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Basic Information of Lincoln Electric Co.

Author: Norman A. Berg, Norman D. Fast

Publisher: HBR

Case Number: 9-376-028

Publication Date: Aug 1, 1975

Revision Date: Jul 29, 1983

Course Category: Management

Case Summary of Lincoln Electric Co.

Were not a marketing company, were not an R&D company, and were not a

service company. Were a manufacturing company, and I believe we are the best

manufacturing company in the world.- George E. Willis, President of Lincoln

Electric Company

Worlds largest manufacturer of arc welding products, manufacturing more than 40%

of supply in United States

Lincoln had grown steadily for four decades

Company History

John Lincoln, co-founder of Lincoln Electric, was a talented inventor and technical

genius, developing more than 50 patents for inventions, including an electric arc lamp.

1911, company introduced first arc welding machine, as a source to recharge

batteries for electric automobiles.

This first-mover advantage stayed with the company despite entrants from two

giants- Westinghouse and GE.

During WWII, proprietary methods were shared with the rest of the industry to aidthe government, but Lincoln eventually outperformed competitors yet again.

Strategy

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Quality products at a lower cost, reduced costs were passed on to the consumer via

low prices. (Many companies left market because they could not compete with these

prices, like GE)

Incentive system played a large role in productivity, workers had incentive to workharder and produce more.

Year-end bonuses averaged close to 100% of regular compensation.

Management built success of company on two factors:

1) Producing more of a progressively better product at a lower price

2) Employee earnings and promotion are in direct proportion with company success

Profits were fairly split amongst workers, customers, and management. Savings were

passed along to customers.

Compensation Policies

Three components to compensation system:

1) Wages based on piecework for factory jobs.

2) Year-end bonuses could exceed regular annual pay

3) Guaranteed employment for all workers

Each job was rated on skill, required effort, responsibility, etc. A base wage rate wasassigned for each job. These wages were comparable to other Cleveland area jobs and

adjusted to reflect cost of living. Second element of compensation was the year-end

bonus, a share of the results of the company. In 1974, the bonus po ol totaled $26

million, an average of approximately $10,700 per employee, or 90% of pre -bonus

wage.

A workers share of the bonus pool was determined by a merit rating, an individual

performance rating based on the rest of the department. Four factors were evaluated:1) dependability 2) quality 3) output 4) ideas and cooperation.

Ratings could be discussed with department heads if there were any disagreements.

Guarantees of employment were seen as essential, otherwise, employees would avoid

improved production for fear of losing jobs. Employees would perform any job

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assigned and work necessary overtime. This incentive plan applied to all workers in

the company.

Employee Views

Employees really liked working at Lincoln and the turnover rate was far below other

companies, with few defections. People felt like entrepreneurs, working for their own

benefit and often would work through breaks to be more productive. Workers were

able to set aside money to pay for their houses and cars without worries.

Management Style

Management considers themselves on the same level as the workers, there is no sense

of division. They park their cars in the same lot and eat at the same tables in the

cafeteria. Lincolns president, Willis James, established an Advisory Board to listen to

the concerns of the workers. Any issues were either immediately resolved or assigned

to an executive to be dealt with. Workers felt like their opinion actually mattered,

although management still had the final say. An open door policy existe d where the

two top executives, Irrang and Willis, would meet with any employee.

Potential weakness- Top people make too many small decisions, with very little

delegation from up top. Irrang and Willis put in 80 hours weeks because of this.

Management had a genuine concern for their workers, helping employees with

personal issues such as the death of a loved one.

The executives office were minimalist in nature and not separated by walls, a very

open environment. Management did not have any special perks, using the same

equipment as everyone else. Costs were kept under tight wraps by the Maintenance

Department and equipment was only replaced if it could not be repaired. Only certain

individuals had access to Xerox copying.

Personnel

All open positions were filled from within, except for entry-level jobs. Openings were

placed on bulletin boards in the plant and there was large room for advancement.

Outsiders could find jobs through hourly or piece rate factory jobs or by a training

program in sales or engineering. Very few business school graduates were hired due to

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the starting pay and harder work involved. Management was more comfortable hiring

people who already knew the system; they knew what they were getting with them.

Possible flaws:

Company did not send employees to outside management development programs or

provide educational tuition grants.

Organizational hierarchy was flat. As a result, the Sales VP had 37 regional sales

mangers reporting to him. This causes overworking and possibly loss of productivity

as some management is stretched too thin.

The president and chairman tightly controlled personnel matters, status changes had to

be approved by Willis. Firings could be appealed to top management for review and

were occasionally reversed.

Marketing

Sales Force was extremely competitive, comprised of engineering graduates, not

MBAs. This gives them a hands on experience which is further improved as they

learn metallurgy and design in a 7-month training program. They are regarded as as

the best paid and hardest working in the industry.

Weakness: Lincoln cant always deliver the product on time due to staff shortages

because management refuses to hire short-term workers. This is also due to the

guaranteed employment clause.

Manufacturing

Plant was crowded with materials and equipment with employees working fast and

efficiently. There was no stockroom for supplies, all materials were transported to

work stations to be used. Workers would work individually or in groups on a job and

were paid by piece. Because there was no union, the company had flexibility indeciding what work could be done at a station. The work flow followed a straight lines

whenever possible.

Many operations were automated and the manufacturing equipment was designed and

built by Lincoln. Coordination was maintained between Product design engineers and

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Methods Department to reduce costs. By 1974, the plant reached capacity and was

running nearly around the clock, so a second plant was in the works to be built.

Lincoln relied on its capability to build its own components rather than purchase from

outside vendors.

Administrative Productivity

Lincoln had a personnel department of only 6 to service 2,300 employees.

Budgets werent even used because employees just spent as little as possible, as if it

were their own business.

Costs to customers were reduced by the Traffic department by mixing products in

loads and shipping in the most cost -efficient way possible.

Computerization- Lincolns Order Department recently began computerizing

operations. There was a lot of resistance because people feared their jobs would

become obsolete. The computers would save $100,000 a year and give greater control

of information. Information was becoming more complicated and human error was

becoming more of a concern, computers proved to be the solution. Employees without

computer experience were taught the system and then operated it after that.

Lincolns Future

Union critic- If the day comes when they cant offer those big bonuses, or his people

decide theres more to life than killing yourself making money, I predict the Lincoln

Electric Company is in for big trouble.

Management saw no need to change strategy or worry about the future. Employees

trusted them and the need for their product would always be there (as they saw it).

Biggest challenge, is to keep up with technology and to maintain profit.