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!