Period 3: 2006-2009

Period 3 corresponds to the years from the beginning of 2006 to the end of 2009. This period shows a significantly different trend than the previous periods. Instead of moving up and down from year to year as in Period 2, the trend was generally downward, with a small recovery in 2009. During this time SEC’s ROA fell continuously from 15.12% in 2005 to 7.62% in 2008, experiencing a slight recovery in 2009 when it rose to 11.22%. SEC’s ROE followed a similar path, falling from 19.27% in 2005 to 9.51 in 2008, with a slight recovery to 14.44 in 2009.

This period is interesting in that, although SEC’s profitability remained higher than the industry average, even in its low points, neither its ROA nor ROE reached the mean level for the period 1998-2009. This difference is even more pronounced if measured against the period 1999-2009, in which the extremely low ROA and ROE of 1998 are excluded. If financial performance is the measure of dynamic capabilities, Period 3 could be an indicator that, although SEC is still ahead of the industry average, it may have reached the limits of its dynamic capabilities.

Sensing opportunities: brand building.

One way for a firm to grow is by building its brand equity. SEC is very conscious of this, as it has continuously made efforts to evolve from a maker of low-end home electronics and appliances to a premium brand of electronics and high-tech equipment. As stated in the 2006 annual report, SEC is working on its brand status in order to develop new market segments (SEC, 2006). It also senses other possibilities for building brand equity and name recognition by associating its brand name with such global sporting events as the World Cup and Olympic Winter Games (SEC, 2006). Although SEC has long been a branded company,

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and has gained high brand status as a producer of consumer electronic products, in 2006 they saw an opportunity in the business to business (B2B) market as well (SEC, 2006).

Making timely and market-oriented decisions: brand building.

SEC has made a number of high-profile decisions to increase their brand equity, such as sponsoring sporting events like the World Cup and the Winter Olympic Games (SEC, 2006), as well as being the official wireless communications equipment partner of the Beijing 2008 Olympic and Paralympic games (SEC, 2008). Less obvious have been its other efforts, such as increasing its R&D and marketing efforts and emphasizing high-end branding (Chu, 2009). According to Chu (2009), it increased its R&D/sales ratio from 4% in 2000 to 7% in 2005. Like many other Asian companies, SEC’s early days in the electronics and

semiconductor industries was marked by their following the OEM model, but unlike many of its competitors, it has “made a conscious effort to switch away from the OEM mode after liberalization brought intense competitive pressure in the early 1990s” (Chu, 2009). The choice to make such an effort, informed by the perception that branding would help to differentiate it from its competitors, demonstrates SEC’s propensity to make timely and market-oriented decisions in terms of building brand equity. Its ranking 19th out of the best one hundred global brands by an Interbrand/Businessweek survey shows the success of SEC’s brand-building decisions (Businessweek, 2009).

Changing resource base: brand building.

SEC has and continues to devote substantial resources to building its brand equity, as is pointed out in the 2009 Annual Report:

“Throughout 2009, and into early 2010, we continued our sports marketing activities, including international sponsorships of such high-profile events as the Vancouver

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2010 Winter Olympic Games. We also sponsored other world-renowned events, festivals and exhibitions, and promoted marketing collaborations and co-sponsorships as we broadened our marketing focus to unique cultural and emotional marketing activities. For example, we participated in cross-marketing campaigns with global luxury brands and created products in partnership with companies in diverse industries, thus elevating our premium image.” (SEC, 2009a).

Sensing opportunities: human resources.

With the desire to become a “true upper-echelon global leader” SEC sensed that to achieve its goals, it would have to do so by cultivating its human resources, especially in the area of R&D (SEC, 2006, 2007, 2008, 2009a; D. Teece, Pisano, Gary, 1994). It also senses the opportunity available in enhancing the human resources of its partners (SEC, 2006, 2007).

Making timely and market-oriented decisions: human resources.

In the interest of nurturing an effective human resource base, both for itself and for its partners, SEC has made the decision to provide extensive opportunities for training, including on-the-job training and rotational human resources development programs (SEC, 2006). In support of their decision to emphasize their human resources, they are “fostering a work atmosphere built on trust and harmony” (SEC, 2006).

Changing resource base: human resources.

SEC’s devotion of resources to human resources development is extensive, and takes many forms. From “providing a new cooperative education model linking schools and industry” and “expanded OJT programs for suppliers” that provide young people greater job opportunities, to forming a consortium of suppliers and universities in Korea to tailor human resources to supplier needs, to training in “GVE (Group Value Engineering), Six Sigma,

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CAD planning, ERP education and support in the fields of manufacturing and quality control” for its partner firms, it is clear that SEC values human resources and devotes many resources to it (SEC, 2006, 2007).

Perhaps the most important aspect of human resources to SEC is its R&D workforce.

In 2006, 26% of its workforce was engaged in R&D, and in 2007 the number of R&D engineers reached 39,000 (including 3200 PhDs) (SEC, 2007). By 2008, the number of SEC’s employees engaged in R&D activities had reached 40% of its entire workforce (SEC, 2008). This dedication of human resources to R&D has resulted in SEC being ranked number 2 (after IBM) in the number of U.S. patents granted for the years 2007-2009 ("Intellectual Property Owner's Association," 2009).

Sensing threats: the global economy.

In 2006, SEC perceived numerous economic threats, from the appreciating Won to a number of external and internal factors that had a destabilizing effect on the Korean economy, as well as the slowdown in the U.S. and world economies (SEC, 2006). In the following year, SEC sensed the deepening of this slowdown, which was exacerbated by the subprime

mortgage crisis and rising oil prices (SEC, 2007). In 2008 SEC began to refer to this

slowdown as a global economic downturn, characterized by further rising oil prices that lead to inflation, volatile exchange rates, and falling asset values that affected real income (SEC, 2008).

Making timely and market-oriented decisions: the global economy.

In light of the increasing global economic slowdown, SEC made a number of decisions to ameliorate its effects on its stakeholders. One decision was to focus on its core competencies (SEC, 2006). Another was to maintain and build shareholder value.

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As part of its focus on core competencies of technology, human resources (particulary as pertains to R&D), and brand image, SEC responded with “the ultimate cost

competitiveness and management innovations aimed at enhancing speed and efficiency”

(SEC, 2006). This included the decisions to “secure creative leadership in technologies, markets, and products in order to maintain … growth momentum” (SEC, 2006). When the global economic slowdown deepened, SEC decided to continue these efforts (SEC, 2008).

In terms of building shareholder value, in 2007 SEC decided to pay out dividends to shareholders and to buy back about KRW2 trillion of company stock (SEC, 2007). SEC also decided to make an effort to help shareholders “better understand the core competencies of each business division” (SEC, 2007). In 2008, despite the volatility in financial markets, decided to work to improve their stock valuation.

Changing resource base: the global economy.

In response to the global economic slowdown, SEC focused on its core competencies by streamlining its price structure, adopting highly efficient work processes, and by building a superior supply chain management system (SEC, 2006). When the global economic

slowdown deepened, SEC made the decisions to invest in strengthening its R&D capacity by investing 9.5% of parent company sales, deepening its human resource base by increasing its researchers to 42,100, and building its brand image (SEC, 2008).

SEC changed its resource base in order to increase shareholder value by paying out a dividend of KRW8,000 per share as well as buying back a substantial amount of company stock (SEC, 2007). They followed up their decision to help shareholders understand the core competencies by holding their third Analyst Day (SEC, 2007). In 2008, SEC “actively worked to build shareholder value” by “pushing ahead with investor relations initiatives to improve our stock valuation” (SEC, 2008). As a result of these efforts, their stock value

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declined only 19% as compared to the majority of technology stocks and global bourses that lost more than half their value (SEC, 2008).

5.2 The Case of Taiwan Semiconductor Manufacturing Corporation