Lincoln Electric’s Harsh Lessons from International Expansion:

Case Analysis
Group 9 - Tavishi | Aman | Anirudha | Hitanshu | Akshay | Hari

Lincoln Electric

1. Introduction & Case Summary

Less than a half-hour after taking over as chairman and CEO of the Lincoln Electric Company in
July 1992, Donald Hastings received shocking news: the company's European operations were
losing so much money that Lincoln was in danger of defaulting on its loans and not being able to
pay its employees their year-end bonus. Because the bonus constituted the foundation of the
company's unusually effective manufacturing processes, Hastings understood that failing to pay
it may result in the company's demise. How had Lincoln ended up in this situation? By use of a
quick foreign growth effort.

Lincoln was predominantly a U.S. firm until the mid-1980s, when a domestic recession and
international competition encouraged executives to believe that the company might become a
global force. Between 1986 and 1991, Lincoln took on significant debt to finance international
acquisitions, primarily in Europe. A variety of issues killed the venture: the European crisis,
unfamiliarity with European labour culture, and a lack of foreign knowledge at the top. But, as
Hastings concedes, the main reason was overconfidence on the part of Lincoln's leaders in the
company's manufacturing capabilities and systems.

Hastings, now chairman emeritus, recalls how the corporation struggled in the early 1990s
before rebounding. It wiped off the majority of its European operations, increased domestic
production and sales, and attracted top executives and board members with global experience.
The company was able to keep paying the bonus and rebuild the trust of its employees as a
result of tireless efforts at all levels of the organisation.

According to us, they had learned some bitter lessons in this tragedy, such as:

● The underlying cause of the issue was Lincoln's leaders' overconfidence in the
company's capabilities and systems. They believed that Lincoln's competitive advantage
stemmed primarily from its distinct culture and incentive system, as well as the loyal,
skilled workforce that the firm had developed over the years. They anticipated that the
 incentive system and culture could be easily transferable to other countries and that the
workforce could be swiftly copied.

● Also Competing on a global scale necessitates significantly more time, money, and
managerial resources. They should have started developing a management team and a
board of directors at least five years before launching their expansion programme in
1987, from whom they might have learned how to proceed.

● It is also worth noting that Mexico City is the only new location where Lincoln has
successfully transplanted the incentive system. That may seem strange given that the
plant, which was purchased in 1990, was unionised, and piecework is frowned upon in
Mexican culture. However, it was later realised that if done slowly and correctly, the
system might be integrated into certain existing companies or cultures where it did not
appear to fit.

● Lastly, never assume that what works in one market will work in another.

2. Reasons for recording losses internationally despite manufacturing

prowess and quality - Hari
Main reasons:
a. Bonus system
b. Over-optimistic outlook
c. Insufficient Market Research,
d. Poor Capital Budgeting &
e. Lack of international exposure
f. Cultural shock

a. The flaw in the bonus system:

● Guaranteed employment: no layoffs since 1948,

● Equity: employees earn comparable, sometimes higher, wages than other
manufacturing companies.
● short power distances between labourers and managers. As a result, employees feel
that they are being treated fairly.
● Measurement criteria: wages based on piecework and an annual bonus gives the
average worker the possibility to increase total compensation. The employees were
given bonuses on 4 criteria - 2 for individual performance and 2 for group work; but not
all of them directly measurable contributed to adding to the revenue.
b. Over-optimistic outlook
● The international sales team were overly optimistic about the figures, despite recording a
consistent loss in every quarter.
● By the end of 1992, the expenses, (including the bonuses) had to be managed by
means of borrowings and debts
● The sales team relied on the business plan, despite there was no tested evidence that it
will work
● Too much trust in European managers, without fully understanding the market dynamics.

c. Insufficient Market Research,

● There was a dire need of conducting market research before performing valuable
acquisitions and establishments
● Too much expansion at the same time
● Too much reliance on local expertise to better understand the labour market,
● Did not have good relationships with government and other local businesses
● Lack of contingency planning. They would have the opportunity to scale back the
venture if it proves unsuccessful or buy out the remainder of the venture if they want to
increase exposure.

d. Poor capital budgeting

i. Lack of long term planning
ii. Greenfield expansion- spent almost 325$ million on expansion
iii. Built 3 greenfield plants in Japan, Venezuela, Brazil
iv. Also, purchased operations with 8 plants in Germany, Norway, United King,
Spain, Netherlands & Mexico
v. Most new ventures were directly reported to / managed by Ted, who also had no
prior international experience.
vi. Expand by reducing costs, applying their manufacturing techniques,
equipment & incentive system
vii. Cost of exporting - a challenge for competitive pricing
viii. Restructuring charges > setting up
e. Lack of international exposure
● Management was not properly trained and/or experienced with the markets they were
entering, thus, not able to adjust the incentive program to suit the priorities of
employees.
● Additionally, no structure was in place to properly administer the new operations
because the internal focus of the rim remained on Cleveland.
● As a result, there were low levels of supervision and evaluation of international
managers.
● Essentially, the company parachuted into unfamiliar markets, ignored almost all of the
relevant cultural issues, severely mistimed the acquisitions market, and then, due to
an unprepared organizational structure – isolated the operations from the rest of the
firm.
 ● They failed to understand the importance of tailoring rewards and incentives for
specific countries/ cultures. The domestic operations accounted for 85% of the
worldwide production and in general, the corporation paid little attention to their
international divisions.

f. Cultural shock

It Is evident that Lincoln Ignored a variety of cultural and macroeconomic effects related to his
plan.
● neglected the transferability of the Incentive system to their countries and the
utilization of management controls to monitor It.
● Everything was based on the assumption that it would work everywhere because it
did in the US.
● Many European managers were opposed to piecework and some valued vacation
time higher than extra income.
● Lack of motivation - some workers in Germany were not working at all. Japanese
people were insulted because the company did not partner with local firms,
● Consumers (especially Europeans) valued local products more than products that are
designed and manufactured in the US

3. Lincoln Electric was known for its effective work culture and incentive system in
the US. Why did it not work in other countries? What would be some of the
recommendations to the company while expanding internationally. - Tavishi

Understanding the Company Culture

● The company’s founding values include: honesty, openness, loyalty, accountability, and
self-management
● Lincoln promotes trust within the organization and its employees. Some of these practices
point toward a decentralized control approach-
■ Encouraging communication
■ Encouraging workers to challenge management
■ Hiring workers with little to no experience and investing in their training and
development
■ Follow a “no layoff policy”
● Other practices suggest a form of hierarchical control such as strict performance goals,
defined tasks, and clear manager/employee differences

Incentive System in the US

● The incentive and control system works extremely well for increasing productivity
● Absenteeism and turnover rates were historically low
● Based on not only work productivity but also the quality of their work, their dependability, and
how well they work with their peers
● Open-book style of management which “allows employees to see for themselves”
Transferring this system to other countries
● The company did not have a country-specific plan for their international plants
● Difficulty using control methods such as open-book management due to the differences in
attitudes and standards in other countries
● With the European labor culture, piece-work and bonus systems were an unfamiliar and
uncommon practice which led to lack of motivation
● Other countries do not have the same work values, beliefs and traditions as those in the U.S.
● Working hours were different and there was a lack of flexibility

Recommendations
● Using Hofstede's Cultural Dimensions to understand inter-cultural nuances
● Re-evaluating their management control approach
● Carefully evaluating the international labor laws and regulations
● Increased training and development to managers and workers of both the parent company
and host company

4. What were the key management challenges and series of wrong

decisions taken by Lincoln Electronics ?

1. Culprits: Insufficient Market Research, Poor Capital Budgeting & Lack of personnel
training
2. Ignoring local culture and Lack of International exposure - Took for granted that European
workers would be encouraged to commit to their job and company’s culture
3. Standardized Incentive Plan- what has been proved successful in the US would also be
successful in europe
4. Overconfidence about the company’s capability (Manufacturing Process) Rushed
to Globalize without sound assessment and proper planning and Execution was a big Failure.
5. Management Continuously Ignored Warning Indicators and largely
influenced by their competitors.
6. The acquisitions were made in the booming cycle and sooner or later the cycle
became deep recession in less than a year
5. What are key expansion strategies Lincoln Electric used to set its foothold in the
European market. What were the problems and what were the repercussions?
Recommendations ?- Anirudha
● Lincoln assumed that its manufacturing prowess and fabled culture would allow it
to succeed anywhere in the world. But the CEO recalls how this thinking went
wrong. The strategies are:
○ Lincoln had had manufacturing and marketing operations in Canada,
Australia, and France for more than 40 years, all three were independent
of one another
○ Competition with ESAB- Taking the battle to enemy’s home
○ Expansion into foreign markets cost them 325 million USD
■ Three greenfield plants in Japan, Venezuela and Brazil
■ Purchase of operations of eight plants in Germany, Norway, the
United Kingdom, the Netherlands, Spain, and Mexico.
■ largest acquisition: certain assets of Germany’s Messer
Griesheim, including a plant that manufactured arc-welding
machines, at a cost of more than $70 million.
● The problems Lincoln Electric faced:
○ US economic crisis of 1980s
○ Global competitor, ESAB, setting foothold in US soil
○ Antitrust laws by US Government
○ Many acquisitions made during the local economy’s top performance
period
○ German reunification and deepest european economic crisis since WWII
● The mistakes:
○ Most of its board members did not have any direct international exposure
○ Unaware of the foreign culture:
■ The incentive scheme was not well perceived in Europe
 ■ Borrowing was a cultural shock - The thought of taking any sort of
debt as reckless.
● Recommendation:
○ PESTLE analysis.
○ Diversity among board members.
○ Decentralisation of plants.

6. Conclusion - Hitanshu

❖ Lincoln electronics accomplishment in the USA is for the most part because of talented
staff, preparing rehearsals, and rewarding frameworks which lead to inspiration.

❖ They attempted to utilize similar approaches and rules to procure and make a presence
worldwide and flopped hopelessly.

❖ Neglected to think about systems to test in different nations for better efficacies.

❖ Disregarded the early admonition signs by accusing the downturn

❖ Paid reward in any event, when the organization was in the misfortune by taking
advances in such situation

❖ Hurrying to secure without much earlier examination, no specialists work force in global
business

❖ This was a major illustration learned for LE just as for different organizations

❖ Schaeffer, CFO of Goodyear was acquired as a specialist to assist yet no benefit

❖ At last, Plans to revive had started.

❖ There were 2 choices yet LE decided to go to US representatives for help rather than
scaling down

❖ A video expressing brutal truth - "Intelligent Selfishness"

❖ Recruited new representatives, worked 30 hrs and attempted to accomplish the objective
to save the business

❖ Visiting the plant and acknowledging individuals not working at the Messer Plant. The
motivating force framework was not very much set up there

❖ Acknowledgment of progress of culture really makes a great deal of issues and

individuals don't embrace that without any problem

❖ Gotten experts to assist in global business

❖ At last, Lincoln saw some light in the dimness

❖ It was genuinely an unforgiving example learned