International Management:Samsung mobile company - Essay Example

International Management Samsung mobile company This paper tries to examine the successful strategies used by Samsung Electronics Company and the general growth strategies within the mobile phone industry. It begins by examining its initial efforts to develop competitive products within the local market, its global strategies and some of the key issues facing it today. Furthermore, the paper insightful hints on how a late-comer to the industry may overcome some challenges and position itself strategically as a respected and successful brand. Key words: Samsung, mobile phone, strategy Introduction Samsung Company marked its turning point in 2003 when it placed itself as one of the best global phone manufacturer. Its products were the topic of discussion in all the media stations, in all parts of the world. In fact, many people had nicknamed the company’s product as the “Mercedes of the mobile phones” while others had named it as “the best Christmas gift” The achievements of the Samsung Company were very remarkable bearing in mind that it had concentrated on home appliances as well as the semiconductor devices (Lee, 2002). When the company decided to venture into the mobile phone business, several industry-viewers observed the move as reckless and foolhardy. Surprisingly, Samsung’s venture into the market in 2003 turned out to be a great achievement. The reputation of the company changed and the profits rose drastically. In the same year, the company recorded a net profit of $5 billion and its annual sales had risen to $37.5 billion. By April the following year, the company’s market capitalization stood at $ 87.5 billion (Cho, 2002). The market statistics showed that it had beaten the Sony Company, which was the company’s benchmark at its initial stage in terms of market capitalization and revenues. This is as shown in Exhibit 1(Joo, 2003). At the moment, the exports of the company contribute to 79% of the total sales. Furthermore, the company has established its brand all over the world. In 2003, for instance, the brand name “Samsung” was ranked 25th global during the inter-brand/Business week study having recorded a steady increase from $ 8.3 billion (2002) to $10.9 (2003) (Kim & Kwon, 2007). This is evident in Exhibit 2. Several initial viewers of the company will not agree to the fact that Samsung has achieved a commendable success in the world market. As a result of this achievement, it is worth analyzing the factors behind its success especially the emerging mobile phone business that has been the backbone of the company (Lee, 2002). Therefore, the objective if this research is to establish beneficial insights of the ways the late-comers may overcome the challenges and position themselves strategically in the market. Background of Samsung Electronics Company The company was instituted in late 1960s with the aim of providing an engine of future expansion for the Samsung Group. Although the electronics industry was very stable during the 1960s, none of the firms in Korea had progressed technology. Samsung started by producing low-end black and white TVs in partnership with a Japanese Electronic company (Sanyo). Three years later, the company started producing black-and-white TVs under its own brand name (Samsung). In mid 1970s, it introduced home appliances like fridges, washing machines, microwave ovens and colored TVs (Chang & Podolny, 2001). The company recorded a significant growth in its initial ventures, and in mid 1980s, the company introduced personal computers, telecommunication networks and devices and semiconductors. For a couple of years, Samsung was viewed as a low-end product dealer that produced very cheap products in the market as opposed to high-end Japanese products. Its products were disregarded as unreliable and with low market reputations by the customers in the market. However, in 1992, the company emerged the best semiconductor dealer in the Dynamic Random Access Memory (DRAM) market. It marked the first case in the entire Korea states that Samsung, the late-comer, became the first local company to capture the world market and beat the initial companies. Behind the company’s success was the stable management that thrives to translate the semiconductor business into global-class business (Kim, 2002). Samsung’s governance and system of a group-wide coordination facilitated the company to direct its resources to the semiconductor business that needed much investment. According to Kim & Kwon (2007), the argue that for efficient technology transfer, Samsung mainly depended on technology licensing, invited Japanese engineers, and developed an R & D center in Silicon Valley to train the Koreans on semiconductor theory. Samsung then sourced the human resource from the American-Korean engineers with a lot of experience in semiconductors, thus giving them attractive and compensational benefits. Irrespective of greater surge in the semiconductor industry, Samsung Company was losing a lot of money in the appliance venture because it had been incapacitated to improve both image and quality of its products. Furthermore, the financial crisis of1997 worsen the situation further, causing a decline in profits to $87 million in 1997 from $ 194 million in 1996 (Kim & Woo, 2003). To counteract these challenges, the company launched a concrete restructuring initiative in 1997 to restructure the organization suit the international standards. The company retrenched over 16000 workers in the first year and disposed off unprofitable manufacturing facilities and business units (Kim & Kwon, 2007). It then majored on more resourceful resources like the liquid crystal displays (LCD) as well as mobile phone business with the aim of diversifying its revenues. At that time, most of the Korean firms put little emphasis on shareholder value and profitability, but emphasized most on innovation, quality and globalization. This could set a good foundation for future expansion and initiate commendable changes within and outside the organization. As a result of the reorganization, the company currently has four major zones of operation: digital appliance network, digital media network, devices solution network and telecommunications. This is shown in exhibit 3 & 4. It takes market lead in various product categories-CDMA, DRAM, SRAM, mobile phones among others (Joo, 2003). Exhibit 5 Mobile phone business for Samsung A Humble Decade (1984~1993) Samsung Company initiated its mobile telecommunication business in 1983 with the vision of becoming the growth engine of the company in future. A group of forty engineers, each of whom had prior experience in facsimile division or wireless telephone division were assigned to another unit called the “wireless development team.” Initially, this team had no idea of what was supposed to be done. Out of desperation, the team sought a skeleton picture of the Japanese made phones. They requested the Japanese Samsung branch for their car phone. After several attempts of dissembling and assembling the phone, the team got an idea of how the phone operates. By 1986, the company unleashed the first an in-built car phone (SC-100 model) (Hyun et al., 2004). However, their result was disastrous: very poor quality and several people using it complained a lot. As a result, the company decided to lay off thirty engineers and worked with only ten. Ki Tae Lee, who is currently the CEO of the telecommunication division was is dilemma of either leaving or continuing in the mobile phone industry. Later, he decided to hold back and proceed with the operation. Ki Tae Lee requested the Samsung Company to purchase ten phones from the Motorola Company for benchmarking (Hyun et al., 2004). At that time, it was a big expense for the company. The total cost of the phones was approximately 20 million won, yet there was no certainty on return on investment. This forced the team to go back to the drawing board to analyze further. Several phones were dissembled, while some were discarded during the process. The team tested these aspects: quality, product design, durability and maxima environments that suit effective communication. At last, Samsung developed its first mobile phone in 1988 (hand phone -SH-100 model). This was the first hand-phone too be developed in Korea. Nonetheless, several customers maintained that only Motorola Company was the best for mobile phones while others, including Samsung, were not the best. Even though the company strived to introduce new models annually, each model could hardly sell up to 2000 units (Lee, 2002). With such disgusting sales volumes, the company initiated talks of dropping the mobile phone business. In the early 1990s, the global mobile market grew rapidly, and several players joined the business. Motorola alone contributed up to 701% of the market share in Korea whereas Samsung contributed only 10% (Cho, 2002). The engineers were very optimistic that they would succeed at long run hence they pressed on very hard. The final decision was reached that the company to proceed in the business hence a lot of efforts were put in. The turning point (1993-1996) The turning point of Samsung Company was marked by the new management in 1993. In one occasion, when one of the marketing team members was climbing a mountain, he saw somebody making a call using Motorola phone. To his distress, he tried to make a phone call using his Samsung phone but all were in vain. An idea struck his mind that if connectivity were increased, then it would be most significant. He realized that it would be important in the country (Korea) to expand its connectivity, now that almost two-thirds of the country is mountainous and radio wave propagation is limited to plains only. The development team was forced to focus on improving connectivity to curb the challenge. They devised an optimal length antenna mainly for mobile phones and improvised a technique of making use of gold to make connections between communication circuits and the antenna, thus minimizing the impedance and facilitating steady wave propagation (Kim, 2002). Furthermore, they developed software for searching waves, more so, within the topographies of Korea. In June 1993, Lee, formally the CEO of the Samsung group, assembled over 200 executives of the company and pointed out the challenges the company was facing. They concluded that the company needed a U-turn to unleash new management. As a result of this, “Samsung New Management” initiative incorporated. This was the CEO’s initiative to drive the company towards change, especially in the field of quality improvement. The chief officer was known for his famous quote ‘change everything except your children and wife.’ New models of mobile phones were produce which were almost similar to those of the Motorola Company (Kim, 2002). The other executives were cooperating and they were confident that they would achieve their goal, especial Cheon Jun, who was by then the product development team leader. The development team came up with over 20 different ideas for improving its operations. As a proof of their achievements, the development team and the engineers travelled to the mountainous parts of the country to confirm their progress. They tested the quality of the connections since that was the only difference with their competitor, Motorola. Because the development and the engineers’ team carried heavy communication equipment to the top mountains, they were suspected sometimes to be the spies making hide-outs in the mountains. By the end of 1993, the development team and the engineers finally unleashed a new model (SH-700). When the team handed the first phone to their general manager, Lee, he was amazed. He threw the phone to the ground, stepped it severally, and when he picked up and made calls, it was intact and operational. Because many people put their phones in the back pockets, Lee commanded his team to develop sturdy phones. By the end of 1994, a new Samsung model was introduced (SH- 770) under the Samsung’s brand name “Anycall”. This was an achievement of the efforts of the marketing team at the brand-building (Hyun et al., 2004). This model was an advancement of SH-700 model with a significant change in quality and design. The aim of the company when it introduced a new model was to change the customers’ attitudes and perception towards the products and develop trust. Serious marketing campaign picks up very well. The initial idea was to change the perception that Samsung products were inferior to Motorola’s. Samsung devised a slogan “Strong in Korea’s unique topography” so as to market the idea of quality. Surprisingly, this slogan enticed customers to accept that Samsung’s phones were best suited for mountainous places (Kim & Kwon, 2007). Furthermore, the company concentrated on establishing a cordial relationship with its suppliers and distributors because customer choice was mostly influenced by the recommendations of the salespersons of the products. The company workers visited over three thousand distributors to launch the products. Advertising campaign was thoroughly conducted. By making use of the most prominent actors in the country in ads, the company secured a strong association between the company’s quality, brand, patriotic feelings and credibility (Na, 2002). Testimonials from the loyal customers also worked positively. Several customers requested the company to give opinions of the company’s mobile phones. Due to the extensive marketing campaigns of Samsung Company, market share of the products, especially the mobile phones, increased from 25.8% to 52%, whereas the Motorola’s declined from 52% to 42% during the 1994-1995 financial year (Joo, 2003). Pioneering the CDMA Era (1996~1998) This service began in 1996 in Korea under the mergence SKTelecom and Shinsegi Telecom. By the end of 1997, three other mobile carriers’ providers (Personal Communication Services, PCS) entered into the market. Thanks to aggressive marketing and heavy investment by the new carriers and government subsidies for buyers of PCS phones, the number of mobile phone service subscribers increased very fast at this time. In mid-1998, the rate at which the mobile phones had penetrated the market had increased by 10% and by august the following year, it had recorded a rise up to 43% (Chung, 1999). The first CDMA mobile phone was developed in 1996, which coincided with the commencement of CDMA service. Without taking long, Samsung became the best dealer of PCS in the market. The company decided to work with Hansol PCS and KTFreetel to offer PCS phones. The SCH-100 was the first PCS phone that penetrated the market with a lot of innovative features. The model had features like prolonged battery life, light weight body and the ability to record delicate sounds. The initial aim was to target the young people because they formed the greater part of the whole population. The company also changed its marketing communication strategy. For instance, for the CDMA cellular market, the company put more emphasis on the new functions of the phone. As the company operated within the PCS market, it introduced a new slogan, “strong in small sounds” in an attempt to put more emphasis on the ability of the phone to capture very delicate sounds. With the help of Integrated Marketing Communication (IMC) strategies, the company’s slogan spread very fast through the appearance of small idol stars within the PCS commercials. December 1997, a year late after the launch of the CDMA service, the company had secured more than half of the CDMA cellular and PCS market (Kim & Woo, 2003). Globalization (1998~ present) In 1996, Samsung Company made its first global market. It started by exporting PCS phones to Sprint, the famous American CDMA carrier. Initially, the Sprint carrier was supplied by the Sony Company. However, due to high demand for advanced phones in the market, it shifted to Samsung because it met the required standards of the customers. Samsung and Sprint signed a three-year contract for the supply of PCS phones under the brand name “Sprint-Samsung.” Samsung worked with the engineers of Sprint in developing customized phones that could work exclusively with Sprint’s networks. After a successful deal with Sprint Company, Samsung expanded to Hong Kong in 1997 and worked with Huchinson CDMA. A year later, it expanded to Brazil and operated with TELESP and TELERJ CDMA. This prompted the company to open a branch in Brazil with the aim of capturing the growing market of Latin America. In 1999, the company secured the top position in the global CDMA market where it contributed to half of the total market share. Nevertheless, great achievement for Samsung Company in the CDMA market was significantly small in the GSM market, which could account up to 70% of the global mobile communications market (Kim, 2003). Therefore, the company had to penetrate into the GSM market to achieve further expansion. SGH-200 was the first GSM model to be developed, but it was mainly for European customers. Furthermore, it was not compatible with the company’s CDMA models. This became an obstacle to entering into the market. Before long, the company’s management team realized the secrets behind it; restructuring of the circuitry. This worked very well and fitted the European tastes. The adoption of GSM technology enabled the company to expand its market to Germany, Italy, Portugal, England and France. Although Samsung’s prices of GSM products were relatively higher than for its competitors, the company sales rose up to 10 million units within the European market (Na, 2002). The GSM market opened other opportunities for the company thus accelerating its growth. Quality products and high-end positioning promoted the prestige of Samsung’s mobile phones to a level of luxury good. In china, for instance, Samsung products take lead the high-end market with the average GSM phone price of about 1600 RMB. Though the overall market share of Samsung in China is ranked third, its market share in the high-end market is approximately half. In 2003, Samsung Company beat the Motorola Company and was ranked the first in the CDMA market. This is because most Chinese government subsidizes the prices of CDMA phones, thus regarded as ‘free’ or ‘cheap.’ Samsung’s market share in UK has been growing steadily since 1999. In 2000, for instance, its market share was 2.6% but in 2002, it had risen to 9.9%. The estimated market share was 15% in 2003 with high expectation of the rise in future (Hyun et al., 2004). In France, the company has made significant attempts to integrate technology and culture through “culture marketing.” In 2001, for example, Samsung organized for an exhibition entitled ‘Samsung going together with culture’ and displayed its products and services. Indeed, it was a provocative attempt for the famous French museum to exhibit the products of the company as opposed to historical relics. In both GSM and CDMA markets, Samsung was ranked the fourth all over the world as the best mobile phone provider in 2002. In 2003, Samsung Company maintained the third position overall in terms of sales volumes and revenues. To date, Samsung has been ranked the best mobile phone dealer in the world (Kim, 2003). The evident is shown in exhibit 8. Global management of Samsung Research and development (R&D) Samsung, by 2003, had made a total investment of $3 billion (8%) of all the revenue in research and development (Cho, 2002). In the same year, it acquired a total of 1313 US patents and was ranked the 11th globally during the US patent award. Exhibit 9 Samsung Company has approximately 19700 researchers working in the field of research. The number of researchers accounts to almost 34% of the total workers (Kim, 2003). R&D engineers invent about 100 technologies every year, and they mainly focus on the development of core technologies in their fourth generation-4G. The headquarters of the R&D department of Samsung is located in Suwon. This R&D center was purposely designed to incorporate its business specialties i.e. electronic components, semiconductors and multimedia. The center also acts as the interconnection center for other R&D centers, both with the country and other parts of the world. Exhibit 10 Since 1998, the company has applied for 25000 patents overseas and 12000 patents within the country (Korea) in the mobile business. The focal point of R&D is to develop new technology standards mainly for 4G communications and mobile internet (Kim, 2003). Currently, Samsung holds approximately 100 3G and 4G patents related technologies. Innovative Designs and Products One of the key factors behind the success of Samsung Company is their innovative designs and functionality. The company devised distinctive but user-friendly designs which were directly integrated with innovative product models, thus allowing it to launch several first-in-the-world phones. According to the ‘Fukuda Report’, the significance of designs had been a top priority. In 1996, the chief executive officer declared the year as the ‘Year of Design Revolution.’ The aim of that declaration was to reschedule and reposition design that was regarded as a function of support into the center of the market/product strategies of the firm. By 2001, a new focus of the design was integrated into the organizational structure. Furthermore, the company built a global design network for four international design centers (Chang & Podolny, 2001). These are San Francisco, London, Tokyo and Los Angeles. These centers were accountable for initiating customized designs for global markets while keeping the brand identity of the company. One of the distinct features of the design Management Center is the use of ‘precedent design system,’ that mandates the design of products and services prior to the actual development. Of late, Samsung has introduced the “Intenna” mobile phone that has an in-built antenna, thus making the phone slimmer than before. It has also devised touch-screen phones for playing games. Surprisingly, some of them have remote sensors attached. Several autocratic design awards have been awarded to the company for showing outstanding design projects excellent features. Industry outlook and key challenges Industry and competition From 1996 to 2002, Samsung Company has achieved an average of 57% annual growth. However, in 2002, there was a drastic drop due to the financial crisis, postponement of rollout of 3G networks and laziness within the global IT industry. Nevertheless, the company regained in 2003 and recorded a 20.5% growth (Hyun et al., 2004). The forces associated with growth were the increases in demand for first-time buyers and introduction of more sophisticated phones with inbuilt cameras, radios and other features. During this time, the company recorded sales volumes of 520 million units and by 2004, the sales had reached 600 million units. Exhibit 12 & 13 At the moment, Motorola, Nokia and Samsung are at the top while Sony-Ericsson, Siemens and LG are lagging behind. Nevertheless, the three key players took more than half the market share from 2002 onwards. The leaders of mobile phone markets have greatly achieved competitive advantages, basing on technology leadership, brand power, economies of scales and superiority of negotiation powers over mobile service providers and suppliers. These mobile phone companies have invested heavily in research and development to keep their technology above the bar. Digital convergence “Digital convergence” is a commonly used term in the field of IT. From early 1990s, the idea of ‘convergence’ of the contents of the media (multimedia) has been a significant buzzword. Since then, several companies have pursued convergence in devices (appliances, computing and communications among others) as well as related networks like wired and wireless communications (Lee, 2002). The expectation of several companies was that convergence could offer opportunities since convergent services and devices cover greater market segments. Nevertheless, to achieve a successful convergent era, a company should develop a central technology and standardize it to suit industrial standards. By doing so, the organization will get a first-mover advantage and extra revenue streams. Because of this, strategic alliances among various companies are rampant. Nokia Company, for example, has come up with an enterprising smart-phone in collaboration with IBM. Big mobile phone dealers like Samsung have diverted their attention to inventing convergent products and technologies. In late 2003, Nokia Company launched an N-Gage mobile phone that integrated online games, digital music player, FM radio and MMS service (Kim & Kwon, 2007). Key issues facing Samsung Company Although Samsung has been on the lead in mobile phone business, it has faced several challenges (Kim, 2002). Competition: this is the most critical factor that Samsung has faced and will face in future. As technology advances, several companies are expected to venture into the same business making competition more intense. The introduction of digital convergence and low market barriers will accelerate more competitors. Companies from related industries like PCS will have a favorable battlefield with Samsung for the limited market. This will force Samsung to devise creative strategies to remain competitive in the mobile market. Sustainability: the sustainability of the company’s high-end strategy has remained in question. Samsung has gained commendable profit margins, same as that of Nokia Company, due to its escalated prices. At the same time, Nokia has achieved so basing on its dynamics. In terms of cost per unit, Nokia Company spends least on R&D and marketing. Therefore, one may question whether a high end strategy may really be sustainable. Overdependence: Samsung Company is relying on foreign companies and investors for core modules and technologies. For instance, it imports CDMA core base-band from Qualcomm and classy camera phone modules from Japanese companies. Consequently, internal cost of production increases. Product Portfolio: there is need for Samsung Company to reinforce its product portfolio especially in coming generations. In the smart phone segment, for instance, Nokia showed a good start by shipping over five million units in early 2000s which contributed to approximately 54% of the global market. On the other hand, Samsung shipped 0.3 units only, which was less than for Sony Ericsson. References Chang, S. & Podolny, J., 2001. Samsung Electronics’ Semiconductor Division (A),”. Stanford Graduate School of Business Case IB-24A. Cho, J., 2002. Evolution of Mobile Telecommunications Devices. LGERI (LG Economic Research Institute) Economy Weekly , 690. Chung, J., 1999. The Secrets of the Anycall Myth. Hit Product Research , 286. Hyun, S., Han, M. & Yeh, J., 2004. Anycall: Building a Powerful Brand. Korea Marketing Journal , 5(4). Joo, T., 2003. Samsung Electronics Co., LTD.: Digital Convergence in the U.S. Mobile Phone Market (A), Darden Graduate School of Business Case, UVA-S-0106. NY: Cengage. Kim, J., 2002. Future of IT industry: Technology and Direction. SERI (Samsung Economic Research Institute) CEO Information, March. Kim, J., 2002. Success Strategy of Advertisement: Samsung Anycall. Advertisement Information, 250. Kim, J., 2003. Digital Revolution and Advances of Korean Companies Information. London: Sage. Kim, M. & Kwon, J., 2007. Strategies and Insights of Major Mobile Phone Manufacturers. NY: Cambridge University Press. Kim, S. & Woo, I., 2003. Kun Hee Lee, 10 Years of Reformation. The Kim Young Press. Lee, B., 2002. Samsung Rising. The Korea Economic Daily Press. Na, J., 2002. Three Paradox in the Digital Convergence Era. LGERI Economy Weekly. Appendices Read More