A Business Failure, Essay Example

Business conglomerates are known as chaebols in South Korea and Daewoo was one of the largest chaebols in its prime days, along with Hyundai, Samsung, and LG. Daewoo completed in several industries including automobiles, heavy industries, shipping, finance, and electronics and contributed 8% of national GDP as well as 13% of exports towards national economy. The company employed over 100,000 people but ultimately went bankrupt due to its inability to pay a debt of over $80 billion (Business Asia, 2005).

The event that first exposed the weakness in the company’s operating model was the Asian financial crisis. Daewoo Group’s accounting fraud of $15.3 billion even surpassed that of WorldCom and Enron (Kim, 2008). Corporate governance failed on a huge level at Daewoo which may be why it entered industries that would not have been strategic fit for the conglomerate, just to please the government. In return, Daewoo enjoyed favorable government loans, subsidies, and protectionist policies against both local and foreign competitors. The upper management was accountable to almost no one and ruled with autocratic leadership style. The management faced no or minimum board oversight and there was no check and balance system.

Daewoo’s founder Woo Choong Kim was the face of the company and he and his executives almost never engaged employees for their ideas or feedback on operations. Daewoo grew at a rapid pace and yet the orders and communication usually flew from top to bottom only. This prevented early signs of trouble being detected by the upper management since it hardly sought feedback from those carrying out day to day operations. Daewoo became victim of its past successes as it continued to pursue expansionary policies even when other chaebols were scaling back during the Asian financial crisis. Instead of being pragmatic, Daewoo’s management got overambitious due to their historical successes. If Kim was a situational leader, he would have taken steps long before to divest unprofitable subsidiaries and reduce the debt leverage of the company. Due to Kim’s influence his management team adopted groupthink approach to dealing with strategic challenges. There was low level of citizenship among the employees who were paid low wages despite an ambitious growth of the company. Daewoo management probably had Theory X view of its employees where as the intensity of competition calls for greater and not less delegation of responsibilities down the organizational hierarchy. This is especially true as the organization grows in size as Daewoo did.

Daewoo’s management also ignored its employees need for achievement and growth and instead stayed focused on enhancing its power and status. The management even pursued unprofitable acquisitions by increasing debt leverage whose rate of return were below the cost of capital. Even though management kept expanding the company, it rarely took steps to align different businesses and completely ignored the strategic fit of potential acquisitions. The company ignored its core competences and it became too big to be managed efficiently. When financial crisis occurred, the management was left with illiquid assets and unprofitable subsidiaries which could not meet the debt obligations, eventually resulting in the dismantling of the Daewoo group by the government.

The employees also had low level of loyalty to the company because despite aggressive growth of the company, they were underpaid. Employees’ need for achievement growth was also ignored by the management in light of Maslow’s Hierarchy of Needs (Maslow, 1954). The leadership rarely took steps to align different businesses with each other and ignored the strategic fit of potential acquisitions into the existing portfolio. The company didn’t try to identify its core competencies and became too big to be managed efficiently.

Red flags could also have been identified by close scrutiny of the company’s financial statements. Daewoo’s debt increased by 2000% between 1988 and 1998 since most acquisitions were financed through debt funding instead of internal funds. Daewoo’s interest rates were much higher than its competitors such as Samsung indicating the company was leveraging itself too much. The management even pursued unprofitable acquisitions whose rates of return were below the cost of capital (Kim, 2008).

Daewoo also fell victim to the moral hazard of ‘too big to fail’ that continuously encouraged the risky behavior by the company. The first government rescue came in 1988 when Daewoo’s Shipbuilding and Heavy Machinery were facing insolvency in the face of a $1.8 billion debt but the government bailed out the subsidiaries with a $600 million restructure package in 1989 (Kim, 2008). Under sound economic policies, the subsidiaries should have let been failed. The government assistance besides protectionist economic policies and lack of management oversight are some of the reasons that reduced the pressure on the company to achieve efficiency and act as a private company where profitability drives strategic decisions. The company was driven by the pursuit of market share and growth strategy instead of profitable but restricted growth.

It is apparent that the company’s ambitious founder tried to rewrite the rules of success and mistakenly believed that growth is always beneficial because it allows the company to increase market share. The company didn’t make the efforts to either understand itself or the external environment and in addition, the protectionist policies as well as support of the government also reduced the incentive to become more efficient.

References

Business Asia. (2005, June 27). On the Block. Business Asia, pp. 3-5.

Kim, J. (2008, Winter). A Forensic Study of Daewoo’s Corporate Governance: Does Responsibility for the Meltdown Solely Lie with the Chaebol and Korea? Northwestern Journal of International Law & Business, pp. 273-340.

Maslow, A. (1954). Motivation and Personality. New York: Harper and Row.