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 firms strategic competitiveness Resulting in increase in profits & increase in firm value Best diversification strategy –Reinforces existing strengths –Creates basis for establishing new competitive advantages
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 - 1974) Suggests related product diversification creates greatest profitability –Synergy –Common skill base –Easier control Hall & Lee – Data from 1987 - 1991 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 1970-75 aggressive export market development 1976-80 overseas resource development to acquire supplies 1980-87 building overseas production facilities to overcome trade barriers 1985-89 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 1988 - Chemicals
12 Mins 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 PhDs 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 1998 - Lee
18 1970s government policy Ahn (2001) indicates in 1970s 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
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 92-97 data Considerable cross-border investment by Korean firms Ratio of foreign assets to total assets Daewoo (largest dev MNC) = 45.94% Petrolleos de Venezuela (2 nd largest dev MNC) = 2.2% GEC (worlds 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 Hyundais 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 LGs 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.