Global strategy of LG Electronics as a leading Korean company

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1 Global strategy of LG Electronics as a leading Korean company Tomikazu Hiraga Senior research Fellow NLI Research Institute Economic recovery in advanced countries including Japan is still sluggish, although corporate financial performance has been recovering gradually. And companies whose business activities in emerging countries experiencing an economic boom account for a larger proportion tend to show better financial performance. Leading Korean companies have a larger presence in the world market and attract considerable attention. I will focus on LG Electronics, Inc., a leading company ranking with Samsung Electronics Co., Ltd. in the world s electrical and electronics industries, with the largest market share in home appliances markets in important emerging countries, such as India, Brazil, and Indonesia, and relatively advanced management methods including corporate governance, which are highly valued, and will discuss features or important points of its global management and personnel strategy in this article. (Reference: Exchange rates as of August 5, 2010 were as follows. The Japanese yen/korean won foreign exchange rate was approximately to the Korean won. The Japanese yen/indian rupee rate was approximately 1.87 to the Indian rupee. ) Leading Korean zaibatsu The LG group The Korean zaibatsu (chaebol), a unique large companies group, is very influential in Korea s corporate sector. Top 28 companies by market capitalization other than public corporations account for 58 percent in the aggregate market value (Korea Composite Stock Price Index: KOSPI) at the end of 2009 and most of those companies belong to zaibatsu company groups. Striking features of the zaibatsu are as follows: 1. Many zaibatu started as a family company. 2. Zaibatsu leaders and their relatives and affiliated companies are major shareholders. 3. Share holding relationships are complicated. 4. Zaibatsu companies are engaged in businesses in diversified business areas. Table 1 shows changes of companies groups and the LG group has occupied a higher position, although some groups failed or are downgraded due to the Asian currency and financial crisis in 1997 and Also its LG s leader is in the third generation ahead of 1

2 other major zaibatsu and he introduced a holding company system, aiming at clarifying the structure of owning and controlling group companies. Total assets of the LG group with 53 affiliated companies reach 78.9 trillion won, the fourth largest in Korea s private sector (following Samsung, Hyundai Automobile and SK) and combined market capitalization of the group s leading four companies (LG Corp., (a holding company), LG Electronics, LG Display, and LG Chem.) accounted for approximately seven percent of the aggregate market value (KOSPI) at the end of LG Corp., a group s core company, controls three large segments, that is, electronics, chemicals, and telecommunications and services. Among these, LG Electronics plays a central role in the electronics segment. However, the group expects LG Chemistry to play a heightened role in its battery business, one of the most important and promising business areas. Management policy of Harmony and solidarity, Respect for human beings Features of LG group s management policies are as flows: 1. Relatives including the zaibatsu leader, large shareholders, carried out corporate management in collaboration 2. Its extent of diversification of business lines is relatively limited and electronics and chemicals businesses have grown mainly. 3. The group s management has abided by its management policies of considering human beings first ( Harmony and solidarity, Respect for human beings ) and the group was the first zaibatsu to start recruiting employees publicly. Thus it has actively wrestled with the appointment and training of promising staff to be professional managers. 4. The group is said to have fewer relationships with politicians and less reliance on them. As a result, it managed to grow its businesses and concentrate management resources by its own policies and strategies. In Korea, many companies face difficulties in dealing with unions and labor strikes. However, both employers and employees agreed on a pay increase for 20 years in a row without any offensive negotiations in LG Electronics (NNA for March 9, 2009). The situation is different from Samsung Electronics which does not have a labor union. The February 26, 2005 issue of the Toyo Keizai describes corporate culture of the leading zaibatsu as Samsung s management, Hyundai s guts, and LG s harmony and solidarity. 2

3 LGE ranked fourth in its industry in Global 500 LGE has five segments: Home Entertainment (TVs and audio products), Mobile Communications (cellular phones and handsets), Home Appliance (home appliances), Air Conditioning, and Business Solutions (monitors, commercial displays for hotels, equipment for automobiles, and security solutions). LGE has expanded into approximately 80 countries and the number of employees exceeds 80 thousand. Its consolidated financial results (FY 2009) and position in the industry are as follows: Sales: 73.0 trillion won (a 15.3 percent increase year over year) Operating profit: 4.2 trillion won (a 3.6 percent increase y-o-y), operating profit margin: 5.8 percent Net profit: 2.8 trillion won (a percent increase y-o-y) Total assets: 44.8 trillion won (equity capital: 17.2 trillion won) LGE was ranked fourth in its industry in 2009 Fortune Global 500 in terms of sales volume, behind first-place Siemens, second-place Samsung Electronics, and Hitachi and ahead of Panasonic and Toshiba, which were ranked fifth and sixth, respectively. LGE s TVs or cellular phones market share and respective position in terms of sales volume in 2009 in the world. LGE had the second largest market share in terms of TV sales (the same 12.4 percent share as SONY. Samsung Electronics had the largest share of 23.3 percent.) and the third largest share in cellular phones sales(10.5 percent. It was behind Nokia (38.3 percent) and Samsung (20.1 percent)). The company is one of the companies with the largest market share with respect to refrigerators, air conditioners, washing machines, microwaves in the world and is the leading home appliance supplier in growth markets including India, Brazil, and Indonesia. Its overseas sales account for 88 percent in its overall sales and is at a higher level in comparison to competing Japanese manufacturers (SONY: 74 percent, Panasonic:47 percent, and Sharp:48 percent). This is largely because Korea s domestic market is not large enough for the company to expand its businesses. Strategic features of its global management are as follows: 1. Selection of growth markets based on long -range plans 2. Prompt and bold decisions to expand into new markets and concentration of management resources 3

4 3. Decisions by local offices on development, locally designed products, building a sales network and internationalization of headquarters 4. Effective sales promotions with emphasis on its brand name I would like to examine those points by citing concrete examples and touch upon its expansion into India, a typical success case in an important market. Expansion into India with can-do attitudes Its main markets targeted for growth have been those of emerging countries with large potential for growth and fewer strong rivals. LGE expanded into India with the second largest population in the world and a younger age structure and longer population bonus period in 1997 (establishment of LG Electronics India, LGE s fully owned subsidiary). Although many of its rival companies including Japanese companies exported their products from home countries to India at that time, LGE started producing products at its factories ahead of the rivals and acquired a competitive advantage. LGE placed a priority on strategic advantages of taking the lead and determined it without hesitation, despite insufficient infrastructure with respect to operations of the factories, product distribution, or representatives daily lives. The company has marketed a series of products, fully taking into accounts consumers tastes and regional needs or features, including TVs which work in an unstable voltage situation, various kinds of colorful and flowery and lockable refrigerators with large crispers for vegetarians and cooler cases for women s cosmetics, TVs with on-screen display options in ten regional languages, washing machines with a "sari" (a national female costume) cycle, and microwave ovens with cooking menus including 77 kinds of Indian dishes. Its products attract customers attention. Also it markets low-end products, while marketing high-end products at the same time in order to increase brand images, in relation to its brand strategy. Furthermore, it has made efforts to establish sales and service offices, building a network of offices across India. Expatriates dispatched from Korea (around 30 people) are mainly involved in the strategic matters or so,and it has employed many talented local employees who knew markets and consumers since its start of local production. The company has actively made use of such local human resources with respect to sales of products and customer service, or development and design of products. (Its R&D center has 3,000 engineers now and plans to hire 2,000 more engineers) 4

5 The organization has been operated by local staff over a long time and heads of personnel and sales and marketing divisions are Indians. The company has introduced an evaluation system on a performance basis which is understood and acceptable by local employees and welfare program including welfare facilities, trying to motivate such employees. On the other hand, there are some points to be noted with respect to representatives dispatched from Korea. First of all, the head of the local subsidiary has held the position since the creation of the subsidiary over a long time and made efforts to enable the company s business to take root and expand from a longer point of view. Secondly, many Korean representatives are accompanied by their families and it appears easier for them to commit to their work, unlike Japanese representatives, many of whom are employees working away from their families in Japan. Furthermore, when it comes to marketing methods on raising company s awareness or corporate image, LGE places more emphasis on concentration and efficiency effects in each market than Samsung Electronics which seems to address the methods worldwide. As a result, it becomes a sponsor for cricket events which is very popular in India, as sports marketing rooted in the region. Additionally, LGE has two factories (It will start another new factory shortly.) and one R & D center in India. Although the company s total investment amounts to approximately 13 billion rupees, it plans to spend 15 billion rupees to expand its production as a production and export base in accordance with its worldwide strategy, not just for sales in India. Sales in its Indian business stood at billion rupees in 2009, accounting for approximately six percent in LGE s total sales. It plans to increase the percentage to 12 percent in 2015, which will exceed the proportion of Korea. Making use of local human resources and inner internationalization on a HQ basis I would like to pay attention to features of LGE s personnel strategy. First of all, making use of foreign human resources (local human resources and those without Korean nationality). The company tries to cut the number of representatives dispatched from Korea in various overseas offices considerably and employs many local staff members and promotes some of them to a higher position. Furthermore, capable officers and employees without Korean nationality are recruited in its headquarters positively. Seven out of 13 executive officers, the highest level of officers, who are in charge of material business operations including marketing, procurement, supply 5

6 chain, HRM and strategy, do not have Korean nationality. This shows that its personnel system has been internationalized to a large extent. It is often said that how foreigners can show their abilities is closely connected with internationalization of headquarters (internationalization at home) and therefore it is important and necessary. It appears that the company s method is advanced on this point. That is, the Company employed many translators in order to support Korean employees who were not good at preparing English documents, when it made English its common language in the company. This was a measure to help the system to take root. Also the company says that employees average TOEIC score is said to be over 900 (excluding R & D staff who is required to have technical expertise, rather than language expertise), although high TOEIC scores of new employees of the company are often talked about. (The average score including such R & D staff is between 800 and 850.) It is said that there is a rule inside the company that there is no need to reply if an message in Korean is sent to an overseas office from its headquarters. It is reported that Rakuten and FAST RETAILING will make English the common language and I consider it important for those companies to create a mechanism to pay close attention to or support employees in order to help the system to take root and function efficiently, like LGE does. LGE and other leading companies including Samsung Electronics and Hyundai Motor have taken similar measures, including targeting emerging markets with large growth potential and fewer strong rivals ahead of them and concentrating management resources on its business there, launching products timely, taking into accounts consumers tastes and regional needs or features, valuing a brand image, and making good use of foreign human resources, despite differences about where to place emphasis on or which method to take. Especially features or strength of Korean companies lies in their can-do attitudes of cultivating a new market ahead of others, despite adverse conditions of insufficient infrastructure. On the other hand, companies utilize and maintain their strength, when responding to changes in their business environment properly. It is impossible to continue success by using the same business model and method. On this point, skillful responses of such Korean companies, which are sandwiched between companies of advanced countries including Japan and those of China, may not function properly and they may face a 6

7 difficult situation in the future. Actually LGE s operating profit plunged in the second quarter of FY 2010 due to intensified competition in the world s smartphone industry. I consider it necessary to watch responses of LGE and Samsung Electronics, while Japanese major companies start making more efforts to cultivate emerging markets. Also the corporate culture of Samsung s management and LG s harmony and solidarity and any changes in their culture in the future, and any connections with their financial results arouse my interest. (This is an unofficial English translation of the original Japanese report which was published in September, 2010 issue of Gekkan Gurobaru Keiei (monthly Global Management) by Japan Overseas Enterprises Association.) 7