LG Electronics Global Strategy in Emerging Markets - Assignment Example

?LG Electronics: Case Analysis And A Critical Analysis of Peng, W., et.al.’s 2008 Journal Task 010. Section A. LG Electronics Global Strategy in Emerging Markets Up to 2007 LG Electronics is a Korean multinational which started as Goldstar Co. in 1958. The business used to be focused on plastics. Goldstar used to be the brand names of televisions, washing machines, radios, refrigerators, and air conditioners that were produced as early as the 1960s (LG 2012). It was in the 1980s when LG Electronics began to export to the emerging markets like China, India, and Vietnam, as well as to industrialized countries, e.g. in the US electronics market. By 1995, Goldstar changed name to LG Electronics when it acquired Zenith, a US firm. The company eventually focused on three industries –“electronics, chemicals, and telecommunication” ((Segal-Horn, S. and Faulner,D. 2010, p.362) by 2007. Its very successful products include the CDMA phones sold in the USA and the flat screen TVs for the world through a joint venture with a Dutch company known as Philips. One of the strategies implemented by LG Electronics was being aligned with Korea’s economic development spearheaded by the government. Another strategy involved entering into joint ventures with foreign firms like Hitachi, Daewoo, Samsung, Sanyo, and NEC. This made LGE dominate the electronics product manufacturing in Korea , with 70% of market share. In the 2007 Annual Report of LG Electronics (LGE Investor Relations 2007, p.9), the CEO of LGE declared: “Creating greater value for every stakeholder is our one and only focus.” Six (6) strategic initiatives were identified at that time. First, the CEO told the management to aim for both growth and Returns on Investment. He meant that the company as a whole should ensure profitability, ROI, and growth in terms of sales and market share (p.11). Second, aim for leadership in the business portfolio. Third, there should be clear targets, clear segments, and clear positioning insights as basis for strategies. Fourth, the company should invest on a way to gain clear global identity. Fifth, keep innovating in technology and design, And sixth, develop the global organization of LGE. He also identified the seven (7) criteria for performance evaluation of the company’s health, namely, the product pipeline health, “channel collaboration, consumer relationships, business portfolio, brand, organization, and finances” (LGE Investor Relations, 2007, p. 10). Product pipeline refers to having clear differentiation in terms of product position in the market. Channel collaboration meant not being dependent on limited patronage from those who buy in volume. As of 2007, LGE was reported to be operating in 120 countries. It had competitive products belonging to 30 categories. To develop advantages, LGE maintains an awareness of what people need and want, and strives to create more value that people will appreciate. Thus, because LGE management realizes how people want to feel sophisticated, the company keeps on innovating particularly the design and technology of its products To be able to maintain such ongoing improvements, LGE funded “38 research labs around the globe” (p.15). The most important issue for LGE has been about the right way for its business to sustain growth in the global community. All the combination of strategies implemented were geared towards resolving that issue which has led the management to decide in favor of adding value to the lives of people via research ad development followed by acceptable innovations. Section B. LG Electronics Global Strategy in Emerging Markets From 2008 Onwards In the 2008 Annual Report (LGE Investor Relations 2008, p.27), the thrust of LGE was towards becoming the # 1 in manufacturing devices for home entertainment by the year 2010. The rank of LGE in the production of mobile phones became 3rd in 2008 after achieving a high growth rate with a total of 100.7 million units sold, up by about 25% growth from the previous year. The same spirit of innovation and desire to add value to the lives of people was communicated by the CEO of LGE in its 2009 Annual Report (LGE Investor Relations 2009, p.14).at a time when the world’s economy was suffering with recession both in USA and Europe. Yet LGE reported not just the challenging economic situation but also its consistent accomplishments in spite of economic deterioration. The company reaffirmed its commitment to add value to the people’s lives to the point of enriching them through product innovation and production. Production and deliveries of mobile phones continued to rise at LGE from 80.5 million units in 2007, to 100.7 million units in 2008, and 117.9 million units in 2009. It was in 2009 when LGE became the 2nd largest LCD TV producer in the world. However, in the Stock Markets (including Nasdaq, S & P, and Dow Jones), no matter how good the strategy of LGE was in 2009, there was a common indication of decline in the value of its shares during the time of the economic recession. This can be clearly seen in a comparative graph in Figure 1. (Source: Finance.Yahoo.com Comparative Historical Chart of LGE Stock Values 2004-2012. Viewed December 8, 2008, 2012 @ http://finance.yahoo.com/q/bc?s=066570.KS&t=my&l=on&z=l&q=l&c=%5EGSPC%2C%5EIXIC%2C%5EDJI ) Nonetheless, LGE managed to tap the opportunity that globalization has to offer. The company was able to keep growing, keep innovating and operating at higher efficiency because of a bigger market covering many countries. Kluyver, Crnelis De (2010, p. 10) described the characteristics of globalization as one which allows companies to “pursue growth, efficiency, and knowledge; to better meet customer needs; and to pre-empt or counter competition.” In the case of LGE, the company found USA an attractive market although it already has a matured market with people having most of the necessities and even luxuries. Through product innovation and differentiation, LGE was able to penetrate USA market for televisions and mobile phone. By having the opportunity to produce in high volume, e.g. of mobile phone, LGE was able to achieve efficiency and thereby profit even during the time of recession in 2008 and 2009 (LGE Investor Relations 2009, p. 49). In 2008, its net income was W 482+ billion (Korean Won), while in 2009, net income even increased to W 2.0+ Trillion. Another advantage gained by LGE through globalization was knowledge about the needs, wants, and preferences of people. This enabled its R & D to create innovative products capable of meeting what people valued. When the final product was produced and offered to potential buyers, the people saw added value for themselves by purchasing the innovative technology and/or design. It was obviously not a result of trial and error, which would have been expensive. Rather, in the course of dealing with people in the market, LGE was able to listen to what people valued and then produced the innovation. This was a strategy formulated with calculated risks through investments in R & D. Kluyver, C.D. (2010, p. 11) furthermore explained that entering an emerging market as a front runner is able to gain the competitive edge, precisely because the product innovation desired by the market is produced ahead and with little or no competition. Segal-Horn, S. and Faulkner, D. (2010, p.7) identified the global characteristics of a company as differentiated from international, transnational, and multidomestic, to be as follows: (1) It is centralized but scaled to operate globally. (2) Strategies being implemented to generate sales are those of the parent company. (3)The centralized company researches for knowledge and uses the information to develop the market for its products. By 2010, LGE redefined its goals by first recognizing that the company already has the best talents, strongest consumer electronics brand, and the technological capability to add value to the lives of people (LGE Investor Relations 2010, p.8). Thus, the CEO aimed to increase investments in developing new technologies as well as business models in preparation for opportunities in the future. He also aimed to improve the quality of management as well as further improve on the competitiveness of LGE products with more innovation. LGE had a high-tech refrigerator that got an A++ rating for energy efficiency, a refrigerator with front-door icemaker, a robotic vacuum cleaner that can find the places to clean on its own, and more. The company has many products with the latest technological advancement not found in competing products. To this day, LG electronics aims to be the leader in product innovation that can solve the problems of people with regards to certain needs. According to Ramaswamy, K. (Segal-Horn, S. and Faulner,D. 2010, p.360), LG Electronics ventured into researching and developing the market for electronics in China, under the leadership of LG Electronics President in China, Mr. Nam Woo. One of the strategies in China as emerging market was to position Chinese managers in the organization of LGE up to 80% of the total managerial positions. This was a good way to encourage the Chinese to support LGE products. In the formulation and implementation of global strategies, the most significant issue is how to successfully reap the benefits of globalization in the spirit of competition without meeting prohibitive resistance from emerging markets. The solution discovered by LGE is to know what people need and want and to provide innovations that meet needs and wants. In order to benefit the most, LGE always seeks to be ahead of its competitors.through ongoing R & D and innovations. Task 011. Critical Analysis Analysis of a Journal by Peng, M.W.; Wang, D.Y.L.; and Jiang, Y.(2008) Section A. Synopsis Peng, M.W., et.al (2008, p.1) argues that there are three potential drivers of International Business strategies, namely, (a) conditions in the industry wherein the business belongs, (2)resources and the differences of access to such resources, and (c)underlying institutions that define the competition in the international business. Institutions within emerging economies present rules or terms and conditions which cause International Businesses to formulate strategies that meet requirements within those rules in order to arrive at a successful business performance(p.2). In a country where the economy is stable or running well, there is an indication of strong institutions controlling the situation, Emerging economies are identified with a society wherein strong institutions are able to allow developments to move on normally and various organizations co-exist with controlling institutions. They exert an influence on the policies within a country. The journal of Peng, M.W. (2008, p.5) gave the example of “anti-dumping law or rule which can prevent potential threats to certain businesses protected by the institution. There are proper procedures to do business in India and/or China. International business strategies formulation would have to consider these undoubtedly. The influence of institutions is strong enough to create a backlash on countries with hostile or biased treatment of foreigners. For example, in the case of India whose people believe themselves to be talented in IT, if institutions in India practice repulsive regulations against foreigners, there is always the possibility that in the country of the foreigner who was harassed in India, the institutions will also make it difficult for migrating people of India to transact or live in another country. One other observation was that in emerging economies like China, there is another influential network not necessarily an institution, which should be considered in the development of strategies. It is an interpersonal network among Chinese managers known as quanxi (p.8). Other countries (Argentina, Chile, Czech Republic, Poland, India, Russia, and even South Korea) had been observed to have a similar force to reckon with in the strategy formulation and achievement of good performance. There can be cultural roots for the situation. If so, their impact will be for quite a long time. Companies aware about the impact of institutions or networks within an emerging economy will be able to formulate strategies capable of gaining a competitive advantage over other firms within the same industry. This is because those institutions or networks maintain formal and/or informal rules or norms. As a matter of fact, it can be lack of rules to maintain what countries like USA as right ways. The example given in the journal was about competitors meeting in China to discuss pricing. This is actually the absence of antitrust laws. In the USA, it is illegal. Another example given was the goal of lowering prices which can be considered also unfair because it is about “cut throat competition” capable of killing small entrepreneurs who cannot withstand a price war. Considering institutions or networks within countries as one of the important basis for the formulation of international business strategies should therefore be taken seriously, along with industry variables and resources available to the company. It is particularly necessary where such institutions or networks have a great impact on the performance of the organization. The tripod recommended as basis for the formulation of a more comprehensive global strategy formulation is therefore very logical and for implementation in order that long term viability and sustainability will be possible in emerging economies. And further studies will be necessary to find out the yet unknown or not clear rules familiar only to those who belong to the institution or the network. Once known, the managers given the responsibility to formulate strategies should be informed about the discoveries. An easier way would be to hire qualified managers who are familiar with local institutions and their practices so that the other members of the organization will learn from those who already know what those factors are. After all, there is a potentially significant impact on the success or failure of the international business over the long run. Ongoing research about such factors involving the institutions and/or networks should be considered valuable in line with these thoughts, even while there may be some local managers with an awareness of the hidden facts. Section B. Critical Analysis This issue about institutional factors is actually not new. As early as the year 2000, Hoskisson, R.E., et.al. (2000, Abstract) had identified the need to consider an “institutional theory” for the formulation of strategies in emerging countries. Hoskisson, R.E, Eden, L.,Lau, C.M., and Wright, M. who wrote the journal, represented four different universities in writing about the institutional basis for strategy formulation. They came from University of Oklahoma, Texas University, Chinese University of Hongkong, and University of Nottingham respectively. They described the consideration of institutions as “pre-eminent in helping to explain impacts on enterprise strategies” (p.4). However, they identified the government as the very influential institution while there are other non-industry influential factors. In their conclusion, these authors classified the institutional basis for strategy formulation as “most relevant” as markets emerge. “followed by transaction cost theory / agency cost theory, and then by the resource-based view”. They had also recommended further research. Considering the many years that have passed, there ought to be more specific and definite findings about those related factors as a result of the influence of institutions within a country. A good documentation should be per emerging economy and per influential institution or network. There is, for example, a sample written work about the more specific institutional effect, which was by Zhu, Y., Wittman, X. and Peng, M.W. (2012). In that journal, China was identified to have an institution that prevented small and medium enterprises from innovating or introducing innovations.They were able to enumerate the following barriers (Abstract): “(1) competition fainrness, (2) access to financing, (3) laws and regulations, (4) tax burdens, and (5) support systems.” All these were classified by the authors as institutional-based barriers. Taken from the standpoint of global corporations in emerging economies like China, it would appear that such barriers would even be to the advantage of big companies like LG Electronics which has the freedom to innovate with its home appliances and mobile phones. Such a company will be protected by growing competition in the field of innovations. What Peng, M.W. (2008) was probably worried about pertained to negative institutional basis for strategy formulation. This means thee may be hidden rules not known to the management of International Businesses which can foil an attempt to become established over the long term. For example, will the Chinese government retaliate against unwanted political initiatives of the US government by eventually making it difficult for the International Businesses owned or partially owned by US citizens, to survive in mainland China? Will the Communist Party not field their own competitor against an International Business right after they have discovered the technologies being utilized in their own country but by a foreign firm. Should global strategies have contingency plans in case this happens? In an article by Badkar, M. (2012), the Chinese Business Insider reported that there were threats of retaliation against accusations thrown at Chiinese Telecom business owners in the USA. It was the House Intelligence Committee of the Communist Party that communicated such a warning. If this institutional hazard takes place, what would become of all the investments in China by countries who might be victimized eventually? What global strategy can prevent substantial losses as a result of such unavoidable circumstances? This scenario raises the risk of doing business in an emerging economy like China. Is there anything that the private business owners can do about it? Actually, there is. That means International Businesses would have to allocate some resources to the work of lobbying at both ends for prevention of unwanted conflicts. And this would prove that considering Institutional-based variables has its significance. Another possible strategy may be the provision of contingencies long before the feared circumstances happen. Ownership of the businesses in China (just for an example) can be partially shared with the people of China, so that any attempt to damage the performance of the International Business in the emerging market will have to be withheld. Implementing a disastrous retaliation will also damage the performance of their fellow Chinese who also owns the International Business in China. These are just possible preparatory strategies for the worse case scenario. However, the sample specific case only involves one particular factor involving the governments. What should be equally important are the other variables that management ought to be aware of for the purpose of being ready with strategy formulations considering those other variables that are not industry related or resource related. This follows the widely accepted idea that knowledge and awareness can serve as competitive advantage in business. First of all, it is possible to research and discover these yet unknown information, considering that International Business R & D can find out what most people want or what they truly value. In the same way, the Institutional or network influential factors can also be known if diligently researched. But it should not take too long as it has taken close to a decade or more than a decade to discuss Institution-based factors in emerging economies. References: Associated Press. EU Imposes $ 1.9 Billion Cartel Fine on Screen Producers Including Philips, LG, Panasonic. The Washington Post, December 6, 2012. Viewed December 8, 2012 @ http://www.washingtonpost.com/business/eu-imposes-19-billion-cartel-fine-on-screen-producers-including-philips-lg-panasonic/2012/12/05/4078b96a-3f41-11e2-8a5c-473797be602c_story.html Badkar,Mamta. Chinese Newspaper Demands Retaliation After US Report on Huawei and ZTE. Business Insider, October 11, 2012. Viewed December 9, 2012 @ http://www.businessinsider.com/huawei-and-zte-prompt-retaliation-demand-2012-10 Hoskisson, Robert E.; Eden, Lorraine; Lau, Chung Ming; and Wright, Mike. Strategy in Emergin Economies. Academy of Management Journal. 2000, Vol. 43, No.. 3 , 249-257. Kluyver, Cornelis and Carpenter, Mason (Ed).. Fundamentals of Global Strategy: A Business Model Approach. NY, USA: Business Expert Press, 2010. LG. About LG: History. LG Electronics 50-Year History. Viewed December 8, 2012 @ http://www.lg.com/global/about-lg/corporate-information/at-a-glance/history LGE Investor Relations. 2007 Annual Report. LG.com 2012. Viewed December 8, 2012 @ http://www.lg.com/global/investor-relations/reports/annual-reports LGE Investor Relations. 2008 Annual Report. LG.com 2012. Viewed December 8, 2012 @ http://www.lg.com/global/investor-relations/reports/annual-reports LGE Investor Relation. 2009 Annual Report. LG.com 2012. Viewed December 8, 2012 @ http://www.lg.com/global/investor-relations/reports/annual-reports LGE Investor Relations. 2010 Annual Report. L\g.com 2012. Viewed December 8, 2012 @ http://www.lg.com/global/investor-relations/reports/annual-reports LGE Investor Relations. 2011 Annual Report. L\g.com 2012. Viewed December 8, 2012 @ http://www.lg.com/global/investor-relations/reports/annual-reports Peng, M.W., Wang, D.Y.L. and Jiang, Y.. An Institution-Based View of International Business Strategy: A Focus on Emerging Economies, Journal of International Business Studies, 2008. Vol. 39, No. 5, pp. 920-936. Ramaswamy, K. LG Electronics: Global Strategy in Emerging Markets. Case Study, 2007. Segal-Horn, S. and Faulkner, D. (Eds.). Understanding Global Strategy. Cengage Learning, 2010. EMEA, pp.360-372. Zhu, Yanmei; Wittman, Xinhua; and Peng, Mike W. Institution-based Barriers to Innovation in SMEs in China. Asia Pacific Journal of Management. 2012. 29: 1131-1142. Read More