Introduction

LG Electronics India, a wholly owned subsidiary of the Seoul-based parent, bet big on India.
LGs first attempt to enter it (in the early 1990s, as Lucky Goldstar) floundered as a result of
difficulties the company encountered working with local importers. But since 1997, following
the Indian government's green light for a state-of-the-art white-goods factory at Greater
Noida, in the state of Uttar Pradesh, the South Korean company has scarcely glanced back.

LG’s hectic pace in the subcontinent has left other multinationals and local rivals struggling
to figure out the secrets of its success. Sceptics may wonder whether its competitive price
strategy will hold, but few doubt its long-term commitment to go on growing in India and to
transform its Indian operation from a useful bit player into a significant contributor to the
company as a whole.

For LG, it was a natural decision to enter Indian market, given India’s population and the
likelihood that the country would become a priority region in the way China has become.
From the outset, LG was determined to commit a lot of money to the Indian venture, but
when they came here in the early 1990s local regulations forbade foreigners from making
independent investments. LG therefore tried to work through exclusive importers or agents.
Around the end of 1996, the rules changed, and LG was able to go ahead on its own.

LG has accumulated experience in a number of overseas markets, stretching hack over 30

years. In 1974, South Korea was still a poor country, a small market with around 45 million
consumers. The only way to make the company's income grow was to export, to push
aggressively outside the home base. Over the years, LG has made many mistakes in
overseas markets, learning through trial and error, and it was that experience they brought to
India. They knew it was important, for example, not to downgrade the Indian market and
instead to treat it just as seriously as they would any developed market. That meant
preparing a full strategy and emphasizing good-quality products, the best technology, the
best network, and access to the best people. What's been different about LG is that they
made a full commitment — a very big investment — from the start, including setting up two
full-scale manufacturing facilities.

Having production in India has put LG in a strong position to tailor goods to the local
consumer. Yes, and so has the way LG invests in and trusts its employees. When one of the
competitors left for Thailand, for example, LG tried to recruit some of its engineers but
decided in the end not to hire them. In the ten years those people had been working for that
company, LG discovered, they had done little to improve the products it was trying to sell to
the local market. It turned out that this company's R&D department back home had been
doing most of the work, with only a few modifications carried out here. On the other hand,
LG imports the basic technology from South Korea, but 90 percent of the subsequent R&D
work gets done in India. LG spends more than a billion rupees a year here on research. That
commitment is something LG had learned in other developing markets.

Local Empowerment

Local empowerment is a very important part of LG strategy and 99 percent of the decisions
are made independently by Indian managers. In 2005, LG had only 20 Koreans here in India
— most of them in R&D — out of a total workforce of 1,700. The expatriates are called in
only when there is a problem, and they are generally seen as consultants, or advisers, to the
business. No Korean works in the administrative branch offices in India. And even at the
corporate level, in India, every decision is made by Indian employees.

The South Korean parent monitors the sales and profit commitments of India operations and
makes sure that they are meeting them. For example, LG had to get permission from South
Korea for the investment in their new factory near Pune. But a decision to invest in existing
operations can be made locally. LGs product managers in South Korea, don't interfere in
the way that their counterparts at some US and Japanese companies do. This means that
the company can bring new products to the market faster. Compare this with a Japanese
company in India where the designers there have to send their drawings back to Osaka for
approval. The process can take six months or more, which means that the company is late
bringing products into the market.

LG believes in employee empowerment. Following is one example, how employee

empowerment has worked to their advantage.

In 2002, LG invested in a new refrigerator production line and needed to buy a vacuum-
foaming machine, one of the most expensive pieces of equipment for this $10 million project.
LG could have sourced the equipment in South Korea, but the local employees thought it
might be better to buy from Italy. LG sent the local employees to Milan several times to
check the machinery — no Korean went on any of the trips — and they eventually made the
decision to buy there. Apart from being the right one commercially, this had an obvious effect
on their attitude. When the machine arrived, they worked night and day to install it — they
hardly went home. They felt real ownership and took full responsibility for implementation.

Another example is LGs policy of making salespeople responsible not just for sales but for
profits too. The salespeople therefore need to know the costs of the business — something
LG readily makes available to them. Many companies are reluctant to do this. But when LGs
sales people know that they are accountable for profits, they understand that they have to
control their marketing expenses and other costs.

A final example would be LGs decision to sponsor the Indian national cricket team. LG had
no idea what sport was popular in India when they first set up base in India. LGs Indian
employees decided that this was the right thing to do.

Generally, LG has a philosophy of empowerment. But this system of profit responsibility is

something LG devised especially for India. Kwang-Ro Kim, MD of LGEIL in 2005, was of the
view that that empowerment results in more hard work and innovation at the workplace, thus
adding to the company's productivity.

Kwang-Ro Kim strongly believed that if you trust people 100 percent, their dedication will
also be 100 percent. If they think you trust them only 50 percent of the time, that will be
reflected in their performance. That said, LG has a very good IT system, and that is
important. He trusts the human beings and the system, as it acts as a check and balance.
LG has good rewards — people can earn bonuses of up to seven times their salary in every
six-month period. But what's more important is that human beings like to be free; they want
to be allowed to be innovative.

LG gives people at least three opportunities, and they do not move people from one place to
another just because performance is poor. LG believes that the key ingredient for success is
passion : To succeed in their business LG does not need geniuses — just average brains
and big hearts with a lot of passion.

Building Leadership

In July 2008, 55-60 executives from LGEIL headed to the University of Michigan where
management guru C.K. Prahalad and other eminent professors imparted lessons in
leadership. This is the first time that the company is taking its leadership training to the
global stage. The objective: to develop global leaders with global skills. Says Y.V.Verma,
Director (HR) LGEIL: “As a global company in expansion mode, we need leaders with
globally relevant mindsets and leadership skills.” These future leaders were taught about the
challenges of operating in a business environment, their role in enhancing the value of their
“borderless” brand and being leaders in subordinate development.
Distribution Strategy

India is a heterogeneous nation, and it is important to have planning and resourcing

specifically for each region. LG therefore has identified various strategic locations where it
would be viable to set up administrative branch offices to handle local business, to make
decisions, and to act as independent profit centers. All the critical departments of the
company are represented in these branch offices: accounts, logistics, customer service,
marketing, and sales. These branch offices are distinct from the retail outlets where LG
products are actually sold. The latter consist of a mix of own branded shops in some large
towns-shops where you can buy only LG items — and independent, multi brand stores for
consumer electronics and consumer durables, where LG products compete with products
from other companies.

The locations LG chose for both the branch offices and the shops were determined by the
likely demand for their products and the viability of operating there. It was always obvious
that if LG could develop a presence in the interior, in rural areas — where 70 percent of the
Indian population lives-they would have an advantage.

However, there was a lot of resistance to open offices in remote areas sighting security
reasons. Before LG opened a branch office in remote Rourkela, for example, people said
that even Indians can't go there because of the security situation. But after three years, LG
finally went ahead and discovered that Rourkela is a big town with lots of buying potential on
account of the steel plant located there. The same arguments were used about Guwahati
and Jorhat, where LG opened branch offices.

LG has been prepared to go up-country. Away from the cities, it is growing at a rate of 50
percent. LG has been one of the quickest and most aggressive companies when it comes to
building the network — In 2005, LG had 2 branch offices in almost every big state in the
country, or 49 in all. LG is spread more widely across the country than most local companies
that have been in business here for 30 years.

Market Requirements

Indian customers are more complex than those of other markets LG is in. In contrast to
consumers in Latin America, for instance, they are less easy to satisfy. Indeed, anyone who
believes that Indian consumers are only interested in price misunderstands this market.
They are very smart and want a quality brand at a reasonable price. LG has competitors
products are 10 percent cheaper, and if the lowest price was all that counted they would be
number one. Take televisions. In more developed countries, people might want to buy a set
and keep it for only three years — but Indians are looking for a model that will last ten. The
fact that it is a bit more expensive doesn't matter, provided the quality and service are good.

Says Moon B. Shin, MD, LGEIL, the largest consumer durables company in India: “The
booming sector is creating a huge pool of high-income, technology-savvy consumers in India
who are more keyed into global lifestyle trends. They demand the very best in terms of
quality and innovation.” Not surprisingly, then, sales of high-end products like plasmas,
laptops, high-end refrigerators and front-loading washing machines are booming.

Capacity Strategy

LGs exports to account for 30 percent of local production, mainly to neighbouring countries
like Bangladesh, plus the Middle East and Africa. They export a little to Mexico and even to
Panama, but because of the geographical distance it is hard to make this profitable.

LG’s Chinese operations are ten times bigger in terms of volume than their operations in
India — LG has many factories in China — and exports amount to around 70 percent of
what is produced. But too much investment in one country is dangerous, so LG decided that
LG should also be an export operation. It's a good opportunity for LG and one that the
country needs to exploit generally, in other sectors as well, if it is to escape poverty.

Business Environment

For many people, bureaucracy in India means something bad, but LG sees a positive side to
it — namely, the stability that it brings. India’s governments have changed many times over
the years, but because of the strong bureaucracy, the basic policies are stable. The
authorities are also responsive. Take, for example, the budget announcement in 2005 by Mr.
P Chidambaram, India's finance minister, imposing a special additional duty on foreign
components for finished products. This move, around the time LG was completing its new
GSM mobile-phone-manufacturing plant, seemed to discourage investment in the country. It
was actually LGs Indian employees who took the lead by protesting through the newspapers
and by meeting officials to explain how the proposed duty could affect jobs, and in the end
the government accepted LGs suggestions.

There are problems with the electricity supply, the roads, and the infrastructure generally,
although the Indian government is doing its best to put this right. LG believes that these
kinds of obstacles give them an advantage in some ways. Marketing books point out that
when you are evaluating a certain area for investment, an obstacle represents an
opportunity, since without obstacles it is also easy for your competitors. In India, at LG,
people enjoy the obstacles. This is a country where expatriates often find it difficult to live,
and to survive, which is why many Japanese executives, for example, come here without
their families. Koreans, on the other hand, always come with their families. This not only
provides encouragement but demonstrates the sort of commitment needed to succeed.

Focus on implementation

Lot of foreign companies start out with the big ideas and aspirations, but most of these
companies find that they cannot achieve such aspirations in practice. Thinking and
implementing are different. Everybody knows that getting up early in the morning and
running is good for your health. But how many people actually do this? Many companies
hesitate, but LG has been successful because it has been positive and aggressive from the
beginning.

Leveraging IT

In our first year, LG didn't have any centralized IT architecture, though the sales
revenues touched Rs 90 crore. At that time LG operated only 10 branches. Today, LG is
spread over 47 branch offices. If you count some of the remote offices, LG is present at
220 locations across the country. It's simply impossible to run a company of this size
without IT; that much is evident. But IT also drives LGs own philosophy: The most
important element for a corporation's success is how much it can empower its
employees. In the 21st century, empowerment translates into information which requires
IT. When LG rolled out the Millennium (M) System (LG's global ERP), it was their first
enterprise-wide application and it was partially meant to network and empower their
employees.

IT's more noteworthy contribution to LG is replacing their offline learning model with e-
learning. With e-learning, every relevant person knows the features of a product before
it's even launched. We're now making this available to LG dealers on a pilot basis.

What LG expects from IT boils down to just one need: Information should be available
instantly to those who want it. They believe in IT so much that without the IT
department's approval they don't open a remote office, since they need to clear issues
like connectivity and communications infrastructure.

LG discourages physical documentation and the IT team has been asked to solve this.
Efficient companies are not known for cumbersome documentation, they are known for
swift IT-empowered decision making.

Main concern for the IT team at LG is to make LG the most efficient and service-oriented
company in the sector. IT already has the ability to provide updates on the status of
sales, dispatches, inventory, returns, damages, etc. LG expects IT to be able to make
demand forecasts so that they can synchronize production accordingly.

LG thrives on its dealer distributor channel. LG has a strong supply chain that connects
to their dealers and distributors across the country. Constant and IT-powered accounts
reconciliation helps LG ensure that they only have Rs 1 crore of bad debt in the market.
For a corporation of that size, this is good.

 In the initial days, when we had only 100 dealers, reconciliation was possible without IT.
Now, LG has 3,500 dealers and physical reconciliation is impossible. That's why we they
created www.lgdealernet.com. LG reconciles the account with 70 percent of the dealers
through this interface.

 LG sells over one crore of products a year. To keep inventory at a minimum it's
necessary to keep in touch with their vendors and suppliers. LG's IT team created
www.lgesource.com to make this possible and for LG to find out what's selling, what's
not, and why.

At LG, sourcing is done through an electronic bidding system. This allows LG to get not
only the best price, but also a wide choice of vendors. Once a vendor, is selected they
are provided a unique user ID and password and they merge into LG's system. The
portal informs them of weekly, monthly and yearly production and when they can expect
their next consignment.

Until the system was put into place, the purchase department was skeptical of dispatch
schedules and was often clueless of stock status. It led to improper planning. Now they
have shortened the production cycle and smoothened the process of sourcing from
vendors.

When LG India started its operations, they had inventory worth a month. Now we're at
half of that. The IT team has a mandate to shrink this even further. LG is also trying to
create a knowledge management system that's going to be connected directly with the
product development system and R&D.

LG India has set a target of Rs 45,000 crore ($ 10 billion) by 2010, of which exports will
contribute 30 percent. Given this goal, it is necessary to adopt the fast track approach,
which we can only sustain if we empower our people and business with equally fast
information systems.

Oracle 11i allows them to do just this. It will empower LG India to integrate seamlessly
with other LG subsidiaries worldwide. Secondly, managing four manufacturing plants
(including contract manufacturing units) is only possible using a robust ERP. MSystem
was great, but a time came when it was no longer possible to make additional
amendments to the system. Hence LG moved to Oracle 11i.

LGezbuy.com is LG’s answer to B2C requirements. The portal targets Non Resident
Indians who want to purchase goods for their families in India. It helps LG push slow
moving items, which are not always in demand. The site allows someone living in the
United States to buy a product at the best price and LG promises to have it delivered. 

LG is viewed as customer-centric company and they require strong customer feedback

mechanisms to keep this reputation intact. That said, they are only in the initial stages of
a large CRM initiative.

 
Kim talks to CIO magazine about the top three expectations from his CIO.

“One, I want LG to be the number one consumer goods corporation. Two, I want it to be
a premier marketing organization. Three, I want to see LG as a first-rate operations
company. These three goals have a lot to do with IT's contribution. The CIO's Key
Performance Index (KPI) clearly mentions these three objectives. He is evaluated by
how much he has empowered LG, how IT has pitched in to shrink decision-making
processes and how much operational excellence he brings in. I think this is only fair. We
judge the sales head on sales figures, and we should be able to judge the CIO on his
KPIs. Even I'm held responsible if the region under me does not perform.”

On the role if business intelligence, he says

“To create an intelligent enterprise, we have to depend on business intelligence powered

by IT. When we say that LG India wants to be a Rs 45,000 crore corporation, I see IT
providing the platform to achieve that vision.

Remaining a leader is tougher than getting to the top. You become everyone's target
when you are a leader. Staying a leader in the years to come will call for an innovative
use of our IT infrastructure.”

Rural Push

There is more to rural marketing than a dubbed ad and a smaller pack size.

Selling refrigerators to rural India is a challenge that could make the most determined
marketer weak-kneed. Just under half of India’s rural population is without electricity, while
prevailing attitudes against storing and consuming leftovers — seen as a sign that the family
is in dire straits — make the task especially challenging. When present, refrigerators tend to
be used only three months each year, for storing bottles of water and preventing milk from
spoiling in the summer.

LGEIL recognised that this market demanded a customised product. The LG team went
back to the drawing board and built a model for rural India based on cultural insight —
expanding shelves to more easily accommodate water bottles. Another key battle was to
convince rural consumers that vegetables would remain fresh in the refrigerator. With
consumers used to vendors covering their wares with a gunny sack, periodically sprinkled
with water to retain freshness, LG devised a product that replicated this, using a special
moisturiser to help keep vegetables fresh. The rural population is less exposed to a global
lifestyle and it is pointless expecting them to alter their ways,' notes LG Electronics head of
marketing in India, Sandeep Tiwari. 'A more practical approach is to adapt to their
requirements.'

Road ahead

LG has done a good job in consumer electronics and home appliances, and the market
share is above 30 percent — in some cases, above 40 percent. LG wants to build on it to
develop a strong position in communications, which means mobile phones, and in
information, which means desktop and notebook PCs. In these two areas, LG want to be
number one. PCs and mobile phones are the fastest-growing segments in India at the
moment.

In consumer electronics, a 40 to 45 percent market share is probably the limit, so LG is now

focusing on building a range of premium products that in the future could represent 10
percent of the earnings. LG does not yet manufacture these products here, because the
volumes are not big enough, but the future growth will be strong. LG is already assembling
LCD monitors here.

In 2005, LG was a $2 billion company in terms of sales. LGEIL wanted to be a $10 billion
business by 2010. They knew they might end up being only a $7 billion or $8 billion
business, but the reasoning was - by aiming to climb Mount Everest you will easily scale a
smaller mountain.

“We will make India the export hub for LG. This market will lead our global innovation and
new development” Moon Bum Shin, MD, LG Electronics India, in The Economic Times in
2010.

Highlights of LGs Operation Strategy

Operation Strategy Benefits

Empowerment of people Brings in innovation
Feeling of ownership and responsibility in
employees
90% of R&D done in India Speed to market
Focus on Local production Cost advantage
 Ability to tailor goods to local consumer
Association with Indian cricket team Brand salience
Sales teams responsible for profits as well Reduction in marketing expenses
Customized products to meet the habits of Better acceptance, better sales
rural consumers
Leveraging IT Reduction in bad debt
Quick decision making
Empowerment
Business Intelligence
Reduce inventory costs
Improve sale of slow moving items

References

1. Premium marketing to the masses: An interview with LG Electronics India's

managing director. By: Sinha, Pramath Raj, McKinsey Quarterly, 00475394, 2005
Special Edition
2. LG’s Intelligent Enterprise : An interview with LG Electronics India's managing
director. By: Rahul Neel Mani, CIO Magazine
3. Countryside competition. By: Balakrishnan, Ravi, Media: Asia's Media & Marketing
Newspaper, 15621138, 6/29/2007