Samsung Motors

8/10/2019 Samsung Motors

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Understanding SamsungsDiversification Strategy: TheCase of Samsung Motors Inc.

Woonghee Lee and am S. Lee

In!""#$the%orean chae&o' Samsungdiversifiedintoautomo&i'emanufacturing(iththe

esta&'ishment of Samsung Motors Inc )SMI*. The timing of this venture turned out to &e

rather unfortunate$ as SMIs first car ro''ed off the +usan ,roduction 'ine inthe midd'e ofthe -sian economic crisis. In serious financia' distress$ Samsung had to a&andon SMI$

se''ingittoenau'tin/000.Thisstudye1,'oresthe,rocessofSMIscreation$andfo''o(s

thechangesinSamsungsstrategicmanagementduringandafterthecrisis.T(o2uestions

are raised in the research: )!* 3o( did Samsung come to invest in automo&i'es4 and )/*

3o(didthe%oreancrisisingenera'$andthecrisisintheautomo&i'emar5etin,articu'ar$

changeSamsungsstrategicdecision6ma5ing,rocess4Centra'toitsdiversificationstrategy

(erethechairmanofSamsungand5eymem&ersofthe,'anningteamatthe7fficeofthe

Chairman. We find that non6economic inf'uences ,revai'ed over economic inf'uences in

thedecisionto,ursuethediversificationstrategy$andthatduein,arttothestrengthofthese inf'uences$Samsung underestimated the mar5et ris5 and overestimated the contri6

&ution its core com,etencies and synergy cou'd ma5e. Matters (ere made (orse &y the

significant costs incurred in transferring Samsungs corecom,etencies d itshigh 2ua'ity

re,utationandcu'ture d

tothene(&usiness.8ythetime%oreafina''yemergedfromthe

crisis$ the finance teamatthe 7ffice ofthe Chairman had ta5en chargeof strategic man6

agement$ increasing financia' contro' and em,hasi9ing interna' efficiency. /00; 6AB0!@ 6 see front matter /00;


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management ac2uires the motivation to ,ursue diversificationE ho( it is su,,orted$ resisted$ and

a,,rovedE and ho( resources for its im,'ementation are a''ocated in organi9ations.

esearchon chae&o's)high'ydiversified%oreancong'omerates*a'sosuffersfromthesame,ro&6

'em$'eavingmany2uestionsunans(ered$suchas(hyandho(the chae&o's

&ecamediversified.The

chae&o's

ra,id e1,ansion$ ho(ever$ &ecame unsustaina&'e (hen the -sian financia' crisis s,i''ed

over into %orea in Decem&er !"";$ forcing ha'f of the to, B0 chae&o'sinto &an5ru,tcy or de&t

(or5outs$andcom,e''ingtheremainderto,ursues(ee,ingchanges. Thesechangesinvo'vedsig6

!

nificantshiftsinthecor,oratestrategiesandmanageria',hi'oso,hiesthathad&eenem,'oyed(ith

greatsuccessfordecades.Theyre2uiredashiftinem,hasisa(ayfrome1terna'gro(thandto(ards

o,erationa'efficiencies.Thereareno(someconcernsin%oreathatthe chae&o's

$oncethenations

maor driver of economic deve'o,ment$ have 'ost their gro(th momentum.

7fa''the chae&o'diversificationeffortsthatoccurred&eforethecrisis$onecasestandsout:Sam6

sungsmoveintoautomo&i'emanufacture.Infact$nocor,oratediversificationinthehistoryofthe

chae&o's in %orea received more ,u&'ic attention than that of Samsung Motors Inc. )SMI*. -'6

though SMIs diversification fo''o(ed the ty,ica' chae&o' ,rogram for gro(th$ it had to &e so'd

to enau't due to its serious financia' situation caused$ in ,art$ &y the crisis. Since then$ there

have &een significant changes in the strategic management ,rocess at Samsung. These$ and the

motivation &ehind the diversification$ are ana'y9ed in this artic'e$ (hich focuses on the fo''o(ing

,articu'ar research 2uestions:

!* 3o( did Samsung come to invest in automo&i'es4/* 3o(didthe-siancrisisingenera'$andthecrisisinautomo&i'esin,articu'ar$changeSamsungs

strategic decision6ma5ing ,rocesses4

Itisho,edthatfindingtheans(ertothefirst2uestion(i'',avethe(ayforadee,erunderstand6

ingofthe chae&o'sdiversification,rocessand(hytheyaresohigh'ydiversified$andthatthean6

s(ertothesecond2uestion(i'''eadtoanunderstandingoftheim,actofthe-siancrisisonthe

chae&o's

currentstrategicmanagementsystemand,rocesses.Inaddition$(hi'esomeorgani9ation

'earning studies have suggested that 'arge firms se'dom 'earn from crises and fai'ure (e e1amine

/

(hether this assertion ho'ds true for Samsung. -s %oreas most inFuentia' chae&o'$ Samsungs

maor cor,orate strategies and management ,ractices used to &e (ide'y &enchmar5ed &y otherchae&o's

. Thiscasestudyisthus&e'ievedtorevea'someofthety,ica'characteristicsofthe chae&o's

strategicmanagementsystemand,rocess$a'thoughtheusua''imitationsofasing'ecasestudysti''

a,,'y.

Thisstudyentai'edma5ingo&servations$conductingintervie(s$andrevie(inginterna'ande16

terna' documents to ascertain (hat ha,,ened at Samsung (ith res,ect to SMI$ and (hy it ha,6

,ened. The study is a'so a ,iece of action research$ since one of the researchers (as for ten years

amanagerinthe,'anningteamofthe7fficeoftheChairmanatSamsung$inchargeofformu'ating

andim,'ementingstrategic,'ansforthe'aunchanddivestmentofSMI$(hi'etheother(asachief

researcher at the Samsung 0 /00; >?"


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information for a refined research$ additiona' in6de,th intervie(s (ith 5ey decision6ma5ers (ere

conducted. Gina''y$ additiona' data (ere co''ected and ana'y9ed to confirm and com,'ement the

intervie( findings.

B

Thisstudyisorgani9edasfo''o(s.Girst$thefo''o(ingsectiongivesanaccountoftheeventsthat

trans,iredinre'ationtoSamsungsesta&'ishmentofSMI$andthenthetheoretica'frame(or5that

(as formu'ated to guide the case ana'ysis is ,resented. This frame(or5 (as used as a &asis for

ans(ering our t(o research 2uestions. Gina''y im,'ications for theory and ,ractice and research'imitations are discussed.

- short history of Samsung Motors$ Inc. )SMI*In/00A$Samsung(as%oreas'eading chae&o'

$&othintermsoftota'assets)/BB.?&i''ion*andthe

num&erofitsaffi'iates)#?*. Samsunghad&eenfoundedonMarch!$!"B?&ythe'ateChairman

>

8yung6Chu''Lee$(ho,asseda(ayin!"?;.3e(assucceededaschairman&yhisson%un63eeLee$

at (hich ,oint Samsung (as the num&er t(o chae&o' &ehind its arch6riva' 3yundai. In !"??$ to

mar5 the #0th anniversary of Samsungs founding$ %un63ee Lee announced the =second founda6

tion of the com,any$ (ith the aim of transforming Samsung into a (or'd6c'ass cor,oration. In

the same year$ he 'aunched Samsung Henera' Chemica' Co.$ his first diversification ,roect as the

ne( chairman.

3ea'so,re,aredto'auncha'ong&eenoverdue,roect e Samsungsentryintotheautomo&i'e

&usiness. In !"">$ 'ac5ing critica' 5no(6ho( a&out automo&i'e ,roduction$ Samsung 'everageda,revious&usinessre'ationshi,toforgeatechno'ogy'icensingagreement(ithissannandSam6

sungMotorsInc)SMI*(asesta&'ishedinthefo''o(ingyear.Ta&'e!summari9esthemaorhistor6

ica' events 'eading u, to this (atershed event.

Many argued that Samsung cou'd never esta&'ish a sustaina&'e ,osition in such a saturated in6

dustry. 8y the !"?0s$ %orea a'ready &oasted the (or'ds fifth 'argest automotive industry$ frag6

mented among four com,etitors. Samsungs first ,assenger car ro''ed off its +usan ,roduction

'ineinMarch!""?$ustthreemonthsaftertheeconomiccrisishad&egun.Thiscrisis$andthere6

su'tant,o'itica'u,heava's$adverse'yaffectedSMIinvarious(ays$not'eastof(hich(asthestee,

fa'' in the demand for automo&i'es$ as sho(n in Gigure !.

In!""? SMI so'd on'y a&out >#$000 cars$ many of them &ought &y Samsung Hrou, em,'oyeesthemse'ves$andSMIs,erformancedeterioratedshar,'y$'osinga&out!"/mi''ioninthefirstt(o

2uartersoftheyeara'one.Theeconomiccrisistransformedthecom,etitive'andsca,eoftheentire

%orean automo&i'e industry. %ia Motors$ the second 'argest automo&i'e manufacturer in %orea$

co''a,sed in !""; a'ong (ith si1 other maor chae&o's

.

%ia(as,utu,forauctioninune!"";.Samsungconc'udedthattheon'yvia&'eo,tionforSMI

(as to ac2uire the Foundering com,any$ e1,ecting this move to reso've over6ca,acity and over6

investmentintheindustry.3o(everSamsung(ithdre(fromthefina'roundof&iddingon7cto6

&er!"$and3yundaiemergedasthe(inner.ThismeantthatSamsung(asfina''ya&andoningSMI$

(hose via&i'ity (as high'y 2uestiona&'e (ithout the merger$ and the grou, announced it (ou'd

,'ace SMI in court receivershi, for 'i2uidation. T(o6thirds its USB.; &i''ion de&t (as ,ersona''yassumed &y the chairman$ and the remainder &y the com,anys affi'iates. With its de&t ,ro&'em

e'iminated$SMIs=c'eanassets(ereso'dtoenau'tforUS#A/mi''ion$andtheointventuree6

nau't6Samsung Motors (as &orn in the year /000. The sa'e of SMI caused controversy in %orea$

(ith some critics arguing that its assets had &een so'd at a ,rice far &e'o( their true va'ue. It

(asestimatedthatSamsunghad,ouredmorethanUS>&i''ionintotheconstructionofits+usan

to mar5 its #0th anniversary Jthe chairmanK announced the aim of

transforming Samsung into a (or'd6c'ass cor,oration.

>"0 Understanding Samsungs Diversification Strategy


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!$000

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+roduction Ca,acity

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Tota' Demand

Gigure !. +roduction Ca,acity$ -ctua' +roduction$ and Tota' Demand in the %orean -utomo&i'e Industry)!""#e

/000*

Ta&'e !. Chrono'ogy of Samsung Motors Inc.

ear oint venture negotiated (ith Chrys'er !"?; Giat and W a,,roached for technica' a''iance

!"?" 3onda a,,roached for technica' a''iance

!""0. A Samsung 3eavy Industries )S3I* enters techno'ogy 'icensing agreement (ith issan6Diese' )Truc5*

!""0. ;. A S3I su&mits techno'ogy 'icensing re,ort to government

!""/. ;. > Hovernment officia''y acce,ts the re,ort

!""/ 8MW a,,roached for technica' a''iance

!""B +eugeot a,,roached for technica' a''iance

!""B Hrou, Su,reme 7,eration Committees a,,rova' to enter automo&i'e industry

!"">. >. /A Techno'ogy 'icensing agreement reached (ith issan ),assenger cars*

!"">. !/. ; Hovernment acce,ts techno'ogy 'icensing re,ort

!""#. B. /? S-MSUH M7T7S IC )SMI* . ! Hovernment ,rohi&its &an5 'oan guarantees &y chae&o's to affi'iates

!""?. !0. ;. Seven industries designated for ==8ig Dea's

!""?. !0. !" Samsung a&andons ,'an to ac2uire %ia

!""?. !/. ; ==8ig Dea' &et(een Samsung and Dae(oo agreed at 7ffice of the +resident

!""". B. /B Samsung signs M7U (ith Da(oo on ==8ig Dea'!""". A. B0 S-MSUH GIL


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,roductionfaci'itya'one$andthatthedea'a''o(edenau'ttoo&tainastate6of6the6artmanufactur6

ing faci'ity on attractive terms and de&t6free.

This(asayearafter+residentDae6ung%imsofficia'announcementthatSouth%oreahadfu''y

recovered from the -sian currency crisis. 8y the end of /00/$ enau't6Samsung Motors had

&ounced &ac5$ reaching &rea56even ,oint in its earnings than5s to its 'o( financia' &urden and

he su,erior 2ua'ity of itssedan$ (hich no( accounts for B0N of the %orean 'arge6si9e car mar5et

segment.

-na'ytica' frame(or5Theintroductiontothisartic'eas5sthefo''o(ings,ecific2uestions:)!*3o(didSamsungcometo

investinautomo&i'es4and)/*3o(didthe%oreancrisisingenera'$andthecrisisinautomo&i'esin

,articu'ar$changeSamsungsstrategicdecision6ma5ing ,rocesses4 Inother(ords$thisstudyaims

to determine the ,rimary motivation &ehind Samsungs diversification$ and then to e'ucidate the

com,anys strategic management ,rocess in re'ation to this diversification. The ana'ytica' frame6

(or5 used in this study is sho(n in Gigure /.

Toconstructtheframe(or5$thecor,oratestrategy'iterature(asfirstrevie(ed$andthet(oma6or inFuences on cor,orate strategy )i.e.$ in this case$ diversification* (ere identified as economic

and non6economic factors )as sho(n in the u,,er ,art of Gigure /*. In this section$ &oth factors

(i''&ee1aminedandcom,aredtoidentify(hichhadthedominantinFuenceonthediversification

decision. -'though much ,revious research on diversification hasidentified motivations from the

,ers,ectiveofeconomics$therearesomeim,ortant(or5sthate1aminediversificationfromanon6

economic ,ers,ective. Gor e1am,'e$ it has &een suggested that institutiona' changes in the U.S.$

suchasthestrengthenedfedera'governmentsantitrust,o'icyinthe!"#0s$generatedstrongincen6

tivesforcor,orationstodiversify. esearchhasa'sosho(nthatcor,oratediversification(asvery

#

muchan=organi9ationa'fadintheU.S.inthe!";0s$,ursued(iththeuseofsuch,o,u'artoo'sas

,ortfo'io,'anning. This,ers,ectiveises,ecia''yre'evantine1,'ainingthee1tremediversification

A

of &usiness grou,s such as the %orean chae&o'sand the a,anese 5eiretsu

$ (hich o,erated in very

different socio6cu'tura' and institutiona' environments )es,ecia''y (ith res,ect to government

and industria' ,o'icy* to Western firms. Some researchers have even argued that the institutiona'

traits of the chae&o'she', e1,'ain their economic success and organi9ationa' fitness.;

7n the other hand$ the economic motivations for diversification can &e &road'y c'assified into

t(o: mar5et ,o(er and synergy. -'though the agency ,ro&'em is another im,ortant motivation

?

for diversification$ (e have e1c'uded it from our ana'ysis &ecause (e thought the sym,toms of

agency ,ro&'ems (ou'd not &e easy to find in the strategic management ,rocess. The ,ursuit of

mar5et ,o(er and synergy$ on the other hand$ can &e easi'y identified. Gor e1am,'e$ many

chae&o's

$inc'udingSamsung$ arefre2uent'yaccused ofe1ercising e1cessivemar5et,o(erthrough

cross6su&sidi9ation$in(hichthe=dee,6,oc5etedFagshi,com,anysu&sidi9esane(su&sidiary.In

additiontosuchanti6com,etitivemotivations$Michae'+ortersvie(ofstrategyasgainingafavor6

a&'e,ositioninanattractiveindustry$(hichisconsistent(iththeassertionthat+ortersvie(orig6inatesfrom themar5et,o(er ,ers,ective$(asa'so inc'udedinthiscategory."

-sforthesynergy

,ers,ective$ t(o theories (ere dra(n on. Girst$ the resource6&ased vie( (as ado,ted to e1amine

(hetherSamsung'everageditse1istingresourcesandca,a&i'itiestostartits,assengercar&usiness.

Second$ transaction cost theory (as ado,ted to see (hether transactiona' synergy had &een

o&tained in the mo&i'i9ation of Samsungs resources for diversification ,ur,oses.!0

many chae&o's (ere accused of e1ercising e1cessive mar5et ,o(er

through cross6su&sidi9ation

>"/ Understanding Samsungs Diversification Strategy


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-'thougheconomicandnon6economicfactorsare&othim,ortantdriversofcor,oratestrategy$

the interna' organi9ationa' ,rocess invo'ving ho( these t(o factorsare conceived$ inter,reted$ re6

sisted$andforma'i9edinanorgani9ationare'oo5edintointhisstudy$assho(ninGigure/.Girstof

a''$asthechairmanofSamsung(asthesing'emostinFuentia'figureinsettingthestrategicdirec6

tion of the entire grou,$ the chairmans 'eadershi, (as se,arated from other com,anys strategic

management ,rocess com,onents to a''o( for a c'oser e1amination. 3is 'eadershi, (as treated

asthemediatingconce,tconnectingthecom,anyscor,oratestrategy(ithitsorgani9ationa',ro6

cess$ &reathing vita'ity and energy into &oth.!!

Thestrategicmanagement ,rocessmaya'soinc'ude &othforma'andinforma',rocesses$(hich

areinFuenced&yorgani9ationa'inertia$cu'tureandinterna',o'itics.-tSamsung$grou,6'eve'strat6

egy(asformu'atedatthecor,oratehead2uarters$former'yca''edthe7fficeoftheChairman.Itcan

&ee1,ectedthatinsucha'arge chae&o'$(ithits'ongandi''ustrioushistory$organi9ationa'inertiain

theformofcorerigiditymayinFuence&othforma'andinforma'strategic,'anning$andthatastrong

organi9ationa'cu'ture(i''im,edeorfaci'itatetheforma'andinforma'strategicmanagement,ro6

cess.Gina''y$thestrategicdirectionofthecor,oration(i''de,endon(hoassumes,o(erasaresu't

ofinterna',o'itica',rocesses. !/

Theim,actofthe-siancrisisonSamsungsstrategicmanagement,rocess (asa'soana'y9ed$as

sho(nontherightsideofGigure/.%ee,ingtrac5ofthechangesinsideSamsungduringthetran6sition,erioda''o(edustoidentify(hatSamsung'earnedintermsofmaintainingits=fitnessinthe

midstofthechangingenvironment.!B

S,ecifica''y$(ee1aminedthechangesthatthene(strategic

management,rocessand'eadershi,hadundergoneintheireffortstodea'(iththeeconomicand

non6economic inFuencesoncor,orate strategy.The fo''o(ingsectionsdetai'ho(thisframe(or5

(as used to address our t(o research 2uestions.

the strategic direction of the cor,oration (i'' de,end on (ho

assumes ,o(er

0 /00; >"B


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Motivation for diversification

on6economic motivations: Com,etitive imitation and 'egitimacy6see5ing

Thenon6economicmotivationsforSamsungsdiversificationare,resentedfirst$asourana'ysisof

thedata'eadsusto&e'ievethatthese,revai'edovereconomicmotivationsinSamsungsdecisions.

Girstofa''$thereisthe2uestionasto(hetherSamsungsstrongcom,etitiveriva'ry(ith3yundai

motivated its decision to enter the automo&i'e industry. This re2uires us to revie( Samsungsear'ier history vis6a6vis its arch6riva' 3yundai$ (hich in the !"?0s had ,ushed Samsung off the

O

to,6ran5ing chae&o's,ot it had enoyed during the !"A0s and !";0s. )Ta&'e / sho(s the ran5ings

of the to, five chae&o'sfrom the !"A0s to the !""0s.*

Samsung and 3yundai had on'y re'ative'y recent'y &ecome direct com,etitors in a num&er of

industries. 3yundai started as a construction com,any in !"#0 and 'ater diversified into heavy

industry$ inc'uding automo&i'es )!"A;* and shi,&ui'ding )!";B*$ (hich ,'ayed centra' ro'es in its

su&se2uent &usiness ,ortfo'io e1,ansion. Samsung$ (hich focused on high6tech industries such

ase'ectronics)!"A?*andsemiconductors)!";>*$a'soinvestedinheavymachineryandthe,etro6

chemica' industry$ esta&'ishing Samsung 3eavy Industries )!";>*$ Samsung Shi,&ui'ding )!";;*$

and Samsung +etrochemica' )!";>*.Un'i5ethe!"A0sandthe!";0s$(hen&usiness(asheavi'yregu'ated&ythegovernment$the!"?0s

and!""0s(asa,eriodof'i&era'i9ationand,rivati9ation.There(asnecessari'yamuchgreaterdegree

ofuncertaintyinthe&usinessenvironment$andthe chae&o'sreacted,rimari'y&yenteringthesame

maorindustries.!>

3yundaifo''o(edSamsungse1am,'e&ydiversifyingintohigh6techduringthe

!"?0s$esta&'ishing3yundai"> Understanding Samsungs Diversification Strategy


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This (as his 2uest to score a maor success$ matching those of other chae&o' chairmen$ and thus

&ecomerecogni9ednationa''yasagreat&usiness'eader$inturn increasinghis'egitimacy&othin6

side his organi9ation and &eyond. The fo''o(ing 2uote from the chairman seems to confirm this

motivation )(hich (as a'so confirmed in other intervie(s*:!A

Istartedthe,assengercar&usiness&ecauseI&e'ievedthatit(ou'dsure'y&eanim,ortantstrategic&usiness in %orea after !0 or/0 years. I5no( that (e cannotma5e money inthe first five or si1

years even though (e invest !0 &i''ion do''ars. 3o(ever$ I 5no( that the !0 &i''ion do''ars (ou'd

sure'y raise the nationa' com,etitiveness of our automo&i'e industry in the 'ong run.

!""A

! Samsung Samsung 3yundai 3yundai

/ Samho LH LH Samsung

B %ae,ung 3anin Samsung LH> Taihan Shinin S% Dae(oo

# LH Ssangyong Dae(oo S%

Long ange +'anning$ vo' >0 /00; >"#


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Samsungs diversification can a'so &e inter,reted from the ,ers,ective of synergy. To e1amine

this ,ossi&i'ity$ (e first tried to identify sources for economy of sco,e$ such as the sharing of re6

sourcesandca,a&i'ities&et(eenSMIandotheraffi'iates.Wea'sosoughttoascertain(hethermo6

&i'i9ation of resources for diversification yie'ded significant reductions in transaction costs. -fter

ana'y9ingsevera'im,ortantinterna'documentsandintervie(findings$(e(erea&'etoidentifyim6

,ortant motives concerned (ith sharing ca,a&i'ities. Girst$ Samsung &e'ieved that one of its core

com,etences e the re,utation of its &rand name$ and its esta&'ished cu'ture of high 2ua'ity that

stemmed from its dedicated and high'y com,etent managers e cou'd &e transmitted to SMI$

and(ou'd&eade2uatetoovercomeits'atemoverdisadvantageandeventua''ya''o(SMItoe1ce'

overtheesta&'ished,'ayers.Second$Samsunge1,ectedthat'everagingtheca,a&i'itiesofSamsung

"A Understanding Samsungs Diversification Strategy


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and$(henSMI(asesta&'ished$thet(omostinFuentia'(erethe,'anningandfinanceteams.The

,'anningteamcraftedandim,'emented'ong6termstrategiesinc'udingdiversification$(hi'ethefi6nanceteammanagedca,ita'mattersatthegrou,'eve'ande1ercisedfinancia'contro'overtheaffi'6

iates.Undercom,etitive,ressurefrom3yundai$the,'anningteamatthe7fficeoftheChairman

su&mittedare,orttothechairmanin!""0$givinganin6de,thana'ysisofthedifferences&et(een

thet(o,o(erfu' chae&o's

&usiness,ortfo'ios$conc'udingthatSamsung(ou'dnevercatch3yundai

u,(ithoutenteringtheautomo&i'e&usiness.

/BThechairmansintentiontoenterthemar5etforrea6

sonsofcom,etitiveriva'ry(ith3yundaiseemstohave&eenreinforced&ythisinterna'strategicman6

agementfunction.

Itisnecessarytoassessthe,'anningteamscoreca,a&i'itiestounderstanditsro'eintheformation

ofSMI.Su,,ortingSamsungsra,iddiversificationfromthe!"A0stothe!"?0s$the,'anningteam

hademergedasthegro(thengineofSamsung.-site1,andedintovariousindustries$itaccumu'ated

genericdiversificationca,a&i'ities$suchasinte''igencegatheringforne(&usinesso,,ortunities$for6

ma''ong6term,'annings5i''s$ne(&usinessesta&'ishment$andresourcemo&i'i9ationfromitsaffi'i6

ates.Throughitsre,eatedsuccess$the,'anningteamscoreca,a&i'ityofmanaginggro(th&ecame

institutiona'i9ed(ithintheorgani9ation$and(as,artoftheteamseverydayrea'ity.Inshort$,ast

diversification e1,eriences had made an inde'i&'e im,act on the mind6set of the ,'anning team$strong'yinformingandmaintainingtheteamscu'tura',ersistenceforgro(th.

/>

The,'anningteamsgro(th6orientedcu'ture(asreinforced&yitsre,eatedsuccesses$eventua''y

givingrisetoorgani9ationa'inertia$(iththeteameffective'y&ecomingc'osedtodifferingo,inions

andcha''engingideas./#

Thus$(hi'ethere(ereris5factorsinvo'vedinenteringthesaturatedauto

mar5et$suchinformation(asnotem,hasi9edintheorgani9ation.Theteam,ro&a&'y&e'ievedthat

it(ou'dsti''&e,ossi&'etothriveinastructura''yunattractiveindustry&y'everagingitscorecom6

,etences and deve'o,ing ne( ones./A

The ,'anning team sought to ,ersuade decision6ma5ers o,6

,osed to its vision &y gathering any ,ositive economic data it cou'd find to su,,ort its case$

and$ in !""B$ commissioned the omura esearch Institute 6 a a,anese consu'ting and research

firm e to ,roduce a feasi&i'ity study on the %orean ,assenger car industry. Contrary to the con6

ventiona'(isdomthatthedomesticmar5et(asa'readysaturated$omura,redictedthatthemar6

5ets 'ong6term mar5et gro(th (ou'd &e ade2uate to accommodate one more ,'ayer.

0 /00; >";


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Committee mem&ers from Samsung


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su,,ortingthechairmansvie(thatthere(asastrongtransactiona'synergy&et(eentheautomo6

&i'e and e'ectronics industries that cou'd &e e1,'oited.

Strategic management ,rocess after the crisisThe!"";financia'crisistriggeredafundamenta'changeinSamsungsstrategicmanagement,ro6

cess.Themostnota&'echange(astheshiftincontro'ofma5ingstrategicdecisionsfromthe,'an6

ning team to the finance team. In the same (ay as the IMG and %orean government tightened

nationa' financia' contro's$ the financia' team no( assumed the 'eading ro'e in formu'ation of

the grou,s strategy. The shift in ,o(er (as readi'y a,,arent over the issue of the ,'an for SMI

to ac2uire the trou&'ed %ia motors. The night &efore Samsungs &id for %ia$there (as an intense

de&ate among the 5ey decision6ma5ers at the Samsung grou, head2uarters$ inc'uding core mem6

&ersofthe,'anningandfinanceteam.Un'i5ethegro(th6oriented,'anningteam$thefinanceteam

hadtraditiona''y&eenconservativeinma5ingmaorinvestmentdecisions.%eyfinanceteame1ec6

utivesstrong'yo,,osedthe,'anningteams,ro,osa'toac2uire%ia$arguingthatfurthere1,ansion

duringsuchaneconomiccrisis(ase1treme'yris5y.Theirassertion,roved,ersuasivetothechair6

man$andSamsungdecidedto(ithdra(fromthe&idding.SMIe1ecutivesinter,retedthedecision

as a sign that Samsung (as fina''y re'in2uishing ho,e for SMIs future.

T(o5eymem&ersofthe,'anningteamresignedand'eftSamsungaftertheteamsfai'uretosee

throughtheac2uisitionof%ia.Gromthenon$thefinanceteamemergedasthemostinFuentia'unit

intheSamsunggrou,afteron'ythechairmanhimse'f$andassumedthe,'anningteamstraditiona'

strategic,'anningfunction.In!""?$the7fficeoftheChairmanchangeditsnametothe=Cor,orate

estructuring 3ead2uarters. In addition to financia' management at the grou, 'eve'$ the financeteame1ertedconsidera&'e inFuenceonim,ortant strategicdecisions thataffectedtheentireSam6

sunggrou,.It(ou'dnot&eane1aggerationtostatethatSamsungsstrategicmanagement,rocess

changedentire'yafteritfai'edtoma5easuccessofSMI$andits,'anningteam(asdis&anded.-''

affi'iatesmaorstrategicinvestment,'ansno(hadtogainfinanceteama,,rova'&efore&eingre6

,orted to the chairman. The finance team a'so coordinated the formu'ation of the =Long6term

Hrou, Strategy$ ,revious'y a core tas5 of the ,'anning team.

7utside

endors

)#B.?N*

Samsung

Affiliates

(27.5%)

Im,orts

)!>.#N*

SMI )>./N*

Samsung N

Samsung -eros,ace "N

Samsung Cor,oration !N

Gigure B. SMIs +art +rocurement Transactions (ith Samsung -ffi'iates

-fterthefinanceteamtoo5,o(er$Samsungsentirecor,oratecu'ture

(asre6oriented.Insteadofe1terna'gro(th$thefocus(asoninterna'

efficiency.

Long ange +'anning$ vo' >0 /00; >""


13/17

The entire cor,orate cu'ture of Samsung &ecame re6oriented$ and$ instead of e1terna' gro(th$

head2uarters&egantofocusoninterna'efficiencyateachaffi'iate.


14/17

com,anies'earn'essfromtheir'argefai'uresthanfromtheirsma''ones.Thisha,,ens(henman6

agersseetheir'argefai'uresashavingidiosyncraticande1ogenouscauses$and(hentherearesocia'

and technica' &arriers to 'earning from 'arge organi9ationa' fai'ures./?

-n e1am,'e of socia' &arrier is a strong organi9ationa' cu'ture (ith 'itt'e to'erance for fai'ure$

(hi'e technica' &arriers to 'earning increase (hen the mu'ti,'e causes of a 'arge fai'ure are dee,'y

em&eddedina'argeorgani9ation.3o(didSamsung&othavoidattri&utingitsfai'uretoe1ogenous

causes)suchasthe-sianeconomiccrisis*$andatthesametimeovercomethesocia'andtechnica'

&arriers to its 'earning4 We suggest that the e1istence of organi9ationa' ,o'itics &et(een the ,'an6

ningandfinanceteamsofSamsungfaci'itatedthecom,anys'earning,rocess.Ifthere(erenoin6terna' com,etition &et(een the ,'anning and finance teams$ 'earning might not have occurred at

a''$ or might have ta5en much 'onger. The fact that there (ere t(o a'ternative vie(s as to the

&est strategy for dea'ing (ith SMI$ and thatthe inFuence of one grou,$ (hich had ,redominated

forsomeyears$(asoverta5en&ythevie(softheotherinthede&atea&outthe%iaauction$meant

thatSamsungnoton'yhadt(oc'earvie(sto'earnfrom$&utcou'da'so2uic5'yado,tthesecond

vie($(ithitscu'tureofconservatismandefficiency$asane(,attern$andthus'eavetheother&e6

hind more c'ean'y. The ,ositive ro'e of interna' ,o(er and ,o'itics in faci'itating organi9ationa'

'earninghas not&eendiscussedmuchinthee1isting'iteratureonthissu&ect:thisstudysuggests

thatresearchersmayneedto,ayattentiontothe,ossi&i'ityoftheinter,'ayoftheseforcesserving

as a vehic'e for organi9ationa' 'earning.Third'y$ the fit &et(een the environment and the organi9ation (as e1amined dynamica''y over

time. The environment not on'y inFuenced the structura' characteristics of the organi9ation$ &ut

a'so changed the strategic management ,rocess at Samsung. In an environment of high industry

gro(th$ the ,'anning team too5 charge of Samsung and e1ercised strong &ehavior contro' under

a centra'i9ed structure. When %orea e1,erienced an e1treme economic do(nturn$ the finance

teamemergedande1ercisedgreaterfinancia'contro'underamoredecentra'i9edstructure.Itisim6

,ortanttonotethatSamsungmaintainedits=fitnesstothene(environment&y'earningfromthe

crisis and &y changing its strategy$ structure and ,rocesses over time.

/"

-'thoughthe-sianeconomiccrisisseemstohave&een'arge'yres,onsi&'eforSamsungsfai'ure$

anum&erofim,ortantmanageria'issuesmaya'sohave,'ayedaro'einthematter.We&e'ievethatthecasehasthefo''o(ingmanageria'im,'icationsfor,ractitioners.Thefirstandmostdirect'esson

to, managers can derive from this case is that underestimating the under'ying economics (hen

ma5ingastrategicdecisioncan'eadtodisastrousconse2uences.Withnon6economicmotivations$

suchascom,etitiveimitationand'egitimacy6see5ing$,revai'ingatSamsung$soundeconomicrea6

soning (asnot,ossi&'e.Under thesestrongnon6economic inFuences$ Samsungoverestimated its

interna'corecom,etenciesandgrou,6'eve'synergy$andunderestimatedthedangerofenteringan

a'ready overcro(ded industry. Samsung seemed to &e'ieve that it cou'd thrive in an unattractive

industry &y 'everaging its core com,etencies$ such as its 2ua'ity6focused organi9ationa' cu'ture$

and &ycreating synergy(ith itsaffi'iates.-'though there (as evidence of o,,ortunities forecon6

omies of sco,e and synergy$ these (ere not sufficient to overcome the 'o( mar5et demand. Toma5e matters (orse$ the cost of esta&'ishing a high62ua'ity ,roduction faci'ity in +usan (as too

high.Managersoftencommitcritica'mista5es&yassumingthattheycaneasi'ytransfertheircom6

,anys intangi&'e core com,etencies$ such as re,utation and cu'ture$ to other units. This study$

ho(ever$c'ear'ysho(sthatsharingandtransferringintangi&'eassetscansometimesincurtoogreat

a cost.

3o( did Samsung overcome the socia' and technica' &arriers to its'earning4

Long ange +'anning$ vo' >0 /00; #0!


15/17

Second$ it seems that$ in going through the restructuring ,rocess during and after the crisis$

many %orean chae&o's have 'ost their engines for gro(th. Samsungs successfu' gro(th in the

,ast(asin ,art duetothe synergiesit created atthe grou,'eve'$and one of the,'anning teams

corecom,etences(asincreatingandsharingcom,etitiveadvantagesatthegrou,'eve'.Theterm

=grou,'eve'im,'iesthatresourcemo&i'i9ationandcoordinationoccurredacrossdifferentaffi'iates

- each of them se,arate cor,orations themse'ves 6 and this grou,6'eve' synergy (as 'ost (hen the

moreefficiency6&asedfinancia'managementteamassumed,rimarycontro'ofthestrategic,'anning

,rocess.3o(ever$thechangeis,ositiveinthathead2uartersno'ongerthreatenitsaffi'iatesauto6

nomyinthenameofcreatingsynergy.The&u99(ordsamongthe chae&o'ssincetheeconomiccrisis

have &een =restructuring$ =do(nsi9ing$ and =efficiency. The more conservative6minded chae&o's

have started to see5 advice from ,rofessiona' consu'tants$ (ho have e1horted them to cut costs

andstream'ineo,erations.)Itisnotsur,risingthatconsu'ting(asoneofthefastestgro(ingindus6

triesin%oreainthe'ate!""0s.*S(ee,ingrestructuringintheefforttoim,roveefficiencycontinued

(e''afterthecrisishad,assed.Samsunghasgainedmuch&y,ursuingefficiency$(ithrestructuring

anddo(nsi9inga''o(ingittorefocusitsenergy$a'thoughthedriveforinterna'efficiencymaystiFe

thesourceofgro(ththereandinmany chae&o's

. -sMichae'+ortersuccinct'y(arnedadecadeago$

o,erationa'efficiencymayon'y&eanecessary&utnotasufficientconditionforagoodstrategy.B0

Some have a'so suggest that$ since Western firms are more e1,erienced at ,'aying the efficiency

game$ %orean firms must ,ursue strategies that invo've &oth gro(th and efficiency if they e1,ect

tocom,eteeffective'yonag'o&a'sca'e.B!

-smostoftheindustriesin(hichSamsungisengagedare&ecomingevermoremature$Samsung

isno(see5ingane(=&'ueoceanto'eadthegro(thofthegrou,.B/

Withoutgrou,6'eve'initiatives$

momentumforgro(thmust&efoundamongtheaffi'iatesthemse'ves$&ut$sincethefina'a,,rova'

on diversification u'timate'y rests (ith the finance team$ the ,ossi&i'ities for gro(th through this

channe'may&e'imited.Inune/00A$Chairman%un63eeLeeannounced=CreativeManagement

asthene(management,aradigmforSamsung$hisfirstmanagement,aradigmshiftsincethe=e(

Management,aradigmin!""B.-'thoughtherearedifferingo,inionsasto(hatthechairmanac6

tua''y meant &y creative management$ it may &e an effective su&stitute for the traditiona' gro(th

strategy as initiated at the 7ffice of the Chairman. Hiven the organi9ationa' changes e1,erienced

sofar$(ithmoreautonomygoingtoaffi'iatesand'essgrou,'eve'decisionma5inginthe,ursuit

ofsynergy$itseemsun'i5e'ythatthe=CreativeManagement(i''&eim,'ementeduniform'y&ythe

strongandvisi&'ehandofhead2uarters.ather$ascreativitycannot&eordered$thene(,aradigm

(i'' &e one that is vo'untari'y acce,ted &y the affi'iates.

The im,'ications and conc'usion dra(n shou'd &e inter,reted (ith the fo''o(ing 'imitations in

mind. Girst$ &eing a sing'e case study$ s,ecia' care must &e ta5en (hen genera'i9ing this research$

eventoother chae&o's

. Second$theagencyvie((asnote1,'icit'yconsideredinourana'ysis&ecause

ofthedifficu'tyofidentifyingconcreteevidenceofagencycostinthestrategicmanagement,rocess

a'one.Third$someim,ortantinformationonSamsungisconfidentia'andcou'dnot$therefore$&e

re'eased.

-c5no('edgementTheauthors(ou'd'i5etothan5+rof.Choe'soon+ar5$theeditorofthiss,ecia'issue$+rof.Char'es

8aden6Gu''er$ theeditoroftheourna'$andt(oanonymousrefereesfortheirencouragement and

he',fu' comments on ear'ier drafts.

in going through restructuring ,rocesses during and after the crisis$

many chae&o's have 'ost their engines for gro(th.

#0/ Understanding Samsungs Diversification Strategy


16/17

eferences!. S. 3aggard$W.Limand*.

>. %orea Gair Trade Commission$ 8usiness Hrou,s under egu'ation in /00A )/00A*.

#. . G'igstein$Thestructura'transformationof-mericanindustry:-ninstitutiona'accountofthecausesof

diversificationinthe'argestfirms$!"!"6!";"$inW.+o(e''and+.DiMaggio)eds.*$ The e( Institution6

a'ism in 7rgani9ationa' -na'ysis$ University of Chicago +ress$ Chicago$ B!! e BBA )!""!*.

A. C. +ar5 and S. Hosha'$ Wor'd C'ass %orean Com,any

$ /!th Century 8oo5s$ Seou' )/00B*E M. Hoo'd and

%. Luchs$Whydiversify4Gourdecadesofmanagementthin5ing$ -cademy of Management *$ #>Be ##!

)!""A*E %. M. #e >A# )/00#*.!>. 3. %. Lee$- 3istory of the Gormation of %orean Chae&o's )in %orean*

$8i&ong+u&'ishingCo$Seou')!"""*.

!#. S. . Chang$ Ginancia' Crisis and Transformation of %orean 8usiness Hrou,s: The ise and Ga'' of Chae&o's

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Cam&ridge University +ress$ Cam&ridge$ )/00B*.

!A. Chosun Dai'y$ Gai'ure study: Samsung Motors$ )!""". ;. !!*.

!;. .3.3yun$Thecrisisandreorgani9ationofthe%oreanautomo&i'eindustryandtheirre'evancetointer6

nationa'i9ationandstrategica'ternativesin


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/>. SeeD.Leonard68arton)!""/*$o,.cit.atef.!/EL.H.Ruc5er$Thero'eofinstitutiona'i9ationincu'tura'

,ersistence$ in W. +o(e'' and +. DiMaggio )eds.*$ The e( Institutiona'ism in 7rgani9ationa' -na'ysis,

University of Chicago +ress$ Chicago$ ?Be !0; )!""!*.

/#.

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