Lincoln Electric Team.

Lincoln Electric Team

What is the Best Way to Enter India?
By acquisition By Joint venture Building a new plant on its own If Lincoln Electric were to enter by acquisition, it is necessary for Lincoln to develop some type of valuation to apply to any of the Indian incumbent companies. In India in 2006, the market was booming and any significant welding acquisition would likely require paying an acquisition premium greater than Lincoln Electric had been used to paying in the past. If the Lincoln Electric were to enter by joint venture, the question is: How can Lincoln ensure its ability to make key business decisions? If the Lincoln was to build its own plant, the question is: Would the cost of starting from scratch be more than sufficiently compensated by the total control the company would enjoy?

Operation Red Elephant: Entering India
The Ador Welding Joint Venture If Lincoln Electric were to enter by acquisition, it is necessary for Lincoln to develop some type of valuation to apply to any of the Indian incumbent companies. In India in 2006, the market was booming and any significant welding acquisition would likely require paying an acquisition premium greater than Lincoln Electric had been used to paying in the past. If the Lincoln Electric were to enter by joint venture, the question is: How can Lincoln ensure its ability to make key business decisions? If the Lincoln was to build its own plant, the question is: Would the cost of starting from scratch be more than sufficiently compensated by the total control the company would enjoy?

Outline PEST Strengths and Weaknesses Organizational Structure Culture
Strategy Recommendations

Strengths & Weaknesses

Key Points Core Competencies Financials Culture & Leadership
Product mix Technical Developments innovation, technology. Customer Relations & Marketing Quality Service Operations speed Productivity efficiency Logistics Financials Culture & Leadership Management Organization Decision-making abilities A core competency is a potential foundation for any new or revised strategy. Assessment of the current financial strength of the organization must be done before thinking about strategy. A new strategy may be costly to implement, especially if it involves the purchase of assets or the acquisition of some other business. Management competence and organizational culture are required for successful strategic change. Minor attention should be given to leadership and decision-making abilities, innovation, speed, productivity, quality, service, efficiency, and applied technology processes.

Product Mix Lincoln could solve customers’ process problems and improve process productivity with its ability to combine both equipment and consumables development needs into one integrated package. Lincoln was one of only a few worldwide broad-line manufacturers of both arc welding equipment and consumable products.

Tech Development Strengths
Technological innovation allows the company to earn a price premium for many of its products. Industry leader in new market introductions and quality performance. The most aggressive, comprehensive, and successful R&D program in the welding industry Award-winning engineers were responsible for Lincoln Electric’s technological leadership in welding, and the company spent approximately 2% of sales on research and development (R&D).

Tech Development More than 50% of Lincoln Electric’s equipment sales in 2005 were generated by welding machines introduced in the previous five years. Known as “The Welding Experts,” vs. its leading competitors who chose to diversify their resources far away from welding. In 2004 began building regional engineering development centers worldwide. Shanghai and Poland in addition to its existing training and demonstration centers in Australia, Canada, Italy, Mexico Netherlands, Singapore, and Spain.

Costumer Relations Strengths
Product support and guarantees, allows the company to earn a price premium for many of its products. Customer support Training Consultation Guaranteed Cost Reduction Program The company believed that it had a competitive advantage because of its highly trained technical sales force and the support of its welding research and development staff, which allowed it to assist the consumers of its products in optimizing their welding applications. As part of the sales process, Lincoln employees visited prospective customers, evaluating their welding requirements, and made specific product recommendations together with a return-on-investment projection. The company guaranteed that the user would save money in its manufacturing process when it utilized Lincoln’s products.

Costumer Relations Weaknesses Geographical distance; logistics
The company did not have any market access at the commodity end of the market, and the company had limited in-country demonstration or after-sales support capability, which is critical in high-tech sales.

Marketing Strengths Strong brand identity Weakness
Brand recognition in the company is strong; this is reflected in the performance of the company However, in region where the company is not recognized is posses a weakness

Operations Strengths Efficiency Weaknesses Solutions oriented
Supply chain and FANUC Robotics Harris Colorific acquisition Weaknesses Maintaining operational efficiency internationally Incompatible power source Lincoln was one of only a few worldwide broad-line manufacturers of both arc welding equipment and consumable products. The benefits of producing both equipment and consumables were tied to the value of providing welding “solutions” rather than just individual products. Lincoln could solve customers’ process problems and improve process productivity with its ability to combine both equipment and consumables development needs into one integrated package. Many of Lincoln’s most advanced equipment products were produced through its supply arrangement with FANUC Robotics. These products combined a robotic arm, a welding power source, and a wire feeder to automatically produce welds using various computer software, welding fixtures and fasteners, and accessories. In 1990, the company expanded its arc welding line by purchasing Harris Calorific, a manufacturer of gas-cutting and gas welding equipment. Starting in the early 1990s the company began growing sales in the North America retail channel. In 1999 the company completed the divestiture of its motor business. In 2003 Lincoln complemented its successful line of retail products with the acquisition of the Century and Marquette welding and battery-charged brands, which had leading positions in the automotive and retail channels. In 2005, the company broadened its metal joining base when it acquired J.W. Harris Company, a privately held brazing and soldering alloys business based in Mason, Ohio. J.W. Harris was a global leader in the production of brazing and soldering alloys with about $100 million in annual sales. Harris products could be sold to Lincoln’s existing set of customers, and vice versa. Also, the introduction of Lincoln’s management system and purchasing and logistics capabilities had led to cost savings at the Harris plants. As a result, theacquisition had produced synergies on both the cost and revenue sides by 2006 Due to a combination of challenges in day-to-day manufacturing management and the lack of a strong distribution channel for its domestically produced products. Lincoln’s welding machine requirements were complicated by the power supply situation in Japan, where there were two voltages and frequencies in use. The one that caused the problem was the common use of 200 volt 3-phase power. While some Lincoln power sources ran adequately on this, the performance was impaired and Japanese customers were reluctant to pay a price premium for a product that was not optimized for their application.

Logistics Weaknesses Local production presence
Once high-end demand increased, Lincoln needed to meet the challenge of providing prompt product delivery and complete technical support without any local production presence. Lincoln was still shipping its high-end machines to Asia from Cleveland and faced long lead times to ship the products.

Is Your Unique Competency a Sound Basis for an Effective Strategy?

Inimitability 5 4 3 2 Product mix Technical Developments
Customer Relations & Marketing Operations Logistics It must be hard to copy. Don’t try to base a long-term strategy on something that your competitors can quickly copy. 1(bad) – 5(good)

Durability 3 4 5 Product mix Technical Developments
Customer Relations & Marketing Operations Logistics 3 4 5 Durability refers to the continuing value of the competence or resource. Some brand names, like Disney’s or Coca Cola’s, have enduring value. Some technologies, however, have commercial value for only a few years; then they are swept aside by new and better technologies.

Appropriability 5 4 Product mix Technical Developments
Customer Relations & Marketing Operations Logistics 5 4 This test determines who captures the value created by your competency or unique resource. In some industries, the lion’s share of profits goes to retailers, not to the companies whose ingenuity developed and produced the actual products.

Sustainability 3 4 2 Product mix Technical Developments
Customer Relations & Marketing Operations Logistics 3 4 2 Can your special resource by trumped by a substitute?

Competition

Ador Welding Ltd. $50 million in sales in 2005 with a 15% operating margin, and a portion of its shares traded on the local stock exchange. Cost-adjusted annual revenue growth rate at 20% over the next two years, which should continue with a return on capital employed at over 40%.

Ador Welding Ltd. The company has shifted some production to Silvassa, a government-created tax-free zone, and by concentrating production at a smaller number of facilities Ador had realized both economies of scale as well as tax savings. In July 2006 the company’s publicly traded shares were valued at 10.9x FY07 estimated net earnings per share, and EBITDA per share was predicted by the same local analyst to grow at a CAGR of 29% and net earnings per share to grow at a CAGR of 23% over the next two years.

Ador Welding Ltd. Ador had annual sales of crore (large values of India’s currency, the rupee, are counted in terms of crore, with one crore the same as 10,000,000 rupees). The company had produced 17,217 MT of consumable welding products in FY06, and Ador had previously constructed plant lines that could produce far more than that should the market continue to grow. Ador had in FY06 paid a dividend of 15 rupees, equal to a 4% yield on the stock.

ESAB India Over $50 million in sales in 2005.
18% operating margin in 2004 Newly Restructured New $4.6 million, 50,000 square foot, greenfield manufacturing plant The company introduced current technology, strict internal controls, staff changes, and reorganized and expanded their distribution channels.

EWOC Allows Ltd. $30 million in revenues in 2005

Smaller Competitors D & H Sécheron Indo Matsushita Anand Arc
$3.5 million in sales in 2005 Indo Matsushita Anand Arc Manufactures full range of welding consumables Claims that it produces the highest-quality electrodes in India

Competitive Superiority
Lincoln Electric Ador Welding Ltd. Esab India Product mix Technical Developments Customer Relations & Marketing Operations Logistics - Is your special competence or resource truly superior to those of competitors? As Collis and Montgomery warn, “Perhaps the greatest mistake managers make when evaluating their companies’ resources is that they do not assess them relative to competitors’.” So always rate your strength against the best of your rivals.

Since a new strategy is the point of our internal analysis, it is necessary
to assess the current financial strength of the organization. After all, a new strategy may be costly to implement, especially if it potentially involves the purchase of assets or the acquisition of some other operating company or unit. Financials

Cashflow Long-term company financial targets included sales growth at double the rate of growth in worldwide industrial production Operating margins over 15% Earnings growth of 10% annually Return on equity exceeding 20%

Cashflow To what extent are cash flows from current operations
sufficient to support a new initiative? A fast-growing company usually gobbles up cash flow from operations and then has to go hunting for outside capital to finance growth. A mature, low-growth company, in contrast, can often finance a new initiative from operating cash flow from current operations.

Access to Outside Capital
India market booming so credit may be easily accessible. Still, any significant welding acquisition would likely require paying an acquisition premium greater than Lincoln Electric had been used to paying in the past If cash flow is insufficient to finance a new strategy, the company will have to look to outside creditors and/or investors. So determine the company’s (1) borrowing capacity, (2) ability to float bonds at a reasonable rate of interest, and (3) in the event of a major initiative, its ability to attract equity capital through a sale of company stock.

Other Scheduled Plans As of 2005 the company spent approximately two-thirds of free cash flow for international expansion Your company may have already approved other capital spending projects. If it has, those might absorb all available capital. Get a list of these scheduled projects and determine the extent to which they will compete for resources with any new strategy.

Hurdle Rate A minimum internal rate of return, based upon total investment, of an initial 10% increasing to a minimum of 18% over the first 3–4 years (with synergy credits) The acquisition price was less than 8x EBITDA The hurdle rate is the minimum rate of return expected from new projects that require substantial capital investments. It is usually calculated as the enterprise’s cost of capital plus some expectation of profit.

Other Data 2005: operating income was $153.5 million and net income was $122 million on sales of $1.6 billion.

Other Data Domestic Reliance Over-forecast and spending
Extensive resources required Human capital Manufacturing The company set a series of ambitious financial goals, but meanwhile growth in its primary market of the United States would be far from sufficient to meet these goals. The company was still dependent on North America for approximately 60% of its sales, and yet other markets for welding products and consumables were growing significantly faster. The new acquisitions in Europe and Latin America that had cost $325 million suffered large operating losses, and in 1992, while the U.S. operation continued to be strongly profitable, the losses internationally were so serious that the company faced a stark choice.8 In order to pay its U.S. employees their annual bonus, the company had to borrow the money Lincoln did not enter the Japan market with sufficient resources early enough to establish an effective presence against strong local competitors.

Regional Performance Region Year ROA Total Sales (USD millions)
Total Assets (USD millions) USA and Canada 2005 0.28 1077.5 652.5 Mexico and Latin America 0.16 121.4 83.0 Europe 0.07 426.3 313.3 Asia and Astrailia 0.05 125.0 98.1 Clearly the further LE is from home, the weaker the company’s performance. LE invested in Europe only to have a .07 in ROA

Acquisition Feasibility of Ador Welding, India
# of Publicly Traded Shares 5,995,933.00 % of shareholding 44.09% Total Number of Shares 13,599,303.70 Earnings Per Share (in Rupees) 29.45 CAGR for Net EPS (2007 projected) 23% Projected FY07 Net EPS (in Rupees) Ador's public share valuation (P/E)* 10.7 *-Based on Ador's FY07 projected Earnings Ador's Price per Share

Acquisition Strategies Total # of Shares % Ownership Required
Price Per Share Acquisition Premium Total Acquisition Cost in Indian Rupees Total Acquisition Cost in US Dollars Leveraged Buyout Options 80% - Commercial 20% -LE Financing via cash Interest Expense Total Acquisition 13,599,303.70 100% 10% 5,798,071,222.79 $127,557,566.90 $102,046,053.52 $8,673,914.55 $25,511,513.38 Majority ownership 51% 2,957,016,323.63 $65,054,359.12 $52,043,487.30 $4,423,696.42 $13,010,871.82 Joint Venture 50% 2,899,035,611.40 $63,778,783.45 $51,023,026.76 $4,336,957.27 $12,755,756.69 Public Takeover (Purchase all Public Shares) 44% 2,556,369,602.13 $56,240,131.25 $44,992,105.00 $3,824,328.92 $11,248,026.25 Strategic Alliance 30% 1,739,421,366.84 $38,267,270.07 $30,613,816.06 $2,602,174.36 $7,653,454.01

2005 Revenue for Largest Competitors in $13 Billion Welding Market
Lincoln Electric’s main competitors are ESAB (European based company) and ITW (Illinois Tool Works). Lincoln Electric also owns assets in Air Liquide, the fourth largest competitor in the market. Total revenue is important, but the total net income far more important.

Industry Benchmark and Competitors
Note: ITW and EASB India earned $1.3 billion, while Lincoln Electric earned $1.6 billion. In 2005, ESAB India gain more capital from investor causing higher ROE. A huge increase of £123.6 million.

Organizational Structure

Introduction

Structural Dimension Divisional Functional Matrix Network Efficiency of resource utilization Poor Excellent Moderate Good Efficiency of time utilization Responsiveness to the environment Adaptability over time Ability to hold people accountable Environment for which best suited Heterogeneous Stable Complex Volatile Strategy for which best suited Diversified Focus/low cost Responsive-ness Innovative

Lincoln Electric Structural Dimension Divisional
Efficiency of resource utilization Poor Efficiency of time utilization Good Responsiveness to the environment Moderate Adaptability over time Ability to hold people accountable Excellent Environment for which best suited Heterogeneous Strategy for which best suited Diversified

Coordination of Mechanisms Hierarchical plans & procedures
Functional Divisional Matrix Network Division of Labor By inputs By outputs By inputs & outputs By knowledge Coordination of Mechanisms Hierarchical plans & procedures Division Gen. Mgr. & corporate staff Dual reporting relationships Cross-functional teams Decision Rights Highly centralized Separation of strategy & execution Shared Highly decentralized Boundaries Core/periphery Internal/external markets Multiple interfaces Porous & changing Importance of Informal Structure Low Modest Considerable High Politics Inter-functional Corporate-division & Interdivisional Along matrix dimensions Shifting coalitions Basis of Authority Positional & functional expertise Gen. Mngt. responsibility & resources Negotiating skills & resources Knowledge & resources

Lincoln Electric Central Issues Divisional Division of Labor
By outputs Coordination of Mechanisms Division General Manager & corporate staff Decision Rights Separation of strategy & execution Boundaries Internal/external markets Importance of Informal Structure Modest Politics Corporate-division & Interdivisional Basis of Authority General management responsibility & resources

Culture

Culture Strengths Industry-leading productivity advances through innovative human resource and incentive systems. stock ownership incentive bonuses via merit ratings Employee Advisory Board employee suggestion system The Lincoln brothers believed that capitalism could actually lead to a classless society if companies would simply provide the right incentives for individuals to fulfill their potential and richly reward those individuals based on their performance. Lincoln was one of the first companies to introduce a number of human resource innovations, several of which would eventually become standard practice across U.S. manufacturing industries. As a result of the company’s emphasis on incentive pay-for-performance, some 60% of labor costs were variable.

Culture The entrepreneurial spirit Trusting relationships
annuities for retired employees group life insurance. No lay-off policy The entrepreneurial spirit Piecework Work days Merit ratings Trusting relationships The company encouraged a highly entrepreneurial environment in its manufacturing plants. Lincoln workers managed themselves, with only one foreman in Cleveland for approximately every 68 employees There were tens of thousands of piecework tasks at Lincoln, and hence individual factory employees were given a great deal of autonomy both in solving problems and reporting their own piecework wages. merit rating, which was based in equal parts on quality, adaptability/flexibility, productivity, dependability/teamwork, and environmental health and safety. Trust was something that the company had to build up over many decades, and the no-layoff policy laid a significant foundation for that culture of trust.

Culture Weaknesses Competent executive management
Synergies of acquisitions Competent operational/functional management Incentive and bonuses The company found it difficult to find, retain, and afford competent local managers. The two sides did not always agree on how to grow the business (volume vs. profits). The company also continued to find it challenging to Attract and retain the local talent needed to build capabilities in supply chain logistics, IT, quality assurance, product development, and purchasing and sourcing. The new acquisitions in Europe and Latin America that had cost $325 million suffered large operating losses, and in 1992, while the U.S. operation continued to be strongly profitable, the losses internationally were so serious that the company faced a stark choice. In order to pay its U.S. employees their annual bonus, the company had to borrow the money

Culture Trust issues Lincoln wanted the new acquisitions to operate in Lincoln USA’s image and to be led by managers from Cleveland.

Strategy

Introduction Many executives argue that brilliant execution is more important than brilliant strategy. The reason is simple: doing is harder than dreaming, and poorly executed strategy is merely a vision of what could be. Effective implementation can prove difficult, as it requires the coordinated and appropriate efforts of individuals throughout an organization. Thus the critical task for senior managers is to define the key success activities for their organization's strategy and develop an organizational system that promotes those same activities.

Structure and Strategy
Massaro rationalized manufacturing so that some plants made consumables while others made welding machinery. The then CEO of the company, Donald Hastings, announced that henceforward the company would learn from its experience and rely more on joint ventures and strategic alliances One of the interesting features of the Indian market was that only approximately 56% of welding consumable sales were taken up by large firms that developed their own designs and technology, whereas the other approximately 44% of welding consumables were sold by over 300 small firms that immediately could try to imitate any new design on the market and try to sell it at a sharp discount.18

The Joint Venture

Negotiation Stage

Equity Structure Control of a joint venture is not something surrendered easily

Technology Transfer Important aspects include defining precisely what technologies (possibly including technologies not yet developed by either side) are to be covered in the agreement and the terms under which they are to be made available to the venture. The developing country partners hope to set bounds on the royalties and fees they will have to pay providers, especially as the technology becomes older, and to broaden the joint venture’s control over its use.

Valuation problems Each partner brings financial and other assets to the joint venture, and it is often not easy to determine what these assets are worth.

Transparency. Getting accurate data upon which to base valuations and other decisions can be very difficult in some countries, especially where accounting standards are quite different from international standards.

Conflict resolution. Disputes are virtually inevitable in a relationship as complex and dynamic as a joint venture. Spell out how disputes are to be resolved

Division of management responsibility and degree of management independence
Attempts by parent companies to micromanage an enterprise that may be thousands of miles away are doomed to failure. A better strategy is for them to set up clear operational parameters and then let the venture’s management succeed or fail on its own.

Changes in ownership shares
How should the ownership structure be changed as a joint venture matures?

Dividend policy and other financial matters
Dividend policy goes to the heart of why companies enter into joint ventures, with some companies hoping to expand and gain market share rapidly while others are striving to achieve quick increases in cash flows that they can use to support other operations.

Marketing and staffing issues
The multinational company (MNC) partner may see the joint venture as only part of a larger strategy to enter the developing country market. As a result, insistence by the MNC partner on control of key positions in the joint venture may be seen by the local partner, first, as overly expensive and, second, as an effort to marginalize it.

Operational stage

Multinationality Many joint ventures undertaken in developing countries involve large MNCs that participate in a variety of other joint ventures and run wholly owned subsidiaries elsewhere in the world. The developing country firms that are their joint venture partners, though they may be quite large by local standards, are often dwarfed by their MNC partners.

Multinationality Export rights – Typically, the MNC would prefer not to allow the joint venture to export products, which may be of inferior quality (compared with those it manufactures elsewhere), into markets already served by other manufacturing points in its own system… Tax issues – An MNC generally wishes to minimize its worldwide tax burden. This objective can dramatically affect its relations with a joint venture… Dividend and investment policies – The MNC partner may have global investment programs that involve transferring of funds from one region to another. It might, therefore, prefer to receive dividends from the joint venture instead of reinvesting earnings, a position not necessarily compatible with that of its domestic partner… Differences in partner size – The local partner is likely to be considerably smaller than the MNC partner, a difference that can have important consequences for operating the joint venture…

Ownership and control problems
One problem that frequently arises in the management of joint ventures occurs when an owner’s attitude changes…

Ownership and control problems
Product line disputes Material and component sourcing Technology utilization Cultural problems

Changing relationships
Joint ventures involve dynamic relationships, and it is almost impossible to foresee at the time of agreement just how underlying conditions might change. For example, learning takes place, and it can modify how one partner views the contributions of the other. A developing country partner often is seen at the outset as mainly contributing knowledge of local practices, and the perceived value of its contribution can decrease as the MNC partner learns more about the local setting…

Recommendations

Strategic Alliance/Greenfield Investment Hybrid
First Best Strategy

Creating a strategic alliance with Ador would give Lincoln Electric instant access to the company with the largest market share in India for welding equipment and consumables. Projected revenue growth for Ador is 20% per year for the next 2 years, with a Return on capital of 40% over the same period. Shares of the company are available on the market, the company is obviously well run, and getting a minority stake (25%) in the company should allow Lincoln Electric to utilize the excess production Ador has available in their Silvassa facility. This would enable the production of consumables locally while a greenfield facility for research, development, and equipment production is constructed.

Lincoln Electric Structural Dimension Network
Efficiency of resource utilization Good Efficiency of time utilization Excellent Responsiveness to the environment Adaptability over time Ability to hold people accountable Moderate Environment for which best suited Volatile Strategy for which best suited Innovative A network structure involves the blurring of boundaries between the organization and its environment which includes vendors, customers, and competitors. Value-added partnerships with vendors and customers, strategic alliances with competitors, and other such relationships blur what is inside and what is outside the organization. The fluidity and ease with which network structures can be adapted also means that the network structure has the advantage of being fast and responsive to environmental demands. At the same time, resources are often duplicated in network structures and accountability can be diffuse and poorly defined. A network structure is ideally suited for volatile environments that change rapidly and dramatically and when innovation is the primary basis of strategic advantage. Under more stable conditions, the network structure may not be as effective as some of the other more traditional structures.

Network Structure

Advances in technology, specifically inverter technology, will be necessary in India, given their limited access to such technology, the efficiency of this technology, and the high cost of electricity in India. This provides a huge opportunity for Lincoln Electric to capitalize on its previous technological achievements in a new market while developing newer technologies for more developed markets. Considering the levels of expansion in the countries GDP growth, the projected level of governmental infrastructure projects, and the development of several thousand miles of new oil and gas pipeline, the Indian market will be profitable through at least 2015, and most likely beyond, as these infrastructure improvements encourage further build-out.

Not a First Best Strategy
Acquisition Not a First Best Strategy

An acquisition would prove overly costly for Lincoln Electric, as the enhanced performance of the welding market would push the costs of the acquisition outside of the boundaries commonly used in justifying the acquisition of a target company. Even if the rules of acquisition were relaxed, there could be several issues in this method. The only viable acquisition target would be a large scale target, as consolidating enough of the 300 smaller competitors into a force sizable enough to rival ESAB and Ador would take far longer and be more logistically and capital intensive than other more practical strategies. Also, given Ador's organizational structure, there is no guarantee that acquiring this company would result in similar performance under LE's ownership, as the management and HR styles are different.

It has already been demonstrated, by ESAB India, that entry into the market based solely on acquisitions is not profitable in the short term. Their acquisitions strategy, started in 1988, only turned profitable in 2005 (+17 years from entry) and this was due to massive restructuring, increased capital funding, and accounting write down; for that level of capital investment a greenfield investment would be a better use of capital in both the near- and long-term.

Lincoln Electric Team.

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