Case study of Samsung – Tesco, Korea

Introduction

Description of Retail Business in Korea

Retail business is emerging as one of the most promising businesses in Korea due to what Samsung-Tesco calls a ‘powershift’ from manufacturing to distribution. Indeed, it is especially true in Korea; while the retail business of U.S. and Japan took 32% of GDP on average, that of Korea’s took only 21% in year 2000. Samsung-Tesco conservatively forecasts that the average growth of retail business, between 2000 and 2005, would be 8.6%. Currently, the ‘big five’—Homeplus (Samsung-Tesco), E-Mart, Carrefour, Magnet, Walmart— consists 52% of the market. As small retail businesses are increasingly being absorbed to big retailers, department store, and supermarket, the competition among the ‘big five’ is becoming fierce to take advantage of high growth market, which also possesses the strategic advantage of a spearhead for entering Chinese market.

This Case Study and the Timeframe

This case study describes the implementation of new economy paradigm, which took place during and after the merger of Samsung Corporation and Tesco PLC. Although the major target of the merger was not exactly on uptaking new economy paradigm, the merger process has played critical role in implementing new economy paradigm in Samsung-Tesco. The case study timeframe stretches from early 1994 to the present while many of the important issues in this case unfolded from 1997 to present. Information in this case was gathered through an interview and questionnaires along with direct observations.

Background

In March 1994, after separating out from Samsung group (chaebol), Samsung Corporation entered into retail business. There was little doubt that Samsung Corporation would be very competitive because of its well-recognized management skills and capital. However, when it opened its first three retail stores (Homeplus Taegu, Samsung Plaza Bundang, Samsung Plaza Seoul) in 1997, the financial crisis broke out.

Plummeting consumer confidence and viciously high cost of financing inevitably placed Samsung Corporation into financial status of literally a step away from bankruptcy; accumulated loss during 1998 was KRW 249 billion (approximately US$200 million)1. To overcome this unprecedented difficulty, Samsung Corporation began to restructure its business and downsized the organization while searching 1 Calculated in KRW 1,200 per US$. It should be much higher if it was calculated by exchange rate of that time (Approximately KRW 1,800 per US$). for the breakthrough strategy. Recognizing that retail business is too attractive to give up, Samsung Corporation decided to seek for foreign investment2. At the same time, after successfully establishing its business in Thailand, Tesco PLC was also looking for partner that could provide strong local background as well as capability of creating synergy for Tesco’s regional network. As the need of both parties met, Samsung- Tesco was established in May 1, 1999. Through the merger, and initial investment of US$ 220 million from Tesco PLC, Samsung-Tesco was able to clear out all debts and rehire all of 1,137 workers who were laid off during 1998. Strategy and Planning Division of now Samsung-Tesco evaluates the merger a success for two reasons. First advantage was financial.

The merger not only saved Samsung-Tesco from bankruptcy but also guaranteed Samsung- Tesco a subsequent investment of $170 million (KRW200 billion) to dominate the market. Second advantage was access to the advanced management skills and IT technology to compete with other world class rivals such as Wal-mart, Carrefour, Costco, etc.

New Economy Narratives

As it was shown in the case of U.S., new economy benefits cannot be fully exploited unless it is supported by infrastructures including human resources capabilities and organizational (socio-cultural) capacity. And it is obvious that, depending on the stages of the development, each recipient of new economy paradigm (business, civil society, government agency etc.) will have different degrees of impact and will show different reactions to the new economy paradigm.

Samsung-Tesco’s situation was unique in that it had already had IT hardware prepared but it had to adopt global standard IT hardware as well as software (infrastructures such as readiness of workers to adopt new system and culture) for heightened competitiveness.

Since the financial crisis of 1997, Korean government actively promoted foreign investments and deregulated related laws. It would have been much difficult or impossible if the regulation that existed before the financial crisis still existed. define3 new economy paradigm narrowly and limit to just IT hardware, Samsung Corporation had already established its own IT system independently. The IT industry of Korea was quite competitive and the very nature of retail business required intensive IT system throughout its entire value chain. However, after the merger, the requirements on the system have expanded to cover global network, as well as future expansion of logistics system. Samsung Corporation’s former system did not meet the requirements of global standards although it worked well on the domestic basis. Samsung-Tesco faced dilemma of either just modifying the former system or changing the entire system to Lotus system that has been used in Thailand4. The Lotus system was more desirable for it was a global standard and flexible enough to take into account a rapid expansion; the former system was consistent with Korean currency, language, practices, and most importantly, people were used to it. The former system was operated in Windows system while the Lotus system was operated in DOS system5.

Samsung-Tesco decided to partly adopt Lotus system: for retail system, Samsung-Tesco fully adopted Lotus system, and for finance, Samsung-Tesco adopted Oracle financial. However, for personnel management and groupware, Samsung-Tesco decided to stay with the former system. The Lotus system was chosen for retail system—the backbone of the entire value chain in retail business—because of following reasons.

• First, the former system does not reflect characteristics of multiple stores network—the multiple stores network requires simplification, standardization, and specification of the system. This problem will inevitably be intensified as Samsung-Tesco expands its business.
• Second, it is clear that, in the near future, global supply chain system will be developed and it will require global standard that the former system is lacking of6. It is highly probable that future competitiveness of Samsung- Tesco will be built around its global network; one of Samsung-Tesco’s tough competitor— Wal-mart—already introduced its global EDI system.
• Third and the most important reason was reliability of the Lotus system. Because the Lotus system has already proven its performance in practice, Samsung-Tesco did not have to risk reliability of the system in the situation where the competition is already intensifying. The principle in adopting the Lotus system in Samsung-Tesco was glocalization (globalization + localization), which is one of the business motto introduced by Seung Han Lee, the CEO of Samsung-Tesco.

Glocalization basically pursues, as far as possible, the global standard while recognizing that global standard is not the panacea and therefore business environment of Korea should also be respected. The transition process took three stages as shown in <Table 2>. Note that it took almost one year (10 months) to adopt new IT system.

In this case study we define new economy as economic model which any networked two-way information and data communication devices facilitate better decision making of the organization and lead to higher performance.

Samsung-Tesco has chosen the Lotus Thailand system because the Thai environment was most similar to that of Korea’s among Tesco’s global network. It does not necessarily mean that DOS system is global standard.