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.
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.
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."
