3 The power of the Korean firm 2002 Korea was11th largest economy in the world in terms of GNP13th largest trading country in the worldDemonstrated huge economic growth in 1970s and 1980sCannot be dissociated from ChaebolsFamily run large industrial conglomerates likeHyundaiLG GroupSamsungDaewoo
4 Defining Diversification Chaebols are highly diversifiedSamsung has five main divisionsElectronicsHeavy IndustryChemicalsInsurance & InvestmentOther – 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 competitivenessResulting in increase in profits & increase in firm valueBest diversification strategyReinforces existing strengthsCreates basis for establishing new competitive advantages
7 Diversification strategies 2 international strategiesIncrease new product lines (related or unrelated)product diversificationIntroduce existing products into new marketsmarket diversification
8 Effectiveness of diversification Rumelt (Strategy, Structure & Economic performance )Suggests related product diversification creates greatest profitabilitySynergyCommon skill baseEasier controlHall & Lee – Data fromUnrelated product diversificationReduces value in US companiesIncreases 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 developmentoverseas resource development to acquire suppliesbuilding overseas production facilities to overcome trade barriersproduction sites in developing countries to exploit cheap labour due to falling competitiveness1990s expansion to China, Vietnam & Eastern Europe
12 Min’s Motivational Factors Min (1985) identifies 6 motivations for global policieslocal market developmentsaving labour cost & quota circumventionsecuring natural resourcesR&D outletlocal market protectionsupporting plant export
13 “Continuous Survival Strategy” Lee (1995) sees Samsung has sought a globalisation policy continuously as a survival strategyResponds actively to strengthening of trade barriers (eg NAFTA, EU)Overseas sales subsidiaries/production facilities respond to local competition with more customer orientationWage 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 homeAlso in oligopolistic industries (eg electronics) companies tend to follow each other into marketsNeed to access raw materials in short supply in KoreaAccess 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 offeringsIf diversification is a survival strategyWhy 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.ChaebolsThey 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 PersonnelKorea 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 80sIncreases in the mid-1980s was due to favourable trade circumstances: the ‘three lows’ oflow interest rateslow oil priceslow 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 ActsAimed at catching up with Japanese industryPromoted through ChaebolsCreating massive economic concentration in Chaebols
19 Outcomes 1970s industrial promotion policies Favoured companies as drivers of industrialisationFavourable rates on government loans to selected companiesCorporate structure based on single family leadership (nepotistic succession)Created corporate promotion of broad sectorsInter-corporate rivalryDiversification mentalityOnly independently sustainable in large companies
21 2 dimensional explanations Song & Cho (2000) argueChaebols’ strategy an be explained in 2 dimensionsResource based explanationsIdiosyncratic resources & capabilities provide sustainable competitive advantageInstitutional based explanationsInstitutional 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 expansionChaebols’ 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 diversificationKorean 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 dataConsiderable cross-border investment by Korean firmsRatio of foreign assets to total assetsDaewoo (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 ChaebolsOssified leadership structureNo minority shareholder protectionEmphasis on growth not profit only viablewith government financial support orin largest Chaebols (top 4)
27 Post 1997 reactions The legacy of financial crisis was Bankruptcy of several ChaebolsBreak-up of Daewoo (collapsed 1999)IMF bailout package stressing less government intervention and restructuring of ChaebolsRestructuring evidenced as inter-Chaebol sales of like divisions to concentrate on core competencies
28 Research findingsKim et al (2003) consider Hyundai & LG Group reactions to 1997LG 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&DSakakibara & Cho studied the government-sponsored R&D consortia in Japan & KoreaThey note a fundamental problem with R&D in Korea is thatpersonal rivalry among Chaebol leaderslimited learning opportunitieslimited resourcesinadequate goal settingCreated ineffective R&D consortia
30 LG’s current strategyLG's business activities have been guided by ideals of research and development, progress, and harmonyLG will naturally innovate and develop the products and services our customers want, moving us one step closer to our goal of providing the utmost valueLG's organizational operations respect the ingenuity and individuality of each and every employee, concentrating on the cultivation of competent, professional personnel in every business fieldR&D represents 2.9% of sales in 2004R&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&DTo 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.