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Korean firms fear disruption of digital transformation

McKinsey suggests CEOs be more innovative to incorporate digital technology

Digital transformation has become a buzzword for various industrial sectors around the world – and South Korea is no exception. Ranging from tech giants to small factories, companies here are scrambling to embrace solutions for better business.

While digital transformation means different things to different firms, it broadly refers to the use of digital technology to improve productivity. It can be applied to manufacturing processes, marketing strategies and corporate organizations.

So far in Korea, digital transformation has been adopted by most large conglomerates, but there appear to remain lingering doubts as to how much of such change can be applied to daily business operations.

Pooya Nikooyeh, a partner at McKinsey & Company’s Korea office, has advised more than 30 executives from Korean conglomerates since coming to the country in 2017, and he said that while Korea has strong infrastructure for digital transformations, the companies still lag behind their global rivals.

“This was a surprise to me when I came to Korea 10 years ago for the first time, the image was so advanced in terms of technology,” Nikooyeh said in an interview with The Korea Herald in Seoul.

“(But) the motivation to do something that is fundamentally changing the business is not a lot. There’s limited incentives to rock the boat. If something goes wrong, you could be seen as, ‘Why did you make such a drastic change?”

Pooya Nikooyeh, a partner at McKinsey & Company’s Korea office (McKinsey & Company)
Pooya Nikooyeh, a partner at McKinsey & Company’s Korea office (McKinsey & Company)

In January, McKinsey announced that no single Korean company had been chosen as a “lighthouse factory” to lead the fourth industrial revolution. The standard for successful digital transformation had eluded Korean firms until steelmaker Posco won it this month with its smart factory technology.

Korean companies’ reluctance to embrace digital transformation was more alarming, particularly compared to Chinese competitors. Even as Korea failed to put an entry on the lighthouse factory list in January, two companies from mainland China and Taiwan were included.

Having worked with companies from mainland China, Taiwan and Hong Kong, Nikooyeh said “openness and eagerness” are keys to their success. It has to do more with the Chinese culture than the country’s systemic framework for business environment, he noted.

“That probably comes from the mentality of, in sports, if you are the underdog, you always want to improve. In a lot of dimensions, they are not underdogs anymore, but they still have that mindset,” he said. 

Nikooyeh stressed such gaps come from different mindset of CEOs, who should play a leading role for digital transformation efforts. He said it could be more challenging when top executives’ tenures are restricted to only a few years.

According to 2016 data from Seoul-based research firm CEO Score, the top 30 Korean companies’ CEOs served an average of about 2.5 years. That is suspected to be about half that of CEOs from similar US companies, which have also seen a decline in their CEO tenure over the past few years.

The restricted tenure could discourage a top executive from making a bold decision that might risk his position in the company. The executive is more likely to seek out in-house solutions rather than partnerships with outsiders, Nikooyeh noted.

“Honestly, there is a bit of preference in a lot of Korean companies for in-house solutions,” he said. “Innovation to me, in this field, is a team sport. You need an ecosystem with the partners, or other companies to work with, and there is a bit of a reluctance.”

Citing chemical sectors and other industrial manufacturers, Nikooyeh asserted companies here have to move beyond the “memory of success.” Tech companies also should put more emphasis on internal digital transformation than asking clients to adopt the change.

“The risky thing with that is, the world is changing. Unless they adopt the new ways of working, they will not be a leader anymore in five years’ times. I argue that some of them are no longer leaders, but they just have the mindset and memory of the past.”

Before joining McKinsey in 2011, Nikooyeh worked as a senior design manager at Australian automobile company GM Holden. While at McKinsey, he co-founded energy solution firm EGG Energy, for which he served as a board director until 2016.