Organizational Culture and Incentives at Lincoln Electric
Lincoln Electric is one of the leading companies in the global market for arc welding equipment. Lincoln"s success has been based on extremely high levels of employee productivity. The company attributes its productivity to a strong organizational culture and an incentive scheme based on piecework. Lincoln"s organizational culture dates back to James Lincoln, who in 1907 joined the company that his brother had established a few years earlier. Lincoln had a strong respect for the ability of the individual and believed that, correctly motivated, ordinary people could achieve extraordinary performance. He emphasized that Lincoln should be a meritocracy where people were rewarded for their individual effort. Strongly egalitarian, Lincoln removed barriers to communication between “workers” and “managers,” practicing an open-door policy. He made sure that all who worked for the company were treated equally; for example, everyone ate in the same cafeteria, there were no reserved parking places for “managers,” and so on. Lincoln also believed that any gains in productivity should be shared with consumers in the form of lower prices, with employees in the form of higher pay, and with shareholders in the form of higher dividends. The company"s incentive system reinforces the organizational culture that grew out of James Lincoln"s beliefs. Production workers receive no base salary but are paid according to the number of pieces they produce. The piecework rates at the company enable an employee working at a normal pace to earn an income equivalent to the average wage for manufacturing workers in the area where a factory is based. Workers have responsibility for the quality of their output and must repair any defects spotted by quality inspectors before the pieces are included in the piecework calculation. Since 1934, production workers have been awarded a semiannual bonus based on merit ratings. These ratings are based on objective criteria (such as an employee"s level and quality of output) and subjective criteria (such as an employee"s attitude toward cooperation and his or her dependability). These systems give Lincoln"s employees an incentive to work hard and to generate innovations that boost productivity, for doing so influences their level of pay. Lincoln"s factory workers have been able to earn a base pay that often exceeds the average manufacturing wage in the area by more than 50 percent and receive a bonus on top of this that in good years could double their base pay. Indeed, employees at Lincoln"s U.S. plants consistently rank among the highest paid factory workers in the world. Despite high employee compensation, the workers are so productive that Lincoln has a lower cost structure than its competitors.
Lincoln"s unique culture and incentive systems enabled it to operate with a very flat organizational structure. The supervisor to worker ratio in Lincoln"s main U.S. plant is 1 to 100. In a typical factory in the United States the ratio is more like 1 to 25, and in some auto plants it is 1 to 10.
Motivated by the incentive system, Lincoln"s employees often work long hours. The average workweek in Lincoln"s U.S. plants is between 43 and 58 hours, and the company is able to ask people to work longer hours on short notice. While this organizational culture and set of incentives works well in the United States, where it is compatible with the individualistic culture of the country, and the tradition of hard work for more money, it did not translate easily into foreign operations. In the 1980s and early 1990s, Lincoln expanded into international markets. It did consider exporting from the United States, but was told by foreign distributors that American equipment would not sell well in Europe, so instead the company decided to set up wholly owned subsidiaries to make the equipment locally. Lincoln acquired seven arc welding manufacturers in Europe and one in Mexico, and established greenfield plants in Japan, Venezuela, and Brazil. The total investment amounted to $325 million, a substantial amount for Lincoln. Lincoln"s aggressive expansion represented a sharp break in the history of the company. Up until that point its foreign operations had been minimal.
The company"s senior management, most of whom were hired straight out of college and promoted from within, had almost no experience running businesses outside of the United States. They were, however, proud of their unique incentive system and the high productivity it created, and they believed that applying this system to foreign factories would be a source of competitive advantage enabling Lincoln to grow its foreign sales and profits. For the acquisitions, Lincoln left local managers in place, believing that they knew local conditions better than Americans who had little international experience.
However, the local managers had little working knowledge of Lincoln"s strong organizational culture and were unable or unwilling to impose that culture on their units, which had their own long-established organizational cultures. Nevertheless, Lincoln told local managers to introduce its incentive systems in acquired companies. They frequently ran into legal and cultural roadblocks. In many countries, piecework is viewed as an exploitive compensation system that forces employees to work ever harder. In Germany, where Lincoln made an acquisition, it is illegal. In Brazil, a bonus paid for more than two years becomes a legal entitlement! In many other countries, both managers and workers were opposed to the idea of piecework. Lincoln found that many European workers valued extra leisure more highly than extra income and were not prepared to work as hard as their American counterparts. For example, in Germany the average workweek was 35 hours, as opposed to the 43–58 hours that Lincoln employees worked in the United States. Many of the acquired companies were also unionized, and the local unions vigorously opposed the introduction of piecework.
As a result, Lincoln was not able to replicate the high level of employee productivity that it had achieved in the United States, and its expansion pulled down the performance of the entire company. To make matters worse, the entry into Europe was soon followed by a recession that hit the industry hard, and many of Lincoln"s foreign plants were working at only half their capacity. Ultimately Lincoln scaled back operations in Europe, shut down its German plant, and closed plants in Brazil, Japan, and Venezuela, taking a restructuring charge of $70 million. The company also shifted its strategy, electing to export U.S. made machines to foreign markets like Germany, rather than build them locally, a strategy that soon turned out to be surprisingly successful. Indeed, in Germany the company gained an advantage by thumbing its nose at one local tradition—the norm that trade shows should not be used for selling products, but for entertaining customers and conducting public relations. Lincoln flew over three planeloads of arc welding equipment from the United States, and set itself a target of selling 1,200 welding machines at an eight-day industry trade show. It sold 1,762 and discovered that contrary to what it had been told, American equipment would sell very well in Germany. From that point on, Lincoln emphasized exports.
The one foreign venture that did do relatively well was in Mexico. Acquired in 1990, the Mexican venture was unionized and piecework ran against the Mexican culture. However, the local manager tried to introduce the incentive system gradually. In a plant of 175 employees he asked 2 of them to take a chance on piecework. He also guaranteed them a minimum income, to reduce the risks associated with piecework. After they started to make more money than their counterparts, other people started to ask if they could go into the system. It took two years, but eventually the entire labor force converted to a piecework system.
Reflecting on the problems it encountered when expanding internationally, the CEO of the company noted that “Our managers didn't know how to run foreign operations; nor did they understand foreign cultures. Consequently, we had to rely upon people in our foreign companies, people we didn't know and people who did not know us.”
Case Discussion Questions
1. What is the source of Lincoln"s long-standing competitive advantage in the United States market for arc welding equipment?
2. Why did Lincoln enter foreign markets through acquisitions and greenfield ventures, rather than through exporting?
3. Why did Lincoln"s foreign ventures fail to deliver the gains forecasted?
4. In retrospect, what might Lincoln have done differently to avoid the financial crisis it found itself in?
5. What lessons can be gleaned from the Mexican venture? Sources
1. J. O'Connell, “Lincoln Electric: Venturing Abroad,” Harvard Business School Case No. 9- 398-095, April 1998.
2. Company information at http://www.lincolnelectric.com (accessed July 11, 2007).
3. D. F. Hastings “Lincoln Electric"s Harsh Lessons from International Expansion,” Harvard Business Review, May–June 1999, pp. 3–11.
4. P. Marsh,“Change to Global Approach,” Financial Times, February 13, 1998, p. 13.
5. R. M. Hodgetts, “A Conversation with Donald F. Hastings,” Organizational Dynamics,