International Human Resources Management Second

International Human Resources Management

Second Assessment

This is a plan for an established Australian commercial organization about the methods through which they should establish a pharmaceutical organization in South Korea. Regarding the question of funds, it has been assumed that the funds have already been arranged. The proposal is meant for the study and evaluation by senior executives for the purpose of discussing the nature of organization to be set up, the person from within the organization to be deputed for discussions with the South Korean representatives, and the facilities that should be available in the organization to be established in South Korea.

The information for the purposes of this study has been collected from reliable international and Australian sources and their experiences about business operations in South Korea. Part has also been taken from the opinions of the Australian authorities regarding methods of business dealing with South Koreans. The information has been collected and the results assembled in the form of this paper.

Discussion:

South Korean behavior and cultural etiquettes are not exactly the same as amongst Australians, and the first step is to note the differences while dealing with them. Entire culture and beliefs of South Koreans are based on the beliefs that were given by Confucius and that involves respect for superiors and parents, duty to the family, loyalty to friends, humility, sincerity and courtesy to all persons. (Korea Profile) This is the types of behavior that Koreans are comfortable with and would also expect from others. Apart from this there are certain established hierarchies that are established in Korea and will be always observed by its people.

For starting any business relationship with Koreans, it is important that there is a formal connection that is established with the Korean party. Thus for the first business meeting with the prospective business associate, it is better for the introduction to be done through an intermediary. The higher the social importance of the intermediary, the better is the chances that the meeting will take place with the right person. Just fixing up a meeting and going and meeting the person will not result in any deals being finalized. (Korea Profile) Thus before making any visits, please make sure that an important person will be available to make the necessary introductions.

Along with this is the importance that visiting cards have to Koreans. When a Korean organization is formed, there are places for all persons involved in the business hierarchy. When any discussions are being started with a Korean, the Korean individual will not be comfortable till the position and other details from the Australian side are made clear. It is better to leave the business cards in front of the Australian person so that it can be referred to easily. It is better to have the card in Korean with a translation of the name and title, but often an attempt to translate directly into Korean may be problematic. When one talks about a managing director, it is the same as saying president in Korean. Another important point is the relationship between the countries in the region, and for this purpose, a card in Japanese should never be used in Korea. (Korea Profile)

Another important point in the success of building a relationship in Korea is having a human relationship with the individuals with whom business has to be done. These are through relationships and that can be developed through meetings at informal social gatherings with considerable amounts of eating and drinking. It is also possible to continue discussions of business in such gatherings, and the atmosphere will be a lot friendlier. In Korea, individuals are also likely to discuss business over dinner. On the other side, it is not so important for legal documents to be made immediately as trust is the most important in all business dealings. Koreans generally treat most documents as Memorandums of Understanding that is in spite of all specifications or complications of the deal, the legal documents are only the broad outlines of the relationship. (Korea Profile)

On the other hand, Koreans are very sensitive to keeping their face, and one of the ways in which they lose face is if they are insulted or criticized when others are present. Even if they are from a smaller company, they should not be treated as juniors in front of other, if they have a high status within their own company. It may even be required to raise sensitive matters through the intermediary who had first made the introductions. In general Koreans have a reputation for being good negotiators, and thus in the course of negotiations, one has to be patient and gentle, but firm. One has to maintain their own position but should not push too hard, and there will be negotiations for every concession that is wanted from them, as Koreans are persistent and generally like others who are also persistent. Another problem may be in being understood, and minutes may be exchanged after every meeting to ensure that all points have been understood by both the parties. Even when there are only courtesy calls, the custom in Korea is to provide corporate gifts in the form of ties, pens, etc.

Well now that the question of dealing with Koreans has been dealt with, let us talk about the business on hand. The first matter to be looked in was the situation of the pharmaceutical industry in Korea. This showed certain problems to be uppermost. One of them was a change in laws regarding the distribution of medicines in Korea. The second problem is regarding the nature of manufacturers in Korea, and it is seen that they have almost the same product mix and rely on low prices to sell their products. This is suitable for a new organization from Australia which is coming in as it does not suffer from the same shortcoming, but it may be worth looking at another question is whether it will be worth looking at the possibility of taking over some of the existing units producing medicines in Korea, but have closed down due to their inability of meeting competition. Since the operation is thought to be in terms of a joint venture, this may be possible.

This will also help in terms of the distribution network as all manufacturers in Korea have their own distribution network, whereas the practice in other countries is to go through a common network, with general distributors of pharmaceuticals. This is not the practice in Korea. The individual distribution and competition in terms of price also leads to very high competitiveness in terms of price and the margins become very low. The provision for R&D is cut to only 3 to 4% of turnover as compared to 12 to 20% that is available in other markets. (Survival strategy for pharmaceuticals) The distribution costs for pharmaceutical industry is higher than many other industries, and there are costs even to set up the channels as required in South Korea. It may be better to look at the possibilities of setting up the unit there only for export, and if the product has to be sold there, then an initial development for the brand name is required through continuous efforts for quite a few years prior to the actual opening up of operations in South Korea.

Regarding area of collaboration that joint efforts have been most successful in South Korea has been the area of Research and Development. This should certainly be pursued in this new venture, as this is one area in which their successes are of note and likely to be less expensive to operate than in Australia. It has also been seen that most South Korean companies are keen to partner foreign companies where there is R&D as also licensing agreements for producing drugs. It is also felt by the South Korean entrepreneurs in pharmaceutical industry that collaborative efforts in R&D would be beneficial for the entrepreneur in the long run. There are certain instances to show that pharmaceutical R&D in South Korea can be innovative, and there have also been instances when they have taken over development of drugs that were not pursued by American companies and succeeded in finally developing the drug.

The quality of production has been seen to be excellent in conditions that are suited to the country. This means that a lot of training has to be provided. This involves costs and that has to be considered when planning for the plant. The level for excellence as seen in an example of another product is that al most 25% of the workers or teams have to be left apart for training and development. In spite of the quality of production, this factory ends up spending the highest among all such companies for their labor. They also had changed their system in 1994 when it had led to a disturbance in terms of stoppage of work. The factory also works for the maximum number of days in a year. At the same time, one does not know whether they offer the workers any benefit or perk as is provided by Korean employers.

This matter has to be sorted out by the Korean partner as the workers are more likely to trust him than Australians. He may also find it possible to offer the workers the same perks that are offered to his employees in other concerns. The hours of working and such details may also be fixed up early so that future conflicts of this are avoided in the future. The difficulties in culture will be very high for any Australian to come and work here, so the responsibility of recruiting the workers may be left to the South Korean partner. The only aspect that one can check is that he does not end up employing only his relatives and friends. This had cost many banks a lot of money as their loans had not been returned. For this purpose, a consultant may be appointed at the cost of the Australian company who will act as their representative during all such actions and send reports to the company. There are also some methods to be innovative and thus get the sympathy of local workers. These have been listed and may be discussed with the Korean partner before implementation, if thought appropriate.

Conclusion:

The entire analysis can be summarized in the following statements:

It is not in the interest of the organization to set up a unit for catering to the requirements of the South Korean market immediately. It should be used for fulfilling the requirements of other markets initially and the product distributed in South Korea for awareness about the brand name. After the name becomes familiar, then the product may be sold in South Korea to any high levels.

It is also in the interest of the joint venture to have facilities for R&D as in South Korea 12% of the employees in South Korean pharmaceutical firms are in R&D. The pharmaceutical industries in South Korea are also interested in joint development as they feel it will be beneficial to them in the long run.

A very important part of getting quality and high production in South Korea is to continually provide a lot of training to the workers. This should be provided for.

Details of working hours and working days, perks in various forms should be decided at the earliest stage possible.

Appendix

First Assessment: Information on South Korea

Pharmaceutical Industry

This is in an interesting position due to certain changes that have been carried out in Korean laws regarding medical practice. The law is called "Separation of Dispensary and Medical Practice. This has started from August 2000 and required many changes in hospitals and pharmacies. In the case of hospitals, the earnings have dropped by 35% as compared to previous years as they are no longer permitted to sell medicines to outpatients. The pharmacies have also lost sales by over 30% as they can not prescribe medicines without a prescription from doctors for the medicine. Further, the types of medicine that they have to store is from only one company under the previous rules and now there will have to be at least 10 times of brands of the same medicine and the doctors will be free to prescribe whatever they want to. (Survival strategy for pharmaceuticals) Thus the situation of existing manufacturers in South Korea is poor and they are finding it difficult to survive.

Regarding the producers in the industry, there are hundreds of medicine manufacturers in Korea who have almost the same product mix and rely on low prices to sell their products. When an analysis of the return on invested capital is done for the top 10 manufacturers in Korea, it reflects a return of only 7% and that is much lower than the international norm of 10%. The low returns are resulting in more and more manufacturers being unable to raise more money for the required research and development in the industry. When the competition is expected to intensify further, then this will certainly hurt the industry in Korea. The risks for a new entrant is even higher as the type of competition that goes on in Korea will be unknown to the new entrants and this will also make their situation even more difficult.

In future, the doctors will not concentrate on the price but will consider the quality and brand awareness, as writing one particular brand name will not provide more money to the doctor. These are reasons to cause a lot of pressure to the existing pharmaceutical companies as they will have to improve their total image and quality of their products. The separation of brands from doctors will cause a lower demand for particular brand names and this hurts the profitability of both pharmaceutical companies as also doctors. This is bound to cause industry re-structuring with only a few of the strongest now surviving the entire process. The process has already started with Cho-sun-mu-yak, the manufacturer of "Woo Whang Chung Shim Whan" or ox bezoar tablets going bankrupt due to the impact of this change. However the benefit will come through the dominance of quality and brand awareness of the medicine rather than the income of the doctor from the sales of a particular brand. (Survival strategy for pharmaceuticals)

Distribution costs in pharmaceutical industry

There are also differences in distribution of medicines in Korea. In other countries there are specialized wholesalers who distribute 80 to 100% of all medicines, but in Korea, all manufacturers run their own distribution network. This is forcing manufacturers to make investments in logistical facilities like warehouses and for transportation. Even at the retail level they have to supply to a wide network of retailers and this causes bad debts for the manufacturers. The general attitude of the Korean pharmaceutical manufacturers have been to produce many medicines simultaneously, and this has led to a situation where at one stage one particular fever remedy was being produced by 100 companies. This ends up providing redundant and a competition mainly on price. This results in poor quality as they use inferior raw materials. This is reflected in their having very low provisions for Research and Development which in Korea is about only 3 to 4% of their turnover as compared to 12 to 20% of turnover in other countries. Even if a medicine is developed by a company after a lot of effort, then it does not have the funds for carrying out clinical tests through spending hundreds of billions of won, and ends up licensing the technology to foreign companies. Thus, one of the main problems of the pharmaceutical industry can be viewed to be the high logistics costs at about 10%. This is much higher than 2% which works out for the publishing industry and 3% for the machinery industry. For corrections to come in this area there has to be removal of redundant warehouses, transportation facilities and staff as also increase order volume so that the transportation cost will come down. (Survival strategy for pharmaceuticals)

Pharmaceutical research in South Korea

Companies here have been moving into innovative Research and Development and this effort has also received a lot of support from the government. Most of the South Korean companies going into R&D have chosen partnering to be the ideal method. The reflection of this in U.S. companies is high and local companies have been keen to partner foreign companies where there is joint investment in R&D as well as through licensing agreements. There are presently 79 local pharmaceutical companies and 86 research laboratories. R&D spending as a proportion of sales is still low, but R&D personnel are nearly 12% of the workforce. The number of projects that are going on is high and in 2002, there were 90 research projects that were being processed. Most of the projects are in the areas of cancer, anti-infection, metabolic diseases and immunology. Though these projects were being followed, local companies were still interested in partnerships as they felt that would help their commercial objectives.

Most of the manufacture that is going on is in the area of generics but there have been investments by some of the companies in the area of R&D for novel drugs. In 1999, SK Chemicals has launched Sunpla and that is a third generation platinum complex anti-cancer drug. This is proof that local R&D can innovate. The organization has since that time been concentrating on drugs for cancer, obesity, and erectile dysfunction. Daewoong Pharmaceuticals has launched Easyef for the treatment of diabetic foot ulcers, but has been trying for foreign collaborations since then. Another company, Choongwae has brought the flouoro-quinolone antibiotic called Balofloxacin to the market, and this was subsequent to Chagai and Ciba having stopped work on this compound in 1995 as they felt it was not effective. This drug is called Balofolxacin and has been approved by the Korean authorities for use in urinary tract infections. (South Korea set to surprise?)

Training for workers

In terms of communication with workers, it is often a difficult exercise in Korea. Let us take the case of one of the most successful operations in Korea. This is the Yuhan Kimberly Daejeon plant. This now operates with 4 teams in all the 3 shifts, and of them one team is always in training or education or on time off, at any particular time. The main purpose of providing such a high amount of training is that they are expected to get 384 hours of training and education every year. The production was reasonable even when the factory started and baby products were being made at the rate of 15,100 units an hour, in 1994. Yet, there were very high defect rates in the products - 14.7%. These matters have been controlled over the next ten years, in September 2003 when the production volume reached 36,200 units and the defect rate dropped to 2.2%. (Knowledgeable employees -- the key to a new labor relations structure)

They also have a range of female products and there the production volume rose from 12,100 units and the defects fell from 26.8% to 2.5%. Now the rates of production in this plant are not matched anywhere else in the world. As an example, one can say that the plant produces 36,200 units of baby products every hour as compared to 29,900 units in the parent company in United States; 29,800 units in United Kingdom; 22,300 units in Mexico and 18,400 units in Australia. The satisfaction of the customers is also high with the products of this plant and that is measured in parts per million or PPM. The plant at Daejeon generally produces at 4.2 PPM and that means 4.2 units in every million are not satisfactory. Compared to this the rates are 8.7 PPM in United States, 17.7 PPM in United Kingdom, and 616 PPM in Australia. This is the reason why all over the world, the plant at Daejeon is considered to be the benchmark. (Knowledgeable employees -- the key to a new labor relations structure)

Keeping the Korean workers happy

Another feature that keeps Korean workers happy is the perks that they get. At Everland Amusement Park outside of Seoul, there is a special entry gate for Samsung employees and they have to pay only 10% of the entry costs. They also get the facility of special locker rooms for private changing areas. This is a paternalistic attitude taken by many corporations of South Korea and the benefits are in free lunches, transportation to and from work and training programs. These help the organizations reach the level of Best employers in Asia. Even during interviews these are the facilities that many potential employees want to know and want to get a benefit from. (Asian Company Perks Make the Difference) At the same time, it is important to create a high efficiency organization through employment of more workers and 24-hour operation. This process also leads to a 7 day week and more days of factory operation in a year. This can be seen in the case of Yuhan Kimberly which operates 360 days a year as compared to the national average of 270 days. (Knowledgeable employees -- the key to a new labor relations structure)