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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-powder “flux” for

    stick electrodes or plated with copper (for conductivity) and put into coils or spools for wire. Lincoln‟s

    Innershield wire is hollow and filled with a material similar to that used to coat stick electrodes. As mentioned

    earlier, this represented a major innovation in welding technology when it was introduced. The company is

    highly secretive about its electrode production processes, and outsiders are not given access to the details of

    those processes.

    Lincoln welding machines and electric motors are made on a series of assembly lines. Gasoline and diesel engines are purchased partially assembled, but practically all other components are made from basic industrial

    products, e.g., steel bars and sheets and bar copper conductor wire.

    Individual components, such as gasoline tanks for engine-driven welders and steel shafts for motors and generators, are made by numerous small “factories within a factory.” The shaft for a certain generator, for

    example, is made from raw steel bar by one operator who uses five large machines, all running continuously. A

    saw cuts the bar to length, a digital lathe machines different sections to varying diameters, a special mining

    machine cuts a slot for the keyway, and so forth, until a finished shaft is produced. The operator moves the

    shafts from machine to machine and makes necessary adjustments. Another operator punches, shapes, and

    paints, sheetmetal cowling parts. One assembles steel laminations onto a rotor shaft, then winds, insulates, and

    tests the rotors. Finished components are moved by crane operators to the nearby assembly lines.

    Worker Performance and Attitude

    Exceptional worker performance at Lincoln is a matter of record. The typical Lincoln employee earns about

    twice as much as other factory workers in the Cleveland area. Yet the company‟s labor cost per sales dollar is

    well below industry averages. Worker turnover is practically nonexistent except for retirements and departures

    by new employees. Turnover is less than four percent for employees who have been on the jobs for at least 18

    3months.

    Sales per Lincoln factory employee currently exceed $150,000. An observer at the factory quickly sees why this figure is so high. Each worker is proceeding busily and thoughtfully about the task at hand. There is no idle chatter. Most workers take no coffee breaks. Many operate several machines and make a substantial component

    unaided. The supervisors are busy with planning and record keeping duties and hardly glance at the people

    they “supervise.” The manufacturing procedures appear efficient--no unnecessary steps, no wasted motions, no

    wasted materials. Finished components move smoothly to subsequent work stations. Appendix 3D includes

    summaries of interviews with employees.

    Organizational Structure

Lincoln has never allowed development of a formal organization chart. The objective of this policy is to ensure

    maximum flexibility. An open door policy is practiced throughout the company, and personnel are encouraged

    to take problems to the persons most capable of resolving them. Once, Harvard Business School researchers

    prepared an organization chart reflecting the implied relationships at Lincoln. The chart became available within the company, and present management feels that had a disruptive effect. Therefore, no organizational chart

    appears in this case.

    Perhaps because of the quality and enthusiasm of the Lincoln workforce, routine supervision is almost nonexistent. A typical production foreman, for example, supervises as many as 100 workers, a span-of-control

    that does not allow more than infrequent worker-supervisor interaction.

    Position titles and traditional flows of authority do imply something of an organizational structure, however. For example, the Vice President, Sales, and the Vice President, Electrode Division, report to the President, as do various staff assistants such as the Personnel Director and the Director of Purchasing.

    Using such implied relationships, it has been determined that production workers have two or, at most, three levels of supervision between themselves and the President.

    Human Resource Practices

    As mentioned earlier, it is Lincoln‟s remarkable human resource practices that are credited by many with the

    company‟s success.

    Recruitment and Selection

    Every job opening is advertised internally on company bulletin boards and any employee can apply for any job

    so advertised. External hiring is permitted only for entry-level positions. Selection for these jobs is done on the basis of personal interviews--there is no aptitude or psychological testing. A committee consisting of vice

    presidents and supervisors interviews candidates initially cleared by the Personnel Department. Final selection is made by the supervisor who has a job opening. Nonetheless, it is increasingly desirable that factory workers have some advanced math skills and understand the use of computers. Out of over 20,000 applications received

    by the Personnel Department during a recent period, relatively few were hired in 1994-1995. Consequently,

    Lincoln‟s expansion is becoming increasingly dependent upon getting employees qualified to work in the

    4Lincoln environment, within the famous incentive system.

    Job Security In 1958 Lincoln formalized its guaranteed continuous employment policy, which had already been in effect for

    many years. There have been no layoffs since World War II. Since 1958, every worker with over two years‟

    longevity has been guaranteed at least 30 hours per week, 49 weeks per year.

    The policy has never been so severely tested as during the 1981 to 1983 recession. As a manufacturer of capital goods, Lincoln‟s business is highly cyclical. In previous recessions the company was able to avoid major

    sales declines. However, sales plummeted 32 percent in 1982 and another 16 percent the next year. Few

    companies could withstand such a revenue collapse and remain profitable. Yet, Lincoln not only earned profits,

    but no employee was laid off and year-end incentive bonuses continued. To weather the storm, management cut

    most of the nonsalaried workers back to 30 hours a week for varying periods of time. Many employees were

    reassigned, and the total workforce was slightly reduced through normal attrition and restricted hiring. Many

    employees grumbled at their unexpected misfortune, probably to the surprise and dismay of some Lincoln

    managers. However, sales and profits--and employee bonuses--soon rebounded.

    Performance Evaluations

    Each supervisor formally evaluates subordinates twice a year using the cards shown in Exhibit C.3.2. The

    employee performance criteria, “quality,” “dependability,” “ideas and cooperation,” and “output” are

    considered to be independent of each other. Marks on the cards are converted to numerical scores which are

forced to average 100 for each evaluating supervisor. Individual merit rating scores normally range from 80 to

    110. Any score over 110 requires a special letter to top management. These scores (over 110) are not considered

    in computing the required 100-point average for each evaluating supervisor.

    Suggestions for improvements often result in recommendations for exceptionally high performance scores.

    Supervisors discuss individual performance marks with the employees concerned. Each warranty claim is

    traced to the individual employee whose work caused the defect. The employee‟s performance score may be

    reduced, or the worker may be required to repay the cost of servicing the warranty claim by working without

    pay.

    Compensation

    5Basic wage levels for jobs at Lincoln are determined by a wage survey of similar jobs in the Cleveland area.

    These rates are adjusted quarterly in accordance with changes in the Cleveland area wage index. Insofar as

    possible, base wage rates are translated into piece rates. Today the average Lincoln factory worker earns $16.54

    an hour versus the average $14.25 manufacturing wage in the Cleveland area. Practically all production workers

    and many others--for example, some forklift operators--are paid by piece rate. Once established, piece rates are

    never changed unless a substantive change in the way a job is done results from a source other than the worker

    doing the job.

    In December of each year, a portion of annual profits is distributed to employees as bonuses. Incentive

    bonuses since 1934 have averaged about 90 percent of annual wages. Individual bonuses are proportional to

    merit-rating scores. For example, assume the amount set aside for bonuses is 80 percent of total wages paid to

    eligible employees. A person whose performance score is 95 will receive a bonus of 76 percent (0.80 ? 0.95) of

    annual wages. While these percentages have often resulted in high total compensation, some employees believe

    that their bonuses are not rising fast enough, despite rising profits. This reflects the firm‟s decision to use profits

    to expand the operations rather than put them into higher bonuses. It also reflects the fact that there are more

    6workers today sharing in a bonus pool that is only a little higher than in many years in the 1980s.

    Vacations

    The company is shut down for two weeks in August and two weeks during the Christmas season. Vacations are

    taken during these periods. For employees with over 25 years of service, a fifth week of vacation may be taken at

    a time acceptable to superiors.

    Work Assignments

    Management has authority to transfer workers and to switch between overtime and short time as required.

    Supervisors have undisputed authority to assign specific parts to individual workers, who may have their own

    preferences due to variations in piece rates. During the 1982-1983 recession, 50 factory workers volunteered to

    join sales teams and fanned out across the country to sell a new welder designed for automobile body shops and

    small machine shops. The result: $10 million in sales and a hot new product.

    Employee Participation in Decision Making Thinking of participative management usually evokes a vision of a relaxed, non-authoritarian atmosphere. This

    is not the case at Lincoln. Formal authority is quite strong. “We‟re very authoritarian around here,” says Willis.

    James F. Lincoln placed a good deal of stress on protecting management‟s authority. “Management in all

    successful departments of industry must have complete power,” he said. “Management is the coach who must

    be obeyed. The men, however, are the Players who alone can win the game.” Despite this attitude, there are

    several ways in which employees participate in management at Lincoln.

    Richard Sabo, former assistant to the Chief Executive Officer, relates job enlargement/enrichment to

    participation. He said, “The most important participative technique that we use is giving more responsibility to

    employees. We give a high school graduate more responsibility than other companies give their foremen.”

    Management puts limits on the degree of participation which is allowed, however. In Sabo‟s words:

    When you use „participation,‟ put quotes around it. Because we believe that each person should participate only in

    those decisions he is most knowledgeable about. I don‟t think production employees should control the decisions of

    the chairman. They don‟t know as much as he does about the decisions he is involved in.

    The Advisory Board, elected by the workers, meets with the chairman and the president every two weeks to

    discuss ways of improving operations. As noted earlier, this board has been in existence since 1914 and has

    contributed to many innovations. The incentive bonuses, for example, were first recommended by this

    committee. Every employee has access to Advisory Board members, and answers to all Advisory Board

    suggestions are promised by the following meeting. Together, Willis, Hastings and Massaro, are quick to point

    out, though, that the Advisory Board only recommends actions. “They do not have direct authority,” Willis says,

    “and when they bring up something that management thinks is not to the benefit of the company, it will be

    rejected.”

    Under the early suggestion program, employees were awarded one-half of the first year‟s savings

    attributable to their suggestions. Now, however, the value of suggestions is reflected in performance evaluation

    scores, which determine individual incentive bonus amounts.

    Training and Education

    Production workers are given a short period of on-the-job training and then placed on a piecework pay system.

    Lincoln does not pay for off-site education, unless very specific company needs are identified. The idea behind

    this latter policy, according to Sabo, is that everyone cannot take advantage of such a program, and it is unfair to

    expend company funds for an advantage to which there is unequal access. Recruits for sales jobs, already college

    graduates, are given on-the-job training in the plant followed by a period of work and training at one of the

    regional sales offices. Today, Lincoln Electric conducts a large number of training programs. Visit their web site

    to review them all and you may be very impressed!

    Fringe Benefits and Executive Perquisites

    A medical plan and a company-paid retirement program have been in effect for many years. A plant cafeteria,

    operated on a break-even basis, serves meals at about 60 percent of usual costs. The Employee Association, to

    which the company does not contribute, provides disability insurance and social and athletic activities. The

    employee stock ownership program has resulted in employee ownership of about 50 percent of the common

    stock. Under this program, each employee with more than two years of service may purchase stock in the

    corporation. The price of these shares is established at book value. Stock purchased through this plan may be

    held by employees only. Dividends and voting rights are the same as for stock that is owned outside the plan.

    Approximately 75 percent of the employees own Lincoln stock.

    As to executive perquisites, there are none--crowded, austere offices, no executive washrooms or

    lunchrooms, and no reserved parking spaces. Even the top executives pay for their own meals and eat in the

    employee cafeteria. If the CEO arrives late due to a breakfast speaking engagement, he has to park far away

    from the factory entrance.

    Financial Policies

    James F. Lincoln felt strongly that financing for company growth should come from within the company--

    through initial cash investment by the founders, through retention of earnings, and through stock purchases by

    those who work in the business. He saw the following advantages of this approach:

    1. Ownership of stock by employees strengthens team spirit. “If they are mutually anxious to make it succeed,

    the future of the company is bright.”

    2. Ownership of stock provides individual incentive because employees feel that they will benefit from

    company profitability.

    3. “Ownership is educational.” Owner-employees “will know how profits are made and lost; how success is

    won and lost. There are few socialists in the list of stockholders of the nation‟s industries.”

    4. “Capital available from within controls expansion.” Unwarranted expansion would not occur, Lincoln

    believed, under his financing plan.

5. “The greatest advantage would be the development of the individual worker. Under the incentive of

    ownership, he would become a greater man.”

    6. “Stock ownership is one of the steps that can be taken that will make the worker feel that there is less of a

    gulf between him and the boss. Stock ownership will help the worker to recognize his responsibility in the

    game and the importance of victory.”

    Until 1980, Lincoln Electric borrowed no money. Even now, the company‟s liabilities consist mainly of accounts payable and short-term accruals. The unusual pricing policy at Lincoln was succinctly stated by Willis:

    “At all times price on the basis of cost and at all times keep pressure on our cost.” This policy resulted in the

    price for the most popular welding electrode then in use going from 16 cents a pound in 1929 to 4.7 cents in 1938.

    More recently, the SA-200 Welder, Lincoln‟s largest selling portable machine, decreased in price from 1958

    through 1965. According to Dr. C. Jackson Grayson of the American Productivity Center in Houston, Texas,

    Lincoln‟s prices increased only one-fifth as fast as the Consumer Price Index from 1934 to about 1970. This

    resulted in a welding products market in which Lincoln became the undisputed price leader for the products it

    manufactures. Not even the major Japanese manufacturers, such as Nippon Steel for welding electrodes and

    Saka Transformer for welding machines, were able to penetrate this market.

    Substantial cash balances accumulated each year preparatory to paying the year-end bonuses. Modest success with international expansion put some pressure on what was basically a conservative financial

    philosophy. However, the company borrowed money in 1992 to pay for employee bonuses in the United States.

    In 1995 Lincoln issued $119 million of new stock. This sale created greater public ownership. As a consequence,

    Don Hastings remarked that the company must now consider not only the employees but its shareholders, 7 For more current financial information, visit Lincoln‟s web site. customers, and suppliers.

    How Well Does Lincoln Serve Its Stakeholders?

    Lincoln Electric differs from most other companies in the importance it assigns to each of the groups it serves.

    Hastings identifies these groups, in the order of priority ascribed to them, as: (1) customers, (2) employees, and

    (3) stockholders. As suggested, the 1995 stock issue increased the salience of the stockholders.

    Certainly the firm‟s customers have fared well over the years. Lincoln prices for welding machines and welding electrodes are acknowledged to be the lowest in the marketplace. Quality has consistently been high.

    The cost of field failures for Lincoln products was recently determined to be a remarkable 0.04 percent of

    revenues. The “Fleetweld” electrodes and SA-200 welders have been the standard in the pipeline and refinery

    construction industry, where price is hardly a criterion, for decades. A Lincoln distributor in Monroe, Louisiana,

    says that he has sold several hundred of the popular AC-225 welders, which are warranted for one year, but has

    never handled a warranty claim.

    Perhaps best-served of all management constituencies have been the employees. Not the least of their benefits, of course, are the year-end bonuses, which effectively double an already average compensation level.

    The foregoing description of the personnel program and the comments in Appendix 3D further illustrate the

    desirability of a Lincoln job.

    While stockholders were relegated to an inferior status by James F. Lincoln, they have done very well indeed. Recent dividends exceeded $11 a share and earnings per share have approached $30. In January 1980, the price

    of restricted stock, committed to employees, was $117 a share. By 1989, the stated value, at which the company

    will repurchase the stock if tendered, was $201. A check with the New York office of Merrill Lynch, Pierce,

    Fenner and Smith at that time revealed an estimated price on Lincoln stock of $270 a share, with none being

    offered for sale. Technically, this price applies only to the unrestricted stock owned by the Lincoln family, a few

    other major holders, and employees who have purchased it on the open market. Risk associated with Lincoln

    stock, a major determinant of stock value, is minimal because of the small amount of debt in the capital structure,

    because of an extremely stable earnings record, and because of Lincoln‟s practice of purchasing the restricted

    stock whenever employees offer it for sale. The 1995 stock sale has changed this situation dramatically. The

    stock now trades freely on the NASDAQ stock exchange.

    A Concluding Comment

    It is easy to believe that the reason for Lincoln‟s success is the excellent attitude of the employees and their willingness to work harder, faster, and more intelligently than other industrial workers. However, Sabo suggests

    that appropriate credit be given to Lincoln executives, whom he credits with carrying out the following policies:

    1. Management has limited research, development, and manufacturing to a standard product line designed to

    meet the major needs of the welding industry.

    2. New products must be reviewed by manufacturing and all producing costs verified before being approved

    by management.

    3. Purchasing is challenged to not only procure materials at the lowest cost, but also to work closely with

    engineering and manufacturing to assure that the latest innovations are implemented.

    4. Manufacturing supervision and all personnel are held accountable for reduction of scrap, energy

    conservation, and maintenance of product quality.

    5. Production control, material handling, and methods engineering are closely supervised by top management.

    6. Management has made cost reduction a way of life at Lincoln, and definite programs are established in

    many areas, including traffic and shipping, where tremendous savings can result.

    7. Management has established a sales department that is technically trained to reduce customer welding costs.

    This sales approach and other real customer services have eliminated nonessential frills and resulted in

    long-term benefits to all concerned.

    8. Management has encouraged education, technical publishing, and long-range programs that have resulted

    in industry growth, thereby assuring market potential for the Lincoln Electric Company.

    Sabo writes, “It is in a very real sense a personal and group experience in faith--a belief that together we can

    achieve results which alone would not be possible. It is not a perfect system and it is not easy. It requires

    tremendous dedication and hard work. However, it does work and the results are worth the effort.”

    As Lincoln Electric has increased its global presence it has learned just how much it can use its same philosophy of managing human resources. The company has learned that countries have important legal,

    cultural and political conditions that can influence the effectiveness and applicability of some of their practices

    and that the company needs to either adapt to them or locate in places where the differences with the U.S. are

    more modest.

This case was written by Arthur Sharplin and appears in R. S. Schuler and P. D. Buller, eds., Cases in Management, Organizational Behavior and Human Resource Management, 7th ed. (Cincinnati, Ohio: Southwestern). It is adapted here by R. S. Schuler and used with the permission of Arthur D. Sharplin.

    Exhibit C.3.1

    Main Factory Layout

Exhibit C.3.2

    Merit Rating Cards

    Increasing Quality

QUALITY

    This rating has been done jointly by your department head and the Inspection Department in the shop and with other department heads in the office and engineering.

This card rates the QUALITY of work you do. It also reflects your success in eliminating errors and in reducing scrap and waste.

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