Risk Management

OVERVIEW OF ERM (ENTERPRISE RISK MANAGEMENT)

Volatility has heightened in the financial markets with sharp movements in foreign exchange and interest rates, while the price of raw materials such as oil and steel have surged. On top of that, tighter regulations are calling for greater management transparency. Amid growing uncertainty in the business environment, LG Electronics adopted ERM (Enterprise Risk Management) to systematically manage risks and maintain stability in its operations.

COMPANYWIDE RISK PROFILE

A risk profile was drawn up between May and November of 2007 that identifies the risks facing LG Electronics entire global network including the domestic operations and the 80 overseas subsidiaries. Based on the risk profile, we decided on five key components to set up an ERM framework that will enable risk prevention while allowing us to respond swiftly according to pre-formulated measures if a risk does occur.

ERM IMPLEMENTATION FUTURE PLANS

Through the adoption of ERM, we have secured risk visibility and devised systematic risk management processes. That has given us the footing to effectively respond to all types of risks and maintain stability By implementing ERM, we aim to minimize losses and shift away from a system centered on crisis response and risk management at individual worksites to an integrated risk management framework encompassing our entire organization.

2. Assessment of the strengths and weaknesses of LGs business with respect to technological innovation and competitors Before delving into details on LGs technological strengths and weaknesses compared to its competitors, one must first define what technological innovation is. We define technological innovation as a two way process between the technical design, development, manufacturing and the management of commercial activities involved in the bringing to market of a new product or service (Freeman & Soete, 1997). Starting with LGs strengths and weaknesses, one sees that the company has been extremely successful in technical design. LG phones are generally perceived as refined, cutting-edge mobile phones that have avant-garde based innovative designs. This has been evidenced by various design awards the company has won such as the red dot design award for the KE850 Prada or the 2007 CES innovations award which the company received for its overall success in the design for the Black series. With a

design focus, LG targets the high-end consumer segment by being the second most expensive handset manufacturer behind Samsung (see Appendix 2). LGs strengths in technological innovation are also highlighted in technology development. This is the case for its pioneering touch-sensitive displays in the LG KE850, the companys sound grounding in 3G technology and the overall simplicity and intuitive technology that come with any LG device. Despite having a strong position in technological design, development and manufacturing, LG however shows a rather weak performance in terms of innovation process and marketing. Since LG is a relative newcomer to the mobile industry, it seems that the companys focus resides on developing distribution networks and product development rather than offering consumer added value services (for example imaging software) and developing customer loyalty. A major weakness we see for LG in 2007 and upcoming years is the companys decision to cut model development by focusing on a platform strategy. Although such a strategy will allow for economies of scope, the downside is that the strategy will ultimately come at the expense of customer choice.

Another drawback in LGs marketing is that the company supplies one operator at a time to negotiate optimal contracts and only when a certain upper limit of incentives has been reached, moves on to supplying new operators, one by one. The danger with this strategy relates to the time needed until LG will be able to establish full market presence. In comparing LG to Nokia, one finds that Nokia performs weak in terms of design, display resolution and focus on 3G technology. However, Nokia is market leader and hence cannot be underestimated. Nokias strengths reside in LGs major weaknesses namely marketing, customer focus and the offering of additional features and services such as the Symbian Operating System that allows other compatible features and

softwares to be downloaded, the possibility to synchronise mobile devices with PCs, or GPS technology. It is also interesting to note that Nokias price per unit is the lowest in the industry with prices per handset that are below $100 (see Appendix 2). The trend of market commoditisation, as such, is well recognised by Nokia. Motorola is also an interesting brand from which LG can learn. Motorolas engineering spirit is evidenced through developing the finger writing technology. This technology is an innovative text-input method for mobile phones that brings the convenience of text messaging and email right into the users finger. By integrating a sensor underneath the keypad, users finger movements are detected while handwriting recognition translates them into recorded text. Motorolas weaknesses compared to LG lie in offering smaller displays, shorter battery life and the fact that the consumer interface is not user-friendly. Sony Ericssons strength originates from the combined forces of Sonys Music and Imaging technology (e.g. Walkman, Cybershot-camera) and Ericssons telecommunications background. The company is a strong player in Bluetooth technology and developed the first phone to work with voice recognition. Lack of marketing experience, however, work to the detriment of the companys success. Samsung is LGs main competitor and who we believe LG can gain market share from. Samsungs strengths lie in pioneering Wi-fi technology and its high-end designs which successfully support the company in charging the highest average handset prices in the industry (see Appendix 2). LG however has potential to build on Samsungs weaknesses which essentially reflect LGs strengths. In other words, Samsungs devices are not differentiable and all have similar designs and features. Also, Samsung suffered a major loss in 2006 due to increased sales of 3G technology which the company did not anticipate.

High-End Market Segment 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 inhouse capabilities, collaborating with design agencies and finally by allowing the customers to customise and personalise their handsets online. 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 (price-based) and differentiation. The cost-focus strategy will be approached by a process innovation and differentiation strategy by a product innovation.