Korean business needs crisis mode
Five years after the global financial crisis, Korean companies are feeling the pinch yet again. Earnings rebounded strongly in 2009 and 2010, but have been steadily slowing since then. In the first half of this year, sales growth stalled. The situation starkly contrasts with robust corporate performance that was evident five years after the 1997 currency crisis.A look at earnings performance (quantitative aspects) of Korean companies and how their business management has transformed (qualitative aspects) since 2008 suggests new directions for Korean businesses.
Korean companies fared relatively better than leading global companies in the months immediately following the crisis. After a brief decline, their sales growth rebounded and ended positive in 2009, while rivals in advanced economies remained in negative territory.
Lessons learned from the 1997 crisis gave them an intuitive understanding of how to handle the 2008 crisis. Yet the sharp depreciation of the won against the U.S. dollar and the Japanese yen deserve some credit for the success of Korean companies.
These supports have receded and there are concerns that some Korean companies either do not fully grasp the current weakness or have become complacent. The fallout of the 2008 crisis on Korea’s global markets persists. Furthermore, competition is more intense with Chinese companies rising and Japanese rivals reviving on a weakened yen, domestic consumption is fragile and social demands on Korean companies are mounting.
The momentum of Korean companies has been ebbing since 2011. Sales growth is slowing faster than that of U.S. and Japanese companies, and the operating profit growth of the latter has eclipsed Korean companies. The number of underperforming Korean companies is surging. Moreover, those whose ability to service their debt is so weak that even a small financial shock could send them into bankruptcy are also increasing.
In the post-global crisis period, Korean companies have also shown notable changes in leadership style, business structure and management methods. Change drivers are the global economic slowdown, technological developments and a search for new approaches to capitalism.
Leadership: Amid growing uncertainty in the post-2008 business environment, Korean companies have emphasized continuity and professionalism in leadership. CEO replacement was higher than for leading global companies before the crisis, but it now approaches the global average. And with government, institutional investors and society expecting higher competence and transparent decision making, a rising number of new CEOs have extensive experience in their industry.
Business structure: Pursuit of new business ventures has contracted. Foreign direct investment and M&A shrank. Amid difficulty in finding drivers for breakthrough, Korean businesses have been integrating their business units to bulk up, strengthen existing businesses, cut costs and raise management efficiency. They also have expanded product lines to boost sales growth.
Management: Even amid heightening risks, Korean companies have steadily expanded investment in research and development while stepping up oversight of liquidity. In addition, in order to efficiently manage limited resources amid slowing sales growth, companies are paying more attention to keeping their workforce motivated. Accordingly, they are focusing more on performance-based pay, departing from traditional age-based criteria and bolstering non-monetary incentives.
Furthermore, use of new marketing channels like mobile and social networking services has expanded to increase marketing efficiency amid an economic slowdown. Finally, corporate citizenship activities - efforts toward the environment and society, etc. - have emerged as a major management function.
The main focus of Korean companies has been minimizing shocks and maintaining the status quo. However, strong performance at a handful of flagship companies and a still acceptable foreign exchange rate masks the magnitude of risks and weaknesses. The government, business and society should keenly perceive the severity of the current situation and carefully decide where to commit for future sustainable growth. The speed at which management can pivot is also crucial to stay ahead. The ongoing changes in management and operations at Korean companies need to continue and should be guides to those who are falling behind.
BY KIM Seung-Pyo
with the Korea JoongAng Daily
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