Samsung Electronics Company (Samsung) is a South Korean multinational electronics manufacturer with headquarters in Suwon, South Korea. It’s a flagship subsidiary of the Samsung Group and by the end of 2004 was responsible for $78.5 billion of the group’s $135 billion revenue (Chang & Siegel, 2009). It is a major manufacturer of component electronics such as batteries, semiconductors, hard disks and optical drives, logical chips, as well as flash and RAM memory for its many clients. Through innovations in both technology and corporate management lead by Chairman Kun Hee Lee, the company has become an industry leader and one of the most recognized brands in the world.
As of late 2004, however, Samsung’s semiconductor and memory division is facing an increasing threat from international competition, especially from the Chinese electronics manufacturer Semiconductor Manufacturing International Corp. (SMIC). Samsung’s executive management is in need to make a decision that will keep the company competitive in this rapidly changing business environment. The following memo serves as a report of the internal analysis using SWOT and VRIO models as well as the external analysis of Samsung’s operational environment using Porter’s Five Forces and PESTEL models.
It also delivers recommendations to the executive board regarding the firm’s future strategy regarding their semiconductor business division.
Strengths – Korea-based Samsung is the world’s leading memory producer for all types of PCs, digital cameras, game players, and other electronic products (Chang & Siegel, 2009). The company holds the second-largest net profit of any electronics company outside the United States. In both size and profits, its memory division especially has overcome its Japanese competitors. It has accomplished this by strategically investing in production and innovating their technology before their competitors. Samsung also benefits from having all of its fab lines located at a single site, while its competitors’ facilities are scattered across the globe. Furthermore, Samsung products are distinguished by reliability and customizability. To be discussed later, the company’s innovative take on human resource management also serves it well. Weaknesses – Their diverse product line is one of the biggest strengths, but also weakness because it leads to a complex brand that may confuse consumers. Since they produce a vast amount of technological products that increases their risk of patent infringement.
A lot of their DRAM products are sold to their major competitors in the consumer market (Dell, Nikon, Toshiba). Opportunities – The semiconductor industry was experiencing growth in economic importance. Communication products such as cellular devices, switches, and hubs were expected to rise to 7.9% from 3.5% of the DRAM market in 2008. Threats – Mainland Chinese companies are increasing the level of competition. While Samsung was a leader in innovation, its Chinese competitors lowered prices to gain more market share. Their easy access to outside finance and talented local engineers allows them the potential to master the design and production process, despite their lack of organizational experience and tacit knowledge. Also, the memory chip industry was expected to experience a cyclical downturn in 2005.
Porter’s 5 Forces Model
Level of Competition – Chinese companies in the memory industry drive much of the competition. As mentioned earlier in the threats section of the analysis, their willingness to sacrifice profits for market share threatens Samsung’s position in the market as the leader. Semiconductor Manufacturing International Corporation, as well as many other Chinese companies have thus far focused on producing logic chips, but a focus on memory chips in the future is not unlikely. Many non-Chinese competitors are either investing in production, while some are experiencing difficulty. Heavy capital investments diminish the threat of new entrants. Threat of New Entrants – In 2005, the industry experienced fierce rivalry and large-scale entry by Chinese firms. In general, however, there are high barriers to entry into this industry, due mainly to intellectual capital barriers, the high cost of production facilities, and, in some segments, the dominance of existing major players The size of existing participants in the industry means new entrants need to spend more on marketing to establish industry links and gain market presence (Ulama, Semiconductor & Circuit Manufacturing: Competitive Landscape, 2014).
Threat of Substitutes – The threat of substitutes in the semiconductor industry is low. Semiconductors are an integral part of virtually all electronics used today with no viable alternatives currently available. Until a technology is invented that would offer a completely new and better way to replace the electrical conductivity in electronics, the threat of substitutes will remain low. There are no effective substitutes that could challenge DRAMs or Flash memory (Chang & Siegel, 2009). Bargaining Power of Supplier – The memory industry contains powerful suppliers. The number of suppliers become more concentrated as the technology for semiconductor equipment became increasingly complex. As of late 2004, the bargaining power of suppliers in the semiconductor industry is high. There is an oligopoly within the suppliers of raw materials to produce semiconductors and the market is dominated by three large companies – Applied Materials, Tokyo Electron and ASML. Suppliers of memory raw materials would provide discounts up to 5% for high-volume buyers.
Rivalry between PC producers was intense, so original equipment manufacturers had to negotiate heavily on price, paying an upwards of a 1% average price premium for a reliable supplier. Bargaining Power or Buyers – The memory industry’s customers are pretty price-conscious, and they are much more fragmented than the industry’s suppliers. Not a single Original Equipment Manufacturer controls more than 20% of the global PC market as of 2005. Many companies’ sales are concentrated in a few customers. Small companies especially concentrate on providing superior service to large customers. Many companies search for new customers overseas to reduce dependence on their largest domestic customers.
Political – Increasing globalization due to governmental action such as industrial policies, tax incentives and free-trade agreements is constantly opening new opportunities for global companies such as Samsung for production and realization of their products. However, in order to attract high-tech semiconductor investments in China, the Chinese government is offering favorable term loans, land leases, cheap utilities and lower wage engineering talent in order to become more competitive in the industry. Such incentives may bring new competitors that may have lower operating costs which may pose a threat to the already low profit margin industry of semiconductor manufacturing and sales Economic – The growing economies of developing countries increases demand for modern electronics, thus creating demand for their components including logical chips, batteries, flash and DRAM memory.
In particular, the expected growth of the markets for cell phones and digital cameras, which incorporate flash memory chips, meant that Samsung could expect higher demand for its flash memory products in the coming years. Although the market for DRAM memory is maturing in the personal computer segment, a lot of growth is still remaining as the developing countries grow their economies and create wealthier citizens. Samsung is in a good position to exploit the growth and offer their products to these growing economies. However, because semiconductor demand is derived from the demand for electronics and their components, it is, therefore, susceptible to general economic climate. A downturn in the global economy will, inevitably, affect the demand for electronics and semiconductors.
Sociological – Human resource executives are faced with the task of overseeing an international workforce as many mergers and acquisitions have become common in the industry. Also, outsourcing software development and help desk operations have also created a need for adjusting employee benefits packages and procedures to meet the requirements of each country. Small companies may depend heavily on the technological knowledge of just a few employees, which means that the competition for experienced employees can be very intense (Hoover’s, Inc., 2014). Ecological – Semiconductor manufacturing requires a series of metallurgical and chemical treatments. The industry, and especially a global company such as Samsung, is susceptible to global environmental regulations and the public’s scrutiny.
Samsung is currently engaged in green operations initiatives that would help reduce the pollutants, conserve resources and control hazardous substances, however, such initiatives are obviously costing the company resources. Technological – The semiconductor industry has a rapid pace of technological advancement – Moore’s Law described the phenomenon that the number of transistors able to be manufactured on one integrated circuit doubles about every two years, and the more recent Hwang’s Law predicts an even faster pace for the density of flash memory. Therefore, the memory chips produced by Samsung and its competitors continue to get smaller, faster, and more powerful on a yearly basis. When a new chip with increased capabilities is released to the market, it is in high demand by downstream consumer electronics manufacturers looking to create sleeker and more capable devices, and is sold at a considerable premium compared to the incumbent models.
Simultaneously, the oldest members of the product family (those with the lowest capabilities) are quickly outdated, lose demand, and are sold at considerable discounts. Legal – The industry is subject to and affected by moderate levels of regulation and standards, mainly in the areas of trade, intellectual capital and the environment. The US federal government regulates exports and some uses of semiconductors due to their potential for dual use in military applications. Intellectual property law is important in protecting a company’s inventions and ideas (Ulama, Semiconductor & Circuit Manufacturing: Operating Conditions, 2014). In 2005, the U.S. Department of Justice made allegations that Hynix and other memory manufacturers had conspired to control prices in the U.S. between April 1999 and June 2002. Hynix paid to settle charges, whereas Samsung set aside a contingency for any future settlement.
Difficult to Imitate
Supported by Organization
Service Capabilities (DRAM)
Service Capabilities (DRAM): We believe that Samsung’s service capabilities are extremely valuable to the company: the company’s memory division can produce more than 1200 variations of its DRAM products alone, which gives Samsung the ability to produce chips for both large customers and niche orders. This wide range of production capability makes Samsung rare among its peers, and the high cost of developing these capabilities makes Samsung difficult to imitate. This function is strongly supported by the organization. Samsung is able to customize their products to fit its customers’ needs. Human Resources: Samsung has an excellent human resources program that is highly valuable to the organization. While their HR functions on a high level, this is not completely rare in the industry and is not difficult to imitate, as long as the firm is willing to invest time into developing it (Yoon, 2014).
In order to drive innovation in memory design, Samsung set up competing design teams in both California and Korea which resulted in winning designs from both teams in different years. In Samsung’s main R&D facility, engineers lived in company provided housing and shared meals and worksites together. This facilitated more collaborative design and engineering related problem solving. Furthermore, Samsung eliminated the established practice of hiring their employees based on the university he or she attended and/or background. They have also separated from the traditional seniority-based promotion and opted for performance-based one instead. Samsung also supported their own employees’ education by paying for their employees’ education and training across the globe that allowed them to become more multi-cultural.
The company also actively recruited foreign talent and paid very competitive wages with bonuses up to 300% for good performance (Chang & Siegel, 2009). These HR practices meant that the company was attracting talent from across the world that would drive innovation and help avoid costly managerial mistakes. Firm Infrastructure: Samsung is present in 58 countries around the world, and their infrastructure allows them to manufacture DRAM chips at the lowest cost to produce in the industry. In addition, Samsung uses its own semi-conductors in its consumer electronics, adding a layer of vertical integration that further reduces overall cost. This infrastructure takes time and a great deal of investment to develop, and is therefore rare in the industry; Samsung spent over one billion dollars to develop a newer, larger wafer in the early 90’s which led to their dominance in the industry.
This infrastructure is difficult to imitate since new companies need a huge amount of capital to develop it; the company’s R&D/Sales ratio is the lowest in the industry, meaning that Samsung spends less as a percentage of sales on research and development than any other company, and yet they still have the highest retail price and lowest manufacturing costs. Samsung supports this infrastructure and continues to maintain the highest profit margin for DRAM chips in the industry. Technological Development: Samsung has been a leader in technological development since its inception, and this is highly valuable to the company. Samsung originally purchased the technology for memory production from Micron but has spent an enormous amount of resources in not only learning everything about the technology, but also innovating it.
Since technological R&D is so costly, the ability to choose a “winning” design has a huge impact on the firm such as stacking vs. trenching of cells in a chip which cost Samsung’s competitors billions of dollars and years of R&D. The company’s large resources also meant that they were able to invest into emerging technologies ahead of its competitors. As was the case with their $1 billion investment into mass producing 8-inch memory wafers in the early 1990s which, while risky at the time, has hugely paid off and made the company a leader in the DRAM market segment for the following 13 years (Chang & Siegel, 2009). Samsung’s high profit margins and revenue allow them to continue to dominate the industry, making their level of technological development rare and difficult to imitate. Their technological development is supported by the industry through continued investment in R/D. Marketing & Sales – Samsung is a well-established, globally recognized brand which ranked 21st globally and ahead of its many electronics competitors. The management’s commitment to becoming a leader in the semiconductor industry has helped in establishing the company as a leader in quality, innovation and reliability. Together, they created a competitive advantage that few competitors can match.
There are two options for Samsung to consider in this situation, and the impact of choosing one over the other is potentially critical to the long-term success of the company. The Chinese have been rapidly gaining momentum in the semiconductor market, and are expected to be the world’s second largest purchaser by 2010. While the Chinese are not equipped to produce cutting-edge chips due to infrastructural and economic factors, they’re ready to enter the market of low-cost, low-quality chip production.The chips they produce will be sold at a loss for a few years in order to gain a share in the market (similar to what Samsung did in the 1980s). They’re government is subsidizing the technology sector to help offset some of their losses. The subsidy already has and will continue to attract financial investors that will help produce new manufacturing facilities. Samsung has to decide whether they can or want to compete with China on cost or perhaps abandon this low-cost market altogether.
Samsung could also join forces with China and build a plant there, but in doing so they would be teaching the Chinese their practices and placing their intellectual property and cultural heritage in jeopardy. Samsung could also begin to focus on niche markets and on more high-end, high-margin products and lower its emphasis on competing in the low-end DRAM market. In doing so, the company would not be supporting the Chinese development of low-cost production and would stall the development of the Chinese semiconductor industry. The cutting-edge technology Samsung would hopefully produce should lead to new patents and new markets. Samsung has the second lowest R&D/Sales ratio in the industry (~8%), so the company has the resources to invest in these new technologies (Exhibit 1). The problem with this strategy is that the Chinese have shown a willingness to sacrifice to succeed in the industry, and it is only a matter of time before they develop this technology.
Our recommendation for Samsung is a hybrid of the two options with which it was presented.
We feel that the increase in Chinese competition in the semiconductor space will take market share from Samsung regardless of what the company chooses to do, but also that the imminent rise in demand for memory chips by Chinese consumers and businesses presents an opportunity that Samsung should not overlook. However, the lack of intellectual property protections in China mean that sharing their design and production techniques with a Chinese business partner could spell disaster in the future. So, our recommendation is that Samsung partner with one of China’s major “foundry” corporations (which do not design their own chips, simply manufacturing them from blueprints), but only to mass-produce low-end DRAM chips for the Chinese market. This will allow it to capitalize on low-cost production to increase the volume of chips produced, and not only meet future demand for low-end memory chips in China but also offset the imminent price drop in this category when new Chinese firms flood the market.
As for the remainder of its core business, Samsung should pursue the high-end market niche. Samsung’s R&D costs as a percentage of its sales are the lowest in the industry, which means that the firm can innovate and develop best-in-class products more cost-effectively than the competition. This is a major internal strength at Samsung, one that it should capitalize on fully. Since it has the capital and resources to heavily invest in R&D, the firm can strive to maintain its differentiation as a market leader in the quality and capability of its products, and its reputation for leading the technological advancement of the semiconductor industry.
Instead of fighting to retain market share in low-end commodity DRAM chips, Samsung would be better off continuing to innovate higher-capacity chips and working to release newer and better versions before their competitors, especially for new markets such as the flash memory products that are in increasing demand by cell phone and digital camera manufacturers. One of the major benefits would be that Samsung can use vertical integration to incorporate their newest chips into their own existing line of consumer products, thus automatically maintaining Samsung cell phones and Samsung TV’s at the cutting edge of capability, and increasing profitability across the whole firm.
Low-end mass production for Chinese market
1. Strictly limited manufacturing partnership with Chinese foundry A. Samsung designs the products in-house in Korea
B. Sends manufacturing schematics to Chinese foundry
2. Establishment of quality control, reporting, and monitoring functions as well as communication protocols A. Place members of Samsung quality control and manufacturing operations team to oversee production B. Set up online information portal so that Samsung can monitor all aspects of production, marketing and sales in real-time
3. Incentive program to encourage compliance and disincentivize confidentiality breaches A. Contract to include incentives for manufacturers based on defect rate, on-time production B. Portion of commission tied to Samsung DRAM sales in China 4. Market DRAM products to Chinese market
A. Collaborate with Chinese market experts about how to market DRAM to device manufacturers in China B. Invest substantially into a marketing campaign to generate brand awareness of Samsung’s DRAM reliability 1. B2B: convincing device makers that Samsung is reliable and cheap 2. B2C: convincing consumers that a product that is powered by Samsung is reliable and high quality
Product Differentiation and Market Leadership 1. Increase capital and human resources to R&D in core product lines A. Samsung should continually strive to release the highest-capacity chips on the market B. Samsung should be the first to enter market with new technological developments (product lifecycle is very short resulting in a small window of time to capture profits, being late to the market could result in millions of dollars in losses). 2. Increase emphasis on innovating products for new markets and applications A. Flash memory for cell phones and cameras
B. Customizability for new devices (both consumer electronics and enterprise tech) 3. Maintain cutting-edge innovation in semiconductor industry A. Allocate funds for acquisition of start-up companies B. Allocate funds for the purchase of patents and other IP C. Integrate acquired intellectual capital into R&D efforts 4. Integrate new products and versions into overall marketing strategy A. Advertise the release of new and differentiated products B. Strategic brand awareness campaigns in certain sectors
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