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

2. The start of globalisation?

3. The power of the Korean firm
2002 Korea was
11th largest economy in the world in terms of GNP
13th largest trading country in the world
Demonstrated huge economic growth in 1970s and 1980s
Cannot be dissociated from Chaebols
Family run large industrial conglomerates like
Hyundai
LG Group
Samsung
Daewoo

4. Defining Diversification
Chaebols are highly diversified
Samsung has five main divisions
Electronics
Heavy Industry
Chemicals
Insurance & Investment
Other – includes hotels, golf resorts, museums, medical centres & press agencies

5. Benefits of Diversification
Hall & Lee (1999)
Diversification is a means to improving firm performance or enhancing a firm’s strategic competitiveness
Resulting in increase in profits & increase in firm value
Best diversification strategy
Reinforces existing strengths
Creates basis for establishing new competitive advantages

6. Diversification Matrix

7. Diversification strategies
2 international strategies
Increase new product lines (related or unrelated)
product diversification
Introduce existing products into new markets
market diversification

8. Effectiveness of diversification
Rumelt (Strategy, Structure & Economic performance )
Suggests related product diversification creates greatest profitability
Synergy
Common skill base
Easier control
Hall & Lee – Data from
Unrelated product diversification
Reduces value in US companies
Increases value in Korean companies

9. Uniqueness of Korean firms?
Why should diversification increase value of Korean companies?
Do Korean companies present a new paradigm for corporate globalisation?
What are the methodologies & differences in Korean corporations?

10. The case of Samsung Samsung globalisation phases
aggressive export market development
overseas resource development to acquire supplies
building overseas production facilities to overcome trade barriers
production sites in developing countries to exploit cheap labour due to falling competitiveness
1990s expansion to China, Vietnam & Eastern Europe

11. Increasing diversification
1938 – Food sales & sugar
1958 – Insurance
1965 – Paper manufacture
1969 – Electronics
1973 – Hotels
1974 – Heavy Industry/petrochemicals/shipbuilding
1977 – Construction
1982 – Museum/baseball team
1985 – Data systems
1987 – Aerospace/defence systems
Chemicals

12. Min’s Motivational Factors
Min (1985) identifies 6 motivations for global policies
local market development
saving labour cost & quota circumvention
securing natural resources
R&D outlet
local market protection
supporting plant export

13. “Continuous Survival Strategy”
Lee (1995) sees Samsung has sought a globalisation policy continuously as a survival strategy
Responds actively to strengthening of trade barriers (eg NAFTA, EU)
Overseas sales subsidiaries/production facilities respond to local competition with more customer orientation
Wage rises, high interest rates currency upgrading causes moves to lower production costs

14. “Continuous Survival Strategy”
Globalisation as a response to more liberalised domestic markets increasing competition at home
Also in oligopolistic industries (eg electronics) companies tend to follow each other into markets
Need to access raw materials in short supply in Korea
Access to advanced technology in other countries, built a research facility in US Silicon Valley in 1983

15. Is diversification best?
Samsung strategies are logical, but…
Could work with limited product offerings
If diversification is a survival strategy
Why did Korean companies adopt this from early years?
Key is firstly politics…..

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

17. 3 “lows” of the 80s
Increases in the mid-1980s was due to favourable trade circumstances: the ‘three lows’ of
low interest rates
low oil prices
low value of won (relative to the yen)
SOAS Economic Digest Dec Lee

18. 1970’s government policy Ahn (2001) indicates in 1970’s
Seven special industry promotion Acts
Aimed at catching up with Japanese industry
Promoted through Chaebols
Creating massive economic concentration in Chaebols

19. Outcomes 1970s industrial promotion policies
Favoured companies as drivers of industrialisation
Favourable rates on government loans to selected companies
Corporate structure based on single family leadership (nepotistic succession)
Created corporate promotion of broad sectors
Inter-corporate rivalry
Diversification mentality
Only independently sustainable in large companies

20. Distorted market forces – Kim 1991

21. 2 dimensional explanations
Song & Cho (2000) argue
Chaebols’ strategy an be explained in 2 dimensions
Resource based explanations
Idiosyncratic resources & capabilities provide sustainable competitive advantage
Institutional based explanations
Institutional isomorphism & inter-firm rivalry

22. Song & Cho - conclusions
Shift of diversification strategy made by a major competing chaebol may bring about a chain reaction from rival chaebols that want to maintain their competitive positions in an organizational field (institutional perspective)
without sufficient resources such as organizational slack and intangible R&D assets, the chaebols face severe obstacles to counteract the competitor's move (resource-based perspective)

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

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

25. Indication of Growth Strategy
Kim (2003) based on data
Considerable cross-border investment by Korean firms
Ratio of foreign assets to total assets
Daewoo (largest dev MNC) = 45.94%
Petrolleos de Venezuela (2nd largest dev MNC) = 2.2%
GEC (world’s largest MNC) = 30.39%

26. Post 1997 reactions The legacy of state directed strategic policy was
Financially unviable Chaebols
Ossified leadership structure
No minority shareholder protection
Emphasis on growth not profit only viable
with government financial support or
in largest Chaebols (top 4)

27. Post 1997 reactions The legacy of financial crisis was
Bankruptcy of several Chaebols
Break-up of Daewoo (collapsed 1999)
IMF bailout package stressing less government intervention and restructuring of Chaebols
Restructuring evidenced as inter-Chaebol sales of like divisions to concentrate on core competencies

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

29. The Role of R&D
Sakakibara & Cho studied the government-sponsored R&D consortia in Japan & Korea
They note a fundamental problem with R&D in Korea is that
personal rivalry among Chaebol leaders
limited learning opportunities
limited resources
inadequate goal setting
Created ineffective R&D consortia

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

31. LG according to annual report 2004
Securing the holding company system, successfully creating spin-offs and finalizing other pending issues. - Focusing on its capabilities on mainstay businesses such as electronics and chemicals. - Substantially expanding its investments by increasing R&D investments by 42%, pouring in a total investment of 11.7 trillion won, up by 26% from last year's 9.3 trillion won.

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