Harsh Lessons from International Expansion - Case Study Example

Lincoln Electric business case study Lincoln Electric is a manufacturing company based in Euclid, Ohio, and it manufactures arc welding equipments, plasma and oxy-fuel cutting equipments, industrial electric motors, along with systems and equipments which do robotic welding. Although, they have wide range of products in their portfolio, arc-welding products are their mainstay business. It is because Lincoln Electric mainly started as the manufacturers of arc welding equipments, and has been one of its leading manufacturers for many decades throughout the world. In early 1990s, the period that is focused in the case study, sale of arc welding equipments accounted for around 87% of their $853 million in total sales. As they “sold high-value, high-quality products at competitive prices and with outstanding customer service”, they were able to make even the corporate giants like General Electric and Westinghouse withdraw from the arc welding business. With such optimum success in their domestic market due to their quality products and efficient work culture or processes, Lincoln electric started having global aspirations in the early 1990s. Factors that triggered the company to take on the foreign expansion Before the initiation of its global expansion plans, Lincoln Electric actually had operations in Canada, Australia, and France. However, all the three functioned independently away from the direct influence of the Lincoln Electric’s headquarters, and so Lincoln was primarily viewed as an U.S. company. Thus, to achieve the tag of a global company, Lincoln started looking for opportunities or situations to arise. It happened first in early 1980s, when the U.S. economy faced financial slowdown. In order to survive or even succeed in those tough situations, the management put forth the idea of foreign expansion. The main argument was, if Lincoln is totally dependent on the domestic market and if that market gets affected by problems like financial slowdown, it may not have other options to survive and proliferate. Although, this idea was rejected by then top management team particularly William Irrgang, who headed Lincoln from 1965 until 1986, Lincoln had to initiate its foreign expansion plans, when the major Swedish manufacturer of arc-welding products, ESAB started making inroads into U.S. ESAB was already operating in the countries of Latin America and Far East Asia, apart from its home operations in Europe. Then, it suddenly bought two midsize arc welding manufacturers in the United States. This showed that ESAB had global ambitions and importantly wanted to make incursions into the U.S. domestic market, thereby capturing a sizable market share from Lincoln. To check ESAB growing influence, Lincoln “decided to take the battle to ESAB's markets in Europe and Latin America.” (Hastings 1999). Thus, to avoid over dependence on the domestic market particularly during tough financial times, to avoid saturation effect in the market, to aggressively compete with its competitor and also to look for potential opportunities in the foreign market, Lincoln decide to launch its foreign expansion plans. Thus, in 1986, after Irrgang died, his successor George E. "Ted" Willis, “dreamed of Lincoln's becoming a global power.” (Hastings 1999). Competitive advantages on which the foreign investments were based As mentioned above, Lincoln was able garner sizable market share, and achieved the tag of a successful company, mainly because it delivered quality products. They are able to do that by having optimal organizational processes, which was fully complemented by effective work force. The work force was skilled and experienced to come up with innovative and quality products in quick turnaround times. Their efficiency was further optimized by motivation programs, particularly the Lincoln’s incentive system. That system combined a bonus with piecework – “the practice of paying each factory worker on the basis of how many units he or she produces instead of hourly wages or salaries.” (Hastings 1999). It is still an integral part of Lincoln’s culture and so bonuses to the employees constitutes more than 50% of employees' annual incomes. With this system, making employees at Lincoln “rank among the highest paid factory workers in the world”, they have highest motivation levels and so they contribute heavily, without the need for anyone pushing them all the time. As mentioned in the case study, employees “act like entrepreneurs” and does not require much supervision. Thus, the foreman-to-worker ratio at Lincoln's main U.S. plants is just 1 to 100, while in a typical manufacturing factory in US, the ratio has to be1 to 25. Lincoln management especially then CEO, George E. "Ted" Willis or simply Ted, thought that this incentive system and the resultant efficiency of the employees is an sure competitive advantage and can be replicated successfully in foreign operations as well. In addition, this decrease in the need for foreman or other supervisors means no need to recruit more of them, leading to costs savings and in a way helps in providing more bonuses to the existing workers. Because of this incentive system and heightened motivation levels, absenteeism and turnover rates were very low in Lincoln. “In 1992 absentee rates were between 1.5 % and 2%, and the turnover rate, including retirement but excluding new employees (people employed for 90 days or less), was 3.5%.” (Hastings 1999). The management at Lincoln viewed all these effective parts of organizational process as key competitive advantages. They hoped that all these can be effectively implemented in their foreign operations, particularly in the companies, which they have acquired as part of their expansion plans. Way foreign expansion was carried out and why was it carried out in that way? As discussed above, Lincoln electric had certain effective organizational processes, and thought that if they can implement these processes in any foreign factories or companies, they can make those units also function in an efficient manner. On those lines, it first purchased “Harris Calorific, a manufacturer of oxyfuel cutting equipment that had plants in Italy and the United Kingdom.” (Hastings 1999). As a support system for their European operations, Lincoln purchased operations in eight plants particularly the ones that dealt with arc-welding manufacturing in Germany, Norway, the United Kingdom, the Netherlands and Spain. In addition, they also focused on South America and Far east, and to run operations there, they built greenfield plants. They built those plans in Mexico, Venezuela, Brazil and Japan. Many of those acquisitions and constructions were done when market cycles of Lincoln was at its peak and at cost top dollar. Starting from 1986 for the next five years, under Ted’s regime, Lincoln spent around $325 million on its foreign expansion plans, although it was a huge sum considering its size. They carried out foreign expansion this way because they thought that they can implement all their effective organizational process in their acquired factories or units as well as in brand new plants. “When we examined the manufacturing operations of the foreign companies on our acquisition list, we saw tremendous opportunities to reduce costs by applying our manufacturing expertise, equipment, and incentive system.” (Hastings 1999). Fit between the competitive advantages and the way it was carried out. Did Lincoln Electric possessed the necessary resources? When one focuses on the fit between the competitive advantages and the way the expansion is carried out, it is clear that there are clear ‘missing pieces’. One of the competitive advantages that Lincoln ‘boasted’ is their effective work force because of good organizational process including incentive system. However, they wrongly assumed that it will surely work out in their European operations as well. That is, without exploring whether the incentive system will be accepted by the European employees, Lincoln thought it has a competitive advantage, which can surely back its foreign expansion plans and provide success. However, they found out that “European culture of labor was hostile to the piecework and bonus system.” (Hastings 1999). Thus, the employees may not provide optimal output and extra hours. For example, they found that even though German factory workers are highly skilled, the average factory workweek is 35 hours, while in Lincoln's U.S. plants it was between 43 and 58 hours. (Hastings 1999). The incentive system was not able to inculcate entrepreneurial mindset or work and even flexibility. With their main trump card or competitive edge not making positive impact on the European employees, and with no back up plan, Lincoln did not possess any other necessary resources to positively influence the employees and motivate them. Thus, there was no apt fit between its competitive advantage and implementation, causing it to make heavy losses in Germany, Japan, Mexico, Brazil and Venezuela. Lincoln Electric's Multidomestic, Global and Transnational Strategy, with control by the corporate headquarters When one focuses on Lincoln’s foreign expansion from the perspective of multidomestic strategy, it can be although they tried it, it also did not work out for them. When an organization follows multidomestic strategy, it will orient or customize its operations focusing on the domestic markets of the entering countries. On the same lines, Lincoln in order to capture the German market and importantly to manage the bias the Germans have towards their own products and against the American products, bought the local player. They bought certain assets of Germany's Messer Griesheim, including a plant that manufactured arc-welding machines, at a cost of more than $70 million, so they can sell their products as one manufactured in a German company by German employees. (Hastings 1999). However, with recession negatively affecting its opportunities and with its incentive programs not working out, the acquisition based on multidomestic strategy did not give expected results. Even when viewed from the perspective of Transnational and global strategy, Lincoln did not perform aptly. That is, both these strategies focus on managing entire gamut of foreign operations from a global headquarters, by effectively setting up efficient regional headquarters and management team. However, CEO Ted did not establish such effective ‘systems’ in its European operations, as he wanted everything of importance only going through him. Even, when developed those systems, the management there was not competent enough to handle the regional operations by themselves, and were not able to ‘boss’ the regional units. For example, when Jim Clauson, England’s regional manager, tried to teach them sales and marketing techniques that were successful in the United States, he was rebuffed by his European counterparts. (Hastings 1999). Thus, it is clear that Lincoln was not able to achieve success in any of its foreign expansion strategies. Root causes of the failure One of the root causes of Lincoln’s failure in its foreign expansion is, without thinking ‘entering market’ specific strategies; they tried to impose America specific processes and strategies in a new environment. As mentioned above, Ted only looked at Lincoln’s foreign expansion “primarily from a manufacturing standpoint”, and wrongly expected that its “lowest-cost, highest-quality manufacturing operation,” with incentive programs would automatically help it to dominate the market. (Hastings 1999). He did not understand that the entering company should also need to have proper distribution, competitive delivery times, relationships in the marketplace as well as with the customers. Without these key factors, and with it’s much talked about incentive program not making positive impacts, it led to failures. In addition, Lincoln’s other top management team members and even middle level managers did not had any experience to handle operations in foreign territories. Even the dubious operations of the local units also led to failures. For example, the operating budget of the management company in Norway was actually funded by the individual regional units in each country, “and the size of its budget was based on the forecasted, rather than the actual, sales and profits of those businesses.” (Hastings 1999). Thus, to inflate and thereby to misuse the management company's own budget, its leaders had wrongly encouraged the regional units to provide optimistic forecasts, rather than realistic figures or forecasts. This clearly led to ballooning of the operating costs, thereby causing huge losses. In addition, the employees in the regional units did not provide optimal output, with the CEO finding that employees in the Messer Plant in Germany are sleeping during their work hours. The other external reason for failure was the onset of the economic recession, right at the time, when Lincoln made its entry. Happy end Lincoln had always been ultraconservative financially. Before making the acquisitions, we had a cash reserve of more than $70 million and no debt. By 1990 we had used up that surplus and taken on a small amount of debt. In 1992 our debt soared to nearly $250 million, or 63% of equity. Our directors - myself included -had known that Lincoln would have to borrow to finance the acquisitions. Most people at Lincoln saw the taking on of any debt as reckless, a view that had its roots in our incentive system. If there was no cash left, there would be no bonus. As soon as it became apparent that we were going to have to borrow to finance the foreign expansion, employees became concerned. We were able to show the ten banks that we had a strategy for dealing with the crisis, and we began negotiations with them in November. We were seeking a credit line of $230 million to replace our existing line of $75 million -and we got it. Our new export strategy -which included selling American-made machines worldwide and rethinking which of our plants around the world could best serve a given market-was a smashing success. Moreover, in countries where we had closed operations, market share actually increased. Uppsala Model of Internationalization Hastings, DF 1999, Lincoln Electric's Harsh Lessons from International Expansion, Harvard Business Review. Read More