Background of the Case
In China, Lincoln Electric encountered the challenge of working in a government-created free trade zone, making it difficult for the company to establish distribution channels. Further, the company had challenges making its operations profitable. With the challenges, the better solution for the firm was to progress with the Chinese expansion by partnering with a Taiwan organization, Kuang Tai. When it comes to the Indian expansion, John Stropski’s, Lincoln electric’s CEO’s main issue is deciding whether to follow through with an expansion plan that has been considered yet never actualized. India’s annual sales growth presents a significant market for Lincoln electric. Having taken over from Massaro, Stropski has returned from Mumbai, where he had the opportunity to study Indian market opportunities.
However, the challenge comes from the requirements of entry into the Indian market because, unlike other markets, Lincoln would only enter if its acquisition was accretive immediately, as stipulated under the FASB goodwill rule. Further, Lincoln’s investment would have to have a 10 percent minimum internal return rate based on its total investment, and all its liabilities would have to be properly recognized on the balance sheet prior to its commitment to the market (Siegel, 2008). Unlike in the previous 19 countries, Lincoln would also have to ensure its ability to pay an acquisition premium, which was greater than any ever paid before. Another challenge hindering the acquisition was that the company’s main competitor owned one of the targets and the other targets had ownership structures and a family control combination.
VRIO Analysis
Value Chain Analysis
The value chain of Lincoln electric company, based on the moment its products are manufactured to the moment they reach its consumers, shows a high level of efficiency in the corporation’s operations. With the existing plants in 22 countries, the firm can get its consumers without the need for the involvement of intermediaries in its distribution channel.
SWOT Analysis
Strengths
Lincoln electric’s commitment to research and development at the start of one hundred and two years enabled it to develop a design that facilitated its ability to expand its product line. Additionally, the design ensured the organization could diversify its products through several welding technologies (Siegel, 2008). In the U.S., having recovered from the 1993 crisis, Lincoln electric made heavy investments in the Cleveland plant’s modernization.
In 86 countries, the company’s products were distributed, and one of its selling points was its ability to provide advice to its consumers, at no extra cost, concerning how to best use its products. Through the company’s strategy of marketing, the organization was able to receive a merchandise price premium that it exchanges for the offered advice based on the size of the merchandise alongside some acceptable highly-priced premiums compared to others.
The organization was limited in the world to manufacture consumable products and arc welding equipment. Through its product mix, Lincoln electric solved problems associated with consumer processes and enhanced its production processes. With the ability to combine consumables and equipment, Siegel (2008) shows the company developed its needs into one integrated package. The products at Lincoln electric integrated into the company’s robotic arm, which eased the cost of production, enabling it to grow its sales in its North American market. Technologically, Lincoln electric had award-winning engineers whose responsibility ensured welding leadership position in the market. Further, with the ability to spend approximately 2 percent of its sales in R&D (research and development), the organization led its competitors in quality performance and new market introductions.
Weaknesses
Despite having learned of the best way to enter the Indian market, Lincoln electric had stayed for long without taking the initiative. As Siegel (2008, 1) illustrates, Stropki, the organization’s CEO, ‘wondered whether a strong push into India should b the next step in the organization’s globalization.’ The management of Lincoln electric had for long considered the Indian expansion option, but the company’s management had not put the Indian expansion into the expansion options for long.
Opportunity
The long-awaited push for the Indian market was an expansion opportunity for Lincoln electric. With a wealth of organizational experiences and lessons to apply, the decision to invest in the Indian market would prove another opportunity to grow. Siegel (2008) shows the growth of the welding industry, and the Indian market is the third-largest in Asia; Lincoln electric had the opportunity to share the $500 million annual revenue in the Indian market.
Threat
Significant large competitors, like Ador Welding Ltd., in the Indian market, posed a threat to Lincoln electric. The other danger was the possibility of new design imitation by over 300 small firms that represented 44 percent of the welding consumables in the country (Siegel, 2008).
Competitive Advantage
The principal competitive advantage enjoyed by Lincoln electric, resulting in its leading position both regionally and internationally, was its technological innovation. Siegel (2008, 3) shows due to Lincoln electric’s innovations in technology, support for the application, and merchandise, the organization could generate a payment for each of its products.’ Further, ‘Lincoln electric’s incentive system and human resources had played a significant role in leading to its historical industry-leading advances in productivity (Siegel, 2008, 3).
The innovations utilized by the firm comprised of employee stock ownership use, merit ratings determining incentive bonuses, Employee Advisory Board creation. The other innovations in use in the U.S. today were piecework pay, group life insurance, annuities for retired employees, and employee suggestion system (Siegel, 2008). Further, the company did not utilize the no-layoff policy resulting in a majority of its profits being shared by the employees.
In terms of technology development, Lincoln electric had technological engineers responsible for technical leadership in welding, enabling the organization to spend approximately 2 percent of its sales in R&D (research and development). The other factor that gave Lincoln electric its competitive advantage was its product mix. As Siegel (2008) shows, the corporation was one of the limited firms internationally that had broad-line manufacturing of consumable products and arc welding equipment. The ability ensured the company’s production of the consumables and equipment was linked to providing valuable welding solutions compared to individual products.
PEST Analysis
Political Factors
The political environment in the United States allowed Lincoln electric to develop human resources and incentive system that enabled the company to introduce some of the human resource innovations that are in practice to date in the country. The capitalist environment helped the organization to grow since 1895. Like in China, Lincoln electric encountered difficulties with the local authorities when establishing operations in the country (Siegel, 2008). Unlike in the U.S., where the trade zone is free from the government, the Chinese government creates the trade zone in China.
Environmental Factors
Lincoln electric encountered strategic challenges as it started to globalize associated with the environment in the different countries the company established its plants. Unlike in the U.S., the business environment does not favor the creation of human resource innovations, and that’s why in Europe and every other place, the innovations did not work for the company (Siegel, 2008).
Social Factors
Trust was an element in the organization that Lincoln electric and its employees worked on overtime. Working with the incentive system, the company’s workers managed themselves and worked with a great deal of autonomy (Siegel, 2008). The independence enabled employees to report their piecework wages and solve problems.
Technological Factors
Based on Lincoln electric’s technological innovations, the company had valuable patents that facilitated it to develop unmatched quality performances and new market introductions (Siegel, 2008). With the specialized focus, the organization came to achieve the term welding experts, a sign of respect, in the welding industry.
Alterative Solution and Recommendation
Lincoln electric has the alternative of entering India through a joint venture, acquisition, or establishing a new plant on its own. By selecting the option to acquire, it would be doubtful how the company would decide which type to use in the existing companies in India. By choosing a joint venture, the organization would have to answer one critical question. How would it warrant its ability to make essential business decisions? Lastly, by setting up a new plant, Lincoln electric would have to find answers that satisfactorily show the expenditure of starting from scratch. Further, the answers on how it can be compensated will be required.
With the expansion to India being an issue of concern regarding how to enter and the conditions necessary for entry, Lincoln should reconsider its requirements for entering the country. The booming market has both its opportunities and challenges.
Therefore, Lincoln should go for the usual initial 10 percent upon total investment with the possibility of it rising to 18 percent in up to four years. Negotiations with the Indian government should be established on the best terms on the acquisition, in terms of acquisition premium, and the liabilities of the company are justified. Upon careful analysis of the cost of starting from scratch, the company will be able to determine whether it would be compensated by the total control. Lastly, like in all joint ventures, Lincoln should draft agreements with the partnered organization to ensure while it has a share of the market, it does not lose its ability to make the necessary key decisions.
Reference
Siegel, J. (2008). Lincoln Electric. Harvard Business School; 707-445, 1-24.