EXREST 2 kersag never jutt, att whatle oility, Lincoln was leary tho line addition within the du any's ranks."Exhibit 2 details the gu The Lincoln system worked well for the company tiff ughout its history. The co ployee largely a collection of entrepreneurs. Whether a line wa colin directed their own work andd reapedd the benefits of hard work a ant effortt , well below am kept thurmo cent common im ma witho worked 30, 4, or more years for the com considere capital and ational knowledge among its okionce to be a key to its com age. Lincoln established eadly market leadership im arc welding and cited a lead over some eled competition, induding Geneall Electric and Westinghouse" During World War IIL mcain shared its technologicall expertise with these companies to help the war effort. es Lincoln estimated that his advanced manufacturing and lice five system saved the ert $35 million (more than $500 million im 2013 dollars) per year in defense procure ant costs " Even with Wimoon's technology, both Westinghouse and GE exitedd the weldding her after the war, finding itt too difficult to compete with Limewilm." imcain's success during e last 95 years is legendary: the company never lost money, It mced a layoff, and world's leader in arc welding. Lincoln Goes Global, Round 1 For Lim itthe United States from 1981 to 1983was tine deepest since the Great Depression. win, the recession caused two problems. First,, with most of its sales in the domestic was hitt hand by the chop in demand. Second, the recession led to a strong doll- e imported foreign goods inexpensive for US consumers. It also made the assets anies cheaper for mon-US companies to purchase. Foreign producers of welding manly Japanese and European firms, entered the market and began to hell- Timnance. Lincoln executives saw globalization as the answer to both prob- access to growing markets in the developing world, Lincoln would be less encyclicalswings in the United States. Foreignentry alsoallowed Lincoln to practice of parry and thust, bby entering the home markets of foreign competition, Lincoln to slow their advances in the US mandient"C-142 Lincoln Electric with the company facing a loss for 1992, Hastings confronted the grim prospect of theone not being able to pay the an y the annual bonus to Cleveland employees. The American operations continued to be profitable, but the bonus was based of d on the overall corporate profit. Missing the bonus could have disastrous consequences for the company because it would violate its agreements and implicit contracts with employees. The resulting loss of trust would alter the most fundamental relationships in the company. After tough negotiations, Lincoln was able to borrow more money to meet its bonus commitments to its Cleveland workers. The bonus for 1992 totaled $52.1 million." Hastings went to the Cleveland workforce and explained the problem to them. He admitted that the international expansion had been a mistake and emphasized that it had been a management error. He then asked them to help bail the company out of its difficulty by boosting productivity, output, and sales in the United States. Hastings hoped that increased profitability in the home market would offset the losses abroad and give him time to fix the foreign mess. US employees responded. With a mix of productivity gains, increased sales efforts, and new products, including a welder sold through Home Depot, US sales went from $1.8 million per day up to $3.1 million. Hastings moved to Europe in order to deal with the situation there. What he found shocked him. The European companies allocated money to individual operations based on their budget targets, not actual sales. This led managers to inflate their projections with little punishment if they missed numbers. Hastings saw first-hand the company's failure to transfer the Lincoln system abroad. During a visit to a German plant, for example, Hastings saw three employees sleeping on the job. This was after the plant had been told the CEO would be visiting!28 Like most competitors in the industry, Lincoln had relied on trade shows as a way to market its products. These trade shows had typically been events where customers were showered with gifts and did not buy products. Hastings changed all that and instructed the sales force to sell, not just schmooze. Lincoln sold more than 1,700 machines at Germany's largest trade show in September 1993. The products had been manufactured in Cleveland and shipped to Germany. Because they sold well, Lincoln realized that in-country manufacturing was not necessary to sell high-quality welding equipment. With that knowledge, Lincoln began to divest itself of many of its money-losing foreign operations in 1994. At the end of 1994, Lincoln recorded a profit of $48 million after paying out $55 million in bonuses to the US workforce. Hastings and the board realized that international expansion was more time consuming and difficult than they imagined, and that the lack of knowledge and talent about doing business globally had jeopardized the company's existence. In response, Lincoln brought in several outside execu- tives with substantial global experience. Although these new hires brought new perspectives to Lincoln, they also stood to shake up the familial, egalitarian culture at Lincoln.29 Shortly before his retirement in 1996, Hastings summed up the experience for Lincoln: "We made major additions and thought things could be done the American way. We thought workers and management would respond to problems the way we do, but they didn't . . . We did too much too fast without understanding various cultures."" It was decided that, moving forward, Lincoln would send its own sales people to a new market in order to determine which of Lincoln's products would meet market needs and the best way to expand. When possible, Lincoln would rely on exports from its Cleveland factory before setting up operations overseas. The new strategy would move internationally by finding experienced local partners and setting up joint ventures or alliances. Lincoln Goes Global, Round 2 In 1996, Lincoln appointed Anthony Massaro, the first outsider to lead the company as presi- dent and CEO, and in 1997, he was named the chairman. Massaro had spent 26 years at Westinghouse before joining Lincoln during the recovery from its earlier globalization push. Lincoln wanted to create a substantial presence in every major market in the world, and overConclusion C-143 the next several years, the years, the company bought, built, or found partners in the top 20 markets for welding products. Massaro led investments in China, Indonesia. Turkey, South Africa, the pines, Italy, Brazil, Venezuela, and Poland." Rather than h to enter these markets, Lincoln chose to join the markets in a measured fashion. In China, for example, the company opened its own electrode facility in Shanghai in 1998, but it chose to form several joint ventures with partners along the welding value chain. As these ventures grew and the Lincoln pres became more substantial, Lincoln bought out the v re partner and assumed full control. The Massaro era also witnessed substantial innovation new product development The company introduced a number of new products and services that incorpor ingly sophisticated computer-guided technology and mproved materials. Although the bash technology of welding remained u making welding both more effective and more efficient, bringing to welding systems, plasma welders, and oxy fuel cutting imed at the retail market, which had begun as a measure to increase sales during the crisis of the early 1990s, continued to progress, and in 2002, the company brought together these businesses in Lincoln Electric Welding, Cutting, Tools, and Accessories, Inc. In March 2001, Massaro dedicated the state-of-the-art, $20 million David C. Lincoln Technology Center, named after the son of founder John Lincoln. At that time, 50 percent of Lincoln's domestic sales came from products introduced in the past five years." John Stropki led the US operations during the 1990s expansion crisis. His leadership and sales acumen helped the company exceed its domestic sales target by $1 million per day." Stropki became the company's seventh chairman and CEO in 2004. In 2005, Lincoln celebrated 10 years as a public company, and Stropki managed a company that rewarded investors with a long-term orientation. Sixty-three percent of the company's shareholders were institutional investors locked in to Lincoln for its long-term returns and stable investment strategy." Stropki continued to expand globally with the intent of deepening Lincoln's presence and market share in key markets such as China, the Middle East, and Eastern Europe. In 2009, the company entered the Indian market when it opened a 100,000 square foot consumables (flux rods) facility in Chennai. In 2010 and 2011, the company bought Russian welding manufacturers MGM and Severstal, giving Lincoln a strong presence in this market. When Stropki retired in 2013, Lincoln competed in more than 40 global markets. Product development efforts also increased during Stropki's tenure. In 2009 alone, the company brought over 100 new products to market. Lincoln expanded through its own internal development programs as the Lincoln Technology Center continued to produce improvements to existing technologies and create new, advanced welding systems. Acquisitions played a role as well. In 2005, Lincoln purchased J. W. Harris, a world leader in brazing and soldering materials. In 2011, Lincoln acquired Torchmate, a company producing advanced plasma and oxy-fuel cutting tables and systems; Techalloy, which made nickel alloy and stainless steel welding consumables; and Arc Products, a producer of orbital welding systems and automa- tion components.3 Conclusion When John Stropki concluded his tenure, Lincoln had developed into a bigger, grown-up version of the company John C. Lincoln founded almost 125 years before. The unique com- pensation system created a competitive advantage in human capital, and Lincoln's research and development efforts continued to produce high-quality products and to continually lower prices. Lincoln's success had not gone unnoticed. President George Bush visited the Cleveland facility in 2008, as had many others over the years, to praise Lincoln for its innovative business practices. In 2013, John Stropki introduced his successor, Christopher Maples, as "the right per- son to lead Lincoln Electric into its exciting future and continue our long track record of uninter- rupted success."36CASE 12 Lincoln Electric Aligning for Global Growth 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 appli- cation of our technologies allows us to create complete solutions that make our customers more productive and successful. We distinguish ourselves through an unwavering commitment to our employees and a relentless drive to maximize share- holder value.' John Stropki looked over at the Vision 2020 document that sat on his desk. The Cleveland, Ohio, based manufacturer of arc welding equipment, Lincoln Electric, had adopted the Vision 2020 strategy two years earlier, in 2011. The document set an aggressive goal for a compound annual revenue growth of 10 percent between 2011 and 2020. Shareholders would see a marked increase in their wealth if the company met its target of 15 percent compound annual growth in return on invested capital. Stropki was proud of his contribution to the company's vision. During the first two years that the Vision 2020 strategy was implemented, Lincoln's rev- enues had grown 38 percent, from $2.07 billion to $2.853 billion, and the return on invested capital had grown a whopping 75 percent, from 10.7 to 18.7 percent.2 Exhibit 1 provides finan- cial information for the company. Stropki had spent 41 years at Lincoln, starting with the company while still in college. His career path began in the sales side of the organization, and he became a company executive in 1996 with his appointment as executive vice president and president of Lincoln's North American operation. He was named CEO in 2004. In spite of the Great Recession of 2007-2009, Stropki oversaw a company that doubled sales, from $1.3 billion to $2.85 billion, between 2004 and 2012. Shareholder dividends also doubled over the same period, from $0.34 to $0.71 per share, and the stock had been split 2 for 1 in 2011. Stropki produced total shareholder returns of 365 percent during his time as CEO. Although these numbers sounded impressive, Stropki considered them to be a typical achievement from one of America's most unique and surprising companies. Lincoln Electric: The Cleveland Years John C. Lincoln founded the Lincoln Electric Company in 1895 after being laid off from his job at a Cleveland producer of electric motors. Lincoln was a natural inventor and, by 1895, already possessed more than a decade of experience in the high-technology sector of elec- tricity generation and electrical products.* Rather than find work for another company, John began producing motors of his own design in his basement. Cleveland proved to be a great place to start a business. At the end of the nineteenth century, Cleveland was the Silicon Valley of its day, and the city was a hotbed for technological innovation and new business start-ups. The Lincoln Electric Company was in good company and began to grow.field. Lincoln hired engineers to staff its sales force, and after an intensive, eight month training course in welding technology and technique at the Cleveland headquarters, the company's technical sales people used their engineering skills and knowledge to create welding solutions for customers." This deep customer knowledge flowed back to product engineers at Lincoln for use in continuous product enhancements, The company lowered costs through seve several means. Lincoln operated with a flat management structure that removed a layer of supervisor y costs and pushed decision mak- ing down to workers on the assembly line." While most companies hired one manager per 20 employees and sometimes went as high as 1:5, Lincoln maintained a ratio of about 1:100. Assembly workers focused on a single task that allowed them to improve their own output and to identify and implement techniques that raised quality or lowered production costs. The Cleveland plant itself was designed to minimize the costs of moving materials through the facility, and very little time was wasted looking for supplies." Shortly after James Lincoln assumed control of the company, he established the Employee Advisory Board. That board has met every two weeks since its inception in 1915. The board allows managers and workers to work together as equals to solve problems. The board grew out of James's deep respect for people, his belief that a company had to earn the efforts of its employees, and the view that productive employees would prove to be Lincoln's most valuable asset. By 1915, the company provided employees with group life insurance, an innovative business practice at the time." And, Lincoln founded a welding school in 1917 in order to deepen the knowledge base about welding among employees, customers, and the community at large. The Great Depression affected all companies, but it affected Lincoln in a unique way. Com- panies laid off thousands of workers, and the unemployment rate climbed from 3.2 percent in 1930 to a high of 24.9 percent in 1933, an eight-fold increase. In manufacturing cities such as Detroit and Chicago, the rate exceeded 40 percent." In the midst of this meltdown, Lincoln avoided layoffs by reducing hours and wages. At the close of 1933, with unemployment in Cleveland standing at 50 percent, a Lincoln employee approached James Lincoln with a prop- osition: "If we did more, tried harder, and worked together as a real team, could the company pay us more?" James Lincoln agreed to a one-year experiment, stating that any increases in the company profits in 1934 would be shared with every employee. 12 At the end of 1934, Lincoln paid out $131,800 in bonuses to its workers.13 The Lincoln compensation system had been born, and the bonus has been paid every year since then. In 2012, Lincoln paid out $99.3 million to almost 3,000 American employees, averaging almost $34,000 apiece with those same workers, averaging total pay of a little more than $82,000. The bonus never represented a gift from the company to its workers; it was a payoff for their hard work and effort. Shortly after World War II, the company developed a performance evaluation system to determine the size of employee bonuses. Every year, each Lincoln worker receives an assessment on five items: Productivity, Quality, Adaptability and Flexibility, Dependability and Teamwork, and Compliance with health, safety, and environmental policies. The bonus represented one pillar of Lincoln's unique compensation system. The second prong was a piece rate system that paid workers for what they actually produced. Lincoln adopted the piece rate system very early in its history, just as this system was falling out of favor in the United States. Managers lost confidence in piece rates because they saw workers game the system and focus on quantity rather than quality of output. For their part, workers came to despise piece rates because they often saw companies adjust rates down in response to high productivity by workers. 14 At Lincoln, all jobs were subject to a time-and-motion study to determine the base rate for the job, and the base rate roughly equaled the prevailing hourly wage for average productivity. The rate could be changed only if the nature of the production process changed and not if the worker became more efficient at their task. Each piece that a Lincoln worker produced carried the stamp with his initials. When a piece failed in the field, it was sent back to the bench of the employee. Employees reworked low-quality pieces but would not be paid again because they had already been paid for that piece. The third prong of Lincoln's compensation system was its guaranteed employment promise. If a worker could not perform well under the demanding conditions of the Lincoln system, they normally left the company and found other, less taxing (yet less lucrative) work Even at the height of the Great Depression, Lincoln chose to reduce hours rather than laC138 Lincoln Electric EXHIBIT 1 Selected Financial Results 2012 Year 2004 2005 2006 2007 2008 2009 2010 2011 2.853 2.07 2.695 Net Revenue is Billions 4.234 1.602 1.971 2 28 2.479 1.729 5.8696 20.09%% 23,0305 15.68% 8. 739% -30.259% 19.72% 20.1990 Growth Rate 0.85 1.52 2.51 3.16 Earnings per Share (S). 2/06 2.67 3.98 4.67 2.68 Growth Rate 49.06% 17.349% 68.28% 65.13% 25.9096 29.61% -42.61% 78.82% 19.209% Return on Equity 14.00% 18.009% 20.50% 18.60% 21.30% 4.50% 10.469% 9.94% 66.96% 32.44% Growth Rate 28.57% 13.89% -9.27% 14.52% -78.87% 0.652 1.193 1.358 Total Equity (S Billions) 0.577 0.853 1.087 1.01 1.086 1.15 7.52% 3.749 13.83% Growth Rate 13.00%% 30.83% 27.43% -7.089% 5.899% 327 Cash Flows (S Millions) 51.3 117 118.7 249.8 257.4 250 157 194 Growth Rate 128.07% 1.459% 10.45% 3.049% -2.87% -37.20% 23.57% 68.56% 0.71 Dividends"* 0.69 0.73 0.79 0.91 1.02 1.1 1.15 0.79 -10.13% Growth Rate 5.80% 8.22% 15.19% 12.09% .84% 4.55% 37.39% . Numbers for 2004-2007 do not reflect adjustment of a 2 for 1 stock split in 2011. Figures for 2008-2012 reflect the stock split. ." Dividends for 2011 and 2012 are per share, after 2 for 1 stock split, growth rate assumes holders enjoyed split. Sources: Annual Reports 2012, 2008. Dividend data from http://www.nasdaq.com/symbol/leco/dividend- history ROE Data from GuruFocus; http://www. ://www.gurufocus.com/term/ROE/LECO/Return%2Bon%2BEquity/ Lincoln62BElectric962BHoldings62526%2BInc. John's younger brother, James F. Lincoln, joined the new company as a salesman. Their father, William, had immigrated to the United States from London just before the Civil War and became a preacher. The elder Lincoln had strong views, which were often at odds with the views of the congregations he led, and the family moved throughout the Midwest as a result of those convictions. William instilled in both of his boys a deep faith in Christianity work they did. and its principles of respect for humanity. He also taught his boys how to work and to love the James Lincoln became General Manager of the company in 1914 and would drive that work ethic throughout the company until his death 51 years later in 1965. James managed the business operations, while John Lincoln focused his energies on developing weld- ing technology. When James took control, Lincoln was beginning to expand its product line into other areas of electrical equipment, including a new, portable arc welding machine they brought to market in 1911. Arc welding uses the heat of an electric current to melt two metal pieces and join them together. Welding was a critical process in the manufacture of many consumer products, such as automobiles, home appliances, bridges, and high-rise construction. office buildings, and factories also relied on welding technology and products in their The Lincoln brothers worked throughout the 1920s to advance welding technology. John created several innovations that improved welding in general and Lincoln's line of products in particular. James focused the company on a single goal: making better welding products to sell to more customers. By the time the stock market crashed in 1929, Lincoln Electric held 30 per- cent of the growing market for arc welding. 5 doi The Lincoln System James Lincoln considered Lincoln Electric to be a "manufacturing company" above all else. The competitive logic of the Lincoln Electric Company rested on using manufacturing excellence to create increasingly higher-quality welding equipment at ever lower costs. Lincoln focused on customer service, learning as much as it could about how its welders were used in the