The Lincoln Electric Company is the world’s dominant producer of arc-welding products (the case dates back to 1974 and hence I’ll use that year as the frame of reference) and in 1974, had manufactured roughly 40% of the arc welding equipment and supplies sold in the United States. Lincoln views itself as a predominantly manufacturing firm and has endured in a highly competitive industry since 1895, when John C. Lincoln founded it.
The firm attributes the primary reason for its success to it being a cost leader, i. . consistently producing a quality product at a lower cost than its competitors, but it is also highly reputed for its value drivers. The company is also known for its highly successful, very rewarding and unique incentive system, which was hard to imitate. The firm has highly valuable resources and capabilities that contribute to and maintain its superior economic performance. I’ll analyze the company strategy and its execution in detail in the subsequent paragraphs.
The basic strategy of the firm is very simple: to build quality and innovative products at a lower cost than their competition and passing the savings to the customer by lowering prices. A very important part of their strategy was tying the employee’s earnings and promotion to his individual and direct contribution towards the company’s success. The strategy had been immensely successful for well over the past half century, was difficult to imitate and had caused the exit of several companies from the market.
Lincoln, on the other hand, continually improved its market share and primary demand for arc welding equipment and supplies by focusing on providing a progressively better product at a lower and lower price to the customer, thus continuously increasing the difference between the value of the product to the customer and its cost (a powerful buyer surplus) and hence giving Lincoln an unassailable competitive advantage. Lets focus on the value and cost drivers, retention and isolating mechanisms and resources and capabilities of Lincoln.
The value drivers clearly are the quality, service, technology, breadth of line, complementary products and the brand/reputation of Lincoln. Lincoln has been around in the market for more than 70 years and has an excellent reputation for providing high quality welding products in an overall breadth of line that no competitor could match. With the global economy picking up and the amount of construction going up, the company forecasts a healthy rise in demand for its products. The cost drivers are vertical integration, economies of scale and scope, practices and the learning curve.
The average Lincoln worker is a highly efficient, highly productive and skillful worker who has been with the firm for a long time yielding a compelling cost advantage. Lincoln is also producing more and more at a lower and lower cost and sharing assets between product lines giving it benefits in terms of economies of scale and scope. The firm practices frugality, which is very evident by looking at its simple facilities, no-frills management and cost-conscious workers. Finally Lincoln insists on producing most of its product components in-house, thus being vertically integrated.
Lincoln can retain its customers by way of learning costs (automated welding products), transition costs (products have useful life of over 30 years and hence once bought are not cheap to replace). The firm also prevents imitation by means of causal ambiguities as the highly efficient and cost-effective practices of Lincoln can not be copied easily. A rival would also have to undergo significant learning costs to imitate Lincoln. Lincoln has done an enviable job of executing its strategy and building its capabilities.
It follows all four dimensions of capability development with a focus on its incentive systems. First, it has been able to sustain its market position as a cost leader because it has consistently executed its strategy of setting cost effective policies and designed its activities to keep costs low. It has passed cost savings to customers while increasing value thus creating a high buyer surplus. Second, the firm has good and effective control and coordination systems. Being small, it is mostly run by two executives at the top namely, Mr Willis and Mr. Irrgang.
There is also a 12 member Company Advisory Board, consisting of elected employee representatives, which meets twice a month and provides a forum in which employees could bring issues to top management’s attention. In addition, there was also a 12-member middle management board that met with top management once a month and encouraged co-operation within departments. The company is organized as a functional organization with close co-ordination between the various functions. Third, Lincoln has dynamic, capable and efficient people and they have created a vibrant culture.
All promotions are in-house and all new hires are required to go through a mandatory and rigorous hands-on training. This promotes organizational learning. Existing resources and capabilities provide the framework for further innovation. By imparting the mandatory training to even sales and management personnel, the firm has created focal points for decision making and solving customer problems aggressively. New hires are required to find one innovative way to improve any one process or product before their training is complete. People even work during breaks.
Finally, Lincoln has a very effective and outstanding incentive system that is based on a piece-rate system of compensation, meaning employees get paid for the amount of output over a period of time. The highlight of the system was a year-end bonus that could very easily equal or exceed the employee’s full annual regular pay. An individual’s share of the bonus was determined by a semiannual merit rating which measured his relative performance to others in his work group. The factors evaluated while giving the rating were dependability, quality, output and ideas and cooperation.
The piece-rate incentive system was complemented by a number of policies that neutralized potential problems that could have made the system infeasible. There was a total absence of hourly wages unless absolutely needed for that line of work, a yearly bonus based on the merit ratings, a very good employee stock purchase plan, the policy of guaranteed employment and promotion from within, open discussion of job and employee ratings, not hiring temporary workers to increase production when demand increased and a system of open and frequent consultation between workers and management.
Thus, we have seen how Lincoln has successfully executed its strategy by building its core capabilities and held on to its valuable resources. However, to face market challenges in the future the company might have to reconsider this strategy or make some adjustments to continue to be growing and profitable. This is a mature industry and there are chances of disruption by a low cost startup having an innovative or technologically advanced product that might change customer preferences or by another large competitor with deep pockets.
We also know that Lincoln operates with a high level of internal consistency to support its strategy of being a low cost leader. However the pitfall of this high level of consistency is that the more consistent Lincoln’s activities, the more difficult they will be to change in future, if demand changes or disruption occurs and the firm might have to change its market position. The management has pointed out that they will not be changing the strategies or policies, which might not be too good for the growth of the company in the upcoming global economy.
The global market will have a different set of rules, which will be different from what Lincoln has experienced till now. Their core compensation system, which is piece-rate, might have to change in future because of local laws, cultures and customs and a variety of compensation and marketing systems. Also, to expand Lincoln might have to raise capital and the financiers might not approve of such a generous compensation system. Keeping all this in consideration, Lincoln should reevaluate its strategy and make modifications to sustain its market leader position.
January 9, 2018
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