Lincoln Electric Company’s Management

Introduction

Lincoln Electric Corporation, a today’s world leader in the welding equipment and consumables industry with more than one hundred-year history, was founded at the end of the 19th century as a small company with $200 capital investment. Initially, the founder of the Lincoln Electric Company, John C. Lincoln aimed to produce electric motors, however, when his brother, James Lincoln, joined the company, the enterprise changed the line of its business to the production of welding equipment and consumable products. By 1922, Lincoln Electric Company became fully specialized on the welding equipment and consumables. Over a hundred years, the company has managed to get into the NASDAQ lists and receive $122 million net income (Siegel, 2006, p. 3).

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Currently, the company has a sustainable competitive advantage. It has a strong brand that is commonly recognized due to the company’s operation all over the world. Lincoln Electric is able to use its resources externally. The success of the Lincoln Electric Company may be partly explained by new human resource management policies that were introduced by James Lincoln. The company invested in the potential of its employees, providing all the necessary conditions for their professional development and rewarding each of the employees for their individual performance. Such policy resulted in an outstanding research and development productivity, which allowed the Lincoln Electric Company to hold the leading positions in the technological market. With 2% of the company’s sales invested in the research and development (the construction of the R&D facilities in particular), Lincoln Electric introduced an extensive number of “valuable patents” in arc welding (Siegel, 2006, p. 4).

These patents gave the Lincoln Electric Company an opportunity to set a price premium for those products that are innovative, which is higher than a general price. Lincolns’ special approach to the production of welding equipment is focused on the welding solutions rather than the individual products (Siegel, 2006). The highly-developed system of communication with customers as well as a wide range of products that includes both simple tools that can be acquired in common hardware stores and automated industrial welding systems has earned the Lincoln Electric a title of “the Welding Experts” (Siegel, 2006, p. 4). Lincoln Electric acquired three enterprises and made their products its own, which enlarged the customer market. FANUC Robotics gave it a right to sell the robotic arm and a wire feeder. Harris Calorific provided products connected to gas-cutting. J.W. Harris Company gave access to brazing and soldering alloys. In 2006, the Lincoln Electric Corporation was one of the world’s leading manufacturers of welding equipment whose products were marketed and sold in 86 countries. At that time, the company’s chief executive officer John Stropki contemplated the possibility of India expansion.

VRIN Analysis

Value of Resources

By establishing their facilities and plants across the world and training its large field sales force, the Lincoln Electric Company has earned a strong brand identity and developed the Global Quality Image (Siegel, 2006). Constant technological progress and a highly developed system of product and customer support allow for receiving a higher price premium (Siegel, 2006).

Rarity of Resources

While the competitors diversified their products far from the sphere of welding, the Lincoln Electric Company remained focused on the welding equipment and consumables. Such determination resulted in a large number of unique and rare products in demand such as digital communications protocol ArcLink and computer-based welding machine (Siegel, 2006). All these innovative products helped the Lincoln Electric Company in strengthening its presence in the market.

Imitability of Resources

Due to the fact that Lincoln Electric invests considerably into the research and development activities as well as the employees, it produces the extra fine quality equipment and welding-related products that are quite difficult to imitate or duplicate. Given that Lincoln Electric was focused on the welding industry for many years, acquiring the necessary experience in the design, production, and allocation of the products, the company created a powerful technological basis for its developments. Any imitation of Lincoln’s production will be rather costly and will not bring the expected results.

Non-Substitutability

Lincoln Electric’s non-substitutable resource is a human resources policy and incentive system of bonuses. The aim of this system is to not only reward individual productivity but also motivate the employees to make the high-quality pieces. The system does not stipulate the time for correcting the quality problems during the working hours: the employees are to do that on their own time. Besides, bonuses that are often equal to the regular salary depend on the company’s profitability: this fact makes the employees identify themselves with the company’s success.

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PEST Analysis

Political Factors

In India expansion, successful operations are connected with macro-environmental factors. Sectors in which the company operates require government approval, which makes it more difficult for competitors to enter them. Still, it is an obstacle even for the Lincoln Electric company as well. The company should consider the fact that the state government and local authorities control some sectors of foreign business and investments. Moreover, some laws and regulations may vary depending on the region, which may complicate the legal organization of the expansion. However, given that the company has already had the experience in dealing with authorities in Shanghai, for example, this political factors may not influence Lincoln electric’s plans significantly.

Economic Factors

If the Lincoln Electric Company plans to enter the Indian welding market, it should consider the rapid development of the country’s open market economy. Analysts claim that in 50 years will become highly profitable and the “fastest-growing of the world’s major economies” (Siegel, 2006, p. 9). On the one hand, the rapid countrywide construction of manufacturing facilities show that India needs a large number of oil and gas utility lines. Therefore, the India expansion is more than justified. Moreover, the absence of taxes, licensing requirements and other regulations within the framework of India’s open market economy is beneficial for the Indian expansion as well. On the other hand, the possibility of free market activity creates a high competitiveness of the market. Siegel (2006) states that in 2006 only 56% of welding instruments and consumables in India were produced and marketed as original designs and technologies, while the rest 44% were simple imitations and duplications of the original designs produced for selling “at a sharp discount” (p. 9). In any case, the VRIN analysis has shown that Lincoln’s highly developed technologies are rather difficult and costly to imitate.

Social Factors

The number of unsolicited job applications that the Lincoln Electric Company receives every day is over 1,000 (Williamudavis, 2009), and less than 20% of the total amount of job seekers across the world have the vocational training (Williamudavis, 2009). That might present a problem for the company; however, Lincoln Electric has developed a powerful training base that allows providing high-quality welding training for the company’s employees. Another problem is the language barriers between the employers in different countries. Due to the fact that it is difficult to find talented and competent managers among the natives, the company places Americans in the top management positions in its subsidiaries across the globe. Language barriers and absence of common cultural grounds may complicate the working process in these subsidiaries. For these reasons, the Lincoln Electric Company should develop a strategy to cope with social issues because the very little number of individuals who are looking for the employment at the company’s international subsidiaries have the vocational training and speak decent English, which prevents them from working successfully.

Technological Factors

The Lincoln Electric Company may fully realize its high technological development potential in India. Due to the fact that the electricity is rather expensive in India, the company may invent the new methods of manufacturing that will require the smaller amount of electricity in order to minimize the production expenditures (Williamudavis, 2009). Moreover, the Indian welding industry lacks some of the tools and systems, and the Lincoln Electric developments may prove to be useful in the new market (Williamudavis, 2009).

SWOT Analysis

Strengths

One of the strategical strengths of the Lincoln Electric Company is its human resource management strategy. The co-founder of the Lincoln Electric Company James Lincoln introduced new human resource policies and that eventually became standard in the U.S. production industries (Siegel, 2006). These practices include a range of human management innovations, such as piecework pay, incentive bonuses, annuities for retired employees, group life insurance, employee’s stock ownership, employee suggestion system, and the Employee Advisory Board (Siegel, 2006). Moreover, as it was mentioned previously, the Lincoln Electric Company invested billions in the research and development facilities, starting with $20 million David C. Lincoln Technology Center that was constructed in 2001 (Siegel, 2006, p. 4). As Siegel (2006) states, the investments, as well as the “award-winning engineers” that controlled the research and development process, ensured the leading positions of Lincoln Electric in the welding market (p. 4).

Weaknesses

In 2006, when the Lincoln Electric executives were thinking of India expansion, the actual state of the company’s finances hardly allowed for this, since nearly 60% of the sales were realized in the North American market (Siegel, 2006, p. 7). Moreover, the dynamic expansion across the globe was complicated by the lack of competent and talented managers among locals. In China, for example, expatriates represented almost half of the top management team.

Opportunities

The India expansion would be beneficial to the Lincoln Electric Company because of India’s rapid economic development. Given that the average annual growth of India’s GDP had been approximately six percent since 1991, analysts state that if this growth rate does not change, over the next 50 years India will become “the fastest-growing of the world’s major economies” (Siegel, 2006, p. 9).

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Threats

In 2006, the India’s welding market had three large companies that presented a direct threat to the India expansion of Lincoln Electric: Ador Welding Ltd., ESAB India, and EWAC Alloys Ltd. As of 2005, EWAC Alloys Ltd. had $30 million in revenues (Siegel, 2006, p. 9). Ador Welding Ltd. had nearly $50 million in sales with a 15% operating margin (Siegel, 2006, p. 9). Analysts forecasted that in two following years Ador Welding Ltd. would have a 40% return on capital and would grow at a 20% cost-adjusted annual rate (Siegel, 2006, p. 9). As Ador Welding Ltd., ESAB India had approximately $50 million in sales (Siegel, 2006, p. 9). Although ESAB India had made its way to the Indian welding market by acquiring various plants, in 2005 the company started to build their first manufacturing plant, aiming to complete the construction in eight months. The new full operating facility would present a threat to the expansion strategy of the Lincoln Electric Company. In addition to these three welding industry giants, there were three small companies that also enjoyed the significant share in the Indian welding market: Anand Arc., Indo Matsushita, and D & H Sécheron (Siegel, 2006).

Competitive Advantages

The Lincoln Electric company has introduced many innovations in its human resource management. Incentive bonuses and piecework pay have already been discussed in previous sections. However, there is one more feature of the Lincoln Electric human resource management policy that should be discussed. The company has a developed employee stock ownership plan, encouraging its employees to associate themselves with the success of the company and share its profits. The shares may be the part of employees piecework pays or may be saved in the company’s trust fund until the retirement or termination of the employment contract. Moreover, every month the company integrates the discretionary bonuses into employees’ wages. Thus, in 1997, $74 million bonuses were allocated among 3,259 employees (Siegel, 2006, p. 4). The company is known for its human resource management policies that are highly motivating and beneficial for the employees. The number of unsolicited job applications that the company receives every month exceeds 1,000 (Williamudavis, 2009).

Recommendations

The conducted case study makes it possible to conclude that the structural dimension network of the Lincoln Electric Company is rather advantageous. The schemes and methods that Lincoln Electric uses for the utilization of resources and time are very efficient. Over the years of international expansion, the company learned an extensive number of lessons, gaining the necessary experience and developing the adaptability of its methods. As a result, they know how to apply their innovative strategies to the Indian welding market. Given that the Income Statements of the company were strong since 1994, the current financial state of Lincoln Electric is rather favorable for the India expansion.

The Lincoln Electric company has three main options to enter the Indian welding market: joint venture, acquisition, and the construction of the new plant. The case study shows obvious disadvantageousness of entering the market by the acquisition of an Indian company. In 2006, the growth rate of the Indian welding industry was higher than that of the country’s because they invested in new facilities and manufacturing infrastructure. In other words, the market was “booming”, and the average price of any welding company would be higher than Lincoln Electric had paid in other countries in previous years (Siegel, 2006). Moreover, practically all potential target companies were managed by families or weakly coordinated ownerships, and it would be difficult for Lincoln Electric to make the key business decisions because their style of management was rather different from the local one.

Given that the acquisition was not an option, Lincoln Electric might consider the possibility of the construction of a new plant. However, it is not clear whether the company would enjoy the sufficient income by starting from the very beginning. In this case, the joint venture seems to be the only reasonable decision. In 1996, Lincoln Electric had the experience of reorganization of its international ventures by appointing presidents for five regions. This shows Lincoln Electric’s focus on joint ventures across the globe. Focusing on the creation of a joint venture, Lincoln Electric can increase its profits and reduce expenses.

Previously it was mentioned that the largest welding company in India was Ador Welding Ltd. that enjoyed nearly $50 million of sales annually. The strategic alliance with such successful welding giant as Ador would provide Lincoln Electric with the largest market share in the country’s market. The fact that Ador Welding Ltd. had a plant in the free-tax zone would make the local production possible for Lincoln Electric. In any case, the Lincoln Electric Company needs their own facility in India in order to strengthen its position in the country by developing the manufacturing capabilities of its own. The alliance with Ador Welding Ltd. would allow Lincoln Electric saving the expenses on exports from other countries during the construction of its facilities. Moreover, the alliance with a small but significant welding company such as Anand Arc. would help to gain a higher profit and minimize costs as well.

Conclusion

Lincoln Electric is one of the leading manufacturers of welding equipment and consumables in the world. It is characterized by the highly attractive system of human resource management policies and significant investments in the research and development activities. With its focus on employees, customers, and welding technologies, the Lincoln Electric Company has managed to open the subsidiaries in 86 countries. Providing brand-new products and ensuring their diversification, the Lincoln Electric Company reached the stability in the world’s welding market. This is supported by the fact that the company decided to focus on welding even though it was oriented to the production of other products at the initial stages of its existence. In this way, Lincoln Electric received a chance to become an expert, while its competitors paid attention to other alternatives.

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In 2006, the Lincoln Electric executives considered the possibility of India expansion. This step was primarily motivated by the rapid dynamics of India’s economic development. For the Lincoln Electric Company, there were three ways to enter the Indian welding market: by the joint venture, by acquisition, or by the construction of new facilities. Given that by 2006 India already had its leaders in the welding industry, the acquisition, and construction of plants were not quite advantageous options. The joint venture with one of the Indian welding giants could help Lincoln Electric in adapting to the new market and minimizing the production expenditures at the initial stages of expansion. This strategical alliance would be beneficial for Indian welding companies as well. With the high-quality standards of the production, high level of technological development, well-trained professionals, and innovative human resource management policies, the Lincoln Electric Company would influence the development of the Indian welding market, introducing new energy saving solutions, new welding instrument models, and consumables.

References

Siegel, Jordan I. (2006). Lincoln Electric. Harvard Business School Case, 707-445, 1-24.

Williamudavis. (2009). A case study of Lincoln Electric [Blog post]. Web.

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