Hwy-Chang MoonProfessor of International Business Strategy

Graduate School of International StudiesSeoul National University

cmoon@snu.ac.kr

Competitiveness: A Korean VisionThe ABCD Framework of K-Strategy

Contents

Korea’s DevelopmentNational Level Firm Level

Existing StudiesReviewCriticism

A New ApproachABCD Framework and Theoretical BackgroundCase Studies

Conclusion Implications Further Studies

2

Korea’s Economic Growth and Industrial Upgrade

3

Imp. SubstitutionExp. Promotion

Source: Data (1960-2012): World Bank World Development Indicators; Data (2013): Korean Statistical Information Service.

OECD(1996)

WTO(1995)

Capital Market Open(1992)

GDP per capita (US$)

1990s 2000s1960s 1970s 1980s

91(1961)

1,042(1977)

21,590(2007)

11,468(1995)

25,973(2013)

Foreign Perspectives: Korean Companies Cannot Succeed?

4

• POSCO: IBRD Report- In 1968, Korea should first develop labor-intensive industries before steel.

- Korea used a part of war compensation fund from Japan

- In 1986, Dr. Jaffe in the general meeting of International Iron and Steel Institute (IISI)- Koreans were beyond common sense

• Samsung Electronics: Mitsubishi Report- Five reasons to fail

- Korea’s market size, related industries, social overhead capital, company size & technology

- A few Japanese companies helped- Semi-conductor VLSI tech from Sharp Corporation

• Hyundai Motor Company: U.S. Consumer Report- The lowest rankings evaluated by U.S. consumers in the early 1990s

- Worst! Never buy again!

- Frequently cited at comedy shows- Junk! Toy!

Existing Studies on Korea’s Development

5

Study Argument

1. Amsden (1989) • Learning existing Western technologies rather than innovation• Efficient government intervention policy in the optimal allocation of resources

2. Song (1997)• Outward, Industry, and Growth (OIG) strategy • Confucian ethic as an underlying basis for development• Land use, a family-planning program, savings and consumption behaviors

3. World Bank (1993) • Rapid physical and human capital accumulation• Government’s market-friendly policy

4. Cho (1994)• Abundance of good workers of high standard of literacy, discipline, and desire to grow• Vigorous entrepreneurship• Export-led growth strategy along with effective government development strategy

5. Toussain (2006)

(1) government intervention, (2) US technical and financial support, (3) land reform, (4) transition from import substitution to export promotion, (5) authoritarian planning, (6) state control over banking sector, currency exchange, capital flows and product prices, (7) US protection, (8) education, (9) scarcity of natural resources

6. Mason (1997) • Slower rates of population growth favored investment in education and incentives for saving, which accelerated the economic development

7. Chang (2003)• The internal operations of Korean business groups and their role in the Korean economy• Financial crisis due to the failed adaptation to changing external environments by the

business groups and Korean government

8. Eichengreen, Perkins, and Shin (2012)

• Learning and government policies for promoting economic growth • Adaptation to the global economic environment• Rapid shift of export structure to focus on high-growth products • Export diversification

Conflicting Arguments between Studies

6

Export-oriented Trade Policy

Song (1997), Toussaint (2006)

Korea’s economic success was due to itsexport-oriented trade polices

Amsden (1989)

The content of institutional frameworksand the capacity to implement policies aremore important.

vs.

Industrial Policy and Structure

vs.

World Bank (1993)

The industrial policy of promoting severaltargeted sectors (e.g., chemical and heavyindustries) had little apparent impact onindustrial structure.

Eichengreen, Perkins, and Shin (2012)

The industrial policy played an importantrole for the transition from light to heavyindustry in the early stages of Korea’sgrowth.

Previous Studies and Porter’s Diamond Model

7

Factor Conditions Demand Conditions

Related and Supporting Industries

Firm Strategy, Structure, and Rivalry

• Fertility: 2, 6• Human capital: 2, 3, 4• Education: 5• Savings: 2• Land reform: 2, 5• Scarcity of natural resources: 5• New Confucian ethic: 2

• Openness-orientation: 2, 5, 4, 8• Global consumers: 8• Export diversification: 8

• Institutions: 1, 8• US technical and financial support: 5• Protection by the US: 5

• Chaebol: 1, 7• OIG Strategy: 2• Entrepreneurship: 4

Government

• Intervention: 1, 2, 3, 5, 8• 5-year plan: 4, 5

1: Amsden (1989)2: Song (1997)3: World Bank (1993)4: Cho (1994)5: Toussaint (2006)6: Mason (1997)7: Chang (2003)8: Eichengreen et al. (2012)

Previous studies explain subsets of the determinants of the diamond model.

Y = β0 + β1x1 + β2x2 + β3x3 + β4x4 …

The Diamond Model (Michael Porter)

8

• Factor Conditions- Basic- Advanced [Japan’s 輕薄短小 Technology]

• Demand Conditions- Size- Quality [Italy’s Footwear Industry]

• Supporting Conditions- Cluster- Synergy [U.S.’s Silicon Valley]

• Rivalry Conditions- Structure- Strategy [U.S. and Japan’s Auto Industry]

RivalryConditions

DemandConditions

SupportingConditions

FactorConditions

“What” vs. “How” Approach

9

“What” Approach “How” Approach

Existing Studies New Study

• Superior resources- Cheaper labor- Higher technology

• Focus on “input” factors• Static view

• Similar resources- Similar labor cost, but HOW?- Similar technology, but HOW?

• Focus on “process” factors• Dynamic view

Y = β0 + β1X1 + β2X2 + β3X3 + β4X4 …

• “What” Approach: X1, X2, X3, X4 …• “How” Approach: β1, β2, β3, β4 …

As the gap in “What” factors has been narrowing, the “How” approach becomes more important.

R&D Expenditure

10Source: Wall Street Journal, July 18, 2012, http://online.wsj.com/news/articles/SB10001424052702304388004577531002591315494

• Nokia is losing ground despite spending $40 billion on research and development over the past decade—nearly four times what Apple spent in the same period

• And Nokia clearly saw where the industry it dominated was heading. But its research effort was fragmented by internal rivalries and disconnected from the operations that actually brought phones to market

Agility

Benchmarking

Convergence

Dedication

The ABCD Framework

11

Speed

Precision

Learning (Imitation)

Global-standard

Mixing

Synergy-creation

Diligence

Goal-orientation

A

B

C

D

4 Factors 8 Sub-factors

The ABCD Framework: An Integration of Established and Emerging Theories

Agility

• Speed Early mover advantage Fast follower advantage(Economies of speed)

• Precision Automation (from L-int to K-int) Process techniques with human touch (自働化)e.g., JIT, TQM, 6 sigma

Benchmarking

• Imitation [Resource-based view of the firm] Absorptive capacity(Economies of learning)

• Global-standard Destructive innovation Incremental innovatione.g., Kaizan, creative imitation

Convergence

• Mixing [Specialization capability][(Economies of scale)]

Combinative capability(Economies of diversity)

• Synergy-creation Related diversification(Economies of scope)

Related & Unrelated diversificatione.g., Chaebol, smartphone (platform strategy)

Dedication

• Diligence [Inspiration] Perspiration(Economies of hard-working)

• Goal-orientation Unique positioning Continued growth after catch-upe.g., constructed crisis, extra commitment

12

Established Theories Emerging Theories

The ABCD Framework: Theories and Cases

Agility

• Speed Early mover advantage Fast follower advantage(Economies of speed) Automobile Industry

(Ford, Toyota, Hyundai)• Precision Automation Process techniques (自働化)

e.g., JIT, TQM, 6 sigma

Benchmarking

• Imitation [Resource-based view of the firm]

Absorptive capacity(Economies of learning) Steel Industry

(US steel, Nippon steel, POSCO)• Global-standard Destructive innovation Incremental innovation

e.g., Kaizan, creative imitation

Convergence

• Mixing [Specialization capability][(Economies of scale)]

Combinative capability(Economies of diversity) Electronics Industry

(GE, Sony, Samsung)• Synergy-creation Related diversification

(Economies of scope)Related & Unrelated diversificatione.g., Chaebol, smartphone

Dedication

• Diligence [Inspiration (West)] Perspiration (East)(Economies of hard-working) Economic Development

(WEST: US, Europe)(EAST: Japan, Korea)• Goal-orientation Unique positioning

Continued growth after catch-upe.g., constructed crisis, extra commitment

13

Established Theories Emerging Theories Cases

Agility = Speed + Precision

14

Agility Established Theories Emerging Theories Cases

• Speed Early mover advantage Fast follower advantage(Economies of speed) Automobile Industry

(Ford, Toyota, Hyundai)• Precision Automation Process techniques

e.g., JIT, TQM, 6 sigma

• First to adopt mass production –economies of scale

• Enhanced speed of production

• Higher productivity and quality through automation with human touch (自働化)

• Appropriate in the stable market, but not in the emerging market

• Higher production speed, tighter control on quality through on-site and 24hr monitoring

• Growing confidence in quality• US: 10-year, 100,000-mile warranty

FordismSpeed, Cost

ToyotaismQuality, Cost

HyundaismSpeed, Quality, Cost

A B C D

Benchmarking = Imitation + Global-standard

15

Benchmarking Established Theories Emerging Theories Cases

• Imitation [Resource-based view of the firm]

Absorptive capacity(Economies of learning) Steel Industry

(US steel, Nippon steel, POSCO)• Global-standard Destructive innovation Incremental innovation

e.g., Kaizan, creative imitation

US Steel Nippon Steel POSCO

Dominated the world steel industry until the 1950s

Dominated the world steel industry in the 1980s

Became the world top company in the 1990s

• Learned from Europe• Created hot strip mill system

• Produced a smoother sheet with more uniform thickness

• Learned from US and Europe • Created combined blown converter

• Increased efficiency and reduced unit consumption of raw materials

• Learned from Japan and the West• Created FINEX

• Increased cost efficiency and eco-friendliness

A B C D

• Japan: The best student of the West• Korea: The best student of Japan and the West • Imitate, Improve, Innovate!

Electronics50%

Construction & Engineering11%Chemistry

2%

Finance9%

Service28%

Convergence = Mixing + Synergy-creation

16

Convergence Established Theories Emerging Theories Cases

• Mixing [Specialization capability][(Economies of scale)]

Combinative capability(Economies of diversity) Electronics Industry

(GE, Sony, Samsung)

• Synergy-creation Related diversification(Economies of scope)

Unrelated diversificatione.g., Chaebol, platform strategy

A B C D

Unrelated Diversification• Developing new competence in new area

(Broadening and deepening)

Related Diversification• Extending existing competence in new area

(Deepening and broadening)

• Narrow diversificationA few related and/or unrelated businesses

Finance33%

Aviation14%Healthcare

13%

Electronics5%

Transportation4%

Energy Infrastructure31%

• Broad diversificationA wide collection of related and/or unrelated businesses

• Dominant diversificationOne major core business taking up 50 –80% of revenues, with several small related and/or unrelated businesses

General Electric

http://www.samsung.co.kr/main.doSamsung Annual Report (2013)

Sony Annual Report (2013)GE Annual Report (2013)

Sony Samsung

Imaging11%

Game8%

Mobile18%

Entertainment15%

Devices8%

Pictures11%

Music6%

Finance15%

Others8%

Dedication = Diligence + Goal-orientation

17

Dedication Established Theories Emerging Theories Cases

• Diligence [Inspiration (West)] Perspiration (East)(Economies of hard-working) Economic Development

(WEST: US, Europe)(EAST: Japan, Korea)

• Goal-orientation Unique positioningContinued growth after catch-upe.g., constructed crisis, extra commitment

A B C D

The World's Hardest-Working Countries

“In South Korea, ranking first place, things are slowly moving toward the OECD norm after the Korean government introduced a five-day working week in 2004 for schools and companies with over 1,000 employees. But with the culture of hard work so deeply ingrained, change is slow.”

- Forbes (May 21 2008)

http://www.forbes.com/2008/05/21/labor-market-workforce-lead-citizen-cx_po_0521countries.html

The U.S. Japan Korea

Japanese working harder than Americans

Japanese employees worked an average of 2,201 hours in 1990. That figure is about 300 hours more than the U.S. average. By comparison, the Japanese work about 550 hours more than workers in the former West Germany.

- New York Times (February 7, 1992)

http://www.nytimes.com/1992/02/07/news/07iht-work.html

Hard work, once America’s Spirit

“The American idea that hard work was to be esteemed distinguished us from Europeans who admired their gentlemen of leisure. For us, hard work rather than idleness was the way to distinction.”

–Lynne Cheney (April 6, 1993)

http://www.aei.org/publication/hard-work-once-as-american-as-apple-pie/

• Protestant spirit- Frontierism for individual success

• Samurai spirit- Disciplinism for collective welfare

• Saemaul spirit- Equalism for social mobility

Conclusion

18

Dedication

Speed

Learning (Imitation)

Mixing

Agility

Benchmarking

Convergence

Less Developed Stage

Precision

Global-standard

Synergy-creation

More Developed Stage

Diligence Goal-orientation

• The ABCD framework is not exclusive for Korea, and can be applied to other countries.

• The usefulness of ABCD Framework1) To suggest Korea for further development 2) To help other countries for efficient and sustainable development3) To apply at various units of analysis: country, industry, firm and individual level4) To apply at various areas: economy, society and politics

• Different stages of economic development need different development strategies.