LG Mergers and Acquisitions (Ch 14)

Here is a short list of notable LG M&A Activity:

It should be noted that LG itself was created as a result of the 1958 merger of Goldstar (electronic products) and Lucky (home products).

In February of 2013, LG announced that they would acquire from HP their web operating system for use with its TV's. The idea is to have a web platform to make the TV's internet-enabled. This is a key competitive parity strategy, most easily achieved with an acquisition.

In December, 2008, LG Chemical acquired super-absorbet ploymer operations from a company called Kolon. This allowed LG Chemical to increase production of certain chemicals significantly.

LG and Strategic Alliances (Ch 13)

LG has long considered strategic alliances to be a key part of their overall approach. Here is one key example:

As I posted before, LG is making a new generation of smartphones featuring curved screens. They employed vertical integration, using their own chemical company to make the batteries and their own screen technology company to make the high-resolution screens. But software and operating systems are not within LG's core competencies, so LG entered into a strategic alliance with Microsoft for the phone operating systems.

This alliance is much more than LG simply purchasing Microsoft technology. The deal involves joint research and development efforts to achieve tighter integration between LG hardware and Microsoft software. It also encompasses an joint investment in marketing the phones. The benefits LG in that they get help marketing the phones and a name-brand operating system. And it benefits Microsoft in that their operating system gets on more phones and makes them at least a parity player with Samsung.

LG Corporate Organization Structure (Ch 12)

LG Is an M-form (Multidivisional) Organization

LG uses a two-dimensional M-form structure, with one dimension being the major functional organizations (i.e., Electronics, HVAC), and the other dimension geographical, where LG subsidiaries operate around the globe.

Figure 1 - LG Functional Organization 

Figure 2 - LG Geographic Organization

LG also uses a corporate organization structure for its core staff:

Figure 3 - LG Corporate Organization 

M-Form is the only logical structure that LG can use as it has numerous divisions that produce a variety of unrelated products. As a global company, it must also create subsidiaries for these companies to operate locally. Despite this independent structure, LG's corporate organization is very strong and is responsible for unifying key processes like supply chain management so that LG can leverage its size and limit the threat of suppliers, for example.

LG Diversification Strategies (Ch 11)

 Main LG Companies

• LG Electronics (LGE) is the main LG company. LGE makes TV's and a variety of electronics. LGE also makes home appliances, which is a diversification strategy
• LG Display is more of a vertical integration that makes displays for other LG companies (LGE, LGT)
• LG Telecom makes smart phones and is another diversification
• LG Chem is mostly a vertical integration. LG Chem makes batteries and other components for LGE and LGT

Here are two very distinct diversifications for LG:

• LG Life Sciences: This is a pharmaceutical company.

• LG Solar Energy: This is an HVAC solutions company, with emphasis on solar panel technology.

What are the possible rationales for these diversifications?

LG has global reach through many retailers and corporate relationships. Sharing customer service and marketing activity could represent a significant economy of scope to develop these lines of business.

As previously noted, LG manages all its suppliers and purchasing centrally. Putting these lines of business together, to the extent that many similar raw materials and logistics are needed, gives LG tremendous power over its suppliers. 

Leveraging this diversification requires a high level of organizational capability, which LG is known to have. So diversification may be a competitive advantage for LG due to their strength of organization.

LG and Vertical Integration (Ch 10)

Backward Vertical Integration          

LG owns several companies that make components that are used in LG products. In this example, we see LG producing a new smartphone using a battery developed by LG Chem (a chemical company that LG bought out). Other components like the screen were developed by their subsidiary, LG Display.

Interestingly, the processor for the new smartphone is being supplied by Qualcomm. So why has LG chosen to vertically integrate displays and batteries but not processors?

We need to look at several of the "rules" of vertical integration to understand this.

Proposition 3 says that when another firm has valuable, rare and costly-to-imitate resources but that are too costly to acquire, don't vertically integrate. On the other hand, Proposition 4 says that you should vertically integrate when the firm has business functions that are valuable and has resources and capabilities that are costly to imitate. 

It could be that integrating microprocessor manufacture is very costly. It may not add much value either as microprocessors are practically a commodity and LG only needs to achieve parity with competitors when it comes to processing power in their phones.

On the other hand, the most important ways to differentiate smartphones are around the things that users care the most about: Size and weight, display and battery life. Using three subsidiaries, LG Chem, LG Display and LG Innotek, LG has integrated the capabilities that will give their phones the most competitive advantage. To some extent, this is a implementation of Proposition 4.

LG and Collusion (Ch 9)

 

 

 

 

 

Introduction

While most of my posts have been pretty enthusiastic about LG's products, innovations, leadership and strategies, this one is not so flattering. Here is an instance where LG was caught illegally colluding with Samsung.

What is Collusion?

Generally, when firms are in the same business and they conspire to set supplies, prices, divide up customers, coordinate marketing activities or share information about bids and other customer marketing activities, they are colluding. Doing this explicitly and having direct discussions about these things can be a violation of anti-trust laws in many countries.

What is Tacit Collusion?

Rather than having explicit discussions, the firms try to find creative ways to signal one another in a way that would achieve some level of coordination about pricing or supply with the other firm.

Could LG and Samsung Tacitly Collude?

It would be hard because of both firms' product differentiation strategies, and the existence of a good number of other firms in their space. If they could pull it off, it might be hard to detect because of these considerations. I have not been able to find any allegations of tacit collusion, although these firms are big competitors and might conceivably benefit from some degree of collusion.

So what did LG and Samsung Do?

According to this article from BBC, the firms explicitly colluded to fix the price on certain appliances in 2008 and 2009. The firms were fined a total of $39M.

LG and Flexibility Strategy (Ch 8)

Strategic Flexibility

The strategic flexibility of a firm is its capability to adapt to changes in the external environment. The organization has to identify major changes in the environment, quickly change commitment of resources to new courses of action to counter the change, and to identify markers in order to restore to previous commitments when the external environment is back to the initial state.(Source)

One of the ways a firm can organize for flexibility is to enter into strategic alliances with other firms. This allows for more flexibility than would exist if the firm had to buy another firm, or commit to a large purchase. The strategic alliance allows the firms to execute against an agreed strategy if - at the time - it is mutually beneficial.

Here are results of a few selected strategic alliances that LG has engaged in:

Designer Smartphone with Prada:

 "LG Electronics worked together with the world famous luxury brand company PRADA
and signed an exclusive deal for cooperative marketing. The luxury brand "PRADA
Phone" was the result of the combined efforts of LG Electronics' advanced technology
the classic, luxurious design of PRADA. In addition, both companies agreed to cooper-
ate in more general areas such as manufacturing, advertising, and marketing."

 Technology-Enabled Solutions for HVAC Systems with Siemens

"LG Electronics and SIEMENS signed an MOU on joint development to build a technological and marketing partnership, and are collaborating to develop standard control solutions for commercial air conditioners."

Enhanced Audio for Smart Devices with Mark Levinson Audio System

 "LG Electronics and MLAS (Mark Levinson Audio System) are collaborating on a variety of products including music phones, home theater systems, and LCD TVs. Tuned by Mark Levinson, an audio master, these products feature superior balance of low, middle, and high sounds. The listeners will feel as if they are right in the middle of the venue where the music is being played."

Product Differentiation (Ch 7)

Introduction

There are a number of ways firms can differentiate their offerings, but two of the more difficult-to-achieve methods are:

• Linkages between functions 
• Service and support 

I'd like to take a look at LG through the prism of these to differentiators - one based on my observations and the other based on personal experience.

Linkages between Functions - Observations

 LG Curved TV

 LG Curved Smart Phone

I've discussed these new, innovative products in previous posts, but in the context of Linkages between Functions, we can see some shared design ideas between disparate divisions at LG. These linkages also manifest themselves in the internet capabilities of many of LG's connected appliances. The general managers of the mobile and appliance divisions have committed themselves to sharing information, designs and best practices.

LG also uses linkages and coordination to support cost leadership. As I discussed last week, all of LG's purchasing is centralized. But strategic supply management may also have a product differentiation effect. Different LG divisions work the same supply chain, push their vendors on innovation and then share information. This is a hallmark of a firm with good interdivisional connectivity.

However, the next part - my personal observation on LG's customer service - was not so positive.

Service and Support - Personal Experience

I got myself one of these LG Bluetooth stereo headsets. In terms of product differentiation, it offered the most comfortable design for wearing. It sits under your collar and you barely notice it. It's easy to put in the earpieces and put them away (instead of dangling, they fit snugly into magnetic receptacles at the ends of the device). The sound quality is good, you can pair it with two phones, and you can listen to while dealing with phone calls.

I thought it would be perfect for working out. I could listen to my favorite music and take calls if needed, even in the middle of a workout because the controls are so easy to operate. The problem with this device is that it's not sweat-resistant. So after a few weeks of use in the gym, the controls stopped working.

Here's where the customer service piece comes in: I set up an online chat with LG, and it took over 30 minutes of interaction before we got to a point where they gave me a return authorization and instructions for sending the device back to their service department. I had to pay for the shipping.

After a week, I started online chatting and calling them to find out the status of my repair. The could only tell me the generic "in progress" status and the due date, which, after several attempts at chatting and calling, started fading weeks into the past.

The online rep said they had no way of reaching out the technicians, or even of knowing where the device was. This is a very poor example of Linkages between Functions.

After four weeks, I received my device (most likely a refurbished replacement).

All in all, a very poor experience with a company that in other ways seems to be so well coordinated among its divisions.

Cost Leadership (Ch 6)

General

To reinforce some of the examples from the text, have a look at this article: Cost Leadership Examples.

LG and Cost Leadership

Here is a representation of strategy for LG that I took from an article called, "An Innovation Strategy for LG1":

This depicts cost leadership as being relevant to the low-end market. Generally, however, LG appeals to the high-end market and focuses on differentiation and in some cases, lock-in.

Nevertheless, there are a number of things that LG has done to manage costs, either to help themselves in the low-end market or to preserve some of the economic surplus generated by cost savings:

• In 2009, LG began an effort to reduce the amount of parts inventory on hand and tried to go to more of a just-in-time approach.
• Backward vertical integration: LG creates parts and insources nearly all the work needed to create its mobile phones. While outsourcing may appear to be a lower-cost alternative, LG's economies of scale seem to allow it to better control overall costs in the mobile manufacturing space by being highly vertically integrated.
• LG centralized its purchasing processes as part of an effort to un-silo its various divisions starting in 20082. As a result, no division can make purchases independently without centralized coordination and approval. This is saving the company an estimated $2B per year.

So while LG is not really a cost leadership player, like any well-managed firm, it attempts to control costs where the opportunity exists without compromising its ability to innovate.

1 Source: http://www.google.com/url?sa=t&rct=j&q=&esrc=s&source=web&cd=4&cad=rja&ved=0CEQQFjAD&url=http%3A%2F%2Fwww.sba.pdx.edu%2Ffaculty%2Fdaveg%2F562%2FLG.pdf&ei=jDkFU_TyGY3LkAfkwIG4CA&usg=AFQjCNGDdlCnwb1V_fAQrL7PAxNWW0Wi7g&sig2=Qw7RK0_IIPLxVB3qnfziCw&bvm=bv.61535280,d.eW0
2 Source: http://www.businessweek.com/magazine/content/10_17/b4175037784791.htm

LG Internal Strengths (Ch 5)

One of the ways you can study a company's strengths is to look at its leadership team. This relates to theories of distinctive competence, which encompasses general managers (key decision-makers for the firm) and institutional leadership (ability to set a vision and get the firm to align behind it). This is usually the easiest way to get a glimpse of a firm's internal strengths.

General Managers

Let's take a look at the backgrounds of LG Electronics' executive leadership team. This team is comprised of the following individuals (source: Yahoo! Finance):

Mr. Bon-Joon Koo , 63 Chief Exec. Officer, Vice Chairman and Member of Management Committee

Mr. Young-Ha Lee , Pres and Bus. Support Officer

Dr. Seung-Kwon Skott Ahn , 57 Pres and Chief Technology Officer

Mr. Do Hyun Jung , 57 Pres, Chief Fin. Officer, Director and Member of Management Committee

Mr. Jong-Seok Park , 56 Pres, Chief Exec. Officer of Mobile Communications and Pres of Mobile Communications Division Bon Joon Koo started off as a computer scientist and statistician. He held various leadership positions at LG and went back for his MBA at the University of Chicago. Here is a little more on him from Forbe's: Koo is probably a very influential person in Korea and within the global corporate community, which makes him a strong asset for LG. Young Ha Lee started off as a chemical engineer, which was likely useful in his earlier days at LG, where he was involved in their refrigeration systems. He later went to Harvard Business School and started down an executive path with LG Electronics. He now runs the home appliance area (which as I posted earlier, is producing a line of connected appliances). Here's a bit more about Lee from LG's web site: Besides being an executive leader, Lee appears to have very strong subject-matter credentials for the area he leads. Dr. Seung-Kwon Skott Ahn started off as an electronics engineering major and eventually earned his PhD from the University of Seoul. He was exposed to global business strategy opportunities early in his career and was instrumental in globalizing LG Electronics' world-view. He is credited with turning the electronics division around. Here is a bit more about Dr. Ahn from LG's web site: Dr. Ahn appears to have a strong knack for global leadership and imparting a global vision for LG. Do Hyun Jung, also known as David Jung (and not be confused with a screenwriter of Asian films with the same name), started his career with a BA in Business Administration. He never pursued an advanced degree, but has nonetheless risen in the ranks of LG's executive leadership. He has worked around electronics since the early 90's and rose to the position of CFO for the Electronics division in 2007. Jong-Seok Park is ranked among the top-25 most powerful people in the wireless business (fiercewireless.com). He has driven LG to become a big player in the wireless equipment space, despite having Samsung to compete with (see my earlier post on the curved phones LG is making). Dr. Park holds bachellor's and master's degrees in electronics engineering, and the earned a PhD in electrical engineering from  University of Florida. He also went back and got an MBA from McGill University in Canada. Dr. Park is credited with a large number of innovations in the electronics space, including DTV transmission technology.  Institutional Leadership It's harder to gain insight into LG's institutional leadership beacuse the main source of information is what LG chooses to share. But here is a brief summary of their vision, mission, and how they impart this to their organization (from LG's website): LG's vision is to be the market leader in their space. Of course, many companies set their sights on being number 1, so what's important is how well they articulate the strategies and values that will enable their organization to achieve that vision.    LG tries to articulate a set of ethics and sustainability-driven principles by which they manage their business. They try to foster a culture of trust and respect, which they believe creates a more functional organization. They place emphasis on their code of ethics, which they believe enables them to be more efficient, while at the same time creating a positive image of a socially responsible organization.

LG Environmental Opportunities (Ch 4)

LG operates between perfect competition and a competitive oligopoly. That is, there are a number of firms in the various spaces in which they compete but not hundreds of firms. So their products (entertainment, appliances, telephony) are not quite commodities. LG is between being a price searcher and a price taker.

As such, LG’s biggest threat is rivalry. LG therefore needs to constantly engage in product differentiation and innovation in order to avoid its products being commoditized. Differentiation also allows LG to avoid slipping completely into price taking.

So LG’s opportunities lie within their ability to execute on innovative, differentiating strategies. Because LG makes a large variety of products, they find themselves within several industry structures at once. They therefore need to leverage opportunities per industry structure, although the strategies are very similar.

Here is a summary of where LG competes, and how they are approaching the opportunities:

Industry Structure	Products	Opportunity	Example
Emerging	Wearable Technology: Fitness-enabling devices.	First Mover – create new types of product	Heart Rate Earphones These earphones measure heart rate and transmit information to a smart phone
Mature	Home Entertainment	Product Refinement/ Reinvention	Curved Screen TV’s
	Appliances	Product Refinement/ Reinvention	Connected Home Appliances These appliances all connect to the internet so you can control them with a smart phone application (e.g.,you had to run out, leaving something in the oven that needs to be turned off later).
Network	Smart Phones	First Mover	Flexible, Curved Smart Phones You can actually bend this phone!