International Business

BUS301

Case Study: Samsung

Prepared By
Naima Hossain
ID: 17304091

Prepared to
Tahsina Banu
Lecturer, BBS
BRAC University

Submission Date: March 26th, 2020

Question 1.

What were the sources of Samsung’s cost advantage in DRAMs in 2003? Consider the relative
importance of productivity and input costs in your answer. What were the sources of
Samsung’s price premium in DRAMs in 2003? Support your answers regarding both cost
advantage and price premium with numbers and calculations when possible.

Answer:

Samsung Electronics started DRAMs business in the early 1980's and has risen to the industry's
peak since 1992. The company has been listed as the most profitable manufacturer of
semiconductors in the DRAMs industry. To find out how Samsung could strengthen its cost
competitiveness in the business of DRAMs, let's dig into Samsung's DRAM's cost structures
relative to its 2003 competitors based on the chart in the case study article- Exhibit 7a.

Samsung's cost of raw materials was 55.1 % lower than its average rivals. This was because the
company had the development capability to manufacture more chips from any defined wafer
size. Because of Samsung's Senior Manager's decisive strategy back in the early 1990s, who
managed to convince the company to expend $1bn in developing the technology that can
manufacture8-inch wafers and being a mass production technology success. As a result, by
bringing down per unit cost of the raw materials incurred much lower than its competitors,
Samsung was able to achieve better economical of scale. This also means that the precision
technology they built to manufacture 8-inch or 12-inch wafer is the most tested and reliable
technology in the industry, as evidenced by the fact that Samsung, which manufactured 12%
and 88% of its total unit chips using 12-inch and8-inchwafer respectively, achieved 80% in
production yield in 2003 compared to Infineon, the second largest memory chips in the world
and 67 per cent of its total 12-inchand8-inch wafer unit chips achieved just 60 per cent yield
rate, shown in Exhibit 10c, respectively.

It was remarkable to find out that, while still achieving the most appealing annual revenue
figure in the industry, Samsung was able to retain its labor costs at a competitive level-37 %
lower than its rivals on average. At $44,000 in 2003, the company reported neither the highest
nor the lowest average wage among its primary competitors. But, the organization offered one
of the most favorable compensation packages in the sector to its workers or known as
performance-based reward schemes consisting of project rewards, efficiency rewards and
profit-sharing schemes in particular.

In turn, the company had decided to reform the conventional seniority-based promotion,
introduce a meritocratic selection program and promote those talented and competent young
managers to the organization's top place. In addition, the organization has invested heavily in
educational and training programs for employees such as the Local Specialist Program and has
funded hundreds of workers to study MBA and PhD overseas. The extra costs incurred in
retaining the employee were partially traded-off with increased operational efficiency within
the organization and lower turnover rates for employees.

Samsung incurred the lowest cost of depreciation among major memory chip makers reflecting
its lower spending on equipment. In Exhibit 7a, however, as of 2003 the most varying product
mix in the industry, the company was able to carry out 1200 different types of DRAM product.
Because of the design and development team of the company, where its R&D engineers
focused on designing new products using a common core design while their manufacturing
engineers focused on constantly improving and changing their current manufacturing
equipment to manufacture cold multiple product architectures at each production line. As a
consequence, the company managed to manufacture many new goods without investing the
new manufacturing equipment but could also achieve lower defect rate and higher productivity
due to improved performance.

This data can be seen from the financial result of its 2003, Exhibit 1, when Samsung recorded
15.1 per cent in return for Return on Assets (ROA) assets while its other competitors–Infineon,
Hynix and Macrons–were negative ROA. In comparison, for every $1 in cash, the company
generated $1.11 in sales, the highest among its other rivals-Infineon, Hynix and Microns, which
generated $0.61 respectively. $0.0 Dollars Six per cent and $0.44 in sales for every $1.
Samsung incurred lower R&D costs, mainly due to the company's consolidation strategy of
having its key R&D facilities and manufacturing facilities at a single site, so that R&D
engineering could quickly solve the product design and process engineering problems.

This has reduced the contact costs between R&D engineering and production engineering,
reducing the time required to rollout new product and increasing production performance,
another explanation is that the company is pushing for an R&D partnership with design firms
such as Rambus, along with the company's engineers, responsible for producing many new
products with a shared common core idea. This has helped the company develop many new
products and faster save time and money if roll out new goods into the market.

Question 2.

Based on your answer to question 1, how should Samsung respond to the threat of Chinese
entry? Evaluate the options available to Samsung, and make a recommendation.

Answer:

Samsung is competing with Chinese companies which are attempting to penetrate the DRAM
market. They use alliances to learn from the rest of the industry, raising trillions of dollars to
develop state-of - the-art facilities and willing to lose market share income. Working with a
Chinese partner could be a way to do so, but the downside of partnering with Chinese partners
is that their intellectual property rights are still not completely secured and that one day a
Chinese partner may become a competitor.

Samsung could increase their investment in niche market products and allow the Chinese to
dominate the lower end market while concentrating on creating more value-goods. Their team
carried out comprehensive analyzes of the study in order to react to the challenge of Chinese
competition.
The industry is experiencing intense competition since 2005, with increased industrial efficiency
and, in part, showing a downward slope. To simplify Samsung’s competition with Chinese
market, we can analyze the industry in light of the Porte’s five forces model. The model is as:

A. Bargaining power of suppliers: production requires strong suppliers. With business

growth, suppliers are becoming more concentrated, with only two or three major
players leading key equipment market segments and providing discounts of up to 5 per
cent for high-volume purchases.
B. Bargaining power of customers: Buyers are not left with much power, they are
scattered, with no single OEM (Original Equipment Manufacturer) controlling over 20 %
of the global PC market in 2005. For three factors, OEMs demand high prices, memory
accounts for 4-% of PC costs and 4-% of cell phone costs, strong competition between
PC manufacturers, and the fact that end-are cost sensitive. Regardless of the high cost
of the necessary capital there is little danger of backward integration.
C. Threat of Substitutes: There are so far no viable alternatives that could even threaten
the memory industry.
D. Threat of new entrants: New entrants face a number of challenges to enter; they need
high capital investment, innovative technology, lots of skill, brand identity and
economies of scale. But, Chinese entrants are in a position to obtain license and
technology for manufacturing with help of joint venture and agreements. Government
funding is now available to draw anyone who wants to partner with a Chinese company
in terms of cheap credit, plentiful land and other important resources.
E. Opportunities and Threats: Opportunities are the dramatic increase in the electronic
device market in the near future and subsequently the growth of the memory chip
industry and others are high customer demand for innovative products and value-added
features such as flash drive which is expected to rise significantly over the years.
Threats are primarily China's low-cost memory chip development, which weakens
profitability and their new nanotechnologies of memory production.
In response to the challenge of Chinese entrants into the DRAM market, Samsung may pursue a
number of tactics, the most effective would be,

Not working with the Chinese market: In this situation, Samsung must save the existing Korean
economy, focusing exclusively on cutting-edge high-end goods. Growth in the DRAM market,
which is the Chinese's threat market, is slowing. The profits from low-end DRAM products are
lower than custom "especially products" like the DDR2 SDRAM and Rambus.

Additionally, Samsung should focus its attention on new business sectors, i.e. flash memory
industry that is witnessing double-digit growth and is in this technology's initial stage to reach
the high-end and niche markets.

Samsung is industry leader in technology for memory chips. Unlike rivals, Samsung is trying to
create new markets by creating new memory and cutting-edge technology technologies which
are unavailable to its rivals. Samsung has launched new DRAM products in laptops and personal
game players, with product-specific applications. Samsung has effectively combined low-cost
and differentiated product strategy to increase profits, due to a range of internal and external
factors.

Samsung can achieve low cost advantages for a number of reasons, they are:

 Collocation of fab and R&D facilities:

Process and production quality has always been the priority of the business. The
business positions all its fabs and R&D facilities at one facility, so that as soon as possible
all engineers from various departments can solve technical problems together. Samsung
benefited from the collocation's 12 per cent construction cost savings.

 Lowest fully charged costs:

As seen in the textbook displays 7a-k, Samsung can keep its fully charged costs below those of
competitors. The company has the lowest expense and depreciation for the raw materials.
Lower raw material costs are probably due to better relationships with suppliers.
 Customize products for a core design:
Samsung has both developed and produced DRAMs for a core design. It helps Samsung
to save money, as it does not need to spend extra capital for each new product it
produces. Additionally, as other rivals were hesitant to invest in larger DRAM wafers,
Samsung managed to build and master the new technology, and has remained a pioneer
ever since. Samsung has the highest product reliability advantage in product
differentiation strategy, according to heavy investment in R&D and constant creativity in
design.