South Korean business environment: 'chaebol' organizational structure of the firms

In order to do prescreening of the Korean business environment for getting an understanding of any potential obstacles for marketing KONE solutions there, let's look at the organization structure that is typical for biggest Korean firms. 

According to Tu et al. (2002), an organizational structure called ‘chaebol’ is common in South Korean business environment. Chaebol is a family-owned conglomerate, containing groups of vertically integrated firms. Each group may operate in a different industry and the only common link between these groups is the ownership. The internal trading between firms within a chaebol is typically high. E.g. in 1998, chaebols’ internal trading was 28 % of their total business transactions (Tu et al., 2002).

Tu et al. (2002) further explain that the South Korean government has had an important role in creating chaebols. Due to government policies, e.g. pricing in certain industries or financial incentives to enter new industries in South Korea, chaebols have often entered industries that are just emerging in the country. In the initial phase, there has been typically a lack of suppliers and uncertain customer demand, and for this purpose chaebols have acquired or established the supplier function themselves and integrated it vertically to their own business. One interesting fact here is also that government has usually given financial support for the firms which have the biggest market share in the particular industry. This has lead chaebols to have market share as one of their main financial objectives. 

When looking at this issue from our project’s point of view, it seems that big part of the value chains in several industries may be located within the same chaebol.  This could be a limiting factor to market our product, if the solution we plan to market is already available for the customer within their own chaebol. This factor will need to be included in the further analysis of our potential customers.   

References

Tu, H.S., Kim, S.Y. and Sullivan, S.E. (2002). Global strategy lessons from Japanese and Korean business groups. Business Horizons (March-April): 39-46.