Samsung Electronics Case Analysis

Overview

Samsung Electronics is one of the world’s leading memory chip producers for all types of electronic products. Led by chairman Kun Hee Lee, the firm prides itself in efficiency and reliability. Samsung contains three core business sectors including electronics, finance, and trade and service, but this case analysis focuses only on its electronics sector. Th firm began as a manufacturer of black and white TV sets in 1969 and has evolved into a $12.6 billion brand, ranking 21st in the world. Samsung has become such a large industry leader that it was responsible for “22% of all Korea’s exports in 2004” (7). However, despite all of its success, the emerging semiconductor industry in China poses a threat and/or an opportunity for Samsung. In this analysis, I will present the following:

1. Summary of the industry landscape

2. Samsung’s competitive advantage

3. Value stick comparison

4. Responses to the Chinese threat

5. Strategic recommendation

1. Industry landscape

The semiconductor industry is categorized into memory and logic chips. This case focuses on the global memory chip industry, which accounted for $33.7 billion in sales in 2003 (2). The memory industry is characterized by highly competitive rivalry due to price competition, market movement, and number of competitors. Samsung has six competitors from all around the world and they all sell their products within a dollar of each other. In technology, the market moves very quickly because legacy products consistently get upgraded, leading to a constant pressure to create new product lines consistently. Because of the number of competitors in the industry, buyer power is moderately high because there are lots of firms to choose from. The only tradeoff for the customer would be quality and reliability for price. On the other hand, supplier power is also moderately high because there are only a small number of suppliers for the raw materials needed to make memory chips. Producers of memory chips could negotiate down price, but low-quality materials produce defective memory, which can destroy an entire product’s value. Therefore, firms are willing to pay upwards of a “1% average price premium for a reliable supplier” (2). The threat of substitutes for memory chips is low because there is nothing that can replace DRAM or flash memory. Finally, barriers to entry are high because there startup costs are expensive. Fab lines and production facilities are costly because production-related machinery is highly sensitive to dust and electronic shock (6). Research and Development is expensive but necessary in order to create new generation of products, and to understand how to master design and production efficiently. This industry is not the easiest to break into even if new firms are able to raise capital; it requires knowledge and innovation as well.

2. Samsung’s competitive advantage

Samsung’s success in the memory chip industry stems from its focus to not only produce a variety of products, but also on its extensive quality control. Chairman Lee demands superiority in product design and process efficiency while minimizing defective chip production. Samsung has won numerous awards for reliability and performance, increasing consumer demand and capturing a higher market share. Samsung spends the most amount on R&D, about $2.9 billion, allowing it to create innovative products and make well-informed investment decisions, like its successful bet on the 8inch wafer (Exhibit 1). It also customizes its products to its customers’ requirement, differentiating it from its competitors and increasing consumer demand. This all translates into Samsung’s price premium. Compared to its competitors, Samsung has the highest average selling price by 34%, showing that it increases WTP and Price (Exhibit 3).

Even though Samsung’s quality and development has pushed up its consumer’s willingness to pay, the firm has also been able to create value by pushing down supply and production costs. In its operating profit of DRAM in 2003, Samsung has 24.4% lower fully loaded costs when compared to its competitors weighted average (Exhibit 7a). They are able to achieve these low costs because of economies of scale purchasing of its raw materials. It not only receives a discount from supplier for purchasing large quantities, but its production volume is 896.4 million, higher than all of its competitors with the lowest per unit cost (Exhibit 7a). Also, their ability to increase the size of the wafers allows for more chips to be cut out at the same time (3). Samsung also experiences economies of scope because they use multiple lines to produce different products. They use the same core architecture for different products making it cheaper and easier to manufacture, producing 1,200 variations of DRAM products (8). Collocation of its R&D facilities and fab lines makes this possible and saves Samsung an “average of 12% on fab construction costs” (9). Samsung also has the cheapest labor costs, spending 27% less than its competitors (Exhibit 7a).

3. Value stick comparison

The value stick comparisons of the DRAM, SDRAM, Rambus and Flash products show the competitive advantages discussed above. For figures one through three, Samsung has a higher willingness to pay. Inferred from the firm’s value chain strengths, Samsung consumers have a higher WTP due to the firm’s infrastructure, operations, and marketing and sales. Samsung’s firm culture emphasizes understanding its rivals and the market and responding efficiently. In order to expedite response times and foster creativity, Samsung employees live together in firm housing. This enables them to solve problems quickly and encourages discussion regarding new product ideas. The demand for superiority from the executive top trickles down into the operations of Samsung because its production process focuses on quality and low defects. It also is capable of producing multiple product lines, adding to the variety and customization its consumers can receive. Samsung’s reliability and quality, makes it a top choice among its customer base, allowing it to charge a price premium because its customers have a high WTP. Samsung’s competitors have a lower WTP compared to Samsung because the industry is rich with rivals, and they do not offer the performance and differentiation that Samsung provides.

Samsung’s true advantage lies in its ability to make a profit by selling its products high while keeping its costs low. In figures one through three, Samsung has the highest selling price compared to the weighted average of its competitors. Toshiba has a slightly higher selling price in the Flash market, but Samsung is able to capture more profit because it has much lower costs. In figures one through four, Samsung has the lowest fully loaded costs. In the memory industry, design and production can be costly, but Samsung’s collocation of R&D facilities and its fab lines in one central location decreases costs as mentioned in Part 2. In terms of operating profit of DRAM in 2003, Samsung has the highest positive operating margin of 24.1%, compared to the competitors’ average of -15%. A higher price ties to Samsung’s ability to push up its consumer’s WTP. Samsung’s low costs are tied to its ability to push down WTS. Another strength in its value chain is in procurement because it engages in economies of scale purchasing. The case mentions how suppliers of memory raw materials would provide discounts up to 5% for high-volume buyers (2). In Exhibit 6, Samsung has the highest production volume of 896.4 million, while its competitors produce much less. Its operating profit is $1.2 billion, soaring way past its competitors. Comment by Microsoft Office User: Redundant?

Samsung not only creates value, but captures it because it creates distance between WTP/P and WTS/C. Its combined competitive advantage allows it to lower WTS due to organizational advantages and use of resources, while increasing WTP through its established reputation. Its competitors do not have the reputation, variety, and procurement strategies that allow them to capture the market.

4. Response to the Chinese threat

Samsung’s main strategic challenge is the entrance of the Chinese into the semiconductor

industry. In approaching this threat, Samsung has four options:

1. Ignore the threat

2. Collaborate with SMIC in DRAM production

3. Cede the low-end market

4. Form a joint venture with a Chinese firm

The first option requires Samsung to change absolutely nothing: they continue their

operations and maintain their current business strategy. Samsung is creating and capturing value in the semiconductor industry, so this option would work in the short-term. However, it is not a long-term strategy because eventually China will understand the market and its inner workings, and a strong competitor will emerge. Even though the United States is not allowed to export any technology to China, other countries do. This means that Chinese firms will be able to learn design and production processes, the one barrier to entry that capital cannot completely solve. Also, China has the ability to cut costs even further, possibly edging out Samsung as the firm with the lowest loaded costs.

The second option is to collaborate with SMIC in DRAM production. SMIC is a foundry headquartered in Shanghai that solely produces chips. SMIC does not have any design capabilities, so they would take other firms’ designs and produce them using technology that was one to two generations old (5). By partnering with SMIC, Samsung can gain access to cheaper labor talent. Samsung can provide the designs and SMIC can do the production, leaving Samsung’s facilities in Korea focused on R&D. This seems like a good option for Samsung to lower costs and focus on innovation, but the tradeoff is intellectual property protection. By giving SMIC design plans, Samsung risks having their intellectual property stolen and manipulated by SMIC. Because Samsung’s core design is a key feature in its ability to lower costs while attracting demand, it would be risky sharing it with another firm.

The third option would be to cede the low-end market to Chinese producers. This is similar to option two, but Samsung would divest production of its legacy products to a Chinese firm. This would enable Samsung to focus on targeting niche markets and its technological development of Flash memory. Because it sells at a lower price point compared to Toshiba, this could enable Samsung to focus on capturing the majority of Flash sales.

The fourth option would be to form a joint venture. Samsung would construct a new site in China, which would give it a presence in the country. Because China is highly regulated, gaining market share requires presence and a good relationship with the government. The government can choose to keep out or make it difficult for “foreign” firms to compete. Samsung’s joint venture would lead to cheaper labor and startup costs because the Chinese governments would support the strategy. The tradeoff would be that Samsung could be expelled at any point by the government, and intellectual property rights are still not protected.

5. Strategic Recommendation

After examining these options, I believe that Samsung should do a combination of both options 3 and 4. The threat of a Chinese competitor is not something that will go away: China is going to compete and enter the market regardless so Samsung can either hedge the threat now, or face it later. Combining the two options, Samsung can focus on R&D in new technologies in Seoul, while DRAM and other legacy products can be produced within China. By forming a joint venture, Samsung receives preferential entrance into the Chinese market as mentioned above. The government would aid in startup costs, and the company culture will not be drastically impacted if both facilities in China and Seoul operate under Samsung’s strong organizational structure. Solely ceding the low-end business to a Chinese firm is not the best choice because it does not give Samsung a presence in China, but making it a joint venture gets Samsung’s foot in the door. As long as the joint venture agreement outlines that intellectual property rights of Samsung’s legacy products solely belongs to Samsung, the tradeoff of possible intellectual property theft is worth gaining a market share in the China.