This note was prepared for the sole purpose of aiding classroom instructors in the use of The Lincoln Electric Company,
H
BS No.
376-028. It provides analysis and questions that are intended to present alternative approaches to deepening students
comprehension of business issues and energizing classroom discussion.
Harvard Business School 5-395-230
June 12, 1995
The Lincoln Electric Company
Teaching Note
The most striking characteristics of Lincoln Electric are its long history of successful economic
performance in the electric arc-welding industry against much larger competitors, its very strong
position currently in their worldwide markets, its relatively simple and straightforward product-
market strategy, but most important, its practice of providing the maximum possible individual
incentives, with year-end bonus payments to employees that average about 100% of the already
competitive base wage or salary. Lincoln really believes that they are the best manufacturing
company in the world, not because they have a high degree of participative management,
fringe benefits, or worker satisfaction, but because they encourage individual performance
and pay very well for it. The case is designed to enable the student to understand Lincolns
approach and explanations of why they think it has worked so well for them. More specifically,
it should be possible:
2. To develop an appreciation for the degree to which the strategy and organizational policies
are interdependent in Lincoln;
4. To form judgments about the applicability of Lincolns approach, or portions of it, to other
situations.
Case Content
The case is a description based on field research of the current position, the strategy, the
approach to organization, and the plans for the future of a company with a very attractive record
over the last 25 years (see graph on the first page of the case). Nothing in the case is disguised.
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Their policies on the importance of providing individual incentives and paying high bonuses
based on performance are described in detail. They have much confidence in their approach, and
we do not need to speculate as to whether such an approach might workit has worked, and
Class AssignmentPossible Questions
1. How would you describe Lincolns approach to the organization and motivation of their
employee?
2. What role do you think this approach has played in Lincolns performance over the last 25
years? Have any other factors been more important?
3. What factors will be critical to Lincolns continued success?
4. What recommendations would you make to Mr. Willis?
5. What is the applicability of Lincolns approach to motivation to other companies and
situations? Why do not more companies operate like Lincoln?
Discussion
Once the record of success and the important facts of their approach have been brought out, it is
appropriate to push for why it has worked at Lincoln, and to defer discussion of the applicability
of what they are doing to other situations for later. It is important to develop a recognition that
there is not any one explanation for their success, but a package of interrelated and consistent
policies that have been applied. The high bonuses are important and highly visible, but clearly
not the only factor. It is important also to look beyond the specific policies and to ask whether
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have great confidence in their ability to attract to their beginning jobs the kinds of people who,
with the training they receive on the job at Lincoln, will serve the companys needs for
management. Should Lincoln change this policy? What implications would this have? What is
the danger, if any, of continuing their current policies?
1. Why has Lincoln Electric been so successful? What are the key elements in the management
system?
The strategy of reducing costsreducing pricesexpanding primary demand and market share
is very powerful. The key is being the low-cost producer and continually reducing costs.
The Lincoln management system is successful because almost all aspects of the companys
practices reinforce the shared goals (cost reduction and high profits) and share values (your
status and reward in proportion to your contribution), and serve to improve communication and
reduce unnecessary barriers to communications and efficiency. Key practices and policies
include:
piecework pay
guaranteed employment
lack of a unionallows most efficient manufacturing layout and novel pay schemes
clear company philosophy and ideologyshared values
leadership by exampleWillis is very hard working and superefficient
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a minimization of conflict between management and workers because they share the goal of
promoting from within.
2. What problems does its management system create? In what kinds of industries would
Lincoln have difficulty?
Guaranteed employment creates a problem of not being able to expand and contract
production as easily as competitors. Therefore, Lincoln gets beaten on delivery. Lincoln
could not compete in a seasonal or highly cyclical industry.
Promoting from within and hiring into only two professional entry level positions (sales
trainee and engineering trainee) prevents the company from hiring Ph.Ds and most
Continual efficiencies reduce Lincolns value-added. The whole system rests on the
continual reduction of costs and increasing efficiency. Yet, as efficiency increases,
Lincolns value-added declines. The way this is counteracted is by back integrating. In the
3. Can the Lincoln system be introduced into other companies? What parts of the fit are
transferable?
There are certain types of businesses (discussed above) in which Lincolns system would not
work well.
There are significant obstacles to the Lincoln system in most companies (such as unions) which
could not be overcome. In addition, the effectiveness of Lincolns system rests in large part on
Parts of it could be transferred to certain objectives. For example, an Advisory Board, early
involvement of process engineers in product design, and training salesmen in becoming
knowledgeable and skilled in the use of their product would benefit most companies. It is
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4. What should Lincolns president be worried about? Is he to involved in detail and unable to
separate the forest from the trees?
He sees his role as perpetrating and maintaining a proven system. Should Lincolns strategy be
changing? In 1947, a union leader predicted that Lincoln was headed for trouble. Are there
The Arc Welding Equipment and Supply Industry
Lincoln Electric was a major participant in the U.S. arc welding equipment and supply industry.
The industry was highly cyclical, following the business cycle for those capital goods where
welding was part of the manufacturing process. The industry could be subdivided into two broad
segmentsmachine and supplies (primarily electrodes)which were roughly equal in annual
sales volume. Taking the markets as a whole, Lincoln Electric was the market share leader.
In the machinery segment, the production process was a complex assembly operation involving
hundreds or even thousands of components. Welding machines had been evolving from
electrical to electronics controls. Machines were mostly sold through distributors. The leading
The other industry segment, electrodes, involved a relatively simple manufacturing process
including drawing, forming, extrusion, baking, and other standard operations. The process itself
had undergone only evolutionary changes, and process improvements were aimed at increasing
throughput through better machine utilization. The total manufacturing cost of an electrode was
approximately 65% raw materials, 20% machinery and factory overhead, and 10%-15% labor.
There were two major segments in the electrode market; submerged arc and shielded. In the