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ADMN 952-Lincoln Electric

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Jason Leach

on 7 February 2014

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Transcript of ADMN 952-Lincoln Electric

Process &
Lateral Capabilities



"We strive for high productivity based on employee effort, continuous improvement in production process, and 7-day a week utilization of equipment"
Internal Strategy:
Respond to customer needs and expectations with quality, integrity, value
Maximize return on employees:
to maintain and expand the Lincoln Incentive Management philosophy.
People are most valuable asset

Safe, Clean, Healthy Environment
Promoted Employee Training & Education
Respond to customer needs and expectations with qualitative, integrity & value
Recognize people are most valuable
LIM Philosophy
Prudent & Responsible Management
Environ Responsible
AA program with opportunity for advancement
Piecework System, Guaranteed Employment, Limited Benefits, Yearly Bonus
Committed work ethic and positive attitude.
Dedicated/Knowledgeable Sales and Service Force.
Responsive to the needs of our worldwide customers.
Practice prudent and responsible financial management: attainable goals, strategic planning, and accountability for results.
Promote employee involvement in cost reductions and quality improvements.
Strive continually to be environmentally responsible.
Support communities where we operate and industries in which we participate: invest in prudently social, cultural, educational, and charitable activities; contribute to industries we serve and society, encourage and support appropriate employee involvement in community activities


Promote dynamic teamwork and innovation in the most profitable and cost-effective way
High Quality, Low Cost
Efficient and innovative Engineering
Open Door policy
Practice Prudent and Responsible Financial management
Attainable goals
promote process of employee involvement in cost reductions
Strive to continually be environmentally responsible
Support communities where they operate and industries in which they participate

Original Approach: LE built on manufacturing and people incentive processes
New approach: local geographical regions cultures and traditions
Oversee the international ventures more actively. Naming 5 regional presidents (VP in structure)
Expand into countries to maximize tax benefit
Strategic plan will expand to encompass Product
Welding and Consumable Manufacturing & Sales
Foreign Govt Regulations-Prevented full adaptation of traditional Lincoln US model
Labor Unions-Foreign Countries
GE & Westinghouse--Can't Compete
Issued Stock (IPO)
Took on $217M long term debt '93
Economic downturn in Japan & Europe
Stagnant US markets
Variable raw material cost and availability around the world--Attempted to source local

Proprietary Technology
Employees-Motivated, innovative, etc.
Stock offerings gained Capital in 1995 (40%)
Brand recognition in the market for high quality welding products-Been around for 100yrs
Market Leader in Sector
Tradition of technical innovation
Management Motivation
Strong incentive program
Annual Bonus
Guaranteed Employment
Limited Benefits
Historically Successful, world leader in the sale of quality welding equipment
Trouble expanding outside the US
We will be a market leader of the highest quality welding, cutting and joining products, distinguish ourselves through an unwavering commitment to our employees and a relentless drive to maximize shareholder value.
To create complete solutions that make our customers more productive and successful through employee productivity and innovation.
"We strive for high productivity based on employee effort, continuous improvement in production process, and 7-day a week utilization of equipment"
Supporting Strategy:
Expand into global markets
Maximize Shareholder Value
Train and develop employees
Increase Profitability
Improve Technology
CEO & 5 Regional Presidents
Factory Workers

Lacked global skills and knowledge and brought individuals in with global skills/knowledge

Left foreign managers in positions of power due to their cultural knowledge to help with transitions.
Individual Level:
Group/Unit Level:
Organization Level:
5 Regions
Employee advisory boards
Strong incentives program
Open Communications with management
Cross-functional/regional incentivized collaboration

Open communication up/down structure
Open Door Policy
Entrepreneurial ownership culture for ideas
In US Voting down of Unionization
Strong lateral capabilities
Company Pride
Produce/Manufacture Welding Products/Consumables

Continued innovation

Expand and implement US structure into global operations
Restructure global operations to increase profitability due to local culture needs
Increase Global profitability
Provide 36% market share by '95
Acquisitions of other companies
'92-'93 Operating Losses
Expected: By implementing culturally appropriate incentive program employees gain ability to earn more money for their effort
Actual: Poor acceptance of LE model in foreign markets
Expected: Once incentive system becomes familiar, the higher productivity would yield 20-40% more output from the same equipment
Actual: Poor performance of most international factories
Question 1:1 - Mission

To create complete solutions that make our customers more productive and successful through employee productivity and innovation.
Question 1:2 - Strategy

"We strive for high productivity based on employee effort, continuous improvement in production process, and 7-day a week utilization of equipment"
Achieve international sales growth through acquisitions and building new manufacturing facilities in both developing and established economic regions of the world.
Be a low-cost producer through operational excellence including continuous improvement, innovation, creativity, and exceptionally high capacity utilization
Institute superior people practices and reward systems (recruiting for individual initiative; employee training and development; motivating performance through a modified multi-level incentive system implemented in a customized way for worldwide production employees, managers, leaders, the factories, and the corporation itself)
Create a culture emphasizing core values, attitudes/beliefs, norms and behaviors regarding individualism, hard work and earned rewards, fairness/egalitarianism, cooperation/coordination across individuals and groups/units, trusting relationships, and endlessly improving operational excellence.
Question 1:3 - Strategic Focus

Primarily Operations with an evolving focus on Product
Operations - Lincoln Electric focuses on efficiency with their rewards system, is team oriented, measures costs of production as well as quality and consistency. Lincoln manages volume and scale with an emphasis on operations management
Product - Lincoln Electric is starting to increase its strategic focus on product. They are encouraging employee development of new products through innovation. The culture is results oriented with a focus on expanding market share. Employees are creative and encouraged to be entrepreneurial in new product development.
Question 1:4 - Key Business Functions

Must have obj in Output
Capacity Planning
Question 1:5 - Lateral Processes

People management
is utilized for performance management, talent management and communication and feedback both up and down the corporate structure.
is an important lateral process as it involves supply chain management which has major financial implications for Lincoln Electric as it expands and has decide whether to import raw materials or purchase them locally.
Business Development
is being utilized but there is room for improvement, specifically in the field of new business/customer acquisition as Lincoln moves into foreign markets.
(knowledge management) will be pertinent for the company to manage/leverage through global IT networks and databases that will be shared across regions.
Management & Financial
processes will have to be scrutinized as Lincoln Electric attempts to expand. This process was neglected in the early 1990's leading to very poor financial performance. Top executives need to focus on these processes in order to avoid repeating failures of the past.
Question 1:6 - Global Structure

- Lincoln Electric is organized around major activity groups such as manufacturing, finance, marketing, HR, etc. This allows them to increase knowledge sharing within each function. This allows Lincoln Electric to standardize production allowing them to continue to to produce reliable high quality products for their customers in all of their manufacturing facilities around the world.
- Lincoln Electric is also organized around physical locations. They are structured into five geographical regions throughout the world. This allows Lincoln Electric to tailor their rewards systems and management practices to local norms and expectations in order to operate effectively and efficiently.
Question 2:1 - Keys to Success & Management's Role

The key to making Lincoln Electric's system work hinges on matching their incentive and motivation system with cultures and individual employees that have similar values. Their system emphasizes four pillars; Piecework Pay, Annual Bonuses, Guaranteed Employment and Limited Benefits. This system is different in many ways from traditional companies but worked so well in the United States because it aligned very well with the idea of the "American Dream" and the belief that with hard work you can better your life and achieve great success. This is exactly what happened in the Cleveland plant where the highest compensated manufacturing worker was paid $133K per year. By using this incentive system workers were encouraged to work as much as they were willing to and to improve processes to be more effective and efficient in order to earn more income. By fostering this entrepreneurial culture and focus on continuous improvement management was able to gain a higher return on investment from their employees, while employees were able to increase their compensation simultaneously. This culture of continuous improvement, knowledge creating and individual entrepreneurship gives Lincoln Electric a competitive advantage over other companies while allowing it to motivate and retain high achieving employees.

Managements core role is to foster a corporate culture in which the hierarchical distinctions are broken down and there is cooperation between employees and management. This is done through managements open door policy, allowing any employees to voice their concerns and ideas. Executives are frequently seen on the factory floor and are visible to employees allowing them to see that management works just as hard as they do. In fostering this open and collaborative culture management is able to encourage employees to produce and innovate at a high level.
Question 2:3 - Foreign Misalignment (Culture & Economic)

Germany was not a good choice for LE to expand in due to the strict labor laws in place there. Piecework compensation is illegal in Germany so the basis for LE's incentive system did not work. With their sales costs skyrocketing, LE was unable to adjust their spending. Unions were also unwilling to be flexible to help the overall business succeed.

Brazil is another location where Lincoln Electric's model did not work. In Brazil, if bonuses were paid for two consecutive years, labor regulations laws made these payments legal entitlements for workers. This law made it impossible for LE to pass along company success to employees without having to provide additional compensation in years the company did not perform well.

Due to the political and economic risks inherent in the market in Indonesia, the LE model will also not work there. The barriers to entry are high, between the stable welding industry already in Indonesia and the acknowledged corruption of the government. There has also not been any previous piecework experience there, which is key to driving motivation and efficiency in their factories. With their past success of motivating through innovative methods, this sort of an environment may not be the best place for them to attempt to implement their full traditional model.

Question 2:2 - Reasons for Failed Expansion

The internationalization thrust of the late 1980's and early 1990's failed because it did not adjust its US model appropriately to local cultures. While global expansion was a viable option, Lincoln Electric (LE) did not properly assess government regulations, tariffs, economies, and cultural values. For example, extra income incentives in the US were not as appealing in other locations, such as Europe, where vacation time is more highly valued. LE also suffered from new acquisitions that had weak sales markets and fragmented production. Each European factory produced all product lines rather than taking advantage of manufacturing one product at each factory. These global issues interfered with LE's strategy of providing incentives to increase employee productivity and innovation.

LE's start-up operations in Japan and Venezuela had its own global issues such as lack of cultural knowledge and US support. In Venezuela, managers were brought in who had strong training with LE's incentive program and manufacturing but did not have the local skill set to execute operations effectively. Also, LE's culture became individualistic causing subsidiaries to fend for themselves. In Japan, LE assumed that workers would accept the incentive system and management style with ease. This assumption proved to be incorrect as CEO, Tony Massaro, remarked that, "Part of the problem was that they tried to do things the Lincoln way everywhere, rather than adjust to local conditions."
Question 2:4 - Massaro's New Approach

Prior to 1996 Lincoln Electric expanded into global markets by merely transferring their existing Ohio based model of Piecework Pay, Annual Bonuses, Guaranteed Employment and Limited Benefits. This yielded limited success in many countries. When Massaro became CEO in November of 1996 he proceeded to enact a different approach from his predecessor. His approach incorporated more lateral processes, increased collaboration, and added accounting for cultural differences. Massaro started by creating a new corporate structure that involves five vice-presidents whose responsibilities involved supervising sales staff in their territories, advising Massaro on the need to create manufacturing capacity in their regions, and developing plans for new factories. As a group they meet every two months to talk about their global strategy and were incentivized to collaborate instead of compete with one another in the name of cost savings.

Further, Massaro gave each of the regional VPs the ability to selectively use the Lincoln Incentive System parts that would have the greatest success in their respective region. In Asia, VP Gillespie developed an integrated sales and manufacturing strategy to build on the company’s existing relationships. LE-Asia would continue to import equipment since it was profitable but would build factories to build brand awareness and loyalty while producing consumables within the region since trade barriers and cost make importing consumables unprofitable. Massaro’s new structure allow Gillespie to analyze the political climate in Indonesia and make decisions based on his findings. He was able to use local partners to gain knowledge about the best entry strategies as well as compensation options that would be best suited for the Indonesian market.

Question 2:5 - Advice & Conclusion

We would recommend that LE use a joint venture with SSHJ in order to enter the Indonesian market. LE already has a strong working relationship with SSHJ as a distributor and a history of cooperation and sacrifice in other foreign business development in other Asian countries. In entering this joint venture SSHJ will be able to provide cultural guidance to Lincoln Electric with regard to their incentive system and what parts of that system may work well in Indonesian and those that may not.

We would recommend that Gillespie puts focus on his lateral processes particularly in Business Development, People Management, and Operations. A focus on BD would allow him to look into building new and existing relationships and brand recognition within Indonesia. People Management would allow him to use the local knowledge to identify the best structure for monitoring performance and providing appropriate compensation. Lastly, an Operations focus would allow him to figure out the most needed products in Indonesia (consumables) and a way to maximize their production and keep costs low (Economies of Scale).

Over the years LE has learned that they cannot use their incentive model as a plug and play system that can just be transplanted from one region to the next. Cultural norms and differences are too vast for a system like this to work. In order for LE to expand internationally they need to focus on aligning their lateral capabilities so that they have a flexible organization. This will allow Lincoln Electric to have a flexible business model and will allow them to adapt and change with not only different cultures as they expand but also the ever evolving business market that they compete in.
Question 2:4 - Massaro's New Approach

New Corporate Structure
More Lateral Capabilities
Regional Flexibility and Independent Decision Making Ability
Incentivized Collaboration
Question 2:1 - Keys to Success & Management's Role

Keys to Success
Matching the correct package of their incentive program with the local culture
Not all of their 4 pillars will work in every culture
Encouraging and leveraging employee innovation in order to continuously improve production process
Results in competitive advantage

Management's Role
Create non hierarchical feeling environment
Encourage communication up/down org. & transparency
Foster entrepreneurial culture
Foster cooperation between employees and management
Question 2:3 - Foreign Misalignment (Culture & Economic)

Labor Laws
Barriers to Entry
Question 2:5 - Advice & Conclusion

Joint Venture with SSHJ
Lateral Capabilities
Learn from past expansion
Create a flexible organization
Note: Squares represent foreign operations and circles represent domestic operations.
Case Study

Team Obi-Wan

Scott Christo
Steve Johnson
Jason Leach
Amanda Smith


1) Keys to Success
2) Failed Foreign Expansion
3) Foreign Misalignment
4) Massaro's New Approach
5) Advice & Conclusion

Question 2:2 - Reasons for Failed Expansion

Failed to asses local environment & strength of acquisitions.
Failed to adjust Incentive Model
Did not monitor performance of international factories closely enough
Congruence Model
Star Model
Function & Geography
Full transcript