Transforming a South Korean chaebol

Yongmaan Park discusses the forces that changed the company’s core business and led to South Korea’s largest foreign acquisition.

September 2008 Dominic Barton and Clayton G. Deutsch

The conglomerate Doosan survived corporate and regional crises in the 1990s to emerge a decade later as one of South Korea’s leading global businesses. A debt crisis that peaked in 1996 forced the family-run chaebol to restructure drastically—just before a financial crisis swept through much of Asia. The effort set in motion radical changes that transformed Doosan from a consumer goods company into one of the world’s leading industrial- and construction-equipment manufacturers.

In 2007, Doosan Infracore, the group’s construction-equipment arm, orchestrated the biggest foreign acquisition by a South Korean company. It bought Bobcat, the world’s largest maker of compact construction equipment, along with smaller units, from Ingersoll Rand for $4.9 billion. The man behind the globalization effort is Yongmaan Park, Doosan Infracore’s chairman, who has brought to Doosan some of the most progressive approaches to business and leadership development.

Started by Park’s grandfather, in 1896, with a single store in Seoul, Doosan rapidly moved into beer and later into other beverages. By the late 20th century, it was South Korea’s leader in a broad range of them—from soft drinks to dairy to whiskey—and active in packaging, bottle caps, and advertising as well. Following the Asian financial crisis (known locally as the IMF¹ crisis), Doosan’s top management, including Park, surveyed the landscape and chose a drastically different path for their company.

In an interview with McKinsey’s Dominic Barton and Clay Deutsch at Doosan Tower, in Seoul, Park discussed the group’s turmoil and transitions, as well as its aspiration to be a global player in the infrastructure-support industry.

Yongmaan Park

Education

* Graduated with BA in business administration in 1978 from Seoul National University

* Earned MBA in 1982 from Boston University

Career highlights

Doosan Infracore

* CEO and chairman (2007–present)

* CEO and vice chairman (2005–07)

Doosan Heavy Industries and Construction (2005–present)

* Vice chairman

Doosan Corporation (2005–present)

* Vice chairman

Fast Facts

* Received Silver Tower Industrial Award (2000)

* Named “Best CEO in Korea” by Maekyung Economy (2001)

* Avid photographer and athlete

* Awarded Order of Civil Merit of Spain (2003) in recognition as Chairman of Korea–Spain

* Economic Cooperation Committee (2000–present)

The Quarterly: Even before the financial crisis hit Asia, in the late 1990s, Doosan faced its own crisis. What happened?

Yongmaan Park: By the end of the 1980s, we dominated all our sectors. We had about a 70 percent market share in beer, 50 percent in soft drinks, and about 70 percent in whiskey. But then several things happened. The Korean market went through another boom. People started spending more money, trying to enjoy their lives. At the beginning of the 1990s, we were busy adding capacity to meet that demand, and we borrowed heavily to support our expansion. Most Korean companies were doing the same. That’s how Korean companies ended up with debt-to-equity ratios of 300 percent or even more.

Then, competitors attacked us in many of our industries, and we were not ready. Our management emphasis had been on adding capacity, not on sales and marketing or preparing ourselves for competition. Our competitors started winning the battle. Suddenly, our revenue was not enough to support our profit expectations or our debt. By 1996, our annual negative cash flow was 940 billion won² out of 3 trillion won in revenues. We were literally bankrupt at that time—two years before the IMF crisis hit the country. We were in deep trouble, and we knew it would just get worse.

The Quarterly: How did you respond?

Yongmaan Park: We decided to sell many profitable units from our portfolio, including our core business, OB Beer. In a country like Korea, where we put as much emphasis on emotional value as on making rational, cold-blooded decisions, nobody understood what we were doing. We needed a massive injection of cash to turn around the cash flow situation. So we started doing deals, selling companies. People here had never experienced a company shrinking in order to restructure, especially a large conglomerate. They said, “Gee, those guys must be in big trouble. They’re dead.”

But we were lucky. We started restructuring before the crisis hit. Nobody was selling at that time, and a lot of people were interested in buying. We sold many of our assets at the right price and turned around the cash flow position within three years. In 1996, our negative cash flow represented one-third of our revenue; by the end of 1998, we had positive cash flow.

The Quarterly: Was that enough to secure Doosan during the crisis?

Yongmaan Park: I was happy that I wasn’t standing at the mouth of hell when the crisis came. Everybody else was walking into it. But we also realized that our operations were not healthy enough to sustain good financial conditions. Even though we turned around the cash flow, we would have been in the same situation again in three or four years if we did nothing more. By 1998, we turned around the balance sheet, and in 1999 we started a massive operational-improvement initiative that included performance and process innovation programs. Within a year, our EBIT³ jumped from 4.5 percent to 11.2 percent.

The Quarterly: With such an improvement, why did Doosan shift its core business from beverages to heavy machinery?

Yongmaan Park: We had a better balance sheet and better operations, but our portfolio was garbage. We had sold many important anchor pieces and were left with a bunch of unrelated, domestically oriented, modestly competitive businesses. But we had aspirations to become a sizable, competitive enterprise.

First, we realized we were not “natural owners” in the consumer industry. We were more than 100 years old, and our corporate culture had not changed much from the days when we were a monopoly supplier. We were not ready to face ever-changing market demands. So we considered industrial products, which require longer-term strategies, longer-term commitments, longer-term investment. We felt we could be the natural owner of that kind of business.

Second, we decided we could not grow organically from our portfolio. We needed to acquire something as a growth platform. Coincidentally, the government announced it would privatize some public companies at about that time. One was Korea Heavy Industries and Construction, a power plant manufacturer. In 2001, we jumped at the opportunity, and this acquisition became Doosan Heavy Industries (exhibit). Later, in 2005, another opportunity came when Daewoo Heavy Industries and Machinery went up for sale. This became Doosan Infracore. These two acquisitions completely changed us, concentrating our business portfolio around the infrastructure-support business.

The Quarterly: How did you progress from domestic to global acquisitions?

Yongmaan Park: We were successful in acquiring Korean companies and growing well, but we knew we could not globalize organically. We needed to acquire a company and leapfrog into globalized operations. So several years ago, we started looking at a number of companies, including Bobcat. At the time, Ingersoll Rand didn’t seem interested in selling it. So we waited. Our purpose was not to buy Bobcat, per se, but to acquire a sizable company with global operations—one that was profitable and healthy and would be a good addition to our portfolio.

In May 2007, when the news came that Ingersoll Rand was selling Bobcat, we pulled the file from our top drawer and started working on it. We quickly put a team together, drew up a proposal, and were ready to deal. We had already done a significant amount of due diligence. The only thing we were not sure about was the people who ran the company, because we hadn’t had any interaction with them. That’s why I made so many round-trips to New York. I needed to be in contact with the managers—to meet them, talk to them, give them confidence.

The Quarterly: Did your turnaround efforts have any effect on how you approached these acquisitions?

Yongmaan Park: We were a much different company when we began acquiring companies than we were in the mid-1990s. We had a different eye. We knew how to manage balance sheets, and we knew that operational improvement is the key to everything. The management know-how we gained through our crisis gave us confidence that we could turn around the companies we bought from the government and, later, that we could successfully integrate Bobcat.

Also, since our turnaround started with selling assets to global companies, we had learned from those buyers about the important levers when you are creating value from an acquisition. We spent about three years dealing with multinationals, talking with them about what was the right value for these assets. That was a huge lesson. Seeing value in this way became a habit. That was particularly important because people who could have brought these capabilities to us from outside the company weren’t interested in working for us in those days. We were just a mediocre company from an emerging country.

The Quarterly: Did you look elsewhere for lessons as well?

Yongmaan Park: We tried to learn from the difficulties some Japanese companies faced when they went abroad. They had processes based on a set of values that were only shared among the Japanese people. When they acquired companies outside Japan, their value set was not transferred to the acquired operations. They would send out people as shadow managers, who would take with them the same value set into every function of the acquired company. Important decisions were made by these shadow people rather than the people who actually delivered the business, who were part of the acquired company. It took away their accountability.

This gave us a clear idea of what not to do when we acquired Bobcat. You have to build a management philosophy and value set that is shared—through processes rather than shadow managers—by both operations. If you do that, you can successfully integrate the global business with the mother business.

The Quarterly: What was your approach toward integrating talent?

Yongmaan Park: After we acquired Doosan Heavy and Doosan Infracore, we tried to visualize the future. When we looked three or four years ahead, we saw an organization in which 70 to 80 percent of our people would have been with us for less than five years. How would we maintain our competitive strengths? We needed to create an organization that would deliver our philosophy and values to these new kids. How would we do that?

We started by interviewing more than 300 people who had experience working with us, who had experience working with my late father. We tried to pull out the management philosophies that gave us the strength to survive the crisis and had supported us for the last 100 years. These centered on integrity and inhwa, which can be translated as harmonious relations or harmonious teamwork. In the Korean workplace, inhwa has typically meant smooth relationships among peers, as well as between leaders and those who report to them. At Doosan, we focus on how to create a harmonious work environment. We acknowledge differences, adhere to fair rules, and build a cooperative, collaborative, and positive workplace. During this effort, we also tried to visualize what philosophy would help us become a strong, truly global company.

In the end, we decided that three areas of focus would carry our philosophy and values into the daily life of our corporate citizens: human resources, strategic planning, and evaluation and control. While other Asian companies were trying to infuse their values into new acquisitions through people, we wanted to infuse our values through management processes. Those are clearly two different ways of doing things.

The Quarterly: Was there any resistance to this approach?

Yongmaan Park: When I started to redo the HR system, for example, I said we’re going to be a global company, and people are going to be the centerpiece, so we would invest heavily in improving our people’s skills. I wanted to create a system good enough to support a global company like GE. Many people told me that Korea’s different. They said the way we manage people is strongly correlated with our culture, and we needed a different system than what the multinationals used. I said that’s rubbish. We sold many of our assets to foreign companies—to Interbrew,⁴ Coca-Cola, and others. But now our ex-employees are working under different HR processes. Overnight, they adapted themselves to those new processes, and they work beautifully.

Culture represents country, race, language, history, and such. But when you add “corporate” and make “corporate culture,” that’s almost identical in most of the successful conglomerates globally. The key processes of those companies—evaluation and control, strategic planning, HR—are all based on a performance-driven culture, meritocracy, transparency. We come from a different national culture, but successful corporations share a very similar corporate culture, and we needed to build the same kind of corporate culture.

The Quarterly: Let’s focus on the Bobcat acquisition. What was the atmosphere as you were approaching that deal?

Yongmaan Park: We were excited because we had been arguing that we needed to globalize. We understood the necessity, but we weren’t sure how to proceed; the only global experience we had was in exporting. But at the same time, there was a lot of fear. We had never managed a global company before. Could we do it?

For the people at Bobcat, we were a big question mark: who the hell are these guys? All of the other contenders were well-known companies in the construction industry. Most of the Bobcat managers had never had a chance to come to Korea, hadn’t had a chance to meet Korean people, let alone to hear about a company named Doosan. One of the first questions they asked me was, what would we do with the Bobcat brand? I told them that we’re paying a lot of money to buy this company. Its value is supported by many things, but clearly the brand is an important factor. My initial reaction was, why should I get rid of it? But I added that the decision on the brand does not belong to me; it has to come from our customers.

The Quarterly: Will you integrate Bobcat differently from the way you integrated your domestic acquisitions?

Yongmaan Park: When we acquired Doosan Heavy, the total number of employees was 7,000. I sent about a dozen people into that operation, including very junior people. When we acquired Doosan Infracore, I did the same thing. With Bobcat, again the same. I don’t need to send in an army of people and create a shadow management. That just shows that you have no confidence in the local people or that you are afraid they do not share the same values. As I’ve said, we instill those values through processes.

When we acquired Bobcat, we created an introductory package containing our credo, our brochure, and our company badge, and we distributed it to every single employee. One of my guys suggested we also include a nice English book about Korea. He said we need to show them what our country is about so they can understand who we are. I said, what for? These guys at Bobcat don’t need to learn about Korea from us, but they do need to learn how we manage the company, what our competitive strengths are. That’s the thing they have to learn from us, not about Korea.

We want to become a global company that happens to be from Korea. Nestlé is a good example. Most people, even in the business community, don’t see the color and taste of Switzerland in Nestlé. It’s simply a multinational company that happened to originate in Switzerland. I want to build Doosan to be such a global company. That’s our aspiration, and it tells us not to oversell Korea.

The Quarterly: What have been the positive and negative surprises from the Bobcat acquisition?

Yongmaan Park: The pleasant surprise was that the operation is pretty healthy; there’s good profitability, and the people are very committed to the job. There wasn’t much red tape or politics going on in the organization. Also, the Bobcat brand is very strong, and some of their technology is superb. All this was more pleasant than what I had expected.

The negative surprise was that some of their processes were not as good as ours, especially in strategic planning. The deal was also more complicated than I had expected. Bobcat was a stand-alone business unit, but the two other businesses—utility equipment and attachments—were part of the Ingersoll Rand operation. We had to tear them out and make them stand-alone businesses. Back-office functions were missing.

We were fortunate, though, that we didn’t need to go through the painful process of dealing with redundancies and restructuring the operation. The two businesses perfectly complement each other. They are strong in North America; we are strong in China. They are big in small, compact equipment; we are big in heavy equipment. We have good manufacturing technology; they have good product-development technology. We don’t have strong in-house technology for core components like hydraulics, but they do.

The Quarterly: How will you measure the success of the Bobcat acquisition?

Yongmaan Park: Of course we have our aspirational, quantified targets. We want Bobcat to become one of the world’s top three construction manufacturing businesses by 2012, with $12 billion in turnover and a double-digit EBIT ratio. Those are the quantitative targets. From an organizational perspective, I think we should also create a less homogeneous focus on Bobcat and be willing to look beyond North America for opportunities in product development and operations, as well as sales. This is similar to my efforts to deemphasize our being a Korean company. The Bobcat brand is very strong, especially in North America, but it doesn’t take in all the opportunities waiting for us in the rest of the world. That would be one step toward a more globalized operation. Then we could look at creating the perfect portfolio of construction equipment, establishing the right assortment in our product line, and sharing the same processes and the same efficiency worldwide. That’s certainly where we must get to.

In the next five to ten years, I would like to see the group capture a larger share of the global infrastructure-support industry, which has a global market of $8.7 trillion a year. That’s huge, and we have so much potential to tap into it. By 2015, we will be a $100 billion company, and 90 percent of our revenues—as well as 90 percent of operations—must come from outside Korea.

When we set that target of $100 billion four years ago, I was 50 years old. We were having beer in the pub downstairs, and I asked, in ten years, what are we going to achieve? Why not $100 billion? Everybody at the table laughed, but as time goes on, that’s becoming a reality. With Bobcat and the two other business units, we’re expecting to achieve about $22 billion this year. With organic growth of about 11 to 12 percent—far slower growth than we have now—we will reach $65 billion by 2015. Can the remaining $35 billion come from inorganic growth? A significant part of that is up to me and my top team. I’m confident we can do it.

About the Authors

Dominic Barton is a director in McKinsey’s Shanghai office, and Clay Deutsch is a director in the Boston office.

Notes

¹International Monetary Fund.

²About $1.16 billion at the time.

³Earnings before interest and taxes.

⁴Now InBev.