1. Lincoln Electric
Team

2. Outline PEST Strengths and Weaknesses Organizational Structure Culture
Strategy
Recommendations

3. PEST

4. Strengths & Weaknesses

5. Key Points Core Competencies Financials Culture & Leadership
Product mix
Technical Developments
innovation,
technology.
Customer Relations & Marketing
Quality
Service
Operations
speed
Productivity
efficiency
Logistics
Financials
Culture & Leadership
Management
Organization
Decision-making abilities
A core competency is a potential foundation for any new or revised strategy.
Assessment of the current financial strength of the organization must be done before thinking about strategy. A new strategy may be costly to implement, especially if it involves the purchase of assets or the acquisition of some other business.
Management competence and organizational culture are required for successful strategic change.
Minor attention should be given to leadership and decision-making abilities, innovation, speed, productivity, quality, service, efficiency, and applied technology processes.

6. Product Mix
Lincoln could solve customers’ process problems and improve process productivity with its ability to combine both equipment and consumables development needs into one integrated package.
Lincoln was one of only a few worldwide broad-line manufacturers of both arc welding equipment and consumable products.

7. Tech Development Strengths
Technological innovation allows the company to earn a price premium for many of its products.
Industry leader in new market introductions and quality performance.
The most aggressive, comprehensive, and successful R&D program in the welding industry
Award-winning engineers were responsible for Lincoln Electric’s technological leadership in welding, and the company spent approximately 2% of sales on research and development (R&D).

8. Tech Development
More than 50% of Lincoln Electric’s equipment sales in 2005 were generated by welding machines introduced in the previous five years.
Known as “The Welding Experts,” vs. its leading competitors who chose to diversify their resources far away from welding.
In 2004 began building regional engineering development centers worldwide.
Shanghai and Poland in addition to its existing training and demonstration centers in Australia, Canada, Italy, Mexico Netherlands, Singapore, and Spain.

9. Costumer Relations Strengths
Product support and guarantees, allows the company to earn a price premium for many of its products.
Customer support
Training
Consultation
Guaranteed Cost Reduction Program
The company believed that it had a competitive advantage because of its highly trained technical sales force and the support of its welding research and development staff, which allowed it to assist the consumers of its products in optimizing their welding applications.
As part of the sales process, Lincoln employees visited prospective customers, evaluating their welding requirements, and made specific product recommendations together with a return-on-investment projection.
The company guaranteed that the user would save money in its manufacturing process when it utilized Lincoln’s products.

10. Costumer Relations Weaknesses Geographical distance; logistics
The company did not have any market access at the commodity end of the market, and the company had limited in-country demonstration or after-sales support capability, which is critical in high-tech sales.

11. Marketing
Strengths
Strong brand identity

12. Operations Strengths Efficiency Weaknesses Solutions oriented
Supply chain and FANUC Robotics
Harris Colorific acquisition
Weaknesses
Maintaining operational efficiency internationally
Incompatible power source
Lincoln was one of only a few worldwide broad-line manufacturers of both arc welding equipment and consumable products. The benefits of producing both equipment and consumables were tied to the value of providing welding “solutions” rather than just individual products.
Lincoln could solve customers’ process problems and improve process productivity with its ability to combine both equipment and consumables development needs into one integrated package.
Many of Lincoln’s most advanced equipment products were produced through its supply arrangement with FANUC Robotics. These products combined a robotic arm, a welding power source, and a wire feeder to automatically produce welds using various computer software, welding fixtures and fasteners, and accessories.
In 1990, the company expanded its arc welding line by purchasing Harris Calorific, a manufacturer of gas-cutting and gas welding equipment. Starting in the early 1990s the company began growing sales in the North America retail channel. In 1999 the company completed the divestiture of its motor business.
In 2003 Lincoln complemented its successful line of retail products with the acquisition of the Century and Marquette welding and battery-charged brands, which had leading positions in the automotive and retail channels.
In 2005, the company broadened its metal joining base when it acquired J.W. Harris Company, a privately held brazing and soldering alloys business based in Mason, Ohio. J.W. Harris was a global leader in the production of brazing and soldering alloys with about $100 million in annual sales. Harris products could be sold to Lincoln’s existing set of customers, and vice versa. Also, the introduction of Lincoln’s management system and purchasing and logistics capabilities had led to cost savings at the Harris plants. As a result, theacquisition had produced synergies on both the cost and revenue sides by 2006
Due to a combination of challenges in day-to-day manufacturing management and the lack of a strong distribution channel for its domestically produced products.
Lincoln’s welding machine requirements were complicated by the power supply situation in Japan, where there were two voltages and frequencies in use. The one that caused the problem was the common use of 200 volt 3-phase power. While some Lincoln power sources ran adequately on this, the performance was impaired and Japanese customers were reluctant to pay a price premium for a product that was not optimized for their application.

13. Logistics Weaknesses Local production presence
Once high-end demand increased, Lincoln needed to meet the challenge of providing prompt product delivery and complete technical support without any local production presence. Lincoln was still shipping its high-end machines to Asia from Cleveland and faced long lead times to ship the products.

14. Is Your Unique Competency a Sound Basis for an Effective Strategy?

15. Inimitability 5 4 3 2 Product mix Technical Developments
Customer Relations & Marketing
Operations
Logistics
It must be hard to copy. Don’t try to base a
long-term strategy on something that your competitors can
quickly copy.
1(bad) – 5(good)

16. Durability 3 4 5 Product mix Technical Developments
Customer Relations & Marketing
Operations
Logistics
3 4 5
Durability refers to the continuing value of the
competence or resource. Some brand names, like Disney’s or
Coca Cola’s, have enduring value. Some technologies, however,
have commercial value for only a few years; then they
are swept aside by new and better technologies.

17. Appropriability 5 4 Product mix Technical Developments
Customer Relations & Marketing
Operations
Logistics
5 4
This test determines who captures the value
created by your competency or unique resource. In some industries,
the lion’s share of profits goes to retailers, not to the
companies whose ingenuity developed and produced the actual
products.

18. Sustainability 3 4 2 Product mix Technical Developments
Customer Relations & Marketing
Operations
Logistics
3 4 2
Can your special resource by trumped by a
substitute?

19. Competition

20. Ador Welding Ltd.
$50 million in sales in 2005 with a 15% operating margin, and a portion of its shares traded on the local stock exchange.
Cost-adjusted annual revenue growth rate at 20% over the next two years, which should continue with a return on capital employed at over 40%.

21. Ador Welding Ltd.
The company has shifted some production to Silvassa, a government-created tax-free zone, and by concentrating production at a smaller number of facilities Ador had realized both economies of scale as well as tax savings.
In July 2006 the company’s publicly traded shares were valued at 10.9x FY07 estimated net earnings per share, and EBITDA per share was predicted by the same local analyst to grow at a CAGR of 29% and net earnings per share to grow at a CAGR of 23% over the next two years.

22. Ador Welding Ltd.
Ador had annual sales of crore (large values of India’s currency, the rupee, are counted in terms of crore, with one crore the same as 10,000,000 rupees).
The company had produced 17,217 MT of consumable welding products in FY06, and Ador had previously constructed plant lines that could produce far more than that should the market continue to grow. Ador had in FY06 paid a dividend of 15 rupees, equal to a 4% yield on the stock.

23. ESAB India Over $50 million in sales in 2005.
18% operating margin in 2004
Newly Restructured
New $4.6 million, 50,000 square foot, greenfield manufacturing plant
The company introduced current technology, strict internal controls, staff changes, and reorganized and expanded their distribution channels.

24. EWOC Allows Ltd.
$30 million in revenues in 2005

25. Smaller Competitors D & H Sécheron Indo Matsushita Anand Arc
$3.5 million in sales in 2005
Indo Matsushita
Anand Arc
Manufactures full range of welding consumables
Claims that it produces the highest-quality electrodes in India

26. Competitive Superiority
Lincoln Electric
Ador Welding Ltd.
Esab India
Product mix
Technical
Developments
Customer Relations & Marketing
Operations
Logistics -
Is your special competence or resource
truly superior to those of competitors? As Collis and
Montgomery warn, “Perhaps the greatest mistake managers
make when evaluating their companies’ resources is that they
do not assess them relative to competitors’.” So always rate
your strength against the best of your rivals.

27. Since a new strategy is the point of our internal analysis, it is necessary
to assess the current financial strength of the organization. After all, a
new strategy may be costly to implement, especially if it potentially
involves the purchase of assets or the acquisition of some other operating
company or unit.
Financials

28. Cashflow
Long-term company financial targets included sales growth at double the rate of growth in worldwide industrial production
Operating margins over 15%
Earnings growth of 10% annually
Return on equity exceeding 20%

29. Cashflow To what extent are cash flows from current operations
sufficient to support a new initiative? A fast-growing company
usually gobbles up cash flow from operations and then has
to go hunting for outside capital to finance growth. A mature,
low-growth company, in contrast, can often finance a new initiative
from operating cash flow from current operations.

30. Access to Outside Capital
India market booming so credit may be easily accessible.
Still, any significant welding acquisition would likely require paying an acquisition premium greater than Lincoln Electric had been used to paying in the past
If cash flow is insufficient to finance a
new strategy, the company will have to look to outside creditors
and/or investors. So determine the company’s (1) borrowing
capacity, (2) ability to float bonds at a reasonable rate of
interest, and (3) in the event of a major initiative, its ability to
attract equity capital through a sale of company stock.

31. Other Scheduled Plans
As of 2005 the company spent approximately two-thirds of free cash flow for international expansion
Your company may
have already approved other capital spending projects. If it has,
those might absorb all available capital. Get a list of these
scheduled projects and determine the extent to which they will
compete for resources with any new strategy.

32. Hurdle Rate
A minimum internal rate of return, based upon total investment, of an initial 10% increasing to a minimum of 18% over the first 3–4 years (with synergy credits)
The acquisition price was less than 8x EBITDA
The hurdle rate is the minimum
rate of return expected from new projects that require substantial
capital investments. It is usually calculated as the enterprise’s
cost of capital plus some expectation of profit.

33. Other Data
2005: operating income was $153.5 million and net income was $122 million on sales of $1.6 billion.

34. Other Data Domestic Reliance Over-forecast and spending
The company set a series of ambitious financial goals, but meanwhile growth in its primary market of the United States would be far from sufficient to meet these goals. The company was still dependent on North America for approximately 60% of its sales, and yet other markets for welding products and consumables were growing significantly faster.

35. Regional Performance Region Year ROA Total Sales (USD millions)
Total Assets (USD millions)
USA and Canada
2005
0.28
1077.5
652.5
Mexico and Latin America
0.16
121.4
83.0
Europe
0.07
426.3
313.3
Asia and Astrailia
0.05
125.0
98.1
Clearly the further LE is from home,
the weaker the company’s performance.
LE invested in Europe
only to have a .07 in ROA

36. 2005 Revenue for Largest Competitors in $13 Billion Welding Market
Lincoln Electric’s main competitors are ESAB (European based company) and ITW (Illinois Tool Works).
Lincoln Electric also owns assets in Air Liquide, the fourth largest competitor in the market.
Total revenue is important, but the total net income far more important.

42. Industry Benchmark and Competitors
Note: ITW and EASB India earned $1.3 billion, while Lincoln Electric earned $1.6 billion.
In 2005, ESAB India gain more capital from investor causing higher ROE. A huge increase of £123.6 million.

43. Organizational Structure

44. Overview

46. Structural Dimension
Divisional
Functional
Matrix
Network
Efficiency of resource utilization
Poor
Excellent
Moderate
Good
Efficiency of time utilization
Responsiveness to the environment
Adaptability over time
Ability to hold people accountable
Environment for which best suited
Heterogeneous
Stable
Complex
Volatile
Strategy for which best suited
Diversified
Focus/low cost
Responsive-ness
Innovative

47. Lincoln Electric Structural Dimension Divisional
Efficiency of resource utilization
Poor
Efficiency of time utilization
Good
Responsiveness to the environment
Moderate
Adaptability over time
Ability to hold people accountable
Excellent
Environment for which best suited
Heterogeneous
Strategy for which best suited
Diversified

48. Functional
Divisional
Matrix
Network
Division of Labor
Coordination of Mechanisms
Decision Rights
Boundaries
Importance of Informal Structure
Politics
Basis of Authority

49. Culture

50. Culture
Strengths
Industry-leading productivity advances through innovative human resource and incentive systems.
stock ownership
incentive bonuses via merit ratings
Employee Advisory Board
employee suggestion system
The Lincoln brothers believed that capitalism could actually lead to a classless society if companies would simply provide the right incentives for individuals to fulfill their potential and richly reward those individuals based on their performance.
Lincoln was one of the first companies to introduce a number of human resource innovations, several of which would eventually become standard practice across U.S. manufacturing industries.
As a result of the company’s emphasis on incentive pay-for-performance, some 60% of labor costs were variable.

51. Culture The entrepreneurial spirit Trusting relationships
annuities for retired employees
group life insurance.
No lay-off policy
The entrepreneurial spirit
Piecework
Work days
Merit ratings
Trusting relationships
The company encouraged a highly entrepreneurial environment in its manufacturing plants. Lincoln workers managed themselves, with only one foreman in Cleveland for approximately every 68 employees
There were tens of thousands of piecework tasks at Lincoln, and hence individual factory employees were given a great deal of autonomy both in solving problems and reporting their own piecework wages.
merit rating, which was based in equal parts on quality, adaptability/flexibility, productivity, dependability/teamwork, and environmental health and safety.
Trust was something that the company had to build up over many decades, and the no-layoff policy laid a significant foundation for that culture of trust.

52. Culture Weaknesses Competent executive management
Synergies of acquisitions
Competent operational/functional management
Incentive and bonuses
The company found it difficult to find, retain, and afford competent local managers.
The two sides did not always agree on how to grow the business (volume vs. profits).
The company also continued to find it challenging to
Attract and retain the local talent needed to build capabilities in supply chain logistics, IT, quality assurance, product development, and purchasing and sourcing.
The new acquisitions in Europe and Latin America that had cost $325 million suffered large operating losses, and in 1992, while the U.S. operation continued to be strongly profitable, the losses internationally were so serious that the company faced a stark choice. In order to pay its U.S. employees their annual bonus, the company had to borrow the money

53. Strategy

54. Recommendations

55. Strategic Alliance/Greenfield Investment Hybrid
First Best Strategy

56. Creating a strategic alliance with Ador would give Lincoln Electric instant access to the company with the largest market share in India for welding equipment and consumables.
Projected revenue growth for Ador is 20% per year for the next 2 years, with a Return on capital of 40% over the same period. Shares of the company are available on the market, the company is obviously well run, and getting a minority stake (25%) in the company should allow Lincoln Electric to utilize the excess production Ador has available in their Silvassa facility. This would enable the production of consumables locally while a greenfield facility for research, development, and equipment production is constructed.

57. Lincoln Electric Structural Dimension Network
Efficiency of resource utilization
Good
Efficiency of time utilization
Excellent
Responsiveness to the environment
Adaptability over time
Ability to hold people accountable
Moderate
Environment for which best suited
Volatile
Strategy for which best suited
Innovative
A network structure involves the blurring of boundaries between the organization and its environment which includes vendors, customers, and competitors. Value-added partnerships with
vendors and customers, strategic alliances with competitors, and other such relationships blur what is inside and what is outside the organization.
The fluidity and ease with which network structures can be adapted also means that the network structure has the advantage of being fast and responsive to environmental demands. At the same
time, resources are often duplicated in network structures and accountability can be diffuse and poorly defined. A network structure is ideally suited for volatile environments that change
rapidly and dramatically and when innovation is the primary basis of strategic advantage. Under more stable conditions, the network structure may not be as effective as some of the other more
traditional structures.

58. Network Structure

59. Advances in technology, specifically inverter technology, will be necessary in India, given their limited access to such technology, the efficiency of this technology, and the high cost of electricity in India. This provides a huge opportunity for Lincoln Electric to capitalize on its previous technological achievements in a new market while developing newer technologies for more developed markets.
Considering the levels of expansion in the countries GDP growth, the projected level of governmental infrastructure projects, and the development of several thousand miles of new oil and gas pipeline, the Indian market will be profitable through at least 2015, and most likely beyond, as these infrastructure improvements encourage further build-out.

60. Not a First Best Strategy
Acquisition
Not a First Best Strategy

61. An acquisition would prove overly costly for Lincoln Electric, as the enhanced performance of the welding market would push the costs of the acquisition outside of the boundaries commonly used in justifying the acquisition of a target company.
Even if the rules of acquisition were relaxed, there could be several issues in this method. The only viable acquisition target would be a large scale target, as consolidating enough of the 300 smaller competitors into a force sizable enough to rival ESAB and Ador would take far longer and be more logistically and capital intensive than other more practical strategies. Also, given Ador's organizational structure, there is no guarantee that acquiring this company would result in similar performance under LE's ownership, as the management and HR styles are different.

62. It has already been demonstrated, by ESAB India, that entry into the market based solely on acquisitions is not profitable in the short term. Their acquisitions strategy, started in 1988, only turned profitable in 2005 (+17 years from entry) and this was due to massive restructuring, increased capital funding, and accounting write down; for that level of capital investment a greenfield investment would be a better use of capital in both the near- and long-term.