BUSI 690 Week 1 Rothaermel Exercise 1 Example

Lincoln Electric Through Rothaermel's First Five Chapters: Strategy, Stakeholders, Industry Forces, Resources and Performance

Introduction

Lincoln Electric Holdings, Inc. was founded in Cleveland in 1895 and today designs and manufactures arc welding and cutting equipment, the consumable wires and electrodes those machines burn, brazing and soldering alloys, and automated welding cells for factories (Lincoln Electric Holdings, Inc., 2026). It reports three segments: Americas Welding, International Welding and The Harris Products Group. In 2025 it sold $4.23 billion of products and earned $718.1 million in operating income. Rothaermel (2015) defines strategy as the set of goal-directed actions a firm takes to gain and sustain superior performance relative to competitors. This exercise applies the first five chapters of the text to Lincoln and argues one thesis: Lincoln's advantage rests less on any single product than on a production culture, built over a century around pay for output and a bonus tied to company results, that is valuable, rare and very hard to copy. The sections that follow test that claim against the company's stakeholders, its industry, its internal resources and its recent results.

Chapter 1: What Lincoln's Strategy Is

Rothaermel (2015) explains that a good strategy has three parts: a diagnosis of the competitive challenge, a guiding policy for meeting it and a set of coherent actions. Lincoln's diagnosis is that welding is a mature, cyclical market in which customers buy mostly on reliability, productivity and the cost of the finished weld, and in which consumables generate repeat revenue long after the machine is sold. Its guiding policy is to be the productivity partner for fabricators, offering equipment, consumables and automation as one system and supporting customers with application engineers. The coherent actions follow: factories in most of the regions it serves so that wire and electrodes reach customers cheaply, a steady flow of acquisitions in automation, and an employee bonus program that rewards output and quality. The competitive advantage that results shows up in operating margins near 17 percent in two of the last three years, high for an industrial manufacturer selling into construction, energy and heavy equipment markets that swing with the economy.

Chapter 2: Strategic Leadership and Stakeholders

Chapter 2 asks how leaders formulate and carry out strategy and whose interests they must weigh. Lincoln's leaders balance the claims summarized below.

Rothaermel (2015) distinguishes a strategy planned from the top from one that emerges through the decisions of people closer to the work. Lincoln shows both. Its acquisitions in automation are planned at the top, while much of its productivity gain has historically emerged from workers who, paid for good output, find faster methods on their own. The leadership task is to keep the planned moves from disturbing the emergent engine; an acquisition that brought in workers on a different pay system, for example, would need careful integration.

Chapter 3: External Analysis

A PESTEL scan shows the forces outside the industry. Politically, tariffs on imported steel and on welding equipment change both Lincoln's input costs and the prices of foreign rivals. Economically, demand tracks industrial production, construction and energy investment, which explains the dip in 2024 sales. Sociocultural pressure comes from a shrinking pool of skilled welders in the United States, which raises demand for automation. Technologically, robotic and collaborative welding cells, laser processes and software that monitors weld quality are reshaping what customers buy. Ecological concerns appear as customer demands for lower-emission fabrication, and legal factors include product safety and fume exposure rules.

Porter's five forces, as Rothaermel (2015) presents them, give the industry view. The threat of entry is low, because a new firm would need a global plant network, distributor relationships and decades of certified welding procedures. The power of buyers is moderate: large fabricators and automakers negotiate hard, but switching welding processes requires requalifying procedures, which raises the cost of leaving a supplier. Supplier power is moderate, since steel and copper are commodities but their prices move sharply. The threat of substitutes is low to moderate; adhesives, mechanical fastening and new joining methods compete in some uses, but no substitute matches welding for structural steel. Rivalry is moderate. Lincoln's 10-K describes relatively few global broad-line competitors but many smaller regional ones (Lincoln Electric Holdings, Inc., 2026). On balance the industry is reasonably attractive for an established leader, and the force most likely to change is the pressure from automation, which could favor firms able to sell complete robotic systems.

Chapter 4: Internal Analysis

Chapter 4 moves inside the firm. The resource-based argument of Barney (1991) holds that a firm keeps its edge only through resources that customers value, rivals lack and nobody can cheaply copy or replace, and Rothaermel (2015) turns that into the VRIO test, adding whether the firm is organized to capture the value. Applied to Lincoln's incentive management system, the test gives a clear result. The system is valuable, because pay tied to output encourages productivity and quality that lower the cost of each unit. It is rare: few manufacturers pay most production workers this way. It is costly to imitate, because it depends on decades of trust that management will not cut piece rates when workers become faster, a history a rival cannot buy. Lazear (2000) gives the mechanism hard numbers: after a windshield replacement firm began paying its installers per unit instead of per hour, each installer's average daily output climbed 44 percent, and he traced about half of that gain to incumbents speeding up and the rest to a change in who chose to join the firm and stay. What a competitor can copy is the pay formula; what it cannot copy is a century of workers believing the formula will be honored. Finally, Lincoln is organized to capture the value, with merit ratings, a bonus pool and management practices that support the system.

On Lincoln's value chain, the system touches primary activities most directly, especially operations, where output and quality are measured, and service, where application engineers help customers weld faster. Support activities such as human resource management and procurement are arranged around it. Other resources pass parts of the test but not all of it: Lincoln's brand is valuable but shared with strong rivals, and its plant network is valuable but could be copied with enough capital.

Chapter 5: Competitive Advantage, Firm Performance and Business Models

Rothaermel (2015) measures competitive advantage through accounting profitability, shareholder value and economic value creation, and he recommends a balanced view. Lincoln's accounting results for the last three years appear below.

Source: Lincoln Electric Holdings, Inc. (2026).

Two patterns stand out. First, when sales fell about 4 percent in 2024, gross margin actually rose, and operating margin fell only a little more than a point. Part of the explanation is visible in the bonus line, which fell by about $26 million as results weakened. Because a meaningful share of labor cost moves with company performance, Lincoln's costs flex downward in a slow year more than a fixed-wage manufacturer's would. Second, the company returns much of its cash to shareholders, which suggests management sees limited need for large internal investments beyond its automation acquisitions.

The business model behind these results is a razor-and-blade structure in which equipment sales create years of consumable purchases, wrapped in a service offering. Teece (2010) adds that the logic connecting what customers pay to what the firm earns is itself something competitors may copy, so a model protects profits only when some part of it resists imitation. Lincoln's model is protected by the same culture that passes the VRIO test: consumables made efficiently by motivated workers earn steady margins.

Ethical and Social Issue: Is Pay for Output Fair in a Downturn?

Output-linked pay raises a fair question. In a recession, workers' bonuses shrink even if they work as hard as ever, so part of the business cycle's risk is shifted from shareholders to employees. Critics could call this unfair. Lincoln's historical answer has been to pair variable pay with a commitment to employment security for longer-serving workers, so that employees bear some income risk but not the risk of losing their jobs. Scripture supports this kind of balance. James condemns owners who hold back what their harvesters earned, saying the unpaid wages themselves cry out (English Standard Version Bible, 2001/2016, James 5:4), and Paul, instructing Timothy, treats a worker's pay as something owed rather than granted (English Standard Version Bible, 2001/2016, 1 Timothy 5:18). A system that pays for real output, explains its formula openly and protects jobs in hard years can meet that standard. The test for Lincoln is to keep the formula transparent as it acquires companies whose workers did not grow up with it.

Strategy Term Project Implications

For a strategy term project, the analysis points to one recommendation. Lincoln should treat its incentive culture as the core of its automation strategy rather than as a legacy of its manual welding past. Automated cells reduce the number of welders a customer needs, but they increase the value of the technicians who program and maintain them, and Lincoln can extend its pay-for-output philosophy to those roles inside its own plants and service teams. Doing so would carry the company's hardest-to-imitate resource into the fastest-changing part of its industry, where advantage is still being decided.

Conclusion

Rothaermel's first five chapters show Lincoln Electric as a company in a moderately attractive industry whose results exceed what its markets alone would explain. The five forces explain why the industry is stable; the VRIO test explains why Lincoln does better than most firms in it. Its margins, steady even in a weak year, reflect a business model that turns equipment into recurring consumable sales and a cost structure that bends with demand. The ethical tension in its pay system is real but manageable, and the company's future advantage depends on carrying that culture into automation.

References

Barney, J. (1991). Firm resources and sustained competitive advantage. Journal of Management, 17(1), 99-120. https://doi.org/10.1177/014920639101700108

English Standard Version Bible. (2016). Crossway. (Original work published 2001)

Lazear, E. P. (2000). Performance pay and productivity. American Economic Review, 90(5), 1346-1361. https://doi.org/10.1257/aer.90.5.1346

Lincoln Electric Holdings, Inc. (2026). Annual report on Form 10-K for the fiscal year ended December 31, 2025. U.S. Securities and Exchange Commission. https://www.sec.gov/Archives/edgar/data/59527/000005952726000006/leco-20251231x10k.htm

Rothaermel, F. T. (2015). Strategic management: Concepts and cases (2nd ed.). McGraw-Hill Education.

Teece, D. J. (2010). Business models, business strategy and innovation. Long Range Planning, 43(2-3), 172-194. https://doi.org/10.1016/j.lrp.2009.07.003