Samsung

The Memory Industry
Threat of New Entrants: High
Because the barriers to entry in the DRAM industry are quite high, it makes the threat of new entrants high as well. These barriers to entry include, extremely high fixed costs, economies of scale, and high switching costs. Huge capital is invested into the first two stages—the design and fabrication stages—of the process, but in addition to that, the investment for human resources is particularly high since they need highly skilled human resources for each of these stages. This implies that as new entrants coms, they need to take a capital risk premium, making barriers to entry high. Another burden for new entrants in this industry is economies of scales. If new entrants only enter on a small scale, this causes a great cost disadvantage for them. Furthermore, since most DRAM producers are vertically integrated, these firms face a cost advantage in procurement and sales.

Threat of Substitutes: Low
For the DRAM industry, the threat of substitutes is relatively low because there are virtually no substitutes for DRAM that have the same functions. However, in the future, flash memory chips may be a potential substitute for DRAM.

Bargaining Power of Suppliers: High
The power of suppliers is moderately high since the timing of the supply getting to the producers and the quality of the equipment producers are using to manufacture these chips are critical factors to developing and producing DRAM. On account of the high level of process automation and a close correlation between the quality of equipment and DRAM productivity, more delicate equipment is needed. In addition, the timing of providing the equipment is crucial; since the DRAM market is cyclical, it will decide the revenue of DRAM providers.

Bargaining Power of Buyers: High
Since DRAM is a commodity-like product, buyers can change their vendors easily. The main customers of DRAM are computer-manufacturing companies so procurement power of these customers is very high. As a result, the power of buyers is very high in the DRAM industry.

Rivalry Among Existing Firms: High
Although U.S. companies originally controlled the market in its initial stages, Japanese companies took up the lead in the market around the 1980s. Soon after, in the 1990s, Koreans companies, like Samsung, became the market leaders in the DRAM industry. While the price fluctuation in the DRAM market depends on the demand and supply of these products, a significant decrease in the prices was caused by DRAM overproduction in 2008. And because of the high fixed costs of the process, DRAM providers could not stop production. Therefore, competition among existing firms in this industry is very high for sales and technology development.
Samsung’s Strategy
1. Prior to 1997, Samsung’s strategy was mainly cost efficiency. But when this article was written, from looking at Exhibit 3, we can see that the average selling price of Samsung products when compared to the average selling prices of the other top three memory chip producers is a lot higher. Relative to other companies around the world, Samsung tends to sell their products at a premium—at one point in time, 68% higher than its competitors.

2. With the new chief marketing officer, Eric Kim, Samsung experienced dramatic changes, including the pursuit of a product differentiation strategy. In Exhibit 5, we see that, unlike the other large memory chip companies in the world who only sell SDRAM and DDR SDRAM, Samsung has broadened their scope of products to also include a few other different product lines. With their larger variety of product lines, Samsung is able to reach a wider spectrum of customers compared to their competitors who only specialize in two product lines.

3. After reading this case, I think that Samsung Electronics’ advantage is mainly in product differentiation. However, they do exhibit both of these strengths and because of the unique ecosystem created around Samsung, they have successfully spread its product lines across both the low cost and differentiation dimensions for both a broad range of customers as well as niche markets.

Dealing with the Threat of Chinese Entrants
1. The strengths of Chinese entrants include the numerous resources that they have obtained from Chinese and foreign investors and their ability to grow their market share at the expense of profitability, just like what Samsung did a couple of decades ago to get to where they are now in the DRAM industry. In addition, Chinese entrants are seeing partnerships with Infineon and Elpida to learn about the new technology. Furthermore, in order to persuade companies and people into helping them build the DRAM industry in China, “the Chinese government [is providing] cheap credit, abundant land, cheap utilities, engineering talent, tax incentives, and other essential resources to anyone who [wants] to build a cutting-edge semiconductor facility with a Chinese partner” (11).

Some of the Chinese entrants’ weaknesses are their lack of real design capability and their use of old process technology and the U.S. and Taiwanese laws that restrict technology transfer to China and working with Chinese producers means possibly losing IP.

2. Chinese entrants are seeking a cost advantage as they have low financial costs because of easy-to-access capital. The Chinese also have lower labor costs which provides them with a cost advantage. And because these Chinese entrants have the patience to endure years of losses while building up their market share, they are making massive quantities of DRAM and selling them as a low cost compared to other companies such as Samsung.

3. Some options for dealing with the Chinese threat:
a. Technological Lead
Samsung could have a technological lead over Chinese companies because of their lack of organizational experience, their old production processes, and their tacit knowledge to master design and production technology. In addition, they could build on know-how of product and process technology to offer high-value customized products with high reliability at low costs.

b. Chinese Production
Samsung could start their own production in China and find a Chinese partner in order to reduce costs of starting up in a new country. However, problems could arise in the company culture since Samsung is mainly based and focused in Korea right now.

c. Cooperation
Samsung’s cooperation and collaboration with non-Chinese competitors can lead to reduction in research and development and production costs and a technological advantage on both ends

4. I think that to maintain the differentiation advantage that the company has right now, Samsung should enhance their work ethic and culture as well as maintain the ability to have a strong firm vision so that all employees and everyone who works for the firm are on the same page and work towards the same goal. As for their product mix, they should work to differentiate their products even further than already have to reach an even wider range of customers. And while they provide both low-end and high-end products currently, they should think about retreating from low-end product lines in order to focus more of their time and resources to producing high-end products, which will give them more of an advantage over other DRAM firms since all the other firms in the industry are already competing to provide customers with the low-end products. Overall, after analyzing their strengths and weaknesses, it seems that Samsung will be able to withstand and remain strong in the midst of the impending Chinese threat as the vision of Samsung Group from 20 years ago, when they first entered this industry, remains strong and forward-looking. Unless the Chinese DRAM firms are able to make a strong entry into the market as Samsung had two decades ago, it seems that the Chinese entrants into this market will not be a solid threat to Samsung.