THE STRATEGIC MANAGEMENT OF KOREAN AND JAPANESE BIG BUSINESS GROUPS: A Comparison Study between Korean General Trading Companies and Japanese Sogo Shoshas by IN WOO JUN A thesis submitted to The University of Birmingham for the degree of DOCTOR OF PHILOSOPHY Department of Management The Birmingham Business School The University of Birmingham August, 2009 University of Birmingham Research Archive e-theses repository This unpublished thesis/dissertation is copyright of the author and/or third parties. The intellectual property rights of the author or third parties in respect of this work are as defined by The Copyright Designs and Patents Act 1988 or as modified by any successor legislation. Any use made of information contained in this thesis/dissertation must be in accordance with that legislation and must be properly acknowledged. Further distribution or reproduction in any format is prohibited without the permission of the copyright holder. ABSTRACT This research is an in-depth study of Korean GTCs (General Trading Companies) and Japanese Sogo Shoshas (the Japanese version of General Trading Companies), which are unique big business conglomerates but not well-known in Western countries. It investigates and compares several of their features, such as their history, characteristics, functions, organisational structure, corporate culture, human resource management, their impact on national economic development, strategic management and decision-making process. First, it examines a wide range of literature to show the functions of Korean GTCs and Japanese Sogo Shoshas as transaction intermediaries, information gatherers, project organisers, international marketers, financial providers, etc. With these varied functions, they have played significant roles not only from the macro aspect, but also the micro aspect. To rationalise their theoretical existence, they are approached from four perspectives: transaction cost economics, informational economics of scale, international marketing, and as financial intermediaries. Second, many elements were examined to scan the general management system within the two groups. Compared to Western countries, both Korea and Japan traditionally have a collectivist culture with low individualism. However, there have been transformations in the culture in terms of employee values, attitude, behaviour and management style. These cultural changes have been reflected in human resource management practice. Traditional human resource management practices lost their effectiveness, as they proved to be unfit for the changing business environment. i Traditional features such as lifetime employment, seniority-based pay and recruitment patterns have been changing since the slower growth of these economies in the 1990s. Corporate governance and ownership structure were also examined. In Korea’s case, control power has been centralised to group owners and their excessive power over ownership has caused problems, especially in the decision-making process. But ownership and management in Japan have traditionally been separated. Third, as a main purpose of this research, a field survey was carried out to examine the strategic management of the two groups by analysing the relationships between the business environment, competitive strategy, organisational structure and performance. As in the previous literature, this research also found that the variables are not independent, but interdependent with the other variables. Environment influences a firm’s competitive strategy and strategy affects its organisational structure. Then, performance is influenced by strategy and structure. For instance, a firm’s employment of differentiation strategy is positively associated with environmental uncertainty and complexity. A differentiation strategy is positively correlated with organisational decentralisation. Consistent with the previous literature, a cost leadership strategy is statistically positive with organisational formalisation. A hybrid strategy and new market development are positively correlated, since the main purpose of this strategy is to offer high-quality products or services at lower prices than competitors do. The research also found that organisational decentralisation motivates and encourages employees’ satisfaction and retention. Fourth, the decision-making process within the two groups was compared. Top executives in Korean GTCs still play important roles in the decision-making process, ii whilst, team leaders and middle managers are positioned as main bodies in Japanese Sogo Shoshas. As primary factors influencing decision-making, ownership and corporate culture are the most important factors in Korean GTCs, whilst corporate culture is a primary component in Japan. Korean decision-makers tend to be individualistic, but Japanese decision-makers practice collectivism. There have been significant changes in decision-making both in Korean GTCs and Japan Sogo Shoshas since the 1990s. Fifth, in totality, some differences in the general management system were found between the two groups. These may be caused by cultural differences, history, organisational size and/or the degree of business scope and diversification. iii ACKNOWLEDGEMENTS I wish to thank the many people who have encouraged, or assisted in, the preparation of my PhD. thesis. This work would not have been possible if it had not been for the help and support of many people. In this short preface I am not able to acknowledge everyone by name. First and foremost, I would like to express my deep and sincere thanks to Professor Jim R. Slater, who has supervised my study for the past three years. His expertise in Strategic Management, as well as his assistance in many other phases, was especially beneficial in completing this dissertation. No amount of words can express my gratitude to him. My special thanks and gratitude are extended to Professor David Bailey. I am greatly indebted to him for his endless efforts and warm assistance in clarifying and refining this dissertation. The useful comments he has given me on Japan-related research were particularly helpful. For my field survey, I am indebted to many people. I especially thank the contact people in Korean GTCs and Japanese Sogo Shoshas, in particular, Mr. Ki Sung, Cho, a manager of Lotte Group, and Mr. Keisuke Sasaki, a senior manager of Tomen Corporation. I also thank all the respondents who participated in my field survey. Most of them gave their total support and encouraged me. I would also like to acknowledge my gratitude to my family. Without their devotion and sacrifice, I could never have finished all my academic journey in the U.K. I especially thank my mother, Gae Soon, Lee, and my brothers and sister, Hong Woo, Young Woo, and Gae Sun, who have given me their emotional and financial support over the years. Finally, I should not forget my only daughter, Eun Chae, who has given me emotional encouragement during my study. With all my heart, I dedicate this dissertation to my family. iv LIST OF TABLES Table 2.1. Definitions of the GTCs/Sogo Shoshas 18 Table 2.2. Market Governance Structure 27 Table 3.1. Changes of Requirements for GTC Designation 4 Table 3.2. Samsung Corporation’s Management Philosophy 47 Table 3.3. Daewoo International Corporation’s Management Philosophy 50 Table 3.4. LG International Corporation’s Management Philosophy 52 Table 3.5. Hyundai Corporation’s Management Philosophy 54 Table 3.6. SK Networks Co., Ltd.’s Management Philosophy 57 Table 3.7. Hyosung Corporation’s Management Philosophy 59 Table 3.8. Sangyong Corporation’s Management Philosophy 60 Table 3.9. Organisational Structure of Korean Major GTCs in 2008 65 Table 3.10. Number of Overseas Branches of Korean Major GTCs in 2008 65 Table 3.11. Impacts of Traditional Social Values on Corporate Culture 67 Table 3.12. Sahoon of Korean Major GTCs 68 Table 3.13. Insider Ownership of Major Chaebols 71 Table 3.14. Traditional and Newer Characteristics of HRM within Korean Big Business Groups 79 Table 3.15. Profitability of Korean GTCs in 2007 85 Table 3.16. The Top 30 Korean Chaebols in 208 8 Table 3.17. Convictions by the Park Regime for Illicit Wealth Accumulation 95 Table 3.18. The Amount of Exports made by the GTCs 99 Table 3.19. The Chaebols’ Ownership of Commercial Banks in 1997 102 Table 3.20. Korea’s FDI by Destination 107 Table 3.21. Total External Liabilities of Korea 13 Table 3.22. Changes in the Debt-Equity Ratios of the Top Five Chaebols 116 Table 3.23. Big Deals Programme in Industries 117 Table 3.24. Infusion of Public Funds to the Financial Sector : November, 1997 ~ October, 2006 120 Table 4.1. Mitsui & Co., Ltd.’s Management Philosophy 129 Table 4.2. Mitsubishi Corporation’s Management Philosophy 131 Table 4.3. Sumitomo Corporation’s Management Philosophy 134 Table 4.4. Marubeni Corporation’s Management Philosophy 136 Table 4.5. Itochu Corporation’s Management Philosophy 138 v Table 4.6. Sojitz Corporation’s Management Philosophy 140 Table 4.7. Tomen (Toyota Tsusho) Corporation’s Management Philosophy 141 Table 4.8. Organisational Structure of Japanese Major Sogo Shoshas in 2008 144 Table 4.9. Number of Overseas Branch of Major Japanese Sogo Shoshas in 2008 145 Table 4.10. Five Major Dimensions of Culture: Japan, Korea and the UK 146 Table 4.11. Comparison of Corporate Culture and Management System: Korea, Japan and the West Firms 149 Table 4.12. Profitability of Japanese Sogo Shoshas in 2007 167 Table 4.13. Comparison of Stability between Major GTCs and Sogo Shoshas in 2007 169 Table 5.1. The Balancing Considerations between Centralisation and Decentralisation 26 Table 5.2. The Hypotheses and Results Summarised 244 Table 5.3. The Hypotheses and Results Summarised 246 Table 5.4. The Formation of the Sample 268 Table 5.5. A Population Number: Total Marketing and Sales Employees within Korean GTCs and Japanese Sogo Shoshas 272 Table 5.6. The Environment Scale 27 Table 5.7. The Strategy Scale 279 Table 5.8. The Structure Scale 281 Table 5.9. The Performance Scale 282 Table 5.10. Statistical Techniques to be used for each Hypothesis 283 Table 5.11. Mean and Standard Deviation of Variables 284 Table 5.12. Correlation Matrix : Korean GTCs 285 Table 5.13. Corelation Matrix : Japanese Sogo Shoshas 286 Table 5.14. Results of Pearson Coefficient of Correlation for H.1.1 287 Table 5.15. Results of Multiple Regression for H.1.2 289 Table 5.16. Results of Simple Regression and for H.2.1 : Korean GTCs 290 Table 5.17. Results of Pearson Coefficient of Correlation for H.2.1 : Japanese Sogo Shoshas 291 Table 5.18. Results of Pearson Coefficient of Correlation for H.2.2 : Korean GTCs 292 Table 5.19. Results of Simple Regression and for H.2.2 : Japanese Sogo Shoshas 292 Table 5.20. Results of Multiple Regression for H.3.1 294 Table 5.21. Results of Pearson Coefficient of Correlation for H.3.2 295 Table 5.22. Results of Pearson Coefficient of Correlation for H.3.3 : Korean GTCs 296 Table 5.23. Results of Simple Regression and for H.3.3 : Japanese Sogo Shoshas 297 Table 5.24. Results of Pearson Coefficient of Correlation for H.4.1 298 vi Table 5.25. Results of Pearson Coefficient of Correlation for H.4.2 298 Table 5.26. Results of Pearson Coefficient of Correlation for H.4.3 299 Table 5.27. Results of Frequency Analysis for Types of Strategy 300 Table 5.28. Questionnaire Survey Results Summarised for Korean GTCs’ and Japanese Sogo Shoshas’ Strategic Management 313 Table 6.1. Comparison of Decision-making Models 30 Table 6.2. A Sample of the Standard Table of Duty of Arbitrary Decision within Korean Firm 340 Table 6.3. An Example of Standard Table for Decision-making within Japanese Firms 347 Table 6.4. The Basis of Ethical Preference of Korean and Japanese Managers 352 Table 6.5. Statistical Techniques to be used for each Hypothesis 365 Table 6.6. Results of Frequency Analysis for H.1.1~1.2 366 Table 6.7. Chi-square Test for Top Executives 368 Table 6.8. Chi-square Test for Team Leader 369 Table 6.9. Chi-square Test for General Staff 370 Table 6.10. Results of Frequency Analysis for H.2.1 371 Table 6.11. Chi-square Test for Power and Politics 372 Table 6.12. Chi-square Test for Corporate Culture 373 Table 6.13. Results of Frequency Analysis for H.2.2 374 Table 6.14. Chi-square Test for Expertise 375 Table 6.15. Chi-square Test for Ownership 376 Table 6.16. Results of Frequency Analysis for H.3.1~3.2 377 Table 6.17. Results of Frequency Analysis for H.4.1~4.2 379 Table 6.18. Chi-square Test for Top Management’s Change of Mind 380 Table 6.19. Chi-square Test for Decentralisation 381 vii LIST OF FIGURES Figure 1.1. Organisation of the Thesis 13 Figure 2.1. A Diagram of the GTCs’/Sogo Shoshas’ Functions 21 Figure 2.2. A New Model of the GTCs’/Sogo Shoshas’ Major Functions 24 Figure 2.3. Distributorship and Agency Contractual Structures 3 Figure 2.4. Financial Services Provided by the GTCs in Trading Transaction 37 Figure 3.1. The GTC as an Absolute Main Force of the Group 61 Figure 3.2. The GTC as One of the Main Forces of the Group 62 Figure 3.3. The GTC as a Supplementary Force of the Group 62 Figure 3.4. The GTC as One of the Main Forces: Samsung Group 63 Figure 3.5. An Illustration of Cross-Shareholding in Korean Chaebols 73 Figure 3.6. Changes of Korean GTCs’ Sales Volumes 82 Figure 3.7. Movements of Exchange Rates and Stock Market Index, and Number of Bankruptcies 10 Figure 4.1. The Position of the Sogo Shosha in the Keiretsu : Mitsubishi Group 143 Figure 4.2. Average Annual Working Hours per Worker 148 Figure 4.3. Changes in the Cross Shareholding Ratio Among Japanese Firms 152 Figure 4.4. Comparison of the Agency Problem 154 Figure 4.5. Changes of Japanese Sogo Shoshas’ Sales Volumes 163 Figure 4.6. The Structure of the Sogo Shoshas’ Busines 165 Figure 4.7. The Ownership Structure of Zaibatsu : Pyramid Structure 173 Figure 4.8. The Structure of a Horizontal Keiretsu 177 Figure 4.9. The Structure of a Vertical Keiretsu : Electronic Firm 179 Figure 4.10. Crossholding of Shares among Four Major Mitsubishi Group Firms 180 Figure 4.11. Japan’s Postwar Economic Growth 190 Figure 5.1. A Co-alignment Model of Performance 200 Figure 5.2. The Elements of Strategic Management Process 202 Figure 5.3. The Five Forces that Shape Industry Competition 209 Figure 5.4. A Combination of Five Resources 221 Figure 5.5. A Functional Structure 29 Figure 5.6. A Multidivisional Structure 230 Figure 5.7. A Matrix Structure: Multinational Organisation 231 viii