Founded in 1939, Samsung is one of the leading companies in the electronics market with 206 offices and facilities in 68 countries globally. The company was founded by the family of the current CEO in a small city of Korea named Taegu operating as an export company (About Samsung-History, par.1). Samsung has grown to become one of the most successful electronic companies with a main focus on digital media and appliances, memory, semiconductors, and system integration. Its profile is one that many companies would like to possess. Throughout the years, the company expanded its product lines and grew its market share and profits. The company is headquartered in Seoul and operates in over 100 countries across the world (About Samsung-History, par.3). Samsung’s profile for 2011 shows that the company closed a very successful year achieving 220 billion euro revenue, and employing 344 thousand people all over the world.
Fig.1 Samsung Profie – About Samsung
The strength and success of the company lies in its innovative and reliable products, talented staff and employees, and responsible approach to business and global citizenship which are shaping the world in completely new directions. The corporate philosophy is about making a better world and enriching people’s lives in several manners. Their values are also important factors which shape their performances and play a critical role to their business (Values&Philosophy, p.1). Their working philosophies accompanied by strong values create their business principles which are represented below.
Fig.2 About Samsung-Values&Philosophy
Samsung has its roots also in other types of businesses rather than electronics. This corporation is comprised of many companies that are setting new life standards from electronics up to petrochemicals.
Samsung Core Business
Samsung’s business is separated into Set Business and Component Business. These two portfolios create the Samsung products which had already taken our lives beyond the ordinary (Business Area, par.1). The Set Business is mainly comprised of Mobile Phones, Personal Computers, MP3 Players, and the key driver in this portfolio TV Business. The Mobile Phones section of this portfolio is one of the most successful ones especially over the last years. In this section, the company had led the standardization of mobile-phones technologies such as Mobile-WiMAX and High Speed Downlink Packet Access (HSDPA) (Business Area, par.4). The TV Business is another key driver in this portfolio. LED TV’s and LCD TV’s have maintained top positions in the market leaving now the road to further innovations such as 3D (Business Area, par.4). Other sections which seem to contribute positively in the Set Business Portfolio are Printer and Camera which are being developed even further with the most innovative technologies. Some of the products of this portfolio are the ones listed below: (LED TV-Samsung) (NOTE Pc-Samsung) (SGH-A867 Eternity-Samsung)
The second portfolio is Component Business which is a leader in memory and LCD markets in product and technology development. This portfolio is divided into semiconductors and LCD. The Semiconductor Business is divided even further into Samsung Memory Division, System LSI Division, and Storage Systems Division (Business Area, par8-9). The System LSI Division manufactures logic and analog integrated circuit devices. The Storage Systems Division is a leader in producing high-capacity and high-performance hard disks for notebook and desktop PCs, digital camcorders, MP4 players and other similar products (Business Area, par.9).
The company is focused exclusively on the consumer electronics segment and given its competitive edge it has managed to garner the maximum market share for itself. As mentioned above, Samsung Corporation manufactures a wide range of products which include different industries such as electronics, machinery & heavy industries, chemical industries, financial services and the like (2011 Sustainability Report, p.7). All these share a commitment to creating high quality products which will create better life conditions for people and businesses. Samsung still remains at the forefront of the digital revolution in which they contributed by continually developing new products that not only meet the customers demand, but also anticipate it.
Because of the wide range of products that Samsung manufactures, our main focus will be in these products, specifically on Mobile Phones and TV’s as they represent the main source for the firm profits (2011 Sustainability Report, p.12). The chart below summarizes that the two most profitable sections of Samsung Corporate are Digital Media and Telecommunications.
Samsung provides a product range that is marked by a high quality and high responsiveness to consumer needs and preferences. This advantage puts the company at forefront when compared to its competitors. With the initiation of innovative and unique products, Samsung took the market by storm and managed to gather the maximum market share. The table below summarizes the global market share of Samsung in comparison with its competitors representing the success of the firm. Products| Samsung’s Global Market Share| Competitors| Market Share| Year| DRAM| 34.3%| Hynix| 21.6%| Q1 2009|
For Samsung partner companies are an important asset that help the company generate profits and operate successfully. The company carries several activities with which they help and collaborate with their partner companies in order to create a stronger and more competitive operating market. A strong supplier network is one of the factors that rank Samsung as one of the top 6 worldwide most successful electronic companies (2011 Sustainability Report).
Because of the crucial role that suppliers hold, Samsung has developed a program known as “Seven Key Program for Mutual Growth” which is intended to strengthen the ties between suppliers and the company, foster strong partnerships and enhance mutual competitiveness(2011 Sustainability Report, p.2). Samsung has a lot of resellers around the world. Some of the most companies that have this position are: A.J Madison, B&S Enterprises, Atlantic Appliance,Inc., Bradley M Griffin, Best Buy, Casa Linda, Audio Enteriors, Dan’s TV&Electronics, Dynamic Entertainment, Flowers Radio, Elite Media Solutions, DK Digital Design, Gerhards, Systems and Excel Media Systems, DWR Inc., House of High Fidelity and much more (Samsung Authorized Resellers, p.1).
Customers are what make a company function and therefore are very much valued by all the companies. Samsung pays a special attention to its relationship with customers. Its aims are to be respected and admired by customers. In order to strengthen the ties with their customers, Samsung has developed several prosumer activities and social network services (2011 Sustainability Report, p.2-3). Through these activities tailored for customers, the company won numerous awards for customer satisfaction. Keeping the customer satisfied is very crucial to consistent success and profits that Samsung holds. The company aims to provide products that will fulfill the customer needs. In order to create a better communication chain, they have created different packages which are composed of different groups of people in TV products or Mobile Phones products (2011 Sustainability Report, p.74).
Porter’s five forces
Threat of New Entrants
The success of Samsung, its loyalty towards its customers and mostly its distinctive and innovative products are what make this company be listed in forefront. Because of these facts mentioned, Samsung has found it very easy to enter in almost every market around the world. The impact of market entry towards the company is very high because of the ease that Samsung had when entering new markets. Samsung managed successfully to enter two major markets such as China and India which had served positively to company’s profile by providing the much needed volumes for its expansion. Additionally, Samsung has an economies of scale advantage being one of the major producers of technological products that are not limited to DRAM’s or semiconductors. As mentioned before, the company stands very loyal to its customers and their preferences by producing products that satisfy their needs. This makes the company be even more preferred and trusted by their clients. Several sources rank Samsung as nr.21 worldwide and this trend is another factor which increases the difficulty of entering in the market.
Hence, a very good brand identity reduces the threat for strong companies such as Samsung from new firms. The electronics business requires a lot of effort and especially a lot of money to firstly be developed and then succeed. To Samsung and any other similar successful company engaged in such business, it required billions of dollars and a lot of time to achieve the minimum of just reserving the place in the market, by not mentioning other costs such as operational costs and the like. The strong position that Samsung holds today and the high costs for the new entrants is another factor which makes it difficult to enter such market.
To add, a similar factor to capital costs is the learning curve which seems also to reduce the risk from infant competitors. Samsung had to learn how to develop such products for a long period of time and spend a lot of effort to maintain the quality. A plus for this company was that it started in Korea where people pay a lot of attention to school and education producing very talented engineers known worldwide. Being composed of such a staff, shortened even more the learning curve for Samsung and strengthened its roots in this market. Such a strong company in the market lowers the possibility of any threat that might appear when new companies emerge.
Bargaining Power of Buyers
Based on the composition of this industry, buyers have good leverage when it comes to bargaining. With so many companies competing in electronics and mobile phones, buyers have several choices on which they can bargain. Hence, the impact of this power to company is a little bit high. Since there are so many players in the fray, this market is essentially a buyer’s market. This can also be reflected in the endless price wars that Samsung is engaged in with other similar companies. Buyers will easily switch between these prices, choices of products or features.
One advantage over this for Samsung is that buyers do not switch brands immediately as first it takes time to adapt and adjust and only in times of complete dissatisfaction is when switching brands takes place. Switching costs or products can be very high in some cases. Different packages offered by different companies might affect customer’s choices and preferences. For example contracts made between a company and a client to purchase a phone for 2-3 years might affect the other phones on the market which are sold to its real price and therefore the difference might be higher. But the risk for this choice is higher. For example, if the customer wants to terminate the agreement before the contract is up, the fees for the clients might be very large.
Bargaining Power of Suppliers
The bargaining power of Suppliers for Samsung is relatively limited because of the form how the company is composed. The fact itself that the company does not produce only mobile phones or TV’s but many other products mentioned above, makes this element somewhat limited. For example, there are over a thousand suppliers around the world for different kinds of parts that the company needs for making the electronic appliances. Given the fact that these parts are very essential for producing the right product, gives them a unique advantage which cannot be ignored. Like in any other industry, Samsung depends on its suppliers for timely delivery of its products and therefore their role is very crucial in company’s success.
However, this element is a little bit different when considering the mobile phone industry of Samsung. In this case, the bargaining power of suppliers is low since Samsung supplies its own components most of the time and most of the time supplies its own raw materials.
Threat of Substitutes
The threat of substitutes is really high for a company like Samsung given the fact in which industry operates. The propensity to switch to alternative products in response to price differences is very high. The company needs to be very strong and keep up with its innovations since the market is characterized by intense competition on a regular basis, introducing similar products to those of Samsung. Also, the introduction of almost the same products, or better say “clones” from other competitors, increases the threats for Samsung where the company must continually produce innovative ideas in order to secure the forefront.
Nevertheless, one advantage over these facts for Samsung is that the customers who are quality conscious do stay loyal to the company and reduce the threat which comes from those that are price conscious.
This is another element that has a huge impact on Samsung because of the presence of strong competitors like BenQ, LG, Nokia, Apple, Motorola and other. An industry with such composition goes through an intense competition especially in the emerging markets like India. From its boom, the mobile phone industry, especially that of smart phones has slowed down and the competition turned into taking customers from other rivals. The risk is high because everything seems to be short-lived firstly due to the emergence and fast adaption of new technologies and second because of the extreme level of competition.
Law of Diminishing Marginal Returns
The law of diminishing marginal returns states that by holding one factor constant and adding more and more variable factors to a given quantity of fixed factors, the marginal product will start to diminish (Law of Diminishing Marginal Returns, par1). MP
This means that as the effectiveness of the variable input decreases eventually, the input of production needs to increase in order to keep the output high which automatically increases the production and supply costs. This direct relationship between price and quantity produced is the essence of the law of supply. This law has a huge effect on the supply side especially on the market supply, supply price and the law of supply. In order to understand this better it is important to make an illustration of it.
As seen, marginal product initially increases in response to the labour factor and eventually starts to diminish (as the law states). The initial increase in marginal product reflects the efficient use of the fixed input from the variable input. As more and more workers are added, the number of workers relative to the amount of fixed workers is much higher and efficiency starts to decline which leads to diminishing MP. The law of diminishing marginal returns is the opposite of the law of diminishing marginal utility and directly related to the supply side (Law of Diminishing Marginal Returns, par.1).
Hence, this law helps in conceptualizing supply or the law of supply which holds that as the production or selling increase the companies have to charge higher prices. The high price comes as a result of the increase in the cost of production which results from the decrease of the productivity of the variable input. Let us assume that the 5th worker of a particular company produces 20 units, the 6th worker produces 12 and the 7th produces 8 units. Because of the ineffectiveness of the two last workers, the company has two workers who produce the same amount as one can. Consequently, the cost of production doubles which results in an increase in price too.
Law of Diminishing Marginal Returns applied to SAMSUNG
It is very crucial to create a correlation or explain the law of diminishing marginal returns based on production factors such as land, labor, capital, entrepreneurship and such. In cases of companies such as Samsung, where the firm has many subsidiaries, it is hard to take one point and analyze further. As outlined previously, Samsung sometimes manufactures itself the raw materials and products and sometimes uses a supplier. Since Samsung produces almost all of its products, the effect of law of diminishing returns is of a crucial importance. In this case, if Samsung decides to increase its production level, this means that it has to increase its inputs which results in higher costs. As it was explained above, to produce and supply larger quantities, higher prices are needed.
Considering the fact that competition in this market is fierce, it would be very harmful for the company to increase its costs. Furthermore, the company already has established and trustful clients and it would not be a good action to take such risks. Technology development had made the manpower be substituted with machines where almost any function is completed by just pressing a button. Hereafter, if the company decided to employ additional workers, the law of diminishing marginal returns will take place as inefficiencies would take place and the costs of each additional worker would result in the end price increase. Since additional employees require extra money, costs, space, DMR will set in even faster decreasing the returns because of the presence of similar level of knowledge and skills that do not add or improve the output.
Instead, it would be more preferable for the company to invest in machinery and technology or even in new entrepreneurs who would help to boost the production and returns. New ideas to the company would result in new ways of producing, new ways of functioning, new products and new customers. In our case, this is the second most vital factor that might affect the company’s productivity as only one successful and innovative entrepreneur might bring additional sales and an increase in market share. As a result, it would be very difficult for DMR to take place if the company succeeds in finding the right entrepreneurs. However the risks of fail in this subject are never disappeared, but believing in their strengths, this could be overcome easily through several testing techniques.
The Porter’s five forces analysis already positioned Samsung to the type of industry competition it pertains. Given the fact that the number of firms in the market is few with a large number of customers makes the electronics market an oligopoly one. Besides the limited number of successful firms present in this market, the barriers to entry are also relatively high because of the presence of strong and trustful companies and also because of the high costs to start a new business.
Additionally, the strong and ongoing competition between the companies in this market represents another characteristic of an oligopoly market. Moreover, the pricing strategy is much controlled by all the firms operating in this market. The companies have a moderate influence over market prices but not a pure influence. This is because of the similarity of the products offered and also because of the size of the firms. In an oligopoly market, the firms do not have much power in price changes. These factors are the main reason why we believe the market electronics to be an oligopoly (Industry Structures, p.171-172).
Economies of Scale
Economies of scale had answered many questions related to economics in everyday life. It has lowered the unit costs of production and provided lower prices for customers. By its definition, “economies of scale are cost advantages that a business can exploit by increasing their production scale” (Economies of Scale, par.3). Therefore, a firm faces an economy of scale when the production cost of a single product decreases with the number of the unit produced. The cost of producing one additional unit (marginal cost) decreases, while the volume output increases. There are two types of economies of scale: Internal and External. An internal economy of scale is when the size of the individual firm estimates the cost per unit and not the whole industry. On the other hand, an external economy of scale is when the size of the industry estimates the cost per unit instead the size of the firm (Economies and Diseconomies of Scale, par.2-5).
Economies of scale have also the dark side which is known as diseconomies of scale. As businesses acquire economies of scale, the bigger that they become, the harder it becomes to manage such a scale (Economies and Diseconomies of Scale, par.6). This complexity inquires additional costs which outweigh savings benefited from greater scale. Further, a business might analyze several factors of both economies of scale and diseconomies of scale before taking action towards increasing its scale of operations.
In our analysis, Samsung must establish the net effect of the decisions which affect its efficiency before deciding on further steps. A decision of increasing its output might result in lower average cost of inputs but at the same time, it could raise the diseconomies of scale which might bring additional costs for Samsung. Hence, when deciding on business expansion, a firm must analyze both the factors of economies of scale and factors that might lead to diseconomies of scale so that the average cost of any decision would be the lowest one and an increase in efficiency would be the end result.
Conclusions and Recommendations
Samsung has a unique history as it was presented throughout our analysis in the paper. In a short period of time, it managed to enter successfully the market and surpass its huge and competitive rivals in many markets, especially that of United States and Japan. This success is also shown in the field of technology requiring the company not only to adapt acquired technologies but also to innovate and create its own. Samsung is nowadays considered as a company which should be observed as its developing history makes it so. To observe the successes and flaws of a company that progressed from a simple television production to state-of-the-art semiconductors, provides important benchmarks and recommendations for the study of new-entrants and also steps to follow in the path of success.
The market in which Samsung operates is characterized by fierce competition which comes due to low product differentiation, low cost strategy and brand loyalty. The demand side for Samsung is not highly affected by substitute goods as their presence is low and the ability to satisfy the consumer needs is weak. However, one factor which affects the demand is the availability of different types of technologies incorporated into similar and sometimes identical goods. As technology advances and better production ways are found, the market will try to incorporate the latest technology and benefit from it. As many companies cannot afford to incorporate the latest technology, especially the new comers, big current companies will benefit from this trend. After incorporating the new technology, the manufacturers will develop new ways of lowering the production costs which automatically will lower also the selling price.
The advantage of this is that these cheaper products produced with the newest technology will be afforded by the customers and hence, the demand for these companies will be larger. Samsung products truly are manufactured with the newest technology and the demand for its products is quite high as customers stay very loyal to this brand. Therefore, the demand of Samsung is positively affected by its innovative technology which also contributes to a larger market share. The company should continue walking on this path as this had led them to many successes and profits already. Furthermore, Samsung should try to incorporate new ways in its manufacturing process as it competes not only on the TV sector but also on the mobile phones one.
The competition risk therefore is doubled and the company should focus and be careful on both these sectors in order to survive the trends and succeed. As the world starts to recover from recession, the consumer purchasing power will increase and therefore there will be more room for the company to innovate without the fear of higher prices products. In the end, quality is what matters and Samsung has shown to be very loyal to customer needs and wants. Additionally, the company should adopt the strategy which is known as “Glocalizing” (Friedman, 156) which means that the strategy has to be global in conception and local in execution in markets in which operates. Since the markets in the developed world have matured, it may be time for Samsung to go global in an aggressive manner and tap the undeveloped markets. This might necessitate a new strategy and adoption of lower price models in order to gain the customers in such markets.
Additionally, they should continue focusing on their core profitable products: TV’s, Mobile Phones, PC and Cameras as these had shown to bring the biggest amount of sales to the company (as presented above). Samsung should also push marketing even further and advertise their products more on social networks (as these are the most frequent websites visited by almost everyone nowadays). This is of a high importance as usually people who are passionate about communication or electronics are the main consumers of communication devices (mobile phones, smartphones, PC’s and such) and the receptive audience would be targeted.
In conclusion, as we are witnessing the ongoing global economic crisis and the sluggish recovery, it may be prudent for Samsung to go back to the basics to search for the right strategy for both, the entrance on the new undeveloped markets and to survive the crisis and overcome conflicts. Recently, the company had faced several conflicts and scandals and therefore today more than ever, it should be very careful in every step undertaken in order to maintain its current position and keep its customers. It may be time for the new management to re-invent Samsung and what better time to do this than now with a paradigm shifts and trends that are happening in the business and economic worlds.
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