1 Internationalisation of Korean Enterprises Strategy & Management in the Asian Corporation Week 3.

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Internationalisation of Korean Internationalisation of Korean EnterprisesEnterprises

Strategy & Management in Strategy & Management in the Asian Corporationthe Asian Corporation

Week 3Week 3

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The start of globalisation?The start of globalisation?

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The power of the Korean firmThe power of the Korean firm

2002 Korea was2002 Korea was11th largest economy in the world in terms of GNP11th largest economy in the world in terms of GNP13th largest trading country in the world13th largest trading country in the worldDemonstrated huge economic growth in 1970s and Demonstrated huge economic growth in 1970s and 1980s1980sCannot be dissociated from ChaebolsCannot be dissociated from ChaebolsFamily run large industrial conglomerates likeFamily run large industrial conglomerates like– HyundaiHyundai– LG GroupLG Group– SamsungSamsung– DaewooDaewoo

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Defining DiversificationDefining Diversification

Chaebols are Chaebols are highlyhighly diversified diversified

Samsung has five main divisionsSamsung has five main divisions– ElectronicsElectronics– Heavy IndustryHeavy Industry– ChemicalsChemicals– Insurance & InvestmentInsurance & Investment– Other – includes hotels, golf resorts, Other – includes hotels, golf resorts,

museums, medical centres & press museums, medical centres & press agenciesagencies

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Benefits of DiversificationBenefits of Diversification

Hall & Lee (1999)Hall & Lee (1999)Diversification is a means to improving firm Diversification is a means to improving firm performance or enhancing a firm’s strategic performance or enhancing a firm’s strategic competitivenesscompetitivenessResulting in increase in profits & increase in Resulting in increase in profits & increase in firm valuefirm valueBest diversification strategyBest diversification strategy– Reinforces existing strengthsReinforces existing strengths– Creates basis for establishing new competitive Creates basis for establishing new competitive

advantagesadvantages

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Diversification MatrixDiversification Matrix

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Diversification strategiesDiversification strategies

2 international strategies2 international strategies

Increase new product lines (related Increase new product lines (related or unrelated)or unrelated)– product diversificationproduct diversification

Introduce existing products into Introduce existing products into new marketsnew markets– market diversificationmarket diversification

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Effectiveness of diversificationEffectiveness of diversification

Rumelt (Strategy, Structure & Economic Rumelt (Strategy, Structure & Economic performance - 1974)performance - 1974)Suggests related product diversification Suggests related product diversification creates greatest profitabilitycreates greatest profitability– SynergySynergy– Common skill baseCommon skill base– Easier controlEasier control

Hall & Lee – Data from 1987 - 1991Hall & Lee – Data from 1987 - 1991Unrelated product diversificationUnrelated product diversification– Reduces value in US companiesReduces value in US companies– IncreasesIncreases value in Korean companies value in Korean companies

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Uniqueness of Korean firms?Uniqueness of Korean firms?

Why should diversification increase Why should diversification increase value of Korean companies?value of Korean companies?

Do Korean companies present a new Do Korean companies present a new paradigm for corporate globalisation?paradigm for corporate globalisation?

What are the methodologies & What are the methodologies & differences in Korean corporations?differences in Korean corporations?

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The case of SamsungThe case of Samsung

Samsung globalisation phasesSamsung globalisation phases1970-75 aggressive export market development1970-75 aggressive export market development1976-80 overseas resource development to 1976-80 overseas resource development to acquire suppliesacquire supplies1980-87 building overseas production facilities 1980-87 building overseas production facilities to overcome trade barriersto overcome trade barriers1985-89 production sites in developing 1985-89 production sites in developing countries to exploit cheap labour due to falling countries to exploit cheap labour due to falling competitivenesscompetitiveness1990s expansion to China, Vietnam & Eastern 1990s expansion to China, Vietnam & Eastern EuropeEurope

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Increasing diversificationIncreasing diversification

1938 – Food sales & sugar1938 – Food sales & sugar1958 – Insurance1958 – Insurance1965 – Paper manufacture1965 – Paper manufacture1969 – Electronics1969 – Electronics1973 – Hotels1973 – Hotels1974 – Heavy Industry/petrochemicals/shipbuilding1974 – Heavy Industry/petrochemicals/shipbuilding1977 – Construction1977 – Construction1982 – Museum/baseball team1982 – Museum/baseball team1985 – Data systems1985 – Data systems1987 – Aerospace/defence systems1987 – Aerospace/defence systems1988 - Chemicals1988 - Chemicals

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Min’s Motivational FactorsMin’s Motivational Factors

Min (1985) identifies 6 motivations Min (1985) identifies 6 motivations for global policiesfor global policies– local market developmentlocal market development– saving labour cost & quota saving labour cost & quota

circumventioncircumvention– securing natural resourcessecuring natural resources– R&D outletR&D outlet– local market protectionlocal market protection– supporting plant exportsupporting plant export

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““Continuous Survival Strategy”Continuous Survival Strategy”

Lee (1995) sees Samsung has sought a Lee (1995) sees Samsung has sought a globalisation policy continuously as a globalisation policy continuously as a survival strategysurvival strategyResponds actively to strengthening of trade Responds actively to strengthening of trade barriers (eg NAFTA, EU)barriers (eg NAFTA, EU)Overseas sales subsidiaries/production Overseas sales subsidiaries/production facilities respond to local competition with facilities respond to local competition with more customer orientationmore customer orientationWage rises, high interest rates currency Wage rises, high interest rates currency upgrading causes moves to lower production upgrading causes moves to lower production costscosts

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““Continuous Survival Strategy”Continuous Survival Strategy”

Globalisation as a response to more Globalisation as a response to more liberalised domestic markets increasing liberalised domestic markets increasing competition at homecompetition at homeAlso in oligopolistic industries (eg Also in oligopolistic industries (eg electronics) companies tend to follow each electronics) companies tend to follow each other into marketsother into marketsNeed to access raw materials in short supply Need to access raw materials in short supply in Koreain KoreaAccess to advanced technology in other Access to advanced technology in other countries, built a research facility in US countries, built a research facility in US Silicon Valley in 1983Silicon Valley in 1983

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Is diversification best?Is diversification best?

Samsung strategies are logical, but…Samsung strategies are logical, but…

Could work with limited product Could work with limited product offeringsofferings

If diversification is a survival strategyIf diversification is a survival strategy

Why did Korean companies adopt this Why did Korean companies adopt this from early years?from early years?

Key is firstly politics…..Key is firstly politics…..

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Shin (1998) 3 factors of the 70sShin (1998) 3 factors of the 70sA Strong GovernmentA Strong GovernmentThe authoritarian government of President Park orchestrated The authoritarian government of President Park orchestrated technological learning through an export-drive and protection of technological learning through an export-drive and protection of the domestic market, and allocation of financial resources to the domestic market, and allocation of financial resources to companies, using the Chaebols as vehicles of technological companies, using the Chaebols as vehicles of technological transformation.transformation.ChaebolsChaebolsThey are groups of large companies in diverse industries They are groups of large companies in diverse industries controlled by a family. Six Chaebols are ranked among the controlled by a family. Six Chaebols are ranked among the world's 100 largest global enterprises. Many of them operate in world's 100 largest global enterprises. Many of them operate in technology-intensive industries.technology-intensive industries.High-quality workforce and R&D PersonnelHigh-quality workforce and R&D PersonnelKorea boasts a high educational level, with the highest ratio of Korea boasts a high educational level, with the highest ratio of high school and college graduates and lowest illiteracy. Among high school and college graduates and lowest illiteracy. Among R&D scientists, Korea has the highest ratio of PhD’s per capita, R&D scientists, Korea has the highest ratio of PhD’s per capita, most of which US educated. The Korean are hard working most of which US educated. The Korean are hard working people, the weekly work duration being 58hr/wk versus 43hr in people, the weekly work duration being 58hr/wk versus 43hr in OECD OECD

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3 “lows” of the 80s3 “lows” of the 80s

Increases in the mid-1980s was due to Increases in the mid-1980s was due to favourable trade circumstances: the favourable trade circumstances: the ‘three lows’ of ‘three lows’ of

low interest rateslow interest rates

low oil priceslow oil prices

low value of won (relative to the yen) low value of won (relative to the yen)

SOAS Economic Digest Dec 1998 - LeeSOAS Economic Digest Dec 1998 - Lee

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1970’s government policy1970’s government policy

Ahn (2001) indicates in 1970’sAhn (2001) indicates in 1970’s

Seven special industry promotion ActsSeven special industry promotion Acts

Aimed at catching up with Japanese Aimed at catching up with Japanese industryindustry

Promoted through ChaebolsPromoted through Chaebols

Creating massive economic Creating massive economic concentration in Chaebols concentration in Chaebols

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OutcomesOutcomes

1970s industrial promotion policies1970s industrial promotion policiesFavoured companies as drivers of industrialisationFavoured companies as drivers of industrialisationFavourable rates on government loans to selected Favourable rates on government loans to selected companiescompaniesCorporate structure based on single family Corporate structure based on single family leadership (nepotistic succession)leadership (nepotistic succession)Created corporate promotion of broad sectors Created corporate promotion of broad sectors Inter-corporate rivalryInter-corporate rivalryDiversification mentalityDiversification mentalityOnly independently sustainable in large companiesOnly independently sustainable in large companies

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Distorted market forces – Kim 1991Distorted market forces – Kim 1991

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2 dimensional explanations2 dimensional explanations

Song & Cho (2000) argue Song & Cho (2000) argue

Chaebols’ strategy an be explained in 2 Chaebols’ strategy an be explained in 2 dimensionsdimensions

Resource based explanationsResource based explanations

Idiosyncratic resources & capabilities Idiosyncratic resources & capabilities provide sustainable competitive advantageprovide sustainable competitive advantage

Institutional based explanationsInstitutional based explanations

Institutional isomorphism & inter-firm rivalryInstitutional isomorphism & inter-firm rivalry

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Song & Cho - conclusionsSong & Cho - conclusions

Shift of diversification strategy made by a Shift of diversification strategy made by a major competing chaebol may bring about a major competing chaebol may bring about a chain reaction from rival chaebols that want chain reaction from rival chaebols that want to maintain their competitive positions in an to maintain their competitive positions in an organizational field (institutional perspective)organizational field (institutional perspective)

without sufficient resources such as without sufficient resources such as organizational slack and intangible R&D organizational slack and intangible R&D assets, the chaebols face severe obstacles to assets, the chaebols face severe obstacles to counteract the competitor's move (resource-counteract the competitor's move (resource-based perspective)based perspective)

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Song & Cho - conclusionsSong & Cho - conclusions

The institutional view that focuses on isomorphic The institutional view that focuses on isomorphic pressures explains why many chaebols pursued pressures explains why many chaebols pursued excessive diversified expansionexcessive diversified expansionChaebols’ very low-levels of profitability (an average Chaebols’ very low-levels of profitability (an average ROI of 0.2% and 2.5% in 1996 and 1995 respectively) ROI of 0.2% and 2.5% in 1996 and 1995 respectively) suggest that efficiency was not the main concern in suggest that efficiency was not the main concern in chaebol diversificationchaebol diversificationKorean chaebols to place much higher priority on Korean chaebols to place much higher priority on growth than on efficiency or profitability because growth than on efficiency or profitability because diversified entries in response to government diversified entries in response to government industrial policy often ensured preferential treatment industrial policy often ensured preferential treatment and government protectionand government protection

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Song & Cho - conclusionsSong & Cho - conclusions

A strong emphasis on rapid growth A strong emphasis on rapid growth through diversified expansion with little through diversified expansion with little consideration of efficiency and consideration of efficiency and profitability may be justifiable in an era profitability may be justifiable in an era when the chaebols enjoyed low wages when the chaebols enjoyed low wages in low-to-mid-tech industries that were in low-to-mid-tech industries that were often sheltered from foreign often sheltered from foreign competition competition

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Indication of Growth StrategyIndication of Growth Strategy

Kim (2003) based on 92-97 dataKim (2003) based on 92-97 data

Considerable cross-border investment Considerable cross-border investment by Korean firmsby Korean firms

Ratio of foreign assets to total assetsRatio of foreign assets to total assets

Daewoo (largest dev MNC) = 45.94%Daewoo (largest dev MNC) = 45.94%

Petrolleos de Venezuela (2Petrolleos de Venezuela (2ndnd largest dev largest dev MNC) = 2.2%MNC) = 2.2%

GEC (world’s largest MNC) = 30.39%GEC (world’s largest MNC) = 30.39%

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Post 1997 reactionsPost 1997 reactions

The legacy of state directed strategic The legacy of state directed strategic policy waspolicy wasFinancially unviable ChaebolsFinancially unviable ChaebolsOssified leadership structureOssified leadership structureNo minority shareholder protectionNo minority shareholder protectionEmphasis on growth not profit only Emphasis on growth not profit only viableviable– with government financial support orwith government financial support or– in largest Chaebols (top 4)in largest Chaebols (top 4)

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Post 1997 reactionsPost 1997 reactions

The legacy of financial crisis wasThe legacy of financial crisis wasBankruptcy of several ChaebolsBankruptcy of several ChaebolsBreak-up of Daewoo (collapsed 1999)Break-up of Daewoo (collapsed 1999)IMF bailout package stressing less IMF bailout package stressing less government intervention and government intervention and restructuring of Chaebolsrestructuring of ChaebolsRestructuring evidenced as inter-Restructuring evidenced as inter-Chaebol sales of like divisions to Chaebol sales of like divisions to concentrate on core competenciesconcentrate on core competencies

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Research findingsResearch findings

Kim et al (2003) consider Hyundai & LG Group Kim et al (2003) consider Hyundai & LG Group reactions to 1997reactions to 1997LG is moving toward organizing unrelated LG is moving toward organizing unrelated businesses under the control of a holding businesses under the control of a holding company framework.company framework.By decentralizing decision-making authority to By decentralizing decision-making authority to affiliates, the holding company system is affiliates, the holding company system is expected to resolve problems arising from expected to resolve problems arising from managing unrelated businesses in a top-down managing unrelated businesses in a top-down fashion.fashion.Hyundai Motor group, which was founded as a Hyundai Motor group, which was founded as a result of Hyundai’s break-up, is an example of a result of Hyundai’s break-up, is an example of a chaebol that has pursued a cooperative structure chaebol that has pursued a cooperative structure in restructuring efforts in restructuring efforts

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The Role of R&DThe Role of R&D

Sakakibara & Cho studied the government-Sakakibara & Cho studied the government-sponsored R&D consortia in Japan & Koreasponsored R&D consortia in Japan & Korea

They note a fundamental problem with R&D They note a fundamental problem with R&D in Korea is thatin Korea is that– personal rivalry among Chaebol leaderspersonal rivalry among Chaebol leaders– limited learning opportunitieslimited learning opportunities– limited resourceslimited resources– inadequate goal settinginadequate goal setting

Created ineffective R&D consortiaCreated ineffective R&D consortia

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LG’s current strategyLG’s current strategy

LG's business activities have been guided by ideals LG's business activities have been guided by ideals of of research and developmentresearch and development, progress, and , progress, and harmony harmony LG will naturally innovate and develop the products LG will naturally innovate and develop the products and services our customers want, moving us one and services our customers want, moving us one step closer to our goal of providing the utmost value step closer to our goal of providing the utmost value LG's organizational operations respect the ingenuity LG's organizational operations respect the ingenuity and individuality of each and every employee, and individuality of each and every employee, concentrating on the cultivation of competent, concentrating on the cultivation of competent, professional personnel in every business fieldprofessional personnel in every business fieldR&D represents 2.9% of sales in 2004R&D represents 2.9% of sales in 2004R&D represents 3.6% of sales in 2005 (budgeted) R&D represents 3.6% of sales in 2005 (budgeted)

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LG according to annual report 2004LG according to annual report 2004

Securing the holding company system, Securing the holding company system, successfully creating spin-offs and successfully creating spin-offs and finalizing other pending issues. finalizing other pending issues. - Focusing on its capabilities on mainstay - Focusing on its capabilities on mainstay businesses such as electronics and businesses such as electronics and chemicals. chemicals. - Substantially expanding its investments by - Substantially expanding its investments by increasing R&D investments by 42%, increasing R&D investments by 42%, pouring in a total investment of 11.7 trillion pouring in a total investment of 11.7 trillion won, up by 26% from last year's 9.3 won, up by 26% from last year's 9.3 trillion won.trillion won.

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Samsung and R&DSamsung and R&D

To propel innovation, the company continues To propel innovation, the company continues to invest heavily for the future. to invest heavily for the future. Samsung Electronics’ 2003 capital Samsung Electronics’ 2003 capital investment of $5.6 billion was one of the investment of $5.6 billion was one of the highest in world. highest in world. In 2004, the company has allotted over $3 In 2004, the company has allotted over $3 billion in R&D and $7 billion for capital billion in R&D and $7 billion for capital improvements, including another state-of-improvements, including another state-of-the-art chip production line and an upgrade the-art chip production line and an upgrade in technology to build larger LCD panels for in technology to build larger LCD panels for television sets and computer monitors.television sets and computer monitors.