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Copy of Lincoln Electric’s Harsh Lessons from

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Bruce Guo

on 1 May 2014

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Transcript of Copy of Lincoln Electric’s Harsh Lessons from

Lincoln Electric’s Harsh Lessons from
International Expansion

Risk Analysis
Risks in Leadership & Decision-Making Process
1. Communication
hierarchical barriers kept at minimum level
Effective open communication system
Conclusion
The issues and corresponding recommendations
:
History of Lincoln Electric
Founded by John C. Lincoln in 1895
Main product
: arc-welding products ----Account for 87% of $853 million in total sales, leading 40% of the domestic market
Main competency
: competitive price and high value and quality product, good customer service
Culture of Lincoln electric
Incentive system
: high bonuses paid to factory workers which aims to assess individual performance and encourage staff to contribute their ideas and improve their team spirit
Open communication with employees
: employee advisory board
important means of communication between management and staff.

Crisis of Lincoln Electric
Lost 4.5m in1992

Crisis of Lincoln Electric
Sales dropped 40% in response to the effects of inflation
ESAB bought 2 companies
In Latin American
1980's
George E wills named as chairman
Took first bank loan and spent
almost 325 million on expansion and acquisition of manufactures
Dream to become global power
1986
ESAB: a major manufacturer of
arc-welding products based on Sweden.
Decided to Battle EASB
Howerer, Spain fell in to deep recession
A high government interest rate in Germany
Europe fall into the deepest recession since
world war two
Lost 38.1m in 1993

Close to violate covenants
with banks
Delay in bonus payment.

Took second loan from bank
to pay off worker’s bonus

1992-1993
1994
1995
Lincoln Electric earned $48m
because of the highest sales
Debt and equity ratio of Lincoln
electric drop from 63% to 12%
Market share increase a lot
Turnaround from 1994
Action
Market Risk
Culture Risk
Top Management Risk
Budgeting Risk
Financial Risk
Market Risk
Lack of Knowledge of international market
Culture Risk
Lack of knowledge of culture diversity
Top Management Risk
Board of the former manager and family members without any dissenting opinions

Overconfidence of their board

Out of their management ability and technology level

Eg: When Lincoln failed into trouble in the international market, people supported by Lincoln cannot turn the tables.
1. mainly operate in the U.S.; new player in the international market
2. experienced competitor (ESAB, Sweden arc-welding manufacturing company)
3. Wills took the battle to ESAB cost $325 million to build plants


Unawareness of macro-economic trend
1. High price acquisition
2. Economy recession
1. Different operating model
Assumed that their successful operating model could be perfectly applied in the international market

2. Different incentive system
Lincoln: piecework
European factories: hourly wages; hostile to the piecework and bonus system

influenced by indolent and inattentive working attitude in Europe

Risk in Budgeting Process
1) to the constantly missed target:


-- nobody took responsibility of the variance

-- no KPI to control it
Financial Risk
Foreign Expansion
2) budget base was not on actual numbers
:

-- no corporate rules or regulations for the budgeting?

-- nobody kept an eye on the budget development?
Financial Risk
Lincoln special incentive system
Pay bonus to employees around 50 million USD per year
* Loss in foreign operation:
lost over 80m in the two years of 1992 and 1993.
Issue 1
: Before they enter into the European market, their corporate management lack sufficient international expertise and had little experience running a complex, dispersed organization.
When the company decide to enter into the new market, the corresponding reservation, people and production should be substantially required, specially the professional employees.
Issue 2
: They fail to predict and analysis the trend of the Europe economic, which suddenly suffer from the economic recession.
Before the international expansion, we should not only consider the relative experience and skills, but also should pay attention on whether or not it is consistent with the company’s culture, background and situation
Issue3
: The loopholes exit in the Lincoln’s management system. CEO made the acquisition decisions, took charge of the negotiations, and required all the new foreign operations to report directly to him.
Everyone in the management system should contribute the ideas of the decision-making, rather than only one authoritarian grab all the power.
Issue 4
:After they enter into the European market, the businesses of Lincoln would always submit extremely optimistic sales and profits targets in their budgets.
The CEO should send the professional people to handle on why the targets were being missed or what to do about the gaps. They should find the key reasons, which lead to the gaps.
The advantages in Lincoln electric company system
1.Lincoln is lucky with the great scale, which seek to a larger credit line to replace their existing line, even though they break the debt covenant.
2.Lincoln is aware of the importance of making good use of talents. They constantly modified their management system and regulation to adapt to the change of the market requirement.
3.Lincoln’s incentive system, which combines a bonus with piecework, encourages workers to boost production and even work harder after they realized the serious situation the company faced.
2. Bonus Incentive
Even suffering a great losses, Lincoln had never thought to give up their employees, because it treated the employees as an advantage resource rather than a massive liability.
Built 3 manufacturing plants in Japan, Venezula and Brazil and purchased 8 plants in Germany, Norway, Uk, Netherlands, Spain and Mexico.
Donald Hasting took over as chairman
eg: management made a video and gave people copies to take home to watch with their families.in the video, the manager clearly give people an accurate picture of the company’s problems and let them know that we had a plan to fight back.
eg: For 1992, we find that about 450 people in the bottleneck areas gave up 614 weeks of vacation, and some people worked seven days straight for months on end. Also absentee rates were between 1.5% and 2%, and the foreman-to-worker ratio at Lincoln’s main U.S. plant is 1 to 100. While in a typical factory in the United States, the ratio is 1 to 25.
3, Sales Promotion
required all European managing directors and their sales managers to develop plans, complete with detailed sales strategies, for turning around their businesses.

Lincoln’s CEO, Don Hastings, presented a 21-point plan to the board that called for our U.S. factories to boost production dramatically and for their sales force to sell our way out of the crisis, which aims to increase sales from $1.8 million per day to $2.1 million.
4, Restructuring
Write off unneeded and obsolete machinery and questionable inventories

Reset management constructure
New directors Ed Hood, Larry Selhorst, Henry Meyer III, and Paul Lego were executives with strong international and financial experience.

Scaled down operations in the United Kingdom, Spain, France, Norway, and the Netherlands.

Luck points
when Lincoln beginning to boost their production, the market started to revive—although nobody in the industry felt it yet.
Supported by National City Bank and Key Bank, increasing from 75 million to 230 million.
Crisis management
Reduce Financial risk- supported by central bank, increasing credit level
Bonus-incentive motivated employee
Increase productivity
Increase sales in US
Offset losses in European
Communication
Less experience of international management
Top Management Risk ——
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