The Hyundai group is facing the dearth of leadership and a coherent strategic direction after the death of its founder Chung Ju-yung. The strategy of expansion and diversification of business portfolio and using this diversity to work in their favor by coordinating and sharing resources is not working for them anymore. Also, with the uprise of Asian giants like India and China, more and more companies from these countries are posing challenges for the new Hyundai.
These companies are not only eating the revenue streams of Hyundai but also imitating the business model of Hyundai. In its golden days, Hyundai used to do business by avoiding direct competition with technologically advanced companies, Hyundai explored opportunities and extended its existing core competencies to develop a new business for them. The first company to be established in Hyundai Conglomerate was Hyundai Civil Industries, which is now known as Hyundai construction.
The conglomerate grew at a tremendous pace until 1997 adding Automotive, manufacturing, construction, shipbuilding, electronics, and financial services companies to their portfolio. The company in its true essence reflected the achievements attained during South-Korea’s economic empowerment. South Korea went from having a GDP of mere 2.7b to becoming 12th largest economy of the world. The group had overall sales of more than $80 billion in 1999.
The growth was mainly due to South Korea's reconstruction programs following World War II, the Korean War as well as due to the state-led capitalism that resulted in domination of the economy by a number of conglomerates. But, as the South-Korean economy took a sharp turn in late 90’s, it triggered a set of problems for the conglomerate. Year 1997 brought the economic turmoil for the country mainly because of Asian financial ‘flu’.
The KOSPI fell by more than 65% in 1997-98. In order to restore the nation's financial health, President Kim Dae Jung launched a series of restructuring programs designed to reform the existing business units, many of which had become heavily debt-burdened. His reforms included changing the ownership, business, and financial structures of the conglomerates. By this time, the Hyundai Group was responsible for approximately 20 percent of Korea's GDP. As such, its financial health was directly related to South Korea's overall economic condition.
Therefore Hyundai decided to sell off many of its businesses in order to pay its debt. Hyundai's concentration remained on autos, electronics, heavy industry, construction, and finance. Even as the group struggled under its debt load, it strengthened its holdings with the purchase of Kia Motors Co. Ltd. and LG Semiconductor. Rivalry between members of the family of founder was another cause of worries for Hyundai, it lead to bad publicity for the conglomerate, leaving many investors anxious about the future of the group and its member companies.
This caused the dissolution of the group after the death of its founder. The new Hyundai Group is smaller and is dealing with a bigger set of problems. Once the symbol of Korea’s economic miracle, Hyundai Construction is now seen as one of the most troubled businesses in the nation. What lead to such a downfall? Why was Hyundai unable to carry on with the strong strategic direction given by its founder? To answer these questions, we need to understand what changed and what went wrong during the transition.
Hyundai Business Model: Exploring business opportunities based on existing core competencies and extending these core competencies from one business to another to translate them into the growth and expansion for the conglomerate and the Korean economy. In the era of Chung Ju-yung, there was a coherent strategic direction that existed and was followed by the business religiously. The group explored opportunities in different sectors such that they do not have to compete directly with the existing powerful competitors.
This gave the group enough time and resources to translate/superimpose their existing core competencies to new businesses and produce quality at lower costs. Rather than starting from scratch, to enter a new business field, Hyundai used existing core competencies and translated them to suit the new business. This gave them a competitive edge over others and helped the group to prosper from a small construction company to a massive conglomerate of 80 affiliates. The Problem with new Hyundai:
Apart from suffering from a dearth of motivational and strong leadership, the new Hyundai is dealing with the lack of coherent strategic direction and rise in global competition because of rise of India and China. If the company plans to stay in the same country, it loses its fair chance to ride the globalization jet and if it plans to go global, it will need to change its strategy. Factors affecting Hyundai:
1.India & China: Earlier, the company explored open and unoccupied spaces in the industry and capitalized them to produce a new business maintaining a competitive edge. But now the global competition posed by countries like India and China has blunt the competitive edge of other businesses conglomerates.
With the fast paced development of these two countries, there has been a rise in direct competition for others. The exploration process has been overtaken by companies in these countries leaving nothing behind. These companies, backed by strong support of bigger economies, have eaten the revenues of Hyundai. 2.Dissolution from a big to small conglomerate: With the division of the group, their competencies and their financial strength is also divided. The era in which Korean companies had this advantage of being well supported by the Korean Government is now past.
The need to revise their strategy and look elsewhere to find their competitive edge. 3.Public Interference: Chung Ju-yung’s single minded strategy was behind the transformation of Hyundai from a small company to a massive conglomerate. The case mentions that Hyundai made some bold moves with Chung Ju-yung’s strong motivation and Whereas today’s Hyundai has to rely on Shareholders (Board of Directors) and stakeholders 4.Too much dependency on one person has lead Hyundai to be a dull and non-innovative company. Recommendations:
1.Look somewhere else: Times have changed and its now a highly competitive world in which all sorts of companies strive hard to find a space for them. It wouldn’t be wrong to say that the strategy of expansion, once used by Hyundai, is now imitated by many other companies. These companies have a similar competitive edge of producing acceptable quality at lower cost and are financially stronger. Therefore it would be difficult to challenge and compete directly with them especially for a financially troubled company.
However, Hyundai and other similarly affected companies can look elsewhere to a more specialized and more quality oriented businesses. With time, Korean companies have acquired relevant expertise and experience to compete in niche businesses in niche markets. They can switch from ‘low cost - acceptable quality’ to a ‘higher cost - top quality’ business.
The rationale behind this recommendation is that no company can continue with a single strategy for eternity, as times change, business dynamics and propositions also change. A company has to define its short and long term strategies in and around these dynamics and propositions. Switching from unexplored markets to competitive markets will enable them to retain their core competency and expand their businesses in an entirely new segment. In today’s world, Hyundai cannot escape competition.
With the rise of Asian giants, the world is nearing a saturation state for companies. We don’t need more companies, we rather need to generate value for consumers out of the existing companies and this value should not come at the cost of environment. This opens another opportunity for Hyundai to use their technology to develop better eco-friendly solutions while maintaining value proposition and get a lead in this area. 2.Collaboration: Hyundai can collaborate with local companies in other countries while using its core competencies and advanced technology to move ahead.
This will enable them to have the strategic-location-economic advantage of the local companies along with superior technological advantage 3.Compete directly: Another solution viable for Hyundai is to establish itself locally and compete directly. In this world of globalization, all companies are given equal opportunities in the participating countries. For example, a foreign company is allowed to set-up its plant in India and to have the same ground for business. Hyundai can look for such ventures to take the maximum advantage of the globalization and use its existing competencies to move forward. This will give them a revenue stream to start with and then they can plan to switch to a highly sophisticated technology business.
Countries like Korea need companies like Hyundai to represent them at global level. Like Japan’s Mitsui Group, Global companies are absolutely essential for not so resource rich economies. Hyundai needs to develop Korean managers to compete globally and it is possible only when they start participating in globalization. Thus the success of Korean companies can be repeated once again if they go global, compete directly, collaborate with local businesses and find or rather establish another competitive edge for themselves but this time with a different strategy.
Strengths •More advanced technology than some developing world countries •Existing business structure – no need to start from scratch •Still very diversifiedWeaknesses •Leadership •Focus •Blunt competitive edge •Management •Public oriented – non coherent Opportunities •To grow in to and with developing world •Switch from exploration to direct competition •Maximum use of competitive technology •Expand globallyThreats •Companies with similar core competencies – especially from developing world •Over specialization in most business areas lead to fall in value of Hyundai model of imitating competencies to other businesses
References Hyundai Group Link: http://www.fundinguniverse.com/company-histories/Hyundai-Group-Company-History.html
Chung Ju Yung, 85, Founder Of the Hyundai Group, Dies Link: http://www.nytimes.com/2001/03/22/business/chung-ju-yung-85-founder-of-the-hyundai- group-dies.html?ref=chung_ju_yung
History of Hyundai Link: http://santafemods.com/History/History%20of%20Hyundai.htm
Made in Korea, Chung Ju-yung and the rise of Hyundai – Google Books Link:http://books.google.ca/books?id=UecUDMPIUIUC&printsec=frontcover&dq=Hyundai+After+Chung+Ju-Yung&source=bl&ots=_v8ttkPs9O&sig=mz3dXyUapkTjFRod3GerjYxVn08&hl=en&ei=dVklTM3vK4a0lQeVofDfAg&sa=X&oi=book_result&ct=result&resnum=10&ved=0CFYQ6AEwCQ#v=onepage&q=Hyundai%20After%20Chung%20Ju-Yung&f=false
Economy Statistics http://www.nationmaster.com/graph/eco_gdp-economy-gdp&date=1962 FROM THE 1997-98 ASIAN FINANCIAL CRISIS TO THE 2008-09 GLOBAL ECONOMIC CRISIS: LESSONS FROM KOREA’S EXPERIENCE http://www.pennealr.com/media/articles/vol5/EALR5(1)_Jeon.pdf