Surviving and Winning in Turbulent Times: Strategic Imperatives for Corporate Leaders 27 th CEO Summer School, KCCI Dominic Barton, McKinsey & Company

Surviving and Winning in Turbulent Times: Strategic Imperatives for Corporate Leaders 27th CEO Summer School, KCCI Dominic Barton, McKinsey & Company

July 18, 2002

020718_chejuCEOseminar_KCCI_ZXQ076.SE

2

EXECUTIVE SUMMARY EXECUTIVE SUMMARY

1. We are living in turbulent times, and corporate leaders should operate assuming this turbulent environment will continue for the next 3-5 years (e.g., the foreseeable future)

2. The key factors underlying this turbulence are a series of fundamental economic, social and technological forces that are converging on the global economy, impacting all markets and all industry structures within and across national borders. In short, we are in transition to a new global more integrated economy. External shocks, whether they be through war or lapses in integrity are accentuating this volatility


3

EXECUTIVE SUMMARY (CONTINUED) EXECUTIVE SUMMARY (CONTINUED)

3. Winning companies will pursue three core action sets simultaneously

A. Ensuring “the basics” are in place: This includes the basis of corporate governance and integrity; customer satisfaction, competitive differentiation and the shareholder value mindset

B. Preparing for the unexpected: This means understanding your company’s existing risk profile (e.g., what happens to your economics if your top 1% of customers go bankrupt) – This means preparing for changes to the external operating environment

(e.g., regulatory, technological change, war) – This means deepening your leadership bench – This means preparing for changes in ownership

C. Pursuing a portfolio of strategic initiatives With different time horizons and risk profiles, as opposed to a single deterministic strategy. This portfolio must be reviewed and updated at least every 6 months, as opposed to the traditional 3 year review


4

OVERVIEW OVERVIEW

1. Turbulent times

2. Underlying forces at work in the global economy

3. Winning in this new world

• Ensuring the basics are in place

• Preparing for the unexpected

• Pursuing a portfolio of strategic initiatives


5

1. TURBULENT TIMES – THE VOLATILITY OF CAPITAL MARKETS IS A GOOD INDICATOR OF THE TURBULENCE IN TODAY’S ECONOMY1. TURBULENT TIMES – THE VOLATILITY OF CAPITAL MARKETS IS A GOOD INDICATOR OF THE TURBULENCE IN TODAY’S ECONOMY

0

200

400

600

800

1,000

1,200

1,400

1,600

1,800

Source:Compustat; Speech by Tsun-yan Hsieh on May 9, 2002 to Singapore Institute of International Affairs

S&P 500 Index: High, Low, Average, 1980-2002Index price level

1980 82 84 86 88 90 92 94 96 98 00 2002E


6

0

50

100

150

200

250

300

350

Asian Telecom (general)

US Telecom Services

TURMOIL IN THE TELECOMMUNICATION INDUSTRY ALSO REFLECTS THE TURBULENT TIMESTURMOIL IN THE TELECOMMUNICATION INDUSTRY ALSO REFLECTS THE TURBULENT TIMES

Source:Datastream

Capital market valuationsIndex, 100% = Jan 1, 1997

• The entire industry is being revalued against radically changing expectations

• The turbulence is not over yet: telecom valuations to date have fallen by ~ 35% as against expectations of market value drops of 30-50%


7

HALF OF TOP 10 U.S. CORPORATE DEFAULTS HAVE HAPPENED IN THE LAST YEAR HALF OF TOP 10 U.S. CORPORATE DEFAULTS HAVE HAPPENED IN THE LAST YEAR

*as of 2001

Source: American bankruptcy institute

• Sept. 11th attack

• Burst of Internet Bubble

• Global recession

Enron Corp

Texaco

Financial corporation of America

Global crossing

Pacific gas and electric

M Corp

Kmart

First executive corp.

Gibraltar financial

FINOVA group

2001

1987

1988

2002

2001

1989

2002

1991

1990

2001

Half of the top 10 US corporate defaults in US in history have happened in the last year• For bankrupt

corporations banks have to collect and dispose assets

• For corporation in chapter 11, debt and corporate restructuring has to be performed

Top 10 largest bankruptcies/chapter 11 by asset size in US Billion dollars; 1980-2002

91.9

63.4

35.9

33.9

25.5

21.5

20.2

17.0

15.2

15.0

14.1

Worldcom 2002?*


8


9

FOUR FUNDAMENTAL FORCES TOGETHER WITH SOME EXTERNAL SHOCKS, DRIVE THE TURBULENCE IN THE ECONOMYFOUR FUNDAMENTAL FORCES TOGETHER WITH SOME EXTERNAL SHOCKS, DRIVE THE TURBULENCE IN THE ECONOMY

Liberalization

Mobility of capital

Digital world

Common standards

Global forces towards a more integrated global economy External “shocks”

Increased turbulence in today’s economy


10

2. FUNDAMENTAL FORCES AT WORK2. FUNDAMENTAL FORCES AT WORK

A series of fundamental political, economic, social, and technological forces are converging on the global economy, impacting all markets and all industry structures within and across national borders

Global capital markets

Liberalization

Digital technologies

Standards & protocols


11Source:McKinsey research “Understanding the Emerging Global Economy”

6

28

65

1980 1994 2000

GLOBAL CAPITAL MARKETS GLOBAL CAPITAL MARKETS

Global Equities & Bonds (corporate, government and international)Nominal US$ Trillions


12

International Capital Flows$ Billions

0

500

1,000

1,500

2,000

2,500

3,000

3,500

4,000

1980 1990 1995 2000

$3,621

Portfolio flows (equity and bonds)

Bank lending

Source:IMF – International Financial Statistics; McKinsey analysis

$468

$966

$1,434

20% CAGR

7.5% CAGR

HUGE CROSS-BORDER CAPITAL FLOWSHUGE CROSS-BORDER CAPITAL FLOWS


13

Average daily FX turnover in New York, London, Tokyo

Combined central bank foreign exchange reserves in US, UK, Japan, Germany, Switzerland

GLOBALIZATION HAS SHIFTED POWER FROM GOVERNMENTS TO MARKETSGLOBALIZATION HAS SHIFTED POWER FROM GOVERNMENTS TO MARKETS

USD billions

139 172

278 284375

197

623

870

1,124

39

1983 1986 1992 1995 1998

Source:Central banks; IMF


14

BREAKDOWN OF REGULATORY BARRIERS BREAKDOWN OF REGULATORY BARRIERS

Source:McKinsey analysis

No right of cross border establishment

No right of cross border offerings

Large currency and FX risk

Access to local market

Differences in fiscal treatment based on nationality

Regulatory differences

Differences in consumer behavior/ cultural differences

• Freedom of establishment for credit institutions

• Single banking license

• Introduction of Euro

• Emergence of “new brokers” and originators

• Emergence of third party services

• Court cases already pending

• Market pressure expected to push for harmoni-zation

• Increased price transparency will tempt consumer in accepting product differences

Impact of European integration

Today

Main differences across European markets

1979 1993 1999 2002


15

A NEW PHASE OF INTEGRATIONA NEW PHASE OF INTEGRATION

• Since 1980, growth in global equities and bonds outpaced growth in money supply 2 to 1

• Significant increase in cross border investments - corporate and consumers

• Growth in highly liquid financial stock makes markets more easily integrated

Global capital pool

Technology: falling interaction costs• Moore’s Law: cost of processing capacity cut in

half every 18 months• Internet population 0 to 110 million Americans

(41%) in less than a decade; Korea - 6 million and growing at 5-10% per month

• Search costs dropping significantly

Liberalization• In Europe, privatization of pension funds and

advent of EMU• In Korea, opening up of the financial markets;

industry de-regulation• Centralization of stock markets

US hit first Europe now starting

Asia accelerating

A new phase of economic integration

across geography Across the country

Across the world


16

Forces at work are causing decline of interaction costs, or the costs incurred in getting different people and companies to exchange economic goods and services

Source:McKinsey analysis

• Finding information• Identifying

counterparties and partners

Search

• Arranging activities• Setting up exchanges/

transactions• Transacting exchanges

Coordination

• Overseeing performance of others

• Following up to ensure proper execution

Monitoring

100%

50%

1995 2005

Interaction costs Forces at work:

Capital mobilityLiberalizationStandardsDigitization

DECLINING INTERACTION COSTSDECLINING INTERACTION COSTS


17

Continuously redefine the Continuously redefine the boundaries of markets and boundaries of markets and economieseconomies Identify and serve Identify and serve

individualized needsindividualized needs

Increased specialization, Increased specialization, scale and scope as costs of scale and scope as costs of managing complex managing complex organization declinesorganization declines

Eliminate traditional Eliminate traditional intermediaries and create intermediaries and create new forms of interactionnew forms of interaction

Deconstruction of value chainsDeconstruction of value chains

Spread out physically Spread out physically and coordinate around and coordinate around information flowsinformation flows

Disequilibrium

DifferentiationDifferentiation

DiseconomiesDiseconomies

Disintermediation

Disaggregation

Dispersion

DecliningInteraction

Costs

Source:Global Practice

RADICAL CHANGES TO BUSINESS ENVIRONMENTRADICAL CHANGES TO BUSINESS ENVIRONMENT

Declining interaction costs are having significant implications on the basic organizational, operational, and performance characteristics of industry and business structure


18

OriginationsCredit underwriting

Funding Servicing

From: Traditional system (spreads sufficient to cover cost of capital and regulatory costs)

To: Securitized mortgage system (spreads not sufficient to cover cost of capital and regulatory costs)

• Banks• Specialized

servicers

OriginationsCredit underwriting/ structuring

Credit enhance-ment

Placing/ trading

Servicing

• Banks/ brokers• Mortgage

brokers• Independent

brokers

• Bank• Freddie Mac/

Fannie Mae

• Freddie Mac/Fannie Mae

• Securities firms

Investing

• Institutional investors

• Pension funds

UNBUNDLING OF THE VALUE CHAIN HAS ENABLED SPECIALIST PLAYERS TO EMERGEUNBUNDLING OF THE VALUE CHAIN HAS ENABLED SPECIALIST PLAYERS TO EMERGE

COMMERCIAL BANKING VALUE CHAIN (MORTGAGE)


19

INFRASERVICE BUSINESS BECOMING MAJOR PART OF ECONOMY INFRASERVICE BUSINESS BECOMING MAJOR PART OF ECONOMY

*Projected to grow to 30~40% within 10 years **Changes in index composition distort sales growth figures Source:Compustat; McKinsey analysis

Infraservice businesses are growing…

100% = $9.3 trillion

50~60%

Infraservices’ share of US gross domestic product2000, percent

Infraservices 1090

Third-party infraservices

In-house infraservices

Growth opportunity*

… and have performed well financially – even in a down market

US infraservices

S&P 500

Nasdaq

14.3

13.8

12.2

5-year annualized total returns to shareholders (TRS)April 1996 – April 2001, percent

20.5

11.7

5-year compound annual growth rate (CAGR) for sales 1995 – 2000, percent

N/A**


20

IMPLICATIONS OF THESE FORCES ON CORPORATES IMPLICATIONS OF THESE FORCES ON CORPORATES

1. Winner takes all economy

2. Increased outsourcing and specialization

3. Increased number of challenges (e.g., more competitors, faster product lifecycles)

4. Increased standardization

5. Higher turnover rate – competition, talent


21

IN THE NEW WORLD, WINNERS TAKE ALLIN THE NEW WORLD, WINNERS TAKE ALL

100% =

Market capthreshold(US$ billion)

30

15.1 26.8 27.2

All others

Global 150**

Dec 2001Dec 1994 Mar 2001

27

735959

4141

3213

Market value of all* publicly traded companies in the worldPercent, trillion USD

*Approximately 28 thousand companies

**Global 150 defined as world top 150 companies as measured by market value

Source:Bloomberg; Global Vantage/Compustat; FIBV; Emerging Stock Markets Factbook 2000; McK Global Strategy Practice


22

THE WINNER TAKES ALL PHENOMENON HOLD TRUE ACROSS INDUSTRIESTHE WINNER TAKES ALL PHENOMENON HOLD TRUE ACROSS INDUSTRIES

G150 Pharma companies

Other companies

100%=

G150 Telecomcompanies

Other companies

100%=

Number of Companies

Market value Dec 94-Dec 01

890 US$ 2.2 tn

Market valueDec 01

US$ 1.7 tn 760 US$ 1.6 tnUS$ 2.5 tn

Source:McKinsey Global Strategy Practice Research; Datastream; Bloomberg; Compustat

Pharma example

2

74 76

98

26 24

Telecom example

3

6979

97

3121

Number of Companies

Market value Dec 94-Dec 01

Market valueDec 01


23

THE TURBULENCE HAS RESULTED IN INCREASED COMPANY CHURNTHE TURBULENCE HAS RESULTED IN INCREASED COMPANY CHURN

1935 1955 1975 1995 2005E

~1.5% ~10%Turn-over rate

90

45

3022

15

Implied lifetime in S&P 500 based on company exits Number of years

Source:McKinsey research on “Creative Destruction”


24*Number of dropouts and number of new entrants differ due to merger between Chevron and Texaco within G150

Source:Bloomberg; Global Vantage/Compustat; FIBV; Emerging Stock Markets Factbook 2000; McK Global Strategy Practice

THE CHURN IS EVIDENT IN THE WORLD’S 150 LARGEST COMPANIES (G150)THE CHURN IS EVIDENT IN THE WORLD’S 150 LARGEST COMPANIES (G150)

…and 2001 is no exception

Mar 2001Old G150

Dropped out16*

Stayed in133

New entrants17*

Dec 2001New G150

11,068137-109

-16511,205

Churn in G150, 1994-2000Percent

New entrants from 1994 to 2000

Top Global 150 Companies 2000

In both 1994 and 2000

Competition has always been keen…

Change in market value from March - December 2001US$ billion

5446


25

TURBULENCE HAS ALSO RESULTED IN INCREASED CEO CHURNTURBULENCE HAS ALSO RESULTED IN INCREASED CEO CHURN

CEO Company Tenure

Richard Thoman 13 months

Durk Jager 17 months*

Michael Hawley 17 months

Douglas Ivester 28 months

Richard McGinn 36 months

Jill Barad 37 months

In the 1990s, 1/3 of CEOs at the world’s major corporations lasted 3 years or less

Jeff Nugent 25 months

CEO sample over last 3 – 5 years

*Shortest tenure in company’s 165-year history

Source:“The CEO Trap,” Business Week


26

THE TRANSITION ECONOMYTHE TRANSITION ECONOMY

IntegratedIntegratedglobal global

economyeconomy

OldOldeconomyeconomy

Recent events like the US technology stock bubble burst, economic downturns, and socio/political acts will not stop and do not invalidate the fundamental economic changes that are transitioning us to an integrated global economy


27

Amid heightened confusion (risks due to unfamiliarity), complexity (risks due to interdependencies), and uncertainty (risks due to unknown factors) we experience an increase in risk awareness and aversion

CONFUSION, COMPLEXITY, AND UNCERTAINITYCONFUSION, COMPLEXITY, AND UNCERTAINITY

B-debt spreads over Treasury rate

• Stock market became willing to value promises versus results

• Many companies created high market expectations for performance

• A large number of companies made “leap of faith” investments that failed

• Other companies simply failed to meet expectations

Too many companies took risks they didn’t understand

Sep 92 Sep 99 Sep/Oct 01

4%

6%

8-9%


28

Deploying intangible capital to create superior, wide-reaching value propositions with less investment of financial capital, which increases specialization and scale advantages and facilitates further deployment of intangible capital

Expand geographically by acquiring similar companies to gain scale benefits which enhances the ability to further acquire others

Exploit internal, company-wide differences in factor costs, skill sets, and productivity to gain value of specialization and scale

Exploit external differences in factor costs, skill sets, labor or capital productivity, or intangible assets to gain value of specialization and scale through contractual arrangements with outsiders

The transition economy provides new opportunities to earn significant rewards for calculated risks taken

WEALTH-CREATING OPPORTUNITIESWEALTH-CREATING OPPORTUNITIES

Virtuous cycles of geographic expansion

Internal integration

External integration

Virtuous cycles of increasing returns


29

3. WINNERS NEED TO PURSUE 3 SETS OF ACTIONS 3. WINNERS NEED TO PURSUE 3 SETS OF ACTIONS

Basics Preparing for the unexpected

Pursuing a portfolio of initiatives

• Corporate governance and integrity

• Customer satisfaction

• Competitive distinctiveness

• Shareholder value focus

• Quantify existing risk profile/exposure – Customer – Supplier – Operational – Employee

• Scenario plan for – Regulatory change – Technological change – Competitor

strengths/weaknesses – Political disruptions

• Deepen leadership bench

• 3 different time horizons

• 3 different risk horizons

• Leveraging “intangible” assets (e.g., brand, knowledge, network, talent)

• Revisit and update portfolio on regular basis


30

Indonesia

INVESTORS WILL PAY PREMIUM FOR GOOD CORPORATE GOVERNANCEINVESTORS WILL PAY PREMIUM FOR GOOD CORPORATE GOVERNANCE

Average percent, 1999-2000

Source:McKinsey Investor Opinion Survey 1999/2000

0

18

20

22

24

26

28

30

Anglo-Saxon

U.S.U.K.

Continental Europe

Italy

Switzerland

Germany

France

Spain

Latin America

ChileArgentinaMexico

Brazil

Columbia

Venezuela

Taiwan

Asia

Japan

Korea

ThailandMalaysia

Over 80% of investors surveyed claimed to be willing to pay an average premium of 24% in Korea


31

Retrospective (past 3 years)Percent of respondentsRespondents = 50

Change of External environment*

Ownership** Leadership***

90

70

56

Forecast (future 3 years)Percent of respondentsRespondents = 50

External environment

Ownership Leadership

8090

52

* Includes introduction of new business models, technologies, deregulation, re-regulation etc.

** Includes client or competitor driven M&A, privatization, demutualization etc.

***Sudden change of leadership due to poor performance, illness, board politics and personal reasons

ALMOST ALL SURVEYED COMPANIES HAVE AND WILL ENCOUNTER AT LEAST ONE ENFORCED CHANGEALMOST ALL SURVEYED COMPANIES HAVE AND WILL ENCOUNTER AT LEAST ONE ENFORCED CHANGE

100% believe companies have faced enforced events

98% believe companies will face an enforced event in

the next 3 years


32

Situation ExampleEventDescription

ENFORCED TRANSITIONS CAN OCCUR IN THREE TYPES OF SITUATIONSENFORCED TRANSITIONS CAN OCCUR IN THREE TYPES OF SITUATIONS

• Singapore Telecoms• IBRA, MAS• Hong Kong stock exchange• Daimler/Chrysler,

HP/Compaq• DBS/UOB, RBS/NatWest• British Gas

• Privatization• Nationalization• Demutualization• Post merger activities• Preventing hostile

takeover• De-merger

• Government to private• Private to Government• Corporative to private• Post merger• Hostile takeover

• Split into separate units

Change ofownership

• Worldcom - Bernard Ebbers• Santander - Angel

Corcostengui • Any Family-owned business

example

• Poor performance• Passing on • Board politics• Replaced to make

room for successor

• CEO sudden transitionChange ofleadership

• Deregulation• Re-regulation • New technologies• New business models• Disruptive technologies

• War• Trade tariffs/barriers• Monetary interventions • Court rulings

• Singapore banking sector• Telco, Energy, etc.• Automation, Digital film• Dell-direct sourcing• Hard disks, Electronic media

• War on Afghanistan• Trade tariffs imposed on

DRAM• Introduction of Euro• Texaco/Pennzoil ruling

• Increased opportunities• Increased competitiveness• Introduction of unique

technologies

• Additional barriers imposed

• Monetary policies introduced

• Judicial ruling

Change ofexternal environment


33

For the past 3 yearsCorporations not prepared for the enforced eventPercent of respondents, N = 50

Change of External environment*

Ownership** Leadership***

54

4032

Over the next 3 yearsCorporations not prepared given current abilityPercent of respondents, N = 50

External environment

Ownership Leadership

4452

32

* Includes introduction of new business models, technologies, deregulation, re-regulation etc.

** Includes client or competitor driven M&A, privatization, demutualization etc.

***Sudden change of leadership due to poor performance, illness, board politics and personal reasons

CORPORATIONS ARE NOT WELL PREPARED TO COPE WITH THE CHANGESCORPORATIONS ARE NOT WELL PREPARED TO COPE WITH THE CHANGES

Over 74% of Respondents mentioned that corporations

were not prepared for the major enforced event(s) encountered

Respondents believe that 79% of corporations will not

be able to cope with the expected enforced event


34

LOOKING AHEAD, EIGHT OUT OF TEN SURVEYED CORPORATIONS WILL RUN INTO MULTIPLE ENFORCED TRANSITIONS*LOOKING AHEAD, EIGHT OUT OF TEN SURVEYED CORPORATIONS WILL RUN INTO MULTIPLE ENFORCED TRANSITIONS*

* Three sets of transitions classified - Change of leadership, ownership and external environment

Source: McKinsey

Number of enforced transitions event types that surveyed

corporations will face100% = 50 respondents

44

36

182

3 transitions

2 transitions

1 transition

No transition • Change of ownership always attends multiple transition events

• None of the single transition events is ascribable to a change of leadership (that is either a co-dependent or a derivative event)


35

THERE ARE A NUMBER OF PREDICTABLE AND PERENNIEL HOT BUTTON ISSUES FOR THE ENFORCED TRANSITIONS PARAMETERTHERE ARE A NUMBER OF PREDICTABLE AND PERENNIEL HOT BUTTON ISSUES FOR THE ENFORCED TRANSITIONS PARAMETER

Under enforced transitions, there are mismatches potentially between 2 or more of these horizons: Market, strategic, Organizational, Technical and Leadership. A faster pace can be achieved by aligning the relevant horizons

There isn’t enough quantity and quality of leadership capability to drive required change

The current discerning mechanisms typically are not able to pick up or detect early, or less visible signs and the guidance that management provides are often too simplistic, rigid or both to deal with exceptional developments

Managing methods are what leadership groups uses to plan, decide, coordinate, control and communicate (i.e., corporate actions) as such they tend to be, but not exclusively vertical processes well ingrained and submerged into the minds of the organization. Tackling changes in mindset is vital to changing organizational pace

Mismatch in horizons

Leadership capacity

Discerning and guidance mechanisms

Managing methods


36

FIVE DEGREES OF FREEDOM CREATE NEW OPPORTUNITIESFIVE DEGREES OF FREEDOM CREATE NEW OPPORTUNITIES

Customer behavior and needs • Customer acquisition and switching costs• Flight to safety• Preferred institutions (e.g., foreign vs.

domestic)• Purchasing power of customers• Suppressed needs or latent

demand (e.g., customers participate in new markets)

Regulatory regime • Entry limits for certain industries (e.g.,

domestic retailers providing banking services, foreign ownership limitations in key sectors)

• Products or services allowed to sell• Limits on competitive behavior (e.g., pricing

xxxxx rules, caps on market share)

Competitive landscape• Financial strength of major

competitors (e.g., bankruptcy)• Opportunity to acquire leading

companies (for both global investors and domestic champions)

• Reliability of supply to key customer groups (e.g., weakened link to key wholesalers)

• Changes in management (e.g., defection)

Organizational capacity for change • Flexibility to change procedures,

power structures, and number of employees

Social values• Views of foreign direct investment and

competition• Trust in public vs. private institutions,

existing vs. new• Role of government in economy• Compliance with international standards• Lifestyle and education

• Real estate zoning laws • Tax policy and rules • Use of customer information

• Compensation systems (e.g., performance-based)

• Company culture (e.g., customer service orientation)

• Speed of implementation• Sense of urgency among employees and

managers


37

MAJOR DISCONTINUITY DRIVERS IN KOREAMAJOR DISCONTINUITY DRIVERS IN KOREA

Economic development

Privatization

Chinese market

Shift in demographics

Korean Growth opportunities

1

2 3

4


38

SHIFT IN DEMOGRAPHICS SHIFT IN DEMOGRAPHICS

MaleFemale

2000 2030

Source: Korea National Statistical Office; McKinsey analysis

Areas of major potential opportunities

• Aging population– Opportunities for

consolidation, outsourcing and efficiency gains in health and aged care

– Leisure & entertainment

• Increased wealth– Wealth management– Pensions– Insurance

(Age)

80+

60

70

50

40

30

20

10

0

1


39

US HEALTH CARE SECTOR ATTRACTIVENESSUS HEALTH CARE SECTOR ATTRACTIVENESS

Sector 15-year TRS CAGR (1983-99)Percent

Source:McKinsey Health Care Practice analysis

S&P 500 = 17%

Ph

arm

a/B

iote

ch

Med

ical

/su

rgic

al p

rod

uct

sC

hai

n p

har

mac

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Dis

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Info

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Man

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Hos

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Dia

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Ski

lled

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faci

litie

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2317 16 16 15 14 13 12 12 10 10

7 6 51 0

-2 -3 -5

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Lab/

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Hom

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Spe

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High potential opportunities in Korea

Med

ical

and

Bot

anic

al P

rodu

cts

X-r

ay a

nd ir

radi

atio

n ap

para

tus


40

THE POOL OF FUNDING ASSETS WILL INCREASETHE POOL OF FUNDING ASSETS WILL INCREASE

35

40

45

50

55

60

1950 1960 1970 1980 1990 2000 2010 2020

Savers as a percentage of Potential Workforce*Percent

• Peak will occur between 2015 and 2025

• Global population will save more– “High saver” population will

grow from 39% to 45% by 2010

– “Low saver” population will fall from 44% to 34%

• Household net asset accumulation in 2002 is expected to be $12 trillion higher than it was in 1992– This is a 33% increase in net

assets

Available capital will increase significantly for the next 20 years as liquid, household savings grow

US

Korea

Today

*Population 40-64 years of age divided by population 20-64 years of age

Source:UN population data; McKinsey analysis


41

SHIFT IN ECONOMIC DEVELOPMENT SHIFT IN ECONOMIC DEVELOPMENT

16,100

31,000

1999 2010

GDP per capita growth – Korea vs. OECD average USD PPP adjusted

Korea OECD average

Source:WEFA–WMM; McKinsey analysis

Areas of major potential opportunities

• Personal Services– Education– Leisure– Media/entertainment– Retailing– Travel– Financial advisory

• Business services– Outsourcing– Third party logistics– Catering– Property management

• New technologies(Biotech, IT, infra services)

2

27,70031,000

1999 2010

+6.1%CAGR

+1.0%CAGR


42

Other***

Media Aerospace Banks

Beverages Computers Cosmetics/personal care

Diversified fin. SVC

Electric Food Healthcare product/SVC

Insurance

Miscellaneous manuf

Oil& gas

Pharmaceutical

Retail

Semiconductors

Software

Telecom

POTENTIAL MEGA TREND OPPORTUNITIES FOR KOREA*POTENTIAL MEGA TREND OPPORTUNITIES FOR KOREA*

*Assuming evolution of Korean markets follow that of U.S.A**Top 230 companies***S&P industries below 2% of total market cap; industries include agriculture, auto manufacturers, building Source:Datastream

713

504

208

2

9

16 2

6

5

5

0

23

5

7

7

2

0

43

11

6

0

24

12

33

12

2

1

S&P 500 KOSPI**

100% = 10,022 240

Comparison between S&P 500 and KOSPI2000, USD billion, percent

Potential future growth industries include

• Media • Aerospace• Beverages• Computers• Cosmetics/personal care• Healthcare products/services • Insurance• Miscellaneous manufacturing • Oil & gas• Pharmaceuticals • Retail • Software

PRELIMINARY


43

GAPS IN SERVICE ANALYSIS EXAMPLESGAPS IN SERVICE ANALYSIS EXAMPLES

Number of listings, 2000

Source:Manhattan Yellow Pages; Naray Yellow Pages (Kangnam & Socho)

61

53

43

2520

11 11

35

7 84

7

1

7,000

2,000

34

Manhattan

Seoul

Automobile related occupations

Medical Rental Wedding Pets Insurance Parties Overall

• Dealers – new, used• Accessories• Washing & Polishing• Driving schools• Repairing• Towing• Dealers – antique & classic• Motor Exchange• Purchasing consultants• Leasing• Loans• Performance & racing• Customizing• Navigation systems• Electric cars• Warranty processing service

• •

Automobile

US Korea

3461

Rental-related occupations

• Electrical instrument• Furniture• Amusement device• Air conditioning equipment• Audio-visual equipment• Baby-Crib

• •

US Korea

743


44

EXPECTED SERVICE SECTOR JOB CREATION IN KOREA BY 2010 EXPECTED SERVICE SECTOR JOB CREATION IN KOREA BY 2010

Source:Korea National Statistical Office; Ministry of Labor; Korea Labor Institute; Bloomberg; Financial Supervisory Service; McKinsey analysis

1,141

810

293

-197

57

-839

1,657Wholesale & retail services

Business & financial services

Personal services

Utilities, transport & communication

Construction

Manufacturing

Agriculture

3,704 net service sector jobs

Total2,922

Thousands of jobs


45

DUE TO UNCERTAINTY IN THE GLOBAL ENVIRONMENT KOOKMIN BANK WILL HAVE TO CHANGE TO A “PORTFOLIO OF INITIATIVES” APPROACHDUE TO UNCERTAINTY IN THE GLOBAL ENVIRONMENT KOOKMIN BANK WILL HAVE TO CHANGE TO A “PORTFOLIO OF INITIATIVES” APPROACH

"Build it and they will come to you"

• "Assuming away" strategic risk

•

• Periodic strategic planning

• Visionary (predetermining where and how to compete)

Establishing the conditions for favorable outcomes of strategic initiatives to: • Shape corporate portfolio• Adapt core operational capabilities• Build new businesses

• Disciplined search for high reward/low risk opportunities (i.e., opportunities where you enjoy familiarity advantages)

• Dynamic, continuous management of portfolio of initiatives

• Flexible and evolutionary (natural selection regarding where, how, and when to compete)

From “Determining the future” To “Portfolio of initiatives” approach


46

KEY COMPONENTS OF A CORPORATE STRATEGYKEY COMPONENTS OF A CORPORATE STRATEGY

Global business

environment

Corporation’s capabilities

Capital markets diagnostic/expectations

• Build new businesses• Adapt core capabilities• Shape corporate

portfolio• Inspire and set

aspirations• Communicate

expectations and manage results

Forces-at-work• Market evolution• Industry dynamics• Geopolitical change• Macro-economic changes

Synthesis of external market’s perception of client:• Historical share price

performance• Overall market expectations• Capital markets/positioning• Business performance

expectations vs. peer group• Business and strategic value

drivers

Portfolio of businesses• Customer base• Geographic scope • Value chain

participation/shared cost structure

• Organization • Corporate center role

and processes• Performance ethic• Capital structure • Governance


47

A PORTFOLIO OF STRATEGIC INITIATIVES WILL BE IDENTIFIED THROUGH INTERNAL AND EXTERNAL DIAGNOSTICSA PORTFOLIO OF STRATEGIC INITIATIVES WILL BE IDENTIFIED THROUGH INTERNAL AND EXTERNAL DIAGNOSTICS

Initiatives

1–2 years 3–5 years

Un

ce

rta

inU

nfa

mil

iar

Fa

mil

iar

Meet current earnings

expectations

Create medium-term

growth

Generate portfolio of high-return

options

2

5 6

1

4

1

1

2

3

5

6

7

8

4

9

10

Adapt core capabilities

Globalize private trust business

Insurance product sales efforts

Performance culture

Hire retail broker/private bankers

Tactical cross-selling effort

Tactical pricing program

Rationalize IT operation

Build new businesses

Distressed debt trading business

Utility for syndicated lending back office

Internal cash management/treasury function

Customized SOHO/small business service/product offers

Corporate/institutional payments network

Check processing utility

Shape corporate business portfolio

A. Restructure/divest

Sell leasing business

Sell corporate trust business

B. Acquisition

Non-bank acquisition, e.g., credit card monoline

Acquire IT consulting/software firm

Acquire private bank

11

12

13

10

11

12

13

14

2

4

6

11 3 58

15

1410

16

Fa

mil

iari

ty

“Low execution risk”

Potential size of impact

87

18

7

12

9

9 17

13

3

FOREIGN EXAMPLE

RISK


48

THE “PORTFOLIO OF INITIATIVES” APPROACH REQUIRES A DISCIPLINED SEARCH FOR HIGH RETURN/LOW RISK OPPORTUNITIESTHE “PORTFOLIO OF INITIATIVES” APPROACH REQUIRES A DISCIPLINED SEARCH FOR HIGH RETURN/LOW RISK OPPORTUNITIES

Scan various value- creation opportunities to identify best ideas

Achieve understanding of risk/rewards of different initiatives

Enhance capabilities to execute successfully

Invest in opportunities with asymmetric expected returns(i.e., "no regrets" or "low regrets" initiatives)

Search Enhance Nurture Go/No-go

• Overcome uncertainty (to the extent possible) and commit management focus, talent, and expense dollars to most attractive potential opportunities

• Acquire/deploy familiarity advantages

• Identify unfamiliarity disadvantages

• Determine opportunities to structure/place risks

• Determine residual risks of complexity and uncertainty

• Estimate risk/reward

• Commit capital (i.e., exercise option)

OR

• Put on hold

OR

• Let option expire

• External and internal diagnostic– Global

business environment

– Capital markets diagnostic/expectations

– Corporate capabilities


49

ONCE THE PORTFOLIO IS CREATED, A RIGOROUS PROCESS WILL BE NEEDED TO IDENTIFY, EVALUATE AND MONITOR EACH INITIATIVEONCE THE PORTFOLIO IS CREATED, A RIGOROUS PROCESS WILL BE NEEDED TO IDENTIFY, EVALUATE AND MONITOR EACH INITIATIVE

Reassess portfolio of initiatives

Identify and categorize portfolio of initiatives along the scale, skills and scope dimension

Evaluate each initiative

(impact, risks, milestones)

Develop synthesis

for

Monitor progress on an ongoing

basis

strategic program

and begin execution


50

EXAMPLES OF EVALUATION FORM FOR EACH INITIATIVEEXAMPLES OF EVALUATION FORM FOR EACH INITIATIVE

Source:Client interviews; McKinsey analysis

FOREIGN EXAMPLE

Key checkpoints and milestonesRelevant prior experience• Significant experience hiring personnel away from

competition• Substantial number of employees with experience in

other firms and with headhunter relationships to facilitate identification of high potential candidates

Key risks/uncertainties• Current economic environment has changed recent

experience on structuring packages• Risk of erroneous selection high, given large number of

unemployed in sector

Approximate timing

• Develop targets for hiring levels• Estimate economics of reaching targets• Obtain senior management approval• Identify candidates or team lift outs and

negotiate contract

• Month 1• Month 1• Month 2• Months 3–9

Revenue assumptions• Hire 20, 40, 60, 80 new brokers in the first 4 years• Average annual production levels for new hires is

USD 350,000 Cost assumptions• Up-front cost 100–150% of trailing 12-month

production • Fully-loaded grid for new hires is 45% of gross

commissions

Steady-state economics

• Years to steady state: 2.5

• Gross revenue: USD 40–60 m

• Operating margin: 55%

Scale up retail broker/private banker hiring targets

Definition: Accelerate growth and performance in private client division by hiring more retail broker and private banking staff

Degree of familiarity Timing

Potential size of opportunity


51

Current 9-cell grid

Revised 9-cell grid

Cease/abandon unsuccessful or unattractive initiatives

A continuous, dynamic management of the portfolio of initiatives provides means to overcome most residual risk

MANAGING A PORTFOLIO OF INITIATIVESMANAGING A PORTFOLIO OF INITIATIVES

Reassess portfolio• Periodically (e.g., 2-3

times/year) reassess strategic opportunities based on:– Market evolution – Client’s unique

capabilities/ intangibles

– New analysis• Add initiatives• Reprioritize initiatives

• Begin execution• Execute high

priority initiatives• Evaluate initiatives

with greater uncertainty/less familiarity

• Set checkpoints and milestones

• Monitor progress (monthly)

• Initial results of implementation

• Attractiveness of initiatives evaluated further


52

Initiatives typically fall in a diagonal, with more distant opportunities also being less certain

Uncertain initiatives unlikely to be capturable in near term due to effort required to remove uncertainty, but some near-term uncertainty can resolve rapidly (e.g., regulatory change)

A broad range of initiatives spacing the grid is necessary to ensure both short-term upside and a long-term pipeline of opportunities

High degree of certainty unlikely for long-term initiatives due to potential for unforeseen developments, but some initiatives with long lead times (e.g., factor cost arbitrage) may be present

TYPICAL 9-CELL GRID PATTERNTYPICAL 9-CELL GRID PATTERN

The POI approach involves corporate-level oversight of the creation, nurturing, development and termination of all significant strategic initiatives by taking into explicit account the risks , rewards, and timing of realization of each initiative


53

Limited low-hanging fruit• Company does not

have many near-term familiar opportunities – success will require a radical transformation involving high risks

Risky future• Company is counting on

unfamiliar and uncertain initiatives even in the near term – involves significant risks due to lack of certainty

Risk-adverse• Company is unwilling to

pursue initiatives involving unfamiliarity or uncertainty – risk aversion undermines long-term value of potential options

Short-term focus• Company lacks long-term

options for growth – may be a consequence of overly conservative management or unwillingness to invest for longer term

Initial POI diagnostic may identify potentially unfavorable grid patterns

GRID PATTERNS THAT ARE CAUSE FOR CONCERNGRID PATTERNS THAT ARE CAUSE FOR CONCERN


54

CORPORATE STRATEGY IN THE TRANSITION ECONOMY CORPORATE STRATEGY IN THE TRANSITION ECONOMY

While the laws of strategy are still the same…

…there are also new elements to consider

•The transition economy is turbulent and affords enormous opportunities and risks

•Sitting still (i.e., low aspirations) will lead to stagnation and eventual loss of strategic control

•Tripling market cap over 5 years is quite feasible

•Disappointing the stock market can be disastrous

•Strategy is still about leveraging distinct competencies to deliver value to customers

•Strategy is still about exploiting market discontinuities to create and capture economic surplus

•Strategy is still about managing risk to build and defend a sustainable advantage over competitors

•Strategy is still about balancing resources and making tough choices


55

• Risks that can be taken with certainty (i.e., risk/reward decisions can be made with a high degree of confidence)

• Risks that provide unfair familiarity advantages (i.e., you possess intangibles that give you an unfair advantage in taking particular risks)

• Risks that provide unfamiliarity disadvantages (i.e., others possess intangibles you do not possess that place you at a disadvantage in taking particular risks)

• Risks filled with uncertainty(i.e., outcomes that cannot be affected either by you or, in all likelihood, by anyone else)

WHAT ARE THE RISKS?WHAT ARE THE RISKS?

Understanding the risks inherent in competition is critical to maximizing the areas where we have some control over the outcome while minimizing the areas where we have absolutely no control over the outcome


56

ComplexityComplexity

ConfusionConfusion

UncertaintyUncertainty

Take risks where familiarity advantages and favorable outcomes probable – shed risks where others have competitive advantages

22

Apply portfolio theory to optimize overall results33

Use options to manage uncertainty44

Disaggregate and structure risks – determine which risks to take and which not to

11

Companies must manage the risks to leverage their strengths rather than avoid them

RISK/REWARD MANAGEMENTRISK/REWARD MANAGEMENT


57

FURTHER RESEARCH FOCUSED ON LEARNINGS DRAWN FROM FOUR GROUPS WITHIN THE G150 CLUBFURTHER RESEARCH FOCUSED ON LEARNINGS DRAWN FROM FOUR GROUPS WITHIN THE G150 CLUB

Incumbents New Entrants

Dropouts Returning Members


58

NOT ALL G150 MEMBERS ARE GLOBAL CHAMPIONSNOT ALL G150 MEMBERS ARE GLOBAL CHAMPIONS

Size & Performance

Superior shareholder

returns

Industry dominance /

shaper

Global Champion

Global Champion

G150 membership

SVC* > 0 Segment leader or better

*Shareholder Value Creation (SVC) is defined as the change in equity market cap less (required return on initial equity market cap**+ share issuance) plus (dividends, share buybacks and spin-offs)

**Compounded at beta-adjusted market index (S&P 500) return

or


59

ENTRY IN THE GLOBAL 150 CLUB IS NOT A GUARANTEE OF LONGEVITYENTRY IN THE GLOBAL 150 CLUB IS NOT A GUARANTEE OF LONGEVITY

*Global 150 as of Dec 31, 2001

**As measured by S&P500 index

Source:Bloomberg; Global Vantage/Compustat; Global 150 Research Database; McK Global Strategy Practice

Below Market Performance**

Superior Performance

Market Value

HigherLower

Shareholder Value Creation(Dec 95–Dec 01)

Mean $73bn

0


60

IT HELPS TO BE IN A “CHAMPIONABLE” INDUSTRYIT HELPS TO BE IN A “CHAMPIONABLE” INDUSTRY

Source:Bloomberg; Global Vantage/Compustat; Global 150 Research Database, McK Global Strategy Practice

Number of Global Champions within G150100% = 100 companies

“Champion-able” industries share some similar characteristics:

• Sufficiently large value pool

• Supply-demand imbalance

• Potential industry discontinuities that may allow for changes in the “rules of the game”

• Potential to change power balance

29

2417

16

86

High tech

Pharma

Energy

Financial Services

All others

Consumer


61




Source:Bloomberg; Global Vantage/Compustat; Global 150 Research Database, McK Global Strategy Practice



Market Value

HigherLower


Mean $73bn

0


62

CASE EXAMPLE: J&JCASE EXAMPLE: J&J

Business innovation• Entrepreneurial environment

– Highly decentralized organization• 188 autonomous operating companies

– Flat, fluid and evolving organization structure• Constant creation and destruction of

entities– Core businesses and growth businesses

subject to differentiated performance metrics• Outward looking entities

– Commitment to identifying external opportunities

– Business development functions staffed with highly qualified VPs of licensing and acquisitions, expected to spend their time "on the road"

– Weeding out of poorly performing businesses• Focus on innovation

– Explicit section on innovation in the company's business plan

– Rapid cocooning of new businesses– Top management participates in innovation

exercises

Source:Compustat; Hoover's; "Organizing for Growth“; McKinsey analysis

CAGR J&J = 24%

Index = -17%

J&J

97 98 99 00 01

“Creative destruction” of portfolio of businesses• Acquired 33• Divested 17

S&P500 Health Care (Diversified) Index**

0

100

200

300

400

500

600

94 95 96

Growth story


63

CASE EXAMPLE: J&J (GROWTH OF J&J THROUGH INNOVATION)CASE EXAMPLE: J&J (GROWTH OF J&J THROUGH INNOVATION)

NOT EXHAUSTIVE

Actions taken

Entrepre-neurial

environment

Outward looking entities

Focus on innovation

1980 1981 1982 1983 1985 1988 1990 1991 1992 1994 1995

•Basiccontact lens manu-facturing

•Access to US market

• Proprietary of new lens technology

• Proprietary of advanced lens manufacturing process

• Relationship with leading injection molder

• Relationship with the trade

• Control of soft molding manufacturing process Vistakon/

Acuvue

Endo-surgery

• Recognition of opportunity in endoscopic surgery

• Expan-sion of line of products

• Interna-tional alliance with leader in endos-copes

• US leadership

• Create Institute to train surgeons


64

GREAT INTANGIBLES ARE KEY TO CHAMPIONSHIPGREAT INTANGIBLES ARE KEY TO CHAMPIONSHIP

• Talent

• Intellectual capital

• Standards / protocols

• Brand

• Networks

People

Knowledge

Process

Reputation

Relationships

Not

Not

Not

More than

More than


65




Source:Bloomberg; Global Vantage/Compustat; Global 150 Research Database; McK Global Strategy Practice



Market Value

HigherLower


Mean $73bn

0


66

FOOD FOR THOUGHTFOOD FOR THOUGHT

1. Ensure the basics are in place

2. Actively prepare for the unexpected

3. Pursue portfolio of strategic initiatives

1. Ensure the basics are in place

2. Actively prepare for the unexpected

3. Pursue portfolio of strategic initiatives

Turbulence is scaryTurbulence is scaryWe can choose to focus on the threats

or the opportunities it presentsWe can choose to focus on the threats

or the opportunities it presents

End of Doc

Documents

Surviving and Winning in Turbulent Times: Strategic Imperatives for Corporate Leaders 27 th CEO Summer School, KCCI Dominic Barton, McKinsey & Company