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Lg Electronics Strategic Planning LG Electronics Strategic Plan Analysis Greg McMillan TM583 Strategic Management of Technology Professor Woody

Wu August 18, 2011 Introduction LG Electronics Inc. founded in 1958 and headquartered in Seoul, South Korea. The company is a major producer of consumer electronics and has over 70 subsidiaries that manufacture TVs, video and audio products, appliances, refrigerators, wireless phone handsets, air-conditioners, and communications devices. LG Electronics has annual revenue of about 23.8 trillion and employs about 66,600 people. LG Electronics mission is to be among the top five electronics brands in the Africa and the Middle East. This vision is simple and clear: venture into new markets and win the consumers by giving what they want. Capturing new markets and providing a strategic direction for all LG Electronics activities in the Middle East and Africa is the main target (Times of Oman, 2006). On the other side, many promising markets like Algeria, Sudan, Angola and some others whose economic power is growing strong are being neglected. LG Electronics is focusing again to regain those markets. The company will use a new marketing strategy such as using power retailers instead of using traditional channels of marketing like using dealers. Traditional dealers are losing their power whereas the power retailers are gaining market share like Carrefour (Times of Oman, 2006). The company is looking to achieve a turnover of $6 billion, to increase overall display sales to $20 billion, and to achieve a growth of over 22% by 2010. This will uphold LGs image as a premium brand, it will increase returns on invested capital, and will maintain product leadership and expand its business portfolio. LG Electronics continually pursues excellence in its endeavors to become a Super A brand (AME Info, 2008). Technology Strategy

LG - Lifes good, "Lifes good" sums up the LG brand identity perfectly. It represents the quality of life that LG strives to deliver to all its customers and the personality and unique nature of their innovative company. LGs technology strategy focuses on gaining advanced technologies to drive you forward. LGs vigorous commitment to R&D is demonstrated by their creation of the world's first Blu-ray disc and the nextgeneration flat-panel display. LG Electronics is increasing its focus on "Smart Technology" technology that adds convenience and joy to customers' lives. Smart Technology is a development philosophy that embraces sensitive communication with customers in order to provide products that everybody wants to use, and easily can. This customeroriented principle has become the most important development philosophy for LG, a result of collecting customer feedback and applying it to our products. In order to sustain leadership among global electronics and information technology companies, LG Electronics' R&D is driving the development of "Great Products" and strengthening core technological capabilities through a process of "select and focus" in key areas such as cell phones and digital TVs. In important business areas such as digital appliances and audio/video products, LG is establishing global leadership in development by focusing on premium products while enhancing R&D capacities in new product categories. Furthermore, in new-business areas such as home networking, GPS, and mobile A/V, the company is directing its efforts toward developing convergence products in response to the current trend of merging different technologies and products. What's more, the company is leading the new market by actively participating in pilot projects to develop new products with various service providers. Core Competencies Quality products and unbeatable technologies constitute LG Electronics' core competencies when faced with emerging new markets. In addition to supplying premium, flagship products such as mobile handsets, digital TVs, flat panel displays, and commercial air conditioners, LG focuses on acquiring advanced technologies to further enhance its global leadership. In 2006, LG Electronics developed the first ever disc player to support both Blu-ray Disc and HD DVD content and once again proved why it holds the top spot for the production of optical storage devices. What's more, LG produced a host of technological top products such as the world's most energy-efficient side-by-side refrigerator, the industry's first ever steam washer,

the ultra-responsive LCD monitor, as well as premium handsets including the A Cappella Music Phone, LG Shine Phone, and PRADA Phone by LG. LG has also succeeded in creating the world's first 60-inch single-scan Plasma panels and introducing first ever 3-up production of 50-inch PDP. LG is making huge investments in promising new business categories including car infotainment and next-generation displays such as OLED and flexible displays. And we are expecting to see results very soon. LG Electronics has established a global R&D system with 30 R&D laboratories around the world. This R&D system is realizing LG's Global R&D Vision by developing core in-house technologies and fostering a strategic driving force. To take a first step into this future, LG needs to develop competence in 4G technologies. Reason being that the remote control of life concept will work effectively through Wi-Fi technology for which the benefits that 4G technologies bring are essential. LG does not anticipate the development of competence in 4G to be of a great challenge for LG, due to its existing strength in 3G technology and the obvious technological capabilities it possesses in this area. However, LG plans to begin collaboration with other handset manufacturers and operators on the issue of 4G in order to facilitate the development of an industry standard. Of equally great importance for the remote control of life is that compatible devices exist which LGs handsets can control. Since LG has two other business units that in fact produce Digital Appliances, intra-company coordination can easily be used to produce devices that incorporate compatible Wi-Fi technology. However, in the longterm, success of LGs mobile phones will undoubtedly depend on the ability of their handsets to interact with devices from other manufacturers such as Philips or Daewoo. Due to the fact that LG is still a relatively small player, it cannot be expected that LG can force its technology on to the market as the industry standard. Therefore development of the technology has to proceed by means of collaboration with other manufacturers such as Philips, or Matsushita. Only an alliance with major electronics market leaders will allow LG to have an effect on industry adoption. Industry Dynamics The future of the mobile telecommunication industry is mainly dependant on developments of telecommunication infrastructures. With the rise of 4G technologies and platforms, radical or disruptive innovations in the saturated mobile handset industry are more likely to appear. The product life cycle of handsets is seen to be rapidly shortening as a consequence of cut-throat competition based on incremental innovations of existing products. Inevitably, mobile phone manufacturers must seek

for new ways to sustain their competitive advantage and enhance product differentiation and segmentation in the market. Drawing on the previous analysis, LG believes the future of the mobile handset industry rests in two market segments: the high-end market and low-end market. To create and sustain competitive advantages in both markets, according to Johnson et al. (2005), LG can have three strategic options which include a price-based strategy, a differentiation and strategy and a lock-in strategy. Technology Sourcing and Internal Innovation Customer satisfaction is always a prominent factor even in the development of an effective design innovation strategy. In its pursuit of continuous innovation, LG has been philosophically very 'Korean', as symbolized in its national emblem of a tai-chi like motif, which stands for balance. According to Chang Ma, the head of the Marketing Strategy Team who directed the LG Chocolates successful global launch, LGs industrial designs will incorporate a balance between concept creation and lifestyle creation, so that the needs, desire and dream of the customers must feature prominently in the overall value innovation process (Screenshots, 2007). This process might be further sped up by allowing customers to directly take part in the design creation online. LGs official website might potentially become a significant source of new ideas for up-to-date and personalized designs. According to Thomke & von Hippel (2002) manufacturers rather than users have traditionally been considered the most logical source of innovation for products and services. Despite this traditional expectation however, empirical studies of the sources of innovation in both the industrial and consumer goods fields have shown that users rather than manufactures are typically the initial developers of what later become commercially significant new products and processes. In the case of LGs website, visitors will be offered the opportunity to customize the exterior of their handsets online, by selecting specific case features, by offering customers this possibility, LG is tapping into a growing trend of customization, as evidenced by e.g. Nike and Adidas customized shoes, colors, materials, accessories, etc., while technology remains identical. At the same time, by letting customers express their creativity online, LG will be able to survey users preferences and needs in the high -end market as well as in the lowend market. By promoting interactivity and multi-directional communication, the companys website might become a valuable instrument to sense the global markets trends, periodically communicate with the end-users and build strategic customers loyalty programs. An additional benefit of online customization and

commercialization is that the dependence on operators and retailers will be somewhat reduced, thereby improving LGs bargaining power towards them. LG should consider modifying its business model and outsource some of the activities performed in its value chain. If we refer specifically to the manufacturing process, LG produced more than 97% of its mobile phones in-house in 2005, following mainly a traditional vertical model (Wu, 2006); compared to its competitors, LGs internal production is extremely high. Instead of manufacturing in -house, we suggest to take advantage of the specialization of external organizations in this area, such as Original Design Manufacturers (ODM) or Contract Electronics Manufacturer (CEM), also known as Electronics Manufacturing Services Suppliers (EMS). Companies using the services of the EMS providers can reduce costs in their supply chain, shorten the time of the product development process and, consequently, bring a new product to market in less time, thereby overcoming the time-pressures of product life cycle shortenings. Utilizing EMS providers expertise in manufacturing, LG would be able to meet and exceed growth expectations since EMS providers have the capability to fulfill demand overshot and effectively manage inventories (Barnes et al., 2000). Along with the optimization of the value chain and in order to achieve a successful cost focus strategy, LG can offer a portfolio of products with a reduced number of features. Budget handsets will be degraded in terms of features and functionalities, for those mobile users who want a simple phone without complicated attributes, but not sacrificing the design style. The R&D funds will be more or less split according to Tidds framework (2005) among three innovation activities: enhancement of industrial designing capabilities (Business investment), development of a low-end product platform (Strategic positioning) and investment in the development of next generation technologies (Knowledge building). As described in the previous section, LGs core competence resides in its designing capabilities, thus the majority of the R&D budget is devoted to strengthening this area and it will remain at approximately 70% for the next five years to come. In the low-end market, due to lack of expertise and internal development and production capabilities in total net sales this particular segment, LG requires a considerable amount of initial investment in setting up a low-end product platform. Therefore 20% of the R&D budget will go into this area and the amount will increase gradually. Once a low-end platform is well established and effectively operating, the resource allocation will decrease again. In addition, in terms of investment in next generation technologies, the projects do not require substantial financial commitment at the moment, as most of the projects are still at the initial idea generation stage of the innovation process; however, as time goes by, the

number will go up as some projects move into the development phase of technological innovation. To achieve its lofty goals, LG Electronics continuously recruits new talent and strives to increase its global business by consolidating R&D systems oriented toward local markets in strategic countries such as China and India. The company is also building international R&D capacity by pushing ahead on strategic alliances with other major companies in regard to standardization and new products. LG Electronics operates a global R&D system that consists of more than 30 research centers around the world. Through this system, the company facilitates open innovation utilizing innovative technologies from the outside, in order to secure core technologies and the early identification of future growth engines. In all these ways, LG is on target toward realizing its vision: Top Global R&D Product Development Strategy In the high-end market segment, which is highly concentrated, LG needs to find effective means to differentiate itself from its key competitors so as to succeed in the fierce competitive environment. Given this scenario, LGs excellence in industrial design will play a key role in the companys short-term as well as long-term strategy. Innovative and cutting-edge design will be crucial for LGs differentiation strategy (Porter, 1985) by launching stylish handsets, perceived as unique by the community of mobile users. Design is relatively easy to change, so the company can roll out new products at a faster pace than other competitors so that LG can always lead and benefit from new demands in the market. As such, continuous design innovation will be achieved by improving in-house capabilities, collaborating with design agencies and finally by allowing the customers to customize and personalize their handsets online. The mobile industry has reached millions of people over the world; to illustrate, in the UK alone there are more mobile phones than UK citizens (Short, 2005). Although developed markets are highly saturated, reports show that there is still growth potential in the low-end segment of these markets. More importantly though, emerging markets (e.g. China, Russia, India) show considerable market potential, also in the low-end segment of the market. Expanding LGs mobile phone portfolio to the price-conscious low-end market can be considered as a means to pursue a deeper penetration in the industry to increase market share. In the low-end market segment (both developed and developing countries), consumer price sensitivity is one of the key drivers to be able to successfully compete. But at the same time, LG has to take advantage of its level of design

differentiation from its competitors. Based on the framework developed by Johnson et al. (2005), to achieve and sustain competitive advantage, LGs innovation strategy for this specific segment will be supported by two of its elements: cost focus (pricebased) and differentiation. The cost-focus strategy will be approached by a process innovation and differentiation strategy by a product innovation. One way to approach the cost-focus strategy (process innovation) is by optimizing the value chain. Porter (1985) introduces the term Value Chain referring to the activities performed by an organization and how they are linked to its competitive position. In order to achieve cost leadership, a company must find and exploit all sources of cost advantage throughout the value chain. Bringing to the market a combination of reasonably priced models to offer a comprehensive range of products that suit all lifestyles and budgets, is not enough for LG to be successful in this new market. There still needs to be a degree of differentiation achieved in this segment; here is where the second element of the Johnson et al.s (2005) framework comes in: differentiation (product innovation). As mentioned before, one of the most important of LGs strengths is its capability to create handsets with a stylish design. Applying these capabilities to the low-end market portfolio of products can be the key element for LG to be successful and sustain a competitive advantage. LG must be smart enough to emulate its differentiation core competency by researching into consumer needs combined with innovative designs. Since the mobile industry is highly competitive, customers needs have to be accommodated in a more individual manner. The development of handsets with robust functionality, simplified user-friendly interfaces, appealing designs and pocket-sized comfort can help LG pave its way to become the 3rd largest mobile phone manufacturer in the global market by 2010 (Screenshots, 2007). In this way, LG can achieve its objective of growing its mobile phone business in this increasingly important low-end segment, while maintaining its brand premium position for the high-end market. Commercialization of the low-end models can forego through the same channels in developed markets as their high-end models. Specific attention should be paid to making sure that distribution infrastructure is in place in emerging markets, as this is a key component to commercialization. At the same time the marketing strategy, that so far only targeted the high-end market, should be adapted according to the specific needs of the low-end user segment. As outlined so far, we see LGs future success in design, i.e. that the focus should be on strengthening current strengths. Yet, it can be argued that design may only be a key to success in the short run and that LG cannot focus merely on design but in the

long term must equally address functionalities. Therefore a long term strategy shall also be envisaged. As we have outlined in the external environment analysis, we see convergence as the major force influencing the business environment. As such, we consider it important that our innovation strategy should also entail a long-term focus, taking care of convergence. Mobile phones, as we have seen in the threats and opportunity analysis, play an ever increasing importance in consumers lives. Already now, mobile phones are multifunctional devices. In the future, however, we see mobile phones as becoming a universal remote control of our lives. In other words, mobile phones will become the device that will be responsible for the flow of our daily life. Mobile phones will act as keys opening front doors and cars; they will switch the TV, radio on/off and be connected to our fridges doing our food shopping by ordering replacement supplies online. This vision is not a wishful thinking but indeed how mobile manufacturers (Nokia, Motorola) envision the future. Strategy to protect innovations A critical point in the competitiveness of this long term innovation strategy is also that LG protects its intellectual property through patent registration. Not only will this ward off competition, but it may also be beneficial for future licensing. However, in line with this, sufficient resources need to be set aside to be able to effectively uphold the patents, without which they are pointless. Commercialization is of course a major element to every strategy; however, seeing as the remote control of life is our long-term strategy that we see emerging within 710 years, we believe that it is not wise to make a commercialization plan just yet. Consumer tastes change so rapidly that any commercialization we propose now may be obsolete in 10 years time. Conclusion As we have seen at the beginning of this report, mobile devices of the future will assume greater, more personalized roles in our lives than they do presently. Convergence of technologies is the single most important factor shaping the trends of the future mobile phone market. This convergence will evidently put a lot of pressure on the mobile phone manufacturers to come up with distinctive value added features to cater for this extremely competitive market characterized by ever decreasing PLCs, lowering margins, rapidly evolving customer demands and increasing competitive pressures from low cost entrants. Mobile phone manufacturers thus will have to devise innovation strategies that will supplement

their existing strengths and allow them to tap into future avenues of innovation by being proactive in initiating processes that support this objective. In line with this philosophy, LG too has to build on its existing strengths of possessing strong technical design competence and having a technology leadership position in 3G technologies to cement its position as a major player for the future. They would need to incorporate improvements in their innovation strategy to cater for a growing low-end market by offering cheaper, customer focused alternatives to capture more market share, while simultaneously keeping the high-end customers in hand. To achieve this they will have to focus both on the differentiation/cost focus strategies as well as lock-in strategies to secure the future technology investments. This report has tried to provide a clear picture of how this can be achieved. Bibliography Accenture (2005) Convergence is now: Accenture Mobile Handset Study pp. 1 -12 AME (2008) LG aims for display sales of $20 billion in 2010. Retrieved February 27, 2009, from http://www.ameinfo.com/167966.html Barnes, E., Dai, J., Deng, S., Down, D., Goh, M., Lau, H.C. and Sharafali, M. (2000), Electronics Manufacturing Service Industry, Georgia Institute of Technology, National University of Singapore Datamonitor (2006a) Mobile phones in Europe- Industry Profile available at www.datamonitor.com Datamonitor (2006b) Global Mobile Phones- Industry Profile available at www.datamonitor.com Dean, J.W. and Bowen, D.E. (1994) Management theory and total quality: improving research and practice through theory development. The Academy of Management Journal, 19 (3), pp. 392-418 Freeman, C. & Soete, L. (1997) Economics of industrial innovation, Routledge: London Frost & Sullivan (2006) Global Mobile Handheld Device Markets available at www.marketresearch.com

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