The following paper is an analysis of the corporate diversification strategy of 1 the most significant chaebol, or Korean business groups in existence. The purpose of this newspaper is to produce a comprehensive analysis focusing on the particular level and implementation of corporate and business strategy. The potential advantages that occur when diversifying are defined using strategic management theory.
The estimation that is manufactured when taking the genuine structure of the business enterprise group into consideration will be done concurrently or at least per individual advantage or opportunity. The reader can therefore not be expectant of two distinct chapters in this value, but an easily readable word for me.
The final goal is obviously to produce a real assessment of the performance implications that the corporate diversification strategy of Hyundai business group have. This will be followed by a realization that is pretty much incorporated in the final part which provides as a bottom line in its own right.
But before we move on to the theory of commercial diversification strategies, you will see a short launch of the business enterprise group which will be discussed.
Hyundai was founded by Chung Ju-Yung in the 1940's a small auto-repair shop and grew exponentially in the last half of the prior century. Being granted large project funded by the Korean federal in order to rebuilt the country and improve infrastructure, Hyundai group grew to the most significant chaebol in Korea. A chaebol is a Korean version of the business group which is founded and ruled by a family group. Hyundai was the most significant chaebol until 2001 when large elements of the group were divested, but it continues to be an important player in the Korean market. (Recreation area 2002)
Theoretical and useful advantages
First of all it appears appropriate to start out off at the basis of the business group; the diversification of any companies' business stock portfolio, referred to as corporate diversification. There are many types of corporate and business diversification that I'd like to discuss, in order to get a firm grasp of the subject accessible. Furthermore the implications as well as potential and theoretical benefits of corporate diversification will be reviewed. It is most off all vital to comprehend the motivation a company group, or chaebol like Hyundai, must diversify in order to understand the presence of such teams, in this section I will purpose at clarifying this important basis.
Corporate diversification is the diversification of the companies' stock portfolio into either different business of different geographic locations. The first type is named product diversification and the second geographic market diversification. The type of diversification strategy that is executed by business teams such as Hyundai is the hybrid or mixture version, particularly product-market diversification.
There are approximately five types of commercial diversification that can be divided under the follow three headers. The foremost is limited diversification; this can be the single-business, or a dominant-business strategy, which fluctuates between ninety-five and 70 % of a organization that includes one business. This is clearly not comparable to the chaebol mentioned in this newspaper. The second type is related diversification, which is divided into related-constrained and related connected, both having income of less than seventy percent from a single business, but the second having far less links and common attributes. The final type is called unrelated diversification which identifies a business which of course acquires its income for under seventy percent from one business and has hardly any common qualities or links that connect the several businesses that are categorized as the corporate headquarters.
For this paper it is actually vital to understand in which of the levels of corporate and business diversification we may find the average business group or chaebol, but even moreover where we can place Hyundai. To be able to attempt an effective classification of Hyundai as such the summary of companies that are part of the Hyundai group should be summed up very quickly in order to give the possibility to create an initial idea concerning where Hyundai group belongs, which could very well be based on intuition concerning the level of diversification. When going to the website of the Hyundai group, Hyundaigroup. com, The associated companies that are talked about are the pursuing: Hyundai Product owner Marin; Hyundai Securities; Hyundai Elevator; Hyundai Logiem; Hyundai Asan; Hyundai U&I; Hyundai Research Institute and Hyundai Investment Network.
Some of the names are quite car explanatory, such as 'Vendor Sea' and 'Elevator', very briefly I will give a conclusion about each of the 'affiliated companies', because they are described by Hyundai.
Hyundai Product owner Marine
"It is a multi-modal sea travelling company that has been through rapid development to its present status of 6th on earth, and 1st in Korea. It commands a fleet of over 200 boats including full container service providers, LNG carriers, olive oil tankers, bulk companies, and more". (Hyundai)
Hyundai Securities
"It's been leading the Korean financial market since its establishment in 1962. Among its many visible feats is the "BUY KOREA" fund, by which it played a major role in rebuilding the Korean current economic climate after the IMF bailout". (Hyundai)
Hyundai Elevator
"Hyundai Elevator, the positioning company of Hyundai Group, is a high-tech production company that gives a full series of elevators and escalators, various parts and components, automatic parking systems, materials controlling systems and system screen entry doors (POSD)". (Hyundai)
Hyundai Logiem
"Logiem is a global thorough logistics company that desires to accomplish a home market talk about of 25% by 2010". (Hyundai)
Hyundai Asan
"Asan was established for the purpose of promoting countrywide reunification and inter-Korean financial cooperation". (Hyundai)
Since Hyundai Asan is perhaps the peculiar one out, as well as difficult to immediately understand concerning its goal, here are its main activities:
Lead Hyundai Group's businesses promoting
Inter- Korean monetary cooperation
Unified and sole office for communication
With the North
Mt. Kumgang travel and leisure and development
Construction of Kesong Industrial Complex
SOC programs of the North
Sports and cultural exchange programs
Hyundai U&I
"Within the last three ages Hyundai U&I has provided global standard IT service in logistics industry and today is beginning the ubiquitous era with RFID technology". (Hyundai)
The main products are: logistics solutions in box, bulk, terminals as well since it outsourcing and ubiquitous R&D task.
Hyundai Research Institute
"Hyundai research institute is the first home research institute to integrate education and research functions where new knowledge is established and distributed effectively". (Hyundai)
Hyundai Investment Network
The main products and services will be the following:
Organization and management of alternative
investment funds
Business strategy consultancy focusing on
development of new business opportunities
Investment advisory and direct investment in
mergers and acquisitions (Hyundai)
The degree of characteristics and/or links between the different companies seems quite lean. When looking at the explanation of Hyundai Elevator it is stressed that it is in reality a high-tech processing company that is customized in multiple systems that seem to be very much interlinked, especially regarding research and development. Overall there are several businesses that can be considered high-tech creation companies such as Hyundai U&I.
Another logical link between the companies is the fact that the travel and logistics experience of Merchant Marine and Logiem can be utilized for carrying products, materials, perhaps even personal of others that are area of the Hyundai group, in so doing creating an obvious cost-advantage as well as making sure that there is certainly some interaction between the affiliates which can donate to assistance and synergies in other cases.
The logistics alternatives that are developed in Hyundai U&I appear to be flawlessly applicable to Sea Merchant for case, seeing as it is just a company that transports storage containers. The majority and terminal solutions seem applicable also, and the same supports for the Logiem Company. In this manner multiple synergies and links can be found that give potential for theoretical advantages for this specific chaebol.
The Hyundai Research institute provides the business group with the unique opportunity to informed their researchers and have them implement their knowledge and competence to the various companies. The development of products of essentially all companies could originate from the research institute since the institute targets the following areas: Consulting; Economical research; Human Tool Development related works, which are applicable to any company.
Number eight on the list, the Hyundai Investment network could donate to the group as a whole when any investment-, acquisition- or home based business opportunities are concerned. Hyundai offers all the skills it requires within the group and will most likely put it to use instead of outsourcing these tasks. The reason why for this will be the obvious cost advantages as well as the bad impression it could make to hire an outside company to resolve problems they help others with themselves.
The pursuing quotation was taken from the publication 'Strategic Management and competitive benefit' by Barney and Hesterley. The definition provides clear and detailed understanding of this concept, and since it is so essential to the understanding of the info that employs, I decided to include it in this paper.
"Economies of scope exist in a company when the value of the merchandise or services it sells raises as a function of the number of businesses in which that firm works. In this explanation, the word 'scope' identifies the number of businesses when a diversified firm manages. Because of this, only diversified companies can, by explanation, exploit economies of scope. Economies of scope are valuable to the extent that they increase a firm's profits or lower its costs, in comparison to what will be the case if these economies of range were not exploited". (Barney & Hesterley 2009)
The economies of scope are divided in the following four organizations: Operational economies of scope, which contains 'distributed activities' and 'key competencies'; Financial economies of range, which may be divided up into 'internal capital allocation', 'risk decrease' and 'taxes advantages'; Anticompetitive economies of range, which includes 'multipoint competition' and 'exploiting market ability'; and finally Staff and stakeholder bonuses for diversification, which is aimed at 'maximizing management settlement'.
The types that are applicable to the diversification strategy of Hyundai will be reviewed shortly; the analysis above is principally for the intended purpose of drawing a picture which has all the various varieties so that it is clear where particular regions of economies of opportunity this specific chaebol operates.
The Hyundai chaebol is apparently well fit for the functional economies of scope with several of its industries; specifically the ones discussed earlier concerning the types of commercial diversification. Shared activities have in this sense been discussed, for the study and Development as well as the logistics network has been talked about. Main competencies have been identified by Prahalad and Hamel in the next way, which I have chosen to use: "the collective learning in the business, especially how to organize diverse creation skills and integrate multiple streams of systems". It seems when viewing the business stock portfolio of Hyundai that the main competencies have a large potential in implementation, especially the integration of multiple streams of technology appears to have materialized in the form of Hyundai U&I and Hyundai Research Institute.
The financial economies of scope seem to truly have a positive influence on the chaebol, as described before this particular economy of opportunity is subject to three different kinds; the performance implications for the Hyundai group are explained separately.
Internal capital allocation can be viewed as a potential substitute for an exterior capital market, since it can create an interior capital market within the group if you will. The firms or businesses that are area of the group compete for the capital influx provided by the headquarters, rather than the similar influx from external buyers and shareholders. In some countries the capital market will not function appropriately to the western model that has been standardized by the United States of America and Britain and that has been launched on the continent of Europe also. A capital market that will not function as well as these european good examples, such as South-Korea for occasion, are especially appropriate surroundings for business organizations, for they provide that capital market themselves, rather than relying on a perhaps badly functioning exterior market. The Internal capital allocation can therefore be viewed as an optimistic advantage of the chaebol.
Risk reduction is an obvious example when it comes to diversified teams such as Hyundai. When a business group is highly varied the sensitivity to inclination of the market, one business might perform very inadequately anticipated to a reduction in demand, while another business could perform very well at exactly the same time. That is also beneficial when related to tax advantages, which will be discussed within the next paragraph. The actual fact that in some instances the business enterprise group is unrelated diversified amplifies this result, because in the case of strongly related or at least related diversification, the difference in inclination of the marketplace demand will be significantly less. This can be attributed to the actual fact that related businesses that for occasion supply each other are both influenced with a fluctuation in the amount of market demand.
Tax advantages can be created by using deficits that may have been made in one of the businesses to counterbalance the income that has been created by another affiliate marketer company, in so doing reducing the total amount of revenue that the group is likely for. This technique can save big money, especially when related to a sizable business group like Hyundai. I'd therefore expect that the financial economy of scope that is attained by taxes advantages can and you will be used in this particular case. Because of the large size of the business group the debt capacity will expand accordingly. In the case that interest repayments on arrears are deductable, the increase in arrears capacity will also create a tax edge for the chaebol. (Barney & Hesterley 2009)
Anticompetitive economies of scope relate to simple fact that each company is way better off when the business environment or market conditions improve. Regarding perfect competition this will not really be the case when there's a higher level of competitiveness amongst organizations within the industry. The companies are all better off when the amount of competition lowers, but price discounts, collusion and so forth are outlawed, for they are categorized as the header of illegitimate anticompetitive do. The varied business group can provide as a remedy to this problem particularly when contending against companies that are part of an diversified organization also. This can be done in two manners, discussed below in further fine detail. (Scherer, & Ross, 1990)
Multipoint competition, multipoint can be most easily described based on two firms. Something made by group 1 that competes with a product produced with group 2 changes its price in a highly competitive way, by doing so threatening the merchandise produced by group 2. Group 1 also competes on the different market with group 2, as a reaction group 2 retaliates by shedding prices in that market and damaging group 1. The end result is that both group 1 and 2 are worse off, an undesirable situation for both. The result will be that both groupings will be careful in challenging the other, creating above market-price prices, this is a desirable situation for both business categories.
Exploiting market ability is mostly referred to as the deep-pockets model. (Barney & Hesterley 2009) As the name suggests, the deep-pockets or large financial capacities of the chaebol are exploited. It works as follows: In the last exemplory case of multipoint competition we already discussed the fact that an as little competitive environment as you possibly can is desirable for companies. Exploiting market electric power by use of the deep-pockets model is based on that very assumption, reducing competition through the elimination of or scaring off opponents. The company can use its capital to decrease prices to such an even that smaller companies cannot endure the level of competition and also have to exit the marketplace; the other situation is of course that the other company does not even decide to enter in any way.
Employee and stakeholder bonuses for diversification are mostly demonstrated by the maximizing of management settlement. The bonuses of top management are in most cases subject to the size of the business, not its profit. This is easily explained by the actual fact that the incentives of top management are typically influenced by the salary they get, which is also subject to how big is the business and tends to grow accordingly. The conclusion in this matter is thus that the bonuses provided by companies do not match with the aim of the company which is maximization of profit in most cases. Mainly because that a larger company boosts both salary and position of the Chief Executive Official for instance, the business could diversify without the proper economic motivation. Regarding Hyundai group this is scarcely unthinkable. The company was founded by an exemplary person, building his companies from the bottom without a wealthy family while building Korea from the ground all together. Whether this tale that oozes of heroism is completely accurate is not important. This epic beginning of the Hyundai group requests the ambition to make it the most significant & most successful business group of the nation, and the most significant they have at least become.
In order to secure the fact that financial value is created by a corporate and business diversification strategy, the business enterprise group must abide by two conditions. The first one is usually that the strategy must make use of valuable economies of range; the several strategies that can end up being successful were reviewed previously. The second condition is the next: "it needs to be more cost-efficient for professionals in a firm to understand an current economic climate of range than for outdoors equity holders on their own". (Barney & Hesterley 2009) Regarding good co-operation between the several companies within the group this will be possible, especially taking the extraordinary size of the chaebol into account. However, we will have in the diagnosis of the performance implications that the co-operation between divisions is sometimes far from perfect.
Performance implications
The diversification of Hyundai on the geographic and product level has already been discussed on conceptual bases concerning the geographic aspect and practical bases regarding the product level. The product-market diversification strategy that is applied by Hyundai is typical for chaebol and has seen major development through the years. Yoon-Shik Area illustrates this truth in his publication The Chaebol and Labour in Korea: the introduction of Management Strategy in Hyundai, stressing the labor rigorous past of the Korean chaebol and Hyundai in particular. The important certainty which should not be left out, especially in this light, is the fact Hyundai has advanced from a labor-intensive company that specific in low value addition to its products, to a business which is specialized in knowledge and technology intensive products. To be able to lower costs Hyundai in addition has chosen for a geographic market diversification strategy, utilizing cheaper labor forces in order to achieve a competitive cost advantages, which can improve Hyundai's position on the earth market. (Recreation area 2002)
In his book Yoon-Shik Park clarifies the difference of way in the very beginning of the business group, when compared with the current situation. The following quotation gives an impression: "HHI personnel were required to build ships that have been marketed in the early years on the basis of cost and swiftness of delivery, somewhat than quality or technology, and thus the employees were forced to work long hours at meager salary, a hot blend of potential labor troubles". (Playground 2002)
Moon Ihlwan represents the go up of Hyundai where it used several economies of range amidst which increasing its anticompetitive economies of range by growing and getting into more and more companies. The debt-based ventures and progress of the company were mainly facilitated by the Korean federal government, this diversification strategy turned out successful at that time, increased by the politics local climate. This very strategy however, proven very challenging and even harmful to the Hyundai group in a more recent environment, this becomes visible in the next paragraph. (Ihlwan 2003)
The Hyundai group has its origin as a family company as mentioned before, the countless sons of the past due chairman took over the group, but rivalry between them triggered several companies to be separated from the group, carrying on as an individual company. Moon Ihlwan illustrates this in the following way: "By September, 2000, Hyundai Engine -- managed by the elder brother -- formally severed links to the rest of Hyundai. Free of the debt-besotted chaebol, Hyundai Motor unit emerged as a powerful, profitable company. Another moneymaking piece of the group, Hyundai Heavy Business Co. , the world's major shipbuilder, manipulated by the 6th sibling, Mong Joon, became unbiased, too: Analysts expect it to carefully turn a big earnings this season". (Ihlwan 2003)
Min Sang Kee, who is a BA teacher at Seoul National University, even described the development with regards to Hyundai Electric motor and Hyundai Heavy Sectors Co. and their independency as: "A blessing for the country. "
The rational follow-up question is whether the Hyundai group still lives up to the conditions that a corporate and business diversification strategy must live up to, in order to secure the actual fact that financial value is created. There are in least two ways of approaching this matter, the first is the next: In the event the diversification could have worked, there would not have been so many companies that acquired still left the group, which means Hyundai group does not surpass the conditions. This may considered incomprehensive with regards to the family feud and so on, nevertheless, the implications of the very independency of many of Hyundai's companies does imply that the amount of economies of range and its own security to set-up economic value for its affiliates has decreased with its size.
Conclusion
In order to summarize the discussion a propos the performance implications of the Hyundai group, it felt interesting if you ask me to handle the incredible power and impact of the chaebol on the whole one more time. Dominic Jones has explained in "Won flew in the Chaebol nest" how the chaebol have done anything in their capacity to prevent the efforts of both Korean administration and the IMF to open up the financial market in Korea and bring in foreign investors. The next quotation is a good illustration of is development: "Korean observers also say the Chaebol have used the recent liberalization of the financial market segments to improve money to aid weak businesses and avoid sale of assets as demanded by the government. The most notable five Chaebol - the Hyundai, Samsung, Daewoo, LG and SK groupings now own 39 financial companies, including investment lenders, insurers and asset management funds offering financing to affiliate marketing companies. " (Jones 2000)
The identification of the energy of the chaebol in Korea is essential in understanding its resilience and its own capacity to diversify. The Hyundai business group has been divested for a substantial part, but it is important to understand that the scale and influence of the chaebol can prove to be a major element in its success on the long run. Demand will usually fluctuate and the surroundings may change, however the chaebol has proven to strong enough to resist these challenges so far.
