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Subject: Principles of Management 

Effective Organizing andOrganization Culture

 Chapter Ten

 Self Study Assignment

 by 

MOMIN ANSARI 

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 Q.2 How Can Daewoo Stay Competitive against Japanese?Auto industry is important to developing countries as this is "linkage intensive". As a consequence, most of developingcountries that adopted industrialization strategies usually selected auto industry as one of the prime candidates for launching the industrialization of country. But history shows that it is not easy under the international oligopolisticmarket, in which 10 leading countries produced over 80 % of world production. The Third World has witnessed so manytriais to develop auto industry, for example, low cost vehicle plan for Asian and Pacific countries in 1960s, ended infailure. UNIDO (1984) once worried "the Korean example remains of great importance, if this project fails, and then

there will be no case in the Third World of a producer trying to go it alone". Korea has become the 5 th auto makingcountry producing 3.5 million vehicles and 3.0 million exports in 2010. There appear some countries particularly in Asiato try 'Korean path', developing export oriented local model in technical alliance with foreign makers. The developmentof indigenous product motivated by the Government policy "Long-term Automotive Industry Promotion Plan" in 1974could lead more rapid progress of Korea to join the 5th auto making country producing 3.5 million vehicles with 3.0million exports in 2010. And it enables Korea to be on the road to globalization of auto industry. Korea has consistently pursued export oriented strategy from the outset to get minimum economic scale under limited size of local demand. It began to export car in 1976 and the export's share of production increased to peak to 53 % in 1988 but it recently falls below 40 % lever. The domestic and export demand has compensated to support production increase by alternate butsaturation of domestic market pushes Korean auto makers to go abroad. The potential domestic demand from active themotorization has compensated export decrease since the fate 1980s and has sustained the increasing capacity. And itinduced Korean makers to expand capacity rather than improve quality. But Korean auto industry is now to meet new

environmental changes as the mature domestic market will no longer guarantee the continuous growth. Moreover import ban has been lifted gradually since 1986 and tariff rate decreased to current 8%. The geographicaladjacency to meet customer satisfaction in terms of after service as well as quality competitiveness might lead Japanese cars to be very competitive in Korea. Korea must respond to the challenge from Japan in2011. Daewoo, a locally owned firm after 21 years of joint venture with G.M (1972-1992) turned to be more aggressivein globalization. But Daewoo has to wait two years more to be on the open road to globalization as G.M restrictedmarketing area of Daewoo to East Europe, Asia and Latin America by the end of 1994. The real globalization of Daewoo Motor began in 1995. Daewoo has become more aggressive particularly in England, Germany, and Romaniathrough direct marketing channels since 1995. G.M. Daewoo rises very serious question to us "What is the globalizationstrategy of Daewoo Motor" and "Can Daewoo be successful in globalization in the long run?" We are interested

in Daewoo as of its aggressiveness in globalization and how it could get over transition from joint venture to mostaggressive auto maker in globalization. We can review the globalization of Daewoo Motor to answer to these questionsas following. Firstly, the chairman Kim, as a founder of Daewoo business conglomerate, takes a direct role andmaneuvers group power to globalize auto business. This could lead rapid and aggressive decision making with respect tothe globalization of Daewoo Motor. Secondly, Daewoo Motor prefers taking over existing plants by M&A. The experience of Daewoo Business group toacquitted existing shipbuilding, machinery, and automobile company in domestic environments enabled it to be moreaggressive to merger of overseas plants. It has recently attempted to merger Thomson Electronics in France. Thirdly,Daewoo is more oriented to localization as shown in dispersed R&D activities. It established DWTC (Daewoo worthingTechnical Center) by merging IAD in England and GTC (German Technical Center) in Germany. This global R&Dnetwork enabled Daewoo Motor to develop three new models simultaneously which appeared already in domestic in

2006 and 2007. These new products might accelerate the globalization of Daewoo as these products will be produced inJapan for EU markets in the long run. Conclusion:

To be an independent auto maker and to be global top ten as in Daewoo's long range plan, with 3.5 million production indomestic (3.0 million) as well as in overseas plants (2.5 million) could not achieved without the success of globalization.The leadership in domestic market might be another important factor. Korean auto makers including Daewoo hasto meet the challenges from the Japanese auto industry in domestic market from the beginning 2012. The severecompetition in world auto industry induces the forecasting that only global top ten auto makers could survive in near future. We need more time to see whether or not Daewoo could meet the success the globalization and how Korean automaker, Daewoo could get over the manifolds challenges to be a global auto maker. & Key to success is the Policy of 

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Globalization. 

Q. 1 What are the advantages and disadvantages of a hands-off, decentralized management approach? This issue of centralization and decentralization is a fascinating one. But you should talk about it only in particular cases, of particular organizations and particular kinds of decisions. Advantages of Decentralization:

● Decentralization will not work unless you really delegate both responsibility and authority. This means that the finaldecisions must be made at that lower level. 

● You just can’t beat a decentralized system. It gets decisions closest to the level where the action really is.

 

●And it really does something for people. The executives are now essentially running businesses of their own. The companyhas confirmed their authority by making it very clear it will not let people dissatisfied with their decisions ‘jump’ over tothe home office. 

●Business is afflicted with this, just like government. When decisions have to go to the top it’s not just a question of talkingwith the chief. His time is limited. So all kinds of other people up there . . . staff people . . . start to look at the questiontoo. I’ve never been convinced that more people make a better decision. It’s OK to say to one individual, “You make the

decision, and I’ll live with it.”. 

● Finally, getting the decision-making out of the home office creates something like a family feeling in the outlying location.People there begin to depend on each other.

 

Disadvantages of Decentralization:

●This means that the final decisions must be made at that lower level. Two things stand in the way of this working. One isthat the people who now have the authority may not let go of it. The other is that the people at lower levels may not want toaccept it.

 

●You need to have systems for evaluating people who make these decisions. You need to put incentives for performance into

 place; which will involve much more than money. 

● Decisions are more rapid, too. Most of the company’s new executives are coming up out of this system.

 

● Delegation of authority means that somebody then makes a decision not you.

 

●You have to make the decision by yourself. What do you do? One thing that seems to characterize people who get to the topis that along the way they were willing to risk their job for a decision they thought was right.

 

●If there are some genuinely bad decisions it will reflect on the person who delegated the authority; no question about it.That’s a risk you as the chief executive take. And it’s a risk you have got to take.

 

● One of the problems, which decentralization aims to solve, is that the chief executive never has enough time to think aboutthe major problems affecting the future of the operation. 

● We are always in danger of being tied down by trivia.

 

Q.3 What were some of the controllable and uncontrollable factor in this case? How Should Mr. Kim have responded tothese factors?

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 As with many Korean conglomerates, Daewoo’s corporate governance did not operate effectively. The

controlling shareholder dominated all decision-making without the necessary checks and balances. The representativedirectors, directors, statutory auditors, shareholders, employees and other gatekeepers all failed to function as providedunder the legal and regulatory framework. In the end, this led to Daewoo’s controlling shareholder single-handedlydriving the conglomerate into entering highly risky business decisions and, more significantly, committing staggeringamounts of accounting and loan fraud.Controllable Factors:

 

Daewoo’s fate remains inextricably linked with its founder Woo Choong Kim. Kim deserves the most credit for theconglomerate’s initial success and responsibility for its ultimate failure. As Daewoo’s Chairman, he was recognizedas one of the world’s most successful businessmen. In 1984, he received the International Chamber of Commerce’scoveted International Business Award that was conferred by Sweden’s King Carl Gustaf XVI. He wrote a best-sellingautobiographical book, “Every Street is paved with Gold,” that was published in 21 languages and sold more than 2million copies. In 1999, he was elected president of the Federation of Korean Industries, Korea’s official organizationof business leaders. He not only had a gift as a corporate turn-around expert, but Kim also made sure that Daewoo’s  business model focused on developing new international markets. From the beginning, he maintained a pioneering,global perspective.Despite Daewoo’s initial achievements, the financial crisis fully exposed the weakness of its concentrated governancestructure. The concentration in decision-making power proved fatal when the conglomerate faced a crisis and Kim’s  business acumen, ethics and principles faltered. Returning to its roots, Kim viewed the crisis as an opportunity for 

Daewoo to expand, not retrench, by acquiring distressed companies and turning them around.Kim’s autocratic control further centralized and decision-making suffered as a result of a generation change of hisclosest advisors. Until the mid-1990s, the key executives that surrounded Kim consisted of those that had been withhim since Daewoo’s establishment. Kim had personally recruited many of these senior executives and they had growntogether with the conglomerate’s expansion. They were similar in age with Kim and many were even alumni of thesame prestigious high school that Kim attended. They could be straightforward and could act as an informal check and balance against his decision-making.Uncontrollable Factors:

As with many Asian conglomerates, the representative directors, boards of directors and statutory auditors of Koreanconglomerates failed to fulfill their role as fiduciaries working on behalf of the interests of shareholders at large. Theydid not prevent controlling shareholders from taking advantage of non-controlling shareholders and other stakeholdersas a result. Furthermore, despite the common law origins of its corporate law, Korea did not legally distinguish between

directors and officers, and these were roles combined into one position. Non-executive outside directors did not existuntil they were required in 1998. This weakened potential checks and balances against the controlling shareholder.Stakeholders such as Daewoo’s employees, as a group, also failed to provide checks and balances that could havemitigated corporate governance failures and ultimately the accounting and loan fraud. Even though they had incentivesto act as internal monitors, employees did not function as an internal control against any of the wrongdoing.Weak corporate governance of conglomerates and their vast network of companies had a devastating effect when the1997 financial crisis hit. Corporate governance reforms since then have mainly focused on the large listed companies of these conglomerates and have proved vital to the restructuring efforts of Asian economies. 

Q.4 What do you think of Daewoo’s Expansion into Europe? What are the advantages and risks for the company?

Daewoo Expansion into Europe

The automobile industry worldwide is in the mature stage of its life cycle. By the 1990s, an oversupply of motor vehicles became such a problem to the industry that a number of mergers and acquisitions (M&A) and alliancestook place. Industry experts stated in the late 1990s, only 6 or 7 companies would remain global players while other companies will be forced to sell in niche markets. In the last decade DaimlerChrysler acquired a major share of Mitsubishi, GM became the controlling shareholder of Fiat and Saab, Ford acquired Volvo, Jaguar, and a major share of Mazda; and Renault became the controlling shareholder of Nissan. Global scale production and sales became importantas a way to cutting cost through developing common platform or engines as well as global procurement. Unlike their European and American counterparts, Korean automobile companies, including Daewoo, did not adopt the M&Astrategy for expansion. To remain as a global competitor, Honda instead expanded its operations by setting up plants inregional marketsBefore GM’s buyout, Daewoo cars were available in different countries.In Europe; Daewoo Motor started selling

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the 'Espero' and Cielo-based 'Nexia' in early 1995. The range was then completed by the Lanos, Nubira and Leganza.The Matiz mini car was released in 1998, and was a great success for the company, most notably in non-Asian countriessuch as Italy where it won many awards such as the “Car of the Year” award three times in a row, in 1998, 1999 and2000.[5]

The Rezzo '(Tacuma)', Evanda '(Magnus)' and Kalos models were then released, before the SsangYong-based SUVs :Korando, Musso and Rexton. After GM’s buyout, the Daewoo models got a new badge, and were sold under theDaewoo name until 2004: the  Nubira III '(Lacetti)' was the last car to wear a Daewoo badge in Europe. (The former Daewoo models were later rechristened as Chevrolets.) 

Advantages: Daewoo’s currently at the crossroads of its European expansion in the automobile market. GM Daewoo has beensuccessful in managing to market essentially the same cars in many parts of the world, particularly in the NorthAmerican and Japanese markets. Executives are wondering whether they should adopt more localized productdevelopment in Europe or not.

Risks

 

The rebranding comes as GM seeks to make a comeback in the global auto market, after having been hit by the globalfinancial crisis, completing the world's biggest-ever initial public offering in November. Its South Korean unit said thatit will drop the badge "GM Daewoo," dogged by negative publicity stemming from bankrupt South Korean automaker Daewoo Motor acquired by GM in the early 2000s. It will introduce the Chevrolet brand for all of its new productsthis year. The company name GM Daewoo Auto & Technology Co will also be replaced by GM Korea Company inthe first quarter. The change is "a needed momentum to increase our sales and our share in the domestic market," MikeArcamone, President and CEO of GM Daewoo, said at a news conference. Arcamone said the company targets a double-digit share in the domestic market this year, up from 8.1 percent last year.GM Daewoo's market share hovered below 10 percent for three consecutive years in 2010, ranking behind Hyundai Motor (005380.KS), Kia Motors (000270.KS) andRenault Samsung, the South Korean unit of French carmaker Renault SA (RENA.PA). 

Q.5 Why do you think GM acquired the company, while ford did not? 

In November 2000, the Korean government officially announced Daewoo's bankruptcy and its assets were put on sale.Amid controversies and almost a year of negotiations with the Korean government, GM signed a preliminary agreementin September 2001 to buy Daewoo's assets for $1.2 billion. However, this agreement ran into problems when GMreported a discrepancy in Daewoo's overseas accounts. With so many skeletons in Daewoo's closet, market observers

wondered when the company would find a buyer and when its problems would be solved. There were five major  business conglomerates or Chaebols3 in South Korea - LG, Samsung, Sunkyong, Hyundai and the Daewoo Group. In1967, Kim established the Daewoo Group as a textiles business.

The then Korean President Park Chung Hee4 (Park) helped Kim by handing over the management of bankruptcompanies, which were slated for restructuring by the Korean government. Park also helped Kim with essentialresources and official assistance. Kim also developed close contacts with politicians and managed to get huge amountsof funds from several Korean banks. Funded by government-approved borrowings, the Daewoo Group witnessedsignificant growth and diversified into several businesses during the 1970s and 1980s. In the early 1990s, the Groupexpanded overseas and soon became the 18th largest corporation in the world. The Group had investments in more than400 projects in about 85 countries.

The Daewoo Group consisted of 24 companies, the major ones including Daewoo Motors, Daewoo Shipbuilding,

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Daewoo Telecom, Daewoo Engineering and Construction, Daewoo Electronics, Daewoo International, Daewoo HeavyIndustries, Daewoo Securities etc. Of the 24 companies, nine were listed while the remaining were privately owned.According to analysts, GM's acquisition of Daewoo seemed to be the ideal solution for the latter's problems. An analystcommented, "GM badly needs Daewoo to establish a beachhead in the Asian market. And without GM, Daewoo willsimply collapse." They also opined that GM was the ideal buyer as it had owned a 50% stake in Daewoo till 1992.Moreover, most of Daewoo's vehicle designs were based on GM's. Analysts felt that in the long run, GM could useDaewoo to gain a foothold in Asia.

Reasons Why Ford did not Acquired Daewoo:

Ford pulled out of its planned $7bn (£5bn) takeover of Daewoo Motor, the struggling South Korean car maker, days before a deal was due to be signed. Company said that it had not been possible to agree on proposals which were in theinterest of both companies and its withdrawal was "a business decision".

Ford, which has been conducting diligent inquiries, had sought to reduce its original $7bn bid to about $5bn to reflectdeterioration in Daewoo Motor's assets. Daewoo's creditors estimated in that the group's motor business had liabilities of $16.4bn, against assets of $10bn and as because company feels that it’s a costly decision and at that time in 2000 Fordalso suffering for its near bottom share prices.

 

Q.6 What problems can GM-Daewoo expect in the future?

 

Continuous innovation challenges our limitations. GM

General Motors like many multinational automobile manufactures has made the decision to excel in many researchand development operations Although the countries relatively new political stage, increasingly stable economy andimproving infrastructure has presented unique opportunities for increased foreign direct investment conducting businessfor the, still presents a number of unique challenges. General Motors was not the first or the last automobile manufactureto enter into global automobile market presenting the unique challenge of overcoming the unique conditions of global business practices while still maintaining competitive advantage. Lowered tariffs for auto manufactures has cause aninflux of assembly operations from nearly all the major automobile manufactures However unlike its competitors,General Motors General Motors has learned how to carefully and effectively conduct business. General Motor’s successwith its joint venture agreements and research developments has even led them to into put them global perspective

 

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