How to overcome challenges in global expansion?
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Autonomy, profitability pose new tasks for Korean companies
Although leading South Korean companies have extensive experience of tapping into global markets, they have only relatively recently begun to operate extensively abroad. They are obtaining substantial revenue in international markets, but profits are lagging.
Korean business executives who took part in the latest Ernst & Young survey this summer said they believe their companies need more local knowledge in overseas markets and currently lack the ability to shape their strategies and offerings to specific market needs.
These are some of the key points in ``Beyond Asia: strategies to support the quest for growth,’’ a report based on the survey of over 600 executives from companies headquartered in Singapore, Malaysia, China and Korea among others, examining challenges in the roads of global expansion and strategies to overcome them.
In recent decades, Korea has built an advanced, high-income economy with a GDP per capita, in purchasing power parity terms, roughly equal to that of the European Union. One of the drivers of this growth has been its strong export success. This was initially concentrated on developed countries, while transitioning more recently toward emerging markets as well.
In trade terms, Korean companies are already much more international than their peers in other Asian countries. Of those polled for this report, 55 percent already export or sell into international markets, compared to just 46 percent of the survey average.
The country’s export strength is expected to continue growing by an average of 10.8 percent per annum until 2020, according to the study. What will continue to change, though, is the reliance on high-growth markets. Even more than their Asian competitors, Korean companies see the leading growth opportunities in populous emerging markets, notably China (cited by 28 percent), Brazil (22 percent), Indonesia (21 percent) and Russia (21 percent).
In looking to these rapid-growth markets, the primary aim is on increasing sales (cited by 53 percent, compared to 46 percent overall. This is consistent with the country’s growing trade with high-growth markets.
Ongoing financial difficulties in developed countries will dampen growth of Korean trade with Europe, although recent ratification of a free trade treaty with the United States will help exports there to grow by 9.5 percent annually. China, however, will grow to be the overwhelmingly dominant export market for Korea.
Despite extensive export activity, Korean companies have only relatively recently begun to invest substantially in operations abroad. Foreign Direct Investment (FDI) outflow has grown rapidly in recent years, to more than $20 billion in 2011.
Although no small amount, this is still less than Singapore’s 2011 FDI outflow, despite Korea’s GDP being more than four times the size, although it is growing rapidly. Accordingly, Korean companies polled for this report are less likely than average to have financial investments in other countries (41 percent do, compared with 49 percent overall).
Similarly, its companies are no more likely to have operations in international markets than its regional peers (38 percent compared to 37 percent), despite being at a more advanced stage of economic development.
A related issue is that Korean companies are having difficulties turning their international revenues into profits. Although 68 percent of surveyed firms earn 40 percent or more of their revenues from international markets, only 28 percent make more than 40 percent of profits outside the country.
Korean respondents identify several issues that may explain this difficulty in generating profitable operations abroad.
First, they believe that their companies have an insufficient understanding of the outside world. In particular, executives flag in knowledge of local culture and business practices (cited by 55 percent, compared with just 41 percent for the survey overall), and understanding of global markets (53 percent) as two particular areas of concern.
Second, 40 percent say that making the board more internationally representative is critical to the success of international expansion plans. Although it starts at the top, the issue is pervasive: the most critical business change required according to Korean respondents is to make corporate culture more international (52 percent compared with 42 percent for other respondents).
This lack of global perspective is all the more problematic given the tendency of Korean companies to control foreign operations centrally. Only one in 20 respondents strongly believes that their company is effective at empowering local leadership, half the level of respondents from other regions.
These issues are likely to complicate efforts to expand sales in rapid-growth markets. Korean companies see their main strengths in foreign markets providing leading technology and a high-quality workforce (both cited by 50 percent).
Although these are important strengths, sales often depend at least as much on making such technology relevant to the distinct needs of customers in different markets.
Only 16 percent of Korean respondents, however, say that their companies are very effective at tailoring strategy to specific markets and just 9 percent say the same about their ability to implement innovations for individual markets.
Perhaps as a result, the function they identify as most in need of change to bring about international success is sales and marketing (43 percent).
Autonomy, profitability, global mindset
So what do these trends mean for Korean companies seeking to expand internationally?
First, it is important to look beyond sales in order to meet increased global competition.
Greater international involvement by companies across the region will affect everyone, but in particular those heavily involved in exports. Meeting this challenge will require more active involvement overseas, including a greater use of operations located abroad. The current focus on sales in rapid-growth markets, although understandable, may also mask other opportunities of operating there, such as access to talent and raw materials.
Second, companies will need to rethink their organizational design and operating models.
Executives need to consider how to combine local relevance with global scale. Current levels of local autonomy, however empowering compared to those of peers, are not satisfactory to Korean respondents. This may require rethinking of how companies are structured. Similarly, managing talent internationally may mean reconsidering human resources and executive search policies.
Third, competition is local as well as global.
Global strengths do not ensure success at the local level. Korean companies need to develop more detailed understanding of the markets where they wish to operate and use this to shape their local product or service offerings appropriately.
Ernst & Young’s Korea Country Managing Partner Gweon Seung-wha concludes: ``Korean companies should develop more practical strategies to focus on the right rationales for investment and modes of entry and capabilities, as well as forecasts to improve decision-making and planning for future global expansion.’’
This article was contributed by Ernst & Young, a leading global professional services firm.