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Harvard Business School 5-398-124
April 24, 1998
Lincoln Electric: Venturing Abroad
Teaching Note
Case Background and Overview
Case Structure
The case begins with a brief introduction of the trigger issue, which questions whether Mike
Gillespie, President of Lincoln Electrics Asia region, should invest in a new factory in
Indonesia. More specifically, it questions whether he should consider transferring Lincolns
unique incentive system of management to such an operation.
The case then presents a broad overview of the Lincoln Electric Company, its historic
This note was prepared by Prof. Christopher A. Bartlett for the sole purpose of aiding classroom instructors in the use of Lincoln
Electric: Venturing Abroad, HBS No. 398-095. It provides analysis and questions that are intended to present alternative
approaches to deepening students' comprehension of business issues and energizing classroom discussion.
In the final section of the case, Massaro and his team decide it is time to renew overseas
expansion, ostensibly having learned from Lincolns previous failures abroad. In particular, the
case focuses on the activities in Asia and concentrates on the entry decision into Indonesia. It
Course Usage
This case is appropriate in a variety of courses, including Business Policy/General Management,
Strategy and Competition, Organizational Behavior, International Management, and Operations
Management. It follows a half-century tradition at Harvard Business School, from the original
Teaching Purpose
This case can be used to develop a number of central teaching purposes including the following:
To demonstrate the development of strategic advantage through the building of organizational
capability. This is a classic case and has long been used to illustrate the concepts of
Preparation and Assignment Questions
There is a very interesting video report prepared by the CBS program 60 Minutes. The 20-
minute segment shows the operation of the Lincoln plant and has reporter Leslie Stahl
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1. How was Lincoln able to grow and prosper for so long in such a difficult commodity
industry that forced out other giants such as General Electric, Westinghouse, and BOC?
What is the source of Lincolns outstanding and enduring success?
2. Given this outstanding success, why did the internationalization thrust of the late 1980s and
early 1990s fail?
Teaching Plan
There are three broad pastures that can be explored in this discussion. First is an overall
diagnosis of Lincolns source of continued success. For those who taught the older Lincoln case,
this was historically the main focus and still represents a major part of the discussion and central
part of the learning. The second broad agenda is to understand why this successful business
model failed when the company tried to transfer it internationally, and the prognosis for future
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Teaching Questions and Discussion
1. What has accounted for Lincolns outstanding and enduring success in the US?
This broad opening question should lead to a rich discussion that provides the foundation on
which the class is built. There will likely be a variety of different opinions regarding the source
of Lincolns enduring success, and the instructor will need a well thought-through board
structure to capture and interrelate these various issues. Indeed, it is the very multi-
dimensionality and interdependence of these various strategic, organizational, and cultural
Why is the incentive-compensation system so critical in a company where labor
represents only 2% of the manufacturing cost? Why is a marginal improvement in a
labor productivity so important for a commodity product?
Exhibit 9 confirms that direct labor represents a very small percentage of their manufacturing
cost, and it is important to challenge the students to understand the economics of this business.
Approximately 70% of the manufacturing costs is represented by materials, a cost which is
probably not controllable by Lincoln since it is largely composed of commodity steel products.
However, it should be clear to students that by improving labor productivity, the company can
substantially leverage its capacity utilization and thereby spread its overhead, which represents
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Video: At this point, I show excerpts from 60 Minutes report showing plant operations and
interviews with management and labor.
One might then ask:
If this has been such a successful system, why didnt its competitors simply follow
Lincolns example? What are the barriers to the systems adoption?
Many students will see this as being a fairly simple-minded system that anyone could have
developed, but the reality is that even after competitors were given the opportunity to look over
Lincolns shoulder during the Second World War, neither GE nor Westinghouse were able to
imitate Lincolns embedded source of competitive advantage. The instructor might also reveal
that since the early 1980s, Lincoln has hosted thousands of companies at an in-house Lincoln
What is key to making this system work so well at Lincoln when other companies have
either abandoned it or been unable to adopt it? What is managements core role?
Piecework-based systems were mostly abandoned in the early decades of the 20th century, but
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guarantee of continuous employment to its solicitation of workers input through the advisory
board.
Probing why this might be necessary, the instructor can encourage students to recognize that
management has at least two important objectives. First, they are trying to reinforce the strong
values that are at the core of the whole systemthe belief in individuals, the principle of
rewards based on performance, the egalitarian environment, etc. This they communicate
2. Given this great success, why did the internationalization thrust of the late 1980s and
early 1990s fail?
The obvious response that students are likely to give is that the acquired overseas companies
This might explain the failure of the acquired operations, but why did Lincolns start-
up operations in Japan and Venezuela fail?
Despite the fact that Lincoln did not have to deal with inherited employees and systems in these
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Coupled with various other influences such as the fact that the expansion took place in the midst
(At some stage during this analysis, it is important to calibrate the extent of the problems faced
by Lincoln in the 1991 to 1993 period. From Exhibit 4, it is clear that while international sales
In which countries is the economic system or the cultural values too different that the
Lincoln system can never work?
Inevitably in the analysis of why the internationalization initiative failed, several students will
assert that there is a misfit between the Lincoln values and the cultural values in the countries
into which they expanded. I like to use this follow-up question to draw on international
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3. What do you think of Lincolns emerging international strategy by the mid-1990s?
Does this company have a competitive advantage that can be transferred to the
global environment?
The first and most interesting question is whether Lincolns approach is one that will translate
into the international environment. While some students may want to argue that this is a purely
How is Massaros recent overseas initiative different from Lincolns earlier failed
approach?
The new strategy seems to have several key elements that differentiate it from Lincolns old
global strategy. First, rather than expanding into a highly-competitive developed markets,
Lincoln is targeting more dynamic and less rigidly structured developing countries. Not only do
these represent less competitive and faster-growth markets, they may also represent economies
and national cultures that are more susceptible to Lincolns unique management philosophy.
Secondly, the company has implemented a regional organization model that provides the
4. What advice would you give to Mike Gillespie with regard to his Asian expansion
strategy, and particularly, his plans to expand operations in Indonesia?
In this final section, discussion should move from the analytic to the action-oriented. There are
three key issues to discuss: the Indonesia entry decision, the ownership structure, and the
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With regard to the entry strategy, most students will find the strategic logic outlined in the case
more convincing than the ad hoc incremental approach that had been used in the previous round
of internationalization. Not only is there a more compelling corporate motivation (as discussed
in the previous question), but the country-level strategy that Gillespie has articulated for
Indonesia, also seems more logical. Rapidly expanding industrializing countries represent an
More controversial is the political and economic risk involved in investing in Indonesia. This
issue is particularly likely to arise given most students awareness of the currency crisis in East
Asia in late 1997. It is important to note, however, that this crisis occurred more than a year
after Gillespie was making these decisions and that there was very little warning in the
international business community that such a crisis was looming. Indeed, Indonesias economic
With regard to the ownership and partnership strategy, there is likely to be an interesting debate
on the relative merits of Tira and SSHJ as potential partners and distributors. Some are likely to
argue that the Indonesian-owned Tira with its strong government relations and its much broader
and deeper market coverage is the most logical partner for Lincoln. However, as others will
Having built the plant, what kind of management system and compensation policies
should Gillespie put in place?
This is the question which is likely to generate most debate as students argue whether to go with
a standard wage, a merit-based bonus linked to factory-level performance, or Lincolns classic
individual piecework-based compensation.
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The most popular option is likely to be the merit-based bonus linked to factory performance,
which will allow workers to earn bonuses up to 30% above their base salary of 250,000 rupiah.
Given the low level of salary, however, some will want to argue that Lincoln should ensure that
Among these free-market advocates, some are likely to push the idea that the company should
adopt the piecework rates that are at the heart of the Lincoln system arguing, along with Ray
Bender, the experienced Lincoln production manager, that individual performance is motivated
when it is tied most directly to incentive. This line of reasoning will lead them to suggest that
bonuses tied to overall factory performance are unlikely to be nearly as motivating as piece rates
tied to individual output. It is interesting to push the students to question what level of support
or floor they would put under the earnings, if any. The strongest believers in the Lincoln system
While the debate is not likely to be resolved, it does serve to illustrate the complications in
transferring a system developed for a mature ongoing process in the US to a new start-up in a
developing country.
In conclusion, the instructor may reveal that Gillespie, a newcomer to Lincoln, harbored real
reservations about the appropriateness of the piecework system in Indonesia. He believed that
the concepts of self-management and self-supervision were so foreign to Indonesian workers
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This situation was reflected throughout Lincoln, even in the Cleveland headquarters. The influx
of outsiders into senior management positions had diluted the companys strong belief in and
commitment to the individually-based incentive system that had been so central to Lincolns
Exhibit TN-1
Board 1: The Lincoln Electric Model
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Exhibit TN-2
Board 2: Lincolns Failed Internationalization
