Alliances commonly known as collaborations are mutual agreements between business entities to share resources and knowledge to expand their operations across borders. Following Globalization and liberalization of economic policies of many countries, accessibility of internal markets have become easier and all business conglomerates have taken the opportunity to gain entry into global markets and increase their business activities. The strategies formulated for entry into foreign markets varies from takeovers, collaborations, acquisition and mergers or setting up plants or retail outlets in other countries. Joint Ventures are preferred over independent establishments as expansion strategies as domestic partners are more familiar with the culture of the host country and are accepted easily by the local people. Therefore strategic alliances can be understood as a partnership entered into by two firms with a preconceived strategy to establish their business in different parts of the world. The choice of the partner in an alliance depends upon the expansion strategy; it may be for upgrading technological systems, for gaining market access or for cheaper raw material and labor. However the learning outcomes of both the partners in an alliance may not be the same (Hamel, G. 1991 87). Also the same research findings indicate that in spite of collaboration, competition between partners may exist and longevity of an alliance does not necessarily indicate its success. Alliances may be dissolved after a period of time when the objectives of both the partners are fulfilled.
South Korea had aimed at economic development through export oriented industrialization that concentrated on the production of goods in which a country has a comparative advantage. Rather than investing time and money to build up local demand for products, Korean firms focused on exporting goods to established foreign markets (Powers, C. M. 2010, 106). Since the investment of firms were controlled by Government, the export products were manufactured by Chaebols – Business conglomerates whose contribution in South Korea’s Economy is tremendous. The paper discusses the origin and functioning of the Chaebol within the Korean Culture and focuses on the operations of a South Korean Conglomerate, LGE. It also discusses the Human Resource Management of LGE to cope with its strategic alliances worldwide.
Origin, Purpose and Organization of Chaebols
South Korea was primarily an agricultural country until its annexation with Japan. South Korea had vast resources of natural wealth and to process this as raw material Japan had to build their own factories without any formal ownership rights. The local people had no opportunity to learn the sophisticated Japanese technology as they were neither given any ownership rights nor included in management of these firms. After the withdrawal of the Japanese during Second World War the industries were in a state of ruin and further damaged by the Korean War. The assets of these deserted Japanese firms were taken over by the South Korean businessmen to establish business enterprises known as Chaebols.
Purpose- Chaebols served the purpose of Industrializing South Korea by manufacturing export oriented products after the military coup over threw the corrupt Rhee Government and declared strengthening the economy by rapid industrialization. While infrastructure development firms were controlled by Government through restricted entry, the export oriented industrialization was handed over to the Chaebols which received sufficient Government patronage for diversification into a multitude of products often unrelated.
Organization- The Chaebol structure demonstrated centralization of ownership within a single founding family. As the Chaebol expanded its network through subsidiaries and branches, family members were appointed as managing heads but the ownership rights remained with the head of the nucleus company even if the head did not involve himself in the management of the Conglomerate.
Role of Chaebols in Local and Global Economy
The role of Chaebol in the internal economy of South Korea has been discussed by (Kim, H., et al. 2004, 33). Chaebols exploited the internal capital markets by funding the new subsidiaries from the equity capital of old subsidiaries. The outcome was cross shareholdings among subsidiaries which enabled Chaebols to use the internal capital to their advantage and also invested in financial institutions. Their diversification into insurance and investment companies turned out to be very profitable. Acquiring internal financing potential was essential for financing the business groups. Chaebol participants also stood as guarantors of the subsidiaries. Furthermore, due to their enterprising ability Chaebols and their subsidiaries had promising prospects. Chaebols also presented employment opportunities in the local economy as there were not many prospects in the external labor market. A study of business groups showed that, in starting new ventures, executive positions were generally filled by outsourcing managers from the subsidiaries even for unrelated ventures.
The initial phenomenal growth of Chaebols can be attributed their efforts to overcome problems emerging from weak economic institutions. Kim et al observe that since capital, labor, and intermediate product markets were absent or weakly developed, Chaebols had no choice but to create these resources internally. By creating diversified business portfolios, groups could build internal market. Therefore it can be seen that Chaebols supported the internal economy by creating new businesses and employment opportunities, facilitated funds through non banking financial institutions and paved the way for good corporate governance (Powers, C. M. 2010, 114).
There are some negative aspects of Chaebols in the local economy that needs to be rectified. (Murillo, D., & Sung, Y. 2013, 36) have highlighted them as a tendency to overinvest in diversifications that are not consistent with financial logic. The Shareholders indulge in internal trading or “tunneling” among themselves which gives a false image of economic well being. Another demerit of the Chaebols is its culture of fulfilling most senior positions in the affiliates from within the family and not on the basis of capability which promotes nepotism and very often the management is in inefficient hands.
Since during the military regime the role of Chaebols was to bring about export oriented industrialization, the Chaebols’ performance was affected by global economic scenario. Many of the major players of the South Korean economy the Chaebol conglomerates like Samsung, LGE, Hyundai have alliances throughout the world and have influenced the economies of many countries. The value of exports by the 30 largest Chaebol accounted for 84 percent of overseas shipments (Ghezzo, P. 2014. 18). Although they still rely heavily on exports, their exports are well-diversified internationally, a strategy that enabled them to sail through the world debacle in trade while many economies floundered. After the 1997 Asian financial crisis, Chaebols adapted to the changing business environment and redefined their policies to meet the demand to the tough economic conditions. Apart from adopting practical financial activities and implementing corporate governance reforms, they persisted in their efforts to innovate and release new products successfully, sustaining their global competitiveness. While South Korean exports received a setback during the global recession, Samsung Electronics and Hyundai Motors still managed to extract market share from rivals in Japan, Europe and the U.S. They leveraged the depreciation of the Korean currency in their favor while successfully selling their products to the developing markets to make up for the loss of sales to the West (‘The Chaebol Conundrum’, The Economist, 2010). However the same articles also pin points some of the Chaebol drawbacks like their dynastic controls, their poor corporate governance, collusions with the Government and a capitalistic obsession that dominates other entrepreneurial firms.
LGE – Strategic Alliances and Human Resource Management of Diversity
LG Electronics is a member of the LG Group, the South Korean business conglomerate, a Chaebol, employing 83,000 people working in 119 local subsidiaries worldwide. With a world wide sale of USD 53.1 billion, the company operates its business through five divisions: Home Entertainment, Mobile Communications, Home Appliance, Air Conditioning and Energy Solution, and Vehicle Components ( http://www.lg.com). During 1997 LG was among the top four Chaebols with more than fifty subsidiary units, with a product range of electronics, and telecommunication, chemicals, oil refining, trade, retailing, financial services, construction, home shopping, etc. Confronted by declining competitiveness and a severe liquidity crisis, LG initiated a group-wide restructuring process with the intention of improving cash flow (Kim, et al 2004, 40). In 1998 and 1999, LG attracted a considerable amount of foreign capital investment for a single Korean company, due to which it lowered debt-to-equity ratio by the end of 1999, overcoming its cash flow crisis. LG introduced a strategy of being more selective in competition and resource allocation in the select areas—rather than across many unrelated areas. For this purpose, businesses with limited prospective were disposed off and core or related businesses were integrated. Consistent with its reinvention it also formulated a human resource strategy to manage the cultural changes emerging from its strategic alliances all over the world. Effective global organizations need to maintain delicate balance among the seemingly contradictory natures of organizational dynamics. From the perspective of domestication of human resources Korea-based MNCs usually have an advantage over other multinationals (Park, Y., Shintaku, J., & Amano, T. 2010, 5).
Human Resource Management Strategy
The three main characteristics of HRM strategy can be stated as Localization, Transparency and Team Work. The human Resource Management Principle of LG supports Localization in managerial positions. LGE delegates responsibility of local employment, distribution of wages, production volume and marketing to local management while the Corporate Management handles important capital expansion and investment decisions. However, incorporation of global competitive strategies necessitates further delegation of decision making power to local management.
Cooperation from local professionals, enhance marketing and distribution network. Moreover the local management has a greater understanding of the culture of the host country and can relate better with the local employees lowering the probability of conflicts between employees. The diverse nature of work force in LGE is believed to harness its positive aspects like presentation of more alternatives in the decision making process, extending help to the foreign members and more learning outcomes. The senior most management in LGE practices transparency with local managers in decision making and policy formulation. A performance incentive scheme and performance appraisal method is followed to motivate the local employees and ensure their commitment to the organization. The HRM system of LGE is considered highly innovative (Kim, D. O., & Bae, J. 2005, 1298) and follows the team work approach. LGE promotes modern human resource management coordination among organizational design and work processes, ERP and HRM functions for enhanced organizational performance.
LGE strategic Alliance with Microsoft Inc. for Windows OS in Smart phones
LG Electronics (LG) and Microsoft Corp. entered into a strategic alliance to increase the number of LG phones operating on Windows, in 2009. According to the agreement, LG would make Windows its primary operating system for its smart phones and increase both the quantity of Windows® phones in its portfolio and the total volume of Windows® phones marketed by it (www.Microsoft/ news). This would create a ten times growth in the volume of Windows® phones available from LG in 2009 and bring up to 26 new Windows® phones to market in 2012 alone.
The New Windows operated LG phones was expected to take advantage of the dynamically growing market. The Windows platform imparts flexible and customer-friendly software that is compatible with the Web and the PC and is versatile enough to address an increasing number of consumer segments. The Alliance was intended at creating joint teams for research and development by both companies, to design phones with powerful features based on a compact integration between hardware and software. It also highlights joint marketing efforts to expand its customer base across the globe.
The Strategic alliance with LGE was apparently to gain entry into the mobile market where LGE was already selling handsets and LGE intended to beat the competition from Samsung and Apple Smart phone Technology. The smart phone market share of LG was not very promising with competitors like Samsung and Apple already incorporating Android technologies. With different OS competitors adopting widely diversified approaches to capturing value, there was a significant uncertainty over how the technology and industry will evolve. The apparent failure of Microsoft to progress its PC dominance to the mobile Internet may be partially attributed to its initial failure to secure a dominant position in the Internet world (Kenney, M., & Pon, B. 2011, 249). The Alliance has not made much headway because of Microsoft’s inability to make the same progress in the cloud technology as Google. Therefore this alliance between LGE and Microsoft is not projected as one of the successful ventures.
Conclusion
Strategic Alliances are a way for conglomerates to gain entry into global markets and are affected by the changes in the global economic environment. The Chaebols or Conglomerates of South Korea had showed a remarkable reinvention of their corporate structuring from that of tyrannical family ownerships to corporate Governance in the wake of the 1997 crisis. LGE, one of the powerful Chaebols survived the 1997 and subsequent crises by consolidating its subsidiaries spread over the world and entering into strategic alliances to strengthen it technological and distribution competencies. Its Human Resource Strategy also shifted to localization of manpower in all positions and treating the locals as equals. This strategy proved to be very advantageous to LGE for its expansion operations as it helped in getting the cooperation of local employees to make the venture a success.
However, all its strategic alliances cannot be termed as successful ventures. Its alliance with Microsoft for Windows based smart phones is yet to materialize because of competition from Samsung and Apple and Microsoft’s inability to beat Google. Therefore Strategic Alliance needs to be investigated for the viability of a project in the given time frame for its successful implementation.
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References
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Ghezzo, P. (2014). Product and international diversification of business groups in China: antecedent or consequence of superior performance? (Doctoral dissertation, University of Kansas)
Hamel, G. (1991). Competition for competence and inter partner learning within international strategic alliances. Strategic management journal, 12(S1), 83-103
http://www.lg.com/global/about-lg/corporate-information/business-domains
Kenney, M., & Pon, B. (2011); Structuring the smart phone industry: is the mobile internet OS platform the key? Journal of Industry, Competition and Trade, 11(3), 239-261.
Kim, D. O., & Bae, J. (2005). Workplace innovation, employment relations and HRM: two electronics companies in South Korea. The International Journal of Human Resource Management, 16(7), 1277-1302.
Kim, H., Hoskisson, R. E., Tihanyi, L., & Hong, J. (2004). The evolution and restructuring of diversified business groups in emerging markets: The lessons from Chaebols in Korea. Asia Pacific Journal of Management, 21(1-2), 25-48.
LG electronics deepens alliance with Microsoft by selecting windows as primary smart phone platform retrieved from https://news.microsoft.com/2009/02/16/
Murillo, D., & Sung, Y. (2013). Understanding Korean Capitalism: Chaebols and their Corporate Governance, ESAD Egeo Center for Global Economy and Geopolitics Position Paper, 33
Park, Y., Shintaku, J., & Amano, T. (2010). Korean firm’s competitive advantage: localization strategy of LG Electronics (No. 292). Discussion Paper
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