Samsung Diversity Strategy

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Long Range Planning 40 (2007) 488e504

http://www.elsevier.com/locate/lrp

Understanding Samsung’s Diversification Strategy: The Case of Samsung Motors Inc. Woonghee Lee and Nam S. Lee

In 1995, the Korean chaebol Samsung diversified into automobile manufacturing with the establishment of Samsung Motors Inc (SMI). The timing of this venture turned out to be rather unfortunate, as SMI’s first car rolled off the Pusan production line in the middle of the Asian economic crisis. In serious financial distress, Samsung had to abandon SMI, selling it to Renault in 2000. This study explores the process of SMI’s creation, and follows the changes in Samsung’s strategic management during and after the crisis. Two questions are raised in the research: (1) How did Samsung come to invest in automobiles? and (2) How did the Korean crisis in general, and the crisis in the automobile market in particular, change Samsung’s strategic decision-making process? Central to its diversification strategy were the chairman of Samsung and key members of the planning team at the Office of the Chairman. We find that non-economic influences prevailed over economic influences in the decision to pursue the diversification strategy, and that due in part to the strength of these influences, Samsung underestimated the market risk and overestimated the contribution its core competencies and synergy could make. Matters were made worse by the significant costs incurred in transferring Samsung’s core competencies d its high quality reputation and culture d to the new business. By the time Korea finally emerged from the crisis, the finance team at the Office of the Chairman had taken charge of strategic management, increasing financial control and emphasizing internal efficiency. Ó 2007 Elsevier Ltd. All rights reserved.

Introduction
Research on corporate diversification has proliferated over the past several decades, providing both academics and practitioners with profound insights on the matter. Seldom, however, has the dynamic process of formulating and implementing diversification strategies in organizations actually been examined. The ‘black box’ of diversification may include such processes as how the 0024-6301/$ - see front matter Ó 2007 Elsevier Ltd. All rights reserved. doi:10.1016/j.lrp.2007.06.011

management acquires the motivation to pursue diversification; how it is supported, resisted, and approved; and how resources for its implementation are allocated in organizations. Research on chaebols (highly diversified Korean conglomerates) also suffers from the same problem, leaving many questions unanswered, such as why and how the chaebols became diversified. The chaebols’ rapid expansion, however, became unsustainable when the Asian financial crisis spilled over into Korea in December 1997, forcing half of the top 30 chaebols into bankruptcy or debt workouts, and compelling the remainder to pursue sweeping changes.1 These changes involved significant shifts in the corporate strategies and managerial philosophies that had been employed with great success for decades. They required a shift in emphasis away from external growth and towards operational efficiencies. There are now some concerns in Korea that the chaebols, once the nation’s major driver of economic development, have lost their growth momentum.

Of all the pre-crisis diversification efforts, one stands out: Samsung’s move into automobile manufacture. Of all the chaebol diversification efforts that occurred before the crisis, one case stands out: Samsung’s move into automobile manufacture. In fact, no corporate diversification in the history of the chaebols in Korea received more public attention than that of Samsung Motors Inc. (SMI). Although SMI’s diversification followed the typical chaebol program for growth, it had to be sold to Renault due to its serious financial situation caused, in part, by the crisis. Since then, there have been significant changes in the strategic management process...
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