SmartCEO feature article image

Why Samsung pays its stars to goof off

By Nicholas Varchaver and Verne Harnish 

Excerpted from The Greatest Business Decisions of All Time: How Apple, Ford, IBM, Zappos, and others made radical choices that changed the course of business
Copyright © 2012 Verne Harnish and Brian Dumaine 

Samsung had a problem. Its culture was static and inward-looking. Then, in the early 1990s, Lee Kun-Hee, chairman of the South Korean electronics giant, made a decision that would reshape his organization and create a blueprint for globalization. He sent a handful of the brightest young employees to far-away corners of the globe to immerse themselves in the culture, learn the language and build networks so that someday Samsung would know how to supply those markets.

What an amazing investment in the future. Today Samsung, based in tiny South Korea, has become one of the most well-known and far-reaching brands on the planet, with nearly $148 billion in annual revenue. The brand evaluation firm Brand Finance recently ranked it sixth in the world.

Samsung is one of many companies, from Apple to Zappos, that have made decisions so forward-looking that they have changed the course of business. Think about how brilliant it was for Apple to bring back Steve Jobs as CEO, after he had departed for a decade. After the company rehired him, he brought the organization back to glory.

As Jim Collins notes in the foreword of The Greatest Business Decisions of All Time, the world is uncertain. “Decisions are about the future and your place in that future when that future is uncertain,” he writes. The one key decision you can make to prepare your business for that uncertainty, according to Collins, is to have the right people with you.

Samsung recognized the importance of having the right people on its team and took the idea a step further. Top management saw that the company also had to develop its talent. That entailed making a commitment to educate its people to thrive in a global economy in a way that transcended textbook learning.

It’s a strategy worthy of your attention. Americans are often missing in action when it comes to global business. (Large numbers of Americans don’t even have passports!) As a result, we’re falling behind other countries in making the most of the global economy. Germany’s exports per capita are almost four times higher than those of the U.S. (Even with its economy in trouble, Spain is ahead of the U.S. on this front!).

As Martin Sorrell, the chief executive of London-based advertising giant WPP Group, has pointed out, China will surpass the GDP of the U.S. eventually. “It will be back to the future, in the sense that some 200 years ago, China and India accounted for 40 percent of world GDP, and they will do so again a few years from now,” he has been quoted as saying.

Why has this happened? Many U.S. companies have been blinded by the large size of the American marketplace to the opportunities that exist in other economies, like China and India, which are growing much faster. U.S. companies have also been deterred by government policies that make it hard to entice top executives to accept posts overseas. The U.S. is among a tiny handful of countries that tax its expats on their income abroad.

More American firms of all sizes need to “Act local, think global.” Giants like GE and IBM understand this but many midsize growth companies still remain on the sidelines of international markets – or aren’t even a part of them.

Fortunately, it’s not as hard as many CEOs think to penetrate global markets, through programs like the one that Samsung started. The Netherlands government, for instance, has sponsored a program somewhat similar to Lee’s: It sends retired Dutch executives to countries, companies and projects around the world. These globetrotters then source valuable opportunities for the mothership.

If you’re thinking of making your own foray into global markets, it helps to understand where Samsung was when it began sending its young executives abroad – and how it got to where it is today. Here’s a crash course.

Audacious gamble

Stagnation and insularity – they’re two of the most common and pernicious causes of organizational dry rot. And by the late 1980s Lee Kun-Hee began to sense just such a weakening in the foundation of South Korea’s giant Samsung Group. The chaebol’s products were ubiquitous but uninspiring: bland copycat microwaves and electronics selling at margins even thinner than the company’s microchips. Meanwhile, family management combined with a Confucian culture that venerated seniority and hierarchy made Samsung a static and inward-looking company.

In 1993, Lee, chairman of Samsung and son of the company’s founder, exploded that tradition with what he called the New Management initiative. He imported Western-style employee autonomy, promotions and pay based on merit rather than seniority, and an end to lifetime tenure, along with a dramatic commitment to research and development, as part of an audacious gamble to transform Samsung into a company that designs and manufactures leading-edge technology.

To say the bet paid off would be an understatement. Within a decade global revenue took off, and Samsung became an elite brand. Today, for example, its Galaxy smartphones and tablets are among the few that can compete with Apple’s iPhones and iPads for coolness. By 2011, Samsung’s brand ranked as the 17th most valuable in the world, according to the annual Interbrand Poll, leaving Sony – the company that defined electronics supremacy for decades – in the dust.

But it was another program that Lee launched in 1990, just ahead of the New Management initiative, that planted the seeds for Samsung’s transformation. It was a simple concept: Take a handful of the company’s brightest young employees, send them abroad to immerse themselves in other cultures, and then reap the benefits of increased global awareness and knowledge. The decision to launch the program was “pivotal in transforming Samsung into a global powerhouse,” says Sea Jin Chang, a professor at the National University of Singapore and author of Sony vs. Samsung: The Inside Story of the Electronics Giants’ Battle for Global Supremacy.

Since 1990 some 4,700 employees have been what Samsung calls “regional specialists,” serving yearlong sabbaticals in 80 nations across the globe. “What strikes me,” says Tarun Khanna, a professor at the Harvard Business School who has written about Samsung and also taught courses for its executives, “is the recognition that people steeped in Korea and speaking only Korean would require some form of unique investments to jump-start an engagement with the rest of the world.”

In truth, it was hardly a new idea. As far back as the late 19th century, Japanese trading companies sent employees on training stints abroad, says Kyungmook Lee, a professor at Seoul National University, who has spent years studying Samsung. But those programs were limited in scope (typically three to six months). And, he says, most of the Japanese companies later abandoned them because they were too expensive.

Old idea or new, much of Samsung’s management resisted the notion, says Kweon-taek Chung, director of the human resources and organizational research department at the Samsung Economic Research Institute. They simply didn’t understand the purpose. “In the 1980s,” Chung says, “going on a business trip overseas was rare in Korea, and they could not imagine sending employees abroad for a year” for something that didn’t seem like work.

Even after the program launched, executives grumbled not only about the cost – close to $100,000 per specialist on top of salary and benefits for a full year – but also about the fact that the company had to give up its young stars for 15 months. They worried that the regional specialists might get recruited to other companies during their sojourns.

Big-picture perspective

But Chairman Lee, who wielded nearly unchecked power, brushed aside the complaints and embraced the program on a large scale during good times and bad for two decades and counting. Observes Khanna: Samsung’s willingness to fund such an endeavor and its “apparently scant regard for short-term profitability concerns – even during the depths of the financial crisis – are quite unusual.”

The regional specialist experience begins with what Khanna calls an “extraordinary” three-month boot camp at a massive company facility in South Korea. Much of the training consists of learning the language of the country the specialist will be living in. (That in itself was originally a big leap for a company that for decades retained the Korea-centric mindset of an operation that began as a local general store in 1938. But when Samsung began its campaign in the early 1990s, it pushed its emphasis on foreign languages far beyond the regional-specialist program. For example, the company went so far as to post English and Japanese phrases in its bathrooms, so that employees could learn even as they washed up.)

The boot camp for regional specialists includes far more than language training. There’s social and physical practice too. As a 1992 article about the program described it, participants were “awakened at 5:50 for a jog, meditation, and then lessons on table manners, dancing, and avoiding sexual harassment.” From there, the regional specialists are deployed abroad for one year. In the early days many went to the U.S. and Europe; in recent years more and more have gone to emerging markets.

Participating requires a measure of sacrifice: Specialists undertake the mission alone, for example, and are not allowed to bring any family members with them.

But for all the training and discipline, the biggest surprise is the free-form nature of Samsung’s program – particularly in its earliest incarnation. The spirit was truly “goof off and learn.” The mission was to imbibe the spirit of the country, meet people, make contacts, and write a report about what you find. That was it.

Consider Park Kwang Moo, one of the first regional specialists, whose experience was recounted in a 1992 Wall Street Journal article. He spent a year in the former Soviet Union, “living, eating, and drinking with Russians,” learning how bribes smoothed the way for everything from airplane tickets to gasoline. “One day,” the article continued, “while stoically waiting 10 hours with scores of Russians for a delayed flight, he began to understand Russia. ‘I felt a strength in their misery. I felt like a Russian.’” The article went on to recount how Park’s boss praised his 80-page report on the sabbatical. “There is nothing in this about business,” the boss rhapsodized. “It is only about their drinking. Their idiosyncrasies. But in 20 years, if this man is representing Samsung in Moscow, he will have friends and he will be able to communicate, and then we will get the payoff.”

Actually, it took a lot less than 20 years. By 2003, in an annual report that specifically credited its regional-specialist program, Samsung proclaimed itself the bestselling brand in Russia (as well as in France and Ukraine) and claimed it had been selected as the Narodnaya Marka, the best national brand in Russia.

In truth, it can be hard to identify the specific achievements of the regional-specialist program, and when you do, they may seem small-bore at first glance. For example, Bill Kim, a Samsung regional specialist in Indonesia during the program’s first years, told a company blog in 2011 that “an Indonesian I got to know tipped me off to unauthorized product-repair services that often led to bigger problems for consumers. Thanks to this information, we were able to provide a safer guide for consumers and modify our product designs to prevent unauthorized repairs.” A 2011 cover story on Samsung in the Harvard Business Review co-authored by Khanna and Lee cited the regional-specialist program as fostering personal connections to key figures in various countries and a much broader understanding of local markets.

But trying to identify the concrete results misses the program’s real significance. As the HBR article noted, it brought in fresh ideas from abroad, imparting information about other markets and corporate practices. The authors described it as “arguably the company’s most important globalization effort.” It nurtured a generation of managers ready to pursue Samsung’s worldwide ambitions, in the view of Yongsun Paik, a professor of international business and management at Loyola Marymount University. And many of the regional specialists later get sent back to the areas they visited in senior positions at Samsung’s offices there.

(Interestingly, Harvard’s Khanna notes that a second globalization program at Samsung, which entails bringing non-Koreans into the company in senior positions, has been much less successful. To this day few foreigners have ascended to the top ranks of the company.)

Over the years the regional-specialist program has evolved in the direction of increased control. Where once the participants could choose any area of focus, they now make the choice in close consultation with Samsung. And though it’s still a yearlong program and retains its “goof-off ”quotient, the free-form piece of the mission has been reduced to six months. The second six months now consists of a more applied independent project, in which participants try to learn something with tangible business utility about the market they’re visiting.

Meanwhile, the program has gained stature within Samsung. Where once the selections were made by human resources officials, and line executives might carp about losing top employees for a year, now the executives themselves nominate their best candidates. That has built more management support for the program. And it has created a motivational tool that encourages competition. Young employees vie for the prestigious assignments.

The success of Samsung’s program has inspired many imitators in Asia, according to Chung of the Samsung Economic Research Institute. In Korea, he says, large companies such as SK Networks, Hyundai Oilbank, Hanwha, and LG Chemical have introduced similar programs, and Korea’s largest banks – Kookmin, Shinhan, and Woor – are sending bright young employees to emerging countries. In Japan, Chung says, Mitsubishi, Itochu, Sharp, and Marubeni have all introduced some version of a regional-specialist program.

Indeed, the underlying concept of exposing an organization, via its rising talent, to new markets has become so accepted today as to seem obvious. Samsung’s success suggests the benefits are significant – even if they’re hard to quantify. Says Harvard’s Khanna of Samsung’s program: “If one were ever to attempt a conventional cost-benefit analysis of some sort, I don’t know whether one would decide that this was a good idea. But I would have to say that it’s a brilliant idea.”

Certainly, making great decisions doesn’t shield an organization from every foreseeable problem. Samsung, for instance, was just ordered to pay Apple $1.05 billion in damages in an intellectual property suit. Samsung was accused of copying design patents covering Apple’s electronic devices.

But some great decisions can give an organization the resilience to ride out the unexpected challenges that all companies eventually face. And, thanks to its own smart move to educate its team to thrive in the global economy, Samsung is more resilient than most. CEO

To read Verne Harnish’s introduction to The Greatest Business Decisions of All Time and download a free chapter, visit www.greatestdecisions.com. Contact us at editorial@smartceo.com.

Leave a Reply