Lincoln Electric Venturing Abroad

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Lincoln Electric
Executive Summary
Michael Gillespie, The Lincoln Electric Company’s new president for the Asia Region, was “encouraged to develop plans to open welding consumables factories in several Asian countries” by the new CEO, Anthony Massaro, and Gillespie had specifically “turned his attention to plans for Indonesia [O’Connell,[1] main reference, p 1].” We worked with Gillespie to prepare for the September 1996 meeting with Massaro and the presidents of the other worldwide regions. We analyzed Lincoln’s current capabilities and its past experiences and prepared a transformative plan based on business concept innovation [Hamel[2], ch 3], documented by this report, with a three pronged approach for the Asia Region. The first prong would be to execute Massaro’s strategy, to grow revenue in the less-developed countries, by building a factory in Indonesia in a joint venture with SSHJ as a pilot step, to be followed by further expansion to other South East Asian countries, and to China. The second prong would be to build on Lincoln’s strengths as an organization, including its technical innovativeness and incentive system and its people, to prepare Lincoln for the expansion effort ahead. The third prong would be to extend Lincoln’s competencies to the level of a living system [Senge[3], ch 12] that learns, from the Asia Region expansion experience and from all aspects of its future existence, how to grow sustainably [Kaplan[4], ch 4]. Current Status

Lincoln was financially sound at this time to undertake the planned international expansion. After having been remarkably successful for nearly a century of existence, Lincoln started to slide in 1988 toward bankruptcy with a steep drop in cash from $61 million to $23.9 million, with $17.5 million from long term debt [p 19]. Return-on-sales dropped from 6.2% in 1987 to 1.7% in 1991 [Exhibit A. Financial Ratios]. Similarly, return-on-equity and return-on-assets, respectively, dropped from 13.5% and 9.4% in 1987 to 5.5% and 3.3% in 1991. Restructuring efforts between 1992 and 1994 [p 19] and the associated management changes [p 7] succeeded in the ensuing financial turnaround to return to pre-1987 status with 6.0% ROS, 18.6% ROE, and 11.2% ROA in 2005. A 40% equity public offering in 1995 [p 1] injected approximately $132 million[a]. With the financial leverage at 2.15x and quick ratio, current ratio, interest coverage, and long-term-debt/total-assets of respectively 0.9x, 2.1x, 9.1x, and 15.2%, Lincoln should be able to finance the Asian expansion. Four Lessons Learned

A major element for any organization to sustain success and to continue growth would be to build and maintain an institutional ability to learn. Because Lincoln had encountered failures in its previous attempt to expand internationally, Lincoln had the unique opportunity to learn lessons from these failures. 1. The Incentive Plan[b] should be implemented within the context in which it was grounded. The governing principle[c] from which the Incentive Plan was created was stated by James Lincoln in that “All those involved must be satisfied that they are properly recognized [p 2].” Thus the question one should ask was not “Should we implement the Incentive Plan?” Rather, the question to ask should be “How the Incentive Plan may be utilized to properly recognize customers, workers, management, owners, community, and society?” From 1987 to 1995, the Incentive Plan system had ensured exceptional productivity that resulted in gross-profit-margins within a range of 35.2 to 38.5. And yet, during the same nine year span, the three major profitability indices of ROS, ROA, and ROE had dipped into the red. Thus, the strict application of the Incentive Plan failed to properly recognize at least the owners. And, Lincoln’s poor overall financial performance during that period would have led to continued total incentives decline and to ultimate demise if Lincoln had depended solely on the Incentive Plan. Non-Incentive Plan...
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