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Management Report

Management reports, briefs and video-clips issued by Samsung Economic Research Institute

Seven Major Issues for Global Corporate Management in 2010

Seven Major Issues for Global Corporate Management in 2010

SHIN Hyung-Won

Jan. 25, 2010

Transcript

Welcome to our video program. I’m Hyung-Won Shin from the Management Strategy Department.

Today we’ll take a close look at major management issues facing global companies in 2010. Amid drastic changes in the corporate environment, including increased earnings of major companies and the stabilization of the financial markets, there is growing curiosity about the strategies global companies will pursue.

An in-depth analysis of the top companies in each industrial category of the Fortune Global 500 was done to find the tone for global corporate management. The analysis found two key terms: the establishment of growth foundation and risk management. Based on these terms, major management issues facing global companies can be divided into seven categories.

First, global companies will focus on strengthening leadership in existing businesses that had contracted with the recession.

Companies will actively respond to the greater demand coming from the economic recovery. To bolster market leadership, many global companies are announcing plans to make aggressive investments that center on core business areas, breaking away from their recent defensive strategies.

Japanese electronics companies are attempting to regain the lead by focusing on technological development and setting 2010 as the debut year for the prevalence of 3D high-definition TVs. Sony plans to incorporate 3D technology into about 50% of its HDTVs by 2012.

Second, there will be fiercer competition to gain the upper hand in emerging markets. Emerging markets were relatively less affected by the financial crisis and have become the basis to increasing corporate earnings. Therefore global companies are minimizing to core functions and lowering prices, while intensively investing in regional-specific products that target emerging countries.

In particular, companies are increasingly reorganizing local sales networks and reinforcing local R&D. Fujitsu is planning to increase its local product design ratio (e.g., printers and storage) for Chinese companies from 30% to 70% by 2011.

Third, efforts are underway to secure new growth engines. Companies will resume the exploration of new businesses and investments. In particular, green businesses are enjoying a rise in popularity as a new growth engine. Investments in various green- related areas ranging from new and renewable energy that apply environmental technology such as wind power and rechargeable batteries and environmental infrastructure will increase. IBM, for example, is planning to develop a lithium-air battery, which is ten times more advanced than existing lithium-ion batteries. Mitsubishi Corp. is also actively engaged in such infrastructure as water and sewage management and sea water desalination projects in the Middle East and China.

Fourth, global companies will become actively involved in M&As. Companies previously focused on holding cash will shift towards aggressive M&As. Increased activity by private equity funds will also encourage the expansion of the M&A market

In particular, leading companies are expected to conduct M&As that seek both forward and backward vertical integration, breaking away from their existing M&A strategies that pursue specializations or business enlargement.

Oracle is on track to acquire the hardware firm Sun Microsystems, while Pepsi is reviewing the idea of acquiring a large retailer. And GM took over a parts manufacturer. All of these attempts reflect corporate needs to reduce uncertainty in the corporate management environment.

Fifth, preparations are underway to better cope with a double dip. Due to lingering financial anxiety and ambiguous timelines for exit strategy implementation, preparing for a possible double dip recession has become important. This is due to concerns over possible defaults on US commercial mortgages and greater country default risk for deeply indebted countries.

In particular, with a high possibility that there will be a worldwide implementation of exit strategies in 2010, if the timing and method of such actions prove to be inappropriate, significant negative side effects will likely emerge. As such, concerns about another financial crisis still remain high.

In this context, global companies, while adopting more aggressive management strategies, are showing a preference for joint investments as part of efforts to reduce the initial burden of investment.

Sharp, for instance, is planning to build a joint solar cell panel plant, an area which the company is pursuing as a new growth engine, with Enel, the top electronic power operator in Italy.

Sixth, knowing how to respond to the volatility in the foreign exchange rate and oil and raw materials prices has become important. As real assets such as oil and commodities are becoming financial assets, price volatility has increased and forecasts have become more difficult to make.

An increase in the dollar-carry trade, a phenomenon driven by the exploitation of interest rate gaps between countries, may cause a rapid increase in international capital flow. This would deepen financial instability. Against this backdrop, companies are engrossed in increasing their share of in-house supply of materials. ArcelorMittal, for example, a steel company in Luxembourg, announced its plan to acquire and develop its own mines in 2010.

Seventh, companies are exploring ways to preemptively respond to green regulations. As new regulations such as those that push for reductions in global greenhouse gases are highly likely to be adopted, the competition structure for companies will change significantly in 2010.

Global companies are attempting to better cope with stronger environmental regulations and use them as a competitive advantage by setting more aggressive reduction targets than their governments.

Despite the absence of mandatory greenhouse gas reductions, Dupont has set its reduction target for 2015 at 15% higher than the 2004 level. It is also calling for the national adoption of climate change-related regulations with nine other large US companies.

With these changes in management of global companies, Korean companies should keep their eyes on a paradigm shift in the global economy. They should also lay the foundation to leverage the transition to green businesses and mobile markets as an opportunity for a new leap forward.

As for emerging markets, Korean companies should go beyond simply meeting local needs and aim to fully adapt to the locations in which they operate. Also needed is to enable local management to make speedy decisions by increasing their autonomy as well as establishing a symbiotic relationship.

Lastly, despite escaping from dire economic conditions, Korea should focus on growth- focused restructuring. It should not adopt a passive form of restructuring that strives to merely survive but rather a plan that promotes the growth of core business areas while cutting out the non-core areas.

The year 2010 marks the beginning of the second decade of the 21st century. Despite the uncertain management environment, Korean companies should lay a foundation that can look ahead for another 10 years.

Thank you for watching. I’m Hyung-Won Shin.

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