Case 19 Samsung electronics_2010-09-28

Case 19 Samsung electronics_2010-09-28 - Case 19 Samsung...

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Unformatted text preview: Case 19 Samsung Electronics* In January 2009, Samsung Electronics began to slim down its operations into two divisions from the five separate ones that it had a year earlier. The sets division, called digital media and communications, will focus on consumer prod- ucts such as television and mobile phones. The parts unit, called device solutions, will handle electronic components such as semiconductors and LCD panels. The firm had already merged its home appliance division, which made refrigerators and air conditioners, with its digital media section over the previous year. The reorganization followed on the heels of a major shake-up of top executives at Samsung Electronics. In the aftermath of a tax evasion scandal involving the parent firm, Yun Jong Yong, the electronic firm ’5 long-term CEO, was replaced in May 2008 by Lee Yoon Woo. In addition, the firm has begun to appoint several younger executives to its leadership team and reassign two-thirds of its execu- tives to different positions. “There has been a sense of cri- sis in the company for more than one year,” said one senior manager. “Radical change is in store.”1 The moves represented a major effort to streamline operations to better address worsening economic condi- tions. Four years ago, the market value of Samsung had risen above $100 billion, making it one of only four Asian companies to move above that mark. Based in Suwon, South Korea, the firm moved past well-known rivals such as Sony, Nokia, and Motorola on the basis of its revolu- tionary products. Its feature-jammed gadgets have racked up numerous design awards, and the company has been rapidly muscling its way to the top of consumer brand- awareness surveys. However, in spite of these advances, Samsung has not been able to deal with the growing impact of the global economic slowdown. Although the firm has been able to boast of having a lower cost structure than most of its rivals, it was expected to announce its first-ever quarterly loss, for the last quarter of 2008. (See Exhibits 1 and 2.) Much of the downturn could be attributed to an overcapac- ity in the global production of memory chips and liquid crystal displays, which has forced down prices. This may case over the next couple of years as many of Samsung’s smaller rivals are dropping their plans to expand capacity. Among all the changes that Samsung has been making, analysts have paid particular attention to the appointment of Choi Gee Sung to head the newly formed digital media and communications unit. Choi’s appointment signifies a break from the firm‘s tradition of picking t0p managers “This case was developed by Professor Jamal Shamsie, Michigan State Uni- versity, with the assistance of ProfessorAlan B. Eisner, Pace University. Mate- rial has been drawn from published sources to be used for class discussion. Copyright © 2009 Jamal Shamsie and Alan B. Eisner. Exhibit 1 Income Statement (in trillions of Korean won, year-end December 31) 2008 2007 2006 2005 2004 Netsales 121,294 98,508 85,426 80,630 81,963 31,532 27,627 25,779 25,378 29,010 6,031 8,973 9,008 7,575 11,761 5,525 7,421 7,926 7,64010,790 Gross profit Operating profit Net income Source: Samsung, Exhibit 2 Balance Sheet (in trillions of Korean won, year-end December 31) 2008 2007 2006 2005 2004 Totalassets 105,301 93,375 81,366 74,462 69,005 Total liabilities 47,186 37,404 33,426 32,854 32,604 Total shareholders' equity 58,117 55,972 47,940 41,607 36,400 Source: Samsung with backgrounds in engineering. In fact, Choi is likely to take over as Samsung’s next CEO when Lee relinquishes this post. Referring to the shift away from its heavy focus on technology, Kang Shin Woo, chief investment officer at fund manager Korea Investment Trust Management, said, “Samsung’s benchmark is shifting from Japanese compa~ nies to innovators like Apple.”2 Discarding a Failing Strategy The transformation of Samsung into a premier brand can be attributed to the ceaseless efforts of Yun Jong Yong, who was appointed to the position of president and CEO in 1996. When Yuri took charge, Samsung was still mak- ing most of its profits from lower-priced appliances that consumers were likely to pick up if they could not afford a higher-priced brand such as Sony or Mitsubishi. The firm had also become an established low-cost supplier of vari- ous components to larger and better-known manufacturers around the world. Although Samsung was making profits, Yun was con- cerned about the future prospects of a firm that was relying on a strategy of competing on price with products that were based on technologies that had been developed by other firms. The success of this strategy was tied to the ability of Samsung to continually scout for locations that would allow it to keep its manufacturing costs down. At the same time, it would need to keep generating sufficient orders to maintain a high volume of production. In particular, Yun was concerned about the growing competition that the firm was likely to face from the many low-cost producers that were springing up in other countries such as China. Yun’s concerns were well founded. Within a year of his takeover, Samsung was facing serious financial prob- lems that threatened its very survival. The company was left with huge debt as an economic crisis engulfed most of Asia in 1997', leading to a drop in demand and a crash in the prices of many electronic goods. In the face of such a deteriorating environment, Samsung continued to push for maintaining its production and sales records even as much of its output was ending up unsold in warehouses. By July 1998, Samsung Electronics was losing mil- lions of dollars each month. “If we continued, we would have gone belly-up within three or four years,” Yun recalled.3 He knew that he had to make some drastic moves in order to turn things around. Yun locked himself in a hotel room for a whole day with nine other senior manag- ers to try and find a way out. They all wrote resignation letters and pledged to resign if they failed. After much deliberation, Yuri and his management team decided to take several steps to try to push Samsung out of its precarious financial position. To begin with, they decided to lay off about 30,000 employees, representing well over one-third of the firm’s entire workforce. They also closed down many of Samsung‘s factories for two months so that they could get rid of its large inventory. Finally, they sold off about $2 billion worth of businesses like pagers and electric coffeemakers that were perceived to be of marginal significance for the firm’s future. Developing a Premium Brand Having managed to stem the losses, Yun decided to move Samsung away from its strategy of competition based largely on the lower price of its offerings. Consequently, he began to push the firm to develop its own products rather than copying those that other firms had developed. (See Exhibit 3.) In particular, Yuri placed considerable emphasis on the development of products that would impress con— surners with their attractive designs and their advanced technology. By focusing on such products, Yun hoped that he could develop Samsung into a premium brand that would allow him to charge higher prices. To achieve this, Yuri had to reorient the firm and help it to develop new capabilities. He recruited new manag» ers and engineers, many of whom had developed consider- able experience in the United States. Once they had been recruited, Yuri got them into shape by putting them through a four-week boot camp that consisted of martial drills at the crack of dawn and mountain hikes that would last all day. To create incentives for this new talent, Yun discarded Samsung’s rigid seniority-based system and replaced it with a merit-based system for advancement. As a result of these efforts, Samsung began launch- ing an array of products that were designed to make a big impression on consumers. They included the largest flat-panel televisions, cell phones with a variety of fea- tures such as cameras and PDAs, ever-thinner notebook computers. and speedier and richer semiconductors. (See Exhibit 4.) The firm calls them “wow products,” and they are designed to elevate Samsung in the same way the Trini- tron television and the Walkman had helped to plant Sony in the minds of consumers. A large part of the success of Samsung’s products can be tied to its efforts to focus on the specific needs of pro- spective customers. Mike Linton, executive vice president of Best Buy, stated that Samsung regularly gets informa- tion from retailers about the new features that customers want to see in their electronic devices. This close link with retailers helped Samsung to come up with two of its recent best-selling products: a combined DVD-VCR player and a cellular phone that also functions as a PDA. According to Graeme Bateman, head of research for Japanese invest- ment bank Nomura Securities, “Samsung is no longer making poor equivalents of Sony products. It is making things people want.”4 Finally, to help Samsung change its image among consumers, Yun hired a marketing whiz, Eric Kim, who has worked hard to create a more upscale image of the firm and its products. Kim moved Samsung’s advertising away from 55 different advertising agencies around the world and placed it with one firm, Madison Avenue’s Foote, Cone & Belding Worldwide, to create a consistent global brand image for its products. He also begun to pull Samsung out of big discount chains like Wei—Mart and Kmart and place more of its products into upscale specialty stores such as Best Buy and Circuit City. Pushing for New Products Yun took many steps to speed up Samsung’s new product development process. He was well aware that Samsung would be able to maintain its higher margins only as long as his firm could keep introducing new products into the market well ahead of its established rivals. Samsung man- agers who have worked for big competitors say they have to go through far fewer layers of bureaucracy than they had to in the past to win approval for new products, budgets, and marketing plans, and this speeds up their ability to seize opportunities. Apart from reducing the bureaucratic obstacles, Yun made heavy investments in key technologies ranging from semiconductors to LCD displays that could allow the firm to push out a wide variety of revolutionary digital prod- ucts. Samsung has continuously invested more than any of its rivals in research and development, with the amount rising during the past couple of years to almost 9 percent of its revenue. It has a large force of designers and engi- neers working in 17 research centers located throughout the world. (See Exhibit 5.) Yun also forced the firm’s own units to compete with outsiders in order to speed up the Exhibit 3 Revenue Breakdown (in trillions of Korean won, year-end December 31) Semiconductors Includes DRAMs, SRAIVIs & NAND flash chips Telecommunications Includes digital phones and handsets Digital media Includes plasma and projection displays and televisions LCD Includes panels for desktop and laptop computers Digital appliances Includes "intelligent" refrigerators, microwave ovens, air conditioners Source: Samsung. process of developing innovative new products. In the liquid-Ciystal-display business, Samsung bought half of its color filters from Sumitomo Chemical Company of Japan and sourced the other half internally, pitting the two teams against each other. “They really press these departments to compete,” said Sumitomo President Hiromasa Yonekura.5 As a result of these steps, Samsung claims that the time it takes to go from new product concept to rollout is now as little as five months, compared to over a year that it used to take the firm just eight years ago. In large part, this has resulted from the effort of the firm’s top managers, engineers, and designers, who work relentlessly in the five- story VIP center nestled amid the firm’s industrial complex in Suwon. They work day and night in the center, which includes dormitories and showers for brief rests, to work out any problems that may hold back a product launch. The progress made by teams that pursue new product designs in the VIP center makes it possible for Samsung to Profits 2007 22.3 2.3 2005 22.8 5.1 2005 20.3 5.4 7.8 23.8 2.8 2.0 2.5 3.1 2007 26.5 1.1 2006 20.7 0.7 2005 0.2 0.4 2007 2007 17.1 2.1 2005 13.9 0.8 2005 8.7 0.6 2004 7.8 1.9 2007 6.9 0.2 2005 5.5 —0.1 2005 5.6 —0.1 2004 5.4 0.1 reduce complexity in the early stages of the design cycle. This allows the firm to move its products quickly to man- ufacturing with minimal problems and at the lowest pos- sible cost. In turn, this can lead to a faster market launch of a product that is likely to be more innovative than all others. Kyunghan Jung, a senior manager of the center, explained: “Seventy to eighty percent of quality, cost and delivery time is determined in the initial stages of product deveIOpment.”6 Such an emphasis on early design issues allowed Samsung to figure out how the D600, one of its latest music—playing camera phones, could be assembled in as little as eight seconds. The speedier deveIOpment process has allowed Sam- sung to introduce the first voice-activated phones, handsets with MP3 players, and digital camera phones that send pho— tOS over global systems for mobile communications net- works. The firm has been just as fast in digital televisions, becoming the first to market projection TVs using new chips C124 Exhibit 4 Global Market Ranking, 2007 Product Category . Market Rank Memowchms 1 Computer monitors 1 LCDpands 1 LCD TVs 1 Plasma We 1 DVD—VCR combos 1 Projection TVs 2 DVD players 2 MP3 players 2 Laser printers 2 Mobile phones 2 Microwave ovens 3 Camcorders 4 Source: Samsung. Exhibit 5 Designers Employed 2005 2004 2002 2000 1998 Source: Samsung, from Texas Instruments that employ digital-light process- ing. DLP chips contain 1.3 million micromirrors that flip at high speeds to create a sharper picture. Texas Instruments had given Japanese companies the technology early in 1999, but they never figured out how to make the TV sets eco~ nomically. George Danko, Best Buy‘s senior vice president for consumer electronics, said of Samsung, “They’ll get a product to market a lot faster than their counterparts.”7 Designing for the Digital Home Yun was hoping that Samsung’s advances in digital technol- ogies would increase its chances of dominating the digital home. He believed that his firm was in a better position to benefit from the day that all home appliances from hand- held computers to intelligent refrigerators will be linked to one another and adapted to the personal needs of consumers. In particular, Samsung appears to be well placed to take advantage of its capabilities to design and manufacture a wide array of products that straddle traditional technology categories. “We have to combine computers, consumer elec- tronics and communications as Koreans mix their rice with vegetables and meats," said Dae Je Chin, the head of Sam- sung’s digital media division.8 Yuri worked closely with Chin to summon engineers and designers from across the firm to mix wireless, semiconduc- tor, and computer expertise in order to pursue its vision of domination of the digital home. One such product from the firm is NEXiO, a combined cell phone and handheld com- puter. The device has a 5-inch screen, large enough for a user to run a spreadsheet or to browse the Web. Another new offer- ing is a refrigerator called Zipel that has a 15-inch flat-panel touch screen tucked into the door. The display can be used to surf the Internet and to send or receive e-mail. In developing these products, Samsung has begun to place a lot of emphasis on the role of design in making its products irresistible in an increasingly competitive mar- ketplace. Since 2000, the firm has opened or expanded design centers in San Francisco, London, Tokyo, Los Angeles, and Shanghai. (See Exhibit 6.) Inside these cen- ters, designers observe the way that consumers actually use various products. They may watch, from behind a two-way mirror, how consumers stuff a refrigerator with bagfuls of groceries. Samsung has also begun to send its grow- ing group of designers to various locations to spend a few months at fashion houses, furniture designers, and cosmetic specialists to stay current with trends in other industries. Furthermore, Samsung created the post of chief design officer to make sure that designers can get their ideas to top managers. A successful rear-projection television was developed by a designer who pitched it to one of the heads of television production. Engineers are pushed to find ways to work with the designs that are presented to them. As a result of these efforts, Samsung has earned numerous cita- tions at top design contests in the United States, Europe, and Asia. After winning 46 awards at a recent US. con- sumer electronics show, D. J. Oh, CEO of Samsung Elec- tronics America, said, “Samsung strives to consistently lead the consumer electronics industry in product design and engineering innovation.”9 Samsung has been relying on the attractiveness of its products to make them the centerpieces of a digital home. It has been displaying its version of a networked home in Seoul’s Tower Palace apartment complex, where 2,400 families can operate appliances from washing machines to air conditioners by tapping on a wireless “Web pad” device, which doubles as a portable flat-screen TV. It may sound a bit futuristic, but when the digital home does become more realistic, Samsung will have a chance. “They’ve got the products, a growing reputation as the innovator, and production lines to back that up," said In—Stat/MDR consumer-electronics analyst Cindy Wolf”) Exhibit 5 Samsung Milestones 1959 1977 1981 Samsung introduces its first color television. on design. 1988 Samsung launches its first mobile phone. 1993 1994 1995 1996 1998 2000 2001 London. 2002 2004 2008 2009 Source: Samsung. Lee Yoon Woo takes over as CEO from Yun. Creating a Sustainable Model? In spite of all the improvements that Samsung has made over the last decade, the firm is expected to announce its first quarterly loss since its brush with bankruptcy. With the sharp decline in demand, prices for most of the firm’s products have been dropping, cutting into its profit mar— gins. The divisional restructuring and the management changes were designed to streamline operations at Sam- sung to better address the worsening economic conditions. Recently, the firm stated that it hopes to eliminate bureau- cracy and speed decision making at a time when flexibility is needed to deal with forces that threaten its existence. To find new avenues for growth, Samsung recently made an unsuccassful bid to acquire SanDisk Corporation. The offer marked the first time that the firm had attempted a major acquisition. Samsung has mostly relied on organic growth to gain its status as a leading electronics firm. But the acquisition of SanDisk could have helped Samsung to expand its business into storage cards and other products that use advanced flash chips. Given the failure to acquire SanDisk, Lee appears to be well aware of the challenges that lie ahead for Samsung. The life cycle of most electronics products can be bru- tally short, with prices tending to drop sharply over time. The profitability of a hardware firm rests on its ability to keep addressing new opportunities such as those offered by Microsoft’s launch of the new Windows Vista operating Samsung Electronics is established as a maker of televisions with technology borrowed from Sanyo. Samsung begins to focus on undercutting Japanese rivals with me-too products, with little emphasis Samsung beginsto reinvent the firm through design. Samsung hires design consultancy IDEU to help develop computer monitors. Samsung sets up its in-house design school, the Innovative Design Lab of Samsung. Yun Jong Yong takes over as CEO. He declares the "Year of Design Revolution," stressing that designers should lead in product planning. Asian financial crisis dents Samsung‘s ambitions,forcing it to cut design staff by 28%. Samsung once again focuses on design, and CEO Yun Jong Yong calls for design- led management. Yun initiates quarterly design meetings for top executives and opens design labs in Los Angeles and Samsung's "usability laboratory" is inaugurated in downtown Seoul. Market value of Samsung rises above $100 billion. Samsung is set to announce its first loss since 2009. The firm announces a maior reorganization. systems. At the same time, it must keep "seeking ways to reduce its costs in order to be competitive with lower- margin products. Samsung has consistently refused to consider branch- ing out like Sony or Apple into music. movies, and games. It has decided against such a move in spite of growing evi- dence that subscription-to-content can provide a firm with a more lucrative source of revenue. Instead, Yuri chose to collaborate With various content and software providers such as Microsoft and Time Warner. Lee understands that the future of Samsung lies in its ability to keep investing heavily in R&D and keep develop- ing new factories in locations that offer lower costs. Critics point out that Samsung is still searching for a product that would be comparable to Apple’s iPod or Sony‘s Walkman. But industry observers warn that the firm must not back off despite the current squeeze on profits. “It’s critical for Samsung that the new leadership keep investing in new technologies and equipment,” said Chang In Whan, chief executive at fund manager KTB Asset Management.11 Endnotes 1. Moon Ihlwan. Samsung Electronics: Same CEO, New Leadership Team. Business Week online, January 19, 2009. 2. Ibid. 3. Frank Gibney, Jr. Samsung Moves Upmarket. Time, March 25, 2002, p. 49. Cliff Edwards, Moon Ihlwan, and Pete Engardio. The Sam- sung Way. Business Week. June 16, 2003, p. 60. Peter Lewis. A Perpetual Crisis Machine. Fortune, Septem- ber 19, 2005, p. 65. Edwards, Hilwan, and Engardio. The Samsung Way, p. 61. Brad Stone. Samsqu in Bloom. Newsweek, July 15, 2002, p. 34. David Rocks and Moon Ihlwan. Samsung Design. Business- Wiaek, December 6, 2004, p. 90. 9. 10. 11. Anonymous. Samsung Electronics Gets 46 CES Innova- tions Awards for 2009. Mreless News, November 24, 2008. Jay Solomon. Seoul Survivors: Back from the Brink. Wall Street Journal, June 13, 2002, p. A1. Ihlwan. Samsung Electronics. Case 19:: Samsung Electronics C127 ...
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Case 19 Samsung electronics_2010-09-28 - Case 19 Samsung...

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