Organizational Culture and Incentives at Lincoln Electric
1. Introduction: An overview of the case study Lincoln Electric is a leading manufacturer of welding products, welding equipment, and electric motors, with more than US$1 billion in sales and 6,000 workers worldwide. Although now publicly traded, members of the Lincoln family still own more than 60 percent of the stock. Lincoln Electric’s tradition of innovative solutions, technological leadership and commitment to customers, employees, and shareholders stems from the vision of its founder, John C. Lincoln and his brother, James F. Lincoln.
Lincoln Electric has a very successful management system that other businesses benchmark their own systems by it. For years, other companies have tried to figure out how management coaxes maximum productivity and quality from its workers, even during difficult financial times. The Lincoln system succeeds largely because of an organizational culture based on openness and trust, shared control, and an egalitarian spirit. Although the line between managers and workers is firmly drawn, managers respect the expertise of production workers and value their contributions to many aspects of the business.
Organizational Culture and Incentives at Lincoln Electric Essay Example
The company has an open-door policy for all top executives, middle managers, and production workers, and regular face-to-face communication is encouraged. Lincoln’s system worked so well in the US that management decided to extend it overseas. Lincoln built or purchased 11 plants in Japan, South America, and Europe with plans to run the plants from the US using Lincoln’s expertise with management control systems. Managers saw the opportunity to beat local competition by applying manufacturing control incentive systems to reduce costs and raise production. The results were abysmal and nearly sunk the company. Production and financial goals
were not met. The huge losses in the international plants meant that the company would have to borrow money to pay US workers bonuses, or forego bonuses, for the first time, in Lincoln history. Management wondered whether the Lincoln Management System could be transferred to other countries. 2. S. W. O. T Analysis Strength Organizational Culture >Everybody in company treated Equally whereby there is no special car parking area for managers and top management executives ,everybody will use the same cafeteria for breakfast or lunch and lastly they practicing open-door policy in the organization >Any GAINS in Productivity will be shared with
Consumers —————— low Price Employee —————— Higher Pay Shareholders—————- High Dividend Incentive Scheme >Pay according to number pieces produced and enable the workers to gain more wages than the other welding company workers throughout the United states. In addition, these incentives system indirectly heightened the sense of ownership among the plant workers and it’s encouraging them to produce more quality product within the timeframe. > Lincoln main strength is Lowest cost structure and High level of productivity strategy Weakness
Long working Hours >According to the labor law in US or any other countries ,the acceptable working hours for manufacturing company workers is (35 hours per week ) whereas Lincoln electric practicing (43-58 hours per week ). No Base salary >when there is no base salary, most of the workers will feel uncomfortable to work in that kind of organization. For instance, if the worker couldn’t work for 43 to 58 hours per week, he or she might low wage than others and how that person would manage the cost of living in United States with that low
wage. Opportunity >It was told by foreign distributor that American equipment will not sell good in Europe >So instead company decides to set up the Wholly owned subsidiaries and acquisition to make the Equipment locally to capture the international market. E. g. Lincoln acquired 7 manufacturer in Europe and Mexico >It takes 2 years to implement or change the entire company workers to follow and adopt the Lincoln organization culture and incentives system in Mexico. Threats Political
In many Europe and Asian countries the government considered piecework as Exploitative compensation system which force employers to work harder, therefore in Germany the strategy doesn’t work well. Society As stated in weakness part, the long working hours became threat when Lincoln implement the strategy in Other countries because it is not acceptable since labor law limit the working hours 35 hours per week Technical Managers have no experience of work outside US and the local managers also felt reluctant to implement the culture of Lincoln in the Unit.
Legal Due to many lawsuit against the organizational culture and incentive systems of Lincoln ‘s foreign acquired companies 3. Case Discussion Questions 1. What is the source of Lincoln’s long-standing competitive advantage in the United States market for arc welding equipment? Lincoln’s Electric long-standing competitive advantage in the United State market achieved by a high productivity rate per worker and this company success had been on extremely high level of employee productivity. Lincoln’s Electric apply incentive scheme based on piecework.
The workers receive no based salary but depend on the number of pieces they produce. The piecework rates at the company enable an employee working at a normal pace to earn an income equivalent to the average rage for manufacturing worker in the area where the factory is based. A company faces a quality aspect when it comes to incentive scheme based on piecework. But at Lincoln Electric’s the worker must repair or paid back any piecework that have defect. It means the workers must be responsible for their outputs. The work culture in Lincoln Electric’s is one of the attributor.
The company had a strong respect for the ability of the individual. Moreover, in this company, they practicing open-door policy whereby the communication barriers between ‘workers’ and ‘managers’ were eliminated. All workers are treated equally despite of their position. Since 1934, production workers have been awarded a semiannual bonus based on merit ratings. These rating are based on; Objective criteria; example: employee’s level and quality of output. Subjective criteria; example: employee’s attitude toward cooperation and his or her dependability.
This semiannual bonus motivates workers to perform better and work harder, resulting boost in productivity. Despite high employee compensation, the worker so productive than Lincoln has a lower cost than its competitors. 2. Why did Lincoln enter foreign markets through acquisitions and Greenfield ventures, rather than through exporting? The Lincoln Electric’s did consider expanding into international market by exporting, but was told by foreign distributor that American equipment would not sell well in Europe. So instead the company decides to set up wholly owned subsidiaries and acquisitions to make the equipment locally.
Through acquisition, it was a quick way to execute. The company can rapidly build its presence in this targeted foreign market. Lincoln acquired seven arc welding manufacturers in Europe and one in Mexico. This move is the quickest way to make the equipment locally and introduce their product to the local market. Acquisition may be less risky because acquisition provides a set of assets that are producing a known revenue and profit stream. It also acquires valuable information such as manager’s knowledge about the local market environment.
Greenfield ventures gives the company a much greater ability to built the kind of subsidiary company that it wants. The backbone of Lincoln Electric’s success lies in its strong organization culture and a unique set of incentives. Thus, by applying Greenfield ventures can be much easier for Lincoln to build that organization. It is to change the culture of an acquired unit 3. Why did Lincoln’s foreign ventures fail to deliver the gains forecast? The Lincoln may have overlooked the organizations cultural differences when the company decided to acquire the seven arc welding manufacturers in Europe and one in Mexico.
When the company acquires these arc welding manufacturers, Lincoln left local managers in place, believing that they knew local conditions better. But there have been told to imply Lincoln’s strong organizational culture and introduce its incentive system in acquired companies. Local managers had little working knowledge about Lincoln’s organizational culture and were unable or unwilling to impose that culture on their unit, which had their own long-established organizational culture. The incentive system or work pieces were a problem to imply to it’s newly acquiring companies.
The piecework was viewed as an exploitive compensation system that forces employees to work harder in other countries. The strong organizational culture and the incentive system were the main reason why Lincoln Electric’s stand up upon other competitors. If these two elements cannot be imply or used in their newly acquire companies, this must be the reason why Lincoln’s foreign ventures fail to deliver the gain forecasted. 4. In retrospect, what might Lincoln have done differently to avoid the financial crisis it found itself in?
Before investing to a foreign country, Lincoln must first in vestige the foreign countries law relating to worker and working conditions. Also the company must know the foreign culture; it might be organizational culture or life culture itself. Then decide what entry made is the most suitable for the company. When it comes to Lincoln Electrical, where strong organizational culture and incentive system were the backbone of it success, the most possible entry mode is through Greenfield. Greenfield ventures give a much greater ability to build the kind of subsidiary company that it wants.
Lincoln can introduce it organizational culture and incentive systems without a clash with another culture or system. While this strategy takes more time to execute, it yields greater long-run returns than the acquisition strategy. 5. What lessons can be gleaned from the Mexican venture? International managers should understand better about the foreign culture that the company wants to invest in. Before foreign instruments are made, the company must understand fully about its culture and laws. The local managers should be train or paid a visit to the successful factories in the America.
They should be taught about the culture and the incentive system. Then the managers can imply these to the factories in their own country. The culture can change slowly if truly it is a good culture. Worker can accept it if it more beneficial to them. The incentives systems are proven to make the worker more productive and make the worker earn more. 4. Recommendation There are three ways to solve the company’s current on whether to expand Lincoln business into international market or not such as Human Resources Management, Culture and Policy and Communication .
Based on the case study, through Human resources management, could bring an end to this issue whereby recruit foreign talents into US headquarters to adopt the culture and once they feel confident, they will be transfer to their home country to oversee the Lincoln’s acquired companies. Moreover, HRM should recruit more degree holder so that could balance between experienced based managers and knowledge based managers in the organization in order to avoid the agency problem.
Apart from that, training is also plays vital role to overcome the lack of international business knowledge of fresh graduates who hired as managers. Nevertheless, Lincoln’s management should create new department called ‘culture and policy ‘ in headquarters and also in acquired companies around Europe and Asia countries. This department main objective should be on understanding the culture, behavior, law, politics intervention, economy, labor law policies and also the market research about a country where Lincoln prefer or desire to expand the business.
Last but not least, communication also an important factor for international business whereby create new channel among the branches and offices in order to update the current situation in the acquired companies, if they found anything goes wrong ,the US headquarters would take immediate action it. Higher the foreign talents and local talents hired, more will be the solution, ideas, suggestion and strategies will be introduce, therefore, it will be easier for Lincoln to expand the business into international market and will sustain for longer term.