Korean companies need bolder transformation to survive post-pandemic world

| Interview

Business and individuals have all been affected one way or another by the pandemic, and while it has had a dramatic effect on the business landscape, companies have never needed the advice of consultancies more to turn their fortunes around and keep their businesses afloat in the postpandemic world.

The Korea Times sat down with André Andonian, the managing partner of McKinsey Korea who has more than 33 years of consulting experience at McKinsey, the world’s leading global management consultancy, to hear insights on a handful of topics ranging from major business transitions companies are facing amid the pandemic to corporate focus on sustainability and new initiatives companies are exploring to survive the next 10 years.

Based on his extensive experience advising leading companies worldwide, Mr. Andonian is also running numerous programs to develop capabilities of global business leaders as co-dean of McKinsey’s Bower Forum.

Mr. Andonian has become the new managing partner for Korea earlier this year after serving his five-year tenure as the managing partner of McKinsey’s Japan office. During his time in Japan, he led the operation to become one of McKinsey’s fastest growing offices, more than doubling its client portfolio and the number of office employees.

Below is the edited transcript of the interview with André Andonian, who joined us on the fifth episode of our series of interviews with CEOs and top executives of global companies.

Q. Can you tell us about your career, how it led you to McKinsey, and the highlights at McKinsey?

A. I am Austrian, of Armenian origin. I was born in Vienna and studied Engineering and Social and Economic Sciences in Austria, UK and Spain. I worked for IBM in Austria, Spain and Asia as well as for a Fortune 200 company in the US (Masco Corporation) before obtaining my MBA from the Wharton School of University of Pennsylvania as a Fulbright Scholar.

I started as a summer associate in 1988 at McKinsey in Munich and as a full-time associate in February 1989. The 33 years at McKinsey have passed very quickly due to my continuous personal growth and renewal and the ever increasing personal impact I could have on individuals, companies, institutions and entire nations. I have had the opportunity to help in the creation of numerous global leaders and counsel many senior executives, CEOs and chairmen over many years to reach their full potential.

I am one of the longest serving members of our Global Board of McKinsey, serving multiple terms from 2005 until 2020, and of our firm’s personnel committees, evaluating and developing our partners and senior partners. Following my passion for developing people, I created and continue to lead our top-rated learning programs for CEOs and Client Service Team leaders.

While in Japan, I was fortunate to oversee the office grow into the largest office in Asia, bring in significant numbers of global colleagues (accounting for about 50% of the senior partners and 30% of the partners), while making Japan one of the best places to work within McKinsey.

I am now in Korea to continue on our terrific momentum here as one of our fastest growing offices in the world, and build on the successes we had in Japan and rest of the firm to make Korea more global and make it an even better place to work at.

Q. McKinsey is an internationally renowned company offering a wide range of management consulting services. Could you tell us about McKinsey in Korea and how it fits into the company’s global vision?

A. At McKinsey, we aspire to be a thought and impact partner to our clients in order to enable them to reach their full potential. In this context, Korea is a very important economy globally as the 10th largest in terms of GDP, and therefore of upmost importance for global clients.

More importantly, Korea itself is the home of many Korean and global players who play a crucial role in the Asian region and across the globe. This is why we launched our Korea office in 1991 and have successfully established partnerships with many of our Korean clients, which reflects the growing trust, commitment to excellence and increasing opportunities in and beyond Korea.

Today we have more than 200 colleagues serving 75% of the top conglomerates in Korea. We moved to a new office in Yeouido earlier this year and proudly celebrated our 30th anniversary in Korea. The Korean office is our fastest growing office globally, demonstrating that our value proposition of combining best global practices with local expertise is well-received. Furthermore, we are keen to continue to improve and grow our value proposition in Korea—compared to the size of the GDP, the aspirations of the institutions in Korea, we see room to significantly grow our impact in the country.

Q. We’ve seen that the COVID-19 pandemic has accelerated technological innovation, as well as corporate focus on sustainability and climate change. What are the major transitions companies would have to cope with on sustainability as they are entering into the post-pandemic era?

A. As you know, the Korean government announced bold targets to achieve carbon neutrality by 2050, including scrapping coal fired power plants. Given coal is the number 1 source of energy in Korea and there are 60 plants in the country, this is no small feat. Therefore Korean companies will also face quite a lot of challenges, and will need to think about several major transitions.

The Korean economy is heavily manufacturing based, with industries such as petrochemicals, refining, automotive, shipbuilding accounting for a large share of GDP. These manufacturers will need to shift to more sustainable power sources, which will not be easy, given that industrial energy prices in Korea is one of the lowest in the developed world with 9 US cents per kWh in 2021 vs the world average of 12 US cents per kWh.

Several industries rely on continual processes, where a loss in power can be catastrophic. For example, we saw the impact on the Samsung semiconductor factory in Texas, where a power outage led to damages of nearly $300 million. Given the importance of semiconductors in Korea, it will be paramount for Korean companies to manage this transition carefully.

Q. What’s McKinsey’s view of how businesses are approaching the months ahead as we enter the post-pandemic era? What are some steps that global CEOs can take to maneuver smoothly through the challenges with a new business plan (such as incorporating improved corporate governance and portfolio optimization)?

A. Korean companies will need to radically think about portfolio restructuring. Our recently published book Strategy Beyond the Hockey Stick shows that the odds of beating competition increases by a factor of 3 if the portfolio is restructured on a constant basis. Many conglomerates in Korea have a mix of high value creating companies, but also a mix of lower/value destroying subsidiaries. They can be much more proactive in shifting their portfolio and take bolder moves on the more “natural” owners of certain portfolios. Many Korean companies, such as SK Group, made big announcements earlier this year to shift their portfolio into ESG opportunities, and have restructured their investment arm as a result.

The next would be “accelerated new business building.” New business models are significantly altering and disrupting industries, such as banking and retail. Digital disruptors such as Coupang are worth more than the combined market caps of the leading retailers in the country. Traditional conglomerates will need to continue to accelerate their efforts to create completely new businesses, offer new services to existing customer base, expand the reach of existing products and services to new customers and create dedicated venture funds to create 3-5 unicorns.

Korean companies should also digitize the full value chain, not just the customer facing portion. When most companies think of digital transformation, they tend to focus on customer facing parts like user interface and apps. From our experience, the holistic transformation including the back end provides much bigger benefits. In particular, leaders have managed to slash product development time by 30%, or capture 5-10% material cost savings on top of the baseline. Moreover, leaders accelerate the transition to cloud computing to further increase the speed and scale of innovation.

Making governance more transparent is also a priority for Korean companies. Korean companies still suffer a discount due to perception of governance issues. It is a pity that we see many Korean senior executives with legal issues. From the view of a foreigner, it is highly discouraging to invest into the countries, and companies should continue to find opportunities to improve the transparency of their decision making.

McKinsey research has shown that several factors such as having a more purpose driven organization and more flexible, agile teams are critical in ensuring higher job satisfaction.

André Andonian

Lastly, there should be efforts to make the workplace much more compelling. We are seeing this “great resignation” globally, including the US where 4 million people have left the job market. We already know that Korea has one of the lowest labor force participation rates in the world (in last year’s OECD study Korea ranked 34th out of 38 countries). McKinsey research has shown that several factors such as having a more purpose driven organization and more flexible, agile teams are critical in ensuring higher job satisfaction.

Q. Korean companies are in the early stages of embedding their new ESG purpose. Where does Korea stand in terms of ESG management, and what is McKinsey doing to help them create value by embedding sustainability in corporate strategy?

A. Overall, we see much room for improvement in ESG for Korean companies.

For “E,” Korean companies are leading the innovation in many areas, such as secondary batteries for EVs. However, Korea is one of the world’s largest emitters of greenhouse gases, and there needs to be significant shift in its industrial base in order to meet the targets set by the government.

At McKinsey we are helping to diagnose the overall nature of challenge to overcome on a country/societal level and help the companies to accelerate their innovation to contribute to the solution of these challenges. During the last year we did 1,000+ engagements globally. Our work in sustainability is growing at over 50%. We are working with banks to help them decarbonize their portfolios, and with industrial companies to build new green businesses (like green steel, batteries, EVs).

For “S,” Korean companies are doing relatively well in certain areas like philanthropy but have much room for improvement in other areas. For example, the participation of women in the workforce is one of the lowest in the world, especially for senior ranks; inclusion of diverse populations such as foreigners and LGBT tend to be mixed.

Governance is the area where Korean companies still the most work to do. Korean boards have much room for improvement particularly in composition of more women and foreigners, being more actively challenging in management decisions (e.g. less than 1% of board agenda items were rejected in the last year) and attracting world class talent (e.g. most Korean directors make less than 50m won which is 1/6 of the US average).

Q. Speaking of climate change, McKinsey has committed to achieving net-zero climate impact by 2030 and joined the Business Ambition for 1.5°C campaign, a coalition of corporate leaders taking climate action. What is McKinsey’s approach to this?

A. To reach that goal, we have first set science-based targets to reduce our greenhouse gas emissions by 2025 in line with a 1.5-degree pathway, the most ambitious goal of the 2015 Paris Agreement.

We will reduce by 25% emissions produced by sources we own or control and those from purchased energy vs 2019. We will also reduce by 30% per employee our emissions from business travel.

We will also increasingly focus on projects that remove carbon from the atmosphere, such as reforestation projects, to ensure our remaining footprint is neutralized by 2030, and we will also continue to invest in projects that protect forests.

During our transition to net zero, we will continue to offset all our emissions by investing in carbon-reduction projects certified to international standards.

As a small example, our office in Korea also achieved LEED global certification, for Leadership in Energy and Environmental Design.

Q. Gender diversity and inclusivity is also a major initiative that many companies are exploring. What’s McKinsey’s approach to gender diversity and inclusivity, and how is Korea catching up with the trend?

A. First, I am frustrated that Korea is so far behind. The 4% female representation in boards falls well short of the global average of 24% as well as Asia–Pacific’s 17.3%. Data from the CXO Institute shows that only one in four employees at Korea’s conglomerates are female. Moreover, the gap in burnout between women and men has almost doubled.

Advancing women’s equality in work offers a significant GDP growth dividend. McKinsey Global Institute’s Power of Parity work has identified a best-in-region scenario for Asia of $12 trillion additional GDP in 2025 from accelerating progress towards gender parity. Companies with more than 30% women executives were more likely to outperform companies where this percentage was lower.

So at McKinsey, we have made big commitments with our “All in” effort, where we are proud to be one of 9 corporate IMPACT champions of the UN’s HeForShe campaign. Women represent 39% of our managers as an example, but we still have much room to improve in representation in our partner group.

As you may know, Korea and Japan are amongst the least diverse countries in the world in terms of ethnicity. But there are several areas where Korea can improve its diversity and inclusion.

Areas where Korea can improve include foreigners in Korea. To combat the aging and declining population, it is imperative that Korean corporations lead the way to embrace foreigners in the country. At McKinsey Korea for example, we have already brought in 5 non-Korean Partners this year alone, and are actively bringing in consultants from other countries across all ranks to improve our diversity.

On LGBTQ+ community, Korean corporate culture can much better embrace diversity. In a recent OECD survey in 2019, Korea ranked the second lowest out of 14 countries in the world where data was available on acceptances of LGBTQ community, ranking below Japan and Italy but above Turkey. At McKinsey, we formalized our commitment to the LGBTQ+ community since 1995 with the establishment of Equal at McKinsey at McKinsey, and we are proud of receiving a perfect score of 100 in the Human Rights Campaign Foundation Corporate Equality Index every year since 2006. In fact, we have over 900 colleagues across 100 offices in McKinsey Equal at McKinsey.

Q. What are your near- and long-term goals as managing partner of McKinsey Korea?

A. I want to help Korean companies to sustain global leadership by combination of personal mentoring and counseling and company strategies adapted for mission, and make sure as McKinsey, we can contribute with a combination of global and local expertise.

Also, I would like to make sure that Korea’s relevance from McKinsey internally is elevated in line with the global economy. Korea is the world’s 10th largest economy but within McKinsey it’s not number 10. We need to grow even more and we need to do even greater things to earn that spot.

And I want the Korean office to become a role model for inclusion, talent development in the country, and be known as the leadership engine for the Korean economy.

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