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End-of-Text Case

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End-of-Text Case

End-of-Text Case (Adapted from S.E. Jackson and R.S. Schuler,

    Managing Human Resources through Strategic Partnerships, 8e

    (Southwestern Publishing Co.: Cincinnati, Ohio, USA: 2003)

THE LINCOLN ELECTRIC COMPANY

    People are our most valuable asset. They must feel secure, important, challenged, in control of their destiny,

    confident in their leadership, be responsive to common goals, believe they are being treated fairly, have easy access

    to authority and open lines of communication in all possible directions. Perhaps the most important task Lincoln

    employees face today is that of establishing an example for others in the Lincoln organization in other parts of the

    world. We need to maximize the benefits of cooperation and teamwork, fusing high technology with human talent,

    so that we here in the USA and all of our subsidiary and joint venture operations will be in a position to realize

    our full potential.

    George Willis, former CEO, The Lincoln Electric Company

    Today, the Lincoln Electric Company under the leadership of Anthony Massaro,, is the world‟s largest manufacturer of arc welding products and a leading producer of industrial electric motors. The firm employs

    almost 6,300 workers in three U.S. factories near Cleveland and sites in eighteen other countries. The company‟s

    1U.S. market share (for arc-welding products) is estimated at more than 40 percent.

    The Lincoln incentive management plan has been well known for many years. Many college management

    texts make reference to the Lincoln plan as a model for achieving higher worker productivity. Certainly, the firm

    has been successful according to the usual measures.

    James F. Lincoln died in 1965 and there was some concern, even among employees, that the management

    system would fall into disarray, that profits would decline, and that year-end bonuses might be discontinued.

    Quite the contrary, since Lincoln‟s death, the company appears as strong as ever. Each year, except the recession

    years 1982 and 1983, has seen high profits and bonuses. In 1995, Lincoln Electric‟s centennial, sales for the first

    time surpassed $1 billion. While there was some employee discontent about relatively flat bonuses in 1995,

    2employee morale and productivity remain very good. Employee turnover is almost nonexistent except for retirements. Lincoln‟s market share is stable. The historically high stock dividends continue.

    A Historical Sketch

    In 1895, after being “frozen out” of the depression-ravaged Elliott-Lincoln Company, a maker of Lincoln-designed electric motors, John C. Lincoln took out his second patent and began to manufacture his improved

    motor. He opened his new business, unincorporated, with $200 he had earned redesigning a motor for young

    Herbert Henry Dow, who later founded the Dow Chemical Company.

    Started during an economic depression and cursed by a major fire after only one year in business, the

    company grew, but hardly prospered, through its first quarter century. In 1906, John C. Lincoln incorporated the

    business and moved from his one-room, fourth-floor factory to a new three-story building he erected in east

    Cleveland. He expanded his workforce to 30 and sales grew to over $50,000 a year. John preferred being an

    engineer and inventor rather than a manager, though, and it was to be left to another Lincoln to manage the

    company through its years of success. In 1907, after a bout with typhoid fever forced him from Ohio State

    University in his senior year, James F. Lincoln, John‟s younger brother, joined the fledgling company. In 1914 he

    became the active head of the firm, with the titles of General Manager and Vice President. John remained

president of the company for some years but became more involved in other business ventures and in his work

    as an inventor.

    One of James Lincoln‟s early actions was to ask the employees to elect representatives to a committee that

    would advise him on company operations. This “Advisory Board” has met with the chief executive officer every

    two weeks since that time. This was only the first of a series of innovative personnel policies that have, over the

    years, distinguished Lincoln Electric from its competitors.

    The first year the Advisory Board was in existence, working hours were reduced from 55 per week, then standard, to 50 hours a week. In 1915, the company gave each employee a paid-up life insurance policy. A

    welding school, which continues today, was begun in 1917. In 1918, an employee bonus plan was attempted. It

    was not continued, but the idea was to resurface later.

    The Lincoln Electric Employees Association was formed in 1919 to provide health benefits and social activities. This organization continues today and has assumed several additional functions over the years. In

    1923, a piecework pay system was in effect, employees got two weeks‟ paid vacation each year, and wages were

    adjusted for changes in the Consumer Price Index. Approximately 30 percent of the common stock was set aside

    for key employees in 1914. A stock purchase plan for all employees was begun in 1925.

    The Board of Directors voted to start a suggestion system in 1929. The program is still in effect, but cash awards, a part of the early program, were discontinued several years ago. Now, suggestions are rewarded by

    “additional points” which affect year-end bonuses.

    The legendary Lincoln bonus plan was proposed by the Advisory Board and accepted on a trial basis in 1934. The first annual bonus amounted to about 25 percent of wages. There has been a bonus every year since then.

    The bonus plan has been a cornerstone of the Lincoln management system and recent bonuses have

    approximated annual wages.

    By 1944, Lincoln employees enjoyed a pension plan, a policy of promotion from within, and continuous employment. Base pay rates were determined by formal job evaluation and a merit rating system was in effect.

    In the prologue of James F. Lincoln‟s last book, Charles G. Herbruck writes regarding the foregoing

    personnel innovations:

    They were not to buy good behavior. They were not efforts to increase profits. They were not antidotes to labor

    difficulties. They did not constitute a “do-gooder” program. They were an expression of mutual respect for each

    person‟s importance to the job to be done. All of them reflect the leadership of James Lincoln, under whom they

    were nurtured and propagated.

    During World War II, Lincoln prospered as never before. By the start of the war, the company was the world‟s largest manufacturer of arc-welding products. Sales of about $4,000,000 in 1934 grew to $24,000,000 by

    1941. Productivity per employee more than doubled during the same period. The Navy‟s Price Review Board

    challenged the high profits. And the Internal Revenue Service questioned the tax deductibility of employee

    bonuses, arguing they were not “ordinary and necessary” costs of doing business. But the forceful and articulate

    James Lincoln was able to overcome the objections.

    Certainly since 1935 and probably for several years before that, Lincoln‟s productivity has been well above the average for similar companies. The company claims levels of productivity more than twice those for other

    manufacturers from 1945 onward. Information available from outside sources tends to support these claims.

    Company Philosophy

    James F. Lincoln was the son of a Congregational minister, and Christian principles were at the center of his

    business philosophy. The confidence that he had in the efficacy of Christ‟s teachings is illustrated by the

    following remark taken from one of his books:

    The Christian ethic should control our acts. If it did control our acts, the savings in cost of distribution would be

    tremendous. Advertising would be a contact of the expert consultant with the customer, in order to give the

    customer the best product available when all of the customers needs are considered. Competition then would be in

    improving the quality of products and increasing efficiency in producing and distributing them; not in deception,

    as is now too customary. Pricing would reflect efficiency of production; it would not be a selling dodge that the

    customer may be sorry he accepted. It would be proper for all concerned and rewarding for the ability used in

    producing the product.

    There is no indication that Lincoln attempted to evangelize his employees or customers--or the general public for that matter. Neither the former chairman of the board and chief executive, George Willis, nor the

    current one, Donald F. Hastings, mention the Christian gospel in their recent speeches and interviews. The

    company motto, “The actual is limited, the possible is immense,” is prominently displayed, but there is no

    display of religious slogans, and there is no company chapel.

    Attitude Toward the Customer

    James Lincoln saw the customer‟s needs as the raison d‟etre for every company. He wrote, “When any company

    has achieved success so that it is attractive as an investment, all money usually needed for expansion is supplied

    by the customer in retained earnings. It is obvious that the customer‟s interests, not the stockholder‟s, should

    come first.” In 1947 he said, “Care should be taken . . . not to rivet attention on profit. Between „How much do I

    get?‟ and „How do I make this better, cheaper, more useful?‟ the difference is fundamental and decisive.” Willis,

    too, ranked the customer as management‟s most important constituency. This is reflected in Lincoln‟s policy to

    “at all times price on the basis of cost and at all times keep pressure on our cost . . . .” Lincoln‟s goal, often

    stated, is “to build a better and better product at a lower and lower price.” James Lincoln said, “It is obvious

    that the customer‟s interests should be the first goal of industry.”

    This priority, and the priority given to other groups, is reflected in the Mission and Values Statement and the set of Goals shown in Appendix 3A.

    Attitude Toward Stockholders

    Stockholders are given last priority at Lincoln. This is a continuation of James Lincoln‟s philosophy: “The last

    group to be considered is the stockholders who own stock because they think it will be more profitable than

    investing money in any other way.” Concerning division of the largess produced by incentive management, he

    wrote, “The absentee stockholder also will get his share, even if undeserved, out of the greatly increased profit

    that the efficiency produces.”

    Attitude Toward Unionism

    There has never been a serious effort to organize Lincoln employees. While James Lincoln criticized the labor

    movement for “selfishly attempting to better its position at the expense of the people it must serve,” he still had

    kind words for union members. He excused abuses of union power as “the natural reactions of human beings to

    the abuses to which management has subjected them.” Lincoln‟s idea of the correct relationship between workers and managers is shown by this comment: “Labor and management are properly not warring camps;

    they are parts of one organization in which they must, and should, cooperate fully and happily.”

    Beliefs and Assumptions About Employees

    If fulfilling customer needs is the desired goal of business, then employee performance and productivity are the

    means by which this goal can best be achieved. It is the Lincoln attitude toward employees, reflected in the

    following comments by James Lincoln, which is credited by many with creating the success the company has

    experienced:

    He is just as eager as any manager is to be part of a team that is properly organized and working for the

    advancement of our economy. He has no desire to make profits for those who do not hold up their end in production,

    as is true of absentee stockholders and inactive people in the company.

    If money is to be used as an incentive, the program must provide that what is paid to the worker is what he has

    earned. The earnings of each must be in accordance with accomplishment.

    Status is of great importance in all human relationships. The greatest incentive that money has, usually, is that it

    is a symbol of success. The resulting status is the real incentive. Money alone can be an incentive to the miser only.

    There must be complete honesty and understanding between the hourly worker and management if high efficiency

    is to be obtained.

    These beliefs and assumptions have helped shaped Lincoln‟s human resource objectives. These are shown in

    Appendix 3B.

    Lincoln‟s Business

    Arc-welding has been the standard joining method in shipbuilding for decades. It is the predominant way of

    connecting steel in the construction industry. Most industrial plants have their own welding shops for

    maintenance and construction. Manufacturers of tractors and all kinds of heavy equipment use arc-welding

    extensively in the manufacturing process. Many hobbyists have their own welding machines and use them for

    making metal items such as patio furniture and barbecue pits. The popularity of welded sculpture as an art form

    is growing.

    While advances in welding technology have been frequent, arc-welding products, in the main, have hardly changed. Lincoln‟s Innershield process is a notable exception. This process, described later, lowers welding cost and improves quality and speed in many applications. The most widely-used Lincoln electrode, the Fleetweld

    5P, has been virtually the same since the 1930s. The most popular engine-driven welder in the world, the Lincoln SA-200, has been a gray-colored assembly including a four-cylinder continental Red Seal engine and a 200

    ampere direct-current generator with two current-control knobs for at least four decades. A 1989 model SA-200

    even weighed almost the same as the 1950 model, and it certainly was little changed in appearance.

    The company‟s share of the U.S. arc-welding products market appears to have been about 40 percent for

    many years. The welding products market has grown somewhat faster than the level of industry in general. The

    market is highly price-competitive, with variations in prices of standard items normally amounting to only a

    percent or two. Lincoln‟s products are sold directly by its engineering-oriented sales force and indirectly

    through its distributor organization. Advertising expenditures amount to less than three-fourths of a percent of sales. Research and development expenditures typically range from $10 million to $12 million, considerably

    more than competitors.

    The other major welding process, flame-welding, has not been competitive with arc-welding since the 1930s. However, plasma-arc-welding, a relatively new process which uses a conducting stream of super heated gas

    (plasma) to confine the welding current to a small area, has made some inroads, especially in metal tubing

    manufacturing, in recent years. Major advances in technology which will produce an alternative superior to arc-

    welding within the next decade or so appear unlikely. Also, it seems likely that changes in the machines and

    techniques used in arc-welding will be evolutionary rather than revolutionary.

    It is also reasonable to observe that Lincoln Electric‟s business objectives, shown in Appendix 3C, are likely to change in an evolutionary rather than a revolutionary way.

    Products

    The company is primarily engaged in the manufacture and sale of arc-welding products--electric welding

    machines and metal electrodes. Lincoln also produces electric motors ranging from one-half horsepower to 200

    horsepower. Motors constitute about eight to ten percent of total sales. Several million dollars have recently

    been invested in automated equipment that will double Lincoln‟s manufacturing capacity for one-half to 20

    horsepower electric motors. The electric welding machines, some consisting of a transformer or motor and

    generator arrangement powered by commercial electricity and others consisting of an internal combustion

    engine and generator, are designed to produce 30 to 1,500 amperes of electrical power. This electrical current is used to melt a consumable metal electrode with the molten metal being transferred in super hot spray to the

    metal joint being welded. Very high temperatures and hot sparks are produced, and operators usually must

    wear special eye and face protection and leather gloves, often along with leather aprons and sleeves. Lincoln and its competitors now market a wide range of general purpose and specialty electrodes for welding mild steel,

    aluminum, cast iron, and stainless and special steels. Most of these electrodes are designed to meet the

    standards of the American Welding Society, a trade association. They are thus essentially the same as to size and composition from one manufacturer to another. Every electrode manufacturer has a limited number of unique

    products, but these typically constitute only a small percentage of total sales.

    Welding electrodes are of two basic types: coated “stick” electrodes and coiled wire. Coated “stick” electrodes, usually 14 inches long and smaller than a pencil in diameter, are held in a special insulated holder by the operator, who must manipulate the electrode in order to maintain a proper arc-width and pattern of

    deposition of the metal being transferred. Stick electrodes are packaged in 6- to 50-pound boxes.

    Thin coiled wire is designed to be fed continuously to the welding arc through a “gun” held by the operator or positioned by automatic positioning equipment. The wire is packaged in coils, reels, and drums weighing

    from 14 to 1,000 pounds and may be solid or flux-cored.

    For more information on products visit the Web site http://www.lincolnelectric.com.

    Manufacturing Process

    The main plant is in Euclid, Ohio, a suburb on Cleveland‟s east side. The layout of this plant is shown in Exhibit

    C.3.1. There are no warehouses. Materials flow from the half-mile long dock on the north side of the plant

    through the production lines to a very limited storage and loading area on the south side.

    Materials used on each work station are stored as close as possible to the work station. The administrative offices, near the center of the factory, are entirely functional. A corridor below the main level provides access to the factory floor from the main entrance near the center of the plant. Fortune declared the Euclid facility one of

    America‟s ten best-managed factories

    Another Lincoln plant, in Mentor, Ohio, houses some of the electrode production operations, which were moved from the main plant. Electrode manufacturing is highly capital intensive. Metal rods purchased from

    steel producers are drawn down to smaller diameters, cut to length, and coated with pressed-