Samsung's Radical Shakeup

It's 6:45 a.m. in Seoul, bitter cold, and still dark. But phalanxes of office workers pour into the lobby of Samsung Group's headquarters. Most Koreans are just beginning to stir, but virtually all of Samsung's 120,000 employees are arriving at work. Riding up a headquarters elevator, a fortysomething executive spots a 31-year-old named Kim who's sporting a light blue suit, blue-and-white-striped shirt, and tulip-patterned tie. "You're lucky," says the executive. "When I was your age, I wouldn't have dared to dress like that."

Had Samsung Chairman Lee Kun-Hee been aboard that elevator, he would have been proud. Getting his employees to work earlier hours and encouraging greater individuality are two small signs that the revolution he's fomenting within Asia's largest non-Japanese conglomerate is taking hold.

There are hardheaded business reasons why Lee has launched a sweeping remake of the $54 billion group's culture. He wants his executives to reorder Samsung's investment priorities, refocus its product-development and marketing strategies, and radically improve quality. The Chairman's goal is to become one of the world's 10 largest "technological powerhouses."

Samsung, widely considered Korea's most successful chaebol, consists of some 30 companies. Among them, Samsung Electronics Co. is the standout performer, having emerged as the world's largest maker of leading-edge memory chips. But other units, such as its consumer-electronics subsidiary, are faltering. Lee argues that the whole group, which his father started in 1938 as a rice-trading company, isn't keeping up with major competitors such as Sony, General Electric, and Philips.

Samsung used to compete on the basis of cheap labor and a cheap Korean currency. Now, both are gone, and the key test is Samsung's ability to absorb and create cutting-edge technology. Except in semiconductors, however, Samsung still relies heavily on foreign sources, even in machinery and chemicals, two other sectors in which Samsung wants to become a world player. The group also has not been able to establish its own name as a world-class brand. Not counting chips, more than one-third of Samsung's exports are things that other companies put their names on. Estimated earnings for 1993 are only $600 million, a fraction of Samsung's $54 billion in sales.

For Samsung to reach the next level, Lee believes he has to do nothing less than turn upside down the hierarchical, inward-looking management installed by his late father, Lee Byung-Chull. "I am telling them to change everything except how they treat their families," says the 51-year-old Lee, who took over upon his father's death in 1987. In stark contrast with his father's spartan ways, the younger Lee loves to drive his 911 Porsche race car at 200 mph, watches hours of movies, and keeps hundreds of dogs on a farm near Seoul.

BOILING POINT. Once at the helm, Lee gradually began exhorting senior management to delegate more authority and take more active roles themselves. In effect, the younger Lee decided to apply the best of what he learned at Japan's elite Waseda University and America's George Washington University. Then he adds his own twist: To force managers to make their own decisions, he often works from his guest house in central Seoul, refusing to take their calls or accept their visits.

His campaign to launch a management revolution didn't take off until 1993. After years of quietly nudging his managers, Lee took the entire top management to Los Angeles and showed them how U.S. buyers and sellers were largely ignoring Samsung products. He thought the on-site inspection would create a sense of urgency. "They didn't listen," he says.

His frustrations erupted in June. En route to Frankfurt that month, Lee opened his briefcase and found a disturbingly strong report from a trusted Japanese adviser. The Samsung Design Center, said the consultant, was poorly run. What's more, the adviser commented, no one at the center listened to his advice. "The chairman was shocked," recounts a senior aide. "He asked why Samsung people weren't listening. It made him very upset."

Lee also learned that a pricey piece of testing equipment at Samsung Electronics' research and development center had gone unused for several days because of a broken electrical socket. So while still aloft, he ordered his staff to use their time in the air to analyze this seeming nonchalance. "We concluded that it came down to education and human nature," says the aide. "He wasn't very satisfied with our answer."

Upon reaching Frankfurt, Lee "exploded," says Hwang Young-Key, a group executive director who was there. "He called Seoul and yelled for about an hour. [And] he ordered that his yelling be recorded and that the tapes be sent to Korea for distribution within the group." Then, Lee issued his so-called Frankfurt Declaration: "Quality first, no matter what."

While still in Frankfurt, he summoned hundreds of Samsung executives in batches of 20 to 40 for intensive, often round-the-clock meetings. In the course of the next two months, he convened groups of all 850 of his senior executives to brutal sessions in cities where he had appointments--from London to Osaka. The foreign settings allowed him to show his top managers how poorly Samsung products were positioned. But most of the time was spent in intensive discussions about competitiveness, quality, marketing, and training. "Between June and August, I don't think Chairman Lee slept more than two or three hours a day," says Hwang.

Lee's message is that without understanding things considered "alien" to Korean culture, Samsung can never compete. "Knowing yourself and your enemies is the first prerequisite to becoming a warrior," says Lee, paraphrasing the classical Chinese military theorist, Sun Tzu. "My first step is getting our people to this point."

Thus, training has become the watchword at Samsung. Take the CEO School. Launched last September, it aims to put all 850 top group executives through six months of reeducation--three months in Korea and three overseas. Lee forbids CEO School students to travel by plane while abroad: They must move around by car, bus, or train to better experience the country they're visiting. One senior managing director, Kim Hun, 51, has spent the past two months criss-crossing the U.S., studying the American revolution and early U.S. history for clues on leadership. Other Samsung executives have spent weeks trekking through Malaysian rain forests and backpacking in Egypt, Syria, and Jordan.

UNLIKELY AXMAN. What's more, each year Samsung hands 400 men with at least three years' tenure a fistful of money and sends them abroad for 12 months to do whatever they want, no questions asked. Lee expects them to return with intimate knowledge of their host country's language and culture. After a few years back in Korea, they return to their country of specialization to push Samsung products. At the end of this five-year program, Samsung will have spent $100 million training 2,000 young managers.

The most attention-grabbing of Lee's mandates has been his "7 to 4" program. Since July, the chairman has required employees at virtually every Samsung operation to show up at 7 a.m. and leave at 4 p.m. This is jarring in a country where the typical white-collar workday is 9 a.m. to 8 p.m. followed by late-night drinking bouts. But Lee did it to dramatize the changes he's demanding, to bolster productivity, and allow time for self-improvement courses. During the first few months of the new regime, he made random phone calls to various business units. Anyone answering after 4 p.m. received severe scoldings.

For many of Samsung's top executives, though, Lee's revolution is the beginning of the end. "About 5% of them can't change at all, so I'll fire them," he says with brutal candor. "Another 25% to 30% may find change difficult, so we'll give them less responsibility." That means demotion. He reckons only 5% to 10% of his top managers will gain responsibility as part of his wrenching overhaul.

Lee himself is hardly the picture of a corporate axman. Meek and deferential with visitors, he speaks quietly and deliberately. "It's my nature to detest revolution," he says. Although perhaps the richest man in Korea, with his family still owning about 5% of Samsung shares, he is a loner at heart and has few Korean friends. Having graduated from Waseda, as did his father, he spends more time with Japanese acquaintances than with Koreans.

An admitted video freak, Lee claims to have watched 10,000 movies on his VCR. He also loves dogs. His kennels house as many as 300 canines, and favorites wander into the guest-house parlor during meetings. "They can't talk, so you have to watch them carefully to determine what they want," he says. "That helps with my observation of people."

DIVIDENDS. After videotapes and dogs, Lee's favorite hobby is fast driving. His collection includes models of some of the spiffiest race cars in the world, and he likes to drive them at top speed on Germany's Autobahn or private racetracks. "Driving at 200 mph puts your life at risk," he says. "It makes you fully alert and relieves most of your stress."

Is he a crackpot or visionary? Some Korean rivals say his personal style and management techniques are dangerous. "Why is he doing this?" asks Bae Soon-Hoon, president of Daewoo Electronics Co. "It's a big risk. You can't make a good organization innovative in one day." Bae thinks the Lee-induced "instability" at Samsung is foolhardy. But Japanese competitors and allies are taking Lee's revolution seriously because of his success in semiconductors. Says Tsuyoshi Kawanishi, an executive at Toshiba Corp., which has a strategic alliance in chips: "Particularly in microelectronics, I respect the speed and foresight of his leadership."

U.S. experts also believe the Samsung shakeup ultimately will pay dividends. "With decentralization, they're gaining strength, and there is a greater sense of esprit because people feel they're part of decision-making," says Phillip D. Grub, professor of international business at George Washington University. He was Lee's professor and visited Samsung in January.

One result of his student's moves, Grub says, is that Samsung is becoming better at targeting niches, such as liquid-crystal display screens, rather than attempting to compete across the board. Samsung is also eyeing digital videocassette recorders, sophisticated chemicals, and highly computerized machinery. If Lee can grasp these 21st century technologies, critics of his revolution will be eating their words.