Samsung Electronics Internationalisation Process: Consumer Electronics Division - Case Study Example

Samsung Electronics Table of Contents: Page number 1.0 Introduction……………………………………………………………………...3 2.0 South Korea as Emerging Market…………………………………………….....4 3.0 Internationalisation Path of Samsung Electronics…………………………….....5 4.0 Internationalisation theories……………………………………………………..7 4.1 Uppsala model…………………………………………………………...7 4.2 Springboard model……………………………………………………....9 4.3 LLL Framework………………………………………………………....9 5.0 Conclusion……………………………………………………………………...10 6.0 Recommendations……………………………………………………………....11 7.0 References……………………………………………………………………....12 Samsung Electronics Internationalisation process: Consumer Electronics Division 1.0 Introduction Samsung is a South Korean multinational conglomerate that provides telecommunication, semiconductor and digital convergence technology to various markets across the world. Samsung Electronics engages in consumer electronics products and the three business divisions include consumer electronics, the device solutions and information technology and mobile communications (IM) division Samsung Electronics, 2015). The information technology and mobile division consists of products such as handhold phones, network systems, digital cameras, computers and Smartphone. Samsung Group registered US $ 327 billion in revenues in 2013 and a net income of US $ 30.1 billion (Samsung Electronics, 2015). The multinational has regional subsidiaries that are based in Peru, Chile, Colombia and Argentina. The multinational is a global leader in semiconductor, mobile and display technologies and has leveraged on its research and development capabilities in order to provide innovative technologies and deliver customer value (Russell and Cohn 2012). The company’s vision 2020 is to ‘inspire the world, create the future’ through providing innovative technologies and developing new value across all core networks (Michell 2011). The research and development (R & D) consists of 42 global facilities that aim at setting new standards of excellence and forging new markets. Samsung Advanced Institute of Technology (SAIT), R & D centers, and division product development teams work together across markets such as US, UK, Russia, India, Israel, Japan and China in understanding the emerging customer needs and preferences (Michell 2011). The paper will discuss Samsung internationalization process of the consumer electronics division, South Korea as an emerging market and Samsung Electronics internalization process. The paper will outline the sequence of market entries, the speed of internationalisation, the market entry modes and targeted market niches using internationalisation theories. The paper will finally offer recommendations for future internationalisation. 2.0 Analysis of South Korea as an Emerging Market Emerging markets are characterised by rapid industrialisation, adoption of mixed economy of free markets. South Korea is the 15th largest economy measured by GDP, industrial output and services and the 12thlargest economy in terms of the purchasing power parity. The country has a nominal GDP of $ 1.449 trillion and an average GDP growth rate of 3 percent annually (Central Intelligence Agency 2014). The GDP per capita is $ 35, 485 and inflation has remained stable at below 2 percent. The main economic industries are electronics, telecommunications, automobile production and chemicals while the leading exports are semiconductors, wireless telecommunications and petrochemicals. The main trading partners are China, USA and Japan (Central Intelligence Agency 2014). The public debt stands at 33.7 percent of GDP and credit rating by Standard & Poor’s is currently A + for foreign debt. The economic freedom stands at 71.5 percent, but political system and extortion still hurts foreign direct investments. South Korea is ranked 45th in the Transparency International’s corruption perception index and limited competition due to the predatory behaviours of the large corporations. The country has a weighing of 15 percent in the MSCI Emerging market index.The country has experienced rapid growth due to economic reforms implemented in the 1980s and implementation of free-economic model in early 2000. The country is the 10th largest importer across the world and has the 13th largest stock market across the world (Central Intelligence Agency 2014). The social and cultural environment of South Korea is characterised by rapid social changes that lead to high volatility such as natural disasters that create domestic policy instability, and external price shocks that lead to volatile currency swings since the country does not have enough power to influence these movements. The country has a high labour force and literacy levels due to high government investment in education. The country has invested heavily in technological research through provision of grants to research institutions and universities. The leading industries such as telecommunication, shipbuilding and electronics have facilitated technological advancements in South Korea (Central Intelligence Agency 2014). The market is experiencing political stability and government policies are geared at promoting private sector investments, safeguarding rule of law and enforcement of contracts. The government has undertaken measures to foster foreign direct investments. 3.0 Internationalisation Path of Samsung Samsung was founded in Taegu, Korea in 1938 and Samsung Moolsan established Samsung Corporation in 1951. Samsung-Sany Electronics was established in 1969 and later renamed Samsung Electro-mechanics in March 1975 and merged with Samsung Electronics in March 1977. The first Black-White TV production started in 1970 by Samsung-Sanyo for domestic scale. The company produced 1 million black-and-white televisions by 1976 and started exportation of color televisions in 1977. Samsung started to internationalise its consumer electronics division in by exporting the TV products to the neighboring Asian countries. The internationalisation process was gradual and since it took more than six years before the company could export its products to the European markets. Samsung Electronics established a sales subsidiary in Germany and began exportation of videocassette recorders to the US market in 1985. The company started manufacturing in China in 1992 and Samsung Electronics acquired US firm HMS in 1993. The company developed the first 30’ TFT-LCD in 1997and utilized the technological breakthrough to develop the fist flat-screen TV in 1998. The company commercialised the digital TVs in 1998 and developed the first 3D TFT-LCD monitor in 1999. The company has fully-owned manufacturing plants in Asian countries such as India, Japan, China, Germany, Italy, Poland, Israel, Portugal, Spain and Brazil. The company has R &D centers and production facilities in UK and the US markets. Samsung consumer electronics division experienced a gradual internationalisation approach since the company has used different foreign market entry modes at different stages. The multinational entered the neighboring Asian countries such as China, Japan, Taiwan and India in the earlier stages before moving to East Europe countries before entering the North American Market, distant European markets and Latin American markets (Frynas and Mellahi 2015). In the recent years, Samsung consumer electronics division entered the South African and Nigeria markets by establishing a sales subsidiary and contract manufacturing deals in order to cater for the growing number of customers in African continent. The consumer electronics division target market niches include the educated and sophisticated customer markets that prefer added-valued, reliable, high quality and differentiated consumer electronics (Frynas and Mellahi 2015). The company competes through use of innovation to differentiate its products and focusing on the most viable niche markets. The company has also established manufacturing plants in low-cost manufacturing countries such as India and China in to attain economies of scale in production and lower the operational costs (Aswathappa 2008). The local production provides Samsung a cost advantage and velocity in responding to the fast growing national markets across the various markets of operation. Samsung consumer electronics division has continued to pursue internationalisation growth path despite the challenges in the global economy in order to identity new opportunities and continue with its innovative trends (Griffin and Pustay 2010). The company has maintained global market leadership in TV products for nearly eight consecutive years due to the focus on the high value-added premium TVs that include the UHD/Curved TV and Ultra sized TV. The company attained outstanding performance due to its premium marketing for large size smart TVs and UHD TV, differentiation with leading features and innovative design. 4.0 Internationalisation Theories and Concepts John and Allen (1998) outlines that multinational firms from emerging markets internationalise missing or imperfect external markets until the costs associated with further internationalisation outweigh the benefits. McDonald and Burton (2002) points out that EMNE select the subsidiary locations that internal the overall costs of their operations. Accordingly, the firms may internationalise their operations in order to seek resources such as distribution networks that will enhance exports from the host country or secure the supply of raw materials that are in short-supply at the home market (Ghosh 2011). 4.1 Uppsala Model (Johanson & Vahlne, 1990) Uppsala model is a stage model that considers internationalization as an incremental process that involves acquisition, integration and use of knowledge of the foreign markets (Wagner 2009). The incremental internationalization process starts with help of independent representatives, building own sales subsidiary, joint venture and ultimately establishment of its on-site production. Buckley & Ghauri (2015) clarifies that the process of entering the foreign market is determined by the company situation, the market and market knowledge since there is a ‘physic distance’ as the EMNEs may not have the information on the demand trends and preferences of the distant markets (Pederson 2010). The first step is the ‘no regular exports activities’ that involves sporadic export that starts the internationalisation process to the psychic nearby market (Margardt 2009). For instance, Samsung consumer electronics division started exporting small quantities of black-and-white TVs to psychic nearby markets such as China, Japan and India. This is the most viable strategy since the EMNEs is faced with high risk of investment in the foreign market, lack of enough information and possible cultural barriers in the external markets. The step enables the firm to acquire market knowledge, ensure efficient control of resources and deal with differences in economic policies and language (Cuervo-Cazurra & Ramamurti 2014). The next step is the export through independent representative due to the increased understanding of the foreign market (Luo 1999). Samsung Electronics was able to identify independent sales agents in European markets such as Germany and UK. The third step is establishment of foreign sales subsidiary thus representing a higher commitment to the foreign markets since the company establishes its sales offices and aligns the product offering to the foreign market (Tihanyi, Devinney & Pedersen 2012). The final step is the foreign production or manufacturing whereby the EMNEs establishes own production facilities and plants to cater for the high demand of the market, reduce the supply chain costs and meet the changing local needs. Accordingly, Samsung Electronics internatonalisation process ultimately led to establishment of foreign R & D centers, manufacturing plants in Latin America, and European markets in order to serve the market niches. (Forsgren 2009) The initial foreign manufacturing started in Asian countries such as China due to low psychic distance and finally to distant markets such as Argentina, Brazil and USA. Rugman (2002) asserts that the basic idea of Uppsala model is that firms from emerging markets lack enough knowledge of the foreign markets which hinders the foreign market entry and thus internationalization occurs in a gradual manner as the firm understands the foreign markets. Gaining foreign commercial experience improves foreign market knowledge and will tend to increase the foreign market commitment and venture in to countries that are dissimilar from the parent country (Schwens 2008). 4.2 Springboard perspective (Luo & Tung, 2007) According to the springboard perspective of multinational firms from emerging markets, the large firms will use internationalization as a springboard to acquire critical resources that are needed in order to compete effectively against the global rivals and overcome the non-market constraints at home (Frynas and Mellahi 2015). The firms will use high-risk and high control modes to enter distant countries such as developed economies where the companies seek to acquire innovation capabilities and critical resources. The home government may offer incentives for emerging markets firms in internationalisation or rapid market changes such as technological changes may change the global market landscapes thus leading to high-risk internationalisation (Frynas and Mellahi 2015). Another factor that may influence the springboard internationalisation perspective is the need to counter global competitors’ expansion in to the home market. The rapid advancements in technology and integration of the global economy has allowed global players the opportunity to easily access distant markets and thus EMNEs should internationalise to the distant markets in order to counter possible competition at their home markets (Bryan 2013). The springboard perspective is still an outcome of the learning process, but the firms do not necessarily expand incrementally through the stages of decreasing psychic distance (Frynas and Mellahi 2015). 4.3 LLL framework (Mathews, 2006) Linkage-Leverage-Learning (LLL) model framework outlines that internationalisation of EMNEs is not based on possession of strategic assets, but the search for linkages and ability to leverage on its capabilities in the organisational learning. Linkages are advantages that may be acquired externally, the leveraging are the ways in which links can be established so that resources are leverage and learning occurs through repeated use of the linkages and leverage process (Frynas and Mellahi 2015). The firms develop through complex interaction of resources and capabilities that aim at sustaining competitive performance and one of the capabilities is the ability to monitor technological and economic information that is essential in identification of new opportunities. Emerging markets experience rapid growth and proactive attitude of EMNEs require them to implement catch-up strategies through international expansion that aim at acquiring valuable resources (Pattnaik and Kumar 2014). According to this approach, firms expand internationally in order to resource and customers that are not available in the home market. For instance, Samsung Electronics expansion to the US enabled the company acquire new niche markets and innovation capabilities through establishment of research centers. Samsung Electronics has been able to establish partnerships with other firms such as Microsoft and Apple in order to ensure innovation and continuous learning. EM MNEs seek to acquire competitive resources such as technological capabilities, brand and distribution channels, managerial expertise and new markets through the internationalisation process (Pattnaik and Kumar 2014). 5.0 Conclusion Emerging economy multinationals (EMNEs) have attained global player status in the recent years due to international market liberalization. The internalization process entails entry in to foreign markets and uncertain environment and this may require structural changes in the firm such as the distribution channels, manufacturing processes, and access to sources of finance. The process of entry of new country foreign markets for EMNEs is risky due to limited market knowledge and initial entry modes should ensure limited commitment and closer psychic distance in order to deal with language and cultural differences. EMNEs expand in to countries with low psychic distance before entering the most distant countries and the firm’s internationalisation process should be a learning curve. The firms increase their foreign market commitment through the amounts committed to the foreign markets and mode of entry in to the foreign markets. 6.0 Recommendations The internationalization process represents as learning process and development of such knowledge is considered a critical firm’s resource. EMNEs should implement a gradual internationalisation approach through using entry modes with low market commitment in order to first gain market knowledge such as the language, cultural barriers and economic environment of the foreign markets. The initial foreign market entry modes should involve low entry costs, low financial risks, low capital commitment, learning abilities, and the possibility of ensuring future expansion to distant markets. The internationalisation process should start with the exporting model using the independent sales representative and finally move to sales subsidiary in distant markets such as African countries in order to gain knowledge of the market. In this case, Samsung Electronics should use independent export intermediaries that are located in developing Latin American countries and African countries since the markets are not ideal for own sales subsidiary or establishment of own manufacturing plants. Samsung Electronics should consider establishing manufacturing facilities in low-cost manufacturing countries that are closer to the niche markets in order to attain economies of scale in mass production and reduce the associated supply chain costs. 7.0 References: Aswathappa, M. 2008. International Business. New Delhi: Tata McGraw-Hill. Bryan, C. 2013. Cultural and Technological Influences on Global Business. London: IGI Global. Buckley, P.J & Ghauri, P.N. 2015. 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