global efficiency. He established a new structure of the company by dividing it into 5 regions (North America, Europe, Russia/Africa/Middle East, Latin America and Asia) and naming a president for each region, which made the company become more centralized. We believe a centralized structure enabled the company to make more effective decisions about Lincoln’s overall global strategy. Each president knew the situation in their region and could advise Massaro on whether or not Lincoln should create a manufacturing capacity there.
This type of collaboration is a very efficient practice in global strategy, since it helps a company to share its knowledge and use its best strategies in each department. Massaro also created a special compensation system for each of the presidents in order to encourage them for interregional collaboration. After that, he choose a different type of compensation system targeted towards workers. Similarly, Lincoln’s incentive system was also an important source for competitive advantage, however it could not fit with all aspects. So, Massaro tried to adjust it to local condition by giving managers freedom to use only the most appropriate elements of that system.
Overall, we believe that Tony Massaro’s international experience helped him create a more successful global strategy than that of what George Willis did.4. Should Lincoln go ahead with its investment in Indonesia, i.e., what advice would you give to Mike Gillespie with regard to his Asian expansion strategy; particularly his plans for entry strategy, ownership/partnership structure, and worker compensation system?After reading the case and looking into the facts surrounding Indonesia, we find it promising to enter the market in Indonesia with a factory. WIth political and economic risks, we see it beneficial to enter the market through a joint venture agreement and recommend entering that agreement with Suryiasurana Hidupjaya (SSHJ). While having less offices in Indonesia, they put forth the effort to show potential customers the importance and benefits of having a Lincoln Electric piece of equipment.
The parent company of SSHJ has also proven through taking losses that they are dedicated to helping Lincoln Electric succeed and enter into markets that otherwise they could not enter. One aspect of the business we see being unsuccessful in Indonesia if implemented there the way it is in the US and other countries is the compensation of workers. In western culture, everything is about the individual and how one can get ahead of their competitors (coworkers) while eastern culture is totally different.
They place value in the team and having everyone do their part to make the group perform at their highest level. While the incentive program works great in the Western part of the globe, it could lead to people in Indonesia not buying into the company because it would lead to unneeded competition between people in the plant. Having a base salary for those in certain positions at the factory in Indonesia is the easiest, most cost efficient way to work around the incentive program. It shows the potential workers, that you care about their culture and want to cater to their needs and some wants.
In the end, we are trying to sell Lincoln Electric parts and we need the individuals who are working for the company to be buying into our culture and business strategy. Conclusion After analyzing the case about Lincoln’s mistakes and successes, we have gained important takeaways about global operations and expansion. It’s clear that clear communication amongst managers, data aggregation and utilization, respect for employees, and customized strategies for countries of varying cultures are among top factors to remember when operating a large organization, especially one with an international presence.