Culture, Goal-Oriented Communication (Leadership), and A Fast

Growing Organization: the case of Samsung Electronics

Hur, Chulboo, Professor Emeritus, Myongji University, Seoul, Korea and

Adjunct Professor of Business Management, Yanbian University of Science and
Technology, Yianji, Jilin, China

Mobile phone 010-9872-7492, e-mail: [email protected] and [email protected]

Summary

In response to the globalization and rapid economic growth of China, the Korean
economy has transformed itself. A few Korean firms, spearheaded by Samsung
Electronics, have successfully driven the economy, even if the Korean economy has
difficulty in the ‘nut cracker’ situation.

The success of Samsung Electronics has been attributed to the strategies of ‘selection
and concentration,’ ‘successful restructuring following the IMF crisis,’ ‘long-term
vision and unprecedented risk-taking strategy,’ ‘speed management,’ ‘world class
brain management’ and ‘successful benchmarking of both Japanese and American
management,’ among others.

But in regard to Samsung’s strategies, cogent questions need to be examined. For

example, would any Korean firm be able to apply the same strategies as used by
Samsung Electronics, and produce the same success? No one could confidently say
yes to this question.

Samsung Electronics has dramatically achieved a successful transformation between

1987 and 1999. We argue that this is the result of Mr. Lee, Kun Hee (the ex-CEO of
Samsung Group)’s strategic learning leadership and its resultant paradigm shift, and
that this can be applied to the emergence phenomenon of complexity theory that
provides the momentum of evolution of the corporate cultural and/or core competence.
The paper explores the dynamic process of this phenomenon.

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 1. Introduction: Korean Economy and Samsung Electronics

After three decades of rapid industrial growth, in itself a dramatic transformation from
the poverty-stricken agricultural economy of 1961, the Korean industries became
exposed to the predicament of borderless competition as well as the threat of the
formidable super-speed chaser, the Chinese economy. In the time between Korea’s
acceptance as a member of the WTO in 1992 and the IMF Control of the Korean
Economy in December 1997, pessimism was high among the Korean leading circles
regarding the future of the Korean firms and the economy.

Nut Cracker Theory of the Korean Economy

(Maekyung Booze Allen & Hamilton Report, July 1997)

Japan 10.22 2.8845, 4,029, 3.5696

Korea 1 1 1 1

China 2.35, 5.7994, 6.09, 5.8399

2000 World Bank estimated GDP ratio in black color

2007 IMF estimated GDP ratio in Red color
2007 US CIA estimated PPP adjusted GDP ratio in blue color
2000 World Bank estimated PPP adjusted GDP ratio in violet color

*The figures have been corrected in this diagram from the author’s 2004 article

But miraculously, the Korean economy has partly escaped the “nut cracker situation,”
thanks to a few large firms spearheaded by Samsung Electronics. For example, three
Korean firms were selected in the Fortune 100 companies in 2006. They were
Samsung Electronics, LG, and Hyundai Motors. But this year, Samsung Electronics
was listed as the only Korean firm with US$92.26 billion in sales in the Forbes 100. It

2
is ranked 6th among Asian firms, following Toyota, PetroChina, Mitsubishi, UF Financial,
and Bank of China. Samsung electronics ranked 3rd in the Info Tech 100, in the 2007
Businessweek scoreboard, following AT&T and Hewlett Packard.

Four Chaebol groups were responsible for 48% of the country’s exports, 49% of the
Seoul stock market, and 42% of GDP based on sales in 2004. And in 2008,10 major
export products from Chaebol groups account for 61.1% of the nation’s total export
(ChoongAng Daily, Feb., 6, 2008).

The Korean Economy Pulled by 4 Chaebol Groups

ChoongAng Daily, April 29, 2004

The major Korean firms exhibiting global competitiveness are centered on the
following industries: semiconductors/ TFT-LCD, mobile phones, petrochemical
products, shipbuilding and small- and medium-sized automobiles. Businessweek (July,
2007), in cooperation with the English Interbrand Co., reported that 3 Korean firms
th
were included in the 100 global top brands value. They are Samsung Electronics, (21
th
place); Hyundai 72nd place); and LG Electronics (97 place). Samsung’s brand value
increased 4% from the previous year’s 15 billion dollars to 16.4 billion dollars, but lost
one place in ranking.

Businessweek reported that Samsung Electronics is 3rd in Asia, after Toyota and
Honda. Samsung is superb in LCD and high capacity memory chips, but suffered loss
because it failed to enter into the low price cellular phone market in the year 2006.
Hyundai Motors attained success by jumping to 72nd position from 2005’s 80th through
explicit brand strategies and aggressive strategies in the overseas market, and thus

3
became the 8th global auto maker. LG also ascended 14% by improving brand value of
400 million dollars. USA captured 1st through 5th places, and registered 52 firms:
Germany, 10; France 9, Japan, 8; England 6; Swiss 4; Korea, 3; and Finland, Italy.
Sweden, Spain, and Bermuda each listed 1 firm in the 100 brand powers.
BusinessWeek July 2007, based on the Interbrand Co., England Research data.

2007 Businessweek Top 100 Global Brands Scoreboard

2007 2006 Change Brand Brand Value Brand Value

Parent
Brand Brand in Name $m $m Country
Company
Rank Rank Rank 2007 2007 2006

1 1 0 Coca-Cola 65,324 67,000 Coca-Cola U.S.

2 2 0 Microsoft 58,709 56,926 Microsoft U.S.

3 3 0 IBM 57,091 56,201 IBM U.S.

4 4 0 GE 51,569 48,907 GE U.S.

5 6 1 Nokia 33,696 30,131 Nokia FINLAND

6 7 1 Toyota 32,070 27,941 Toyota JAPAN

7 5 -2 Intel 30,954 32,319 Intel U.S.

19 19 0 Honda 17,998 17,049 Honda Motor JAPAN

21 20 -1 Samsung E. 16,853 16,169 Samsung S. KOREA

25 26 1 Sony 12,907 11,695 Sony JAPAN

72 75 3 Hyundai 4,453 4,078 Hyundai Motor S. KOREA

Matsushita

78 77 -1 Panasonic 4,135 3,977 electric JAPAN

Industrial

92 92 0 Lexus 3,354 3,070 Toyota Motor JAPAN

97 94 -3 LG 3,100 3,010 LG S. KOREA

98 90 -8 Nissan 3,072 3,108 Nissan Motor JAPAN

Three years earlier in 2004, Businessweek (August 9~16, 2004) listed only Samsung
Electronics as the sole Korean firm in the list of 100 global brands, and also placed the
firm in 4th place in the global top 5 brands (world ranking was 21st). The Weekly also
published a special edition on the Samsung brand (November 29, 2004) and reported
that Samsung’s competitive edge came from cost reduction through innovation and
world class industrial designers who enabled the firm to capture five world class

4
design prizes in 2004. The firm had also won over 100 design prizes between 2000
and 2004. Samsung Electronics ran her own innovative design institute, and its
designers took lectures directly from IDEO, the top class US design company, and
from faculty members of a US design school located in Pasadena, California. The
number of the firm’s designers increased from 170 in 2000 to 480 in 2004, accordingly.

In the following table, the 2008 Forbes global 2000 big companies are reclassified
according to country. Reflecting unfavorable world trade, there are signs of setback
for the firms of traditional trading countries like Korea and Japan in profit ratio, but
one can notice an increase in the number of firms in oil exporting countries and BRIC
countries. For example, in terms of sales volume, Japan had 87 firms and South
Korea had 24 firms in the 2007 Fortune 500, as oppose to France’s 38, Germany’s 37,
and Great Britain’s 33 firms.

2008 Forbes 100, 500 and 2000 Large Companies*

Countries 100, 500, 2,000 Class
USA 29, 165, 590 I

France 9, 32, 67

Germany 9, 26, 59

Great Britain 8, 34, 120 II

Japan 7, 47, 260

China 5+1, 12+7, 70+39**

Swiss 5, 11, 37

Canada 4, 20, 59

Spain 3, 13, 28

Italy 3, 10, 37

Netherland 3, 10, 24

Brazil 3, 7, 34

Australia 2, 12, 50

Belgium 2, 3, 12 III

South Korea 1, 12, 52

Russia 1, 9, 29

Norway 1, 5, 14

Finland 1, 3, 12

Luxemberg 1, 1, 8

Panama 1, 1, 2

5
 Sweden 0, 10, 29

India 0. 6, 48

Taiwan 0, 4, 41

Singapore 0, 4, 18

Ireland 0, 4, 10

Bermuda 0, 3, 25

South Africa 0. 3, 17 IV

Mexico 0, 3, 16

Turkey 0, 3, 14

Austria 0, 3, 13

Greece 0, 3, 12

Saudi Arabia 0, 2, 11

Portugal 0, 2, 10

Denmark 0, 2, 9

Thailand 0, 1, 14

Israel 0. 1, 10

Cayman Islands 0, 1, 4

Czech Republic 0, 1, 1

6
 Malaysia 0, 0, 15

United Arab Emirates 0, 0, 11

Kuwait 0, 0, 7

Chile 0, 0, 7

Indonesia 0, 0, 5

Iceland 0, 0, 4

Poland 0, 0, 4

Qatar 0, 0, 4

Egypt 0, 0, 3

New Zealand 0. 0, 2 V

Hungary 0. 0, 2

Parkistan 0, 0, 2

Philippines 0, 0, 2

Peru 0, 0, 2

Columbia 0, 0, 2

Morocco 0, 0, 2

Barain 0, 0, 2

Jordan 0, 0, 1

Liberia 0, 0, 1

Channel Islands 0, 0, 1

*The global 2000 by Forbes.com, April 2, The Forbes 500 and 2000 figures include Forbes 100 and 500

figures respectively.

**The Hong Kong figures were added to the Chinese figures.

Samsung Electronics has maintained its position as a leader in semiconductors for 12

years after seizing first place in the global memory semiconductor chip sector with the
introduction of the first 256-megabyte D RAM chip in 1994. The firm has been the
world leader in the 8 hitec products such as D RAM, 28.7%; S Ram, 33.3%; Flash
Memory, 30.7%; TFT-LCD, 20.5%; Display Driver Chips; 20.5%; Monitor, 15.2%;
nd
digital TV sets, 10.6%; and Mobile Phones, 14.3% (2 place after Nokia, beating
Motolora in 2006). The Group, in total, has 25 world best products. The firm has also
been the number one exporter in Korea for 12 years since 1994. In 2004, Samsung
Electronics has recorded W110 trillion in accumulated sales and W29 trillion in profits,
clearing all the loss accumulated since 1973 when the firm first entered the
semiconductor industry. In the entire semiconductor industry, including non-memory
chip sectors, the firm is the world's second largest chip producer following Intel, the

7
world leader.

The Samsung Group contributes 21% of the nation’s exports; 20% of the entire stock
market; and in sales volume, 18% of the country’s GDP. As of 2005, Samsung has
23,000 researchers with over 2,400 doctoral degree holders spending an annual
research fund of 4.7 billion dollars. In 2000, Samsung ranked 6th in U.S.A. patent right
applications. During 2005 and 2006, Samsung placed 5th. and aspires to be in the top 3
by the year 2007. (Lee, Chae Yoon, 2006)

Samsung Electronics’ revenue was over 92.26 billion dollars last year, but the firm
recorded a 10.3 billion dollar net profit in 2004, the 7th largest position among 9 world
10 billionaire firms. This surprised many Japanese opinion leaders, recalling the
similar phenomenon in 1999-2001, when a spectacular performance of net profit
amounted to 120 billion won from semiconductors and mobile phones, at a time when
almost all world leaders of semiconductor manufacturers recorded red ink (with the
exception of GE, IBM, and Nokia.) A bad period for chip producers worldwide, many
leading semiconductor manufacturers closed down their production lines. The number
of worldwide semiconductor manufacturers has declined from 22 in 1998 to 12 since
2004, including such famous IT leaders like Toshiba, Motorola, and Fujitsu.

Samsung Electronics faced some difficulty in mobile phones in 2006, but it improved in
2007, as there were some progress in the mobile communication services. Samsung
Electronics agreed to begin 3rd generation WiBro commercial services across the
United States on a nationwide basis with the service provider Sprint and Nextel,
starting in 2008. WiBro is a wireless high-speed Internet technology that enables the
transmission of data anytime, anywhere, even within vehicles moving faster than 100
kilometers (62 miles) per hour or on mountaintops. The connection speed is even
faster than a fixed-line Internet connection. In addition, Samsung Electronics has
th
recently announced the development of the 4 generation WiBro technology which is
expected to operate five times faster than the presently available 3rd generation WiBro
system.

Korea's WiBro technology, also known as mobile WiMAX, is the result of three
decades of continuous research. As it was solely developed in Korea, it is potentially
far more lucrative than CDMA had been. The project was a product of collaboration
between the Samsung Electronic research team and the governmental research lab

8
under the governmental policy led by Minister Chin, Dae Jae, former President of
Samsung Electronics, all under the influence of Samsung corporate culture,
exemplified by: “look for our next lines of business, ten years ahead …”

The story of Korea's advance in telecommunications began in the 1970s, when the
mechanical national telephone system reached a saturation point. To resolve the
problem, the Korean government decided in 1976 to develop Korea's own time division
exchange, or TDX, a form of electronic operator. With 1,060 researchers working on
the project, Korea became the 10th country in the world to develop her own TDX. At
the helm of this project, part of his national development plans, was Park, Jung-hee.

President Park, Jung-hee, a self-educated economist, was the nation’s top class
expert on the history of Japanese modernization since Meiji Restoration (1869). He laid
the ground of the Korean industrial development in 1961, following the Japanese track.
He also indirectly influenced the growth of the Korean Chaebuls and their
technological development/learning processes.

In 1989, the Korean government developed the TDX-10, together with the
governmental research intitutes, the researchers in the Chaebol groups, and from the
universities. The outcome was a more sophisticated digital operator system, and as a
result, Korea could afford to export the technology, although only a half of the parts
used in the TDX were locally produced. However, all stages of the TDX-10, from
design to software, were devised and produced in Korea. Samsung Electronics played
a major part in the developmental procecess, but we must also note that Samsung
alone started to build up global capabilities of semiconductor manufacturing all by
herself as early as 1973.

The foundation of Korea's subsequent success in mobile phones was laid in 1993,
when Korea became the first country in the world to commercialize the code division
multiple access technology, or CDMA, conceptually developed in the laboratory level
by a small U.S. firm, Qualcomm. Unlike the time division multiple access, or TDMA,
system used in Europe, which assigned a specific frequency for each user, CDMA
allowed multiple subscribers to a single frequency. The CDMA was adopted by Korea
because of low connection error compared to other technology in the Korean situation
of high population density, of mountainous areas and multiple concentrations of high
rise building blocks.

9
Expectations were high with the hope that the Korean firms would turn huge profits
from the Korean’s share of CDMA technology improvement, as countries such as China,
India, and Brazil decided to adopt the system. But with Qualcomm demanding high
royalty payments on CDMA source technology, its price competitiveness soon eroded.
(The Korean firms have paid over 1 trillion won or $1 billion in royalty payments to
Qualcomm, the CDMA source technology holder up to date.)

Moreover, Europe looked to nurture her own telecommunications companies with the
development of the Global System for Mobile Communication, or GSM. The adoption of
this updated version of TDMA meant Korean firms were further handicapped because
the Korean firms were not able to sell CDMA technology to one of the world's biggest
cellular phone markets. In short, Korea found success by copying foreign
telecommunications technology in the 1980s; and by the 1990s, Korea was
commercializing foreign developed technology but still had a long way to go until
technological independence. (ChoongAng Daily Aug. 10, 2006)

Future of Samsung Technological Capabilities: In close coordination with Government,

Chaebol, and university research instututes, Korea developed a new generation of
mobile phone wireless Internet technology. WiBro system, the new technology, is
leading the rest of the world by years ahead. It is accepted as one of the standards by
the World electronic organizations. Samsung Electronics has made trial-runs with
Brazil, Venezuela, Croatia, and Saudi Arabia, and has begun entry into the US market,
while telecommunication companies in Japan, Britain, France, and Italy, are showing
keen interest in the technology.

WiBro shall be the fourth generation technology, if the CDMA technology used today is
considered as the third generation. According to the agreement with Sprint, the US
partner, Samsung Electronics will provide base stations, handsets, and chipsets. About
100 small- and medium-sized business firms will participate as well. Samsung
estimates that the deal will produce 33 trillion won and create 270,000 new jobs.
(ChoongAng Daily Aug. 9, 2006)

Samsung Electronics has made successive technological breakthroughs, most recently

in the world's first 50-gigabit NAND flash memory chip, employing a new method
called the charge trap flash, or CTF. The firm is a world leader today in LCD TV,

10
mobile phone parts, and various memory chips. The CFT technology provides the
foundation for entering the tera-bit [1,000-gigabit] age after 2010. Dr. Hwang,
Chang-kyu, president in charge of Samsung Electronics R & D Division added that
Samsung's semiconductor division was different from its competitors in terms of its
dual investment in facilities as well as in research and development. "This year, we
spent 2.8 trillion won ($2.9 billion) on semiconductor research and development. For
CTF technology, we started to develop it five years ago and created an independent
developing team three years ago. We have 30 to 40 of these development teams, so
imagine what kind of developments we can achieve in 5 to 10 years," he said. He had
rosy predictions for the DRAM and graphic DDR DRAM markets, saying they were
diversifying and could lead to a supply shortage. "Even now, Samsung is only able to
meet 70 percent of the demand. Prices shall be good until 2009," he said. "Samsung
currently occupies 50 to 60 percent of the graphic DDR market and will provide 100
percent of the chips for the Nintendo game players," he added.

Samsung Electronics developed the first 256-megabit NAND flash memory in 1999,
and ever since, the company has doubled the capacity of its semiconductor on a yearly
basis. The industry has even dubbed this phenomenon as "Hwang's Law," an allusion to
Moore's Law, which states that the processing power of chips will double every 18
months.

NAND flash memory chips are mostly used to store data in small devices such as
digital cameras and music players. The chip Samsung presented was made using 40-
nano technology; last year, chips were made using 50-nano technology. The
difference allows more semiconductors to be produced from each wafer. Forty
nanometers is 3,000 times thinner than a human hair.

It is expected that the new NANO chip would create new Flash memory chip demand
worth $60.6 billion by the year 2016 when the technology becomes fully commercial in
2008
2. Previous Research works on the Samsung Transformation

Samsung Electronic’s evolution from a fledgling company within a developing nation to

a powerhouse global leader and technological innovator has attracted much attention
from academicians and journalists, and as a result, numerous articles have documented
the transformation, mostly from Samsung in-house researchers, journalists, and some

11
Japanese observers and scholars, as well as a few Korean scholars.

Senior researcher Chang, SangSoo from Samsung Economic Research Institute (SERI,
August, 2005) observed that the Samsung Group has gone through four stages of
growth in an accelerated pace, owing to the superb leadership of the CEO and the
inspiring corporate culture in which the upper management work under a shared value
system, exemplified by: “a single mind towards a single goal.”

His four growth stages are as follows:

(1) Inauguration of the enterprise and foundation of the system between 1938 to late
1950’s: Included in this period were the turmoil and confusion of the Liberation
(1945), the Independence (1948), and the Korean War (1950 -1953). Samsung has
started the first Japanese-style public new employee recruit examination in
Korean history as early as in 1957. (Recruitment of recent college graduates
based on general examinations—in effect, an IQ test.)
(2) Growth from a small- and medium-sized firm to one of the large firms in Korea. It
had elements of the early stages of a business group. It was the period of General
Park, Chung-hee’s Military Coup and the launching of successive five-year
economic development plans between late ‘50’s to mid ‘60’s.
(3) Ascendance to the Korean top enterprise between late ‘60’s to late ‘80’s. This
period includes the 6th Five-Year Economic Development Plan and the 1988 Seoul
Olympic Games.
(4) Ascendance to the global top Enterprise between late ‘80’s to now. This period
started with the transfer of the leadership from the first generation group
chairmanship to the second generation group chairmanship, thereby marking “new
management.” There were crises, rising from the Korean WTO participation, and
turmoil caused by the IMF crisis, as well as the 2002 Korea-Japan World Cup.
Chang believes that the quantum leap resulted from the superb human resources
management and the overall strategies of the Samsung group.

Samsung Electronics, the forerunner of the Samsung group, has gone through a
paradigm shift of personnel management in the following ways:
1. Growth strategy based on mass production and economy of scale centering on
seniority pay system until 1996.
2. Survival strategies under IMF crisis--employing a merit system of individually

12
 differentiated salaries between 1998 and 1999.
3. Core competence based personnel administration of up-grading overseas
personnel and team based compensation system adopting profit sharing and stock
option programs between 2000 and 2002.
4. Further strengthening of the core competence based personnel administration
aiming at solidifying the pool of the global top grade human resources.

And the evolution of the human resources management has been reinforced by:
(1) The regional expert system for the employees to get on-the-spot training for
one year. Over 2800 persons have gone through the program between 1990
and 2004.
(2) Through Samsung MBA program since 1995, the firm conferred the master
degree to some 460 persons. The program is divided into Socio-MBA and
Techno-MBA programs.
(3) Under the overseas genius program, over 100 full scholarship grants were
awarded to top 5% level students enrolled in India, China, and Russian top
universities since 1995.
(4) An in-house semiconductor college was established for 30 graduates with BS
degrees, 20 graduates with masters degrees, and 3 graduates with doctoral
degrees.
(5) An in-house manufacturing technology college was set up for the retraining of
100 overseas engineers.
(6) Five to six week courses for the functional expertise educational programs
were set up to provide training for some 700 specialists in the fields of finance,
planning, procurement, marketing, and personnel administration.

Autographic writer Hong, Ha Sang (2005) sketched 16 Samsung top managers, both in
Korean and Japanese. He emphasized, similar to the opinions of many Japanese
journalists, that the troika leading the Samsung transformation consisted of (1)
Chaiman Lee, Kun Hee, (2) a group of professional managers, and (3) the Center for
Structural Realignment.

Cho, Tu Sup, Professor of Yokohama National University and former Professor of

Nagoya University in Japan with Yoon, Chong-sup, his Ph.D. student and a researcher
of SERI, wrote a book in Japan titled, “Samsung strategy to technological capability –
technological learning process towards global business,” based on Yoon’s dissertation

13
(2004). Their research is centered on a single business entity, an organic cluster
comprised of four Samsung companies. They are: Samsung Electronics, Samsung SDI,
Samsung Corning, and Samsung Electricity. And their classification of the technological
learning process includes the following four stages:

(1) Absorption stage: It took place in the early 1970’s in a declining industry of
black and white TVs, tuners, cathodes, tubes, DY and FBT. Samsung relied on a
simple assembly line technology of joint venture partners, such as Sanyo, NEC,
and Corning. But Samsung also intensified its technological absorption, having
its engineers attempt to reverse-engineer beyond the level of formal
technological cooperation by penetrating into the tacit knowledge behind the
explicit knowledge. The firm implemented strategies of producing the parts
domestically rather than simply relying on the importation of parts from partner
companies. Samsung Electronics also established the vertical integration of the
electronic products, even starting to export black and white TV sets to Japan on
OEM basis. Depended on the Japanese technology.
(2) Emulation stage: It started in the late 70’s as it evolved into color TV set
assembly. Samsung had developed some level of maturity in technological
capability through reverse-engineering. And as a result, Samsung could take
over some of the decision power of the joint ventures.
(3) Improvement stage: It took place in ‘80’s, a rapid growth stage for Samsung
technology in the area of large size flat panel TV including large size CPT, CTD,
and CRT. Samsung became self-sufficient in designing numerous models and
developed mass production technology. The firm could export plants and compete
with overseas manufactures of color TV sets with its own R&D division.
Samsung diversified its products including the development of an overseas sales
network.
(4) Innovation stage. The ‘90’s and beyond marks the development of high
definition TV and digital TV. Samsung solely developed TVs of an original
concept, such as thin TV sets. Samsung could enjoy the freedom of cross
licensing, strategic alliance, and it could export products on her own brand,
through her own network of overseas production bases.

The book does not deal with semiconductor technology capability building, because
Samsung had to build the capability all alone, as no advanced nations were willing to
provide assistance in the sensitive area. However, the corporate culture of strategic

14
learning has been preserved and documented. When Korean technological and
educational capabilities were poorer in comparison to that of advanced nations,
Samsung’s intense in-house higher educational system continued to benchmark
themselves against the GE in-house educational system, and Lee, Kun Hee’s “genius
management” provided many effective solutions.

Professor Kim Shin proposed a strategic model of Samsung in comparison with Toyota
Motors. (June, 2003. Japan Korea Association of International Management, Tokyo.)

Samsung Electronics Toyota Motors

th
World rank 3rd in IT, Fortune ranking 115th and 3rd in Auto, Fortune ranking 10
th
Financial Times, 67

2002 records Sales, 40.5 billion; Net profit 7.25 bil. Sales, 16 billion; Net profit, 1.4 bil (Yen)

(Won) 14.5% of total South Korean

export

Management strength Superior human resources, speedy Positive adaptation to change, Rational

adaptation to change, high work management based on strong community

motivation spirit

Unique management Digital convergence JIT inventory management

concept

Production mode Production of multiple products in small Production of multiple products in small

quantity quantity

Corporate image Digital best Japan is in trouble but Toyota is an

exception

Strategy Global HRM, increase the number of the Globalization, Concentration on R&D

world best products and social and sustained cost reduction

friendliness

Chang, Se-Jin (2008) also compares Sony and Samsung, the winners of both analogue
electronics and digital electronics centering on strategies and HRM.

Journalist/writer Lee, Chae Yoon (2006) compared Samsung and Toyota in a similar
manner: He observed that Toyota benchmarked Ford to overcome the adverse
productivity rate of 8 to 1 as early as 1935, and again in 1949, and, in that process,
Toyota developed what is known as the Toyota Production System, or Just In Time

15
(JIT) and Kanbang system (zero inventory), all contributing to the “Toyota Way.” He
also observed that since 1987, Samsung has benchmarked GE and Toyota in the
development of world best products, speedy decision making, and R&D and Market
strategies.

A senior consultant and an expert on the Korean industry, Midarai Hizami (御手洗久己)
from the Nomura Research Institute of Japan observed that the strength of the Korean
business system reform lies in the efficacy of the Samsung Electronics’ decision
making mechanism, which was lacking in the Japanese firms. (2005) He observed that
Mr. Lee Kun Hee, in power, was making important decisions, and the system of
external board members and board of directors was nominal in the corporate
governance.

He summarized that the uniqueness of Samsung Electronics was due to (1) the
corporate chairman’s unique ability for judgment and leadership, (2) existence of a
corporate strategic center called the Center of Structural Realignment, (3) delegation
of power to professional managers and their compensation system, and (4) business
projects based on strategic marketing viewpoint. Finally Midarai proposed that the
Japanese company reform planners had to be mindful of the Samsung system.

A business consultant and Chairman of Japan Debate Association, Kitaoka, Doshiaki (北

岡俊明), published a book titled “I am afraid of Samsung” documenting a year long
debate series on the threat of Samsung and how the Japanese firms could roll back.
He concluded that Mr. Lee Kun Hee was a genius, who had an exceptional gift in both
technology and management, and who would concentrate solely on long-range
strategic research to command outstanding think tanks and watch dogs called the
Strategic Realignment Center and the Samsung Economic Research Institute. He also
argued that, with Mr. Lee’s long-range strategic view, swift decision making, and
enormous scale of resources allocation, Samsung could have overrun all the world top
class giants of the Japanese electronic firms when the IT bubble collapsed in 2002.

He felt that the Japanese CEOs were handicapped because they would stay in their
positions for a relatively short term (2-3 years), while Mr. Lee, Kun Hee could stay in
his office for life, thereby able to formulate long-range strategies for Samsung. He
argued that the Koreans were so dogged that they were posing a potential threat to
the future of the Japanese firms’.

16
Hasekawa, Tanashi (長谷川正), management professor of Kyotokakuen University,
contributed an article to Nikkei Business Monthly Magazine and commented that the
Samsung quantum jump from Korea’s best to global leader was dependent solely on Mr.
Lee Kun Hee’s leadership. (July 11, 2006) He observed that when the global IT
bubble collapsed in 2000, Samsung surpassed the poorly performing Japanese
electronic firms including Sony, and became a global IT power. In the process, Mr.
Lee’s “New Management” became the leading vehicle of the transformation process.

According to Dr. Hasekawa, ex-CEO Lee Kun Hee. lead the Samsung innovation even
before the Korean economy was crushed by the 1997 liquidity crisis, by taking the
shareholders seriously, putting emphases on the transparency of management and
accounting, personnel management based on ability, and the introduction of an annual
salary system. In addition, he observed that the Center for Strategic Realignment, in
cooperation with Mr. Lee Kun Hee and the professional managers, played key roles in
information gathering, sense-making, and planning in an organic manner to effectively
operate the overall business. An example can be found in the merging of the
semiconductor and telecommunication business units. The decision to select and
concentrate on three major areas, namely electricity-electronics, finance-trading, and
service, has provided the basis for the Samsung jump into a position of global power.

3. Discussion

The points of Chang, Sang Soo’s (SERI, August, 2005) four stages of growth, the jump
from the Korean top to the global top based on the superb leadership of ex-CEO Lee
Kun Hee and the superb corporate culture of upper managements’ shared value,
exemplified by “a single mind towards a single goal,” is well understood in a post facto
analysis. But his proposal of a superb human resources management, outstanding
educational system, and retraining systems can be better understood as an end result
of the strategic means rather than as the actual cause of the transformation. After all,
most of the leading global firms of Japan, USA, and Korea share similar characteristics
with Samsung. Nonetheless, it is possible that Samsung has simply benchmarked
itself against these rival companies, surpassing them even, in regards to these specific
factors. Although Chang, Sang Soo’s proposal could be understood as a occurrence of
novelty, with a serendiptious effect resulting from its organizational development
techniques. However, Samsung’s transformation has not been a transient phenomenon.

17
In fact, Kim, Chang and Lee,s comparson of strategeis and HRM is not sufficient to
explain the rapid change processes of Samsung. And many writers make a point to
emphasize the rapid and timely decisions made by Lee, Kun Hee in regards to the
speedy growth process, as well the leadership undeterred by outside inteference.

Samsung, at its inception under the leadership of Mr. Lee, Byung Chul (founder and the
first CEO of the Group), had been an ardent follower of Japanese Management. Mr. Lee
received his education from Waseda University in Japan before WWII, and was famous
for his annual “Tokyo Conceptualization:” He would stay in Tokyo at the beginning of
every year in order to learn firsthand the forecasts of the coming year as made by
Japanese journalists and economists through TV and mass communication media. He
also had a Japanese girl friend in Tokyo. Also, he carefully studied the Japanese
government’s new year economic plans and new year strategies for major Japanese
corporations. He would personally follow through this information with Japanese
experts and leading Japanese businessman friends. He, then, would collect necessary
books and articles and return to Korea to encourage his top managers to read the
material before formulating each year’s strategies and planning for the entire Samsung
group. In addition, they also examined the forecasts made by the Korean experts.

Mr. Lee, Byung Chul was not only the first generation CEO for Samsung but also one
of the pioneers of the contemporary businessmen of Korea. Partly we can state that
Samsung Group is an outcome of the Korean government’s modernization effort to
transform the economy from one of the world’s poorest agricultural economy to an
advanced industrial economy under President Park, Jung Hee between 1961 to 1979.
However Samsung had been a forerunner of a small group of successful large
corporations who quickly grew to keep pace with the rapid growth of the national
economy. It was well known that President Park, Jung Hee, the architect of the
Korean economic miracle, had thoroughly studied and became one of the Korean top
level experts on the Japanese industrialization history since the Meiji Restoration.

But General Park was not particularly favorable towards Samsung from the beginning
of May 16, 1961, the date of his military coup d’etat. Rather he was hostile, in the
early days of coup, toward all the Chaebol or rich men because of his concept of
socialistic and Confucian justice, at the time, reflecting the general sentiment of Korea
and the ever critical Korean mass communication. General Park’s economic
development policy was greatly influenced by socialistically oriented economist Park,

18
Hi Bum, the then dean of Commerce College, Seoul National University, and they
agreed to mobilize capital from the rich families including the Chinese restaurant
owners in Korea. Furthermore, the Military Government staged a currency reform with
disastrous results.

The event provided Mr. Lee, Byung Chul from Samsung Group momentum to stage a
personal confrontation with General Park (who then was elected to the Presidency of
Korea) in 1963, and persuaded President Park with a plan of industrialization of import
substituting, export oriented growth policy, and the normalization with Japan. Lee,
Byung Chul contributed an article on the same idea of Korean economic development
plan to Hankuk Daily Newspaper in Seoul, then, owned and operated by Deputy Prime
Minister of Economy, Chang, Ki Yung.

In the earlier phase of Korean industrialization, there was serious debate among the
scholars and policy makers of Korea, with forceful arguments that Korea should build
agriculture first before industrialization, because Korea had no basis of
industrialization at all. These models were available in Taiwan and Denmark. And
Denmark educated agricultural economist Yoo, Dal Young and Max Weber economist
Choe, Moon Whan, both from SNU, who were in turn personally tutoring President
Park, who would later formulate Saemaul movement to change the Korean farmers’
culture, in the manner of McClelland’s achievement motivation education from Harvard,
in order to develop an agricultural economy without much material investment.

Since Mr. Lee, Byung Chul and President Park, Jung Hee’s meeting, President Park
decided to take Mr. Lee, Byung Chul’s Japanese style of the “industrialization first
policy” with a Weberian push, in addition to his all-out effort on the export oriented
industrialization projects and thereby attained the ‘Han River miracle’. But in the
process, he delayed the ever mounting public desire for democratization and ended his
life tragically in October 24, 1979, with his famous last words, “spat upon my tomb
later.”

After a few years of trial and effort, President Park’s economic plan was more or less
settled around the US educated econometrician Nam, Duk Woo, an engineer oriented
bureaucrat Oh, Won Chul, along with the use of the history of Japanese
industrialization as the main textbook after normalization with Japan in the mid ‘60’s.
Also, his policy line did not deviate much from Samsung’s first CEO Lee, Byung Chul’s

19
original 1963 proposal.

Along the same line of thought, Hong, Ha Sang’s (2005) sketching of Samsung’s top
professional managers can also be taken as providing the necessary condition for the
transformation because all leading OECD global corporations have plenty of top level
professional managers similar to Samsung’s “genius management.” But the genius does
not automatically yield global management.

Anyway, Mr. Lee, Kun Hee, in a way, has adopted American style management on top
of his inherited Japanese style management with a Korean color, by recruiting global
scale top managers with engineering backgrounds, which is rare in traditional Korean
managers unless the founders also have engineering backgrounds. Because of business
closely linked to the governmental economic development plan at the same time to
deal with every level of governmental Confucian feudalistic heritage, most of the top
managers from large corporations have consisted of economists and lawyers to cope
with the governmental or pseudo governmental interference and for lobbying purposes.
Mr. Lee, Kun Hee maintained groups of lawyers and economists, but he stepped aside
from the Korean conventional practice and recruited professional top managers from a
combined elite of engineering and business specialties and encouraged them to break
away from their traditional conservative bureaucrat nutshells and exhibit their high
level entrepreneurship of experimentation including a certain a latitude of failure
tolerance

Nikkei Business weekly magazine, (July 14, 2006) maintained that “Samsung power
originates from passion and solidarity,” and this was the very aspect that was missing
in the Japanese firm. It was pointed out in the article that the strength of Samsung
human resources management can be found in the strength of regional expert
development program to strengthen Samsung marketing in strategic regions such as
China and India, as well as in the potential growth markets, like France and Italy.

The missing link was not fully described in the article regarding the “passion and
solidarity” behind the superb HRM. The question remains: What makes the top
managers and employees deeply moved with this burning passion? A Korean diplomat,
who was stationed in Japan for a long time, wrote a very persuasive book in Japanese,
contrasting the two different cultures of Korea and Japan: Park, Seun Moo, ‘Sunbi’
(humanity scholar-poet-politician) and ‘Samurai’ (sword man-scholar-politician),

20
Tokai University, Japan (2004). One aspect of contrast can be seen between emotive
idealism and cool headed pragmatism. And there are some scholars and businessmen
in Korea who can harness the Korean passion and emotive energy into the productive
Korean style business management: Lee, Myun-woo, “Create W theory of Korea,
1969” (as oppose to McGregor’s X theory and Y theory and Okuchi’s Z theory or
Americanized Japanese theory) and Lee, Chang-woo, “Han Management, 1992”
(Harness Long suppressed emotion, Han, 1994) Chin, Dae-jae, “Manage Passion,
2006”

The secret also lies in the American style competitive compensation system. In the
words of Mr. Lee: “The incentive system is the greatest invention of the century,
turning the tide favorably for capitalism, vis-à-vis socialism” where the top managers’
annual income is roughly several times higher than that of the comparable top
managers in Korea, and the system runs down throughout the Samsung system to the
very bottom.

Cho, Tu Sup and Yoon, Chong Sup’s joint work narrates the learning and maturity
process of Samsung’s technological capability. The work is descriptive of the past
track, but it is limited in causal analysis. However, the strategy of technological
capacity has been the core of the Samsung organizational learning in the age of
globalization, “the first comer takes all.” “There is no place for the second comers,”--
all translated into the catch phrase—increase the number of the world best products.

Also, Samsung observers do not fail to mention the golden triangle of Mr. Lee, Kun
Hee, the Center for Structural Realignment, and the outstanding abilities of elite top
management groups, as the source of the Samsung transformation from the Korea best
to the global best. But Japanese observers tend to put more emphasis on the
outstanding leadership of ex CEO Lee, Kun Hee. There are at least three books
published by a group of Korean journalists and a writer. They are “Samsung Rising:
Why Samsung Electronics is Strong,” (2002, Hankuk Economic Daily) “Lee, Kun Hee,”
by Hong, Ha Sung (2003, Hankuk Economic Daily), covering the period immediately
after the Samsung Spectacular Performance between 1999 – 2002, and a slightly
critical autobiography by Kang, Jung Man, titled “Lee, Kun Hee’s Era,” reflecting
increasing criticism of Mr. Lee because of a ”no union policy” and a suspected immoral
deal in the process regarding his property inheritance for his son, etc. (2005,
Personality and Thought)

21
What has Samsung achieved in the process of organizational transformation that made
a paradigm shift to facilitate an essential part of the Korean-style management? In
other words, what kind of model or models could be applied to explain the
transformation processes of Samsung Electronics and Samsung Group?
There are at least three models, which can explain the change process of Samsung.
These are:
Strategy models such as R&D strategy and core competence models.
Organizational theory models such as HRM, leadership, learning and culture
Knowledge management model
But each of these models can only provide a partial explanation of the dynamic
processes of organizational transformation within the Samsung Group.

Strategy models: R&D strategy and core competence model: There is the effect of
equifinality, one of the concepts of General Systems Theory and/or contemporary
complexity theory) in most of the successful firms’ strategies and outcomes. All the
global leaders have similar strategies in the large framework of aspiration towards
global leadership. The question is, how does one attain them. Almost every Chebol
group with better technological leadership adopted a similar strategy when South
Korea signed the WTO membership in 1992, but only Samsung has reached the goal(s).
The simple contrast cannot explain the dynamics behind the quantum leap of Samsung
from a developing nation status to the advanced nation status of Sony, Erickson, and
Motorola, the established leaders of the industrialized countries.

Samsung can be better compared to the NEC case of 1980’s vis-à-vis GTE. C.K
Prabalad and Gary Hamel (Harvard Business Review, 1990) observed that top
executives will be judged on their ability to identify, cultivate, and exploit core
competencies that make growth possible. And Mr. Lee is the right person in that
capacity for Samsung.

GTE NEC

1980 Sale $9.98 billion $3.8 billion

1988 Sale $16.48 billion $21.89 billion

22
In 1988, GTE has become a telephone operating company with a position in defense
and lighting. GTE has divested Sylvania TV and Telenet and put switching,
transmission, and digital PABX into joint ventures. In the same year NEC has emerged
as a world leader in semiconductors, consolidated a position in mobile telephones,
facsimiles, laptop and mainframe computers. As early as in 1970, NEC communicated
her strategic intent of computer and communication convergence (C&C) both internally
and externally. The NEC’s strategy has been adopted by most South Korean firms as
the Government proclaimed in 1983, the 1st year of the Korean Information Age.

Samsung Group has concentrated her whole effort towards the strategic intent of
“world best” and “increase number of world best products.” It’s organizational culture
is simplified in this precise catch phrase and readily communicated to every corner of
the system.

According to the authors Prahalad and Hamet, The most powerful way to prevail in the
global competition in the ‘80’s were top executives’ ability to restructure, de-clutter,
and de-layer their corporation, but in the ‘90’s on, they will be judged on their ability
to identify, cultivate, and exploit the core competencies that make growth possible.
And this was exactly what Mr. Lee did since the beginning of his chairmanship.

Samsung’s successful transformation in the last decade or more can be explained from
successful organizational change and innovation model and/or leadership model and/or
strategy of core competence building model and/or knowledge management model and
more. But it can be enveloped into organizational learning, centering on transformation
of organizational culture and cultivation of core competence. Some observers attested
that Jack Welch started from restructuring to reform of organizational culture, but Mr.
Lee went the other way around because the very unfavorable Korean socio-cultural
environment and the 1997 IMF crisis have facilitated the process.

Now under Mr. Lee, Kun Hee the leadership of the new Korean management style is a
blend of both Japanese and American styles of external labor market and differential
compensation and no life long employment, with the element of Silicon Valley’s
revolutionary spirit. And it is also actively benchmarked by many Korean firms, as
observed by Professor Lee Byung Chul (2002).

There are indications that Japan, too, is groping reluctantly towards a new model.

23
After all, many aspects of the Japanese cultural model can be considered as a
reflection of globally small firms in the stage of rapid growth, rather than the
uniqueness of the culture. A new approach is recommended to tap “culture” holistically
and longitudinally instead of by simple snapshot of two firms for better causal
explanation as practiced by political scientists, communication scientists, and
sociologists relying on secondary sources of data too.

Samsung leadership under Mr. Lee has gone through a systematic, dynamic, organic
and nonlinear process of leadership of strategic or targeted organizational learning
centering on core competence building. In the global arena, prevailing firms are
mutually inspired by a competitive mutual benchmarking process among the world best
firms. And it is observed that, of late, Samsung and Toyota are mutually benchmarking.
(Lee, Chae Yun, 2006) Recently, Mr. Lee stated, in the presidential meeting of
Samsung corporations, “we don’t need top executives who are copying someone else’s
ideas and strategies”. “As many of our products are in the leading positions in the
global market, we lost the target to benchmark or imitate. Samsung must strive
towards a unique and differentiated creative management.” “With negotiation on FTA
with U.S.A. for an accelerated domestic market opening and with China making a big
stride in the global market, we are faced with both crises and opportunities. We must
discover and cultivate a creative management system and creative personnel.”
(Hankyung Economic daily, June 28, 2006)

As many observers have attested, Samsung Electronic has the elements of GE and
Toyota. It is natural that any firm among the global leaders would attempt to
benchmark the best practices for the best performing companies. But one should not
overlook the fact that there is an organic approach in the Samsung word “fusion.”
Technological capability advancement, strategies of marketing and finance, and the
process to convert into market taste of design are simultaneously used to break
through the barriers of bureaucracy, or the tyranny of the small business unit, as
written by Prabalad and Hamel (1990).

Bureaucracy is the greatest invention of the Industrial Revolution. The founding

fathers of economics and sociology, Adam Smith and Max Weber, respectively,
described the merits in an elaborated manner: specialization and division of labor. How
to retain the merits of the system and at the same time reduce the inherent problems
of delay and red tape? In 1992, Mr. Lee was awarded the Korean Management Prize

24
of the Year at Korea University by the largest Korean business professor’s academy,
The Korean Association of Business Administration. In his acceptance speech, Mr. Lee
said in a slow and hesitant voice, “I was once approached by a Japanese engineer at
Kimpo Airport. He said that Samsung Electronic developed a high quality DRAM no
sooner than the time when the Japanese rivaling company announced its own
development. Our production was 6 months delayed by Samsung’s inner paperwork.
So, for the next time, I assembled every concerned party so that we could announce
the next generation chip simultaneously with the world big leaders, and eventually we
beat them.” This was exactly the way how the late President Park handled the
problems by regularly holding the Blue House Expanded Presidential Export Expansion
meetings.

Quite a few Japanese specialists on Samsung have observed that Samsung’s strength
lies in the fact that Lee, Kun Hee’s term of office is indefinite, allowing him a free hand
to delve into long range opportunities and strategic visions, while the Japanese CEO’s
term of office lasts only 2-3 years, on average. This reminds us of the similar
observations made by American scholars in the ‘70’s and ‘80’s. The Japanese CEOs
were obligated to satisfy the major shareholders, the bank, whereas the American
CEOs had to satisfy shareholders every year. However one should take note of the
Samsung golden triangle in terms of its dynamics. Kang, Woo-ran, SERI (2006)
conducted a survey to find that the Korean firms with Owner CEO- Professional
managers combination out-achieved, as compared with Professional CEO only model
or Owner CEO only model between 1986 and 2004.

Michael Porter (1996 2004) suggested that the often acclaimed strategy of Japanese
management was nothing but operational effectiveness. The Japanese businessman
quickly caught up with the American businessman in a relatively short time span,
between the 1960’s and 1980’s. In the process, Japanese firms exhibited core
competence and accompanying Japanese best practices. They were recaptured by the
American scholars in the form of new management theories: Total quality management,
6 sigma management, MIS network linked inventory-delivery systems, lean
management and restructuring, knowledge management, benchmarking, organizational
learning, to name a few. So the Japanese firm’s comparative advantages have been
shared by many global firms in a slightly differentiated manner.

25
 4. Culture, Goal Oriented Communication (Leadership) and A Fast Growing
Organization, Samsung Electronics

Samsung Electronics’, the centerpiece of the Samsung group, market value was only
420,680 million won in 1987 when ex CEO Lee, Kun Hee assumed the chairmanship. Ten
years later in 1997, it was 3,996,909.66 million won or roughly 950% increase. That is not bad.
But from that time on, there has been a steep ascending of the market value of 12,179%
increase of 91,671,138.128 million won in 2007. One would naturally be tempted to ask, “What
happened to the leadership of the first 10 years with ex-chairrman Lee, Kun Hee?”

Sams u ng Electro nics Market V alu e (1,000w o n)

12 0,00 0,0 00,0 00

10 0,00 0,0 00,0 00

80 ,00 0,00 0,0 00

60 ,00 0,00 0,0 00

40 ,00 0,00 0,0 00

20 ,00 0,00 0,0 00

0
Name

1980

1981

1982

1983

1984

1985

1986

1987

1988

1989

1990

1991

1992

1993

1994

1995

1996

1997

1998

1999

2000

2001

2002

2003

2004

2005

2006
Name 1980 1981 1982

Samsung Electronics Market Value (Unit 1,000 won

41,440,000 59,500,000 64,400,000
equals roughly 1 to 1.30 US Dollars)

1983 1984 1985 1986 1987 1988

63,350,000 76,950,000 137,500,000 308,000,000 420,680,000 1,020,330,990

1989 1990 1991 1992 1993 1994

1,640,470,000 1,318,439,793 1,328,438,858 1,587,069,540 3,013,541,426 6,272,521,240

1995 1996 1997 1998 1999 2000

9,052,186,755 3,579,480,030 3,996,909,660 10,918,438,172 44,086,251,261 25,544,557,299

2001 2002 2003 2004 2005

44,932,513,615 51,542,526,788 73,785,248,588 73,174,129,278 108,281,475,740

2006 2007

26
 101,254,538,541 91,671,138,128

Key Figures Representing Changes in Samsung Group in 20 Years

Unit 1987 2006 Ratio
Sales Trillion Won 17 152 8.9

Profit Before 0.27 14.2 52.8

Tax
Market Value 1 140 140

Export 9 663 73.7

Brand Value 100 million None 169 (2007) N/A

dollars
Number of 10,000 men 16 25 1.6
Employees
Source: Samsung Greoup PA Office Materials, Feb., 2008.

Scanning through the observervations made of Samsung Electronics’ rapid growth, one
factor clearly emerges--the ex-CEO Lee, Kun Hee’s leadership as the success factor
including his bold and swift large scale investment decisions at key junctures: When
there was a debate over DRAM and SRAM, it was Lee, Kun Hee’s decision concerning
DRAM, difficult to develop, but with the promise of a greater potential market. And the
decision turned out to be a very wise one. When Samsung started to build Kiheung
semiconductor lines, it was completed in 6 months while similar lines would take one
year and a half in the overseas cases.

Chang, Sang Soo (2005) observed that Samsung Group has gone through 4 stages of
growth in an accelerated pace based on superb leadership of ex-CEO Lee Kun Hee
and superb corporate culture of upper managements’ shared value: “a single mind
towards a single goal.” It indicates that Samsung’s global technological capability
development has been possible due to the transformation of corporate culture as one
of the pillars of Samsung global competence. So the leadership in transforming the
Samsung culture and core competence by Lee Kun Hee has created the paradigm shift.

27
To understand Lee Kun Hee’s leadership, the comparison of first and second
generation corporate culture is in order. Over the years, Mr. Lee, Byung Chul an
ardent Japan learner had shaped Samsung as a rational bureaucratic model under a
fragile and protective Korean economy. Korea did not have any capital, so the
government obtained good quality loans and grants from the USA, West Germany,
Japan, and World economic organizations, and in turn provided loans to selected
Korean firms under the condition that the firms use the funds to set up industries
within the guideline of the Government Plans. The interest rates were at international
level, but the Korean market bank loan rate was several times higher under the high
inflation rate, and thus the economic developmental loans were highly covetous in
Korea. And this is one of the sources of the blame on the Chaebol and rich families
receiving the governmental special favor, or the politician-capitalists corruption
suspicion to date. Having neither technological nor managerial capabilities, most
Korean firms exploited the cheap labor from the agricultural sector, at the same time
attempting to build scale economy as sources of international competition emphasizing
quantity in light industry and new and primitive petro-chemical and heavy industry.
And Mr. Lee, Kun Hee emphasized quality over quantity in his first statement soon
after his chairmanship inauguration. Against such backdrops, Chang, Sang Soo
compared the first generation and second generation corporate culture as follows:

Change of Samsung Core Values

First Generation Corporate Culture Second Generation Corporate Culture

(1938-1987) (1988 – 1993. 3) 1993. 3- to date

Founding Father’s Doctrine (1973) Second Founding Father’s Doctrine(1993)

Contribute to nation through business Dedicate to the human society through the best

Put priority on human resources manpower, technology and the best services

Seek rationality Samsung Spirit (1993)

Samsung Spirit (1984) Co-prosper with customers

Creativity Challenge to the world

High ethical standard Create future

Be Number one in the nation Core Value (2005)

Perfectionism Priority on human resources

Co-prosper Aspire to be the best

Leader of change

Righteous business management

28
 Co-prosper

Principles of Management (2006)

Stick to principles of law and ethics

Maintain clean corporate culture

Principles of Business Management

Respect customers, stockholders and employees

Respect environment, safety and health

Fulfill social responsibility as a corporate citizen

From the chart, we can examine the Samsung aspiration to be the leader of the
industrial age in the first generation founding father’s culture of rational bureaucracy,
and the transformation of the second founding father’s culture as the leader of the
globalization and digital and/or knowledge economy. In a similar vein, reporters from
DongA Daily Newspaper depicted the change of corporate culture as follows:

Change of Samsung Corporate Culture

Past Present

Minimizes Risk Taking New Investment Put Emphasis on Taking a New

opportunity First recognizing

Failure

Decides after a Through Internal Decision Making Down size Delegated Decision

Investigation Power

Culture of Strong Management Management Management Staff Step Aside from

Staff the Operational Staff Decision

Making while Financial Control

System is Retained

Conservative Image Emphasizes Speed

Emphasizes Process Rationality in Evaluation Emphasizes the Outcome

Every Detail

DongA Daily Newspaper, June 4, 2004

Mr. Lee, Kun Hee has received thorough CEO training from his father for 21 years
before taking over the position. He and his father-in-law, a lawyer and owner of
ChoongAng Mass Communication, were ever present at his father’s staff meeting,
usually during lunch hours. He could not retire from his office until he personally
confirmed that his father was in bed. Mr. Lee, Byung Chul had chosen Mr. Lee Kun

29
Hee, the third son, against the conventional Korean tradition of passing the reins onto
the eldest son, because the first son had a grave disagreement with his father. The
second son was talented in business, but Mr. Lee Kun Hee was more futuristically
oriented, even forcefully starting his own hi-tech venture in the early days when
Korean technology was at an infantile stage..

Leadership Styles Compared: Mr. Lee, Kun Hee went through CEO training from his
father, but his leadership style is so different from his father, though sharing some
similarities. Mr. Lee, Byung Chul emphasized the importance of personnel management
and human resources, and he also mentioned that 80% of management dealt with the
question of how to manage persons. He personally participated in the recruitment
process in examination problems and personnel interviews, and at times, personally
selected topics for group discussion in the screening process.

Mr. Lee, Kun Hee expanded the inner labor market of selection and promotion systems
to open system for the external labor market in recruiting outstanding personnel and
managers. His father, a strict time keeper, who enjoyed talking, was concerned with
every detail of the Business operation. His father practiced regular walks around
management and was strict in awarding prizes and punishment for the subordinates.

In contrast, Mr. Lee, Kun Hee is a good listener and often repeatedly asked, “why?
why? why?” He rarely came to his office in the company building and mostly delegated
his authority to his professional top managers, and confined himself mostly in his
electronic fortress called Seungjiwon, modeled after Microsoft CEO Bill Gates’ work
place/residence, and developed long range visions of strategies for Samsung,
specializing in a comprehensive and long range gatekeeper role.

His organizational management has a flavor of human touch. He is a night worker and
his sleeping hours are irregular. Although he confined himself in Seungjiwon, he gets
instantaneous high quality information and knowledge resume news from his think
tanks and staffs. He reads relevant scientific and technological journals thoroughly. His
personal explanation is from a Chinese classic, Dalseangpyun (達生篇) by Jangja (莊子)
on wood carved fighting cock, Mokke (木鷄). A well trained fighting cock is so stable
as if carved out of a wooden piece. It has such a solemn posture that no other
fighting cocks would dare to challenge the Mokke. And these life and leadership style
had prompted Newsweek (November 23, 2003) to carry a cover story of Mr. Lee under

30
the titles: “The Hermit King” and “Lee Kun Hee and Samsung Have Led Korea’s
Resurgence. Where Are They Heading Next?”

Mr. Lee, from his childhood in isolation became a movie manic and acquired a habit of
thoroughly dismantling and reassembling hi-tech products, such as audio sets,
automobile or cellular phones, and he also developed high engineering (through
reverse engineering) capability and insight to benchmark the products by looking into
the heart of the matter or insight into the essence, which he termed employing
Buddhist concept of “Up (業)” or Karma. This capability casts him as a left-brain
originated right brain thinker as opposed to his father, a typical left brain thinker, the
winner of the industrial age. He has deep insight into the future, be it a business or
technology, very much similar to many contemporary futurologists like Toffler and
Drucker.

As a venture type entrepreneur, Mr. Lee made large scale investment decisions
related to an uncertain future such as semiconductor and LCD production facilities. He
personally made the decisions of risk taking based on his second sight or instinctive
insight, and they turned out to be very wisely made decisions several years later. His
most trusted top managers were ex-vice chairman of Samsung Electronics Mr. Yoon,
Chong Yong (尹鍾龍) and ex-Head of Center for Structural Realignment, Mr. Lee, Hak
Soo. (李鶴洙) Most of the works were delegated to these two persons. On this point, he
quotes from a Chinese classic on leadership by Hanbija (韓非子), “If you cannot trust a
subordinate, do not give him a job, if you use him you never mistrust him” Eui-In Bul-
Yong, Yong-Iin, Mul-Eui (擬人不用 用人勿擬).

He used to contrast two chariot drivers, Ben Hur and Messala, in the Hollywood movie
“Ben Hur.” While Messala ceaselessly and violently struck the horses with his whip,
Ben Hur never used the whip during the race, instead, he simply caressed the horses
the previous night and won the race.

When Samsung Group had to restructure the companies, Mr. Lee gave the big picture
of “selection and concentration” and delegated all the decision power to the Head of
the Center for Structural Realignment, Mr. Lee, Hak Soo. And he single-handedly
selected firms for sale and negotiated with many foreign firms without any direction
from the chairman.

31
According to Lee, Kun Hee, “Pre-emptive investment is critical to success in the chip
industry, or the missed opportunities quickly turn into huge losses.” Thus Samsung
could concentrate on core business projects taking calculated risks. The Center for
Structural Realignment provided a vehicle for the top managers both short range
competitive strategies as well as long range vision, and enabled the coordination of
R&D and corporate strategies, and brand marketing in the catch phrase of “fusion,” an
organic approach.

Nikkei Business weekly also reported (October, 2004) that lack of strong leadership as
exhibited by Mr. Lee, Kun Hee is the very weakness of the Japanese business reform
effort. The articles reported that Mr. Lee had repeatedly emphasized the sense of
crisis despite the outstanding performance of the Samsung group. He specialized in
business management, but he also has a deep understanding of technology to enable
him to make farsighted decisions for the business models of Samsung. From the stages
of developing one GIGA DRAMS, which would require a 10 billion dollar investment,
many Japanese and American firms were hesitating to make the investment decision
because of the involved high risk. But Mr. Lee, Kun Hee made swift and bold
investment decision. And as a result, the positions of global leaders and follower have
been reversed ever since.

To understand Mr. Lee’s life-style, an explanation of his educational background is in

order. He has been educated in the Japan, USA, and Korea, and is thus versatile in the
three major economic environments. Also, unlike the typical overly protective Korean
quick rich family’s rearing, during his early and young growth stages, he had to
experience loneliness and thereby developed a strong sense of independence.

Mr. Lee, Kun Hee encouraged the professional managers to make mistakes, but his
father, a rationalist and perfectionist, could never stand his staff making mistakes and
thus severe punishments were immediately followed. Some Samsung managers
reportedly confided: “Mr. Lee, Kun Hee is the right type of CEO for a large
conglomerate, but his father Mr. Lee, Byung Chul is a CEO who is suitable for small
and medium sized companies. Had the first generation CEO still survived, we could
never be able to have Samsung Electronics as it is today, because top managers would
be busy preparing potential questions rather than concentrating on their work.”

No doubt, Mr. Lee, Byung Chul was one of the most successful 1st generation Korean

32
businessmen, who started out from nothing to end up turning a tiny venture into a large
firm, but he could not change his earlier life-style till the end of his life. But with any
venture business when it has landed a big deal, it must prepare to change from the
informal less structured management style to the professional management system.
And over the years, Lee, Byung Chul, an ardent Japan learner, has shaped Samsung
into a rational bureaucratic model under the fragile and protective economy of Korea.

But a question to be answered still remains: As the professional management system

and bureaucratic model of the stable industrial age is gone for good in the turbulent
borderless competition and globalization age, where is the right model of business
organization and management style which all the world managers and management
educators are anxiously groping for. But Mr. Lee Kun Hee who is the second
generation CEO of the Samsung Group is attempting to provide a new model to face an
entirely different environment of naked exposure of the Korean economy in the age of
borderless competition since the Korean membership of WTO from 1992. He decided
and succeeded in transforming a moderate level bureaucratic model complacent with
the position of the Korean best companies into a global competitive type.

5. Strategic learning Leadership as a means of Paradigm Shift

Unlike most of the Korean Chaebol operation, where the owner-CEO directly leads the
group, Mr. Lee, Kun Hee had been engaged in a long range strategic intend formulation
and monitored the group performance through the Stratetigic Planning board (recently
renamed from the Strategic Realignment Center to allow each company CEOs more
freedom. But during the Samsung Group’s restructuring process, he directly and
forcefully led the change processes. The problems he faced and the transformation
process shall be discussed in seven waves below.

The problems he faced were, firstly, how to provide the momentum for the quantum
leap from the developing country model to the advanced country stage model, where a
not linear but qualitative thick wall stood to be overcome, as there were the
psychological or perceptual barriers that had to be dismantled, and all Samsung
members of staff, who had more or less self-imposed walls, needed to be penetrated.
Change means learning and abandoning what we have today by the reluctant Samsung
employees, and moving on to the uncertain tomorrow

33
Secondly, the outcries of the futurists were high with the end of the industrial age and
the start of the post industrial age, coupled with the anxiety of the fast approaching
millennium. These anxieties were high with the pessimism of the American thinkers
as the economic power of Japan accompanied by four small tigers of the region had
been posing a major threat to the economic might of the U.S.A. Of course it was
overturned by President Bill Clinton when he introduced a new global game, namely
the Internet and World Wide Web, which turned the tide very favorably for America in
the glorious uninterrupted decade of growth of the USA, as opposed to the 10 some
years of the collapse in Japan in the 1990’s and on.

But there were many signs of revolution in American management with Silicon Valley
ventures and change of business structure in the name of GE restructuring, downsizing,
business process reengineering and core competence. Being sandwiched by the
contrasting developments between the reality of Samsung and the forerunners of the
leading economy could have deepened Mr. Lee Kun Hee’s frustration.

Against such a background, Mr. Lee, Kun Hee’s strategic learning leadership as a
means of paradigm shift takes form in several waves before completely changing the
norms, values and culture or the mindsets of the entire Samsung employees to form
the Samsung core competence. The leadership took very forceful and original
persuasion or communication mode.

The First Wave: As discussed earlier, the basis of the Korea success in information
and communication technology has been developed in close cooperation between the
Korean government and large Korean firms including Samsung in 1976 TDX; in 1989
TDX-10; in 1993 CDMA; and in 2006 WiBro.

However, it must be noted that as early as in 1973, Samsung started semiconductor

industry at the persistence of Lee, Kun Hee, who in effect, started IT industry in Korea.
Therefore, it can be stated that the seed of the Korean ICT industry was sown and
cultivated as early as in December 6, 1973, when he insisted on purchasing the
bankrupt Hankuk semiconductor, a US direct investment firm producing transistor level
IC and reprocessing primitive wafer, that was regarded as a hi-tech area too far ahead
for the Korean firms’ technological capabilities. The opposition was high not only
within Samsung Group but also from the Government side.

34
South Korea was an agricultural base supplying rice to Japan, while Manchuria and
North Korea provided the bases of heavy and chemical industry during the Japanese
colonial and WWIl period. The feeble South Korean industry started after the Korean
War in 1953 by reprocessing the main American grant type aid products such as wheat,
cotton, and molasses, in order to relieve the malnourished, starving, and underclad
populace. { CJ stands for Samsung’s original Cheil (first) Sugar Mill, Cheil Flour Mill
and Cheil Textile for example}. Before Park, Jung-hee’s Military Coup, the Korean
government’s main foreign policies consisted of begging more relief type aids goods
from America, and governmental revenue came from reselling the grant good to a few
Korean companies. Korea’s main export products were cheap clothing, wigs, and
plywood between the ‘60’s and ‘70’s, and footware in the ‘80’s with President Park’s
industrialization plans in the beginning, who died after laying foundations for the
Korean heavy and chemical industry base in 1979.

And naturally, there was mounting opposition from in and out of Samsung Group when
Lee Kun Hee purchased the American factory with his personal fund. It was a time
when Korean technology and industry was still in the infantile level of primary and
secondary industry, such as cheap textile and apparel. There were elementary
shipbuilding, fertilizer, and cement plants for domestic consumption. It was a time
when President Park, Jung Hee had just started to build Pohang steel mill despite
mountainous opposition from the major aid organization, World Bank, USG Aid Mission,
and many leading Korean economists.

At that time Mr. Lee Kun Hee was only a senior staff of the Dongyang Broadcasting
Corporation under the ChoongAng Mass Communication Co., the then Samsung group
company. The decision to purchase the bankrupted Hankuk Semiconductor was a lone
and brave decision. And that is why Mr. Lee is labeled a far sighted leader or a
genius by many Japanese observers. And this decision, later turned out to be a right
decision, became the starting point of the third miracle of Korea’s leadership in ICT,
following the Korean miracles of industrialization and democratization since the 1960’s.

It was Lee Kun Hee’s personal venture for ten years until the then group CEO Lee
Byung Chul, his father, and the Korean Government under Minister Kim, Jae Hyup,
Minister Oh, Myung and President Chun, Doo Huan, recognized the ICT potentials
through the development of the persistent Lee Kun Hee’s long experimentation of IT
capacity building together with the telecommunication technological development

35
initiated by the Government Ministry of Telecommunication under Minister and General
Oh, Myung, a US trained Ph.D. in electronic engineereing.

The Government proclaimed full-fledged support for the semiconductor industry by

pronouncing the year 1983 as the “First Year of the Korean Information Era,” and Mr.
Lee, Byung Chul immediately approved a large scale semiconductor investment in
Kiheung, located south of Seoul. Soon the move was followed by semiconductor
projects by LG, Daewoo, and Hyundai, which was later renamed Hynex. But after
successive government misjudgment and IMF huddles, only Samsung and hynex remain
today. Samsung surprised the world by announcing the development of 64 KD RAM in
December 1983, only 10 months after massive investment in semiconductor processing
lines, and it announced the development of 256 KD RAM in January 1985, owing
largely to Lee Kun Hee’s 10 year effort.

Of course, Mr. Lee Kun Hee’s personal venture, Samsung Semiconductors, later
merged with Samsung Electronics, had received massive cross-investment from the
rest of Samsung Group companies in several years of massive learning and core
competence buildup period ever since, to fill in the technological gap of DRAM
technology with the world leaders, until early 1990’s. The production line of the
Hankuk Semiconductor was resold to Fairchild, an American firm in 1998 in the
process of restructuring to overcome the 1997 IMF Foreign Exchange Crisis. But the
venture served to provide the evolution of Samsung core competence. in
semiconductor industry and subsequent IT capability.

In the core compentence buildup or learning process, Mr. Lee Kun Hee offered
unprecedented compensation packages to induce top level Korean American scientists
from top level American IT firms, in his word, “genius management,” to fill in the
seemingly huge gap between Samsung/Korean capability and the world leaders in the
hi-tech area. And from the time Samsung developed 16 mega DRAM, most of the
researchers were invited US trained scientists and overseas researchers, including
IBM staff researcher Chin, Dae-Je, the former Minister of Information and
Telecommunication, Korean government, in 1985, and who developed 16 mega DRAM;
Dr. Park, Chong Woo, vice president of printers division; Whang, Chang-kyu, president
of semiconductors R&D division and the former Stanford University Professor who in
1988 developed 256 mega DRAM; and Kwon, Oh Hyun, President of system LSI
division from Stanford University. There are altogether 8,000 researchers including

36
713 PhDs working in the R&D section of Samsung Electronics as of 2004.

The Second Wave: Mr. Lee, Kun Hee’s second exercise of leadership was clearly
expressed in his inauguration, “Let us divorce from the tradition of quantity oriented
management (economic scale as a source of global competition) and move on to the
quantity oriented management (knowledge based and hi-tech based global
leadership.)” This is “decree approach,” clearly described in the organizational
development and change text books in the American schools of management. Every
manager from Samsung would not heed what the chairman said.

Scale of economic was the norm of the industrial age, and not only Koreans but many
leading Japanese businessmen and their counterparts in the mature industrial nations
of America and European industrialists’ practicing the norm under the high cries of
leading consultants until the 1970’s. In the process, most large Korean firms were
inclined to use as much bank loans as possible with lower equity ratio of some 25% to
be vulnerable to liquidity crisis. Besides, the Korean technological capability was still
immature in comparison to the global level. So the realistic managers must have
decided that the Chairman was simply an idealistic daydreamer, a rich man’s son who
did not see reality as it truly is.

What the Samsung managers failed to see was that Mr. Lee was not drawing the
picture out of a clear blue sky, but his far sighted vision was based on the solid reality
of his nearly completed old time venture of semiconductors, a hi-tech product with a
great estimated future demand. He was trying to propagate the seemingly trifling new
blood from a corner of Samsung to the mainstream of Samsung. Mr. Lee casually
conversed with the managers and carefully observed, to discover that his impact was
marginal. And Lee was deeply frustrated and expressed openly that Samsung
companies were deeply affected by many kinds of serious illness.

Yes, the Samsung group was deeply immersed in the industrial age and its
accompanying bureaucratic system with many of its inherent symptoms. And Samsung
was still affected by the aftermath of the Group’s property inheritance distribution
among Mr. Lee, Byung Chul’s sons and daughter. It took almost a painful 8 years since
his father’s death, and the task was finally settled in February 1995, with deep injury
for the group. Mr. Lee, from 1991, started to decentralize by drastically shrinking the
Chairman’s Office of Secretariats to 100 from the original 200 persons, and

37
emphasized autonomy of respective companies of the group.

The Third Wave: In March 1993, Mr. Lee was on a business tour to Los Angeles,
U.S.A. He happened to visit department stores and discount stores there. He was
seized by deep distress when he noticed that Samsung products were in the invisible
back row covered with thick dust, while the products from Sony and NEC were in the
readily visible front row, sparkling and shining. He summoned several Samsung
presidents to eyewitness exactly what he saw. And they were dumbfounded. He
immediately ordered to secure a party parlor of a big hotel and displayed Samsung
products with the comparable top class products from Japanese and other world top
class firms in order to clearly emphasize the technological and design contrast, while
adding his own expertise of reverse engineering for the Samsung professional
managers.

The Fourth Wave: Mr. Lee, Kun Hee had been in deep uneasiness throughout 1992 and
1993. He had been sleepless and had completely lost appetite, even losing 10
kilograms one year before the Frankfurt Declaration of “New Management.” He had
constantly emphasized change and reform including a 1987 proclamation of the second
rebirth of Samsung. But no signs of change and reform were visible. He knew that
Samsung was in deep trouble, and unless Samsung quickly changed to adapt to the
rapidly changing environment, the entire system would be dismantled by global
competitors sooner or later. It was precisely at this juncture, that a series of three
dramatic events took place to prompt a long journey of “New Management.”

On June 4, 1993, Mr. Lee presided over the technological advancement staff meeting
for Samsung Electronics in a Tokyo hotel. There were about 10 persons attending
the meeting including Mr. Fukuda, Shigeo, a Japanese design advisor for Samsung
Telecommunication and Electronic Division. After the meeting, Mr. Lee invited 3 or 4
Japanese experts exclusively to his room. He seriously requested the frank opinions
from the Japanese experts, who Mr. Lee personally invited and recruited to Samsung
to bridge the technological and design gap between Korea and Japan. They initially
were reluctant to be candid. But as the meeting got heated, it became a Samsung
denouncing meeting. The heated meeting lasted from 6 pm in the evening till 5 am, the
next morning. Surprisingly, Mr. Fukuda personally submitted to Mr. Lee a written
report documenting all the design problems he had faced while working at Samsung. It
documented, the technology Samsung must secure, proposal for the commodity

38
development process, issues of design management as Samsung was planning to enter
the operational division system, especially focusing on the gap of view point of design
between managers and designers.

Mr. Lee Kun Hee read the report thoroughly many times during his flight from Tokyo
to Frankfurt, and grimly realized that his 6 years of reform effort had been a futility.
Before the flight he received a video tape prepared by the in-house broadcasting team
belonging to his Office of Secretariats. This was a 30-minute rundown of the
Samsung washing machine assembly process. It documented how defective products
were mass produced without any corrective measures.

He watched the tape upon arriving in Frankfurt and immediately called Lee, Hak Soo,
the head of the Office of Secretariats. He ordered to tape record his voice and firmly
said, “Is this the net result of change after my 6 years of emphasis on quality
management? Let each of the presidents and executives report to Frankfurt
immediately. I am going to manage everything myself personally.”

So the long journey of his lecture series started in a Frankfurt five-star hotel,
Kempinski on June 7, 2003. Mr. Lee personally took the podium to lecture on an
average of 8 uninterrupted hours, once lasting for a straight 16 hours. The meetings
were for the 1,800 Samsung top managers, and conducted over a period of four months.
The hours of the meetings, around 10 in all, added up to a total of 500, taking place in
the best hotels in Frankfurt, LA, London, Osaka, Tokyo, and Fukuoka, between March
and June of that year.

The contents of the lecture series were recorded and transcribed in 8,500 printer
pages. It was about the Samsung reform in the package of “New Management,” made
popular in Korean society in general even today in the catch phrase “Change
everything except your wife and children.” The transcribed contents were summarized
into two 200 page books of Samsung reform textbooks, “Samsung New Management:
The Change Must Start From Me” and “The New Language of Samsung People: Let Us
All Go Towards One Direction.” Every executive would allocate one hour each day to
read the text in rotation, and the text was written in cartoon book form for those who
would have difficulty in reading, and also the texts were translated into 10 foreign
languages including English, Japanese, Chinese, and Malay language for the overseas
reading-discussion sessions. Furthermore, a special task force was organized to

39
carry out the “New Management.”

The Fifth Wave: In early July 1993, Mr. Lee called Secretariats’ Head Lee, Hak Soo
and told him over the phone, “Start the 7. 4. system immediately.” It was meant to
readjust over 200,000 employees’ work hours from 7 am in the morning till 4 pm in the
afternoon. After some resistance and delay, the system was put into practice 5 days
after the phone call. Mr. Lee wanted to instill behavioral shock, in addition to the
symbolic reform effort. He had shown a tangible symbol of change for all Samsung
employees who were reluctant to change, despite the successive waves of
communication to change. Some observers asserted that this all-out behavioral change
of the system truthfully provided a momentum to change the whole Samsung mindset.

The 7. 4. system meant to accomplish five fold objectives. (1) Change of mindset
through shock treatment. (2) Improve the quality of individual life as the employees are
set free from the traffic jam by avoiding the traditional commuting hours. (3)
Cultivation of T-type individuals (multiple specializing experts or holistic knowledge
workers). (4) Alleviate the societal transportation problems. (5) Faithful family life, as
the time saved from the traffic jam would allow the employees to spend more hours
with their families. As soon as the new commuting hours was put into practice, the
employees spent the extra hours taking courses in foreign languages and computer
skills. This system lasted until 2000, when it was replaced by flextime system
reflecting the digital age.

The Sixth Wave: On March 9, 1995, at 10 am, 2,000 managers and employees were
assembled from the Koomi Factory, near Taegu. It was a cloudy day. There were signs
of quality products such as “quality is our pride.” Suddenly every participant was
dumbfounded to eyewitness a shocking happening: At a signal, some 10 employees
with large hammers in their hands started to break down the boxes, which were full of
freshly made cellular phones, key phones, and facsimiles amounting to 150,000 sets.
The broken sets were torched. The burning ceremony of the defective electronic
products started when Mr. Lee presented some 2,000 cellular phones to Samsung
employees as the New Year’s Day gift. Many turned out to be defective products. It
was soon learned that the products in the market contained numerous poor quality
products, and all of them were recalled and put into the smashed and burning boxes
including 150,000 mobile phone sets. “Let us never make a single defective product
even at the cost of our production lines being shut down.” The leaders of the burning

40
ceremony solemnly pledged, and it deeply touched each participant’s heartstring.

Mr. Lee has special affection for the mobile phone, even saying: “There shall be a day
when every citizen of the world will carry a cellular phone.” It was a time when the
machine was so expensive that only a few rich businessmen used it. So Mr. Lee’s
anger was very high. He commanded, “Collect all the products in process, in the
inventory, and even the products distributed in the market, and burn them all. Haven’t
we talked about quality in the last several years? Let every single individual of the
factory watch the burning ceremony.” All the product development and manufacturing
processes were closed down, and started all over again from the ashes and scratches
of the smashed and torched products worth some 1.5 billion won.

Samsung Group was directed to prepare for the emerging China market under a new
catch phrase by Mr. Lee, “Preparatory Management,” (Chang, Sue Myung, Kitaoka,
Doshiaki, 2006) (Kim, Yu Jin, 2005) He promoted the status of the China Samsung
Branch and appointed half-retired China Expert, Kim, Yu Jin, the president of Samsung
China, to expand and upgrade the Chinese operation, and there has been a strategic
expansion in the area linked to other world wide operations with synergy effect.

The Seventh Wave: Samsung Electronic benchmarked GE Jack Welch, Sony, and other
electronic giants. So the Samsung Group had secret plans for the downsizing and
restructuring as well as process reengineering and TQC, as they were the norms of
the day. But Samsung was hesitant to apply restructuring, because of the general
culture in the Far East of lifelong employment. Then the IMF crisis came in December
1997. Subsequent IMF control of the Korean economy was a disaster or curse for
many Korean firms with a very high debt ratio, and as a result, Daewoo group under
Kim, Woo Joong, who was then the chairman of the Federation of Korean Industries,
representing all the big business in Korea, was completely dismantled. However, the
curse for the Samsung Center for Structural Realignment was a blessing as the saying
goes, “heaven helps those who help themselves.” Samsung could concentrate her
resources in a few selected business targets and some 30,000 employees, or 20% of
all the employees, were terminated. However, Samsung also exerted her effort in
helping 18,000 fired ex-Samsung members to find reemployment in other places.

In the process of well calculated seven waves of dynamism of leadership and forceful
communication processes, there is a steady undercurrent of Lee, Kun Hee’s

41
penetrating insight on the problematic Korean organizational culture and insight to
manage them: (1) catfish theory—predatory catfish in the mudfish breeding pond would
chase around the weaker, and mudfish would grow up to be healthy and delicious. (2)
Carrot theory—first grade horse trainer would use only carrot instead of whip, and we
should also use more carrots in employing prizes rather than punishments. (3) Hind leg
theory—sneaky persons in an organization would employ hind leg tactics to trip good
runners. This kind of person is unforgivable. (4) 5% theory—in any group or
organization, there are well performing 5% and falling behind 5%. When the winning
5% is allowed to lead, the group or organization can be an excellent performer. But if
the losing 5% is allowed to lead, the group or organization will face a disastrous fate.
(5) One direction theory—if everybody starts to paddle in every direction in a ship, the
ship reaches nowhere. Everybody must paddle in one direction towards a fine
performance. (6) Bottom-up reform theory—if we ignore the voice from the bottom,
we shall die. Criticism from the bottom shall be encouraged to obtain fresh ideas and
make our organization lively.

From this wording, we can tell that Mr. Lee has an outstanding communication ability
for labels and catch phrases, coining his ideas in unique ways so that many of the
everyday incidents in the system can appeal to the listeners in a more personal and
vivid manner. And from the first demonstration of his leadership in the Frankfurt
declaration of “New Management,” Mr. Lee firmly established his leadership and
charisma, that his sustained ripples-more or less the joint products of the Center of
Structural Realignment, professional top managers and himself have well headed in and
out of Samsung. Despite good performances, Mr. Lee continues to speak of crises and
therefore encourages the professional managers to take risks, so that the system will
remain full of energy and passion geared towards employing the good strategies from
the Center of Structural Realignment.

The dramatic dynamics of the leadership took the form of sustained and well timed
sets of communication for the whole Samsung Group in a holistic and organic
behavioral modification stimulation following the Freudian psychoanalysis, and
Bandura’s social learning and modeling (benchmarking, process reengineering, QC
circles, speedy decisions, speedy and light weight inventory, marketing and HRM
towards organizational learning) fully employing Skinner’s operant conditioning. The
dynamic is also explained in the general systems theory of holistic approach or
interdisciplinary (multidisciplinary) approach and/or multi methodological validity.

42
The transformation dynamics can also be explained from the perspective of complexity
theory, also known as the butterfly effect. A remote fluttering of a nearly invisible
butterfly wing will, sooner or later, strike with a formidable force in an unexpected
zone, thereby creating a paradigm shift. In the case of Samsung--from conservative
bureaucracy to an innovative venture type firm. But in the process, one would
inescapably notice a sustained flow of energy from the original butterfly wing
movement. In complexity theory, the emergence of a paradigm is towards a seeming
chaos, but the source lies in the original movement, or in this case, design. And the
emerging outcome is translated in the statistics, with Samsung Electronics and the
group reborn to shape the core competence of technology and global brand names in a
knowledge-based organization. Students of organizational development would think of
unfreezing freezing for the organizational change.

Reconstruction of Lee Kun Hee’s Leadership; Goal-Oriented Communication of Stragetic

Learning towards Paradigm Shift; In order to reconstruct Lee Kun Hee’s
communication of strategic learning, we should examine the major current of
leadership studies. Robert Tannenbaum, Irving R. Weschler, and Fred Massarik(1961)
defined leadership as interpersonal influence, exercised in situation and directed,
through the communication process, toward the attainment of a specific goal or goals.
This definition has been borrowed by many authors, as it clarifies the relationship
between leadership and the comunication process.

Ralph M. Stogdill is one of the gurus of leadership studies. In 1948, he changed the
tide of leadership studies from personality or individual psychology level of “trait
approach” to his proposal of “situational approach” to expand the area of studies to the
social psychology and group psychology level. He organized a leadership research
center at Ohio State University in 1966, and published “Handbook of Leadership” in
1974, surveying over 3,000 books and articles on leadership. He classified different
definitions of leadership in the following types;

1. Focus of group processes

2. Personality and its effects
3. The arts of inducing compliance
4. Exercise of influence
5. Act or behavior

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 6. A form of persuasion
7. Power relation
8. Instrument of goal achievement
9. Emerging effect of interaction
10. Differentiated role
11. Initiation of structure

Bernard M. Bass succeeded Stogdill and published “Stogdill’s Handbook of

Leadership,” (1981), and in “Bass and Stogdill’s Handbook of Leadership” (1990), he
added the following:

12. Combination of Elements--combining a large set of meaning including

personality, and power to be a transformational leader as a skilled and
knowledgeable change agent with power, legitimacy, and energy among others.

One can find rare entrepreneurship from the second generation Korean owner-CEO in
Lee Kun Hee who combined 5 type behavioral and 6 type persuasional leadership. He
also employed 7 type instrument of goal accomplishment, and 11 type power
relationship, and finally 12 type leader of transformation, all combined towards a long
range creative communication process to achieve the desired goal(s). His creative
communication process took the form of behavioral (1,3,5,6,7 waves) and persuasive
manner (2 and 4 wave), and fit into the behavioral psychology of 3-S theory--Short,
Shock, and Surprise--in the twenty odd year time span between 1973 and 1997.

Some Notes on the Korean Culture: Jim Collins, in his book, “Good to Great: Why Some
Companies Make the Leap…and Others Don’t,” (2001) described the big leap
companies as characterized with sustained persuasion, as opposed to the non-leaping
companies. Would Lee, Kun Hee have been successful had he followed the Jim Collins
pattern instead of his powerful shock waves of unique persuasion? Had Park, Jung-hee
taken more democratic measures, could he have been successful in bringing forth the
Han River Miracle, in which the poorest country in the world in the early 60’s
transformed itself into its present state of 10th to 13th economic power in the world?
There is no easy answer to these questions. However it would be helpful if we have a
little insight into the Korean culture. US journalists were constantly condemning Park
Jung-hee’s treatment of his ever critical Korean opponents, including the Korean
leftists. But ex-Singapore Prime Minister Lee Kwon Lew and ex-Malaysian Prime

44
Minister Mohamad Mahathir counter-acted USA’s zeal to spread American style
democracy by raising the theme of Asian culture’s “authoritarianism.”

It is a little queer that Jack Welch is not labled authoritarian when he ruthlessly
executed restructuring, or when American firms easily laid off their employees, which
is unthinkable in the ordinary Korean and Japanese context. On average, Korean and
Japanese supervisors do not have any right to hire or fire their immediate subordinants,
unlike average American supervisors. The Korean and Japanese supervisors have
relatively less position power compared to their American counterparts. In other
words, the issue is not so clear-cut

Furthermore, political scientist Gregory Henderson, who had been in Korea between
1958 and 1963 as a high ranking US diplomat, discussed the high Korean political
motivation resulting in the vortex of politics caused by homogeneity and centralization.
(1968) However, Hur (2000) agreed with Henderson that the Korean culture is
highlighted by high political motivation and consciousness, but disagreed with the
causes of the phenomenon. Instead, Hur (1993) contrasted the Confucian cultures in
Korea, China, and Japan.

Confucianism has been developed in two schools: the more idealistic Chutzu school (朱
子學) and the more pragmatic Yangming school (陽明學). Both elements exist in China,
but Korea had only the Chutzu school and solely deepened it into the Korean Sungrihak
(性理學) while Japan had traditionally only the Yangming school. That explains why
Japan quickly dismantled her old system before the appearance of Commodore Perry’s
“Black Ship,” while Korea vehemently resisted both French and American Far Eastern
Fleets at Kangwha Island, the Seoul gateway, the site of the present day Inchon
Airport. In fact, Korea boasted Chuksawuijung (斥邪衛正), “reject evil and uphold
righteousness,” to delay Westernization/industrialization, only to become prey to the
Japanese occupation.

Of the five Confucian countries in Asia--China, Korea, Vietnam, Japan, and Ryukyu
(present-day Okinawa)--only Korea, China, and Vietnam applied nation-wide
examination systems to recruit governmental officials. In Japan, the power elite,
Samurai (swordman) refused to adopt the system, lest they lose their power status. In
Korea, the examination system had been given from AD 958, the time of King
Kwangchong, Koryu to date. The traditional examinations were given in three tiers of

45
rural examinations of Hyangshi (鄕試), Whaeshi (會試), and finally at the Royal Court,
Chunshi (殿試). The contents were Chinese and Korean history, the ability to compose
poetry in the ancient Chinese language, moral code, and Confucian philosophy, etc. So
upward social mobility was sought through hard and persistent preparation for the
series of examinations, in order to attain high status and wealth for the family. And the
importance of the idealistic/ideological humanities and poetry students have dominated
Korean culture, as life-long study promises eventual power and status for its males.

The typical four distinct classes in the Far East were described identically in Korean
and Japan--Sanongkongsang or Shinokoshio (士農工商, aristocrats, farmers, artisans,
and merchants)--but have different interpretations in actual meaning. Sa (士) is
interpreted as Sunbi, humanities-scholar/poet/government official in Korea and in
China, while the same Chinese character Shi (士) is read as Samurai,
swordsman/government official, in Japan. A typical Japanese family is high in
paternalistic color, men having economic power in the family rather than the woman,
whereas in a typical Korean family, men were indifferent to monetary matters because
they were always engaged in the study of literary works in preparation for the
examinations. The Samurai versus poet-scholar distinction also explains why Koreans
are more individualistic and expressive, and less action-oriented as opposed to the
more group-oriented and instrumental (pragmatic behavior) oriented Japanese Samurai.

Amitai Etzioni (1961), in his study of organizatonal types, employed the concept of
compliance to draw congruency, which again is subdivided into (1) coercive-alienative,
(2) renumerative-calculative and (3) normative-moral types. Perhaps, the Japanese
Confucian culture has elements of type 1 and type 2, coercive-alienative and
renumerative-calculative, while the Korean Confucian culture has elements of type 1
and type 3, coercive-alienative and normative-moral. One being action and
behavioral communication oriented while the other being more expressive verbal
communication oriented, if the two share the common denominator of being vertical. In
the traditional Korean society, the man of action, such as those in military professions,
technicians, and merchants, were despised with the exception of farmers, as opposed
to the relative higher position of the men of action in the traditional Japanese society.
The influence still remains in the air of both Korean and Japanese cultures.

6. Conclusion: Samsung Contributions towards Korean Management

46
There is renewed interest in the family type corporation. Futurist Alvin Toffler, in his
book “Power Shift” (1990), spoke highly of the family business. He noticed the
strength in terms of flexibility, elasticity, and adaptability. In fact, there were new
boom of venture incorporations started in the US since the 1980’s with all the rapidly
developing hi-tech. Venture is a form of business looking towards the future, the
potential market that will open up for a limited duration to be captured at the right time
and harvested (terminate the business) at the right time. That is why Whang, Chang-
kyu, Samsung Electronics President for R&D Division, emphasized that we are all
nomads in the new digital age of nomadism. He is also famous for establishing
Whang’s law, that semiconductors would double its capacity every year, as opposed to
Moore’s law, which states that the memory performance doubles every year and a half.

Window of Opportunity, Jeffry A. Timmons, New Venture Creation: Entrepreneurship

for the 21st Century, 4th ed. Burr Ridge: Irwin, 1994: pp 90 -92

(1) The Samsung model of transformation can be summed up to the second generation
owner CEO organized a powerful strategic realignment center. It is for boundary
scanning, for strategy formulation, powerful control, and coordination function with
global level professional techno-managerial executives, who in turn exercise full
autonomy and are encouraged and compensated to experiment and exercise
entrepreneurship.
(2) And leadership of Owner-CEO is concerned with the buildup of the long range

47
strategies and core competence, and they are not expected be perpetual as in the
case of the industrial age. In knowledge based economy everything is transient.
And the role of Owner CEO is to act like a scaled up venture capitalist looking for
the future market and to insure the competence and capability buildup to go into
the window of opportunity at the right time and come out of the window also at the
right moment.

What contribution has Lee Kun Hee made for the Korean Management? Most
global corporations have left big marks on management theories, and. Lee Kun
Hee of Samsung Electronics is no exeption. Many people make erroneous
assumptions that management theories are developd solely by the scholars of
management. Of course, there are such cases. Max Weber made contributions to
the science of management and of the public administration with his theory of
bureaucracy. But there are cases of working managers who also wrote theories
of management, including Henri Fayol and Chester Barnard. The case of
operations research, the forerunner of contemporary mathematical management,
was solely done by a scholar in the desperate war effort and for the process
management of military weapon development.

But there are many cases of a manager’s effort to improve business also leading to
the development of important management theories:

A) Henry Ford I developed the conveyer belt system in the 1920’s, which is a
mass production system still in use today. With this mass production system,
the USA won WWII, even beating technologically-advanced Nazi Germany.
B) GM developed division system and borrowed capital system, and these have
become the norms of contemporary firms.
C) GE under Jack Welch in the ‘70’s, initiated the techniques of restructuring,
downsizing, outsourcing, and sigma quality control systems, all which have
become the norms of contemporary firms.
D) Toyota’s Kanbang sytem, zero inventory, and Kaizen have been known as key
features of Japanese management, and in turn, they provided the impetus of
important management theories developed by the American management
scholars including TQC, TQM, BPR, learning organization, knowledge
management, and organizational culture.
E) An indepth analysis of the case of Fujitzu in the ‘80’s stimulated American

48
 scholars of management and their study of the concepts of core competence
and C & C corporate culture.
F) James Abbegglen (1958) examined five major Japanese firms and wrote the
book, the Japanese Factory, a classic and pioneering text, which analyzed
cross cultural management.

In the same context, what contribution has Lee Kun Hee made towards the
development of the Korean management, specifically in the process of shaping
the transformation of Samsung Electronics together with the transformation of
the rest of Samsung and other major Korean companies?

a) Lee Kun Hee introduced the first Individualized American meritorious

system in the Korean management where the employees would be
compensated automatically based on a criterion system of years of
employment, against the strong background culture of community and
common life sphere. This system was later adjusted to group level
differentiation after trial and error.
b) He has adopted the first Anglo-American open employment system of
hiring top and middle managers from outside of the firm labor market,
where traditionally the managers were solely promoted from the inside
labor market or from within the company.
c) He has revolutionalized and upended the Korean Chaebol’s traditional
passing of inheritance to the eldest son through a persistent cultivation
of inhouse venture, thus building a new tradition of establishing
‘notorious’ inheritance legitimacy.
d) He has established a model of leadership and communication of strategic
learning to break the high wall, before the quantum leap of a firm from a
developing country including the transformation of an industrial firm into
a post industrial firm, a bureaucratic organization into a knowledge
based organization and learning organization through persistent
cultivation of core competence of technology and design and brand
image.
e) Whereas the Korean blood of other large corporations consisted mainly
of law and economics majors, reflecting the contemporary royal court
examinations and also the need for government lobbying, as most of the
high ranking government officials came from a law and economics

49
 background, he revolutionized the workforce by appointing those with a
techno-MBA background as top level managers.
f) He also presented a new model of the Korean Chaebols’ owner-manager,
with a troika system of owner-manager, strategic planning board, and
autonomous professional managers, whereas it is still common for the
owner-managers to directly manage their groups.
g) Finally, he demonstrated that the second generation owner-manager,
too, can exhibit strong entrepreneurship.

A departing reference must be made about the role of the Korean government in the
successful accomplishment of Lee Kun Hee’s paradigm shift. The Park Jung Hee
government, from the start of the 1st Economic Development Plan, included the plan to
develop the Korean electronic industry, and in 1979, the government set up the
Electronic and Telecommunication Research Institute and developed the first Korean
semiconductor, 4K DRAM and 32 K DRAM to lead all the civilian research institutes.
Major Korean Chaebols including Samsung, LG, Hyundai, and Daewoo all started their
research on semiconductors. However, it was only Samsung who outpaced the
government research institute by developing 64K DRAM, 256K DRAM, and 1M DRAM
successively between 1982 and 1985. The rest of the Chaebol groups all withdrew
from the semiconductor industry due to the high uncertainty and astronomical cost,
and the present day Hynix, originally the LG Semiconductor Division, was taken over
forcefully by the Kim Dae Jung government to be awarded to Hyundai Electronic in
return for Hyundai’s cooperation with the Sunshine policy, but has faced restructuring
to date. The homeless Hynix has been surrounded by scandals of illegal exportation of
technology to China. (Park Seung-duck and Kim Chung-duck, 2006)

50
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