Lincoln Electrics International Business - Essay Example

? Module Table of Contents Table of Contents………………………………………………………………………………………….…2 Section A……………………………………………………………………………………………………..3 Identify and appraise the key strategic issues confronting John Stropki as he leads the expansion of Lincoln Electric’s international Business in 2006. Explain how you have used module concepts and frameworks in your analysis………………………………………………………………………………………………….3 Section B…...…………………………………………………………………………………………………7 “Lincoln could enter India by acquisition, by joint venture, or by building a new plant on its own” (case p. 33) Use module theory and evidence from the firm’s past experience to explore the advantages and disadvantages of these entry modes. Which would you recommend for use in Lincoln’s entry to India, and why……………………….…….......................................................................................................................7 How far and in what ways have Lincoln Electric developed dynamic capabilities through learning form experience in Japan, South Korea and China? Apply your analysis to explain what changes the firm will need to make to its resource management strategy in order to succeed in India…………………………………...………………………………………………………………….....12 Appendix 1- Bibliography…………………………………………………………………………………...16 Section A Identify and appraise the key strategic issues confronting John Stropki as he leads the expansion of Lincoln Electric’s international Business in 2006. Explain how you have used module concepts and frameworks in your analysis. Lincoln Electric is one of the leading manufacturers in the welding industry in the United States incorporated since 1895, on a mere investment of $200. Since 2005 it has enjoyed its reputation as one of the leading global manufactures in this industry. John Stropki, the Chairman, Chief Executive Officer and the President of the company, has played a key role in expanding the company’s business globally, and now he is planning to expand the operation in India in 2006, after covering the markets in North America, Latin America, Europe and Asia Pacific. The company has expanded its operation worldwide through joint ventures, acquisitions and establishing its own plants through out the globe as a major part of its strategy. In its present strategy the company has set a range of financial goals which are not likely to be satisfied only by its operations in the home market of United States. The company’s revenue are still derived mostly form North America; where as the market of welding industry is growing fast all over the globe. Company’s latest goals include double sales growth as compared to the worldwide industrial production, operational margins of over 15% earnings growth of 10% annually, and return on equity of more than 20%. In order to achieve these goals the company had spent approximately two thirds of its free cash flow on global expansion. Now the CEO/Chairman and also the President of the company is focusing on its experience in China and how he can use it so that the same mistakes are not repeated. According to Kendizor, there are a certain kinds of factors that a company should consider when it’s set on the course of expanding its operations globally. Business Risk: The Business risk is high as the stability of the business overall structure depends on how the results would turn up. We have seen in the case of Lincoln Electric in the year 1999, that whenever it entered a global market unprepared it has suffered huge losses, not only internationally but locally as well. Financial Risk: Though the financial risk is low as only a company with a strong foothold in its home base would consider expanding its businesses, still we can see that Lincoln Electric has already spent two thirds of its cash flows in the process and it hasn’t yet established a foothold in India. This can be a problem for future operations nationally and internationally. One more important factor to consider is that what kind of entry option or model a company is going to use is it going to acquire a business interest or is it going for a joint venture. Entry Option: The risk of making the wrong decision about what kind of mode the company should choose to invade a foreign market is very vital for the company because of its past mistakes. The history of Lincoln electric has shown that when it entered China by acquiring business interests or establishing its own establishments, it proved difficult to generate profit because of the inability to find competent local managers. So it entered into joint ventures which proved difficult due to different approaches between both the parties and lack of controlling interest for Lincoln Electric. Lack of information: Lack of homework regarding the targeted market would also lead to disasters like when Lincoln Electric entered China and it hadn’t considered the option of utilizing the local human resources, it did not take any measures to attract the competent human resources so that they could help Lincoln Electric achieve its goals. Lack of proper planning: Also Kendizor suggests that the expansion should not be rushed, it should be meticulous and it should be done after careful planning that seems to be lacking in Lincoln Electric’s History. Political Risk: Political risk is of crucial importance while considering global expansions, it can never be certain when a change would come and the best option to deal with it is hiring the local human resources as they are best to understand and deal with the situation, which clearly in the case of China is nowhere to be seen. Risk of inability to properly utilize local resources: Furthermore if a company lacks the skills to penetrate a market’s local resources because of local laws and regulations, it may be vital for a company to establish its own facility in the targeted market. But as it can be seen in the case of China it did not work for Lincoln Electric because of the lack of preparation on the company’s planning behalf it is vital that before expanding its businesses the company should first clearly research the local market of the targeted country, see if it could gather the necessary support without establishing its own facilities and if it cant then before it goes ahead and establishes its own facility it should properly research if the local human resources are supportive or not. Risk of high costs: It should also factor in the costs it would have to incur to enter the foreign market, and it should analyze if that option is cost beneficial or not, as the company is planning to generate the sales that are double the size of worldwide industrial production. If it will incur more costs than it could incur its sales and even if it achieves the targeted revenue mark, it might miss the mark on its return on equity for its shareholders, so the net return would not be worth the trouble (Keegan 1989). These are among many different aspects that are to be considered. While strategizing the new aspects penetrating the global market, the CEO/Chairman/President of the company should consider the company’s past mistakes and experiences and should design the new strategies in order to achieve its goals while incorporating new measures that could make up for its past unfortunates. Section B “Lincoln could enter India by acquisition, by joint venture, or by building a new plant on its own” (case p. 33) Use module theory and evidence from the firm’s past experience to explore the advantages and disadvantages of these entry modes. Which would you recommend for use in Lincoln’s entry to India, and why? An entry mode was defined by Root in 1987 as “an institutional arrangement that makes possible the entry of a company’s products, technology, human skills, management or other resources into a foreign country” (Wagner 1987, p 3). The basic kinds of modes through which a company can enter a foreign market are acquisition, joint venture or by building a new plant. The factors that influence the mode of entry of a firm into a foreign market can be divided into three types, ownership advantages of a firm, location advantages of a market and internalization advantages of assimilated transactions (Agarwal and Ramaswami, 1992). These factors should be considered while deciding what mode of entry should be chosen to penetrate a foreign market. If the advantages and disadvantages of each mode of entry are assessed briefly, their relevance to the entry in India can be better understood. Direct Investment: Having a direct investment can lead to gaining greater knowledge of local market and specialized skills can be applied in a more effective way while being seen as an insider. But it’s also more risky because of higher level of resources required and higher level of involvement in the management of local resources. Joint Ventures: Whereas in case of joint ventures cultural differences can be overcome by lesser investment, but its major disadvantage is dilution of control where there is a higher risk of the partner becoming the competitor. Building a new Plant: By building a new plant higher involvement is ensued with a higher control on company’s assets by then higher risk of losses is also part of the deal. Past Experience analysis: In light of the past experience of Lincoln Electric it can be seen that the company has a vast history of entering global markets through various modes. Here it will be analyzed how those entry options turned out for the company. Japan: In Japan, the company had a very restricted access to the commodity end of the market. There was also no distribution channel or brand recognition. The basic operations of Lincoln Electric in Japan consisted of the sale of products to a small group of customers. All of it led to the conclusion that when Lincoln electric entered Japan, the company was ill prepared to penetrate such a highly competitive market. South Korea: In South Korea the company had no permanent foothold but it used a local distributor with very good country wide coverage. So it effectively gained access to most of the business areas that Lincoln Electric was targeting. China: In China, the company had sales presences for a very long time before it started implementing the plan of having a stronger foothold. The company initially established a manufacturing plant but it was a disaster because the company was unable to effectively deal with the local government and it could not establish strong distribution channels. So as a result the company moved into a joint venture, which proved effective but still wasn’t satisfactory for the company because of the different approaches that both the parties of the joint venture pursued. Entry mode for India: If the conditions in India are now analyzed it will be seen that the climate over there is highly competitive because of the presence of many larger companies such as Ador Welding Ltd, a company that is locally controlled by a Advani family. This means that the company has deep cultural roots in the country it understands the cultural and political climate of the country, another one is one of the multinational competitors of Lincoln Electric knows as EASB. It has acquired controlling interest of a local Indian company. Now let’s analyze the status of Lincoln Electric in light of the conditions that exist in India. Over the past few years India has really developed its economy with the help of the welding industry, thus making it a very attractive market. Lincoln electric neither has any prior history of sales in the region nor does it have any sort of distribution channel in the country. The market there is highly competitive because of strong foothold of two major companies. These companies acquire 56% of the total sales of the revenue industry in India the remaining 44% consists of small companies which are more like trend followers than trend setters. The labor market institutions follow the pay-for-performance approach. Thus in the past history of the company Lincoln Electronic, it would be suggested that the company should either initially try and establish distribution channels through sales to gain a better understanding of the economy, political environment and the culture of the country. But as there are already highly competitive organizations at work in the market the best way could be the involvement in a joint venture with a local company who has better understanding of the issues in place in India. With better local management team, they can steer the company in the right direction and gain a stronger foothold. The company already believes in rewarding its employees in the light of their performance so it will be on terms with the local labor market approach. Initially the acquisition of controlling interests in any of the company of India will not be cost beneficial as the entry fees in the market are already very high. So in case the company is not able to gain a better competitive edge against its fellow competitors the investment will be wasted which will not look good in the eyes of the stakeholders of the company. How far and in what ways have Lincoln Electric developed dynamic capabilities through learning form experience in Japan, South Korea and China? Apply your analysis to explain what changes the firm will need to make to its resource management strategy in order to succeed in India. When the company first penetrated the market in Japan, it was ill prepared. It had no complete knowledge of the local culture or the market there. In light of the resource management the company had no access to the commodity end of the market. It had no means of providing after sales support in the country which at that time was very crucial in Japan especially when it came to high tech sales. The company did not utilize any resources to gain a better brand recognition in the market nor did it establish any proper distribution channels. All its operations in Japan comprised of sales to a small number of customers. After wards when the company started expanding its operations in South Korea it can be seen that though the company had no strong manufacturing presence in the market, it focused on expanding its operations through strong distribution channels, something which it lacked in Japan. In South Korea, the company used a very well reliable local distributor which helped the company to gain access to most of the business markets that were the company’s targets. The basic challenge that the company faced in Korea was that the companies were reluctant to invest in high end technologies, but it changed with the development of Hyundai Technologies and other companies which were trying to move into the high end of the business. But with it came another challenge. The company had to provide prompt deliveries even in the absence of a local production environment. Meaning that even the company had no manufacturing establishment in South Korea it was still shipping its high end products from Cleveland. As a result it had to face the problem of long lead times which was bad for business. But later on it will be seen that when the company expanded its business in China it planned to establish a production facility in China which would help in delivering products to Korea and other Asian countries. Now if we further see the history of operations of Lincoln Electric in China we will see that the first thing that the company did without properly investigating the environment was establishing a production industry in the free trade zone of Shanghai. However it proved difficult. The company was not able to find competent local managers that could guide the company in the light of the local political changes. Because of that the company lost its strong foothold and it wasn’t able to develop strong distribution channels. It could not even succeed into the day to day operations of the company. As a result of that the company moved into a joint venture and was able to stable its operations. As a result of all these experiences the one thing that the company focuses on is gaining a better understanding of the environment of a potential market and then analyzing how it can utilize its resources so that the operation can be profitable. It transformed from being ill prepared in the basics of the operations in Japan to establishing a strong distribution channel in South Korea to establishing a production facility in China as well as a joint venture. Now if the operations in India are to succeed, the resources should be managed as to fulfill these goals: Understanding the environment: The first thing that we should understand is the environment of the company. How its socio-culture dynamics work? How the political changes in the country affects the local operations and how those changes affect the international organizations in the country? How the foreign exchange rates fluctuate whether the economy is stable or not. Establishing a strong presence: Besides that the other things that need focus is establishing a stronger foothold in the country market as it is highly competitive. For that first of all, a strong distribution channel is to be established that could strengthen the ties with the local consumers. That would also lead to brand recognition in the market. The largest companies of the markets are trend setters. It has to be ensured that the Lincoln Electric’s resources are used to generate high end products so that their specifications and quality is competitive with that of its competitors. ESAB is already a competitor so their products will not be something that the company is not familiar with, so the focus should be on Ador Welding Ltd, which is not only a new competitor but is also the one that holds the majority of the sales generated by welding industry in the market of India. Access to local human resources: Among the many important resources that need to be managed are the human resources. They are of utmost importance. They are the ones that will help the company understand the local market. As learned form their experience in China, the company should not forget that if it will be able to attract enough local human resources, it will be able to design a better management team that would be a mix of the local as well as home resources. Together they can steer the company in the right direction. The home resources will ensure that the interests of their investors are satisfied where as the local resources will ensure that the interests of the rest of the stakeholders are met. These are among the few crucial changes that the company should focus on in light of its past experience to gain a foothold and a strong competitive advantage on its already existing competitors. Bibliography KEEGAN, W. J., & KEEGAN, W. J. (1989). Global marketing management. Englewood Cliffs, N.J., Prentice Hall ROBERT KENDIZOR, Expanding Your Business Internationally: 8 Points to Consider Before Going Global, Woodridge Global Marketing Articles, Available at:< http://global-marketing.bestmanagementarticles.com/a-12863-expanding-your-business-internationally-8-points-to-consider-before-going-global.aspx> [accessed at: 03-Jan-2010] WAGNER, T. (2009). Foreign market entry and culture. Mu?nchen, GRIN Verlag GmbH. . SANJEEV AGARWAL, SRIDHAR N. RAMASWAMI, Choice of Foreign Market Entry Mode: Impact of Ownership, Location and Internalization Factors, Journal of International Business Studies, Vol. 23, No. 1 (1st Qtr., 1992), pp. 1-27, (article consists of 27 pages), Published by: Palgrave Macmillan Journals, Stable URL: http://www.jstor.org/stable/154882 Foreign Market entry modes, Available at: , [Accessed at: 03-Jan-2012] Read More