SAMSUNG ELECTRONICS 1) What is the case about?
By investing in the DRAM production in the 80´s, the Samsung Company managed to turn Samsung Electronics group into its main source of revenue. The company developed a very specific strategy: * Investment in production process in order to increase productivity : the main goal being to produce more quickly with less mistakes * Leading in frontier product : always be the leader in technology * Quality control : always focus on the quality of the products * Human resources : stimulating environment by a meritocratic system based on incentive programs
In 2005, the arrival of firms companies in the memory chip market is threatening Samsung´s leadership. More specifically, the global memory industry is a sector with a little number of powerful suppliers and various price-conscious customers.
Like Samsung in the 80´s, new Chinese companies are creating a fierce competition, willing to sacrifice profits in order to get market share. Those companies got industry experience by creating leadership and managed to build high value facilities by raising international financing. In spite of the American and Taiwanese´s blockade, the government created incentive for other foreign countries by creating an attractive environment.
Samsung decided to create partnerships with Chinese companies but this implies two main risks: * The fact that intellectual propriety is not being well-protected * The fact that by moving its production to China, Samsung might destroy the innovative environment it had created by gathering its facilities.

2) Assess the attractiveness of the Memory Chips industry in 2003 and in the future. Identify its Key Success Factors.

* Attractiveness of the memory Chips Industry
The figures of the Memory Chips industry s show clearly the attractiveness of the sector: * The Memory industry in 2000 account for $200 billion sales * The sector has been experiencing an annual growth of 16% since 1960 * More specifically, the Memory Chip industry account for $33.7 billion sales in 2003 * Even if the share of DRAMs ( a type of memory ship) going to PCs dropped, they are more and more used for telecommunication products ( increase from 3.5% to 7.9% in 2008) * SRAM and Flash memory (other types of memory chip) accounted for 10% and 32% of the industry sales in 2003
Moreover, we can see that this sector is very competitive: indeed, in the 80´s Samsung Electronic was trying to be leader on the market, facing Japanese competitors and now fears Chinese firms. The presence of many competitors on the market can also be seen as a proof of the attractiveness of the memory chip industry. * Key Success factors

* Leadership in technology :
One of the particularities of the memory Chip industry is the constant need for innovation. Indeed, companies are always seeking the best product and thus have to invest constantly in R&D. Samsung for example by creating internal competition among the company managed to create an innovative environment and thus maintain their leadership on the market.
As technology is growing more and more complex and mainly due to the ups and downs in demand for products, we can also highlight that the memory chips industry is characterized by a short product life cycle:

Given that, we can see that companies who have the technological advantage manage to get a high profit which makes it possible for them to reach a high return on investment and then invest again. On the contrary, the companies who will follow the innovation will enter the market at the mature stage of the product where the prices are dropping and then get fewer profits. * Quality control :
As we can see in this case, the quality of the product is vital for this sector. Indeed, it contributes to create a brand image for customers: the idea is to be seen as a reliable supplier in order to get market share. We can once again clearly this that in Samsung´s Strategy: at every step of the development of the group, the several chairmen always focused on the quality of the product and on avoiding any mistakes.
This can be related to the importance of the equipment too: state-of-the-art facilities are required to produce quickly while reducing manufacture defect. The Chinese competitors of Samsung have adopted this strategy. * Pricing :
The presentation of the Memory Chips Industry points out that this is market with price-conscious customers. Indeed, as the market is very competitive, companies need to be able to reduce their prices for their product. Thus, Samsung in 2004 announced a decrease in prices, facing the Chinese competition. As in the Samsung’s case, reducing the prices implies to improve the production process, which is related to investment. * Financing :
The Memory Chips market is also characterized by high costs entrance, mainly due to high fixed costs and economy scale. Thus, to be successful in the memory chips industry companies have to be able to raise enough funds in order to afford the costs. Indeed, we can see that Samsung in the 80´s and its chines competitors later are able to reduce their margin for years in order to get market share.
External sources: * Investopedia: http://www.investopedia.com/features/industryhandbook/semiconductor.asp * A study of the DRAM industry by Jookyu Kang, B.S. , Sogang University, 2001, Submitted to the MIT Sloan School of Management In Partial Fulfillment of the Requirements for the Degree of Master of Science in Management At the Massachusetts Institute of Technology June 2010 : http://dspace.mit.edu/bitstream/handle/1721.1/59138/659514510.pdf

3) What where the sources of Samsung’s cost advantage in DRAMs in 2003? Measure this advantage.

There are many sources of Samsung’s cost advantage in DRAMs as of 2003. We could cite 4 main factors: favorable location, skilled workforce, superior technology, and efficient processes.

Favorable location, as Samsung capitalized on already existing facilities, such as their first manufacturing facility which they managed to create as fast as possible, in less than 6 months, thanks to hard-working people, even though climate conditions were bad. Then, new Samsung facilities were extremely well located and organized, because everything was gathered, not spread across the country or the globe like competitors’ facilities. They saved an average 12% on fab construction costs this way. And this made it possible for every engineer to live with its fellow engineers, in a healthy environment.

Skilled workforce, since the company could rely on hard-working engineers from the beginning, who didn’t hesitate to work the whole week, thanks to whom Samsung managed to catch up with its competitors. Then, Samsung’s engineers were put in internal competition in order to deliver the best results. This has resulted in Samsung developing new technologies very fast.

Superior technology, because Samsung made the good decisions. For instance, they had to face the crucial decision between choosing “stacking” and “trenching”. They chose stacking and it was the good choice and thus, they saved money and got ahead of some of their competitors, and even catch up with the then leader. Samsung really wanted to become the leader in innovation and they achieved that. They achieve technological superiority when they managed to increase the size of the wafers, when no one else was willing to take the risk, and thanks to this, they gained number one market share for a long decade. Being the first ones the use the technology, they could master it and thus reduce costs.

Efficient processes, because despite having thousand variations of DRAM products, all these products share the same core design, which makes it very easy to customize them, as production lines. These are such made that they can produce multiple architecture on the same line. The company can easily customize its products, without spending too much on the production costs.

This advantage can be measured as follows:

For instance in 2003, in Exhibit 7a: Samsung has an operating profit of $1.37, whereas all its competitors lose money (or only win 2 cts).
We could do the same for each type of DRAM, since Samsung always has an operating margin far superior than that of its competitors. Yet, it is true that Samsung almost always sell its DRAM a bit more expensive than its competitors.

4) What where the sources of Samsung’s price premium in DRAMs in 2003 ? Measure this advantage.

Samsung sells its DRAM more expensive than its competitors because: * It had leadership in this market and had thus all power to raise its prices * It offered a huge product mix, with more than 1,200 different kinds of DRAM, making it possible for each company to find the one DRAM it was looking for, the exact one. State-of-the-art customization has a price, that’s why Samsung could sell its DRAM at a higher price than average * It also developed new technologies, making DRAM faster, more powerful, more economical, etc., raising the product quality, what made it legitimate to raise the price * The company made a point of honor to provide customers with top quality products, as the CEO Lee wanted. To support this, Samsung won several awards for reliability and performance, meaning that their products were truly superior to their competitors’. This is why Samsung could sell them at a higher price

Precisely, this can be measured as such:
According to Exhibit 3, the average selling price (ASP) in 2003 for DRAM and for Samsung is $5.68.
Micron’s is: $4.93
Infineon is: $5.05
Hynix: $4.97

Let’s put an average price at: $5.158 (the average of the four last prices)

The price premium of Samsung is: (5.68 – 5.158) / 5.158 = 0.10

Samsung sells its products 10% more expensive than its competitors.

5) How can Samsung combine a cost and a differentiation advantage ?

To combine both is quite difficult in theory, but Samsung succeeded, out of several factors. They managed to have at the same time an impressive range of products and a common chain of production.

Differentiation has been achieved with what Samsung has divided into three categories: * Frontier products: high-end, state-of-the-art products * Legacy products: mainstream products * Specialty products: niche markets products

This was reached thanks to a common core design for every chip produced, which made it easy to produce a large variety of products since the differentiation was done by customizing this core design. Also, Samsung’s production lines are capable of producing different architectures. They are very flexible, which naturally helps when it comes to build a lot of different products in little time.

Differentiation and cost reduction could have also been combined because the R&D and the production facilities were in the same location, which leads to faster market response and faster marketing. Samsung saves money and can develop faster more new products. Also, this combination has been made easier thanks to the talent pool strategy. Samsung sponsors local students who will in the future work for Samsung. These future well-trained employees take part in the differentiation, and being local, they don’t have to be as paid as a foreign engineer would be.