Joining forces Featured

8:00pm EDT September 25, 2008

As you walk through the glass entry doors at the world headquarters of Lincoln Electric Holdings Inc., you’ll see beautiful portraits of the company’s founders and past leaders, but you’ll also read in large letters, “The actual is limited. The possible is immense.”

It’s a pretty good saying, especially for a company so committed to reaching results. In the last three years, Chairman, President and CEO John M. Stropki has led his team through eight acquisitions and joint ventures while also training hundreds of employees around the world in Six Sigma. In addition to those efforts, Stropki and his team have increased training efforts in environmental, health and safety areas, and they’ve strengthened communication and employee development initiatives.

While Stropki and his team certainly accomplished a lot in the last three years, their focus was just as the phrase on the wall suggests — limited. There are hundreds of initiatives or directions that the welding parts manufacturer and reseller could pursue in any given year. But to get a measurable improvement out of any of them, Stropki says you need a plan — a short one.

It doesn’t sound like rocket science, but the company had struggled with larger strategic plans in the past.

“It was a very high-level plan, of which there was very little communication throughout the organization to all the people who really had to do all the heavy lifting to get the work done,” he says.

In order to be more effective, he and his team created a three-year strategic plan in 2004. The company would focus its efforts on recruiting top talent, increasing customer service, improving operational efficiency, expanding globally and fostering innovation from 2005 through 2007.

This plan proved successful. In 2004, Lincoln Electric had net sales of $1.33 billion. By 2007, that number was $2.28 billion. Diluted earnings per share in that same time period increased from $2.06 to $4.67.

“We had great financial results,” Stropki says. “Some of that was we had good wind at our back from the economic model — more wind than we expected — and, secondly, we executed on certain elements of the plan in ways that were more successful than we thought they’d be.”

A $1 billion revenue increase in just three years is impressive, but he didn’t bask in the glory of success. Instead, before the plan was even finished, his team went hard to work creating a 2008 to 2010 strategic plan to take Lincoln Electric to the next level of success.

Create your plan

When it comes to creating a strategic plan, time is important. If you look too far out, it’s easy to get sidetracked, but if you make it too short, then you may find your team failing at the execution portion. Stropki and his team decided to do their planning in three-year intervals.

“It’s a compromise,” he says. “A lot of companies have five-year strategic plans. You can’t look that far out. The markets are too dynamic, and there are too many changes. You can have certain things that you can recognize are five-year or 10-year kind of journeys, but you can’t quantify what you want to accomplish in those time periods.”

Once you’ve decided on a time frame, then you have to look at what you actually want to do during that time. There are a lot of different projects and initiatives that your business could run with, so you have to first decide what’s most important to focus on.

“What we tried to do is take a look at our organization and say, ‘Where are we strong? Where are we weak? Where can we improve? What do we get from that improvement?’” Stropki says. “There are a lot of things you can do or you can identify that can be done, but you always have to make choices in regards to what those priorities are and the amount of time and the resources that you have and what gives the best return to shareholders.”

It’s crucial that you have a process that promotes people expressing their opinions and ideas.

“We recognize that, as a group, we succeed or fail,” he says. “In order to be able to do that, all people’s opinions have to be expressed in order to come to a consensus of where we should be spending our time and energy.”

If you don’t allow everyone to share in the creation of the plan, then ultimately they won’t buy in to it.

“If they don’t buy in to the plan, then how are they going to go back to their constituents and say, ‘This is what we’re going to do,’ if they don’t believe in that on their own?” Stropki says.

He also notes that not every idea will be used, but every idea can be heard. To get every idea, you have to include many people in the debate.

“You’ve got to involve more people — not less people — because you want to get the ideas of people, and you have got to get the buy-in of people,” he says. “If people are handed a plan of which they did not help create, they are not going to buy in as you want them to buy in.”

This also requires getting a large cross section of the company involved when you’re planning.

“That doesn’t mean you can involve everyone in the organization,” he says. “It’s not practical, but you have to rely on enough people within the organization that they really have the breadth of knowledge of the people, the markets, the dynamics that are going to be important as far as the plan is concerned. It can’t be a person’s plan. It can’t be a few persons’ plan. It has to be enough of the organization that you’re really capturing the thoughts and the experience of the people that are going to make the plan work.”

For Lincoln Electric, each of the company’s five regions was represented in the planning process along with the corporate executives.

After they put the initial plan together, he sent each of the regional leaders back out into their respective parts of the world to get more input from all of their people.

“They went back to their regions and said, ‘OK, with these elements, what do we need to do within our region to accomplish the corporate objectives, which obviously have financial implication associated with it, and what are we going to do to adapt this?’”

They collaboratively worked with each of their staffs to develop those specific initiatives to focus on in order to accomplish the bigger strategy.

“Then they come back and presented it to us and do some consulting and consolidating of the ideas to be sure that we feel we can achieve the objectives, and that those rolled up objectives are going to reach the corporate objectives,” he says.

The number of people you need to involve in the creation of a strategic plan varies from business to business, but Stropki offered some insight into how to know if you were right after the fact.

“You know based on what you get as a final plan,” he says. “You’ll see that when you go to communicate that plan whether people are enthusiastic about it. Most importantly, you’ll know when you’re done — did you accomplish what you set out to accomplish? If you didn’t, chances are it’s because you didn’t have the right information in the creation of the plan.”

Stay accountable

As you begin executing the plan that you’ve created, you have to find ways to hold you and your team accountable.

“There’s a lot of follow-up to this,” Stropki says. “The plan isn’t a document that can go get tucked into a drawer and forgotten.”

He says that Lincoln previously did that, so to avoid that pitfall again, Stropki and his team created metrics.

“First, you’re going to have financial metrics,” he says. “We have shareholders who demand return on their investment. It’s pretty easy to look out over that three-year horizon and identify what those expectations are.”

Lincoln Electric is in the S&P 400 MidCap category, so he looks at available financial data about what the expectations are for earnings growth as a baseline, but then he pushes it a little bit because he wants to reward his shareholders better than the baseline.

Beyond external data, creating a solid financial metric starts with earnings per share, which starts with sales growth.

“You get sales growth, and from that, you want to get some operational efficiency within the margin expansion,” Stropki says. “So you start with sales growth. You say, ‘OK, we expect to grow our revenues 10 percent this year. Where are we going to get that?’”

He says you may have to raise prices if your costs have gone up or just to capture more margin.

“You have got to look at your business and say, ‘What are we doing that we should do better?’” he says. “With that, ‘How are we going to get some benefit from higher sales through operational efficiencies and grow margin expansion through that element of the business?’”

With your financial metrics established, start establishing other measurements.

“Once you establish the financial metrics, it’s pretty easy then to break those down into increments that will drive those financial metrics,” Stropki says.

For example, if his team talks about customer service, they look at their fill rates or inventory levels and ask themselves if they’re where they should be, and if they aren’t, what needs to happen to get there.

“You can pretty well lock in those metrics and then hold yourself accountable to them,” he says.

“Financial metrics we look at every month. Some of the other metrics are longer term and are going to be looked at less frequently. Customer service metrics are looked at sometimes daily. There’s different elements of the metrics depending on what the metric is that you measure and how frequently that you review it and how frequently you’re measuring it.”

It can be challenging to hold yourself responsible for looking at so many metrics, so often you need someone else to be accountable for achieving the results. Stropki depends on his board of directors for this and says whether you’re public or private, you should have a group of people to hold you accountable along the way. Each member gets copies of the plan, and at least annually, the members will hold Stropki and his team to the metrics established.

“Be open and honest with your board,” he says. “... You never want your board members to be surprised by something you had imminent knowledge of and didn’t share. You share the good, bad and ugly. Then you have the responsibility of walking the board through how you captured the success or where you failed or how you’re going to adjust your strategies to make up for any mistakes that you made or any challenges that have been presented to the business that you didn’t expect were going to be there.”

Providing them with accurate data is crucial.

“If I don’t get them the data that they need to be able to provide that advice that we need, I’m wasting my shareholders money, my board members’ and our management’s time,” he says.

Stropki also says that you need to make sure your board has the knowledge and experience to actually help you.

“Find those areas where you as the chairman or your management team lacks experience and expertise, and bring in a board member that can provide some experience and expertise that would be valuable to you,” he says.

Lastly, on top of having a board holding him accountable, he also meets at least twice a year for detailed meetings with his managers. In some regions that might mean three times a year. In the Cleveland headquarters, that means monthly because he’s here more. The chief financial officer is always in on those meetings for checking numbers, and Stropki may bring in the heads of functional areas, such as engineering or human resources, to those meetings if there’s a particular issue he wants to focus on.

While the board holds Stropki and his team accountable, and he’s continuously meeting with top managers to keep them going, there’s still other people around the world that need to keep working at making sure goals are achieved. For Lincoln employees, it often comes down to one simple thing — pay. For example, with U.S. employees, 57 percent of their 2007 wages were paid in profit-sharing. Every employee in the company participates in a profit-sharing program, and last year, the company’s gross bonus pool totaled $82.4 million, which meant 3,000 Cleveland employees received an average of nearly $27,000 each.

“If you know that the success of the company is going to determine a big share of what your overall compensation is going to be, you want to know what you can do to contribute successfully to that.”

Continue improving

While you work on achieving the different elements of your strategic plan, it’s important to keep in mind that a plan isn’t static.

“It has to be tweaked and advanced as you go through the process,” Stropki says. “You have to have that kind of debate openly in order to be able to do that.”

Sometimes you’ll have to make changes to both your goals and metrics if the economy enters a recession. On the other end, sometimes the markets are in your favor, so you have to be more aggressive. Be mindful though that sometimes you may think you’re doing better than you really are if the market is in your favor.

“You have to really be objective in looking at the organization and recognize that sometimes you’ve been successful despite yourself, and the weaknesses that are inherited in the organization are still there. ... Don’t overlook the weaknesses or the opportunities that you have, and really continue to stretch the element of that.”

Lastly, as new things come up, you have to be willing to commit additional resources to those new plans.

“Be it people resources, facilities, funding, whatever it happens to be, you have to be prepared then to make those kinds of commitments or else the plan can’t succeed,” Stropki says.

He and his team do a lot of work developing that along the way.

“You don’t want to give someone the challenge of doing a plan and then say, ‘By the way, there’s no resource here to make it work,” he says.

Even if you allocate all the resources you can and have the best-laid plans, you may not accomplish everything that you set out to do. Those places you didn’t achieve are often good starting points for creating your next plan.

“People, for example, you can’t build all the people programs that you want to be the number or quality or development ... in three years, so you continue to carry forward with it, but you take a step back and always recognize where you were and where you have yet to go,” Stropki says.

You should also start creating your next plan before you finish your current one.

“There’s no real stop and finish,” Stropki says. “Even before you’re done with this, you formally start working about a year before the existing plan expires. Even when the old plan expires, you’re working on the existing plan where you’re updating it, tweaking it — it’s a continuous process. The only period of time where you’re not creating is right there in the middle — then you’re in pure execution, and you’re really driving, and you never stop executing, and you never stop creating.”

He says that sometimes it can be a challenge to balance executing one plan while creating another.

“The biggest challenge is focus and commitment on the time side,” Stropki says. “These things take a lot of time. If it’s not an urgent situation, it’s easy to put it off, but again, that’s where the board accountability comes into place, and you’ve got hard deadlines. If you have to present a plan to the board, it should be done.”

As you look toward the future, try new things to make sure your plan continues to grow your business. When Stropki and his team sat down to create the 2008-2010 plan, they brought in an outside facilitator to help ensure they got some fresh ideas.

“We just thought it’d be a good idea to have somebody come in and maybe he could listen in a little different way than we were listening and throw out some ideas in which they had some experience in working with some other organization that we didn’t have,” Stropki says.

No matter who’s involved or what you’re brainstorming about, it’s also important to make sure that as you create a plan for the next phase and while you’re working on the current plan that you do not settle with what you’ve already achieved.

“You’ve got to continue to challenge yourself,” Stropki says. “We have a tendency that the more successful we’ve been, the more you take for granted, and you can’t do that. The dose of reality you get out of that won’t be a very good dose.”

HOW TO REACH: Lincoln Electric Holdings Inc., (216) 481-8100 or www.lincolnelectric.com