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Korea's Next Challenge: Global Competitiveness

Korea has weathered the economic downturn remarkably well. Analysts expect it to register GDP growth over the past four quarters of just under 1%, far below its historical average growth of nearly 5% but an impressive performance for an economy heavily export-oriented and almost exclusively reliant on imported energy.

Several factors account for this. The Korean won fell precipitously in U.S. dollar terms relative to the Japanese yen and Chinese yuan early in the downturn, helping to preserve the competitiveness of Korean exports. Korean consumers rallied to the cause, shifting purchases from imports to local products in behavior evocative of the "IMF sales" of the 1997 financial crisis. Korea's low labor costs also bolstered the country's performance. As the crisis peaked in the fourth quarter of 2008, Korea was the only OECD country to register a decrease in its unit labor costs. While Korea's labor costs fell 4.3%, Japan's grew 1%.

The bulwark of Korean competitiveness remains its large companies, and their resilience in the face of the economic downturn has proved critical. Today 14 of the Fortune 500 companies and four of the 100 largest—Hyundai (005380:KS), LG Electronics (066570:KS), Samsung (005930:KS), and SK Telecom (017670:KS)—are Korean. The nation's dominant businesses are leading exporters of products that range from cars and flat-panel displays to memory chips and telecommunications handsets.

Five Critical Areas

But as Korea emerges from the global recession, its biggest companies should revisit their strategies of international competitiveness. The era in which Korea can rely on labor market flexibility and exchange rate advantages is waning. Korea's historically successful globalization model will come under increasing pressure due to unsettled financial markets, a weakened U.S. dollar, increased protectionism, and stronger competitors.

To succeed in the future, Korean multinationals will have to adopt flexible managerial systems and more sophisticated financial tools. They will have to transform their traditionally hierarchical and risk-averse cultures in order to sharpen their competitive positions relative to Japan, China, and other emerging countries. That will require fresh thinking in five critical areas:

• Strengthen external governance to attract more foreign capital. With changes in its commercial code and the way securities are traded, Korea has made substantial progress over the past 10 years in the rules it sets for business operations. Korean companies now boast much improved financial reporting, restrictions on self-dealing, and the beginnings of board independence. Yet many foreign investors and potential partners remain skeptical of Korea's commitment to the sound governance and accounting practices demanded in today's global markets. Moves by Korean companies to adopt "poison pills" (measures that insulate executives and inhibit shareholder value and flows of private equity) have done little to allay that skepticism.

Improving external governance will help fuel a more robust capital sector, allow greater liquidity in its financial markets, and present fewer barriers to consolidation and investment from overseas. While the Korean government estimates infusions of foreign capital hit a record $12.5 billion in 2009, that was less than one-third the foreign direct investment that Japan received and a tiny fraction of what flowed into China. With such an advanced economy, Korea should have attracted far larger pools of domestic and international private equity and venture capital.

• Revamp internal governance practices to decentralize decision-making. Korean companies time and again have proven themselves capable of rising to challenges. Now they need to revisit the fundamentals of their organization structures, such as decision rights (who gets to make what decisions), information flows, and management incentives. The old model of centralized management, top-down decision making and numerical rather than qualitative analysis, will not suffice for such highly diverse, highly globalized companies. Executives running local units require more autonomy than Korean companies have traditionally felt comfortable granting. The risk aversion that causes many Korean middle managers to prefer to attempt 10 things in a year and accomplish all of them rather than attempt 100 and accomplish 90 will have to be uprooted.

• Manage human assets to attract the best talent in a global market. Most important, Korean corporations have to initiate significant changes in the way they nurture human capital. Korean multinationals must invest in developing well-rounded executives with global experience; to build a management cadre with the requisite skill, they will also have to accommodate more non-Koreans in management. Although Korean companies today have among the highest rates of U.S.-trained managers, of the major trading nations Korea has the lowest ratio of non-nationals in its corporate senior management.

There is some evidence that leading Korean companies are now prepared to confront that challenge. LG Electronics, for example, has adopted English as its language of business. More Korean companies should look to such multinationals as Novartis and HSBC, which have turned their ability to attract talented executives who understand business and cultural subtleties in far-flung markets into a competitive advantage.

• Broaden innovation programs to uncover fresh opportunities. Monitor Group has defined 10 types of innovation, ranging from business model to user experience breakthroughs. Korean companies, like most companies with management dominated by engineers, concentrate their innovation efforts on areas of product and process improvement that have the least impact on market position. Korean corporations need to develop the capacity to innovate in such areas as customer experience, distribution, and product finance.

• Execute new strategies for the next phase of globalization. Korean companies have become world class because of their ability to execute. As the international marketplace expands far beyond the U.S. and Western Europe, Korea's multinationals must redefine what execution means. Korean companies traditionally have exported uniform product lines without regard to different tastes—or different distribution channels—in local markets. In the future, they should cede more authority to local managers and improve their ability to engage with their customers, especially those from less-developed markets. With 65% of the world's economic growth expected to come from outside high-income countries in the OECD, Korean companies will have to cultivate the same quality of insight into developing markets that they possess for sophisticated markets.

All this will require a new type of learning and growth, respecting but no longer relying exclusively on the structures and practices that have worked in the past. With the revenue of Korea's three largest companies representing 45% of GDP, their success will be critical not only to shareholders, but to their homeland's future as well. As longtime friends of Korea who have watched its companies overcome one obstacle after another in the past, we wouldn't bet against them doing it again.

Joseph Fuller is a co-founder of Monitor. A highly respected speaker and author, his work has appeared in The Wall Street Journal, Financial Times, Washington Post, Sloan Management Review, and Harvard Business Review

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