Lincoln electric case study

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Lincoln electric case study

  1. 1. 1
  2. 2. Table of contents 1. 2. Background 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. Conclusion 2
  3. 3. 1. Background  History of Lincoln Electric 1,200 A severe recession in Europe and Japan US$ Millions 1,000 800 Net Sales Net Income 600 Was operating in the red 400 200 0 -200 1987 1988 1989 1990 1991 1992 1993 1994 1995 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 3
  4. 4. 1. Background  Current status Plants shut down Ongoing plants • The plants in Germany, Japan, Venezu ela, and Brazil were shut down • US share was still enormous Net sales (US$ millions) 12,000 Other 10,000 Europe 8,000 U.S. Look for Asian markets 6,000 4,000 2,000 0 1987 1988 1989 1990 1991 1992 1993 1994 1995 4
  5. 5. 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. 2. 3. 4. 5. Is Indonesia an appropriate market? How about profitability? How should we enter? Is Licoln’s incentive policy adaptable? When should we enter? 5
  6. 6. 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 6
  7. 7. 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 7
  8. 8. Market Analysis (Consumable)  Market size is about $76M in 1996 and CAGR(1996-2000) will be 9.4% 1996 Automatic welding process Semi-automatic welding process Equipment Size (per year, in metric tons) US$ Consumables 1,500 n.a. n.a. 2,025,000 Size* 1000 * $1.35 Annual growth rate Consumables Equipment Equipment Total Market Size Consumables 5,000 n.a. 6,750,000 12% n.a. n.a. Stick welding process 50,000 67,500,000 12% n.a. 76,275,000 9% 1996 1997 1998 1999 2000 Automatic welding process 2,025,000 2,268,000 2,540,160 2,844,979 3,186,377 12.0% Semi-automatic welding process 6,750,000 7,560,000 8,467,200 9,483,264 10,621,256 12.0% 67,500,000 73,575,000 80,196,750 87,414,458 95,281,759 9.0% Stick welding process Growth Rate CAGR(1996-2000) Total Market Size 76,275,000 83,403,000 91,204,110 99,742,701 109,089,391 9.4% 8
  9. 9. Lincoln in Indonesia Semi-auto welding process (9%) Market size ($M/ year) Automatic welding process (3%) Stick welding process (88%) 0.0 10.0 20.0 30.0 40.0 50.0 60.0 70.0 80.0 Stick welding process Semi-auto welding process Automatic welding process (0.8% MKT share) 4% 1% (0% MKT share ) (1.5% MKT share ) 35% 45% 0% 40% 40% 0% 20% 50% 25% 15% 20% 0% Lincoln has only 2.3% of $76M 5% 9
  10. 10. Profitability Analysis  Lincoln estimates that Indonesia business is more profitable than the consolidated Lincoln business performance Consolidated Cost structure of welding electrodes manufactured in Lincoln Performance Indonesia $ Million Net Income 1995 Normal 20% 40% 1032.4 Price $1.35 $1.35 $1.35 Cost of goods sold 634.6 Cost 0.80 0.80 0.80 SGA 287.9 0.20 0.17 0.14 0.35 0.38 0.41 25.9% 28.1% 30.4% Materials, Valuable cost and Direct labor Shared of fixed cost including SGA and depreciation Gross Profit Gross Margin 109.9 10.6% Exhibit 5 Gross Profit Gross Margin Exhibit 9 10
  11. 11. 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 11
  12. 12. PEST Analysis 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 Situation 12
  13. 13. Wholly-owned or JV JV Wholly-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
  14. 14. 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 14
  15. 15. Incentive Policy Piece work Annual bonus Guaranteed employment Limited benefit Hofstede’s cultural dimensions Power Distance Individualism 100 80 60 40 20 0 Long-term Orientation Individualism 100 80 Masculinity 60 40 20 0 Power distance 100 80 60 40 20 0 Uncertainty Avoidance Indonesia USA Succeeded Succeeded 15
  16. 16. 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 16
  17. 17. 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 - OK Team incentive system 17
  18. 18. Sales/Profit Forecast Assumptions Automati c welding Semiautomatic welding Stick welding Sales and Profit (Indonesia) 12 Market Growth rate 12% Market Share target Maintain 50% Cost Plant running three shifts, normal labor Productivity Investment 12% 8% (5 years) 9% 8% (5 years) • Manufacturing Plant in Indonesia (Consumables) • Investment = $21.77MM • Construction starts and completes in 1996. • Capacity : 7,500 tons $US millions 10 8 6 4 2 0 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 Sales Profit [Invested in 11 countries] Japan, Germany, Ireland, Italy, Netherlands, Norway, Spain, United Kingdom, Brazil, Mexico, Venezuela [1987] $195.7MM ->[1992] $435.2MM = +$239.5MM 18
  19. 19. Investment Analysis  Investment: $21.77 million  IRR: 15.3%  Payback Period: 4.1 Years $10.00 Cash Flow $5.00 Profitable enough but longer than expected break even period!! $US millions $0.00 ($5.00) Year 1 Year 2 Year 3 Year 4 Year 5 Year 6 Year 7 Year 8 Year 9 Year 10 ($10.00) ($15.00) ($20.00) ($25.00) [Cash Out] [Cash In] 19
  20. 20. Financing Plan 11. 0% 28. 6% 9. 8% [Sales Growth Assumption] US 7%, Euro 7%, Others 3% (CAGR ‘89-’95) 100.0 80.0 1000.0 60.0 40.0 500.0 20.0 .0 .0 1996 Sales -1997 U.S. Sales - Other Repay 300 longthe term debt right 250 after cash income 250 200 $US millions 1500.0 1998 1999 2000 Sales - Europe Net income Net income [$US millions] Sales Growth & Net income (estimation) Sal i 1995 C AG R(1989-95) vs 1995 es n 711. 9 7. 0% 201. 7 6. 8% 118. 8 3. 2% Sales [$US millions] $M US Euro O ther Long-term debt = 0 in 1998 200 150 150 100 100 50 50 0 0 1990 1991 Cash and equivalents M&A 1992 1993 Current deb 1994 1995 1996 1997 1998 1999 2000 Long-term debt Restructuring Repay long-term debt from operating cash flow 20
  21. 21. Execution Plan Wait 2 years till 1998 for repaying long-term debt Reasons No cash and much long-term debt Economic and political risks Enough growth in the US Not brilliant investment in Indonesia Y1996 Decision making for the postpone of Indonesian strategy Y1997 • Market research in Asia • Look for the consultants from Indonesian market • Increase retained earnings from the US market Y1998 Start to construct the factory in Indonesia Y1999 Enjoy Indonesian market 21
  22. 22. Risk Management Type of Risks External Impact Possibility Mitigation Plan Political Risks Large Middle Economic Risks Internal Large High Business Risk Middle Middle Operational Risks Middle High - Set up risk management office - Maintain full controllability: Clear exit plan (whollyowned) - Hire local business consultant - Employ local business managers to adapt local practices 22
  23. 23. Management Organization  Due to match with local culture, Indonesian COO will be assigned  Establish Risk management office to control political and economic risk in Indonesia Hire from outside! Asia President Michael Gillespie Indonesian COO Risk Management Office Sales department Manufacturing department 23
  24. 24. Conclusion Issue: Decide entry strategy to expand business in Asia 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 24
  25. 25. Q&A 25
  26. 26. Market Research Benefit for ASEAN No/ Low tariff 26
  27. 27. Financial analysis (Appendix) 30%  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 Cash and equivalents 150 10% 0% -10% -20% -30% 350% 250 200 20% Long-term debt ROA ROE 300% 250% Net income Equity ratio Fixed assets ratio Current ratio 200% 100 150% 50 100% 0 50% -50 -100 1987 1988 1989 1990 1991 1992 1993 1994 1995 0% 27
  28. 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) 28
  29. 29. Wholly-owned or JV Wholly Owned Subsidiary Management Contract JV / Affiliate Control Financing Turnkey Project Licensing Exporting Risk Indonesian Market has a lot of uncertainty → Management control is inevitable Entry Strategies for International Markets, 1987; 3-21 29

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