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The key factor that helped Lincoln Electric in its success was the founding philosophy, namely, the idea about human motivation formed by James F. Lincoln. He believed in the individual and the equality of management and workers. He implemented the unusual structure of compensation and benefits which was the basis of his philosophy of ‘incentive management’. In 1951 he wrote in his company-published monograph: ‘There never will be enthusiasm for greater efficiency if the resulting profits are not properly distributed. If we continue to give it to the average stockholder, the worker will not cooperate’. His system included four components: wages based on the number of pieces produced by the worker; an annual bonus (a year-end bonus that might be equal to or exceed the regular payment); guaranteed employment; limited benefits. The company strove to erase hierarchical distinctions and tried to create a system of rational incentives to build a spirit of cooperation between management and employees. The culture that resulted from Lincoln’s incentive program and unusual management style seemed to encourage individual employees to produce and innovate. In the post-war period, productivity per worker was increasing at twice the rate of benchmark manufacturing companies. Later George Willis, Lincoln’s CEO in the late 1980s and early 1990s, summarized the success of the company in the following way: ‘We’re not a marketing company, we’re not an R&D company, and we’re not a service company. We’re a manufacturing company, and I believe that we are the best manufacturing company in the world.’
The main reason why the internationalization thrust of the late 1980s and early 1990s failed was the recession in Europe and Japan that hit the new subsidiaries’ sales in 1991. The corporate executives, focused mainly on Cleveland, paid little attention to the problem. They thought the modified versions of the incentive system would help most plants abroad achieve rapid productivity growth similar to Cleveland’s and did not adjust to the local situation. The new plants in Europe were dragging the whole corporation down. The reasons for the issues faced by the company were: the focus on the quality of the acquisition target’s manufacturing facilities, and the high cost of fragmented production. Many plants competed with each other. In addition to this, Lincoln’s corporate headquarters contained no managers with substantial international experience. As a result Willis, who became CEO after Irrgang died in 1986, retained the existing managers of most of the acquired companies to take advantage of their local knowledge but directed to implement Lincoln’s incentive and manufacturing systems. He sent out US managers who knew the system in Cleveland to help them. However, beyond this corporate headquarters largely left the new subsidiaries to manage on their own. Moreover, most of Lincoln’s acquisitions were unionized, and each relationship between management and labor historically had been less cordial than at Lincoln. Many of the European managers and workers were philosophically opposed to piecework pay and seemed to value vacation time more highly than extra income from bonuses. Regulations presented additional obstacles: in Brazil, any bonus paid for 2 consecutive years became a legal entitlement and in Germany piecework was illegal.
Tony Massaro, hired in April 1993, was a former worldwide group president at Westinghouse Electric, as a consultant. Later in August, he became the director of international operations. In cooperation with Jay Elliott Massaro quickly identified several causes of the poor financial performance on the European market such as several European companies having small market shares and weak sales organizations, high cost of fragmented production, overcapacity, and competition between plants. Massaro and Elliot had to restructure international operations to achieve profitability. Some subsidiaries had to be closed, the remaining ones had to go through the rationalization of the product lines and improvement of the sales force. In March 1996, Massaro became President and CEO of the Lincoln Electric company he looked to expand the company’s presence abroad. In 1995 Lincoln began extending its sales and distribution network in Latin America and Asia, the next step was to build manufacturing capacity in these markets. He created a new for the company’s international operations and named a president for each of five regions: North America (including the USA and Canada), Europe, Russia/Africa/Middle East, Latin America, and Asia (including Australia). Massaro was more flexible than his predecessors about the workers abroad compensation system. He realized that the incentive system was an essential part source of the success in the USA, but was not sure that it was reasonable everywhere. He gave his team of international managers a chance to employ only some of the elements of the system that they judged suitable for their countries. Thus, Tony Massaro’s leadership turned out to be more productive for the company.
Lincoln should go ahead with its planned investment in Indonesia in 1998 as its market was large. However, semiautomatic or fully automatic welding machines were used less commonly than hand-held. Thus, Mike Gillespie made the right decision to build the factory there as Indonesia’s economy was growing rapidly. Entering Indonesia’s market Mike Gillespie could consider the advisability of a joint venture as the entry strategy as it could provide access to local expertise and relationships with important people in government and business. In terms of implementing the company’s incentive management system, Gillespie had to take into account the necessity to pay the legal minimum wage of 170,000 rupiahs per month. In addition to this model, he thought to offer a merit-based bonus the maximum of which was 30% linked to the factory performance. Another option appeared during the discussion with Ray Bender, who had joined Lincoln Asia as head of manufacturing. It was the idea of paying the prescribed minimum wage and the bonus based on the piece of work. It could be the best decision for the company as it might be a great stimulus for workers to increase their productivity and at the same time, it enabled the company both to keep up with its philosophy and to obey Indonesian laws.
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