Daewoo – A Business Failure, Essay Example

Daewoo was one of the largest conglomerates in South Korea and rapidly grew under the leadership of its founder Woo Choong Kim. Kim led the company in an autocratic manner and pursued aggressive growth as his business strategy instead of profitability. The company rarely analyzed its own strengths and weaknesses as well as the strategic alignment of potential targets in the existing portfolio and became too large to manage efficiently. In addition, there was a huge trust and communication gap between the management and the workforce. The Asian financial crisis was the final nail in the coffin and the company went bankrupt due to its inability to pay $80 billion debt.

Daewoo Group was one of the largest South Korean business conglomerates along with some of the other South Korea’s most respected business empires such as Hyundai, Samsung, and LG. The company competed in several industries including automobiles, heavy industries, shipping, finance, electronics, and textile and contributed 8% of national GDP as well as 13% of exports at the time of its collapse in 1999 due to an inability to pay a debt of $80 billion (Business Asia, 2005).

Even though the eventual collapse was triggered by the Asian financial crisis, there were numerous red signals within the organizational structure that should have made the management experts uncomfortable. First of all, the management ruled with autocratic leadership style and there was no or minimum board oversight, indicating the absence of check and balance system. Daewoo also fell victim to the moral hazard of ‘too big to fail’ as the government rescued Daewoo’s Shipbuilding and Heavy Machinery in 1988 instead of letting it failed. The government also put protectionist policies in place which further reduced the incentive for effective risk management and operational efficiency for the company (Kim, 2008).

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).

In addition to ineffective organizational structure, Daewoo also failed at the management and leadership levels. First of all, the company entered industries that might not have been a good fit for its core competencies and stretched its resources and focus too thin. Daewoo’s founder Woo Choong Kim didn’t like dissent and would often ignore the opinions of his executives (Sang-Hun, 2006) which eventually led to ‘groupthink’ environment at the management level. The management hardly engaged the employees in decision making processes or sought feedback from them which may have prevented the management from detecting early signs of trouble. Daewoo’s management probably had Theory X view of its employees which may be why the communication was mostly downward the organizational hierarchy.

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. 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.

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.

Sang-Hun, C. (2006, May 31). Daewoo’s Founder Is Given 10-Year Sentence for Fraud. Retrieved January 22, 2012, from http://www.nytimes.com/2006/05/31/business/worldbusiness/31daewoo.html?ref=kimwoochoong