M&As will pave the way for Korean firms to become truly global players
By Kim Jae-kyoung
Major Korean companies, such as Samsung Electronics and Hyundai Motor, are emerging as true export giants following the global financial crisis. They are now rolling up their sleeves to speed up globalization to become a true global player.
If you look into their revenue structure and overseas operations, they are already global players. However, few people believe that they are global ones because if you look at their leadership and corporate culture, they are truly Korean.
This is not a typical case only for Korean players. Many big firms abroad call themselves global companies, but when you look at their leadership, it’s either only German or Japanese or American.
This has a very important implication for Korean firms as they have to overcome this challenge to move to the next stage ― a true global player. In other words, leading Korean manufacturers have succeeded in internationalizing organizations but they are only at the very beginning of true globalization.
“True globalization is different from internationalization,” Paul Meehan, the regional managing director of Bain & Company in the Asia-Pacific region, said in an interview with Business Focus at its Seoul office in Namedaemun on March 27.
He points out that a company can be an export giant and generate the majority of its revenue from overseas markets but that doesn’t translate necessarily to being a truly globalized company.
“Winning on a global basis requires deep insight into local consumer needs, powerful tailoring of products and services while leveraging global scale efficiencies. It also requires a true bench depth of global management talent who can lead and operate across borders as well as delivering local market results. This remains a challenge for Korean companies too,” he said.
Meehan, who has almost 25 years of experience working with global corporate and private equity clients, stresses that Korean players should focus more on pursuing inorganic growth and building up a system that can create a global culture as they extend their international operations.
“As demonstrated by lack of non-Korean executives in top 20 chaebol, Korean companies will need to be much more open and flexible with global talent to sustain success on a global basis,” he said.
According to the veteran consultant, most globally successful companies grow both organically and inorganically, and those who successful manage the acquisitions well. “Korea has a weak track record of acquiring and managing other companies. Going forward, Korea’s best companies must be able to grow inorganically, otherwise Korea’s success over the past twenty years will turn out to be short-lived on the global stage,” he said.
“I suspect that there will be a huge need for executives and managers who are bi-cultural and bi-lingual and can function in multi-culture environment and integrate and manage an acquired foreign company. I believe this is the final piece of the puzzle to becoming a truly global firm.”
Chaebol and Korean economy
Korea’s chaebol in Meehan’s words has played a key role in making the country’s economic success possible, saying that there are three key words that characterize successful multinational Korean firms ― aggressiveness, passion and commitment.
According to him, Korea was very successful by making bets ― sometimes seemingly against all odds, but ultimately executable due to the chaebol ownership’s ability to make the hard and often risky decisions.
“Up until now, Korea was able to take various products and make them cheaper, faster, and better than competitors. The involvement of major shareholders or owners in management has facilitated long-term investment decisions,” he said.
“Hyundai Motor’s inroads into the U.S. market and Samsung’s current presence in the semiconductor industry would not have been possible without the aggressiveness, passion and commitment of such owners.”
He explains that Western firms can be more sensitive to the immediate-term given the shorter average tenure of Western CEO’s in their jobs and the pressure the stock market places on quarterly earnings performance against expectations.
From ‘fast follower’ to ‘innovator’
Meehan, who led the Bain’s Australian business between 1998 and 2005, stresses that Korea’s successful fast follower strategy has been great but now is time to redesign organizations from “fast follower” to “innovator.”
In Meehan’s view, Korean firms are not innovative and creative enough, less globalized, and not fully skilled yet to integrate different cultures.
“Successful fast follower strategy is truly astounding. However, a corporate culture deeply engrained in fast follower behaviors cannot be changed easily and can be a big stumbling block to becoming an innovator,” he said.
“To nurture innovation, it must start from the fundamental core, because one does not become an innovator overnight. Unless Korean firms can fundamentally address the issues of culture and behaviors, the challenges will remain. So they need to hire creative talent and redesign the organization and decision structures accordingly.”
Meehan recommends that as for the strategy going forward, Korean companies should maintain their focus on the core, and try not to extend too far away from their normal bandwidth.
“Non-related diversification risks challenge the rules of effective allocation of corporate resources and capital. Of course, the capabilities required in the future no doubt will vary from company to company,” he said.
“The future will require innovation, research, and making bets on future technologies that will shape the world. This will mean more investments, bigger bets, seeding and nurturing yet-to-be opportunities, and then eventually set new global standards.”
China’s hard landing unlikely
Meehan, who oversees Bain’s Asia operations, expects that China will experience some degree of volatility in the coming years but it will manage to avoid a hard landing and stay the course.
China’s downgrade of its 2012 real GDP growth forecast to 7.5 percent from 8 percent has increased global growth anxiety, raising fears that the world’s largest consumer market will make a hard landing due to the burst of a real estate bubble.
“Whether China will make a hard landing or soft landing is actually wrong question. Real question is, ‘will China display more volatility for the next 4-5 years in important economic transition,” Meehan said.
“We expect more volatility. A number of factors are driving it. There will be volatility while China handles many challenges but I think China will continue to sustain robust growth.”
The following are excerpts from the interview
Q: How do you think Korean firms adapt to the world of 2030, where 20 percent of the top 500 companies will be in emerging markets?
A: Korea will be fine but we need to start thinking about extending enterprise reach to the emerging markets such as Southeast Asia, India, and China more aggressively. Services will become more important. The Korean wave will definitely help. I am confident that the very top Korean chaebol will be part of the top 500 companies. The issue is whether the next tier Korean companies can be part of that list in addition. Again, the answer depends on whether those companies can compete with up and coming companies from China, Brazil and others. It will require a developing markets mindset in our Korea views and competes on the global stage.
Q: Some major Japanese firms, such as Sony, are struggling to stay the course. Why do you think they are struggling?
A: I think there are still many Japanese firms that have successfully met the challenges created by the global crisis and strengthened their core business even further during this period. We are seeing many accelerate their investment levels in developing markets as well as increasing their outbound M&A activities. Having said that, Japanese companies continue to be challenged by the need for greater “cultural flexibility” as they extend their international operations to become true global enterprises.
Q: You said that the focus of R&D has to shift from production technology to creative technology. What does that mean?
Many Korean firms, such as Hyundai Heavy Industries and Samsung Electronics have focused on how to manufacture high quality zero defect products efficiently as fast followers. As a result their R&D has focused on how to improve existing products incrementally with very positive results. Typically, their R&D processes have evolved from sourcing licenses from leading competitors and then focusing efforts and investment on making products with slightly altered specs with comparable quality and lower prices. Now the rules of the game are changing, as it is getting harder and harder to get licenses from leading competitors and new low cost competitors are emerging from other markets like China.
Over the long term, it is hard to sustain leadership with only superior manufacturing and process technology. It can be replicated at lower cost in other markets. Be it software or hardware, Korean companies should aim to make more strides toward “innovative or original” R&D.
For this purpose, R&D strategy must ensure the right balance between breakthrough innovation and technical excellence as a core capability. Also, the R&D organization should function to align the strategic and operational direction of the firm to ensure innovation moves beyond short-term impact to transformational breakthroughs that drive more sustainable competitive positions. Once again, these changes require cultural transformation to overcome incumbent barriers as Korea’s manages its growth transition.
Q: You think that strategy matters only when you have a winning culture. Can you briefly explain about the characteristics of winning culture and how Korean firms can nurture such culture?
A: Organizations with winning cultures tap into the discretionary efforts and loyalty of their people in a truly unique way. This drives real performance and differential competitive outcomes. We have found that the companies with winning cultures succeed on two dimensions simultaneously. First, every winning culture has a unique personality and soul that cannot be invented, replicated or imposed. Based on shared values and heritage, the company’s character needs to be discovered from within. It is there and every company has a unique one that is truly differentiated. Second, winning cultures usually embody six common high-performance behaviors, including high aspirations and a desire to win, an constant external focus on customers and competitors, passion and energy, strong teamwork, thinking like owners and a bias to action. To nurture a winning culture, an organization should both deeply understand its heritage and defining mission while building an environment that openly embraces the need for constant change. More than anything else, the CEO and leadership team should have real clarity around a compelling vision, ensure real management alignment and then work hard to translate this in a highly committed way through to the frontline - who have to demonstrate and live the culture in “moments of true” for their customers every day. Without the right sponsorship and role modeling from the top team the change will not happen.
Q: China is the largest trade partner with Korea. What would be the implication of slowing Chinese economy for South Korea?
A: China is the number one market in the world. It is the second domestic market for Korea. Korea has to have sustainable commitment to Chinese market ensure a strong competitive position. China is very important source of growth. It is not something that you can play a short-term game. This is going to be a serious economy for a long time. Korean firms and other should really think hard how to shape the global portfolio position to ensure winning in China.