Lincoln Electric Student Example
The way a company organizes and manages its workforce has increasingly become a source of competitive advantage Summers, 1 994), and for Lincoln it is no different. Lincoln Electrics competitive advantage is their most positive aspect revealed in the assigned case study that is embodied through its rewards system and human resource management techniques, along with quality management techniques Of value innovation and continual cost reductions to make Lincoln so successful, even through hard economic times. Competitive advantage has contain ally shifted over time.
What is an advantage today may not be tomorrow; however, it seems that in the assigned case study that Lincoln Electric has created a system that makes the intention nearly irrelevant (Prefer, Whatnot, & Essentialness, 1995). Competing in an industry that is highly price-competitive and where price variations on standard items amounts to only one to two percent it immediately creates a realization that to sustain continual high performance, Lincoln Electric must have a business model built on creating a continual competitive advantage (Lincoln Electric, 1994).
A competitive advantage is formed when a firm can add value through a strategy that isn’t being simultaneously implemented by a competitor or is able to do so where another firm has failed to duplicate the benefits of such strategy Assonance’s, 2008). The human resource techniques used at Lincoln Electric are a major key to its success and are what has helped drive Lincoln Electrics ability to gain a competitive advantage and continual high performance.
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It is suggested that there are sixteen different elements that help a company achieve a competitive advantage through its people to include: incentive pay, high wages, employment security, selectivity in recruiting, employee ownership, information sharing, participation and empowerment, promotion from within, training and skill development, symbolic egalitarianism, wage compression, names and job redesign, cross-utilization and cross-training, long-term perspective, measurement of the practices, and overarching philosophy (Summers, 1994).
From the assigned case study on Lincoln Electric, nearly every one of these techniques is being utilized, especially incentive pay, high and cross-utilization/ cross-training. One of the basic functions of Lincoln Electrics management system is a incentive-based compensation for employees (Houses, 1995). The incentive system is a key driver/ element used at Lincoln Electric that drives the employee’s high productivity (Brown, 1992).
In the case study, it is revealed hat Lincoln incentive pay system utilizes four elements that are suggested to be vital to success: it eliminates raises based upon seniority or cost-of- living, places everyone on some form of incentive pay, gradually increases the pay percentage, and it utilizes quality and customer satisfaction (Brown, 1992). The incentive system at Lincoln Electric rates employees on output, quality, dependability and ideas/ cooperation (Harris & Klein, 1993). Throughout this case study, we see fact after fact indicating the importance of the piecework pay incentive system utilized at Lincoln Electric (Harris &
Klein, 1993) and how it keeps the employees motivated. One example shown in the case study is the interview with Jimmy Roberts, a 47 year old drill press operator, who stated that the bonus distribution plan along with biweekly pay Were the reasons for such high productivity (Lincoln Electric, 1994). Pay at Lincoln Electric is industry leading, and hourly shop workers with a high school education can earn around ninety thousand dollars a year between hourly pay and incentives/ bonus pay (Harris & Klein, 1993) and this has helped form a company with a highly motivated workforce (Schuler &
MacMillan, 1984). Tying into the reward compensation system, beyond the piece-work pay, is the ability to obtain additional wages through knowledge sharing/ suggestions. According to the case study, the value of suggestions for improvements results in recommendations for high performance scores that ultimately determine an individual’s incentive bonus amount (Lincoln Electric, 1994). This type of system of “pay-for-knowledge” promotes investment in firm-specific human capital that has helped improve organizational productivity though a workforce that is both multi;skilled and flexible (Guthrie, 2000).
A study conducted by Guthrie (2000) revealed that the pay systems that were primarily “skilled based” (primarily incentive based plans) were far less likely to have employee turnover than those jobs that were group based (strictly wage based plans), thus reinforcing the elemental need to gain a competitive advantage (Summer, 1994) such as that seen at in the assigned case study on Lincoln Electric.
Tying into this concept of a reward compensation system is the notable fact mentioned in the case study that Lincoln Electrics employees earn nearly twice as much a year as other factory workers in the Cleveland, Ohio area Lincoln electric 1994). This accounts for the second element that Lincoln Electrics management meets in creating a competitive advantage. Lincoln Electrics wage system, part from hourly pay and part from the previously mentioned incentive pay, meets the need of Masses,/s (Theory Z) hierarchy need of self-actualization (an individual’s need for success) (Harris & Klein, 1993).
Since this is the last step on Mascots hierarchy this indicated that all other needs are met below it as well (Harris & Klein, 1 993) and since Lincoln Electric meets its employees needs they feel no urgency to leave the company which leads us into the third key human resource element that creates a competitive advantage for Lincoln Electric: long-term, stable employment (summers, 1994). Lincoln Electrics quality management utilizes a continual practice of long- term employment security that has also been a key element of its competitive success (Katz, 1998).
Motivating employees can take many forms and the difference between some of the best managed companies versus other companies is their individual methods of implementing their accompanied management techniques (Harris & Klein, 1993). In this case study it mentions that Lincoln Electric has not laid anyone off since World War II (Lincoln Electric, 1 994) which encompasses part of the accompanied management technique of motivating through superb human resource management (Lincoln Electric, 1994).
Additional proof is given of a stable workforce in the case study showing that turnover is less than four percent for employees who have been on the job for eighteen months or longer (Lincoln Electric, 1994). Not laying anyone off for over forty years and the use of a guaranteed employment policy has created a waiting list of applicants at Lincoln Electric since nineteen hundred ND thirty-three (Harris & Klein, 1993).
There are negative consequences of down (right) sizing, using contingent work forces, minimizing labor costs, outsourcing, and temporary/contract workers (Stevens, 2001 ) which Lincoln has managed to avoid through its practice of guaranteed employment. The use of this policy has created a proclamation that people are Lincoln most valuable assets (Stevens, 2001) which is reinforced by the founding principles of the company that after the customer the employee is the second most important person, even above the stockholders (Lincoln Electric, 1994).
The fourth element that is observed in the assigned case study is that of its Lincoln Electrics selective job placement/ recruitment processes. Competitive pressures, greater recognition of human resources as a potential source of competitive advantage, and changing workforce demographics have made the hiring process more vigorous than ever for management (Boswell, Rolling, Lupine, & Monomania, 2003).
The case study of Lincoln Electric reveals a company policy of promotion from within since nineteen- forty-four, that external hiring is only permitted for entry-level positions, and hat final selection of job candidates is made by the hiring supervisor after a committee consisting of the Vice Presidents and supervisors interview candidates and is approved by the personnel department (Lincoln Electric, 1994).
Harris and Clinker (1993) give an additional account to the process in that it is a very vigorous one where each applicant is first screened by personnel and then is interviewed by four vice presidents who must all agree on the applicant. Each applicant is judged on their desire for success, evidence of dependability, and skills valuable to the current job (Harris &
Clinker, 1993). It is suggested that management circles for a long time have known that promoting from within is good for employee morale and further more is beneficial to the company since the employee is already familiar with the ins-and-outs of the company and is well acclimated to its overall culture (Hoist & Klein, 2002).
Since opportunity for promotion or advancement appears to be an important driver of attraction it is evident that this conceptual element is very apart of the Lincoln Electric accompanied management process that has helped it to maintain a competitive advantage (Boswell, et al. 2003). This also covers the element of promotion from within Summers’ (1994) sixteen elements to promote a company’s competitive advantage. Another competitive advantage element that is evident in the assigned case study on Lincoln Electric is the promotion of employee ownership.
First the Company promotes an employee stock ownership plan that has resulted in employee ownership of fifty percent of the common stock with seventy-five percent of the employees participating in the program (Lincoln Electric, 1994). A project at HP experimented with the use of stock payments as an incentive here it stock was offered for meeting completion dates and the ending result was that the project was completed six months ahead of time (Beer, Cannon, Baron, & Dailey, 2004).
While a survey at the conclusion of the experiment revealed that seventy percent of the employees felt they would have worked just as hard on the project without the incentive program, sixty percent of the employees surveyed recommended that incentive programs be used with other projects at HP (Beer, Cannon, Baron, & Dailey, 2004) providing further support that stock ownership can promote growth and a competitive advantage as a whole.
Second the case study on Lincoln electric reveals that employee ownership is utilized through idea sharing and employee suggestions (Lincoln Electric, 1994). This point focuses on employee ownership as well as information sharing, and the participation and empowerment of Summers’ (1994) sixteen factors that help a company’s competitive advantage. From the earliest years of the company James Lincoln encouraged employees to be involved and promoted an employee “Advisory Board” that has met every two weeks with the Chief Executive Officer (Lincoln Electric, 1994).
It is suggested for employees to remain engaged and productive that their input be respected by management which encourages employees to participate in decision- making and creates a sense of belonging, thereby increasing their engagement and participation in future growth Of the company (Marko’s & survived, 2010). Empirical evidence in a study of advisory boards backed the theory that advisory boards help promote growth in at least a small way with eighty-three percent stating that it was at least somewhat effective to very effective and only seventeen percent stating it was a waste of time (Morsel & Poster, 2002).
Additionally a number of studies have found positive relationships between employee engagement (such as Lincoln Electrics employee Advisory Board) and increased organizational performance (Marko’s & Survived, 2010). It is apparent that the advisory board suggestions have had an influence on Lincoln Electrics success, with nearly where fifty out of two to three hundred suggestions are implemented on a monthly basis (Harris & Clinker, 1993).
Supplemental support can be made in the fact that Lincoln Electric continually reveals dividends to stock holders that exceeded eleven dollars a share and eave reached nearly thirty dollars per share (Lincoln Electric, 1994). A more subtle, yet still evident, element of Lincoln Electrics quality management that promotes a competitive advantage is its promotion of training and development. Harrington (1998) states that to maintain a company’s most valuable resource, its people, training is necessary.
Reality is that no company can maintain high performance without a knowledgeable workforce. In the Lincoln Electric Case study production workers are given a short on-the-job training when first hired, sale agents, already college radiates, are given on-the-job training in the plant, which helps them sell products and reduce welding costs, followed by a period of work and training at one of the regional sales offices (Lincoln Electric, 1994).
Giving employees appropriate training to perform their job functions increases core skills and knowledge which in turn increases their confidence allowing them to work with very little if any supervision (Marko’s & Survived, 2010). This may be evidence as to why Lincoln is able to retain high performance while first line supervisors generally supervise any. Veer up to a hundred employees with animal interaction as stated in the case study (Lincoln Electric, 1994).
Previous studies have shown that training has a positive impact on organizational performance and is associated with a company’s productivity and profitability (Hansson, 2007). An empirical study, utilizing four different mathematically tested models resulted in a the coefficient of the “training variable” that remained positive through all four models giving evidential proof that company training is linked to higher performance on a accompanied level (Danville del Valley, ?Engel Aster Castillo, Rodriguez-Treated, 009).
Additionally the case study points out that Lincoln Electric created a welding school in nineteen-seventeen on the recommendations of the Advisory board that is still in existence today, adding to continual education and the ability to learn and understand the company’s primary products that revolve around the welding industry (Lincoln Electric, 1994).
Saba, a Lincoln Electric Vice president, is quoted at the conclusion of the case study stating “Management has encouraged education, technical publishing, and long range programs that have resulted in industry growth, thereby assuring racket potential for The Lincoln Electric Company’ further emphasizing Lincoln Electric commitment to training and knowledge that has help it maintain its high performance over the years; an element made in Summers’ (1994) key elements to maintaining a competitive advantage.
Symbolic egalitarianism, while not defined directly, is definitely revealed in the assigned case study on Lincoln Electric. Many firms that are known for achieving and sustaining a competitive advantage have some form of an egalitarianism environment according to Prefer, Whatnot, & Essentialness (1995). Symbolic egalitarianism is promoting equality; it is a way of signaling o both the internal and external environment that the company has comparative equality (Prefer, Whatnot, & Essentialness, 1995).
In the case study there is mention of one cafeteria where both blue collar and white collar employees all eat in the same cafeteria and there are no reserved parking spaces either, even one of the vice presidents has to park on the far end of the parking lot when arriving late one morning after giving on off-site speech that morning (Lincoln Electric, 1994). Another company who also utilizes both Of these same characteristics is ANNUM where the executive dining room was laminated, everyone eats together and there are also no “reserved” parking spaces (Prefer, Whatnot, & Essentialness, 1995) both signs of egalitarianism.
Symbolic egalitarianism helps promote a competitive advantage because there are no status distinctions to overcome and information/ ideas are more free-flowing (Prefer, Hating, & Essentialness, 1995). Another way Lincoln Electric promotes competitive advantage that has helped them maintain high performance is through their lack of a corporate structure. While, it is pointed out within the assigned case study that at one point business school researchers created an organizational chart, management felt it was disruptive and no formal chart is used within the company today (Lincoln Electric, 1994).
Also, the aforementioned employee stock purchase plan can also be considered a form of symbolic egalitarianism. There is evidence cited by companies showing that employees believe the existence of such stock ownership plans and other profit-sharing plans do in fact promote egalitarianism within their company (Moran, 2010). Empirical evidence also suggests that open office layouts encourage and facilitate inter- class interaction by reducing both status differentials and physical barriers (Moran, 2010).
The case analysis alludes to the old plant of Lincoln Electric that runs like “clockwork” because of integrated layout and non-exclusivity of the design which helps to additionally support the fact that Lincoln Electrics high performance through competitive advantage is obtained through use of symbolic forms of egalitarianism. Wage compression is somewhat interpreted in the assigned case analysis on Lincoln Electric.
At Lincoln Electric base pay is deemphasized and the reward pay system is emphasized more greatly, as seen in the fact that some employees make up to ninety thousand dollars a year on base wages that anger no more than nine to sixteen dollars an hour (Harris & Klein, 1993). Even at sixteen dollars an hour at forty hours per week for fifty-two weeks of pay that only amounts to roughly thirty-three-thousand dollars a year at the top and for those on the low end (nine dollar an hour) that’s roughly on nineteen-thousand a year.
This means that someone making ninety thousand dollars a year at Lincoln Electric earns only twenty to thirty-seven percent of their pay from hourly pay and anywhere from sixty three to eighty percent of their pay from the compensation system. Since workers from new hires to hose close to retirement are all condensed into a base salary range between nineteen and thirty-three thousand dollars this signifies that there is in fact wage compression at Lincoln Electric with emphasis on pay being directed towards the piecework pay system.
According to the case study incentive pay has actually averaged ninety percent of pay since nineteen hundred thirty-four and the average worker makes just over sixteen dollars an hour which is about two dollars better than the average manufacturing wage in Cleveland, Ohio (Lincoln Electric, 1994). One Of the benefits of Wage compression is that it fuels high performance commendations; people are not constantly worried about their compensation, whether they are getting paid enough, and are not continually focusing on re-bargaining their pay scale (Prefer, Hating, & Essentialness, 1995).
A 2002 study investigated wage dispersion and training in Europe finding that training was more frequent when wage compression was higher (Hansson, 2007) emphasizing the earlier point of Lincoln Electric promotions of training. This study shows direct relation between wage compressions and training revealing that workers are more knowledgeable and well trained hen wages are compressed, both pointed out in the Lincoln Electric case study.
The overall De-emphasis on pay through wage compression helps employees focus more on organizational goals and creating meaningful colleague relationship that work towards organizational success, producing higher overall performance (Prefer, Hating, & Essentialness, 1995). Other elements included in Summers’ (1994) key elements to maintaining a competitive advantage, which is the prime component of Lincoln Electrics abilities to maintain continually high performance are: teams and job redesign and cross-utilization and cross-training.
Teams and job redesign, as well as cross-utilization/ cross-training aren’t really focused on within the case study assigned on Lincoln electric however it is an essential element in today’s ever changing global environment (Limit, T;KC, Kemp, 2008). According to Harrington (1998) Lincoln Electric does invest heavily in cross-training employees in many different aspects in an effort to make employees more valuable to the company.
While the case study did not mention anything about cross-training another case study points out that at Lincoln Electric nearly everyone must complete the welding program; since it is the Meany’s main product line and to graduate from the program a requirement is that the attendee must materialize a recommendation of how to innovate the product (Prefer, Hating, & Essentialness, 1995). Long-term perspective and measurement of practices were not directly pointed at within the assigned Lincoln case study either but are implied within it.
Lincoln could not have the long-term, high performance it has had without looking to the future and continually reengaging itself to measure its standards of practice. Overreaching philosophy is another topic not directly it upon in the case analysis of Lincoln Electric but this philosophy is one of bringing everything together. Various things from sales, to training, to production, to finance are all discussed within the analysis and this underlining principle is a must for any company to succeed, because if the left hand and right hand don’t work together then little can get accomplished.
Beyond these competitive advantage elements described there are a few other notable items revealed in the case study that promote Lincoln Electrics continued high performance over the years to include: value innovation, costs deduction, avoiding an employee union workshop, and no long-term debt (Lincoln Electric, 1994). Value innovation is essentially the simultaneous pursuit of differentiation and low cost (Leave, 2005).
The case study shows instances of Lincoln Electric differentiating itself from the competition in the advancement of its small motors as well as its contribution in the welding Inner-Shield process. Additionally, it is mentioned within the case study that cost reduction programs are in place around many areas including shipping, cost reductions around material procurement and purchasing, accountability o reduce scrap, energy conservation, and maintain overall initial product quality (Lincoln Electric, 1994) which all contribute to providing low costs, high quality products to end consumers.
It is noted that value innovation can occur anywhere within a company’s activities to include: products, services, delivery, costs, pricing, and the business model itself (Leave, 2005). Another minor item that can be considered minor contributions to the high performance of Lincoln Electric in the case study is the avoidance of employee unions.
In the assigned case study James Lincoln was quoted as eying that Unions selfishly attempt “to better its position at the expense of the people it must serve” but understood that it was a “natural reactions of human beings” to counter the abuses of management with abuses of their own and emphasized that labor and management are “not warring camps; they are parts of one organization in which they must, and should, cooperate fully and happily’ (Lincoln Electric, 1 994); a founding management strategy that has warded off any attempt for employees to unionize.
Strong evidence is supported suggesting that higher union coverage within a company educes investment opportunities and are more capital intensive than those firms that are Nan-unionized (Brogans, Deere, & Tracy, 1994). Avoiding union of the labor force has allowed Lincoln Electric to avoid these capital intensive investments. Finally management’s ability to keep the company running with no long- term debt accrual is evident in the assigned case study on Lincoln Electric that has helped to contribute to their high performance.
When there is an unexpected shortfall of cash flow within a company empirical studies have shown that there is a significant negative price reaction for outstanding debt ND equity (Achieve & Easter-wood, 1997). Additional empirical studies show that firms that secure more debt tend to record lower earnings within that fiscal year and the year following (Achieve & Sisterhood, 1997).
In the assigned case study it is noted that risk associated with Lincoln Electric stock is minimal because the company has little debt in capital structure, extremely stable earnings year after year which encourages investments in the company, until nineteen-eighty Lincoln Electric borrowed no money, and currently liabilities consist mainly of accounts payable and short-term accruals (Lincoln Electric, 1994). These practices have helped the company maintain high performance as cash flow is available to keep the company running, like a “well-oiled machine”.
The number Of things Lincoln Electric does that helps drive its high performance seems almost endless. More than sixteen different quality management elements that help drive Lincoln Electrics competitive advantage have already been identified. The key to any business is the ability to adapt and change; this has helped Lincoln Electric maintain the high performance demonstrated in the assigned case study. Even some of the aforementioned topics, such as training, could always be improved upon.
Having an understanding of certain potential weaknesses observed in the case study will allow for recommendations to be made that can aid in Lincoln Electrics continued high performance levels. Recommendations for Continued Success Lincoln Electric is no doubt innovative in its management techniques but there are a number of concerns that are addressed throughout the assigned case study including: incentive system, education and advancement, and employee power. While each of these has been represented as the Lincoln
Electrics strengths, it is recognized that a company maintains a competitive advantage though readdressing the source of the competitive advantage (Prefer, Hating, & Essentialness, 1995), or in other-words’ realign company strategy to maintain competitive advantage as markets change. A simple change in economic or industry conditions can change a company’s source of competitive advantage (Consonants, 2008), even when certain management practices have been uncontested in the past.
In the assigned Lincoln Electric case study this was evident during the three year recession room nineteen-hundred eighty-one to nineteen-hundred eighty three when sales plummeted thirty percent one year and then another sixteen percent the proceeding year, and through strategic adaptive change the company prevailed without laying off one single worker (Lincoln Electric, 1994). Recent uncertainty has surfaced in regards to the supply of finances with the sub- prime crisis of 2008 (Assonance’s, 2008) along with a changing global economy over the past two decades promote additional need for companies to remain flexible and adaptive.
It is recommended that focus of restructuring Lincoln Electrics management practices around these three key areas will help Lincoln Electric remain adaptive to future cyclical changes: . Incentive system – Wages, Bonuses, & Benefits There are a few key indicators within the case study on Lincoln Electric that point to some concern over the current wage and incentive pay systems. Based on the contradictions even within the case study it is surprising how successful Lincoln incentive pay system has been in the past.
The case study point outs that, while the past percentage of bonus pay has resulted in high compensation, employees expressed concerns that the bonuses arena rising n accordance with profits and that today’s workforce is sharing in a bonus pool that is higher than in the last few decades (Lincoln Electric, 1994). Expectancy theory predicts that bonus pools that are based on a predetermined percentage will be more effective and empirical studies have proven that when a bonus pool is set as a percentage of company revenue it significantly increases revenue and thus the money allocated to the bonus pool (Long, 2000).
Based on this study it is recommended, that to maintain the current employee satisfaction and to allow employees greater access to refit sharing, that Lincoln Electric create a formula for profit sharing where a pre-determined mathematical formula will levy the size of the bonus pool so that employees have a guarantee of the percentage that they will receive to help improve moral.