Go to content

Management Report

Management reports, briefs and video-clips issued by Samsung Economic Research Institute

The Main Drivers Behind Today’s High-Performance Businesses

The Main Drivers Behind Today’s High-Performance Businesses

KIM Sung-Pyo

Sept. 24, 2008


Welcome to our Video Program. I’m Sung-Pyo Kim from the Management Strategy Department.

Despite today’s negative business environment, including an economic slowdown both at home and abroad, rising raw materials prices, and instability in the international financial markets, Korea’s listed companies registered relatively strong performance in the first half of this year. Average sales for companies registered year on year growth of 22%, while their net profits grew by 8% on a year to year basis.

Profitability for these companies, however, marked a slight decrease, indicating that quality in management worsened. This phenomenon has become chronic. Despite the deployment of more profit-centered management since the financial crisis, the average profitability of the nation’s listed companies has remained stagnant or declined slightly. Despite these difficult circumstances, there are some companies which have enjoyed both robust growth and high profitability over the past several years. Today, we’ll take a close look at the key features of these high-performance companies.

SERI analyzed the performance of a number of Korean companies over ten years, based on two axes, growth and profitability. 74% of the high-performance companies that recorded high performance in both growth and profitability before the financial crisis dropped out of the high-performance list. Drastic changes continued over the past 4-5 years even after the remaining companies returned to normalcy after restructuring. During the transitional period from 2002 to the first half of 2008, 308 firms, or 73% of total listed companies, experienced hardship more than once, with 67% of the high- performance companies dropping out of the high-performance business group list.

Only 18 companies, including Samsung Electronics and POSCO, have continued to achieve high-performance results.

To clear the way for domestic firms to escape from the trap of high growth but low profitability, comparative analysis of high-performance and low-performance business groups is required.

To this end, SERI conducted comparative analysis by using both external factors like the type of industry, the scale of the business, and membership in a business conglomerate, as well as internal factors like investment, intangible assets, global variables, and financial structure.

This analysis led to the following findings. First, there is no direct relation between the type of industry and corporate performance. The analysis divided industries into high- growth and low-growth ones and looked at the relations between the type of industry and business performance. It found out that two types of industries have both high- growth and low-growth companies.

Second, the business performance of the companies has little correlation with the scale of the companies in question, nor does membership in a business conglomerate significantly affect the results.

Third, there is a marked gap between high-performance and low-performance companies in investment activities from the perspectives of tangible asset growth and the proportion of R&D. This indicates that aggressive investment is essential for those who are eager to continue to achieve high performance.

Fourth, there is also a conspicuous gap between the two groups in intangible assets from the perspectives of the price book value ratio and growth in advertising costs.

Fifth, there is no clear relation between global variables like the share of exports and the proportion of overseas investment and business performance, indicating that the upgrading of export structure and quality-oriented globalization matter more than a simple increase in the share of exports and quantity-oriented globalization.

Sixth, from the perspective of financial structure, both groups have relatively low debtto- equity ratios.

Some companies, however, have made it as high-performers in and after 2007. Unlike those who have continued to remain in the group, the performance of the new entrants is influenced heavily by industrial and market factors.

In other words, if these companies become negligent in improvement of internal capabilities or the market situation worsens, they could easily fall out of this group. Even more worrisome, these companies now account for about 80% of the high- performance business groups.

Thus far, we have examined the characteristics of high-performance business groups in Korea. To ensure sustainable growth and performance, businesses need to strengthen their internal capabilities through aggressive investment in facilities, R&D, and market exploration.

Today concerns are mounting over the economic slowdown which may cause investment sentiment to cool down further. However, even when the economy enters a full-scale recession, businesses must not be negligent in improving their internal capabilities. Honda, for example, has developed a string of leading technologies through aggressive R&D investment. Even when it was difficult to generate short-term profits by using technologies, Honda made investments if they were in line with the company’s direction. This investment mindset has led to the development of the ultra-small jet aircraft the ‘Honda Jet.’

One good way to break down passive investment practices is the introduction and stipulation of the R&D 10-10 rule. This rule requires spending 10% of sales for R&D and 10% of R&D for basic research.

Thank you for watching. I’m Sung-Pyo Kim.

Go to list