Managing Diversified Firms through Socio-Cultural Mechanisms: A Focus on Korean Chaebols

Abstract

Based on theoretical considerations, this article investigates the socio-cultural mechanisms through which diversified firms are effectively managed without loss of control. Empirical results from extensive questionnaire surveys in Korea and the U.S. show that socio-cultural mechanisms such as shared values and corporate-level training were significantly and positively associated with divisional performance. In addition, socio-cultural mechanisms appear to have unequal effects on the corporate performance in societies with different cultural contexts. Statistical results show that socio-cultural mechanisms worked better in than in large U.S. firms, possibly because such mechanisms positively interact with high-context culture. Key words: Diversified Firm, Chaebol, Socio-cultural Mechanism, Shared Value, Inter-divisional Interaction 1. Introduction Theories from the strategy literature suggest that there is a limit to how much a firm can diversify, and, indeed, many large U.S. firms seem to have reached this limit in the early 1980s. The high level of diversification led to poor performance, and this, in turn led to massive wave of refocusing (Bowman/ Singh 1990; Markides 1995). However, in Korea, most business groups - called chaebols - have continuously expanded their scope of business, although such trend has been somewhat slowed down since the Asian Economic Crisis in 1997 ~ 1998 (Choi 1996; Choi/Cowing 2002). Moreover, the largest and most diversified groups such as Samsung, Hyundai, SK and LG have been among the most profitable economic entities. In fact, the existence of many highly diversified business groups in emerging economies including Korea has recendy attracted the attention of strategy researchers. Studies on developing countries indicated that business groups can be functional substitutes for allocation failures in countries where market mechanisms are inefficient and the transaction costs are high (Leff 1978, 1979; Caves 1989; Granovetter 1995; Khanna/Palepu 1997, 2000). However, comparative analyses focusing on the managerial - compared to the institutional (North 1990; Wan/Hoskisson 2003; Fauver et al. 2003; Peng et al. 2005) - side of diversification have been neglected in the literature on diversified firms. Suggesting that diversifiers in emerging economies may generate more benefits due to institutional voids (e.g., Khanna/Palepu 2000) does not necessarily mean that diey can successfully diversify to a higher level than their counterparts in advanced economies. If diversifiers in emerging economies fail to manage diversification in a cost-efficient way, the benefits of diversification due to institutional voids will be offset or exceeded by the costs of diversification, thereby deteriorating performance. Furthermore, with the rapidly improving market mechanisms in emerging economies, the benefits due to institutional voids may well decrease themselves (Peng et al. 2005). Bringing the management of diversification back into the picture, this paper tries to explain the seemingly puzzling performance of highly diversified through the lens of the organizational capabilities to maintain integration among numerous, diverse divisions operating in their own competitive fields. Specifically, I focus on the socio-cultural mechanisms, which have been increasingly emphasized theses days compared to the structural ones. While relatively implicit and indirect, socio-cultural mechanisms such as shared values and corporate-level activities may work well to increase the level of integration and resource-sharing within a diversified organization, especially in a society with high-context culture (Hall/ Hall 1990) like Korea. In the empirical section of the paper, I test the actual relevance of the sociocultural mechanisms to divisional performance with large-sample data obtained from mailing questionnaire surveys in Korea and the U.S.A. I also test whether successful Korean were better in leveraging the mechanisms so that they have were less vulnerable to the costs of diversification compared to large, diversified U. …