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Many South Korean businesses have flourished over the past few decades, and some have emerged as world-class makers of mobile devices, memory chips, LCD screens, automobiles, and ships. In recent years, however, Korean companies have seen their financial results slip as economic shifts, such as the slowdown of China’s economy and the weakening of the yen, have curbed broader expansion (Exhibit 1).

[[exhibit 1]]

How can Korean companies thrive in a new era of low growth? To answer that question, we used McKinsey’s Organizational Health Index (OHI) to look at how effectively Korean businesses are run. Significantly, we found that they lag well behind their global peers in adhering to management practices that could help them succeed in an environment of intense competition and dwindling corporate profits.¹

We also learned that a majority of Korean employees are dissatisfied with the routine overtime, inefficient meetings, and frequent management reports that are features of Korea’s corporate culture. These are symptoms of the organizational weaknesses our survey identified. Scores were especially low among employees in their 20s and 30s—the talent pool companies depend on for their next generation of executives—and for women.

For years, Korean companies succeeded with what we call an authoritative management formula: executives pressed for better performance through top-down directives. But economic conditions and workplace attitudes have changed. In this article, we discuss the organizational weaknesses and strengths that we found in many Korean companies and what they mean in today’s competitive landscape.

An organizational-health check for Korean companies

McKinsey has assessed the organizational health of about 1,800 companies around the world. Our study of 100 Korean organizations—31 large corporations and 69 midsize companies—found they are in poor condition compared with their global peers.² Seventy-six have overall health scores below the global average: nearly half of the large companies and all but six of the midsize ones. Among the latter, 49 of the 69 were in the bottom quartile.

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These results matter because good organizational health—the ability to align, execute, and adapt faster than competitors do—is closely correlated with superior financial and operating performance, which will be essential to competing as profit growth slows. From 2003 to 2011, companies we define as healthy generated total returns to shareholders three times higher than those of unhealthy companies.³

While Korean companies are effective at motivating their people and making them feel accountable for the results they produce, a closer look at our framework’s nine dimensions of organizational health shows that Korean companies are weak in four areas (Exhibit 2):

Leadership. The surveyed companies favor authoritative leadership: applying pressure from the upper levels of a hierarchy to make sure that work gets done. They also neglect leadership styles, such as involving colleagues in decision making, that could provide a counterweight to authoritative approaches.
Coordination and control. The companies in our survey scored poorly on evaluating and rewarding talent, managing operations and finances, and identifying and mitigating risks.
Capabilities. The companies we studied are spending significant time on acquiring and developing talent and establishing sound processes to support execution, but this hasn’t translated into an ability to use talent effectively.
External orientation. This dimension looks at how well companies engage with outside groups and organizations to create value. The companies in our study maintain weak relations with their business partners, with the government, and with local communities.

[[exhibit 2]]

Yet if Korean companies are in poor health, their leaders don’t seem to be aware of this. The 985 CEOs and other executives in the study gave their companies an average health score that would rank them in the top quartile worldwide. Employees, on the other hand, judge their companies’ health to be considerably worse.

Unhealthy companies, unhappy workers

We noted earlier that a majority—60 percent—of the surveyed Korean employees are dissatisfied with cumbersome procedures, pointless meetings, and long days and evenings at the office. In light of our findings on the weaknesses of the surveyed companies, these features of Korean workplace culture stand out as symptoms of deeper problems.

The lower an employee’s position in a Korean company’s hierarchy, the worse these problems appear. People below middle management say that their companies’ health is in the bottom quartile worldwide. So do the younger workers in our survey—those in their 20s and 30s. But workers in their 40s and 50s see their organizations as healthier: in the third and second quartiles, respectively.

This generational divide can be frustrating for younger and older workers alike, as we heard from those we interviewed. One respondent in his 20s told our researchers, “Leaders seem to be trapped in their own experience of success, refusing to accept anything new. Whenever I hear them say that they’ve already tried it in the past or that I should simply do what I am told, without giving me a solid explanation, it feels like we will never be able to understand each other.”

Older workers, too, feel it can be hard to relate to their younger peers. One executive in his 50s commented, “While younger generations these days complain about instability and difficulty in planning for the future, this is nothing compared to what we had to go through 20–30 years ago. We were able to achieve growth under tougher circumstances, so I don’t really understand what is so hard for them. I’m sure they can do it once they put their minds to it, but they seem to worry without even trying.”

The generational divide in the Korean workforce is matched by a gender gap. Women rate their companies’ health at levels that would put them in the bottom quartile worldwide, while men score organizational health at third-quartile levels. Women and men also have different beliefs about the prevalence of gender discrimination. Seventy percent of women think women face discrimination at work; less than half of men agree.

In search of a winning formula

The poor organizational health of Korean companies is one part of the story. Another is the management practices they choose to apply. McKinsey’s earlier research found that four combinations of practices, which we call “recipes,” were associated with sustained success. Companies whose practices closely resemble one of these winning recipes were five times more likely to achieve strong performance.⁴

About two-thirds of companies around the world use management practices that look like one of the four winning recipes. But only half of the Korean firms in our survey do (Exhibit 3). The rest could be at a disadvantage unless they use a coherent set of beliefs about value creation and success to define their organizational models, their approaches to change, and their workforce programs.

[[exhibit 3]]

Among the Korean companies whose practices resemble a recipe, all were aligned most closely with the “continuous improvement engine” one. This calls for involving all employees in enhancing business performance, gathering insights, and sharing knowledge, as well as a meritocratic approach to rewarding and recognizing people.

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However, the Korean companies that look like continuous-improvement-engine firms depart from this recipe in problematic ways. Compared with companies around the world that follow the same recipe, the Korean businesses place excessive emphasis on authoritative leadership, talent acquisition, and outsourced capabilities. They also put less emphasis on performance management, knowledge sharing, operational processes, and innovation.

These differences may be a legacy of the common Korean organizational model combining top-down control, capable talent, and a “fast follower” mind-set of building on the innovations of pioneering businesses. But whatever their origins, they reduce the probability that Korea’s continuous-improvement-engine companies will attain good organizational health.

It also must be said that this particular recipe will not fit all Korean companies, whose strengths, weaknesses, and aspirations might make other recipes more suitable.

No survey as broad as this one can point to solutions that will work for every company in Korea. But some executives have already taken our findings as motivation to understand and improve the organizational health of their companies. More are beginning to do the same. In doing so, they might find it helpful to acknowledge openly that their companies should adapt to a period of low growth. The typical Korean organization’s command-and-control style will take time to recalibrate. Admitting that this style may no longer fit today’s competitive environment is one way to start.