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40/4-5 August-October 2007



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Special Issue


Choelsoon Park Theme Editor

The Corporate Transformation of Korean Firms


Charles Baden-Fuller Editorial

I am delighted to welcome readers to this Special Issue on The Corporate Transformation of Korean Firms following the Korean Crisis of the late 1990s. Organised and shaped by Professor Choelsoon Park of Seoul National University as guest editor, we have e in addition to his introduction - five articles that explore different dimensions of the Corporate Transformation of Korean Firms. Three examine carefully the causes of the crisis, emphasising failures in management practices. Professors Yoon-Dae Euh and Jay Hyuk Rhee set the scene by looking at the micro failings in financial institutions, Professor Dong-Jae Kim probes the causes of the troubles at Daewoo and Medison, and Professors Woonghee Lee and Nam Lee look at those of Samsung Motors Inc.. Whilst the context of these failures was uniquely Korean, and deeply influenced by high (but variable) growth rates stretching back over several decades, the stories are remarkably similar to those of companies in other countries that have found themselves in trouble, in both East and West. Many firms failed to keep micro-level processes in line with the macro changes, and modernization inside firms did not keep pace with modernization of the economy as a whole. Even where modernization did occur, too often executives stuck to past recipes rather than properly adjusting to new circumstances, and perhaps worst of all, continued to expand their Chaebol empires without regard to new market place realities. Whilst there is no suggestion of personal gain, as Professor Choelsoon Park aptly summarises, these failures were manifestly human. Those working with, or in, other Asian countries, or in Eastern European countries engaged on similar growth tracks, will want to be forewarned of the causes of crises: there is much to be learned here.
Perhaps the greatest lessons from the Special Issue comes in appreciating what firms did to respond most effectively to the crisis and how executives transformed their firms. Whilst all the articles touch on this issue, Professors Soonkyoo Choe and Thomas Roehl look at the whole landscape in examining how the Chaebols restructured and reorganised to improve efficiency and set new directions. The reader should realise that the specific actions that Korean firms took had to deal with the specifics of the Korean corporate landscape. Whilst the outward signs of the change appears to be of adopting traditional remedies of restructuring and rejuvenating mature businesses (as discussed often in this journal and elsewhere) practical implementation requires getting people to change their way of thinking and to act speedily. And it is this speed of action that is most impressive. It is worth remembering that the USA took more than 10 years to recover from the great depression of the 1930s, when output there fell by a comparable amount; in contrast, the Korean economy bounced up in only a few years. This was no doubt in part because some firms adjusted very quickly: at Samsung, as Professors Woonghee Lee and Nam Lee show, internal decision making was reorganised within months once the crisis became manifest. Only a few Western firms could match this response rate. While some firms reacted more slowly, even in the depth of the crisis the economy transformed itself and institutions found the ability to tolerate upstarts to fill gaps. This new appetite for growth provides the setting for the final article, in which Professor Kyungmook Lee and his colleagues examine how new firms such as Neowitz emerged from the depths of the slump to drive innovation in the Internet Space.


Choelsoon Park Radical Environmental Changes and Corporate Transformation: Korean Firms - Special Issue Introduction by the Guest Editor cpark@snu.ac.kr

In the institutional economics and strategic management fields, it is well known that institutional environments affect firm behaviors. To managers and policy-makers, as well as for academics, what is critical is to understand how a firm should react to changes in its institutional environments.

Korea is an excellent setting to examine this issue. The Korean economy experienced phenomenal economic performance prior to the late 1990s, followed by a severe downturn and more recently a dramatic recovery. Considerable attention has been paid to the factors that contributed to its past success, its failure and its recent recovery. Particularly, the dramatic environmental changes in the late 1990s, i.e., during the economic crisis and the period of the IMF ‘bailout’, have influenced almost all Korean firms. Faced with these radical changes, some Korean firms failed to recover from the crisis and eventually fell into bankruptcy. But others have recovered from their difficulties, and emerged more competitive than ever.

Our Call for Papers invited and selected articles that address the following issues. First, why did firms in Korea follow different strategies than firms in other countries? And why did Korean firms suffer in the late 1990s while they had been highly successful in the past? Second, why did certain Korean firms succeed in their transformation while others did not? We were both surprised and delighted with the array of responses. We had to reject a number of articles because of their inconsistency with our theme, rather than because of their quality, and also simply because of the limited space in this Special Issue. I appreciate the work of all the authors who submitted their high-quality papers for this Issue.


Dong-Jae Kim Fall From Grace and Lessons From Failure: Daewoo and Medison dkim@yonsei.ac.kr

Examining the spectacular cases of the failures of Daewoo and Medison – one an established traditional chaebol, the other the country’s leading entrepreneurial start-up - the author uncovers a rich vein of lessons for others. Benefiting from five year’s field research, the author shows how grand visionary concepts and charismatic leadership led these contrasting organisations, flagship examples of Korea’s old and new economies, not to the bank, but to bankruptcy.
His analysis of their failures leads him to believe that, while the outcome of corporate transformation may seem radical, a successful process will be gradual and incremental, the careful implementation of solid change management steps. He judges that neither Daewoo’s attempt to reproduce itself world-wide via a series of regional ‘mini-Daewoos’, nor Medison’s attempt to design the ‘Ever-Lasting Organization’, capable of shedding its skin and continually reproducing itself, were impossible or unrealistic ambitions. What let these companies down in their pursuit of glory was the unwillingness to take the necessary pains with the detail of change management. He shows how the fascination of grand visions, the single-minded obsession with growth, the lack of effective organisational systems the inability to challenge the authority of charismatic leaders – indeed there is more than a smell of hubris lingering over these stories - led directly to the downfall of two of Korea’s most famous success stories.


Kyungmook Lee, Sangkyu Rho, Seongsu Kim and Gyung Ju Jun Creativity-Innovation Cycle for Organisational Exploration and Exploitation: Lessons from Neowiz - a Korean Internet Company kmlee@snu.ac.kr

This article follows the story of Neowiz, the first company in the world to sell virtual products for real money, to explain how it has successfully ridden the Internet market waves and retained its leading position in this highly contested environment. The authors show how its swift-footed ability to translate creativity into innovation enabled it to successfully change its major service category three times in ten years, and stay one jump ahead of the competition with both breakthrough innovations and a non-stop stream of successive minor service improvements.
They describe the company’s four-stage creativity-innovation cycle: generating creative ideas from employees, communicating the ideas, implementing them and learning from market responses to feed the next round of creativity. They encourage firms keen to develop their innovation capabilities to learn how to find and hire creative people – selling virtual ‘avatars’ was first proposed by a 19-year-old intern – to organise work patterns to suit them, and to value creativity within their organisations. They also recommend an open-communication culture to guard against breaks in the creativity/innovation cycle, and running the cycle as tightly and as often as possible. In Neowiz’s case, this meant daily communication structures and the weekly addition and removal of minor service improvements, together with careful monitoring of users responses, to the point where the customers themselves effectively became a part of creative service design.


Woonghee Lee and Nam S. Lee Understanding Samsung’s Diversification Strategy: The Case of Samsung Motors, Inc. victory@hanyang.ac.kr

Samsung’s 1995 diversification into automobile manufacture was expensive, ill-timed and motivated more by non-economic than economic influences. The result was an embarrassing failure, with Samsung Motors Inc. being sold off (arguably too cheaply) to Renault. This article, by two men with direct research and managerial experience in Samsung’s ‘Office of the Chairman’ at the time, dissects the venture’s rationale and the effects of its outcome on Samsung’s strategic planning organisation, showing how the group learnt uncomfortable but valuable lessons which helped to weather the economic storm of the times.
Samsung’s economic rationale for the move was based on its ability to transfer its quality brand image, its planning team’s well-earned reputation for entering new markets successfully and the expectation of significant synergies with its undoubted electronics expertise. But the authors show how competitive imitation and legitimacy seeking – in effect, the desire to match the business portfolio of Hyundai, its arch-rival chaebol – were more influential motives. Samsung only took two and a half years to build its state-of-the-art production line, but by then Korea was deep into its economic crisis, and auto market growth had virtually evaporated.
In a final throw of the dice, Samsung’s planning team proposed bidding for the Kia auto company, but were out-argued by the more conservative financial group at a decisive Chairman’s Office meeting. The authors trace how this group’s influence rapidly replaced that of Samsung’s hitherto all-powerful planning group, leading directly to increased emphasis on efficiency reducing centralizing tendencies within the group – and therein lies the learning.


Yoon-Dae Euh and Jay Hyuk Rhee Lessons from the Korean Crisis: Policy and Managerial Implications jayrhee@korea.ac.kr

The 1997 Asian crisis shocked both the region itself, and those worldwide with trading or financial relationships with Asian firms. Focussing on the Korean situation, the authors argue that now the crisis is past is the time for worthwhile lessons to be learnt.
They examine the triangular relationships which allowed the government to use the country’s established business groups and banks as policy delivery vehicles, and reviews the development of the environment which allowed the crisis to cause such damage. They show how the availability of cheap finance in the 1980s encouraged the chaebols to expand headlong into favoured industrial sectors and aggressive exporting on the basis of maximising assets rather than returns, leading to dangerous levels of concentration of economic power. In globalisation ‘rush’ of the 1990s, they note how the too-rapid removal of market and financial restrictions in the pursuit of OECD membership fuelled even more aggressive overseas diversification, with local financial institutions obliged to maintain support for the chaebols, now massively indebted around the world.
The exchange rate crisis of 1997 is described briefly, and lessons from the whole story drawn for managers and policy-makers alike. They include the needs to be ready for market and financial liberalisation, to avoid mismatches between major stakeholders, to improve financial structures and standards of corporate governance, and above all to tie the ‘visible hand’ of government so the ‘invisible hand’ of the market may work efficiently.

Soonkyoo Choe and Thomas W. Roehl What to Shed and What to Keep: Corporate Transformation in Korean Business Groups Tom.Roehl@wwu.edu

When the Asian economic crisis hit Korea, the all-powerful chaebols, who for years had followed headlong diversified growth strategies, were forced into dramatically reducing their affiliated unit numbers. Within two years, nearly half the leading 30 chaebols’ manufacturing subsidiaries longer existed as separate units. Some were sold, some dissolved and some consolidated – but how did groups decide which firms should face which fate?
Analysing the outcomes, the authors point to the group’s or affiliate’s financial state, the affiliate’s closeness to the core group business, whether the unit had originated as an IV or an acquisition, and the longevity or closeness of their trading relationships with the group as possible reasons behind differing decisions as to their fate. They also point to differing levels of decisiveness between groups that survived the crisis and the many that went under.
Their overall judgement is that Korean business groups have become more competitive, with core competencies being more efficiently exploited, and long-run viability enhanced by more successfully balancing exploitation and exploration (‘cooking sweet and sour’), and they offer five lessons for managers in surviving such crises and rebuilding their group’s fortunes afterwards. They note the re-emergence of a more circumspect trend towards diversification, and recommend taking time to successfully absorb and rationalise one set of changes before embarking further growth.


This issue is available in full on-line at www.sciencedirect.com


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