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Strategic Management

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BUSI 1317: Srategic management | Lincoln Electric | The Welding Industry’s Titan | | | |
1st December, 2014

ABSTRACT The purpose of this paper is to analyze Lincoln Electric’s overall strategy and business model and evaluate how generalizable is the company’s business model in other industries, specifically focusing on feasible strategies for one of the fastest developing country, India. |
Contents
Lincoln Electric’s Background 2 Recent Reporting 2 Main Features of the Lincoln Electric Business Model 2 Company Philosophy 2 Overall Strategy 3 Compensation, Leadership and Communication 3 How generalizable is Lincoln Business Model to other industries? 4 How generalizable is the Lincoln’s approach to India? 5 Employment System 5 Incentive System 6 Conclusion 6 Appendices 7 Exhibit 1: Hofstede's Dimensions Comparison - India & USA 7 Exhibit 2: India and U.S GDP Comparison 7 Bibliography 8

Lincoln Electric’s Background
Lincoln Electric Company is the largest manufacturer of welding equipment in the world and has been in existence for over 100 years since 1895. The founder, John C. Lincoln started the business selling his own designed electric motors with the $200 he made from redesigning Herbert Henry Dow’s engine (Paul F. Buller, 2006).
The company grew steadily, and in 1906 sales rise to $50,000 a year. John expanded his work force and in 1907, his brother, James F. Lincoln joined the company as a senior manager and introduced several innovative human resource policies and management practices (Siegel, 2008).
According to the company’s official website, demand for welding products hiked during World War II. ‘Arc-welding has been the standard joining method in shipbuilding for decades. It is the predominant way of connecting steel in the construction industry.’ The company saw an opportunity to expand its market by welding ship hulls; they became the world’s leading producer of arc welding products as sales grew from $4,000,000 in 1934 to$24,000,000 in 1941.
Recent Reporting
Under leadership of John Stropki since 2004, Lincoln Electric shifted expanding more in the Asian market – specifically China. It is now the world’s largest designer and manufacturer of arc welding and cutting products. Thanks to its technological innovation and good support, the company can charge a price premium for its products. In 2005 Lincoln’s net income was $122 million on sales of $1.6 billion, by 2006 the company held manufacturing operations in 19 countries across five continents (Siegel, 2008).

Main Features of the Lincoln Electric Business Model
Company Philosophy
Lincoln’s vision is to become an international global market leader in the welding industry. The company’s core philosophy fits the meaning of strategy – to fulfil customers’ requirements with value thus create competitive edge over rival companies.

According to Jackson, James was fathered by a Congregational minister, and thus built his business philosophy around Christian principles (Susan Jackson, 2011). It influenced him to prioritize quality, efficiency and moral ethics instead of focusing on deception in cunning marketing techniques.

Overall Strategy
Since the 1940s, Lincoln Electric had international operation and its hunger for expansion continued. The first major international expansion was during 1986 – 1992 from 5 manufacturing plants (in U.S, Australia, France and Canada) to 22 plants in 15 countries.
Lincoln’s use of merger and acquisition strategy continued in the United Kingdom, Mexico, Brazil, Scotland, Norway, Germany, Spain and Netherlands. However, the acquisitions in Europe and Latin America caused the company a $325 million in operating losses. In order to pay for its employees’ annual bonus Lincoln had to gather finance through loans (Siegel, 2008).
Success did not come smooth, soon after its 1980s’ expansion problems, Anthony Massaro then CEO saw the chaos of duplicate products in its European plants and closed down unprofitable plants in Japan, Venezuela, Germany and Brail. Taking those business experiences into account, the next CEO, Donald Hastings announced to rely more on joint ventures and strategic alliances. Up until now, CEO John Stropki encouraged expansions into the Chinese market with strategic alliances strategy and is now eyeing opportunities in the Indian market.

Compensation, Leadership and Communication
The Lincoln brothers believed in providing right incentives and allowing employees to fulfil their potentials. James F. Lincoln was renowned for introducing innovative human resource policies such as ‘employee stock ownership, incentive bonuses determined by merit ratings, Employee Advisory Board, employee suggestion system, piecework pay, annuities for retired employees’. Since 1958 he implemented a no layoff policy which created a sense of job security amongst the employees and greatly boosted morale so employee turnover is rare.
In 1965, James passed away and employees had concerns such as the management system may fall in disorder, profits decline, and year-end bonuses might be stopped (Susan Jackson, 2011). On the contrary, high profits were attained and bonuses were given each year - except for the 1982-1983 recession years. Sales grew and in 1995, the company’s centennial year, sales broke records and surpassed $1 billion.

Lincoln encouraged an entrepreneurial environment in its manufacturing plants and the most important form of communication is trust. The company allowed workers to manage themselves, with a ratio of 1 foreman to approximately every 68 employees (Siegel, 2008). It is clear Lincoln’s leadership style is a mix of ‘democratic’ and ‘affilliative’ (two of six leadership styles studied by Daniel Goleman, 2000). The company encourages workers to voice their opinions through suggestions, and focuses on building mutual trust.
Lincoln’s incentive system requires a lot of trust between employees and senior management. The suggestion system offered workers a platform to submit suggestions on a weekly basis that they believe would benefit the company and ultimately benefit themselves. Mutual trust was built and with trust comes transparent communication and high degree of willingness to follow the leadership.
How generalizable is Lincoln Business Model to other industries?
Lincoln Electric’s business model has been a very popular study material. Many make reference to the Lincoln plan as a model for attaining higher worker productivity. According to the case (Siegel, 2008), ‘the company’s human resource and incentive system had led to a history of industry-leading productivity advances’. Every industry requires and strives for improving performance in all aspects.
However, some aspects of Lincoln’s business model e.g. employee incentives ‘piecework pay’ may not be suitable for all industries other than manufacturing sector. Yet with slight adjustments and focusing on its core – ‘rewarding based on performance’ and ‘year-end bonuses’ can be adapted by service based industries like insurance firms (commission on contract), real estate firm etc.
Nonetheless, the company’s merger and acquisition strategies are a great way to expand. This suit most manufacturing industries but critical point is whether there is a well-planned strategy behind it. Tarmac Ltd, a leading supplier of building materials also strategized to have international operations – because, similar to Lincoln, these products have a global demand. They should have a local plant to be more cost effective with logistics and higher responsive rate to local market. Acquisitions will speed up process of gaining market share by exploiting current resources in a new area and overcoming barriers to entry. Tarmac ltd supplies mainly to the United Arab Emirates. It is a good move to join forces and make strategic alliances in that area instead of going straight for acquisitions if they are not familiar with the local legislation, culture, market etc. As we have seen in Lincoln’s case - the duplicate production and huge loss of operation costs displays the difficulty in integration. Companies without well planned acquisition strategy may end up with something they neither want nor need.
Lincoln’s principle of quality should be employed in both product and service orientated industries – a market where rivals compete to become efficient in their performances and provide better quality products/services for customers. It is important to plan corporate strategies that regard stakeholders’ interest. Stakeholders are the people who are affected by a business and thus have immense interest in it; a company’s human resource help plan business level and implement functional strategies. Tarmac invests a lot in human resource by hiring specialists in each department from research & development to creative marketing, to sales and finance. All these go into providing customers a value, they are the group of people a company must satisfy to create competitive advantage over rivals who are also challenging each other to continue to advance technology.
How generalizable is the Lincoln’s approach to India?
India is one of the world’s fastest developing country, with big scale constructions comes demand for welding equipment and products. According to J. Siegel (2008), by 2006 India is expected an industry sale of $500 million. Although Lincoln Electric is leader in the North America and U.S markets, they face tough competition in Asian markets. ESAB (Charter plc) is the current market leader in India. Lincoln Electric backed down an acquisition deal with ESAB in 2000 for $750 million, now this rival generated $1.3 billion worth of sales in 2005.
Employment System
In terms of culture, workers in the western country prefers less rigidness – thus allowing them to manage themselves and empowering them could be beneficial. But this might not be the case in the Asian counterparts where studies by Hofstede (Anon., 2014) Exhibit 1 shows that India – a high power index 77 compare to U.S’s 40 indicates that operating in India may require a clearer/direct instruction – less of Lincoln’s original leadership of allowing employees to manage themselves. India’s low score on Individualism show they prefer teamwork and belonging to a group. They may not dare to openly give suggestions as it will immediately separate them from conformity.
Therefore, if Lincoln decides to make a solid stand in India they should adjust these features. Perhaps an anonymous suggestion board may encourage more workers to voice out. The culture is not ready for stark change so steady steps must be taken to keep synergy and build trust with the workers in India.
Incentive System
As shown in Exhibit 1, India scores low 26 for Indulgence, this suggests they possess a culture of restrain and feel gratification is not an acceptable social norm and have a tendency to be pessimistic. However, this doesn’t mean the incentive system will not work in India. Exhibit 2 shows India’s gross national income (GNI) is at a low $1,570 compared to U.S’s $53,670. Thus, rewarding incentives based on work performance is feasible because not only is it fair but India is already familiar with such payment policies. The real difficulty is implement successfully so workers understand not only is the quantity important for piecework payments, but that quality is one of Lincoln’s core focus. It is hard to make a living in India, a lot of poverty and child labor. Lincoln must have strict policies on forbidding child labor or it will negatively affect their long built reputation.
Lincoln can implement other types of incentives that are less monetary based, such as providing work and/or life insurance packages, family holiday trips etc. These will all show a deeper caring and slowly build a real trusting relationship with workers who are culturally pessimistic about big businesses.
Conclusion
Being recognized as the third largest welding market in Asia, India should indeed be Lincoln’s next expansion target. The company should not jump straight into acquisitions and should learn from previous business experiences. Building strategic alliances in the initial stage would be a better move to get familiar with the local market, followed by planned acquisition strategies targeting medium sized competitors in a bid to compete against the current market leader in India.
Appendices
Exhibit 1: Hofstede's Dimensions Comparison - India & USA

Source: http://geert-hofstede.com/india.html, 2014
Exhibit 2: India and U.S GDP Comparison

Source: http://data.worldbank.org/country/india, 2014.
Bibliography
Anon., 2014. Company History. [Online]
Available at: http://www.lincolnelectric.com/en-us/company/Pages/company-history.aspx
[Accessed 25 November 2014].
Anon., 2014. India - Geert Hofstede. [Online]
Available at: http://geert-hofstede.com/dimensions.html
[Accessed 27 November 2014].
Goleman, D., 2000. Leadership that gets results. In: s.l.:Harvard Business Review, pp. 78-93.
Paul F. Buller, R. S. S., 2006. Managing Organisations and People. 7th ed. s.l.:Cengage Learning.
Siegel, J., 2008. Lincoln Electric.
Susan Jackson, R. S. S. W., 2011. Managing Human Resources. In: s.l.:Cengage Learning, p. 560.

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