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International Case – Restructuring at Korea’s Daewoo

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    INTERNATIONAL CASE – RESTRUCTURING AT KOREA’S DAEWOO Question – 1. What are the advantages and disadvantages of a hands-off, decentralized management approach ? Answer – 1 1. Decentralization. It is the “tendency to disperse decision making authority in an organized structure”. 2. Decentralized Organization. A decentralized organization is one in which decision making is not confined to a few top executives rather is throughout the organization, with managers at various levels making key operating decisions relating to their sphere of responsibility.

    Decentralization is a matter of degree, since all organizations are decentralized to some extent out of necessity. At one extreme, a strongly decentralized organization is one in which even the lowest-level managers and employees are empowered to make decisions. At the other extreme, in a strongly decentralized organization, lower-level managers have little freedom to make decisions. Although most organizations fall somewhere between these two extremes, there is a pronounced trend toward more and more decentralization. . Advantages & Disadvantages of Decentralization. Advantages of decentralization include faster, more responsive decisions, greater flexibility, more initiative at lower levels, reduced coordination efforts, reduced administration, and redundant capabilities. By moving decision making down the structure, response time is cut as the person making the decision is closer to the situation. The organization can react more quickly in this arrangement than if it had to route all decisions through a central location.

    In addition to more rapid decisions, decentralization can lead to greater flexibility in dealing with problems. A small unit is able to adapt to unexpected circumstances with more ease than a large, cumbersome organization. 4. Flexibility is often the by-product of innovation. As responsibility and functions are dispersed throughout the agency, individuals can express an amount of initiative rarely seen in centralized structures. Given the opportunity to “strut their stuff,” some employees will take risks and make valuable, new contributions in the process.

    More autonomy leads to a reduction in the coordination game. Since not every aspect of a decentralized organization must be standardized, the costs of ensuring that all subunits are performing identically are eliminated. Also eliminated is much of the administrative work at the headquarters. With each dispersed portion of the whole responsible for its own operations, those at headquarters do not have to deal with the day-to-day minutiae. Several of the smaller agencies when decentralized, might perform identical functions but with a focus on certain areas.

    If for some reason one of the units failed to operate, the others could pick up the slack. This redundancy could avert a catastrophic failure, which might occur if there was only one unit performing a critical function. Decentralization offers many advantages, but there are some drawbacks as well. Included among these are duplication of effort, localized use of expertise, difficulty in standardizing change, and lack of uniformity in decisions or output. 5. If two agencies perform similar functions, but in separate locations, this duplication of effort is wasteful.

    The resources and manpower required to maintain these duplicate operations can be a drain on the parent organization. Separate operating locations demand the careful disbursement of expertise and specialized equipment. If there are but two experts on a certain procedure and more than that number of operations requiring their services, how are they to be assigned? Some units will not function as well as those that get the expertise. When changes are necessary throughout a decentralized organization, it is difficult to ensure all subunits react the same way.

    Detailed instructions go to subordinate managers, who must all interpret the instructions similarly. The possibility for confusion exists. If changes are difficult to coordinate and some agencies have experts while others do not, the potential for a lack of uniformity in decision making or end products is quite high. The succeeding paragraphs summarise the advantages and disadvantages of decentralization. a. Advantages (1)Top management is relieved of much day-to-day problem solving and is left free to concentrate on strategy, on higher level decision making, and oordinating activities. (2)Decentralization provides lower level managers with vital experience in making decisions. Without such experience, they would be ill-prepared to make decisions when they are promoted into higher level positions. It also provides them more freedom and independence in decision making. (3)Added responsibility and decision making authority often result in increased job satisfaction. (4)Responsibility and the authority, that goes with it makes the job more interesting and provides greater incentives for people to put out their best efforts. 5)Lower level managers generally have more detailed and up to date information about local conditions than top managers. Therefore the decisions of lower level management are often based on better information. (6) It is difficult to evaluate a manager’s performance if the manager is not given much latitude in what he or she can do. (7)Promotes establishment and use of broad controls that may increase motivation. (8)Makes comparison of performance of different organization units possible. (9)Facilitates setting up of profit centers. (10)Facilitates product diversification. 11)Promotes development of general managers. (12)Aids in adaptation to fast-changing environment. b. Disadvantages (1)Lower level managers may make decisions without fully understanding the “big picture. ” While top level managers typically have less detailed information about local operations than the lower level managers, they usually have more information about the company as a whole and should have a better understanding of the company’s strategy. (2)In a truly decentralized organization, there may be a lack of coordination among autonomous managers.

    This problem can be reduced by clearly defining the company’s strategy and communicating it effectively throughout the organization. (3)Lower-level managers may have objectives that are different from the objectives of the entire organization. For example, some managers may be more interested in increasing the sizes of their departments than in increasing the profits of the company. To some degree, this problem can be overcome by designing performance evaluation system that motivate managers to make decisions that are in the best interests of the rganization. (4)In a strongly decentralized organization, it may be more difficult to effectively spread innovative ideas. Someone in one part of the organization may have a traffic idea that would benefit other parts of the organizations, but without strong central direction the idea may not be shared with, and adopted by other parts of the organization. (5)Makes it more difficult to have a uniform policy. (6)May result in loss of some control by upper-level managers. (7)May be limited by inadequate control techniques. 8)May be constrained by inadequate planning and control systems. (9)Can be limited by the lack of qualified managers. (10)Involves considerable expenses for training managers. (11)May be limited by external forces (national labor unions, governmental controls, tax policies). (12)May not be favored by economies of scale of some operations. Question – 2. How can Daewoo stay competitive with the Japanese ? Answer – 2. Daewoo can stay competitive with the Japanese by adopting following measures :- a. Efficient Production Methods and High Quality Products.

    Japanese are known for producing high quality products in international market specially automobiles and electronics. Daewoo needs to introduce efficient production methods and high quality products in already highly competitive world market. b. Focused Strategy. Daewoo needs to adopt focused strategy instead of going for large scale productions specially when it is already under financial debts. It should focus the selected areas and customers and go for selective production to attract the target customers suiting their needs. c. Differentiation Strategy.

    USP and USF are other keys to find new avenues in present day business world where new brands are cluttering up the market. The differentiation strategy is to be followed even by the well recognized and reputed brands in the market. Same holds equally good for Daewoo. d. Mergers and Joint Ventures. In this era of global recession and financial crises faced by Daewoo, Joint venture with other reputed firms / companies is likely to accrue desired dividends and could supplement its product line enabling it to expand into new markets. e. TOWS Analysis.

    A deep analysis of its failures, and following TOWS matrix dictates will help finding new courses of action to Daewoo to stay competitive with Japanese. f. Improve Brand Image or Change Brand Names. Daewoo with its demise resulting out of bankruptcy has become a symbol of failure. Introducing its new brand names, though difficult to initially find its due place in international market is likely to pay the desired dividends. g. Introduction of Variety of Consumer Tastes. With the consumers becoming mature enough, they are exhibiting more variety seeking behavior and demanding more models.

    Therefore, Daewoo needs to introduce more models to stay competitive. h. Penetration Pricing Strategy. Daewoo has to use penetration pricing strategy to gain a share of Japanese automobile market. j. Increase the Capacities. In response to the consolidation of global automobile industry, Daewoo has to increase its capacities at home and abroad to be large enough to complete at global scale. k. Global Alliance and Networking . It needs networking of global manufacturing, parts supply, marketing and R into a cohesive strategy, fully utilizing strategic partners. Question – 3.

    What were some of the Controllable and Uncontrollable factors in this case ? How should Mr. Kim have responded to those factors ? Answer – 3 1. Factors which affected the performance of Daewoo in general are as under :- a. Uncontrollable Factors (1)Government Interventions. Government policy served as a double edge sword. It protected the Daewoo providing them with massive subsidies, unlimited cheap credit, and protection against foreign competition. However, the price for these services was total loyalty to the government. Daewoo were forced to take over industries against their will.

    The government was constantly involved in their businesses and stifled their creativity. (2)Labour Market. The traditional work ethic that helped Korea reach economic prosperity had been threatened as workers had begun increasingly violent protests against years of long hours and low pay. Daewoo shipbuilding suffered heavy losses due to workers demand for pay raises. (3)Operating in a Global Economy. International demands for free trade was forcing the Korean government to open its market. The Daewoo lost its protectionist import controls.

    The North American Free Trade Agreement and the European Economic Community imposed trade limitations. (4)Product Quality From Korea. Korean products were considered to be of low quality. b. Controllable Factors (1)Physical Standards of Company. It included material used, feedback from employee, services rendered, labour hours per unit of out put, units of production per machine hour and quality of products. (2)Cost Standards. Labour cost per unit or per hour, material cost per unit, machine hour costs, cost per seat mile and selling cost per Dollar or unit of sales. (3)Capital Standards.

    Like balance sheet rather than the income statement, return on investment, rates of current assets to liabilities, debt verses net worth, fixed investment to total investment, cash and receivables to payables and bonds to stocks. 3. Response by Mr. Kim. Mr. Kim could have responded to the factors mentioned above by the following to bring Daewoo out of the crises :- a. Controlling intangible standards such as company’s environment, values and culture, feed back from employee and feed back from consumers. b. Restructuring. c. Recentralization. d. Appointment of young energetic managers. e. Joint ventures with established companies. . Selling the dead assets. g. Rebranding the cars. Question – 4. What do you think of Daewoo’s expansion into Europe ? What are the advantages and risks for the Company ? Answer – 4 1. Daewoo entered into Europe with a deal with Polish government that it would put 1. 1 billion into FSO without laying off any of its 21000 employees for at least three years. The deal combined with the earlier purchase of a light truck manufacturer and a plant for making TV Sets, was aimed at a key role in the country to become the biggest direct foreign investor in Poland, the largest economy in Central Europe. . From the pivotal position of Poland, Daewoo planned to challenge some major forces. Demand for new cars had Slowed down in western Europe where it was likely to grow no more than 3% or so far the rest of the decade. But in the seven nations of central Europe, demand was expected to jump at attention getting rate of 10% a year. Daewoo wanted that business. 3. Daewoo pursued very different globalisation strategies. company took into account its competitive position vis-a-vis the other’s when forging its global strategy.

    Daewoo focused on achieving economies of scale by targeting the East European markets for its overseas capacity expansion, as a way of overcoming its manufacturing cost disadvantage in the domestic market exporting supported by technological advancement determining factors as top management’s commitment to specific strategic decisions and resources, both managerial and financial, from each company’s parent business group, Subsequently, it was altered or reinforced as each company accumulated different learning experiences. 4. Advantages for the Company in Europe.

    Daewoo’s entry into eastern Europe has the following advantages :- a. There is a large potential market for automobiles in this region. The absolute size of the market is ranked as Poland, Czech Republic, Romania, and Hungary, with strong growth prospects in Bulgaria and Slovakia. This increase in automobile demand is supported by a strong economy in these countries, which has seen GDP growth rates of 5. 8% (Poland), 4. 8% (Czech Republic), and 4. 8 %(Romania) in 1995. Inflation has also come down to 20-30% per year from triple digits of just a few years ago. . At the time Daewoo had made its investment decision, the major automakers of the world had not entered these countries. Therefore, Daewoo has the first mover advantage in these markets. c. Eastern Europe with its low labour costs and solid technology base in mechanical engineering, promises high quality products without the high cost. d. The establishment of the CEFTA and Poland and Romania’s entry into the EU in the future will help alleviate the effects of trade barriers for the Korean automaker. e.

    Daewoo can take advantage of global synergy from numerous regional headquarters, over 1000 foreign subsidiaries, over 30 global R centers, 250,000 foreign employees, numerous global financial firms and strategies alliance with Asian firms and governments. f. Daewoo has established its sales and distribution networks in 19 European countries. 5. Risks for Daewoo in Europe. Although Daewoo has an ambitious strategy, it is viewed as being very risky. Several environmental factors and hurdles must be cleared for Daewoo’s venture to be successful. The risks involved are :- a.

    The economies in which the automobile plants are located must have steady economic growth. Since most of the plants are counting on strong local demand to sustain large scale production, it is imperative that Poland, Romania and India grow economically. b. Currency fluctuations should be minimal, or least Daewoo must be able to hedge against currency fluctuations. Since Daewoo’s global strategy involves large trade in automobile parts, KD kits, and fully assembled cars, currency fluctuations could have a detrimental effect on cost, trade, and profitability, if not managed well. c.

    Daewoo must be able to defend its incumbent position against new entrants. Daewoo may do this through a strong distribution network, superior after service, improvements in product quality and competitive pricing. d. The European market is already cluttered with competitors. It will become a “red ocean strategy for Daewoo”. e. Being a non European company it would be difficult for them to get foot hold. f. Labor costs are more in Europe. Question – 5. Why do you think GM acquired the company, while Ford did not ? Answer – 5 1. GM acquired Daewoo because of following reasons :- a.

    GM needed the Koreans’ design chops, and Seoul didn’t want to lose the tens of thousands of jobs provided by the company and its hundreds of suppliers. b. It was too important to GM’s future. The unit was a key developer of small cars for GM’s global lineup. c. It was a vital source for engineering and parts for the China operation, and it made a new Chevy compact due to face off with the Toyota (TMC) Corolla and the Honda (HMC) Civic. “GM Daewoo could play a more important role in the New GM’s global business strategy d. The company owned half of Daewoo for 20 years, but in 1992 bailed out over management differences.

    A decade later, after Ford took a pass on the bankrupt Daewoo, GM looked more closely and decided the company was worth the risk. GM thought that combining Daewoo’s small-car smarts with GM’s engineering and distribution could be a winning formula. e. GM was in desperate need to have the ability to quickly develop and produce small price competitive cars, which are in heavy demand not only in US but also in China and other emerging markets, which offer the sales growth fundamental to survival. 2. Ford did not acquire Daewoo due to following reasons :- a. Ford had done everyone’s home work and shown that Daewoo was not worth uying at least not at the Dollar of Billion level. b. Ford let drop its dissatisfaction with Daewoo cooperation in examining their books but many are convinced that real reason Ford backed away it because it was building up its reserves for possible fallout from the Bridgestone, Firestone, Ford explorer fire recall fiasco. c. They had no earlier trade, industrial relationship with Daewoo. d. The figure head personality of Daewoo was out of scene with embezzlement and fraud allegations. Question – 6. What problems can GM-Daewoo expect in the future ? Answer – 6 Problems GM-Daewoo Can Expect.

    Despite the progress GM Daewoo has made, it could still face some headwinds :- a. The biggest challenge remains its home turf. Although GM Daewoo has maintained its 9. 5% share even as overall sales in Korea have hit the skids, that remains far below the 33% share Daewoo had in its heyday. b. Exports also could get nicked by the stronger Korean won, which has gained 9. 4% against the dollar this year. c. GM Daewoo, one of the cornerstones of production and product development for New General Motors (GM), is showing increasing signs of major distress as sales and exports plummet. d.

    The GM-controlled company has never had pockets as deep as those of Hyundai Motor (HMC) and for nearly six months now, HMC has been squeezing its smaller rival in every segment of the domestic market. e. A weak balance sheet means GM Daewoo cannot afford to match the incentives that HMC and Renault Samsung are using to attract buyers back into showrooms at home. f. Daewoo has lost the figure head and leader Mr Kim’s who had very aggressive and innovative approach. He lead and rose the company from incubator to the international level. g. GM Daewoo faces rising labor costs. h. Over extension is required to be replaced with consolidation.

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    International Case – Restructuring at Korea’s Daewoo. (2018, Feb 07). Retrieved from https://graduateway.com/international-case-restructuring-at-koreas-daewoo/

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