Internal and External Factors Explain Lincoln Electric Failure in Ventures outside the US - Case Study Example

REPORT ON LINCOLN ELECTRIC NAME COURSE INSTITUTION STATE DATE REPORT ON LINCOLN ELECTRIC Introduction The case study of Lincoln Electric provides insight into how companies make decisions on expansion and possible challenges that they may face as well as successes. The case based on the welding industry has over a period of more than 100 years made decisions that have contributed to internal expansion. The company developed in both portfolio and size. For instance, Lincoln Electric began as a producer of electric motors, and later incorporated the production of welding equipment and welding consumable products. The later additions became the main line of business for the company marking its portfolio expansion. Additionally, the company opened up its human resource policies and management practices become a pioneer in innovative procedures that became the standard for the welding industry. Part of the growth was in its international expansion in which from 1940s the company became international, with greater expansion realized between 1985 and 1992 as Lincoln Electric expanded into 15 countries. The following analysis explores the experiences of Lincoln Electric during its phase of expansion, identifying its success and failures, and the reasons for the differences in outcomes across the international market. The analysis then uses these lessons to outline a case for expansion into the Indian market. Internal and External Factors Explain Lincoln Electric Failure in Ventures outside the U.S Lincoln Electric expansion outside the U.S. market was marked by building manufacturing plants in Canada, Australia, France, Brazil, Mexico, Scotland, Norway, the United Kingdom, the Netherlands, Spain, and Germany (Siegel 2006). The expansion into Europe and Latin America marked critical losses for Lincoln Electric in operational cost. By 1992, the company was forced to borrow money to be able to pay its U.S. employees annual bonus, regardless of the U.S. plants remaining strongly profitable. The failures did not only occur in the Latin American and European countries but to some extent occurred in the Asian markets. The internal and external failures are analysed using the VRIO analysis that shows the value, rareness, imitability, and organization of the company thus helping understand the company resources, and its competitive advantages as well as weaknesses (Grünig & Kühn 2015). Value stands for how expensive the resource is to obtain, rareness refers to how rare or limited the resources is, while imitability consider difficulties in imitation, and organisation looks at how company arrangement support the resource. The resource may be tangible or intangible. The internal factors contributing to the losses included transfer of labour practices, use of expatriates, poor management knowledge of the new markets, and poor adoption of transferred practices. Regarding transfer of labour practices, Lincoln Electric had innovative human resources practices in which it had established piecework payment, and a bonus system. Begin in 1907 Lincoln Electric adopted a system in which it used employee stock ownership, incentive bonus based on merit, employee suggestion system, piecework pay, annuities for retired employees, and group insurance in the U.S. manufacturing plants (Siegel 2006). The company human resources policy represents a rare resource in terms of important it was to the company and no other company had yet to adopt this system. More so, the policy was embedded into the company organization, and thus possible to transfer into other systems if the company addresses ways to transfer the knowledge from home office to the host office. The company also adopted a no-layoff policy. These policies were critical in promoting a work ethic in which the employees worked hard to earn what they wanted, and they were also part of the creative process. The workers understood that they had a role in the company, and their contributions were recognised and appreciated by the company. The company transferred this working model to its international platform, expecting the managers to introduce piecework, and a bonus system. The local managers and employees did however not believe that these practices were appropriate for their local environment. This meant that the company did not effectively check into how the new market would accept such policies or how to modify the policies to meet the work standards of the host countries. Furthermore, the introduction came from management imported from the U.S. office, which created a challenge of understanding the new market. The result was that the practices were never implemented or failed. Therefore, although the company had key resources in terms of its human resource policy that could be transferred, it lacked a well organised approach that would be essential to tap into the competitive advantage offered by a rare resource and organisation. Poor knowledge transfer thus marks a critical weakness in the company process. The Lincoln Electric executives did not have experience with trade unions and lacked knowledge of the labour practices and laws of the host countries. Management knowledge acts as a critical driving factor in the behaviour of companies with different markets, as they ensure their company operates within the established standards (Grünig & Kühn 2015). However, Lincoln failed in ensuring that its management had this knowledge. Agreeably, the problem was not in transfer of management from the U.S. to the other countries, but failure to prepare the expatriate managers with the information needed to understand the new markets. Such preparation would include knowledge of labour laws and practices, and an understanding of how to incorporate the policies that have been effective in the U.S. welding industry into the new markets. An external factor affecting this early expansion was international economic processes. The company bought into European companies at a time just before a global economic downturn. Another issue was that the companies were competing with each other in which they duplicated production. Anthony Massaro corrected this by streamlining production and ensuring duplicating ventures were closed down (Siegel 2006). However, the company had already lost in operational investment by failing to critically study its production processes and rationalized its manufacturing. Another internal factor experienced in the Asian market was failure of Lincoln Electric to respond to market changes and demands. This challenge to some extent relates to external factors that affected the company success. The Japanese market offers an illustration of this challenged. The Japanese market was challenging in itself in that it required specific uses of power welding machines. Lincoln Electric power sources were able to run on the 200 volt 3-phase power, but their performance was impaired making Japanese customers reluctant to pay for a product that did not meet their requirements for optimized application (Siegel 2006). Despite this shortcoming, Lincoln Electric failed to optimize their machines for the Japanese market, an element attributable to lack of resources. In addition to the internal factors, the company further faced external challenges that contributed to the failures of its international growth. One such challenge was adherence to local laws, such as experienced in China. When Lincoln Electric entered China, it did so within a government created free trade zone, which followed a series of challenges including failure to obtain competent local managers, difficulty dealing with local government authorities, difficulty in establishing distribution channels, and difficulty in meeting operation profitability (Siegel 2006). Among the challenges was Chinese bureaucracy and uncertainties. To overcome this challenge, the company chose to adopt a joint venture approach, by working with the Kuang Tai, which had an established production plant and distribution network in China (Siegel 2006). The partnership in China introduced another challenge for Lincoln Electrical, in which the two companies did not agree on how to grow their business in both volumes and profits. They engaged in time-consuming decision-making, in which Lincoln Electric did not have control over. Furthermore, even with the partnership, the company continued to find it hard to find competent local general managers, especially as the talented ones attracted a pay equivalent to that of the U.S. market, and there was frequent turnover in the Chinese market. Lincoln Electric has thus had to continue working with expatriates in senior management. Other challenges seen in the Asian market that have been present in Japan, South Korea and China is a lack of distribution channel and brand recognition, especially considering the company has been entering a market with already established local competitors. Regarding distribution, South Korea shows how this has been a critical challenge for the company as it was combined with local companies willingness to invest in high-end welding equipment (Siegel 2006). The challenge for Lincoln Electrical initially was that although it had identified a competent distributor with countrywide coverage, local companies were unwilling investors, and when this changed, the company has to deal with ensuring prompt product delivery and competent technical support, especially without local production. The home office in Cleveland provided the machines shipped to Japan and South Korea, as the company continued to develop the Chinese production, which would then replace international shipping for the Asian market. These different internal and market induced challenges formed lessons that now inform the expansion of Lincoln Electric into the Indian market. The company has continued to learn in its expansion structure such as by identifying the advantages of forming joint ventures thus tapping into established distribution channels, and streamlining operations. Lincoln Electric Expansion into India The company expansion into India may be facilitated in three ways; namely, an acquisition, building a new plant, or through some type of a joint venture. Lincoln Electric management recognizes that India has increasingly become an attractive market for the welding industry and thus it would be an opportune time to expand into the market. However, the company has to factor in that the market already has strong actors such as the ESAB India, and Ador Welding Ltd. Based on the characteristics of the Indian market, the recommended model of expansion is building a new market. The analysis into expansion into Indian market uses the PESTLE analysis, namely political, economic, sociological, technological, legal and environmental considerations that affect the context of company growth (Dransfield 2001). Companies have four main strategies through which they can expand into foreign markets, including direct investment, joint ventures, licensing, and exporting. Each present opportunities and challenges that companies need to consider. For instance, exporting while representing a speedy entry, and maximization of sales using existing facilities, may not be ideal due to trade barriers, limited access to local information, transport costs, and company being viewed as an outsider. Joint ventures as a possibility presents advantages in overcoming restrictions of ownership and cultural distance, the company becomes an insider, has the potential for learning, and requires less investment (Dransfield 2001). However, the operations may be harder to manager, dilute control, create risks in exporting and licensing, create knowledge spill over, and the partner may turn into a competitor. Direct investment on the other hand is an opportunity for reducing cultural distance, obtaining sales, minimizing knowledge spill over, gaining market knowledge, and the company can grow to become an insider. However, companies contend with intense resources investment and commitment, and high risk taking. The suggestion for Lincoln Electric falls within the direct investment category. The reason for suggesting plant development rather than an acquisition is that an acquisition may turn out to be an expensive strategy for the company considering the Indian market is already established and the companies involved are successful. Furthermore, as shown in the case of India, forming partnerships have also proven to be problematic for the company, as this has wrestled part of the control from the company. However, the basic reason for suggesting building a plant comes from lessons identified in the Asian market. One of the challenges faced by Lincoln Electric as it tried to establish its foothold in South Korea and Japan was that it had to depend on equipment made in the U.S. Therefore, it would be repeating a similar element in India with probable similar challenges. Building a new plant fits in with modes of entry into an international market, in which by building the company obtains the advantage of directly dealing with customers and thus building relationships that will facilitate the establishment of the business. Furthermore, by building the plant it means that the company can adapt its product to fit the market specification. A challenge experienced in Japan was that the company was not able to easily respond to customer needs in terms of adopting their machines to the Japanese specifications such as in terms of power allowances. Therefore, building a plant would mean that the company can research into the needs of the India welding industry and begin developing products that specifically align to the market. This would mean that in addition to its international commodities, Lincoln Electric can develop markets that fit within the needs of the Indian customers. Building a new plant further offers the company an opportunity for further innovation while holding the property rights of the innovations. Lincoln Electric has grown within the welding industry as a company known for its innovativeness and cutting edge developments that lead the way for others. Therefore, developing a plan creates an opportunity to continue ownership of cutting edge technological advancement, while retaining control, capabilities, and resources (Siegel 2006). This would occur while the company is also developing talent in India. By building a new plant, the company will continue to hold its position in the market as an innovator. However, building a new plant also holds challenges for Lincoln Electric. Among these challenges is the need to factor in technological, financial, and managerial resources that are required to promote the development. Within the PESTLE framework, technological changes includes consideration of information and communication technologies that influence how business conduct business online and offline, their communication lines, and their interaction with other entities (Dransfield 2001). In China the company found that collaborating made it easier to obtain these elements but with a cost on control for the company. Expansion into India gives an opportunity for the company to use the lessons learnt in the Chinese expansion, in which it establishes resource allocation based on market knowledge. In the development, the company will need to consider cultural dimensions as suggested by Hofstede model, in which the company management will need to develop a profile that fits in with the Indian cultural environment (Hofstede 2011). For instance, expanding into India will require understanding the position of management, whether the people appreciate a bottom-up or top-down form of leadership or one that considers shared decision-making. Another aspect is finding the role of rules, presentation of values, and the balance between individual goals and those of the company. A failure seen in previous expansion of the company is not considering the practices that may be acceptable among certain groups, which was one of the challenges experienced in its expansion into Europe and Latin America. The employees did not appreciate the transfer of policies from the American market into their market. Cultural considerations is useful in overcoming this challenge, in which case the management will consider the individual, social and company values, and then underscore how they can ensure such will not act as a barrier toward the growth of the company. Critical understanding in the Indian market may include power distance, in terms of how people view equality; individualism and collectivism looking at whether people work better in groups or as individuals; integration of men and women; short and long term goal development; control; and uncertainty avoidance. Each country respond to these countries in different ways, and thus it is advisable for Lincoln Electric to ensure that it does not transfer lesson from America, Europe, Latin America, and the established Asian markets as whole, but learn the Indian market to understand those lessons that will form a basis for success. This will ensure that the company does not recreate the European experience. Building a new plant offers Lincoln Electric possible market expansion, but as noted this needs to occur within a model that allows critical understanding of India as a unique market rather than importing lessons from other areas. The recommendation is to create new opportunities for the company through incorporating direct investment. Conclusion The case analysis of Lincoln Electric sough to explore experiences of the company in its international expansion starting in the 1980s when it expanded into the Latin American and European markets and continues into the 21st century when it expanded into Asia. The analysis identifies the challenges faced by the company during the expansion process, including management lack of market knowledge, transfer of policies and standards from the home country to the host, failure to understand the legal framework of host countries, which related to internal human resource challenges that created an environment for failure. Additional contributing factors were competition, creation of joint ventures leading to loss of control, and problems with distribution channels due to exportation choices, and failure to change commodities to market specifications. The second element addressed was Lincoln Electric expansion into India, in which the recommendation is for the company to use direct investment option by building a new plant, which offers an opportunity for building new knowledge, and generating products that respond to the needs of the Indian market. REFERENCE Dransfield, R 2001. Corporate Strategy, Heinemann, Oxford. Grünig, R & Kühn, R 2015. The Strategy Planning Process: Analyses, Options, Projects, Springer, New York. Hofstede, G 2011. ‘Dimensionalizing Cultures: The Hofstede Model in Context’, Online Readings in Psychology and Culture, vol 2, no. 1, article 8. Siegel, JI 2006, November. ‘Lincoln Electric,’ Harvard Business School Case 707-445, (Revised August 2008) Read More