Cost Leadership in Strategic Management - Assignment Example

Samsung’s Strategic Management Table of Contents Table of Contents 2 Introduction 3 Task 4 Task 2 6 Advantages of Cost Leadership Strategy 6 Disadvantages of Cost Leadership Strategy 7 Advantages of Product Differentiation Strategy 7 Disadvantages of Product Differentiation Strategy 8 Task 3 8 Conclusion 8 Recommendation 9 Reference List 10 Introduction Samsung Electronics is a South-Korean based company headquartered at Seoul. It operates in 65 countries worldwide and has employee strength of more than 250,000 (Samsung, 2014). Samsung produces devices like semiconductors, hard drives, digital displays, home electronics, mobile phones and others. The products come with a tone which automatically plays as soon the device is turned on. This tone is an identity of Samsung, so that the customers can easily recognise their products (Samsung, 2013). Business-level strategy is a coordinated and integrated set of actions and commitments implemented by a firm to gain competitive advantage by making use of its core competencies in a specific product market. The core competencies of an organisation are focused on satisfying customer needs and demands to achieve more than average returns (Thompson, 2001). The Business-level strategies help the organisation to achieve its targets. The actions of Business level strategies provide value to customers and help the organisation to gain a competitive advantage (Kaplan and Norton, 2001). The Business-level strategies are also concerned with the position of the firm in an industry, with respect to competitors and to the five forces of competition (Hill, Jones and Schilling, 2014). A competitive advantage is a benefit which is gained over its rivals by a company by offering customers value for the products, through lower prices or by providing additional benefits and service that can justify similar or higher prices (Ansoff and McDonnell, 1990). Manufacturers or producers who are involved in niche marketing, exploring a competitive advantage, to them it means increased profit and a sustainable business and its success over the long term (Pearce and Robinson, 2000). The following categorisation defines competitive advantage better and discusses several strategies which help in building a competitive advantage of a company. Cost Leadership is a strategy by which the company makes continuous efforts to cut costs relative to its competitors (Goldman and Nieuwenhuizen, 2006). Here the company aims to compete for a wide range of customers based on price. Differentiation is a strategy by which a unique feature in the product provides value to the customers. It is created by lowering buyer’s cost, sustainability and raising buyer’s performance (Stevenson and Hojati, 2007). In Focused low cost strategy, the company selects a small segment of market to sell its products or services at a competitive price (Thompson, et al., 2008). In Focused differentiation, the company sells differentiated products or services in a small segment of market (Hoskisson, et al., 2012). Task 1 Samsung Electronics follows two main Business-level strategies, Cost Leadership and Differentiation. Samsung competes to attract customers based on price (Johnson, Scholes and Whittington, 2008). The price of its products is based on internal efficiency. In order to earn a margin above average returns and keep cost within the reach of the customers, Samsung focuses on internal efficiency. Cost Leadership strategy works well when products or services are standardized. Samsung makes continuous efforts to reduce costs relative to competitors like, Apple, LG and Nokia in order to be a cost leader. Samsung also aims to provide value to its customers by offering unique features and characteristics in its products and services, besides by lower price. This is possible by providing good quality features, better customer service, frequent product innovation and advanced technological features. Samsung created value by lowering the cost of the buyers, offering products which improve the performance of the buyers and by creating high switching costs through unique products and product differentiation (Nisen, 2013). Initially, its focus was on cost efficiency only, as a result of which the company was heading towards bankruptcy. Later the strategy of product differentiation was adopted which brought about a dramatic change in the operation of the company. Since then, the operations in Samsung is completely based on innovative approach aiming to improve the company’s existing products, and introducing new products in the market (Bordes, 2009). To accomplish the strategies of Cost Leadership and Product Differentiation, Samsung had to adopt several other strategic measures: Product Innovation Samsungs product range includes CTVs, LEDs and LCD TV, video and audio products, IT products, cell phones and home appliances. Its product range covers almost all the categories in the home appliances and consumer electronics. The wide range of products by Samsung is one of main reasons for its success in the Global market (Nisen, 2013). Design Strategy Design strategy is a discipline which helps firms to determine what to make and do, why do it and how to innovate accordingly, both immediately and over the long term (Jones, 2010). Samsung executes this strategy as it builds the connection between design and business strategy. It helps the organisation to integrate holistic-thinking, research methods used to inform business strategy and strategic planning which provides helps in design. Design strategy by Samsung uses social research methods to get a result and lower the risk of any course of action. The approach has proved useful for the Company in a variety of strategic scenarios (Nisen, 2013). Energy Management Strategy Samsung Electronics has adopted various measures such as high-efficiency facilities, energy management systems and training programs for employees to reduce energy consumption across all operations. The Company introduced an energy certification program for new facilities and buildings from 2010. The company established a working group for energy management which meets every two months to share best practices for energy saving and management throughout all business divisions. These activities encourage facilities to set up highly energy efficient equipment and technologies such as energy efficient water humidification systems, low-power vacuum pump technology, and energy efficient process optimization (Arvand, 2012). Samsung committed to enhancing employees awareness through training programs, promotions and incentive to facilitate activities that save energy at workplaces. Compliance Management Strategy Samsung Electronics has developed a compliance system that can serve the problems related to agreements and intellectual properties. The Compliance program of Samsung includes training, control and supervision which ensure whether the employees are abiding by the law or not. It reduces risks related to violation of laws and regulations. Samsung’s compliance activities are classified into prevention, monitoring and follow-up processes. Prevention activities include employee education, distribution of manuals on compliance, system-based self-inspections, and operation of a help desk to respond to questions on compliance matters. The Company also keep up to date with the introduction and revision of various laws and regulations. There is a separate team dedicated to monitoring activities. After dealing with a compliance issue, they analyze the related process and outcome to find the fundamental cause and pursue improvement measures. Real life examples are used in training programs as a way of preventing recurrence of any compliance problems that arise (Nisen, 2013). Blue Ocean Strategy Samsung’s primary tool for product development is Value Innovation, the first component of Blue Ocean Strategy. Value Innovation Program centre was started in 1998 and by 2004 the centre was playing a very key role in rapid growth of Samsung to become the world’s top consumer electronics company. The Blue Ocean project teams had firmly fixed the approach in the corporate culture with an annual conference presided over by the business heads. One of the key successes of Value Innovation Program centre was, within five years of entering the mobile phone market, in 2003 Samsung has become the No2 player in the mobile phones market (Ketchen and Short, 2006). Samsung’s Blue Ocean Strategy has also helped it to maintain top position in TV market since 2006 and LCD panel market since 2002 globally. The strategy is still at the core of the Samsung product strategy and company makes the necessary adaptations according to the business environment and changing consumer preferences. The company later launched Market Driven Change (MDC) which focused how to develop an new product with the help of consumers’ perceptions and opinions. The Flat panel LCD TV Bordeaux was the result of successful MDC. This TV helped Samsung to overtake Sony in the LCD market. Samsung, by launching a store in the Second Life Site, focused on Teenagers. The virtual space will serve the need of the teenagers with relative to cell phones and assessories, in a less competitive way (Nisen, 2013). Task 2 Advantages of Cost Leadership Strategy Higher Profitability- The benefit to the low-cost operators in an industry is higher profit margins. In case of sales of products or services with low cost and competitive pricing, the margins are more than the companies that produce products of similar quality at a higher price (Mack, 2014). Increased market share- Companies that are able to produce goods and services at a lower price usually induces more business from budget-conscious customers. They generate industry standard profits because they sell products at low costs. A low-priced product draws in more customers looking for the same product. It leads to the fall in market share of the rivals (Huebsch, 2014). Capital for Growth- Another major benefit of Cost Leadership is that the company has more capital resources for further growth and investments. Keeping the operating costs low, the company can invest more money in research and development of the products, technology upgrades and other business expansions (Kokemuller, 2014). Disadvantages of Cost Leadership Strategy Credibility- Being a cost leader leads to loss of credibility of the company among the customers. The internet now offers the ability to check the pricing of ample number of retailers. If the pricing of the company is not lower than that in the internet, the company loses the customers (Gann, 2014). Perception of Quality- Competition-based pricing depends upon the pricing of the rival firms. It ignores the product cost, the margin and the demand. It forces the company to sell products even at loss. This creates the perception among the customers that the product lacks quality (Root, 2014). Customer Service- An everyday low-pricing policy reduces the profit margin of the company and insists to operate on low budget. The company then would not be able to afford the required number of sales associates needed to maintain a high level of customer service. The company would not be able to maintain repeat business (Gann, 2014; Linton, 2014). Advantages of Product Differentiation Strategy Brand Loyalty- Companies often differentiate their products from their competitors’ by advertising and trademarks. This differentiation allows customers to associate products and services with the companies. The association benefits the companies as it promotes brand loyalty which safeguards the companies against the threats of the competitors (Kelchner, 2014). Innovation- Product differentiation encourages innovation which sets a company apart from the competitors. A company involves in two kinds of innovation, transformational innovations and adopted product innovations. Both provide positive benefits to the stakeholders and customers by developing new products, improving production process and promising economies of scale (J. Sun, X. Sun and Xu, 2002). Barrier to Entry- Product differentiation is a barrier to the entry of new companies in the market. Customers who are associated with existing products or companies take time to get associated with the new ones. Companies offering differentiated products spend a lot in advertising and promotion that bars the entry of new companies (Jaquier, 2010). Disadvantages of Product Differentiation Strategy Expense- Differentiation strategies that support high level of service, product quality, reliability, durability, features, research and development and advertisements are costly. Customers pay for these increased costs in the form of high profit margins of the company (William, 2014). Implementation- Product differentiation does not provide any tangible benefits to the company if it is based on something that the customer does not value. Unnecessary features that the products include may not offer advantage to the customers (Saint-Leger, 2014). Sustainability- Product differentiation is difficult to sustain for a long term. Customers’ tastes and preferences change with time and competitors aim to copy successful differentiators, reducing the uniqueness of the existing products (University of Cambridge, 2014). Task 3 Conclusion Samsung has created an entirely new pace of innovation in hardware, software and electronics, turning its technical novelty into a commodity. To do that though requires big calls on future technologies. Samsung took 10 years to develop its products, to gain the second spot. The investments the company makes are impressive. Almost 5.7% of its total revenue is spent on research and developments of the products (Park, 2014). The new vision of Samsung Electronics aims to leverage its three key strengths, ‘New Technology’, ‘Innovative Products’ and ‘Creative Solutions’. It also aims to promote new value for Samsung’s core networks such as, Industry, Partners and Employees. Through the joint efforts, Samsung hopes to contribute to a better world and richer experience for all. Recommendation Samsung should establish certain other strategic approach in its business, such as ‘Creativity’, to be a leader in new markets. Secondly, ‘Partnership’, to explore new territories and become one of the world’s top five brands. Thirdly, ‘Talent’ because fresh brains are more innovative, which may take the business forward. Reference List Ansoff, H. I. and McDonnell, E. J., 1990. Implanting strategic management. New York: Prentice Hall. Arvand, N., 2012. Leveraging technological capabilities for competitive advantage: Giving Samsung way a glance. [pdf] International Business School. Available at: [Accessed 14 August 2014]. 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E. and Zengan, G., 2008.Crafting and executing strategy: The quest for competitive advantage: Concepts and cases. Boston: McGraw-Hill/Irwin. Thompson, J. L., 2001. Strategic management. Stamford: Thompson Learning. University of Cambridge, 2014. Porter’s generic competitive strategies (ways of competing). [online] Available at: [Accessed 14 August 2014]. William, J., 2014. Advantages and Disadvantages of Product Differentiation. [online] Available at: [Accessed 14 August 2014]. Read More