South Korea and Business

¶ … Fab Five is to provide a strategic plan for the U.S. based computer hardware designer Hewlett-Packard (HP) in its analysis of the internet technology (IT) hardware industry in South Korea, Russia, India, and China. The Fab Five will determine which country is best suited for HP, as well as, the internet hardware manufacturer in that country that HP should engage in a joint venture to align with HP's strategy for global expansion. This paper has three parts: Part 1 consists of an overall industry analysis looking at the market size and growth potential in each of these countries and comparing this analysis to that of the IT hardware industry in the U.S. Part 2 will examine the risks associated with this venture and any opportunities, taking into account the market potential and structure of the industry in each country, as well as, the overall business climate in these countries. Part 3 will examine multinational and local South Korean IT hardware manufacturers to determine a target company to enter into a joint venture. The main tool that will be utilized for comparison of the industry in each country is Porter's Five Forces analysis and PESTEL. In 1980, Michael Porter identified the five competitive forces that shape every industry. These competitive forces will assist us in analyzing an industry's strengths and weaknesses. The five forces Porter identified are: the competition in the industry, the potential of new entrants into the industry, the power of suppliers, the power of customers, and the threat of substitute products.

To determine HP's growth the Fab Five team needs to tie HP's vision and global strategy to an understanding of the market environment and HP's ideal growth style. From HP's most recent 10k filing, HP's global vision: "Our products and services are available worldwide. We believe this geographic diversity allows us to meet demand on a worldwide basis for both consumer and enterprise customers, draws on business and technical expertise from a worldwide workforce, provides stability to our operations, provides revenue streams that may offset geographic economic trends and offers us an opportunity to access new markets for maturing products. In addition, we believe that future growth is dependent in part on our ability to develop products and sales models that target developing countries. In this regard, we believe that our broad geographic presence gives us a solid base on which to build such future growth."

From HP's most recent 10k filing, HP's strategic focus is explained as follows: "Our strategy is focused on leveraging our existing portfolio of products, services and solutions to meet the demands of a continually changing technological landscape and to offset certain areas of industry decline. To successfully execute this strategy, we must emphasize the aspects of our core business where demand remains strong, identify and capitalize on natural areas of growth, and innovate and develop new products and services that will enable us to expand beyond our existing technology categories. Any failure to successfully execute this strategy, including any failure to invest sufficiently in strategic growth areas, could adversely affect our business, results of operations and financial condition."

To determine the strategic growth needs of HP, it is vital to understand the business environment in which HP currently operates. We will use Porters Five Forces Framework to analyze the business environment.

New Entry Threats -- Low: There is low risk of new entrants threatening the market due to barriers to entry from high capital and resource needs.

Power of Suppliers -- Moderate/High depending on the component: The power of suppliers is high as there are few suppliers for specialized, high quality components. However, for some components that are easy to manufacture at a high quality, the suppliers have lower power as there are many more suppliers of these items.

Power of Buyers -- High: The market is flooded with numerous choices from which buyers can choose products and services, and this gives buyers high power.

Threats of Substitutes -- High: There are a lot of comparable products in the market and this means a high risk of substitutes.

Existing Rivalries -- High: Rivalry is very high as market players have all made large global investments to establish themselves. Product margins are kept low by competition and there is intense rivalry for expansion into additional products and global markets.

Having gotten a high-level understanding of HP's business environment we will now determine the strategic style that would be beneficial for HP, using the BCG strategy style matrix. Once the strategic style required is identified via the matrix, we can know figure out what kinds of growth needs suit HP's strategic style, and what the specific growth needs are. The specific growth needs should tie with HP's business vision and market strategy focus, identified earlier.

Please see the BCG matrix chart in Appendix 1. HP's primary business is Computers and Peripherals. This business model falls in the top left quadrant of the matrix -- "Adaptive." HP needs adaptive approach to meeting growth goals as the market offerings change extremely fast so HP needs to be able to shift and adapt quickly to remain competitive. This means that instead of having 5-year goals and plans, HP need shorter term goals and plans as technological advances happen often throughout the year and many of these technological advancements are unpredictable and require operations and manufacturing to be very quick to change, as products can become obsolete overnight.

To be adaptive, and meet HP's global vision and strategic focus, strategic growth needs are to:

• Be quick at testing and rolling out new products globally, including in developing countries. This could be done with having the right global partners for R&D and local market sales.

• Develop strong relationships with local suppliers in global markets in order to fulfill orders quickly and ramp up or shut down production when needed. Also, by having close cooperation less time and resources are sacrificed seeking new suppliers or renegotiating contracts every few months as product enhancements are made.

• Acquire or partner with companies globally that increase HP's growth flexibility and adaptability, where product investments and divestitures can happen quickly. This also means that countries where these partner firms are based need to have regulations to support this model of quick change and not be slowed-down and restricted by the government.

• Tie global strategy very closely to global operations so that as soon as the market environment changes, the company can react, strategy can adapt, and necessary production changes can be made as soon as possible.

• Develop a global corporate culture relying less on long-term corporate planning cycles and more on short-term tactics.

While it is clear that there exists promising potential for growth in the hardware IT industry there are significant risks in expanding the client's operation into these countries. The structure and market situation in each of the 4 countries is unique and it has a resounding impact on the prospects of our client.

The Russian market is perhaps most troublesome for the HP to expand into for a variety of economic, social, and political reasons. The Russian economy is suffering from a number of issues such as currency stagnation, political sanctions, demographic decline, and relatively low purchasing power of the consumers. During the last year the revenues for hardware have dropped 10-30% for producers as the Russian Ruble has lost value against all major currencies in the wake of major economic sanctions and an overall poor performance of the economy. Many domestic and foreign producers have suspended sales or pulled out of the market entirely making potential niches for new entrants. Yet this drop in competition has initiated numerous consolidations and rapid expansions of the most durable players that have capitalized on the opening of the market in order to seize market share. Given the overall drop in demand, with no foreseeable rise in the short run, the consumers can dictate the market leading to very cut throat price wars between suppliers. This situation has been further deteriorated by the readily available supply of substitutes in the form of gray/black market imports and counterfeits. (Atradius 2015) This makes it an especially troublesome prospect for HP to expand its production and marketing into such a market. The prospects for long-term growth are decent as the expected revenue growth will remain in the double digits until 2020 but given the poor state of development in Russia's economy this does not necessarily mean huge gains for potential partner firms. The hardware industry generates barely 2 billion in revenue which places it at the bottom of the industrial nations. (Statista 2016) The problem is compounded by the government actions to boost the production of domestic electronics and become less reliant on foreign imports and capital. Due to special programs the government is giving preferential tax and financial incentives to domestically owned producers putting a handicap for HP's expansion plans. (Kouzbit 2015)

The Indian hardware industry has been a dynamic machine for many years growing in size and diversity. Although the technology market here is often dominated by outsourcing and software production it also has a strong hardware industry that could be of interest to HP. Last year the hardware market has grown 24% generating close to $124 billion making it a dynamic market with a lot of potential for both production as well as domestic consumption. (Malhotra 2015) This dynamic growth is expected to continue fueled by a large population that is increasingly educated and wealthy population. The market is expected to expand by 12-14% annually to eventually triple in size to $350 billion by 2025. This dynamic growth is so far broken up among many companies making it a competitive market with the top 6 firms controlling only 36% of the industry (IBEF 2016). This competitive structure does make it possible for HP to enter with little difficulty that a major competitor would dominate the market from the initial phase. On the down side such a mobile market allows easy entry creating the risk of new competitors. While the consumer base is increasing in wealth there do exists driving the demand for electronics some of the largest purchasers of hardware are government organization that can demand large discounts for their purchase orders. This is compounded by an ever increasing shortage of components and manufacturing capacity in India to fill the rising demand. Between 70-80% of electronic components are imported putting more power into the hands of the suppliers who mostly come from the Chinese market. In addition, close to 50% of completed electronic devices are also imported providing an established and readily available source of substitutes for HP's products (IANS 2016). In this situation the industry while potentially very profitable does have severe limitations for HPs plans.

The Chinese market would seem ideal for HP as it is the great hub of manufacturing of hardware for years and many U.S. companies have benefited greatly from expanding into China to harness their cheap labor, plentiful resources, great infrastructure, and tax incentives. China has quickly become the leader in producing electronics parts and components making it the dominant supplier for all assembly plants around the world. Entry into the market remains relatively open but any competitor will have to contend with not only the largest multinational corporations but also with a robust domestic industry. The power of suppliers remains low due to the size of the market for components in China. On the other hand the consumer power is rather high as multiple domestic producers compete fiercely over the domestic market by cutting costs (EUSME 2015). The risks associated with the Chinese industry are actually numerous as the rising consumer sophistication and higher operating costs has begun to erode away the competitive advantage of manufacturing in China. Having succeeded thanks to cheap products the Chinese industry is having serious difficulty to switch to catering to customers that demand high quality products in their electronics and other hardware. In addition, the Chinese industry is also troubled by a lack of sophistication in their supply chain organization. While adequate for middle level quality products it lags behind what is necessary for high end consumer hardware. Forecast times, speed of delivery, and sourcing have all been assessed as inadequate for the keeping up with the demands of the future (Eloot 2013).

The South Korean industry shares many elements with the above mentioned industry markets in that it is dynamic and expanding. The estimate is that this mature market will continue to grow by about 2% a year till 2020 with the device sales alone reaching $20 billion.(BMI 2016) The market is dominated by a few giants such as LG and Samsung that have gained a dominant holding of the market through innovation as well as government intervention. The suppliers retain a good amount of influence as South Korean firms tend to prefer to source their component from Korean firms considering imported Chinese component as substandard. This makes the role of the supplier much more critical and integral into the whole business process. On the other hand the consumer power is also relatively high as the large selection of products from around the world, to include U.S. and Japanese imports, makes substitution an easy option if prices break from the established trend. (Dobbs 2010) The two key elements of the South Korean Industry are innovation and quality. While many other companies such as Sony have scaled back their R&D budget, the South Korean firms have continued to invest heavily in developing newer technologies to leverage their research prowess in the market (Wakabayashi 2012). Unable to compete with China or India in terms of scale and cost South Korea has placed the emphasis on high quality goods that use the latest innovations. This combination is geared to providing the maximum level of value for the customers' money (Dobbs 2010).

Globalization creates opportunities for companies to grow and increase market presence worldwide. Guillen and Garcia-Canal (2011) predicts that emerging MNCs will account for half of the world's 500 largest company within two decades. This shows the important role that MNCs play or will play in globalization. According to Rizvi (2010), companies that wish to expand globally must first determine their core competencies in order to operate successfully. It is also very important for companies to develop strategies that will enable them to adapt to the specific needs of the local market they choose to expand to.

Hewlett-Packard (HP) is a multinational information technology company and as such will need an effective business strategy if it intends to expand into other global markets. This part of the paper will provide a list of potential countries that our client (HP) can either choose acquire or enter into a joint venture with other local technology companies. Our group selected four potential countries, which include South Korea, Russia, India, and China based on different reasons. However, our group chose South Korea to HP as the proposed country for expansion. The reasons for choosing South Korea are explained below. First of all, according to the 2015 United Nations Conference on Trade and Development (UNCTAD) report (2015), South Korea ranks seventh among the most attractive countries in South and East Asia for multinational companies. This means that MNCs like HP are likely to be successful in the market if they adopt the right business strategies. Also, South Korea has a credit rating of AA from the Standard & Poor Agency, which shows the creditworthiness of the country (Trading Economics, 2016). The credit rating allows investors and MNCs to invest with confidence in the market. South Korea has a highly skilled workforce with a high level of disposable income, and is willing to spend on quality products (UNCTAD, 2015).

Secondly, South Korea ranks as the 5th easiest country to do business (World Bank Doing Business, 2016).

This means that South Korea's economy has a conducive business environment that will be ideal for both local and MNCs to operate. Our client can also be assured that the business regulatory environment in the country is designed to protect MNCs such as ours, and even reward companies that satisfy certain conditions. It is also good to know that the government supports MNCs and make policy decisions that will encourage and attract more foreign investors. For example, the government reduces or exempts corporate tax for foreign companies that certain criteria.

Another reason is that South Korea is noted to have a technology and brand savvy economy, where customers are willing to spend more on product brands they prefer. Trading Economics (2016) projects that the consumer spending in South Korea will keep rising based on past spending behavior (see diagram 1). This means that our client will have the customer-base to purchase our products and also being a well-known brand name will play an effective role in the marketing process.

All the above reasons makes South Korea a potential country that our client consider to move to and then decoded whether to make an acquisition or enter into a joint venture with a local company. Deciding on the type of approach to enter the market requires a careful evaluation of the costs and benefits, which will be discussed in the next paper.

South Korea Consumer Spending (Source: Trending Economics)

Conclusion