Rutgers Newark University LG Electronics: Global Strategy Case Study Paper Question 2 – Trace the strategic growth of LG Electronics. Were there any distin

Rutgers Newark University LG Electronics: Global Strategy Case Study Paper Question 2 – Trace the strategic growth of LG Electronics. Were there any distinct patterns in terms of the company’s approach to emerging markets? Trace the commonalities across its strategies in the BRIC countries. TB0073
August 17, 2007
Kannan Ramaswamy
LG Electronics: Global Strategy
in Emerging Markets
Mr. Nam Woo, President of LG Electronics (LG), was collecting his thoughts after the press conference
in Beijing. He had been appointed as the President of LG Electronics in China in 2006 and was unveiling an ambitious agenda to accelerate LG’s presence in the country. He reflected on the emergence of
South Korea as a major hub in the consumer electronics business and the role that LG had played in the
rapid transformation. Having spearheaded a significant part of LG’s forays into emerging markets such
as Brazil, Russia, China, and India, Mr. Woo had synthesized some crucial lessons that he would have to
bring to bear as China moved up the scale in economic importance. He had told the press that LG
would target local Chinese managers to fill at least 80% of its managerial ranks shortly. “We want to
make China a strategic base for our business, so we must be a leader not only in sales, but also in
research and development and in localization.”1 It was a classic summary of the essence of LG’s success
in emerging economies.
LG had bet an important part of its future on success in emerging markets. It had entered countries such as Brazil, China, and India fairly early in its evolution, and those investments were providing
healthy returns. In many of these markets, LGE had emerged as the market leader and was setting the
trend for other competitors to follow. Many believed that the company was defining the broad contours
of successful global strategy for a multinational from the developing world. However, LG realized that
it had to demonstrate success in developed markets to rightfully claim its position among the leading
global consumer electronics and appliance manufacturers. Having conquered the major emerging markets, what would LG have to do in order to breach established markets such as the U.S. and Western
Europe where the global giants were active? Would the lessons it had learned in the BRIC countries
(Brazil, Russia, India, China) be helpful in making the transition from emerging to developed markets?
What were the implications for its global strategic positioning? These were the key questions that Mr.
Woo had to ponder.
The Korean Electronics Industry
By 2007, Korea had become synonymous with high quality, innovative consumer electronics products.
Within the short span of a few decades, Korean manufacturers had managed to shake off the stigma of
upstarts in an industry dominated by established Japanese and European players. Gone were the days
when products carrying labels such as Goldstar, Samsung, and Zenith were relegated to the back rooms
of electronics retailers. When the titans of the digital age such as Bill Gates of Microsoft and Craig
Barrett of Intel headlined the Consumer Electronics Show (CES) in 2005, they demonstrated digital
convergence using equipment from Korea. In 2007, LG showcased the world’s first dual-system DVD
1
Liu Baijia. 2006. LG wants local managers to aid growth. China Daily. April 20, 2006.
Copyright © 2007 Thunderbird School of Global Management. All rights reserved. This case was prepared by Professor
Kannan Ramaswamy for the purpose of classroom discussion only, and not to indicate either effective or ineffective
management. The active support of Mr. Nam Woo, President, LG Electronics, is gratefully acknowledged. Mr. Jin Kang,
LG Electronics, provided research assistance.
player that was compatible with both Blue Ray and HD-DVD standards. The Korean manufacturers
had indeed climbed into the spotlight. In the last two decades alone, the market value of LG Electronics
had grown at a compound growth rate of 22% from $200 million in the mid-1980s to $1 billion by the
mid-1990s and almost $11 billion by early 2005. Samsung had twice the market capitalization of
archrival Sony. This success story was a product of foresight, careful strategic thinking, and leveraging
an array of advantages that Korea was building at home.
The History of LG
LG was born as the Lak Hui Chemical Industrial Co. in 1947. It was founded by Mr. In-hwoi Koo for
the manufacture of cosmetic creams. Finding that there were no independent manufacturers capable of
supplying bottle caps needed for packaging the cream, Lak Hui Chemical set up its own facilities and
utilized the excess capacity of its injection-molding machines to manufacture small consumer products
based in plastic. This led to an entry into the manufacture of plastics components for telecommunication and electrical companies presaging LG’s entry into the telecommunications business. In fortifying
its access to feedstock for plastics manufacture, the company moved into oil refining and later into
shipping to transport crude oil. It was in 1958 that the Goldstar Co. (currently LG Electronics) was first
established to consolidate expansion in the fast-growing area of plastics.
Exhibit 1
The Evolution of LG Group’s Portfolio of Businesses
Founded as
a Cosmetics
Cream Maker
Electric Fan Blades
and Telephone
Casings
Plastic Caps
Combs, Toothbrushes,
Soapboxes
Electronic Equipment
and Telecom
Oil Refining
Insurance
Shipping
LG Electronics soon pioneered the growth of the Korean electronics and appliances industry,
becoming the first Korean company to build a vacuum tube radio, electric fan, black and white television, washing machine, and an automated telephone switching system. By the mid-1960s, the company
had moved into a range of industries including oil refining, cables, heavy manufacturing, and energy.
Much of the meteoric growth of the group started in the 1970s. Spurred by a country that wanted to
boost its exports and consolidate economic growth at home, the electronics, refining, and chemicals
businesses set records in terms of revenues that they contributed to the group. This era also saw the
move into financial services through the acquisition of an insurance company and a securities trading
firm. The 1980s were a period of dedicated internationalization. Starting with intensive exports to
developing countries, LG soon moved to capture markets in the developed world. It launched a range of
joint ventures with established players from the West such as Caltex and EDS, and started testing the
U.S. markets for electronics products. By then, the ground had already been laid for growth in developing markets such as China, India, and Vietnam, where the company had established a significant presence in a variety of industry sectors.
2
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In 2007, the company was well under way with its rebalancing and restructuring program that
sought to rationalize its business holdings into core and non-core groups. It had identified three focused
business areas as the key domains for its activities—electronics, chemicals, and telecommunications.
The group adopted a holding company structure that promoted more transparency and autonomy for
subsidiary operations. It had already made its presence felt in the most developed consumer market in
the world, the United States, where its CDMA phones outsold all competitors two years in a row. It had
also established a strong beachhead position in flat screen televisions through its joint venture with
Philips, the Dutch electronics company. LG-Philips was the largest manufacturer of flat screens in the
world by a wide margin. By 2006, sales revenues at the group level were roughly $23 billion, generating
profits of $500 million. The group had to consolidate these successes in developed-country markets to
evolve into a global competitor across the wide range of industry sectors that the organization competed
in.
Betting on Electronics
LG Electronics had been quite instrumental in launching the LG brand worldwide. Given its suite of
consumer products, ranging from home appliances to mobile telephones, LG had been at the forefront
of the group’s globalization efforts. It accounted for approximately 47% of group revenues. The company exemplified a “come from behind” approach to defining its strategy by focusing first on markets
that few dared to enter. It had formulated a unique mix of management principles and practices to fight
its way to the top in the consumer electronics and appliances industry. It owed much of its origins to the
competitive context within which it had evolved.
Much of Korea’s rise in the economic sense has been attributed to the chaebol, largely familyowned business groups that have powered the economy forward in a variety of industries ranging from
petrochemical and textiles to semiconductors and shipbuilding. Working hand in hand with the
government’s industrial policy and growth initiatives, three of the largest chaebol—Samsung, Daewoo,
and LG—led the charge in the field of consumer electronics. President Park Chung Hee, seen by many
as the creator of modern Korea, enacted the Economic Development Plan that highlighted the electronics industry as a national priority sector that would be developed. The government encouraged foreign
direct investment to secure technology and creation of joint ventures with leading electronics companies worldwide. LG partnered with Hitachi of Japan, Daewoo with GE, and Samsung with Sanyo and
NEC. Soon thereafter, foreign companies through their joint ventures in Korea were exporting close to
70% of all electronics products from the country. This formative period focused on labor-intensive, low
value-added products that did not have any significant technology dimension with foreign companies
assuming leadership roles in much of the technologically sophisticated products.
It was only in the 1980s that the industry accelerated its drive to prominence by emphasizing
technology and indigenous research. Firms were encouraged to invest in local R&D, and the government created a research infrastructure to help this initiative. Resulting from these efforts, Korea had 120
private research institutes and 18 research consortia in operation by the mid-1980s.2 Industry promotion councils and cooperative institutions were formed to ensure technology access across all Korean
firms. A national education policy that emphasized science and technology education went into effect.
Vocational schools attracted more students for technical education, while the universities were encouraged to build an elite group of experts in science and technology. As a result of these initiatives, the
number of people engaged in R&D jobs in consumer electronics multiplied roughly five-fold in a 20year period from 1975 to 1995.
Encouraged by the technology investments, many of the companies started to explore export
markets under their own labels and tried to break out of the OEM mode. Many of these firms, like
Samsung and LG, were quite surprised to find that their products were not well received in the devel2
W. R. Shin, and A. Ho. 1997. Industrial transformation: Interactive decision-making process in creating a global
industry. Public Administration Quarterly. Summer.
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3
oped markets. Retailers relegated their wares to the back rooms of their stores where they only collected
dust. This proved to be an important lesson in understanding the value of differentiated products,
innovative design, and superior product quality. Chastened by the experience, these companies invested
much more effort into developing a world-class range of products.
Since the home market was relatively small, Korean companies had to establish a firm foothold in
overseas markets. Building on this early exposure to demanding foreign markets, Korean companies
were forced to differentiate their previous-generation products from those of past global leaders. Years
of aggressively exploiting technological innovations while simultaneously improving internal valuechain arrangements and organizational structures to reduce their costs had pushed Korean firms harder
than their global competitors, whom they had now surpassed. This called for audacious investments in
R&D, anticipatory internationalization, a focus on process innovation, and careful cost control.
If You Are Not Hungry, You Cannot Find Food
The big three Korean electronics manufacturers leveraged their relationships with the leading consumer
electronics companies to understand the markets that their main buyers served. The OEM relationship
offered a fairly comprehensive view of the markets where the established veterans from Japan were
fighting their competitive battles. Squeezed by the very small and economically poor home market on
the one hand, and constrained by the OEM relationship on the other, LG and others could not visualize
a future that was not global. Although the OEM relationships had helped LG and others in numerous
ways, it was clear that this would not lead to global competitiveness.
Having studied the developed-country markets secondhand through their joint venture partners,
LG and others felt emboldened to launch their own branded lines in these challenging markets. LG
used the Goldstar brand to sell a range of home appliances such as microwave ovens and toaster ovens in
the U.S. It found the battle for shelf space in retail outlets a very difficult challenge to overcome.
Dogged by poor brand recognition, and questions about product reliability and quality, it found that its
products were not showcased to sell. The prime spots on the shop floor were always set aside for the
more elegant Japanese and European product lines. Goldstar appliances were relegated to the corners of
the store or hidden away in back rooms gathering dust. LG realized that it would have a lot of work to
do in order to give its products the appeal that developed-country buyers often sought. Faced with the
difficulties in establishing a foothold in developed-country markets, LG started to craft an alternative
approach.
Anticipatory globalization through bold and audacious investments in emerging markets became
a centerpiece of the LG strategy. Mr. Kwang-Ro Kim (currently President of LG Southeast Asia), who
led LG’s meteoric rise in India, for example, observed, “We have seen many Japanese and Chinese
companies arriving in India, but like other foreign-owned businesses, they typically put one foot in the
water to see if it is warm or cold. They have doubts. They lack determination.”3 The ability to visualize
markets in the long term was a critical ingredient in LG’s success recipe. While some of its competitors
were concerned about making sustainable profits in the short term, LG was willing to enter a market if
it believed in its long-term potential. For example, LG entered India in the early 1990s, but it took more
than a decade for the company to navigate local regulations and market structures to establish a position
of significance. Although the company had set its sights early on Europe and North America, much of
its success came from the emerging markets, specifically Brazil, Russia, India, and China.
Brazil: A Bold Move Forward
LG established its Brazilian operations in the mid-1990s and started manufacturing televisions and
VCRs at its factory in Manaus. The government of Brazil was promoting investment in the underdevel3
P. R. Sinha. 2005. Premium marketing to the masses: An interview with LG Electronics India’s Managing
Director. The McKinsey Quarterly Special Edition: Fulfilling India’s Promise.
4
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oped rainforest region around the headwaters of the Amazon, and offered tax incentives and subsidized
land for investors setting up operations. In parallel, the company also established a factory in Taubate,
located between the major Brazilian cities of Sao Paulo and Rio de Janeiro. While the factory in Manaus
produced audio/video products and related equipment, the other plant focused on communications
products such as cellular telephones and monitors.
The Brazilian market of the late 1990s was characterized by very high import tariffs, significant
competition from the gray goods market, and very low brand awareness. The major consumer electronics players such as Sony and Philips were operating in Brazil with mixed fortunes. Things started to turn
sour in 1999 when the local currency became unstable, leaving managers scrambling to manage operations. The exchange rates started to plummet with increasing levels of uncertainty. This made planning
nearly impossible. Many of the global players decided to either scale down their operations as a consequence or to temporarily exit the market. This proved to be a turning point in LG’s Brazil strategy.
Despite the precipitous exchange losses, LG decided to not only stay in Brazil but also expand its
presence there and conceived a strategy that would leverage Brazil as a regional manufacturing hub
serving South America and the U.S. markets. Thus, with the dropping value of the local currency, the
real, LG was able to shore up some of the low-cost advantages that made exporting increasingly advantageous. It could balance its accounts receivables and payables accordingly, and thus build a viable
hedge against exchange rate fluctuations. In due course, LG became one of the largest electronics exporters from Brazil, vaulting the company into the ranks of organizations that the local government saw
as a preferred partner in national growth.
LG augmented its Brazil strategy through a series of well-orchestrated moves. First, upon entry, it
focused on maximizing the benefits that the government was providing by way of preferential land
access, and lower tax rates for locating in underdeveloped areas. Given the rampant smuggling of graymarket goods, LG made it a priority to join with the government in combating this problem. Since
imported gray goods were sold at cheaper prices, it had made it difficult for manufacturers to build a
strong revenue base when their prices were relatively higher given the incidence of local taxes, something that the smugglers did not have to contend with. Perhaps the biggest challenges were in the areas
of marketing and financial management.
The LG brand was hardly known in Brazil when the company first entered, and much needed to
be done to build consumer awareness. Taking a cue from the immense popularity of soccer in the
country, LG piggybacked its branding campaign on sports events sponsorship. It even sponsored a
football club in Sao Paulo, one that was ranked among the top clubs in the country. This sponsorship
activity gave the company the instant brand recognition it sought. Leveraging this brand recognition
into tangible revenues required careful customization of its product offerings. It started by adopting a
premium positioning strategy in the market for displays, televisions, and home appliances. Its approach
to product quality was refreshingly new for the Brazilian market, although it demanded a price premium for it. It backed most of its products with a three-year warranty coupled with a guarantee of
almost instantaneous service in case of product failures and breakdowns. It employed a fleet of service
vehicles that could be dispatched to a customer’s location within a very short period of time. This
ensured that the consumers could expect a level of reliability that was unknown in the market at the
time.
It signed agreements with local distribution chains to gain quick access to the market. The development of its own preferred/authorized dealership network complemented third party distribution
arrangements. It placed an enormous focus on relationship development in nurturing its networks of
dealers by scheduling periodic product events, social gatherings, and educational opportunities. The
portfolio of products that it sold was also customized to address local market realities. Its approach to
customization was, however, unique. Where others had sought to downscale their offerings to suit the
thinner wallets of the impoverished customers in emerging markets, LG sought to expand its offerings
to encompass a wider range. It typica…
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