A Case Study of Lincoln Electric
Nine out of ten new businesses fail within their first year. This is an upsetting statistic that may in fact be more of a myth than truth. However, recent data indicates the same trend just not as extreme. According to Brian Headd and data from the U.S. Census, a more realistic figure indicates that 62% of businesses close within the first six years of operation (Headd 2). This raises the question of: What makes a successful business? By analyzing and dissecting the intricacies of Lincoln Electric’s consistently stellar performance in addition as paying close attention to several interesting financial pitfalls an answer can be found.
Value in the Individual
An organization at its chief is made up of individuals and equipment. Now which of these has the most influence over the success of that organization? Most emphasis must be placed on the individual because he is the one that can be creative, motivated, skilled, efficient, and responsive. The proper function of management is to draw out these characteristics and encourage their growth in a productive setting. A large portion of Lincoln Electric’s (LE) success can be credited to this rare and effective management style which ultimately leads to a competitive advantage. No matter the economies of extent a huge corporation such as GE can offer, the increased productivity level of a properly motivated individual production worker can easily compensate for it. This management style is further fostered by a combination of structural, strategic, and cultural norms within LE.
Structurally, Lincoln Electric aims to flatten the hierarchical structure and eliminate nonfunctional middle management locaiongs. To do this, LE has fostered an “open-door” policy between production workers and executives in addition as produced an Advisory Board that has representatives of the workers who meet with executives twice a month. Strategically, LE pushes for an integrated approach of maximizing output and reducing costs. Though this seems straightforward and simple, the effectiveness is in the details. Cost reduction will be explored at a later time, but to maximize output, Lincoln Electric draws from its motivated employees. However, these employees are not naturally motivated. This is the role of James Lincoln’s motive Management System. This system provides a tool to motivate all employees by bonuses that redistribute a large portion of the corporation’s yearly profits. Two main results grow out of this redistribution. First, there is a heightened sense of ownership in the company from top to bottom because if the company as a whole does well, everyone is compensated for it respectively.
Secondly, there is increased personal performance. This performance raise is the consequence of a sort of quiet competition within each work group. A specific bonus pool dollar amount is allotted to each work group, and the bonuses are then distributed to the members of that group according to their quantified relative performance on the semi-annual Merit Rating. Now the Merit Rating’s function is to counteract some of the pitfalls of a strategy based on speed and efficiency. Generally the consequence of an emphasis on speed is the sacrifice of quality and safety. Each tenet of the Merit Rating (including Dependability, Quality, Output, and Ideas/Cooperation) is a reaction to the shared shortcomings of a traditional production worker. By being rewarded for attendance, work quality, and contribution of ideas on top of their piecework output leads to a well-rounded final product that is produced at the proper specifications in record time.
To further the speed of production, LE places a strong emphasis on idea generation and worker input. This allows for creative ideas and suggestions on the production course of action to be spread over the whole corporation. As a consequence, there is a strong and steady increase in LE’s productivity per worker. The Merit system also serves to increase coordination by rewarding teamwork while at the same time introducing an component that is historically known to be one of the greatest efficiency drivers of all time: competition. Though this seems like teamwork and competition would be in conflict, they are not. Since there are only a certain number of possible Merit Points obtainable, competition over these points between members of the work group exists. However the total payoff at the end of the year is divided up based on the profit of the corporation as a whole; consequently encouraging teamwork and idea sharing. This comprehensive motive Management System unifies the direction of the workforce and leads to a balanced and efficient set of goals that yields a strong competitive advantage over competitor companies. In a commodity industry it is the time of action, not the product, that must prevail and be differentiated. Lincoln Electric has found the perfect course of action, but is it a universal course of action that can apply overseas?
Cost Reduction and Market Expansion
The blind pursuit of profit can easily rule to poor decision-making. That is why the method to creating income is vital. The question is how does a company increase margins? Two simple choices exist: Reduce costs, or increase output by expansion and efficiency. Lincoln Electric has identified this dynamic duo and integrated it into the general business strategy. To reduce costs, LE uses a variety of strong business tactics. There are three shifts on equipment, so it is regularly rotated and allows for no downtime on equipment. This prevents having excess capacity which leads to unnecessary overhead costs. Also, LE has aimed to flatten the structure of the company and eliminate levels of the organization that detract from the established open communication ecosystem between workers and management. This reduces salary expenses and ultimately increases profit margin.
The concept of guaranteed employment is another bright cost-reducing idea of James F. Lincoln. The cost of retaining employees on payroll is less than the cost to recruit and aim motivated and creative workers. As a consequence, during downturns, LE did not layoff workers but would retrain and deploy them in other places in the company. This would encourage loyalty to the company and highly reduce employee turnover, once again reducing cost to Lincoln Electric by a variety of quantitative in addition as qualitative method. Lastly, there is the concept of limited benefits enhanced profits. This enhancement reflected back to bonuses and worker’s piecework compensation which put more control in the hands of the individual with the allotment of money and compensated for their without of benefits. LE’s approach to maximizing output was explored before, and the general consensus was a focus on developing a creative, motivated, and efficient production worker who consistently puts out more effort than a similar production worker in another firm. Another option to increase output is expansion into other markets.
Lincoln Electric first expanded to Canada by opening a manufacturing plant in Toronto in 1925. About twenty years later, LE Canada adopted the motive Management System (IMS) including its annual bonus and piecework aspects. Due to the similar cultural norms between the U.S. and Canada, this adjustment flowed smoothly. However, poor decision-making led to this application of the IMS in other markets, including Europe and South America. Friction resulted because the cultural values of the production worker are different. Also, government regulation in Germany and Brazil led to major adjustments that undermined LE’s motive efforts. In Europe, workers valued benefits such as vacation time over annual bonuses. It was discovered that annual bonuses did little to increase individual production efficiency without the piecework aspect of the IMS. Piecework was in fact illegal in Germany.
clearly if more planning or research had been done, this crucial fact would have been discovered and LE would have avoided expansion into Germany. The root of Lincoln Electric’s troubles began with the quick expansionist mindset of George Willis. The main trouble was the speed of the expansion. LE incurred long-term financial debt for the first time in the corporation’s history. The additional interest expense and long-lasting liability hurt future income statements heavily. A study of Lincoln Electric’s Consolidated Income Statement in addition as the Balance Sheet discloses some interesting financial facts.
Starting in 1987, LE had no long-term debt. This skyrocketed along with the push for expansion in later years to over $220 million in 1992. As the Income Statement indicates, the height of this long-term debt matches with the first net loss of Lincoln Electric. Failure to control spending and keep costs low (the historical competitive advantage of LE) undermined the desire to increase output by expansion. Another interesting fact is that as sales leveled off in 1992 and 1993, general costs and expenses failed to coincide so they continued to rise until 1994 which happens to also be the first posted net income after the losses of 1992-93.
This examination of cost-reduction and market expansion raises several questions. How can Lincoln Electric prevent similar losses in the future? How closely correlated is the 1992-93 net loss with geographic expansion? What can Lincoln Electric do in the future to continue its historical rapid growth and competitive advantage?
So decision time has come about Indonesia. Is Indonesia ready and willing to match up with Lincoln Electric’s strategy, or will it ward off the incentives that are the meaningful competitive differentiators? After examination of Indonesia’s economic and financial situation, I recommend slow expansion into their welding market. The current dispensing network of Tira and SSHJ should be changed so that it can be perfected and expanded. Though smaller, SSHJ’s strategy coincides with LE’s more so than Tira’s strategy. I suggest using only SSHJ salespeople because they highlight the cost-savings and benefits of Lincoln Electric’s products while aiming to draw in new customers via LE’s name recognition and reputation for high-quality. LE should utilize cooptation to provide the company with local contacts and recommendations so that past errors in motive management can be addressed and changed. Exact details of my recommended Indonesian expansion are stated in the following list:
o Combination of piecework and salary with a salary representing a figure slightly lower than the average Indonesian manufacturing worker wage of 250,000 rupiah.
o No annual bonus because the economy is so shifty and volatile that it would most likely not affect daily effort.
o Guaranteed employment would exist by the understanding that economic change would not threaten a workers job. Job security would encourage intense loyalty and be a strong factor in building a consistent workforce.
With this comprehensive entry strategy into the Indonesian market, I feel that Lincoln Electric will only be met with success. This strategy encompasses the strongest aspects of LE’s Cleveland motive system while tailoring it to be profit-maximizing in the specific Indonesian ecosystem. Gillespie should have no worries as he presents these plans to his colleagues because the foundations of this plan are rooted in the historically successful traditions of Lincoln Electric, and have been modificated to compensate for the differences that hindered past global expansion.