Samsung Electronics

Prepared by: M. O.
Prepared for: Dr. N. C.
Course: Organizational Strategy, MGM 6123, Fall 2009

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Date: October 5, 2009
H. State University

Samsung Group is one of the leading global conglomerates originating in South Korea, termed chaebol in native terms. Their sales in 2004 climbed to $134billion with 337 overseas operations in 58 countries and they employed 212,000 people worldwide. They have myriads of businesses in a wide variety of industry sectors including electronics, finance, trade and services (Siegel and Chang, 2005).

In 1974 a semiconductor company in South Korea started ‘wafer’ production. This was purchased by Samsung Company who merged the semiconductor company with their electronics division to form a ‘global powerhouse’ (Siegel and Chang, 2005). They started with producing watch chips. In the 1980s, semiconductor was decided to be the future of Samsung Group. And the company gave most of its resources to this ‘star affiliate’ (Siegel and Chang, 2005). During 1983 to 1985, Intel exited the DRAM market. Samsung still held on despite incurring losses hoping that it would someday pay off. Their persistence paid off in later years.

Samsung built its first large plant in the mid 1980s. Building a semiconductor facility is difficult and time consuming, because of high sensitivity to dust and electric shock. But the Samsung workers, from the executives, engineers, down to the field laborers, were highly dedicated. One memorable event was when a 4-mile long road was paved in one single day. There was a shipment due on the evening and the people who brought it in were taken by surprise to find a newly paved road which was entirely unpaved the previous day (Siegel and Chang, 2005).

Since 1992, semiconductor has been South Korea’s largest export, which is fully 10.4%of the country’s semiconductor export volume (Siegel and Chang, 2005). Samsung Electronics Company has been the leading memory producer for all types of PCs, digital cameras, game players, etc. by 2003.

Memory industry: Semiconductors were classified into two broad categories, memory chips and logic chips (Siegel and Chang, 2005). Memory chips would be further classified into DRAM, SRAM and flash memory. Samsung was in the business of designing, manufacturing and marketing all these three category of products. It was a highly specialized industry requiring high start up costs and tacit knowledge in semiconductor technology. It was a technology that was continuously growing more complex.

Rivalry within the Industry: A large number of Chinese firms were about to start competing. These firms were willing to sacrifice profits in order to gain market share as they had investment money pouring in from foreign and local investors.

Buyers: The customers of memory chips were largely original equipment manufacturers (OEM) but none of them controlled more than 20% of the Personal Computer market worldwide (Siegel and Chang, 2005). The OEMs were highly price sensitive because memory comprised a significant percentage of production cost for PCs. Despite this fact, they were willing to pay a premium for products as long as they guaranteed reliability.

Entry Barrier: The entry barriers in the memory industry were high requiring high capital investment, high precision and complicated technology. Average time for building a plant was 18 months and average cost was $200 million in 1985 which climbed to $3 billion in 2004 (Siegel and Chang, 2005).

Competitors:

1. Elpida memory of Japanese origin

2. Hynix semiconductor of China – Wrong inv timing – lost market share.

3. Infeneon tech of Germany was spun off from Siemens produced DRAM

4. Micron Technologies of US focused on DRAM production, received investment from Intel in 2003 to invest on DRAM production.

5. Nanya Technologies of Taiwan was 5th largest DRAM producer with 2 manufacturing plants

6. SMIC of China established in 2000 was China’s largest DRAM “foundry”, China’s only DRAM producer. Foundries don’t design chips, they take blueprints from others and make the chips. But Samsung designs chips.

Technological development: In mid 1980s, Samsung needed outside technology to design and produce 64K DRAMs. Micron agreed to do so for cash. Later Samsung set up two product development and design teams in California and South Korea who would compete among themselves to develop ‘frontier technology’ (Siegel and Chang, 2005).

In the Late 1980s, chair person Kun Hee Lee was to solve a technological limbo in the production method of breakthrough 4Mbit DRAMs. He chose the ‘stacking method’ over the ‘trenching method’, and this was just one example of the numerous correct and on time decisions that helped the company climb to the leading position in the industry. Other companies like IBM who implemented the complicated trenching method fell behind because of wrong decision making. Samsung soon began to catch up with the then market leader in DRAM – Hitachi.

In 1992, Samsung made another $1billion investment for increasing the size of the wafers which doubled their production capacity. They finally attained the leading position in the industry.

Product mix: Samsung produced 1200 different variations of DRAM products as of 2003. Ability to produce such a wide variation of products was rare in the industry. Such a large variety allowed the company to reach a wide range of customers which their competitors could not satisfy with their standardized products. Among these, they offered ‘frontier products’ for the technology oriented customers and yet they also did not completely phase out the ‘legacy products’ – which were actually sold at higher prices to a smaller number of customers who sought older generation products. Thus the 526Mb RAM was sold at a lower price than 256Mb RAM at that point. Apart from these, there were also specialty products for niche markets – such as very high cutting edge memory for gamers. Samsung also increasingly moved into flash memory and the Huwang’s law for flash memory was proposed similar to the Moore’s Law for semiconductor capacity. The Huwang’s Law stated that the flash memory capacity would double every 12 months (Siegel and Chang, 2005). And it did, pioneered by Samsung itself.

Samsung tried to create new uses for DRAMs taking help from design firms like Rambus. They launched new DRAM products with product specific applications for laptops and personal gamers. Samsung actively sought to customize its products around a core design.

Plant location: Samsung’s main research and development facility and all its ‘fab lines’ (Siegel and Chang, 2005) were situated in one location south of Seoul in South Korea while competitors had their facilities scattered worldwide. Samsung saved a lot of capital expenditure by keeping their plants in one centralized location with clean air and all their talented engineers working together. This pooled their talents resulting in more innovative and fool proof designs ideas. In the fabs, they produced multiple product architectures on each product line.

Quality Control: Samsung prided so much on reliability that during the 1980s and 1990s, the CEO himself identified faulty products and initiated destruction of those products. He urged the employees to stress on precision. By the late 1990s, the company kept winning awards for reliability and performance. Samsung simultaneously developed products for rival companies like one type of flash memory for Sony and a different one for Nokia (Siegel and Chang, 2005).

HR Policies: The Samsung organizational culture forbade the pride and respect based on seniority and the reputation of the school where the employees graduated from (Siegel and Chang, 2005). They gave extensive foreign training and required the trainee to record what he learned. They also sponsored higher studies for employees extensively. They recruited many foreign talents. This helped their local employees overcome cultural barriers and learn valuable tacit knowledge on semiconductors from the foreign colleagues.

The company developed what was called a Global Strategy Group which attracted talents from around the world. It was a corporate resource that helped solve business problems at the business level unit and prepared global managers for important positions (Siegel and Chang, 2005).

It was also part of Samsung’s policy to only reward good performance. But they did not punish failures. Apart from the monthly salaries which were competitive in the region, they had three kinds of incentives for their employees for project completion, high levels of production and overall performance of the department. These incentives often topped 300% of their base salaries (Siegel and Chang, 2005).

Threat of New Entrants: In 2005, there was fierce rivalry and large scale entry by Chinese firms. Samsung announced a sharp drop in market price in the end of 2004. Chinese competitors were ready to forego profits for market share. Capital investment in the memory industry was high. Still Chinese firms found little difficulty to raise the money. These firms did not have the knowledge to go into the memory industry, but they had young talented engineers who could learn fast, tax subsidies from their government and financial backup from local and foreign investors. Hence there was always the threat that if a new start up firm introduced a more efficient technology, the current players in the industry like Samsung would lag behind with their inertia of vast investments, established designs, and production methods and hence would be slow to react. But the threat that was imminent was that of a fierce price war. The Chinese firms were likely to introduce memory chips at incredibly low prices supported by cheap Chinese labor.

Strategy: Samsung Group appears to have achieved a dual advantage of both cost leadership and differentiation. Not only did they have a highly price sensitive customer base but they had the continuing threat that competitors would offer low priced products and thus take away their market share. But Samsung was able to retain loyal buyers because of their reliability. Despite seeking lowest cost, buyers were willing to pay 1% premium for reliable products, since reliability and precision were crucial factors in the complex semiconductor industry (Siegel and Chang, 2005). If one semiconductor chip failed in performance, it would result in bad reputation of the OEM who purchased from Samsung.

At the same time, they had a widely differentiated range of product offerings – totaling 1200 different products. Hence they were able to meet the varied needs of different buyers and provide customized products. They were constantly being rated as the only supplier of choice by even rival companies.

Unlike competitors, Samsung tried to create new uses for DRAMs. Samsung had launched new DRAM products with product-specific applications in laptops and personal game players. It enabled Samsung in creating new markets that were unavailable to its competitors.

Samsung was the market leader in memory chip technology and constantly remained ahead of its competitors. Samsung was able to create new markets by developing new applications of memory and cutting edge technology.

This provided Samsung dual advantage of cost and value over its competitors. The Chinese counterparts were lowering the profitability of the market as they had easy access to funds and support from their government.

Samsung had two options. One was to actively collaborate with the Chinese partners. Collaboration would provide access to local Chinese market which was growing rapidly and access to cheap resources and local talented engineers. But there was the risk of losing its unique culture and the intellectual rights, which were not yet fully protected.

An alternative option was to invest heavily in cutting edge memory products and niche markets and leave the low end of the market for the Chinese competitors (Siegel and Chang, 2005).

The integrated cost leadership/differentiation strategy gave Samsung better capability to:

1. Adapt quickly to environmental changes: with their already highly varied number of product offerings and their company policy to have the entire group’s resources to be made available to the semiconductor division whenever required.

2. Learn new skills more quickly: Samsung recruits foreign talent extensively.

3. Effectively leverage its core competencies while competing against rivals: they stress highly on reliability of their products and also they strive to do deliver ahead of time. They have been termed as the number one supplier of choice by their buyers for several years. Example of their tendency to be ahead of time was when a one of their fabs was built in 6 months, while such a construction normally required 18 months.

Despite having an upper edge in the above aspects, Samsung still has the risk of being “stuck in the middle” (Hoskisson, Hitt, Ireland, & Harrison, 2008). This is the biggest risk of enjoying dual advantage. The company is in high risk of not being thoroughly specialized in any one strategy. It lacks specialized expertise that other companies following only one strategy possess.

Recommendation: Hence in the backdrop of the Chinese new entrants threatening to initiate a fierce price war and promising to lead the semiconductor market by 2010, Samsung must implement some vital turnaround strategies.

It is recommended that instead of working in collaboration with the Chinese, Samsung should slowly move away from the low end DRAM markets, leaving those for the Chinese (Siegel and Chang, 2005). The Chinese who still lag behind in semiconductor know how are likely to attack the low-end market first. They would offer a low price previously unthinkable by buyers. Samsung can safely tap into the higher end of the market and develop more product offerings with newer technologies as they are by now a company that prides of a deep knowledge base in the memory industry. They should also devise new uses of the DRAMs. The ultimate goal is to retain customers who will continue to perceive that buying at a slightly higher price from Samsung is more than offset by the value they get in terms of reliability and cutting edge technology.

References

Siegel, J.I. & Chang, J.J. (2005, June 30). Samsung Electronics. Harvard Business School

Hoskisson, R. E., Hitt, M. A., Ireland, R. D. & Harrison, J. S. (2008). Competing for Advantage (2nd Ed.). Thomson Southwestern.

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Source: compiled from the text Competing for Advantage by Hoskisson, Hitt, Ireland & Harrison and the HBS Case ‘Samsung Electronics’ by Siegel and Chang