lincoln electric case study
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1
1. Background
2. Issue• What is the main issue for Gillespie?
3. Option• What are criteria?• How do we analyze each option?
4. Recommendation• Which option is the best?
5. Execution plan• What should we consider for the execution of
recommendation?
6. Conclusion2
Table of contents
33
1. Background
1987 1988 1989 1990 1991 1992 1993 1994 1995-200
0
200
400
600
800
1,000
1,200
Net SalesNet Income
US$
Mil
lion
s
History of Lincoln Electric
Growth & Decline Revival period Post revival period
Key person George Willis Don Hastings Tony Massaro
Management policy
• Aggressive international expansion
• Frequent acquisitions• Retain Lincoln’s way
• Conduct an examination
• Hire executives with international experience
• Restructure international operations
• Build manufacturing capacity in the developing markets
• Reinforce local sales team
A severe recession in Europe and Japan
Was operating in the red
44
1. BackgroundCurrent status
• The plants in Germany, Japan, Venezuela, and Brazil were shut down
• US share was still enormous
Look for Asian markets
1987 1988 1989 1990 1991 1992 1993 1994 19950
2,000
4,000
6,000
8,000
10,000
12,000Other
Europe
U.S.
Net
sal
es (
US
$ m
illio
ns)
Plants shut down
Ongoing plants
55
2. Issue
Before the meeting between Massaro and the presidents of Lincoln’s five worldwide regions in 1996…
Issue:Decide entry strategy to expand business in Asia
1. Is Indonesia an appropriate market?2. How about profitability? 3. How should we enter?4. Is Licoln’s incentive policy adaptable?5. When should we enter?
66
3. Option
1. To build a factory in Indonesia →Reduce the production costs & better access of market
2. A wholly-owned factory or a JV?→100%: Full control and the right to all profits
→JV: Experience including good access to market
3. To adopt Lincoln’s incentive policy →Piecework, Annual bonus, Guaranteed employment,
Limited benefits
77
3. Option (1)
1. To build a factory in Indonesia →Reduce the production costs & better access of market
2. A wholly-owned factory or a JV?→100%: Full control and the right to all profits
→JV: Experience including good access to market
3. To adopt Lincoln’s incentive policy →Piecework, Annual bonus, Guaranteed employment,
Limited benefits
8
Market Analysis (Consumable)
Automatic welding process Semi-automatic welding process Stick welding process Total Market Size
Equipment Consumables
Equipment Consumables Equipment Consumables
Size (per year, in metric tons) n.a. 1,500 n.a. 5,000 n.a. 50,000 Size* 1000 * $1.35 2,025,000 6,750,000 67,500,000 76,275,000
Annual growth rate n.a. 12% n.a. 12% n.a. 9%
US$ 1996 1997 1998 1999 2000 Growth Rate
Automatic welding process 2,025,000 2,268,000 2,540,160 2,844,979 3,186,377 12.0%
Semi-automatic welding process 6,750,000 7,560,000 8,467,200 9,483,264 10,621,256 12.0%
Stick welding process 67,500,000 73,575,000 80,196,750 87,414,458 95,281,759 9.0%
CAGR(1996-2000)
Total Market Size 76,275,000 83,403,000 91,204,110 99,742,701 109,089,391 9.4%
Market size is about $76M in 1996 and CAGR(1996-2000) will be 9.4%
1996
0.0 10.0 20.0 30.0 40.0 50.0 60.0 70.0 80.0
9
Lincoln in Indonesia
Stick welding process (88%)
Semi-auto welding process (9%)
Automatic welding process (3%)
Stick welding process(0.8% MKT share)
Market size ($M/ year)
Semi-auto welding process(0% MKT share )
Automatic welding process(1.5% MKT share )
1%
45%
15%
35%
4%
40%
20%
40%50%
5%
25%
20%
Lincoln has only 2.3% of $76M
10
Profitability Analysis
$ Million 1995
Net Income 1032.4
Cost of goods sold
634.6
SGA 287.9
Gross Profit 109.9
Gross Margin 10.6%
Consolidated Lincoln Performance
Exhibit 5
Normal 20% 40%
Price $1.35 $1.35 $1.35
CostMaterials, Valuable cost and Direct labor
0.80 0.80 0.80
Shared of fixed cost including SGA and depreciation
0.20 0.17 0.14
Gross Profit 0.35 0.38 0.41
Gross Margin 25.9% 28.1% 30.4%
Exhibit 9
Cost structure of welding electrodes manufactured in
Indonesia
Lincoln estimates that Indonesia business is more profitable than the consolidated Lincoln business performance
1111
3. Option (2)
1. To build a factory in Indonesia →Reduce the production costs & better access of market
2. A wholly-owned factory or a JV?→100%: Full control and the right to all profits
→JV: Experience including good access to market
3. To adopt Lincoln’s incentive policy →Piecework, Annual bonus, Guaranteed employment,
Limited benefits
12
PEST AnalysisSituation Impact
Risk Possibility
Unstable political situation- Corruption, riots- Change regulation due to gov. change- Permit 100% foreign ownership company
Large Middle
Growing but unstable- GDP +7.3%, Inflation +9.0%→Salary increase- Chance of financial crisis, currency fluctuation- Controlled by Presidents’ relatives- Dominated by local companies
Large High
Different culture-Population 196,600,000-GDP per capita $945-Less educated labor -Islam religion → Cultural difference
Middle High
Lincoln’s product is good enough- Less sophisticated- Hand-held stick welders is common
Low Low
Politi
cs
Econo
mic
Soci
al
Tech
nolo
gy
Wholly-owned or JV
JVWholly-owned
Less than 50% More than 50%
Initial Investment(Capital)
Small Middle Large
Local access Strong Strong Weak
Management control Weak Middle Full control
Implement own strategy Difficult Middle Full control
Incentive policy Difficult Middle Full control
Right to profit In proportion to share
In proportion to share
100%
Risk control Low Middle Full control
13
1414
3. Option (3)
1. To build a factory in Indonesia →Reduce the production costs & better access of market
2. A wholly-owned factory or a JV?→100%: Full control and the right to all profits
→JV: Experience including good access to market
3. To adopt Lincoln’s incentive policy →Piecework, Annual bonus, Guaranteed employment,
Limited benefits
Incentive Policy
Hofstede’s cultural dimensions
Individualism
Masculinity
Uncertainty AvoidanceLong-term Orientation
Power Distance
0
50
100
Indonesia USA
Indones
iaUSA
Canad
a
Australi
a
France
0
20
40
60
80
Power distance
Indones
iaUSA
Canad
a
Australi
a
France
0
20
40
60
80
100
Individualism
Piece work Annual bonus Guaranteed employment Limited benefit
Succeeded Succeeded
15
1616
Recommendation (1)
1. Build a plant in Indonesia Indonesian Market is Attractive Market is not large, but a lot of room to increase Lincoln’s
market share Production in Indonesia is profitable
2. Wholly-owned factory is appropriate Indonesian market has a lot of uncertainty Wholly-owned factory has full control for risk & benefit
1717
Recommendation (2)
3. Adopt local incentive policy Piecework & annual bonus might not work in Indonesia Create an original incentive policy to fit the local tradition Set team incentive policy
USA/ Others Indonesia
Piece work OK NO
Annual bonus OK NO
Guaranteed employment OK OK
Limited benefit OK OK
Team incentive system - OK
18
Sales/Profit Forecast
1996 1997 1998 1999 2000 2001 2002 2003 2004 20050.0
2.0
4.0
6.0
8.0
10.0
12.0
Sales Profit
$US
mill
ion
s
Sales and Profit (Indonesia)Assumptions Automati
c weldingSemi-automatic welding
Stick welding
Market Growth rate
12% 12% 9%
Market Share target
Maintain 50%
8% (5 years)
8% (5 years)
Cost Plant running three shifts, normal labor Productivity
Investment • Manufacturing Plant in Indonesia (Consumables)
• Investment = $21.77MM• Construction starts and
completes in 1996.• Capacity : 7,500 tons
[Invested in 11 countries]Japan, Germany, Ireland, Italy, Netherlands, Norway, Spain, United Kingdom, Brazil, Mexico, Venezuela[1987] $195.7MM ->[1992] $435.2MM = +$239.5MM
19
Investment Analysis Investment: $21.77 million IRR: 15.3%Payback Period: 4.1 Years
Profitable enough but longer than expected break even period!!
Year 1 Year 2 Year 3 Year 4 Year 5 Year 6 Year 7 Year 8 Year 9 Year 10
($25.00)
($20.00)
($15.00)
($10.00)
($5.00)
$0.00
$5.00
$10.00
[Cash Out] [Cash In]
$US
mill
ions
Cash Flow
1996 1997 1998 1999 20000
50
100
150
200
250
300
1990 1991 1992 1993 1994 19950
50
100
150
200
250
Cash and equivalents Current deb Long-term debt
$US
mill
ions
20
Financing Plan
M&A RestructuringRepay long-term debt from
operating cash flow
Repay the long-term debt right
after cash income
Long-term debt = 0 in 1998
1996 1997 1998 1999 2000.0
200.0400.0600.0800.0
1000.01200.01400.01600.0
.010.020.030.040.050.060.070.080.090.0
Sales - U.S. Sales - Europe Sales - Other Net income
Sale
s [$
US
mill
ions
]
Net
inco
me
[$U
S m
illio
ns]
$M Sales in 1995 CAGR(1989- 95) vs 1995US 711.9 7.0% 11.0%Euro 201.7 6.8% 28.6%Other 118.8 3.2% 9.8%
[Sales Growth Assumption]US 7%, Euro 7%, Others 3% (CAGR ‘89-’95)
Sales Growth & Net income (estimation)
2121
Wait 2 years till 1998 for repaying long-term debt
No cash and much long-term debt
Economic and political risks
Enough growth in the US
Not brilliant investment in Indonesia
Execution Plan
Reasons
Y1996 Y1997 Y1998 Y1999
Decision making for the postpone of Indonesian strategy
• Market research in Asia• Look for the
consultants from Indonesian market
• Increase retained earnings from the US market
Start to construct the factory in Indonesia
Enjoy Indonesian market
22
Risk Management
Type of Risks Impact Possibility Mitigation Plan
External Political Risks Large Middle - Set up risk management office
- Maintain full controllability: Clear exit plan (wholly-owned)Economic
RisksLarge High
Internal Business Risk Middle Middle - Hire local business consultant
- Employ local business managers to adapt local practicesOperational
RisksMiddle High
2323
Management OrganizationDue to match with local culture, Indonesian COO will be
assigned Establish Risk management office to control political and
economic risk in Indonesia
Michael GillespieAsia President
Indonesian COO
Risk Management Office
Salesdepartment
Manufacturing department
Hire from outside!
2424
Issue:Decide entry strategy to expand business in Asia
Conclusion
Questions Recommendation
1.Is Indonesia an appropriate market? Yes, the market is still small, but the growth rate is high
2.How about profitability? Higher profit margin than current market
3.How should we enter? Wholly-owned is better than JV in terms of risk control
4.Is Licoln’s incentive policy adaptable? No, it should be localized and the group incentive will be adapted
5.When should we enter? Not now, the plant will be established from 1998
Enter the Indonesian market by establishing wholly owned plant with localized incentive policy from 1998
25
Q & A
26
Market ResearchBenefit for ASEAN
No/ Low tariff
2727
Financial analysis (Appendix)Have enough capability for
additional investments in financial status
Not still have much cash in hand and have long-term debt, however, although we have huge net income
0%
50%
100%
150%
200%
250%
300%
350% Equity ratioFixed assets ratioCurrent ratio
1987
1988
1989
1990
1991
1992
1993
1994
1995
-30%
-20%
-10%
0%
10%
20%
30%ROAROE
1987 1988 1989 1990 1991 1992 1993 1994 1995
-100
-50
0
50
100
150
200
250
Cash and equivalents
Long-term debt
Net income
28
Investment Analysis (Appendix)
[Assumptions for Investment Analysis]Additional revenue and cost saving• Additional revenue is from semi-auto and stick welding process (Assumed these two
segments are lower margin segments)• Tariff and shipping cost saving is from auto welding process (shift from import to
local manufacturing)• Depreciation is completed in 10 years (25% tax rate)
2929
Indonesian Market has a lot of uncertainty→ Management control is inevitable
Wholly-owned or JV
Con
trol
Risk
Entry Strategies for International Markets, 1987; 3-21
Management Contract
Financing
Licensing
Exporting
Turnkey Project
JV / Affiliate
Wholly OwnedSubsidiary
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