Samsung Electronics: Case Assignment
1. Samsung has a competitive advantage from both a price and cost perspective:
Price - Exhibit 3 shows that, compared to its rivals, Samsung is able to demand a
greater price. From 1Q00 to 1Q04, Samsung ASP price premium over its rivals was, on
average, 34% higher than theirs and it never fell below 10%, showing that Samsung was
offering more value than its rivals. In terms of product variety, Samsung supplied 1,200
different DRAM product versions, giving its clients options and showcasing Samsung's
advancements across a range of goods and industries. Exhibit 5 shows how Samsung had a
distinct advantage in many of these products. For instance, Samsung dominated the DDR2
SDRAM market in terms of product volume with 40.4 million units, while rivals Micron and
Hynix did not produce any. Even for the more common DDR SDRAM, Samsung produces
585.3 million units, compared to Micron, Infineon, and Hynix 475.6 - , 437.8 - , and 401.4
million respectively. This corresponds to an increase in unit production of about 34%. Due to
the lack of available alternatives on the market, Samsung was able to charge a premium price
for many of its products thanks to this production advantage. As shown in Exhibit 6, the price
of the specialised memory chips is greater in general, which raises the average price overall.
Cost - As shown in Exhibits 7b, 7c, 7d, 7e, 7j, and 7k, Samsung was able to maintain
the lowest cost structure in the sector throughout the majority of its products. For instance, as
shown in Exhibit 7d, Samsung's fully loaded cost for the 256 Mbit DRAM in 2003 was 26%
less than the weighted average cost of the competition. The expenses of raw materials,
labour, SG&A, and R&D are the main causes of this extraordinary cost differential.
2. Compared to its rivals in the semiconductor sector, Samsung's “value stick” is
distinctively longer. Customers have a strong WTP for Samsung products as a result of their
high quality and customer brand loyalty. Consumers are willing to pay more for Samsung
products as they believe it to be produced above industry standards. In fact, since 1994,
Samsung has prioritised product quality and has been awarded bonuses of up to $1 million
for its product performances. Samsung became the preferred supplier for the majority of its
customers as a result of the dependability of its products. Kun Hee Lee, chairman of the
Samsung Group, set stringent rules to ensure that the products were of the highest quality.
Simultaneously, Samsung has a low WTS to consumers because of the cost efficient
nature of its production process. It achieves this cost efficiency using vertical integration in
itsbusiness operations. It is also cost effective thanks to low price for the raw materials
compared to its competitors. Samsung’s suppliers gain popularity when customers know that
the product originates from them, thus are more incentivized to sell their raw materials to
Samsung at a lower price in return for this “free publicity”. Besides, Samsung’s suppliers are
concentrated and powerful, and constantly competing on pricing levels, inferring that the
pricing levels are already at the lowest possible level. Separately, Samsung’s employees are
willing to take a lower salary just to be employed at Samsung due to its prestige, educational
perks and meritocracy culture.
Even though the goods are high quality, it does not mean the production is expensive.
The combination of this high WTP and low WTS stretches Samsung's value stick longer than
the industry average. Illustration is shown below.
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3. The drivers for the competitive advantage are as following:
a) Samsung invested into manufacturing technologies and centralised the production
facilities in South Korea compared to its competitors who had production scattered all over
the world. This impacted the time-to-market and saved an average of 12% in construction
costs. Samsung’s efficiency was also driven by the quality of its employees. All R&D and
production engineers lived together in the same company-provided housing, which led to
quick design, resolve and process any issues in design or production which in turn led to
quick turnaround time, lower idle times and increased productivity. Also, the site was located
in the mountains where the air was fresh and clean, which meant lower maintenance costs
since most machinery was highly sensitive to dust and other particles.
b) The Human Resources promotion policies have shifted from their more traditional
structure towards a meritocratic system where highly skilled managers can be promoted as
soon as eligible. Samsung has also heavily invested in employees’ global business skills
through various internal mobility and specialising programs. All these employee-centric
advancements ultimately drove innovation in product design and process efficiency higher
than its competitors.
c) Samsung created new uses for DRAM by outing its manufacturing and R&D in
support of design firms. Over the years, new DRAM products were launched which shared a
common core design. This way, more DRAM chips were produced and sold, helping the
company, not only to achieve larger economies of scale, but also to learn more about the
market and its preferences.
d) The production was also such that it helped Samsung achieve a lower cost. Its
ability to control the mix of products and outputs is one of the ways the company was able to
survive the past downturns while competitors experienced net losses and increased cost
structures. Samsung always chooses to manufacture multiple products on each production
line, maximising production time for each plant and for each production line.
e) Samsung’s focus on quality, led to lower defect rates which in turn lead to fewer
defective returns and lower costs, as illustrated by the raw materials costs in the various
Exhibit 7s. Moreover, Samsung had the highest yield rate in the industry as illustrated in
Exhibit 10c.
f) Samsung devised a plan to increase the size of the wafers so that more chips could
be cut at the same time, while its competitors were not willing to invest and mass produce
larger DRAM chips. With the larger wafers Samsung was able to more than double the
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number of the chips produced in a single wager and increased its yield rate by more than 20%
than its next competitor as illustrated in Exhibit 10c.
4.
1) Partnering with complementary industries
Samsung might also consider collaborating with businesses like Intel and Nokia. It
was mentioned that Intel had previously invested in rival companies, so it appears to be a
possibility for Samsung. The risk for Samsung would be reduced, and it would be possible
for them to invest in technologies that are compatible with new emerging products. Similar to
this, Samsung might collaborate with a number of OEMs and mobile phone makers. Through
these alliances, Samsung would secure its market share and virtually prevent competitors
from entering the market, setting high barriers to entry. Additionally, OEMs will feel at ease
joining an agreement with Samsung because they presently has the competitive advantage.
Last but not least, it avoid compromising their work environment or the calibre of their
products by working with a comparable business rather than a rival. Thus, the formation of
solid partnerships would cause costumer’s WTP to remain the same or even grow.
2) Move to China
Moving production to China is an obvious tactic given that China represents a threat.
Despite having the lowest price for DRAM chips, China's costs are much higher than
Samsung's. However, labour costs and SG&A are significantly lower for SMIC. Samsung's
operating profit would rise by cutting labour and SG&A expenses. Therefore, shifting
production to China might aid Samsung in reducing prices so it can utilise the money to
purchase new technology like Flash. However, this tactic presents more risks than
advantages. Moving to China might potentially upset Samsung's culture, which is a
significant part of its competitive advantage. Similar to how Samsung's cutting-edge
technology keeps them in the lead, shifting to China would expose its intellectual property
and offer China a competitive edge. Lastly, Samsung's reputation depends on its goods. It is
sacrificing quality control by transferring production to China, which has given them an edge
over its rivals and, therefore, a larger WTP from its clients. Lower WTP from its clients will
most likely be the result of this adjustment reducing both the added value of the client and
Samsung's market share.
3) Continue to invest in R&D and focus on new technology (best strategy)
Although the first two options have some appeal, we believe Samsung's best course of
action would be to remain a lone participant. We are aware that transferring or cooperating
would harm Samsung's culture, which is important. Since Samsung is already a major player
and has made large investments in R&D, new technologies should be its main area of
concentration. It can accomplish this on its own more quickly and offer more customization
options for its products. Due to the results of this ongoing R&D investment, neither China
nor any other competitor will be able to match Samsung's better IP production.
