Samsung Group[1]

The Samsung Group had a long history and considerable experience in managing commodity businesses.  In 1953, the company, founded by Byung-Chul Lee, made its start as a sugar refiner.  The next year it entered textile manufacturing and soon added property and casualty insurance and life insurance operations.

For many years, the Samsung Group benefited from close relations with the Korean government.  Following the Korean War, the government relied on Samsung and other chaebol to bring economic development to the country.  Together the leaders of the chaebol worked with government officials to develop a strategic plan for the economic development of the country.  Samsung group entered diverse business lines, including paper manufacturing, construction, shipbuilding, and electronics, which would bring economic growth to Korea.  Because the government offered financial subsidies to the chaebol to encourage their expansion, they entered diverse business lines in rapid succession with little incentive to focus on operating efficiencies in existing businesses.  In 1959, Chairman Lee established a headquarters office to make strategic decisions about entry and expansion into new businesses.

For many decades, the chaebol used profits from more efficient businesses to support other group companies facing financial difficulty.  The Asian Financial crisis of 1997 brought a change to these and other business practices.  In order to bring economic stability and increase investor confidence in the Korean economy, the government began to enforce regulations that the chaebol operate their subsidiary companies as legally independent entities.  In addition, one of the conditions of the bailout of the Korean economy by the International Monetary Fund was that barriers to foreign ownership be reduced.  As a result, the practice of transferring funds between chaebol companies was eliminated.  Group companies were forced to become self-sufficient, although they still operated under the strategic direction of the group headquarters.[2]

Samsung Group Headquarters

The Samsung Group operated under the philosophy that its corporate headquarters could provide the strategic direction and analytical research to identify new businesses and direct the resources necessary for initial investment.  Resource allocation to both new and existing businesses was decided according to three value disciplines: product leadership, operational excellence, and customer intimacy[3].  In addition, each business was expected to exceed a hurdle rate for return on investment.

The headquarters performed its analysis in a collaborative effort with the managers of the Samsung businesses.  Dr. Soon-Bong Yoon, Senior Executive Vice President at Samsung Economic Research Institute, described this strategic planning process as “middle-up-down management”[4]:

Chairman Lee shows us the vision and the big picture for direction.  Then, the middle managers generate the various ideas about that vision.  The Chairman’s headquarters evaluates those ideas and selects among them.  If an idea is selected, a real business is started.  And that’s the key point of the centralized leadership and decentralized managers.  We have both advantages.[5]

The headquarters benefited from its ability to look across a greater breadth of the organization than was available to each business unit president.  Once an idea was funded, however, the leader of that business was entirely responsible for execution.  Most strategic and tactical decisions, including subsequent investments, were decided by the president of the business, who operated for the most part autonomously.

Dr. Yoon described middle-up-down management as a four-part, self-reinforcing system.  The first driver of the system was the intuitive wisdom of the chairman, whose vision drove the long-term direction of Samsung Group.  The group headquarters compiled extensive analysis and made recommendations on strategic direction, but it was the intuition of the chairman, developed over many years, which selected the future direction of Samsung.  Dr. Yoon used Samsung’s semiconductor division as an example of managing with intuition:

The investment for a semiconductor fabrication plant costs several billion dollars. It takes about one to two years to construct one factory.  If the demand forecast is not clear at the time, the investment decision is very difficult.  At that time, the owner’s intuition can be critical for the investment.

Dr Yoon agreed that intuition was difficult to define, but that it meant an ability to make sound judgments leading to decisions, without necessarily articulating a transparent logical path.  It was based on experience and the ability to recognise patterns that had occurred before and understand the potential for their future application.

The second driver was ownership management, meaning that investment decisions were made by the chairman, who had a significant ownership of the chaebol.  Samsung believed there were benefits of having ownership and management held by the same person, one of which was that decisions could be made quickly.  Because one of Samsung’s core values was product leadership, first-mover advantage was highly valued.  Dr. Yoon explained:

[In the early 1990s], we caught up with NEC in the DRAM market by developing the 4 megabit DRAM.  NEC and Samsung made the decision to invest at the same time.  But NEC had to borrow money from Sumitomo Bank.  The process took so long, maybe a year or more.  Samsung was able to invest immediately.  The key point was the speed, the short funding time, which resulted from ownership management.

The third driver was portfolio management, which protected the Samsung Group in case the decision-making of the headquarters was mistaken.  Diversification of the investment portfolio ensured that Samsung Group’s capital was not overly concentrated in one area, to the extent that its failure would bring down the entire organization.  According to Dr. Yoon, Samsung referred to portfolio management as “flying geese management,” referring to the fact that “when geese fly, they don’t fly alone; they fly together” and take direction from the front[6].

The fourth driver was core competency management[7], the principle that funds would only be made available for businesses which were based on Samsung’s core competencies.  Core competency management would protect Samsung Group against entering businesses without the necessary management strengths to be competitive.

As a result of the portfolio approach and the core competency discipline, the businesses were implicitly in competition with each other for funding and would receive the additional capital required to grow only if they could demonstrate a track record of success.

Together, Dr. Yoon believed that “these four management elements comprise a positively reinforcing system” and that this self-reinforcing system was critical in the success of the semiconductor business.

[1] For more information on Samsung Group history, see “Samsung and Daewoo: Two Tales of One City,” HBS No. 9-804-055.

[2] GSB No. IB-24A, pp. 7-8.

[3] The concept of the three value disciplines is detailed in: Michael Treacy and Fred Wiersema, The Discipline of Market Leaders: Choose Your Customers, Narrow Your Focus, Dominate Your Market. Reading, MA. Addison-Wesley, 1997

[4] The concept of middle-up-down management is detailed in: Ikujiro Nonaka and Hirotaka Takeuchi, The Knowledge-Creating Company, New York : Oxford University Press, 1995.

[5] Quotations from Dr. Soon-Bong Yoon, Senior Executive Vice President, SERI, from case writer interviews July 14, 2006.

[6] The flying-geese model was first used to describe the life cycles of industries in the course of economic development (Akamatsu, 1962), with the focus on specific industries in specific countries.  Subsequently, it was extended to study the dynamic changes in the industrial structure (that is, the rise and fall of different industries) in specific countries, and further to the shift of industries from one country to another.  See Kaname Akamatsu, “A Historical Pattern of Economic Growth in Developing Countries,” The Developing Economies, 1962.

[7] The concept of core competency management is detailed in: Gary Hamel and C.K. Prahalad, Competing for the Future, Boston, Mass: Harvard Business School Press, 1994.

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