Issues Affecting Samsung Performance - Literature review Example

LITERATURE REVIEW LITERATURE REVIEW 2 Introduction The paper focuses on the relevant literature that tries to explain the purpose of the research which is to identify the possible issues affecting the company (Samsung) performance and the possible improvement approaches. The content will be referenced from various website, reports, books, journals or newsletters that have relevant content to the issue being Addressed. 2.2 Review of theoretical literature According to (Samsung, 2014) Samsung is a conglomerate with many affiliate companies. The most known Samsung Company deals in electronics with and is operational in over 150 countries worldwide. Du to innovation and quality product, Samsung has been able to retain a good percentage of the visual display company especially on smartphones are Television. Management complication comes in due to the expansive and the wide market operation of Samsung. Samsung Company has its five corporate headquarters in different locations in South Korea. Overall, Samsung has 150 subseries in the world with 26 being in America, 33 in Europe, 21 in Asia, 32 in china and 22 across Africa. To ease management Samsung has categorized its production units into three divisions which at the moment are: CE division, IM division and DS division. Though IT IS LUCRATIVE to be a multinational company, it creates management complications that sometime might lead to an initially profitable company failing rapidly (Samsung, 2014). 2.2.1 Current issues affecting Samsung BBC news report on 24th January 2014, the quarterly profit for the world largest mobile phone and TVs maker had reportedly experienced an 11% drop in profit over the period between Octobers to December. The report claimed that the drop in earnings were as a result of drop in margin of the mobile phone division that saw operating income drop by 18%.Other source of problem was too much indulgence into special bonus program for employees and change in currency value (fluctuation of the south Korean currency). The special bonus strategy that the Chairman Lee Kun Hee had positively implemented and drew positive growth from led to around 800Bn being won by the employees. Samsung is also facing serious competition from rivals like Apple, Nokia and HTC who had all launched new affordable models in the market (Samsung Electronics quarterly profit declines, 2014). According to Tibken (2014) the Korean electronics giant had posted a 74% drop in the mobile business operating profit for the 3rd quarter ending September. The 60% overall drop in the Samsung was the fourth time Samsung was experiencing a decline in the n performance since 2011.The revenue drop by 20 percent and a further 22 percent drop in sales. The management blamed the fall in profit on stiff competition, low average selling price of smartphones which the customers mostly purchased instead of expensive phones like Galaxy S5.The other electronic division that deal in televisions and home appliances also performed below the internal expectation especially in the third quarter due to decline in the selling price. The competitive edge is in the selling price where companies like the Chinas Xiaomi and Indias Micromax who are able to deliver quality to the local market at lower prices. However the introduction the 4.7-inch iPhone 6 and the 5.5-inch iPhone 6 Plus created a challenge due to the wide screen that caught the customers attention. Therefore the low prices that the Chinese and Indian phone go for was too hard for Samsung to challenge (Tibken, 2014). Performance is the measure of the management ability to organize the available resources to gain market competitive advantage. Unfortunately the Stock exchange performance has not been promising and according to an article by (Blurry, 2014) Samsung recorded the worst drop in share price in slightly over years. By 23rd of September 2014 the share price dropped to 1.161 million won (US$1,116) per share which was a 2.27 percent drop from the previous price. The drop of Samsung electronics will automatically affect the whole Korea composite stock exchange since it control approximately 17% of the market value of KOSPI. The value of shares was lower than it was 52 weeks earlier at 1.18 million won (US$1,133) recorded on the 3rd of September and almost equivalent to the position it was on 25th July 2012 at 1.18 million won (US$1,133) and this show that the Samsung market capitalization had in the recent past fallen from 174.9916 trillion won (US$168.3997 billion) to 171.0145 trillion won (US$164.5724 billion) (Woollaston, 2014). According to (McCormick, 2014) Samsung electronics announced it had made a profit of 6.25 trillion won ($6.1 billion) which was down ward movement from initial profit of 7.77 trillion won ($7.58 billion).Therefore that mean that if the company had recorded an operating profit of 7.19 trillion won ($7.02 billion) at the same time then it is a drop of approximately 15% in reference to the last quarter at an income of 52.35 trillion won ($51.02 billion).Therefore the operating profit has taken a 25% drop from June 2013. The below expectation performance according to Rich McCormick is due to the customer shift of attention due to the rising competition in the area of smartphones and tablets sales. The global competition is possible going to rise with Chinese manufacturers like Huawei taking more control of the export market and might possible doubling the export (McCormick, 2014). 2.2.2 Internal control system for Samsung company Companies like any other business need to be managed within given rules, policies and procedures to ensure that: There is efficient operation, the reporting’s are reliable and all the activities done are within the various structures, laws and regulations put in place watch dog bodies. Therefore the board of governors of Samsung should be at the fore front ensuring responsible internal control system. At the same time management need to create a positive working environment that is disciplined and therefore act as the pillar upon which all the internal control system is built. Therefore, Samsung need experts to assess and analyze in good time the factors that will prohibit the company from achieving its goals. At the same time control activities are needed to check on: physical assets protection and guarding, information system process control and third is the performance review. Well managed organization require proper information system which maintains accountability and record risk and finally the system need monitoring to ensure quality is assessed (Chorafas, 2001) According to (Kendra, 2014) a serious internal control system should allow an organization to maintain environment that is never easy to corrupt and protect the organization from fraudulent activities by management and employees. The competence of the system can be evaluated during company financial statement audit. To achieve the desired level of internal control system, the management must ensure that: i) there is management integrity within the employees and this is communicated to them through handbooks and possible procedural manuals and enhance employee training through policy manuals; ii) The organization need to hire competent personnel which is a show of intent to achieve quality and maintain good financial records that stabilize and strengthen the company operations; iii) duty segregation is also key in ensuring chances of mistakes or inappropriate actions is significantly reduced. At the same time it ensure that the workers are not overloaded; iv) Proper record maintenance is key in management success hence proper documentation should be well stored and safeguarded or possible electronically stored. If Samsung employs a good record management program it will help reduce operation cost, improve efficiency of management and lower possible risk mitigations; v) finally a good control system should be able to safeguard the company valuables such as assets from being accessed by any unauthorized persons. Therefore Samsung should work on protecting its cash, inventory and supplies (Kendra, 2014). If Samsung structure its internal control system well, the company is bound to benefit in the following ways: i) the system control can be effectively used to enhance the company objective by controlling the risk while at the same time ensuring the organization is managed within the rules, regulations and organization policies; ii) ensuring that governing bodies, all levels of managements, employee and assurance providers have defined roles and responsibilities; iii) in order to respect and act within the risk control strategy and the policies related to internal control system, the management team will have to create culture that motivate the people; iv) exposes individuals calling for accountability in fighting to achieve the company objectives through internal control strategy; v) all the company employees should have enough technological ability to convincingly execute their duties; vi) able to respond incase called upon to handle specific trouble causes and possible consequences; vii) the organization must ensure that communication regarding regulation and control system are properly managed; viii) both the individual employees and the internal control system should have an efficient monitoring and evaluation system that hence help in risk identification and failure control; and ix) encourages the management to be transparent and exercise accountability in dealing with the company stakeholders (Pickett, 2001). 2.2.3 Financial Analyzing for Samsung company Samsung management needs to be up to date with its financials management requirement since they can be productively used to determine the performance of a company hence help in calling for right improvements. There are many financial statements that can be used by the management to determine and compare the performance of Samsung Company with other competitors or its subsequent years. Examples are statement of income, balance sheet, statement of cash flow and statements of share-owners’ equity (Friedlob & Schleifer, 2003). Various financial methods are normally used to determine the performance of company and recommendations and way forward can be determined from that. Therefore ratios such as profitability, liquidity and financial statement are important management tools that Samsung will have to analyze keenly to ensure that risk can be pre-assessed (Muro, 1998). Ratios are quite important in the in analyzing position of the business. For example Samsung can use profitability ratios too determine the financial viability of the business or when comparing itself with its competitors. For example the Net profit margin measure how much a company earn after tax deductions in respect to the sales. Therefore if Samsung has a higher profit margin than its competitors then that shows it operations are more flexible and efficient. Another ratio is the operation margin which is also called coverage ratio and it tells the company what it has earned before interest and taxes. Its value is normally different net profit margin due to the influence of the interest and tax expenses. By Samsung analyzing operating profit margin, it can better access its investment potential by getting into more debts or through alternative investment. Return on assets (ROA) can be used by Samsung to determine the utilization efficiency of the company resources. It is the ratio between the net profit and the total assets. The value of the Return on assets varies so much from company to company since some companies do not have many assets in the system. The more assets intensive the company needs, the lower the value of Return on assets and while service based companies like consulting firms require very low hard assets to operate. Return on equity (ROE) can also be used by the Samsung Company to measure how the performance of the business is in relation to the investment put in place by the shareholders. Therefore it indicates the benefit the shareholders account from each and every dollar they have invested on the business (Byrd & Megginson, 2013) Ratios such as inventory ratio can be used by Samsung to determine the efficiency of management in terms of cash collections and operation results. Inventory ratio can help Samsung management determine the amount of time it takes for the inventory to be sold and replaced during the operation year. According to (Scarlett, 2007) the companies that rely on inventory the ratio can be a factor that determines its failure or success. It is important to assess the inventory since factors like gross profit are analyzed every time there is a turnover in the company. Therefore through the ratio analysis, the company management will learn how to organize its buying practices hence improve the inventory management .Ratio like inventory to the net working capital is usable in a company to determine the if there is too much in terms of working capital that the management system tie up in the inventory. This is calculated by dividing the value of the inventory with the total current assets of the company. 2.2.4 Budgetary Control system the all system about payment Budgeting is very important in management and to ensure wise use of the available resources. Modern business like Samsung need proper budget to ensure all the operation are forecasted and planned before time and the budget is an evaluation tool that will be used to compare the actual and the predicted progress. Planning must be done properly for any business succeed. Through budgeting and budget control, Samsung management can be able to plan, control and co-ordinate the business effectively (Scarlett, 2007). Through budgeting Samsung company will be able to: i) budget will compel the management in all the levels to plan in good time the activities they foresee themselves doing in the immediate future; ii) budget ensure better team work and team spirit hence improve what they can achieve through enhancing coordination; and iii) budget is a communication tool hence tit encourage the involved stakeholders to share ideas and execute better plan of achieving the overall objective: and iv) finally budget is a control tool that dictate performance within the initial plan, within the predetermined standards as represented in the budget hence ensure controlled expenditure(Rubin, 1991). However, according to (Wiseman, 2010) budgeting will force company such as Samsung to structure itself in a competent way that can enhance its performance. First to draw out its objectives, Samsung will have to revisit its objectives. This is because the management has to know what it is the budget is targeting to achieve. Therefore budget will ensure well laid down plan that is co-ordinated and within the performance control mechanisms. Secondly, budgeting will call for Samsung experts to seriously delegate duties to competent employees to ensure the budget is executed within the recommended time. In this case organization chart can be used to explain the responsibilities and authority. Thirdly, budgeting will call for Samsung improve communication which should be two way to ensure accurate implementation of strategies at the same time call for all round employee participation towards achieving common goals as represented in the budget. Budgets are executed at the lower level of company hierarchy and this gives them opportunity to contribute. According to (Rubin, 1991) the success of the budget depend on the involvement and participation of the employees of that organization. The fourth aspect is that it recognizes the uncertainty of the future hence it accommodate slight changes. Finally budget is a motivation tool that encourages employees towards specific goals. Samsung is experiencing a profitability situation that proper budget would have help solved due to the advantages synonymous with the well prepared and implemented budgetary control system. According to (Buck, 1927: Rubin, 1991; Scarlett, 2007) budget help in: i) profit maximization through eliminating unnecessary wastage hence the expenditure is reduce and controlled; ii) ensure proper co-ordination of various company plan, policies and guidelines. It act in as a friend and guide that direct the management; iii) create unity through communication and this ensure every employee knows the goals and the path towards achieving that goal; iv) through budget, Samsung can measure its performance through summing up the performance of the departments and their reporting to the top management. This can help in cost economy and profit maximization; v) inter level planning create room for a company to achieve economy and efficiency by ensuring optimum use of the available resources; vi) through budget company like Samsung will point out the weak point and strategize on how to fill the gap in good time; vii) Budgeting can alert experts of deviations in time and this if reported to the right team of expert or the top management can result to immediate call for corrective action; viii) the employees are motivated since they know at the end of the financial years their performance will be crystal clear to the management hence motivate them to achieve the target in the budget; and ix) finally budget improve the overall efficiency through ensuring optimal utilization of the available resources. Reference: Buck, A. (1927). Applied Budgeting. By Henry Bruere and Arthur Lazarus. Chicago: A. W. Shaw Company, 1926. Pp. xi, 248. 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