Lincoln Electric: Venturing Abroad Case Memo
Founded by John C. Lincoln in 1895 in Cleveland, Lincoln Electric Company is the largest global manufacturer of arc welding machines and a leading producer of industrial electric motors. With being a global leader comes numerous responsibilities that you experience through boundless obstacles. In addition, greater challenges arise whenever a large company but inexperienced internationally like Lincoln Electric decides to expand its operations overseas. In this paper, I will analyze the questions being raised to better understand Lincoln Electric's success thus far and future success as it expands into the Asian market.
Before we move forward with how Lincoln Electric is still striving today, we first have to study its origin. John C. Lincoln's founding philosophy set the company up for long-lasting success. His brilliant outlook on human motivation created the fundamentals behind the incentive compensation system. The incentive system was created in order to optimize its employee's work efficiency through compensation and benefits structure. This vital system was implemented because he believed that “there will never be enthusiasm for greater efficiency if the profits are not properly distributed.”
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Now, there are many reasons behind Lincoln Electric's success in the United States. Most notably, the implementation of the incentive system flows without any issues in the United States. The system of incentives creates interconnectedness among its employees across all levels. The employee board, where all can freely make suggestions on the efficiency of the company is an effective strategy to use all resources in order to cut down costs. In return, this improved employee trust within the company as well as creating a competitive advantage over the market. Additionally, Lincoln Electric's success arises from its cultural trait within the United States. The U.S. is a very individualistic society and one of the key factors embedded in the incentive system is the benefits that come with an individual output of work efficiency. Not only that but also gives the opportunity for each employee to better form their financial goals with the way they work.
Lincoln Electric was growing significantly and prospering exceptionally well until the company’s decision to embark on a confident tactic to go global. This of course brings forward how vital HRM becomes for a company as it goes international. While early venturing into international markets, Lincoln Electric didn’t seem to have many issues implementing its same tactics. In Canada, Australia, and France, Lincoln Electric essentially used the lift and drop system in those countries and the incentive system was quickly adopted. The company developed a formula that was working for them in those three international countries. However, it brought greater challenges as it finally expanded rapidly into nine more countries under George Willis
Recognizing the immediate need for an executive with international experience, Tony Massaro was hired, where he was the former worldwide group president of Westinghouse Electric. Massaro’s approach was different compared to his previous initiatives. Which is that he was Lincoln Electric's first effort toward actually studying the international market. Quickly, Massaro identified many problems in the overseas facilities. He recognized that several causes behind the subsidiaries’ poor financial performance and that fragmented production kept costs high. However, I believe the most important discovery by Massaro was how the company tried to do things the Lincoln way everywhere, rather than fluctuating to local surroundings. This was the moment when the company realized that the lift and drop system was one of the reasons behind their international struggle. They couldn’t simply operate under the same system everywhere they went. The incentive system is strong and is the reason behind Lincoln's success, but it doesn’t work in every market. Therefore, the decision behind Massaro giving his international managers full freedom to only employ parts of the incentive system that they believed were suitable for the host country was the correct approach.
In addition, it is clear that Tony Massaro had done an exceptional job figuring out the core issues in Lincoln's international ventures. His previous experience helped him identify precisely what had to be done to fix these underlying problems. Massaro’s internationalization strategy consisted of two stages, the first one is to shut down the plants that they can’t save and the second one was to improve the sales force to increase the volume in the remaining plants. Tony Massaro was already in the process of uplifting the company’s international operations. The issues Massaro unfolded before and after his arrival was crucial and an important lesson for Lincoln Electric. Although Tony Massaro had done significantly more than his previous initiatives, it shouldn’t go unnoticed that George Willis was behind the rapid expansion toward internalization for Lincoln Electric. Without his initial efforts to finally take production overseas, it would be difficult to say where Lincoln Electric would stand today in terms of its international growth.
After reconstructing the international operations and achieving profitability again, Lincoln Electric was making efforts now to expand into the Asian market. Gillespie was recruited by Massaro as Lincoln's president for Asia. Gillespie’s plan was to build manufacturing factories in Asian countries to manufacture consumables for the native markets. This is where Gillespie put Indonesia as its first target to build a factory. However, political and economic uncertainty was high in Indonesia. But Indonesia’s economy was growing nevertheless, and this attracted Gillespie. However, local companies dominated the import, export, and distribution businesses, because native customers preferred doing business with their own citizens. These were all factors that Gillespie pieced together to develop a strategy.
Once Gillespie took all this under consideration and developed a strategy, he had a variety of methods to choose from. The first one is 100% ownership of a manufacturing venture, which gives full control and rights to all profits for Lincoln Electric. Another one was doing a joint venture, which will give them local expertise and ties within the nation. As mentioned above, local companies did much better than foreign ones, so this was a serious factor to what Gillespie could lean towards. With that being said, Lincoln Electric had two partners to choose from if they were to do a joint venture. Tira Austenite and Suryiasurana Hidupjaya were Gillespie’s two possible distributors. Both were very different from one another, but that meant both were in their own way better at something and Gillespie recognized that. Therefore, partnering with both of them was also another factor that was put onto the table. Lastly, Gillespie brought forward and questioned the compensation and incentive system and if it should be introduced into the Indonesian market. It contains high importance towards Lincoln Electric’s culture and success.
Moreover, I believe it is important that Gillespie understands all the mistakes Lincoln Electric has done previously and avoid repeating them. With all the options available, I believe the best route would be to go into the Asian market through a joint venture with both Tira and SSJH. With that much uncertainty in a country, I think it would be smart to create ties with a company that has strong connections locally. Tira is essential because it’s a native firm and has already established connections that would take Lincoln Electric many years to build. On the other hand, SSJH is a foreign firm that encountered similar challenges mutual to Lincoln Electric. Through these joint ventures, Lincoln Electric lower its risk and gain local respect. Not only that but would also create invaluable relationships with the government. Moving forward, they can reevaluate this decision as they gain experience in the market. On the contrary, the incentive system is too early to be implemented in Indonesia. After Lincoln Electric gains enough knowledge and confidence it could consider applying parts of the incentive system, but in the meantime focus more on its joint ventures.
In conclusion, founder John C. Lincoln created a company that is the largest global manufacturer of arc welding machines and the leading producer of industrial electric motors today. Its success in the United States was unmatched by the implementation of the incentive system. It was Lincoln's core philosophy and helped grow the company. However, Lincoln Electric had minimal understanding internationally as they decided to expand operations overseas. They believed that their incentive system was so strong that it would work wherever they went. They learned this was wrong with the arrival of Tony Massaro. After reconstructing and recovering from its failure internationally, Lincoln Electric made efforts to go into the Asian market. Where Gillespie took on great challenges to make strategic decisions that will place Lincoln Electric at its optimal position within Indonesia. My recommendations were to go through a joint venture to reduce risk and gain connections as well as customers through these partnerships. As Lincoln Electric grows in this market it could reevaluate these decisions and start implementing parts of the incentive system. But in the meantime, stick to growing in the Indonesian market through joint ventures.
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