As financial and conglomerates restructuring have been proceeding, writer would like to introduce U.S conglomerates` historical financial strategy shifts as well as their long term vision in order to point out Korean conglomerates in the right direction to launch into the 21st century.
After World War II, U.S. conglomerates went through 4 stages in their financial strategies. The first stage was the diversification of enterprises to attain a high growth rate from 1945 to 1965, the year, before outbreak of Vietnam War.
The second stage was the conglomerates boom era from 1966 to early 1980, the period of competitive nuclear armament race between the U.S. and the Soviet Union. In this stage, it started with financial deregulation of 1980s and continued until the collapse of the eastern block after the fall of the Berlin Wall in 1989. Most of conglomerates returned to their original core businesses selling out the non-related enterprises. Of course, in this stage, the merger and acquisition (M&A), even including hostile take-over, was prevailing phenomenon in financial circles.
The fourth stage is the prime era of institutional investor, from 1991 to present. In this stage, the conglomerates concentrated their capital, labor and other production factors into the original core business, in preparation for globalization. Some of the most noteworthy precedent cases are Du Pont, Texas Instruments, 3M, Texaco, Colgate Palmolive, etc.
Korean Conglomerates are a decade or more behind the U.S. in financial strategy building. Domestically, the first stage was a high growth period from 1965 to 1988. The second stage was the prime era of Korean conglomerates from 1989 to 1996, the year before Korea entered into the IMF system. The third stage began in 1997 when Korea entered IMF system, and continued up to now. Korea is now in transition period, since Korean conglomerates have been returning to their core business any way. Thus, the merger and acquisition (M&A) is the prevailing mode of realignment for the 21st century.
The Korean Conglomerates should learn from what U.S. counterparts have already experienced by making use of financial indices, which are namely EVA (Economic Value Added), EP (Economic Profit), TSR (Total Shareholder Return), and TBR (Total Business Return). Through the recent restructuring, especially Daewoo and Hyundai, Korean conglomerates need to scrutinize:
1. How to invest correctly (decision-making system)?
2. How to evaluate precisely (evaluation system)?
3. How to divide resources fairly (compensation system)?
These three elements must be combined together into one system to work efficiently.
In the by-gone days, Korean conglomerates, by and large, followed Japanese financial management style. First of all, the decision-making system was based on long-term market share approach. Second, the evaluation system was absolutely rooted in pursuing profit, based on market share ratio. Third, the compensation system was built on seniority base with life long employment.
However, after Korea entered into IMF system, the Japanese-style system began to dwindle and we clearly observed even one of the big five conglomerates could be sunken. The rule of Wall Street is now becoming a predominant doctrine.
In conclusion, the financial management strategy based on the shareholder value approach will become the key financial strategy in the 21st century. Owners of conglomerates, from now on, should be committed to making full use of financial management devices such as EVA, EP, etc. and set up their own decision-making, evaluation and compensation system. This is the only way to survive in severe global competition. Starting from the collapse of Daewoo and restructuring of Hyundai, we should bear in our mind that not only Korea but also the whole world is watching Korean conglomerates owner`s sincerity, honesty, and courage to attain genuine restructuring in the 21st century.
