Strategic Management of Samsung - Case Study Example

Strategic Management of Samsung Name: Tutor: Course: Date: Introduction Samsung is a South Korean technology company established in 1938 with affiliated businesses and subsidiaries in retail, securities, insurance, textiles and food processing. The most dynamic part of the company is Samsung Electronics which generates more than a quarter of the total revenue (Wit & Meyer, 2010). With research and development in new plants and technology, the company has overtaken Sony in market capitalization. In the late 1990s, the company was restructured into three business units; semiconductors (memory chips), telecommunications and digital media. Semiconductor business unit will be the focus of this report. Samsung semiconductors: Strategic capabilities and environmental analysis On value, Samsung is a leader in memory chips with a capacity to achieve economies of scale. In the last decade, the brand value of Samsung has tripled with its large product portfolio enabling economies of scope. The company has financial muscle of investing $14.3 billion to build a new complex called ‘Samsung Semiconductor Valley’ that is equivalent to 400 soccer fields will begin in 2017 (Vincent, 2015). Given the long learning curve in the industry, the company has been able to maximize operational efficiency and developed new engineering capabilities. Rarity of raw materials and labor at Samsung come at low cost and depreciation despite being higher with competitors. With a lot of investments in research and development, the company develops cutting edge and frontier products more quickly. Product design is done in-house with all fab lines and main R&D facilities built by competent design and process engineers and are collocated (Pimentel, 2005). Overhead or fixed costs are reduced because process and designs undergo faster resolution. Since production in 2010, 20 and 30nm-class DRAMs and NAND flashes are inimitable and have not been copied by competitors. This gives Samsung a sustained competitive advantage (Samsung, 2015). Unlike Samsung telecommunications unit that is being undermined by Xiaomi and Huawei, the semiconductor unit gives it a sustained competitive advantage as it is not easily imitated by competitors. Besides, Samsung is the main supplier of processors to Apple but is a competitor in the mobile phone business. Is Samsung semiconductors organized to exploit? In the recent past, the foundry segment became a significant portion of the business. Samsung intends to drive sales in terms of strategic growth. The firm is also determined to become the largest chip maker in the world since 1993 (Samsung, 2015). Samsung is second to Intel in the micro-chip business with the revenue gap closing to 1.6 percent in 2014 from 6.9 percent in 2011 (Peng, 2011). Samsung made quick strides in penetrating the supply of semiconductors for mobile devices to beat Intel that was still stuck to semiconductors for Laptops and PCs. The company is also opening a plant in the US which is set to take advantage of the huge American market in semiconductors. To understand the strategic capabilities of Samsung, VRIO analysis and Value Chain analysis are conducted respectively. Table 1: Strategic capabilities of Samsung semiconductor Resource Is it valuable? Is it rare? Is it difficult to imitate? Is the firm organized to exploit? Performance implications Technology and product line expertise Yes Yes Yes Yes Sustained competitive advantage Partners and customers Yes Yes Yes Yes Sustained competitive advantage Brand value Yes Yes Yes Yes Sustained competitive advantage Quality Yes Yes Yes Yes Sustained competitive advantage Fabrication capacity Yes Yes No Yes Temporary competitive advantage Customization and product mix Yes Yes No Yes Temporary competitive advantage R&D on memory chips production facilities Yes No - Yes Parity From the table 1 above, Samsung has sustained competitive advantage in brand value, partners and customers, quality and technology and product lines. However, it has temporary competitive advantage on fabrication capacity and product mix as well as parity in research and development on memory chips production activities (Peng, 2011). On the other hand, Samsung semiconductor business unit exploits a range of primary and support activities to claim a huge market share in (35 percent) because of the cost advantage. Hoopes (2003) argues that with high capacity utilization and low depreciation cost, a company has advantage over competitors. The infrastructure has to be massive with effective human resource management. In Samsung, recruitment is also transparent and diverse with competitive pay scales. The value chain is as shown in the figure 1 below. Figure 1: Value chain analysis of Samsung semiconductor unit From the figure above, Samsung support activities constitute new introduction of products such as DDR-SDRAM and NAND flashes. This originates from excellent research and development (R&D) work that reflects the desire to meet the changing needs of customers. Innovation and technology is part of the company’s mission to success. This has enabled the firm to compete on quality and brand of which it has been rated among the top 20 leading brands (Samsung, 2015). The fact that it acquires its raw materials at low cost means that the output prices are also low compared to that of competitors. The primary activities include operations, outbound logistics, centralized computer linked to vendors and heavy investment in infrastructure. The company believes in its employees and has given them competitive pay scales for competence and talent. On internal environment, SWOT analysis and Porters five forces were used to assess internal and external environment of Samsung semiconductor unit. SWOT analysis considers the strengths, weakness, opportunities and threats faced by the firm while pursuing increased revenue and market share (Rothaermel, 2012). Table 2: SWOT analysis of Samsung semiconductor unit Strengths: Huge financial resources for R&D. Invested $14 billion in 2014 for a production facility in Seoul to be opened in 2017. Partnership and collaboration with suppliers of raw materials procurement at low cost. Leader in low cost products. Pioneered NAND flashes and DRAMS with patent rights Excellent and competent employees with excellent pay scales. Guarantees high retention rates and ability to tap on talent and expertise. Massive state-of-the art production facilities in Seoul. High brand value and the largest memory chip maker in the over two decades. Innovative and technological processes are streamlined, efficient and effective. Weakness: Major competitors such as Apple are also the largest buyers. Not sophisticated due to patent infringement by Taiwan and Chinese semiconductor suppliers Product diversity is too broad for more attention to be given to the semiconductor unit Prefers hiring shop-level technicians who require extra training and education Opportunities: Apple is highly dependent on the expansion of the Korean company and is looking forward for more business. Long-term procurement contracts with suppliers based on price. Demand for high-quality memory chips is on the rise. Huge growth in the semiconductor market especially in the US. Threats: Reducing monopoly and supply base of semiconductors to Apple after Taiwan semiconductor manufacturing started shipment to the US. Tough regulations and laws to comply in the international market such as US. High tariffs. Surging competitors such as Intel, Elpida and Micron will diminish the market share of Samsung semiconductors. Price wars and legal wars against Apple Slow reaction of potential and emerging markets such as India Weak DRAM market likely to reduce the profits of the semiconductor unit From the table above, it is evident that Samsung semiconductors have greater strengths and opportunities that compensates for its weaknesses and threats. Strategic Options for Samsung semiconductors Strategic options are action-oriented responses or creative alternatives towards external situations faced by an organization (Ambrosini, 2003). Samsung intends to invest in core competencies that align its strategy into building brand value. When investors perceive Samsung semiconductors, they have a view of a leader in memory chips manufacture and R&D. When complimented with cost leadership, the company is able to beat Intel as the leading producer of semiconductors (Wang & Ahmed, 2007). To choose a growth strategy, this report identified five growth ‘anchor’ in which the company will pursue. Table 3: Strategic options for Samsung semiconductors Product/Service Customer/Market Technology Production capacity Distribution Expertise in NAND memory flashes and DRAM chips Target market is mobile device manufacturers Nanotechnology exploited to produce memory chips Massive production facility in Seoul B2B channel Ties to product. Re-assembles past, current and future products. Existing products inform future products. Leverages on multiple customers Class of users such as TV, Radio and smartphones. Customer needs require identification. Satisfy similar customers with multiple products. Destiny of product in customers’ hands Improve memory chips through technological capabilities. Solutions should look for problems. Key capability is to create the market Maximize human resource and production facilities. Keep efficiency high and optimize on unit cost. Profitable if plant at full capacity. Getting products to customers in a unique way. Sell what can go down the channel. Leverage on the products within the channel. Develop and expand growth of the semiconductors to new customer segments Sell the semiconductor devices to new customer base such as Nokia and JVC Patent the nanotechnology to create growth Maximize growth by keeping the production facility fully utilized Create growth by maximizing the throughput of the channel From the table above, the strategic options for Samsung semiconductors are five. The analysis has found that the company already has patent and expertise in the production of NAND flash memories (20-nm class) and DRAMS (30-nm class) both of which are less than six years since they were produced in mass (Samsung, 2015). This implies that the viable strategic option is to concentrate on the customer or the market (column 3). This is because it will take time for competitors such as Micron and Intel to imitate the technology. The solution is selling the semiconductor chips to the existing customer segment of mobile devices but to new markets in different geographical zones. To arrive at the best solution to develop the market, a table is used for analysis. Table 4: Analysis of strategic options Strategic option Company has the needed resources Company has the strategic capabilities 1 Develop and expand growth of the semiconductors to new customer segments (Market Penetration) Yes No 2 Sell the semiconductor devices to new customer base such as Nokia and JVC (Market Development) Yes Yes 3 Patent the nanotechnology to create growth Yes No 4 Maximize growth by keeping the production facility fully utilized (Product development) Yes No 5 Create growth by maximizing the throughput of the channel (Diversification) Yes No From the table above, based on the ANSOFF matrix below, option 2 is chosen. Figure 2: ANSOFF Matrix for Samsung semiconductors From the matrix above, the company is already making profits from selling semiconductors to mobile phone manufacturers. Regarding the first option, the company specialized in memory chips for mobile devices such as smart phones while Intel and Micron were still stuck to TV, Radio and PCs. The company has already penetrated the existing segment of mobile devices. New products for new markets do not apply to the semiconductor business unit. Moreover, new products from the already installed facility to be opened in 2017 under a $14 billion budget is still committed to hands of capital budgeting. This leaves the strategic option of developing the market for memory flashes in new markets for existing customer segment (mobile devices). Market development of Samsung semiconductors Samsung semiconductor unit has learned that it will need to sell the existing NAND and DRAM memory chips to new markets in Europe and Japan. The target market will have to be Nokia and Japanese firms like Kyocera and NTT Docomo. These new markets will be approached in four ways. First, the products can be exported to the new geographical markets. Second, packaging or developing new product dimensions. Third, the company can opt to use mail order or e-commerce to deliver the products based on new distribution channels. Fourth, the company may need to create new market segments or develop different pricing policies in order to attract different customers. Although it targets a broad base of customers in new geographical areas, it is a risky strategy. Exporting to the new geographical markets can involve direct or indirect exports or through partnerships and alliances (White, 2004). Direct exports is selling and delivering the products directly to the client. For Samsung semiconductors to succeed, it has to avoid middlemen or brokers and be competitive by setting lower prices. In this case, it can sell the memory chips to Nokia and NTT Docomo at lower prices. However, it will require the company to have a direct relationship with the two customers before the export business begins. A representative can sell related lines of products within a specific geographic area making them a specialized agent (Miyoung, 2013). However, the representatives and agents may have the authority to enter with foreign customers into contractual sales agreements on behalf of the company. Normally, when they sell the product is when they will receive a commission (White, 2004). Regarding trading houses, they are domestic intermediaries that will the technology products to Nokia and NTT Dicomo abroad. Implications of market entry strategies Exporting has been seen as the most appropriate entry mode for Samsung semiconductors to the Markets of Finland and Japan. This is intended to secure the customer base of Nokia and NTT Dicomo as the major manufacturers of mobile phone devices in the Far East and Europe. Zollo and Winter (2002) show that a company like Samsung can have greater capabilities and resources with increased knowledge in the manufacture of memory chips through continuous research and development (R&D). Since representatives or agents have the authority to enter with foreign customers into contractual sales agreements on behalf of the company, this remains the most viable option. Representatives from South Korea, Finland and Japan will all converge to discuss on how to enter and share market information. Undoubtedly, Samsung semiconductors by investing in the new manufacturing complex will keep abreast with the demand for memory chips in the new markets of Japan and Finland. Export market will also allow the production facility to be maximized while agents or representatives are engaged in making medium-term to long-term contracts with customers. The decision to export memory chips through representatives to Nokia and NTT Dicomo is evaluated in terms of SAFE model (Suitable, Acceptable, Feasible and Enduring). Table 5: SAFE model for Samsung semiconductor unit Decision Description Requirement met Suitable All decision areas covered Meets best interest of all parties Meets company needs Yes Yes Yes Acceptable Acceptable by business standards Followed by businesses globally Yes Yes Feasible Capable of execution Realistic/makes sense Yes Yes Enduring Endures concerns, questions and confrontation Builds rapport and camaraderie with employees Yes Yes From the table above, it is possible that the decision to export micro-chips to Nokia and NTT Dicomo can be reached at when all the concerned parties from Samsung and the representatives from the customers can reach an agreement. This will guarantee a high level of success for the strategy. Strategy formation process Byung-Chull Lee, Samsung chairman, in the early 1980s travelled to Japan to assess growth opportunities and found it in semiconductors (Wit & Meyer, 2010). This was the beginning of a strategy formation not to slowly emerge or become a reactive copy cat but grab the leadership role. In this period, developments of semiconductors for new high-tech products speedily opened up massive opportunities for Samsung (Carlsson & Fuller, 2010). Instead Samsung did not allow its strategy of becoming innovative and a leader in the technology industry to slowly emerge. Unlike it competitors in China and US, the company intentionally set ambitious long-term goals and became committed to it through discipline to become the leader in manufacture of semiconductors (Wit & Meyer, 2010). The company is soon to beat Intel as the number one producer of NAND memory flashes and DRAMS globally. In 1982, a project team for semiconductors was formed secretly to study the most attractive semiconductor product. This led to strategic options and forecasts for the different electronic components. After one year, the company started making Dynamic Random Access Memory (DRAM) in the chip industry. Rather than acquiring relatively simple technologies, Samsung came up with a long-term strategic plan that modified imported technology and designed new products. Advanced products were eventually developed through reverse engineering making Samsung the ‘black-belt master’ in process and product innovation (Rothaermel, 2012). The long-term plan also included hiring South Korean engineers trained in the US to work on the DRAM business project that had just started in the US. Over the next 10 years, Samsung followed its strategy as planned and not as it emerged. This made the company a leader in DRAMs manufacture. The strategy of developing detailed plans and extremely ambitious goals paid in the later years. However, the dramatic dip in prices and demand for memory chips in 1997-1998 made competitors to react by slashing production and capital spending. In this period, Samsung strengthened the production of memory chips and remained committed to its long-term plans (Wit & Meyer, 2010). It became one of the few companies to reap the benefits of DRAM manufacturing once the bust cycle turned into a boom. The strategic planning team were not worried of the 2008 global credit crisis and continued to invest in substantial R&D efforts to ensure that their strategic objectives were met. By creating a leading position in the new age, the company focused beyond economic crisis to invest in digital media, communication services and smartphones. The semiconductor unit was created as a division by combining with other component businesses to facilitate synergies and cut costs (Wit & Meyer, 2010). With intended strategic formation process, the company has been able to make long-term investments, coordinate various businesses and sustained its commitment to technologies (Wit & Meyer, 2010). The company in Korea is living by its name ‘lasting, large and strong forever’. In conclusion, Samsung Electronics would not have made significant leaps in brand value, market share and capitalization if it were not for intended or planned strategic formation processes. Conclusion Samsung semiconductor unit has various resources and capabilities to gain sustained competitive advantage. The company has adequate financial resources ($14 billion) to investment in a new manufacturing complex to be opened in 2017. Employees work on competitive pay scales and the production facilities are state-of-the art in Seoul, South Korea. Although the company is not sophisticated due to patent infringement by Taiwan and Chinese semiconductor suppliers, it has secured long-term procurement contracts with suppliers based on price. The company has strategic options of improving on product, market, technology, distribution and production capabilities. From the report, market development was seen as a strategic option that required interest. This was effectively evaluated based on the SAFE model and found that exporting the micro-chips to Nokia and NTT Dicomo are viable decisions. Lastly, the company has always planned or intended its strategic formation processes which have made it formidable to economic crises and fall in consumer demand. References Ambrosini, 2003, Tacit and Ambiguous Resources as Sources of Competitive Advantage, Palgrave Macmillan. Carlsson, C & Fuller, R 2010, Adaptive fuzzy cognitive maps for hyperknowledge representation in strategy formation process, Proceedings of International Panel Conference on Soft and Intelligent Computing, Technical University of Budapest, pp. 43-50 Hoopes, D. Madsen, T & Walker, G 2003, Why is there a resource based view, in the special issue of the Strategic Management Journal, vol. 24, no. 10, pp. 889–902. 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