Lincoln Electric Case Study

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A variety of other efforts boosted volume and, through it, profitability. For example, Massaro replaced several managers and hired new European sales and marketing staff who had experience in international business. He negotiated long-term supply agreements with key customers and arranged for some products being manufactured in the United States for export to Europe to be transferred to the European plants. These moves increased volume and utilization and cut tariff costs. Increasing reliance on local materials also reduced tariff bills. Finally, at Massaro’s behest, Lincoln’s engineering department developed new products that met European customers’ needs better than the U.S. designs the company had been offering.

created NEW incentive system 40 top European managers. it was designed to encourage their cooperation in the service of the corporation as a whole. The new system ensures that they aren’t penalized for contributing to other Lincoln subsidiaries’ production and efficiency,” Massaro explained.

Following the restructuring, the overseas subsidiaries rebounded. In 1994 European operations made profits grew through 1995 and 1996. The plant in Mexico followed a similar trajectory, while Canada boomed following the NAFTA-related rationalization.

- A New Approach, 1996

In March 1996, Massaro was President of The Lincoln Electric Company, and in November succeeded Hastings as CEO. The first outsider among the company’s six CEOs and the only one with substantial international experience, Massaro looked to expand Lincoln’s presence abroad. Two years earlier, foreign customers had accounted for 36% of the company’s sales, but with the international operations in crisis, the newcomer had questioned whether the figure could reach 50% by the turn of the millennium.

naming a president for each of five regions: North America (including the United States and Canada), Europe, Russia/Africa/Middle East, Latin America, and Asia (including Australia). With vice-presidential rank in the corporate structure, these presidents supervised sales staff in their territories, advised Massaro on whether Lincoln needed to create manufacturing capacity in their regions, and developed plans for new factories. The five met as a group with the CEO every two months to discuss global strategy. Their compensation reflected Massaro’s desire for interregional cooperation. A sophisticated bonus system motivated each to develop profitable production operations and maximize sales within his or her territory, but made it most personally rewarding to source goods from the Lincoln factory that could provide them most profitably, even if it was located in another territory.

- Lincoln Electric—Asia

As of mid-1996, plans to expand Lincoln’s international p in the Asia region. Gillespie, the Lincoln’s director of international operations

Strategy

- Gillespie planned to build factories in Asian countries to manufacture consumables for their local markets. Better then import equipment.

- The strategy was that Lincoln consumables would build brand awareness and loyalty, generating new sales of imported Lincoln equipment. It targeted the construction and manufacturing industries, which were large consumers of welding products and accounted for much of Asian economies’ rapid growth. Ray Bender—former head of manufacturing for Europe who now had been appointed to the same post for Asia—summarized the situation:

Indonesia

- Country and market Indonesia was one of Gillespie’s first targets for a new factory. The country’s market for welding products was large, but unsophisticated( bsee6). About 50,000 tons (50 million kilos) per year of stick welding consumables were sold each year in Indonesia.

- The bulk of the stick consumables market was served by two multinationals that had local factories and well-developed distribution networks—although some reports of distributor problems had been circulating. Several local firms had significant market shares, but their products were of lower quality. Tariffs of approximately 30% and shipping costs of approximately 7% of factory cost made it impossible for Lincoln to compete in the low-margin stick consumables segment without a local manufacturing base.

- Lincoln’s reputation as a high-quality producer was well established, and Gillespie believed that customers would switch to Lincoln stick consumables if these were offered at a good price. He envisioned a factory that could produce about 7,500 tons of electrodes per year at full capacity. Although only one shift’s worth of production workers would be hired initially (at first), others would be added as sales grew, and the plan anticipated using a full three shifts within about three years.

- Gillespie had to consider broader political and economic risks in deciding whether to enter Indonesia. The was revolution or civil war.

- Economic and political risks were serious, but Indonesia’s regulatory environment had been improving. While distribution companies had to be joint ventures with local partners, 100% foreign ownership of manufacturing ventures was now permitted. Furthermore, the government imposed no restrictions on repatriation of profits and the rupiah was freely convertible. As a result, foreign direct investment in the country was booming, having risen 13.3% in the first quarter of 1996.

Entry strategies

- If Gillespie decided to enter Indonesia, he could choose from a variety of methods. While 100% ownership of a manufacturing venture would give Lincoln full control or a joint venture would provide access to a partner’s local expertise and relationships with key people in business and government.

- The most obvious possible joint venture partners were Lincoln’s two local distributors: Tira Austenite (Tira) and Suryiasurana Hidupjaya

- TIRA

- owned Tira had a network of 14 offices throughout the country and sold a full range of hardware products, including welding equipment and supplies. It had been distributing Lincoln products in Indonesia since 1991,

- while it had good access to medium-sized and large customers in a variety of industries, its sales force tended to sell from Tira’s vast catalog of products it had sold for decades, servicing their existing clients’ established needs.

- The company’s high-level relationships