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In 1895 an inventor by the name of John C. Lincoln designed and developed the electric motor. He developed it in such a way that it could not be matched by any other competitor. However, his passion for inventing kept him from being able to manage the company he created. In 1907 he hired his brother, James F. Lincoln, to manage the day-to-day of the plant operations. This is when the plant began its growth and success. It became a billion dollar company under his tutelage.
The Lincoln Electric Company, the world’s largest arc-welding manufacturer and top producer of industrial electric motors, now employees over 4,000 people and its sales have topped one billion dollars. How did Lincoln gain this overwhelming prosperity? Many have tried to figure this out, even studies have been conducted on Lincoln Electric’s organizational structure, James Lincoln’s incentive management practices, and the other keys to their success; and still no one has mastered it. Lincoln still operates today the same way that they did years ago and it is still working for them. However, what does the future hold for Lincoln Electric? Will they be able to keep up with high demand of productivity that everyone has come to know without lower employee job satisfaction? Managerial Issues:
In this analysis we will examine different factors of Lincoln Electric such as the company’s communication between employees, their problem solving techniques, and their conflicts. But the most important factors we will analyze are the incentive reward systems, the pros and cons of the system, the company’s leadership and the vision of the company.
Incentive reward system:
Lincoln Electric did not feel that it was important to regularly communicate with all of their employees, which is the reason behind the advisory board. The advisory board is a group of employees that would meet every two weeks to discuss any new ideas on ways to improve operations, increase productivity, job satisfaction, and how to raise profits. If an idea was implemented and there is an increase in company profits, then the employee that suggested the change receives half of the first years increase in the profit. This is a monetary incentive that encourages creative ideas to increase profits, but it still does not allow other employees to have a voice for their ideas or creativity.
Lincoln Electric has manufacturing locations spread out across the globe but the most successful branch is the one located within the United States. The U.S. employees favored Lincoln’s incentive management style because the incentive was monetary. James felt that paying bonuses, and paying employees based on productivity, would benefit the organization by encouraging employees with incentives that reward efficiency. However, these practices were not as successful in other locations outside of the U.S. because money was not always a motivator for those employees. For example, this system would be modified for the Chinese employees because their key inspiration is trust. The trust between the pieceworkers and upper management is far less than it is in the U.S. because of their beliefs, “Asians are less future oriented” (Man from Modesto, 2012). On that account, Lincoln’s monetary incentive management style would not be as successful. Seeing is believing, and the Chinese have visited the U.S. factory to see how they implement their processes. They have yet to be as successful as the factory in the United States.
The incentive reward system has downfalls as well and can potentially lead a company down a not so profitable road. The system can have a negative affect on staff moral, creativity, individual focus, rather than best interests of the company, or even subjective judgment of employees. One of the most important negative effects the incentive system could have is staff moral. Staff moral could plummet if there is a significant difference in the amount of bonuses given out to employees having similar job responsibilities. Low staff moral could lead to more troublesome effects within the company, most importantly, low company profit or even worse no profit at all. Employees may become so focused on earning those bonuses that they forget about what is best for the company as a whole. Competition can be good, but if it is too aggressive it can become a detriment to the company. Bonus plans can also discourage creativity or “risk-taking” (Kohn, 1993).
People are, for the most part, motivated by money and with that, they do what makes them the most money. With that being said, pieceworkers are paid by the “pieces” that are produced for an overall product. When paying for pieces, money motivated workers are going to produce the easiest piece first, creating a larger paycheck for themselves. Also, they will be less likely to take risks and explore new opportunities within their determined tasks. Simply put, they will only do what directly affects the employee and not what is the best interest for the company, nor its potential profits. Many organizations feel that the best motivator is money and the companies that use this form of motivational tool are successful, but over time the incentives are no longer worth fighting for. David C. McClelland discussed this topic back in 1968 in his article, Money as a Motivator: Some Research Insights.
McClelland determines that money does motivate employees in the beginning, but as those employees advance within the company, it takes other incentives to encourage better performance such as; “focusing on the future, striving for high morals and ethics, keeping conflict friendly, being structured but building relationships within, and turning hard work into profits” (Joni & Beyer, 2009). Good friendly competition is healthy within the organization, it aids in motivating employees and challenges the employee to work harder, but Lincoln Electric employees are focused on their own productivity, they were not concerned with how their “neighbor” is doing. Therefore, missing the important factor of working as a team. Lincoln Electric encourages the advisory board to “think outside the box” and create inventive ways to improve production, but unless the employee is part of the advisory board the pieceworkers never get the chance for incentives. They are focused on the task at hand; their new and ingenious ideas are never discovered. So how can a manager motivate their employees by things other than money? The choice of intrinsic versus extrinsic reward and motivational stimuli is key. One of the main reasons people leave their current positions is the lack of recognition and praise for a job well done.
“Positive reinforcement from upper management is one of the highest forms of motivation within any organization” (Winter, 1997). Therefore, management must find a way to sustain an elevated level of job satisfaction all while supporting the businesses demands for productivity. Frederick Herzberg developed a motivational theory that has been used for many years. It states that managers must find a balance between intrinsic and extrinsic rewards. “Intrinsic rewards are known for a job content variable or motivators, and extrinsic rewards are known as job context or hygiene variable” (Reif, 1975). These motivators can be things such as recognition, responsibility, and advancement for improved performance on the job. The hygiene variables are not linked directly to performance, but to the structure of the company, policies, relationships, salary, etc.… so managers must create a way to balance the two variables. For example, an employee might get a raise or bonus and once received, that employee is happy, but not necessarily be more productive especially if they feel they deserved that raise long before it was given.
Consequently, a successful organization must start with a set of structures policies and organizational procedures to formalize the organization. Once complete, employee performance must be evaluated and accurate appraisal is necessary if the manager wants to improve productivity, because the employee and manager must know how well they are performing. “An effective performance appraisal assures that feedback is provided on a continuous basis, not in the form of a written annual evaluation, but in the form of daily, weekly, and monthly comments from an employee’s supervisor or manager” (Caruth & Humphreys, 2008). The cost of implementing an effective performance management system could be alarming for some business owners, but the benefits they will receive will outweigh the initial costs. They will be able to better monitor productivity and remove poor performers. Also, “just recognizing each individual’s performance helps create unity between management and the employees” (Caruth & Humphreys, 2008).
More trusting, informal relationships are likely to develop in the workplace, not only between managers and employees, but also co-workers, and when relationships are formed, moral and job satisfaction improve. Lincoln Electric is focused on motivating their employees with money and nothing else. Employees are told exactly when to go on vacation, they are encouraged to work at a rapid pace, and are not given sick time off. The incentives are becoming increasing less as they continue to grow, because the bonus structure is based on overall productivity that is split up between employees, but as they add employees to the organization, the bonus pool becomes smaller. This form of incentive management has proven its success within Lincoln Electric, but can it last? It is working well for the plants located in the U.S., but the international employees are not all motivated by money. Successful leadership
“Leadership combines co-coordination and commanding to perfect the art of involving, bringing together and harmonizing others in order to put a plan into action” (Fayol, 1949; Fells, 2000; Gazendam, 1994). Leaders are focused on the right things within the organization such as “goals, direction, objectives, purpose, effectiveness, intention, vision and direction” (Morden, 1997). “Leadership is important because it goes beyond management issues and into the long-term strategic direction and ultimate survival of a organization” (Morden, 1997). Armstrong (1990) stated, “leadership is not only important, it is required because there has to be someone to point the way”. It also said “a leaders goal is to get people to do what he or she wants by willing cooperation, not submission” (Armstrong, 1990). Bennis and Towsend (2005) tell us that organizations that fail almost always do so because they are over managed and under led.
Reich (1994) tells us “leaders of high-performance organizations strive to ensure that the organization they lead is highly productive, flexible and adaptable”. “This also entails a long-term perspective and a workforce that shares a common vision” (Reich, 1994). Reich continues by laying out the following characteristics and traits of high performance organizations like Lincoln Electric. Workplace and workforce practices are integrated with broad business strategies within a high performance workplace. We see this in Lincoln Electric through the employee-rating system. Encourage employee input in all aspects of the company. An example of this is the management advisory board. Invest in and leverage training of employees through the training program.
Work is organized in self-managed teams or cross-functional groups. Employees at Lincoln have little oversight and are relied on to do the job with little or no supervision. Workers have a significant influence in the decision making process within the company. This is exhibited in the management advisory board. Pay is linked to performance and profits or productivity gains. Lincoln has as employee-rating system, piece rate and bonus system. Retaining and outplacement assistance is provided when layoffs are unavoidable. There really is no issue in Lincoln Electric with this because everyone has guaranteed employment. Vision
Foster an Akdere (2007); tell us that an organizational vision is “conceptualized as something that offers direction to an organization and helps increase organizational success.” It is essentially a guidepost for the organization to peer into the future and determine the direction that is needed to travel in order to achieve the overall goal. Vision also serves as a reflection point that allows the organization to check that the outlined goal is actually being achieved.
“A sound vision does three important things; it motivates people to take action, it simplifies many detailed decisions, and quickly and efficiently coordinates the actions of those people” (Kotter, 1996). The importance of a vision is vital if leaders want to achieve anything significant within their organization. Geller (2002) tells us “when a vision is shared optimistically with the work force, employees are likely to buy-in and do whatever it takes to support in achieving it.” “One important concept to note is that if an organization has a vision statement, it does the organization no good if it is not communicated or does not lead to purposeful action” (Kotter, 1996). Kotter (1996) also states “a lack of defined vision can lead to confusion and company goals going in the wrong direction or nowhere at all.”
What makes Lincoln Electric successful in their vision? “Some research highlights that only 1 in 20 corporations has a definite vision statement and that fewer than 1 in 100 has had that vision communicated effectively to its employees” (Houser, 1994). Lincoln is one of the few that beat both of those statistics. Lincoln Electric’s vision statement is: “We are a global manufacturer and the market leader of the highest quality welding, cutting and joining products. Our enduring passion for the development and application of our technologies allows us to create complete solutions that make our customers more productive and successful. We will distinguish ourselves through an unwavering commitment to our employees and a relentless drive to maximize shareholder value” (Lincoln Electric, 2014). Not only has Lincoln Electric clearly defined their vision, but they have also tied it to employee performance and actions. As in the Dick Spencer case, “integrating the vision into the daily aspects of company operations to include performance reviews and training is also beneficial because it assists in tying everything back to your vision” (Kotter, 1994). Organizational change
Lincoln Electric will soon need to face a change within the organization if they want to continue their ongoing success, but after following the same exact business structure for so many years, an effective organizational change will be a huge challenge. So what are some things Lincoln can do in order to survive the change? In an article by Higgs and Rowland (2005) they suggest three simple stages of implementation. First, the organization will need to freeze, or study the company at one point in time. Second, they will need to adjust or make the necessary changes; and then lastly, they will need to unfreeze and allow the new plan to work after adapting to modifications. This process sounds easy, but with over 4,000 employees, implementation in incentive management is very difficult. Management cannot create change until they take a look at themselves. “The enemy of change is often the fact that leaders do not look in the mirror” (Goldberg, 2005). A good leader must not succumb to the pressure of change, but instead take charge, clarify his/her and the employees role, and most importantly, stick to the commitments that have been made. “Leaders must articulate exactly what is needed and why, to accomplish the change rather that just expressing what they want” (Goldberg, 2005). Recommendations:
From reading about this highly successful company, one has a hard time finding what is wrong with their standard. However, combining the case’s shareholder letter from the company CEO with outside research, we find that Lincoln Electric has faced some tough trials breaking into the international market. Everything that works in the U.S. does not work in the rest of the world. Donald Hastings, Lincoln Electrics CEO at the time highlighted the following causes of the company’s international failures. First, the company’s effective incentive system was often unsuited to foreign operations. Second, the manager at headquarters lacked experience in international markets. Lastly, Lincoln lacked adequate distribution, relationships in the marketplace, and a sales force that could understand and help customers aboard. (Hastings, 1999)
Lincoln’s pay for performance system had worked quite well and been a huge success within the United States (Robbins, et al, 2003; Hastings, 1999). Thus, it was naturally expected that the company’s incentive system would be correspondingly effective on foreign soil. However, that assumption proved to be grossly incorrect (Hastings, 1999). The incentive system fostered discontent and conflicts among employees of its European operations because the foreign work force’s culture was hostile to such systems (Nadolska & Barkema, 2007). Nodalska and Barkema (2007), suggested that a company alleviate the impact of such things by pursuing a gradual internationalization process. This way the company will be more likely to avoid the problem sine they should effectively see it coming as they gradually apply the new policy. Even Hastings (1999) has conceded that the company was naïve to think that they could have become an instant global contender.
Next Lincoln needs to find international experience amongst the ranks of their senior leadership. Hastings (1999) recognized only after the crisis was over that the senior ranks of Lincoln Electric were both thin and had a severe lack of global experience. The company lacked the right quality and quantity of managers with the ability to operate in different cultures (Fleck, 2010). A company obviously has a diminished risk of this issue when it already has developed managers with global expertise (Cuervo-Cazurra, Maloney & Manrakhan, 2007). Additionally, companies that have either diverse multi-national dealings or manage business activities across several geographic locations will be less likely to suffer the same issue Lincoln Electric experiences (Cuervo-Cazurra, et al, 2007).
Prior to entering another country’s market, Lincoln Electric needs to develop it’s senior managers by educating them on global markets and seeking to have them acquire global expertise (Cuervo-Cazurra, et al, 2007). It should be relatively possible to educate these managers on foreign culture and markets as well as have them perform various “non-critical” foreign assignments to acquire expertise. As we recall from another case study (Dick Spencer) that research suggests many managers struggle with cross-cultural adaption and interpersonal conflict arising from cultural differences (Cavusgil, et al, 1992; Jassawalla, et al, 2004). Lincoln Electric can alleviate this by training their globally exposed senior executives to address their low intellectual, psychological and social global capital (Javidan, et al, 2010).
Lincoln Electric quickly found out during their global expansion that it lacked several critical resources such as relationships in the marketplace, people who could understand and help with customers and proper distribution (Hastings, 1999). This was coined “liability to newness” (Cuervo-Cazurra, et al, 2007). Global firms avoid this since they have already developed the necessary resources by competing in other global markets (Cuervo-Cazurra, et al, 2007). Essentially, they are leveraging on resources developed to meet the needs of a current foreign market to meet the needs of a new one (Cuervo-Cazurra, et al, 2007). Lincoln Electric can overcome the liability of newness by actively acquiring and/or developing the essential resources necessary to be competitive within a new company (Cuervo-Cazurra, et al, 2007). It can invest internally to develop the resources the company needs such as hiring, training and deploying an international sales force (Cuervo-Cazurra, et al, 2007). Otherwise, resources could be acquired within the country the company is planning on expanding to (Cuervo-Cazurra, et al, 2007).
In order for Lincoln Electric to continue to have growth and be prosperous, the company must construct a plan that will embrace a change in management. Even though the process must be done on a small, microlevel so fear does not spread throughout the company, it will still be considered a radical change” (Plowman et al., 2007). It will be considered a radical change because the organizational structure will be a revised plan that has never been done before and Lincoln Electric has followed the same plan without change for many years. Since Lincoln Electric is not at a critical level, management can take their time to develop a plan that is continuous and radical by executing small adjustments in an organized fashion. According to Kotter’s dos and dont’s that leaders must follow in order to transform their business, if the leaders do not take each step seriously, it will not successfully institutionalize their organization. I think that the most important management error found by Kotter is “not anchoring changes in the corporation’s culture” because the culture of the company determines its success (Kotter, 1995). The culture at Lincoln Electric is very strong and if a change is not supported and “anchored” into that culture, the employees will no longer feel their role is important. Conclusion:
Lincoln Electric, like its first motor that was developed, has a very unique business model that cannot be matched by any other competitor. It has a very competitive incentive program that works for employees in the United States, but does not always work for other cultures outside of the U.S. For this reason Lincoln Electric needs to look at other forms of incentives for its foreign employees. Also, the company needs to start making changes for the future, but needs to include all employees of that change so they feel included and have an opinion in the changes being made.
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