Global Strategy in Emerging Markets
Having spearheaded a significant part of Lag’s forays into merging 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 LAG 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. L It was a classic summary of the essence of Lag’s success in emerging economies. LAG 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, LEG 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, LAG 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 LAG 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 BRICK 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. Wealth the short span of a few decades, Korean manufacturers established Japanese and European players. Gone were the days when products carrying labels such as Goldwater, 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 (SEC) in 2005, they demonstrated digital convergence using equipment from Korea. In 2007, LAG showcased the world’s first dual-system DVD 1 Lieu ABA]IA. 2006. LAG 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 Keenan Ramsey for the purpose of classroom discussion only, and not to indicate either effective or ineffective management.
The active support of Mr.. Name Woo, President, LAG Electronics, is gratefully acknowledged. Mr.. Jinn Gang, LAG Electronics, provided research assistance. This document is authorized for use only by Justine Ala in (BUSBIES_2013) Korean business and management in the global context taught by Martin Hemmers from March 2013 to September 2013. For the exclusive use of]. ALA player that was compatible with both Blue Ray and HAD-DVD standards. The Korean manufacturers had indeed climbed into the spotlight.
In the last two decades alone, the market value of LAG Electronics had grown at a compound growth rate of 22% from $200 million in the mid-asses to $1 billion by the mid-asses and almost $11 billion by early 2005. Samsung had twice the market capitalization of archival 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 LAG LAG was born as the Lack Huh Chemical Industrial Co. In 1947. It was founded by Mr.. Len- hoi Kook for the manufacture of cosmetic creams.
Finding that there were no independent manufacturers capable of supplying bottle caps needed for packaging the cream, Lack Huh 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 Lag’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 Goldwater Co. Currently LAG Electronics) was first established to consolidate expansion in the fast-growing area of plastics. Exhibit The Evolution of LAG Group’s Portfolio of Businesses a Cosmetics Cream Maker Electric Fan Blades and Telephone Casings Plastic Caps Combs, Toothbrushes, Soapboxes Electronic Equipment and Telecoms Oil Refining Insurance Shipping LAG 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-asses, 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 asses. 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 wrought the acquisition of an insurance company and a securities trading firm.
The asses were a period of dedicated internationalization. Starting with intensive exports to developing countries, LAG soon moved to capture markets in the developed world. It launched a range of Joint ventures with established players from the West such as Caltech and DEEDS, 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.
In 2007, the company was well under way with its refinancing 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. LAG-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 LAG Electronics had been quite instrumental in launching the LAG brand worldwide. Given its suite of consumer products, ranging from home appliances to mobile telephones, LAG 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 Koreans rise in the economic sense has been attributed to the cacheable, largely familiarity 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 cacheable?Samsung, Deadwood, and LAG?led the charge in the field of consumer electronics.
President Park Chunk He, 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 plopped. The government encouraged foreign direct investment to secure technology and creation of Joint ventures with leading electronics companies worldwide. LAG partnered with Hitachi of Japan, Deadwood with GE, and Samsung with Sandy and NECK. 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 the asses that the industry accelerated its drive to prominence by emphasizing genealogy 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-asses. 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, hill 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 arrear 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 MOM mode. Many of these firms, like Samsung and LAG, were quite surprised to find that their products were not well received in the device W. R. Shin, and A. Ho. 1997. Industrial transformation: Interactive decision-making process in creating a global industry. Public Administration Quarterly. Summer. 3 opted 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 avalanching 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 main buyers served.
The MOM 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 MOM relationship on the other, LAG and others could not visualize a future that was not global. Although the MOM relationships had helped LAG 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, LAG and others felt emboldened to launch their own branded lines in these challenging markets. LAG used the Goldwater 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 reduce lines. Goldwater appliances were relegated to the corners of the store or hidden away in back rooms gathering dust. LAG 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, LAG started to craft an alternative approach. Anticipatory globalization through bold and audacious investments in emerging markets became a centerpiece of the LAG strategy. Mr..
Kiang-Or Kim (currently President of LAG Southeast Asia), who led Lag’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 Lag’s success recipe. While some of its competitors were concerned about making sustainable profits in the short term, LAG was willing to enter a market if it believed in its long-term potential.
For example, LAG entered India in the early asses, but it took more than a aced 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 LAG established its Brazilian operations in the mid-asses and started manufacturing televisions and Vicars at its factory in Unmans. The government of Brazil was promoting investment in the underdeveloped P. R. Sinai. 2005.
Premium marketing to the masses: An interview with LAG Electronics Indian’s Managing Director. The McKinney Quarterly Special Edition: Fulfilling Indian’s Promise. 4 opted rainforest’s 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 Debate, located between the major Brazilian cities of SAA Paulo and ROI De Jeanine. While the factory in Unmans 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 asses 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 Lag’s Brazil strategy. Despite the precipitous exchange losses, LAG 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, LAG was able to shore up some of the low-cost advantages that made exporting increasingly advantageous. It could balance its accounts receivables and payable accordingly, and thus build a viable hedge against exchange rate fluctuations.
In due course, LAG 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. LAG 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 gerrymander goods, LAG 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 lid 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 LAG 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, LAG piggybacked its branding campaign on sports events sponsorship.
It even sponsored a football club in SAA Paulo, one that was ranked among the top clubs in the country. This sponsorship activity gave the 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 horn 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 ileitis. 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, LAG sought to expand its offerings to encompass a wider range. It typically complemented its global product line with customized offer- 5 inns at appropriate price points, chiefly at the lower end. The customization effort focused on the unique cultural and social dimensions of their consumers’ lives.
The local market clearly saw that LAG had come to stay in Brazil and was not about to leave n the face of difficult economic crises. This endeared the company’s brand to the consumers and helped it fill the void that had been left in the wake of exits by other players. LAG capitalized on this sentiment in its dealings with the Brazilian government as well and built on it. It expanded its manufacturing facilities in both Unmans and Debate. As of 2007, the Unmans plant produced air conditioners, PDP televisions, and audio equipment in addition to the original line of televisions and Vicars it started out with.
The Debate plant also expanded to produce GSM phones and CDMA phones in addition to monitors. The company reported sales of roughly $1. 8 billion in 2006, a 35% increase over the previous year. The Passage to India LAG made a start in India in 1993 and entered a Joint venture with a consumer line of products in India while building a manufacturing operation to serve the market. Unfortunately, this proved to be a false start when the partner could not bring in additional funds to bankroll the manufacturing operation.
LAG had learned an important lesson about the challenges of managing Joint ventures in emerging markets. Since the Indian government at the time insisted that all foreign firms would eve to enter India only through a local partnership, LAG had begun negotiations with one of Indian’s leading business groups for a possible Joint venture arrangement. During this negotiation phase, the Indian government announced significant market reforms and allowed foreign companies to set up their own wholly owned subsidiaries in India.
LAG decided to shelve the partnership negotiations and launch LOGIC (LEG India Ltd. ), a fully owned subsidiary. LEGIBLE was launched in 1997, and for a year imported its entire line of products as it built its own manufacturing facilities locally. Its manufacturing operations in Greater Oneida, close to Indian’s capital, New Delhi, were set up to manufacture televisions, washing machines, air conditioners, and refrigerators. Right from the start, LEGIBLE focused on customizing parts of its product lines to address local needs.
While the fundamental product platforms remained invariant across country markets, local R&D teams were involved in coming up with product variations that would reflect the unique demands of the local marketplace. For example, it launched a cricket television set with a built-in cricket video game to eater to the teeming millions who are cricket fanatics in the country. Its “golden eye” technology used in television sets was designed to automatically sense the levels of ambient lighting and adjust picture brightness and contrast accordingly.
This proved to be an important feature in the local market, especially given the periodic variation in lighting intensity resulting from power supply imbalances. Similarly, it designed a unique air filtration system for its range of air conditioners to filter the fairly high levels of particulate pollution in metropolitan cities in India. All its home appliances were equipped with circuits that could weather dramatic voltage fluctuations that were very common in the country. These customized products were flanked by Lag’s typical product range that included high-end appliances that it sold in developed markets as well.
LEGIBLE believed that this blended approach to product portfolio development was a crucial ingredient to succeed in India. Mr.. Kiang-Or Kim, Legal’s Managing Director at the time, observed, “We knew it was important, for example, not to downgrade the Indian market and instead to treat it Just as seriously as we would NY developed market. This meant preparing a full strategy and emphasizing good- quality products, the best technology, the best network, and access to the best people. 4 LEGIBLE recognized very early on that there was enormous potential to be tapped at the lower rungs of the economic pyramid in India, and set about formulating a strategy to address the rural markets. In an important departure from common practice, it was decided not to drop prices on existing lines as they were moved to rural markets. Instead, the company built new versions of its products with a more 4 6 impact set of features and cost-efficient materials so that they could be manufactured at lower cost.
The company did not cut corners with the engineered quality of the appliances, focusing instead on value engineering and design as the source of cost reductions. Thus, LEGIBLE introduced a television set with a smaller screen size and a scaled-down sound system, resulting in a price reduction of roughly 40% in entry-level models. Similar efforts produced rural versions of washing machines and air conditioners, placing these traditional luxury products within the reach of Indian’s rural majority. These customization approaches were indeed thoughtful and reflected a deep understanding of Indian’s cultural and linguistic diversity.
For example, the television sets sold in rural markets offered menus in local languages?a feature that most of the local manufacturers had themselves not offered. In due course, the company was generating over a third of its sales revenues from this rural segment and close to 60% from non-urban areas. Indian’s geographic diversity combined with its inadequacy of infrastructure made distribution a very challenging proposition. Most of the large players were content to establish beachheads in large metropolitan centers, but LAG attempted a different approach.
Realizing that a well-penetrated distribution system was crucial to success in smaller towns and villages where much of Indian’s population lived, the company deployed a tiered approach. Although it originally depended on four national distributors to begin with, it soon moved toward a regional distribution system that was anchored by Regional Distributors who supported smaller channel partners in tier 2 and tier 3 cities. It built remote area offices in the small towns that could not purport a larger channel.
The company soon blanketed the country with a distribution network encompassing close to 4,000 access points reaching all areas where customers could be found. This bricks-and-mortar distribution strategy was complemented by an online channel called legible. Com. The online channel offered extensive product information along with comparative pricing across geographic regions, combined with the ability to accept online orders from individual buyers. Since this was the first such attempt by any major consumer durables manufacturer n the country, it immediately created a differentiated position for LAG.
Customer service was another important feature that set LAG apart from its competitors. Taking a page from its Brazilian operations, the company launched a fleet of repair vans that could reach remote areas at short notice.