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kaskus-samsung - Samsung Electronics: a dramatic turnaround...

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Unformatted text preview: Samsung Electronics: a dramatic turnaround Samsung Electronics has become a global company living in accord with global standards. JEFFREY D. JONES, President of the American Chamber of Commerce in Korea We are living a nomadic life. We move on if other companies catch up. HWANG CHANG GYU, President of Samsung’s memory division (quoted in Business Week, 2003) Background The economic structure of South Korea was, and still is, similar in many ways to that of Japan. There was some deliberate imitation of the Japanese model. After all between 1910 and 1945 Korea was a colony of Japan. Japanese influence was, and still is, strong, despite the legacy of hostility from World War II. The zaibatsu or keiretsa organization of the Japanese economy was closely paralleled by the chaebol system of South Korea. In alliance with the chaebol, government institutions engaged in a significant degree of guidance planning. The conglomerates were largely responsible for South Korea’s impressive rate of growth between the 19603 and 1997. Reform of the chaebol system was considered neces- sary as a result of the 1997 crisis. What is it that has made reform necessary? What changes of environ- ment have turned a plus into a minus? Samsung was one of the leading chaebol. It was an enormous group, comprising 25 different companies and producing a wide range of products, catering mainly for the domestic market. In the area of elec- tronics Samsung was, in the pre-I997 world, by repu- tation a low-end maker of refrigerators and VCRs and similar products. It was an imitator rather than an ini- tiator. In this it also followed Japan and its pattern of development. Backward engineering allegedly allowed this copying. The competitiveness of products was based on low cost, which reflected the existence of cheap labour. The name of South Korea and its chaebol had almost no brand value, certainly not at the inter- national level. The strategy was very much one of cost or price leadership. Is the transition from a cost leadership strategy to a product differentiation strategy a natural part of eco- nomic development? The South Korean economy was badly affected by the Asian economic crisis of 1997. The South Korean cur- rency, the won, experienced a dramatic decline in value, as capital was withdrawn. However, its speed of descent in 1998 was more than matched by the speed of ascent in 2000. Recovery was speedy and dramatic. The four leading chaebol were all put under enormous pressure by the crisis. Daewoo, the weakest of them, nearly went bankrupt. Samsung responded extremely well, much better than the other two large chaebol, Hyundai and Lucky Goldstar. It developed a turnaround strategy which has left it much better placed in the world economy than previously, although it still carries a legacy of the old Korea Inc., notably in its top-down hier- archy and the rigid control by Chairman Lee Kun Hee and his family, although they own only a small fraction of the shares of the company. There still exists a complex web of affiliate holdings. The present case study is focused on Samsung Electronics rather than the whole chaebol. It leaves unanalysed the role of the chaebol and the perceived need for structural reform. Why have the chaebol responded so differently to the turnaround situation created by the 1997 crisis? The obvious strategic questions to ask are: how far did the chaebol suit a strategy which characterized rapid eco- nomic development in its early stages? How far have circumstances made the old structure out of date? Should the chaebol change both strategy and struc- ture to suit the new times? Samsung has reinvented itself as a breathtakingly innovative competitor seeking to ‘snatch Sony’s crown’ (Larkin, 2002: 36). It has set out to establish a reputa- tion for quality and innovative ability. In doing this it has sought to differentiate its products. The generic strategy adopted now stresses product differentiation as much as cost leadership. It has also focused on certain key markets, principally the largest and most demand- ing of all markets, the highly developed American market, and also on the fastest growing market, the Chinese market. It has emerged as a top three player in a host of product areas and as a top five receiver of patents on a worldwide basis. Samsung Electronics: a dramatic turnaround 755 Is Sony a good role model for Samsung to emulate? Changing the strategy In the depths of the 1997/8 crisis Samsung was losing millions of dollars every month. It emerged from the crisis with a mountain of debt. In 1997 debt reached an unsustainable $10.8 billion. Yet by 1999 the company was once more profitable. In 2000 the position improved further, with a net income of over US$5 billion. Since then it has flourished, with the level of profit sustained during recession and the debt level having fallen to just $1.4 billion. How was such a dramatic turnaround achieved in such a short time? Until 1997 Samsung, as other chaebol, was hierarchical in structure and deferential in the corporate culture inculcated in its staff. In 1997 Yun Jong Yong became the CEO. He had the advantage of speaking fluent Japanese and significant Japanese work experience. There was a pronounced change of leadership and lead- ership style. He turned the group into what amounted to Korea’s first great global company. How far is one person responsible for the choice of strategy and the successful implementation of that strategy? Initially Yun Jong Yong dispensed the traditional painful medicine, a 30% cut in costs in five months. Overall the company shed 30,000 of its 70,000 workforce. It also shed a number of non-core units. However, the turn- around required rather more than this, nothing short of a profound change of attitude, in particular an increased stress on performance, achieved through an emphasis on creativity and open-mindedness. Yun’s greatest achievement was to change the corporate culture, although yielding nothing in the exercise of decisive leadership. How far is it possible for one man to change the cul- ture of a company? How is it possible to reconcile the exercise of leadership with a culture which empowers staff to innovate? The company has thoroughly internationalized itself. The group began to hire American-educated staff or those with significant experience in the USA. Three non- South Koreans become members of the board of direc- tors. Two of the three possible heirs to Yun Jong Yong could speak English. Foreigners owned 60% of the shares of the group, including significant ownership by companies such as Apple. The company now generates 70% of its revenues outside South Korea, manufacturing in 14 different countries, including China and Mexico. Why is internationalization so important to a company like Samsung? In 1999 Eric Kim, a very experienced marketing director, who also had significant early experience in Japan and later in the USA, was attracted to the company. He set out his main strategic objective immediately: ‘Samsung is going to be the first Korean company to create a truly global brand’ (Solomon, 2002: A1). This became the driving force of Samsung’s strategy. Is a stress on marketing a critical part of the turn- around strategy? The new strategy The strategy which was ad0pted in the recovery is dis- tinctive, partly because it differs significantly from that of its main competitors (see the Sony case study in Chapter 18). The strategy has been focused on five main aspects: 0 Hardware, rather than software, despite the general belief that profit margins are wider and lead times longer in the latter. The company believes it is much better off buying the software rather than the hardware from outside. In this emphasis, Samsung is different from its main competitor Sony. The strategy does lay it open to a problem of getting the software needed. 0 Vertical integration, producing rather than buying the chips and display screens required for its consumer elec- tronics. This has meant that it has invested vast sums in investment in new productive facilities and has had to maintain a wider range of competencies than other companies operating in its markets. For example, over the last five years Samsung has put over $19 billion into new chip facilities, which are getting more expensive and more competitive. 0 A so-called ‘nomadic’ strategy. On the hardware side prices are falling relentlessly and the life cycle of prod- ucts is short. However, something like 90% of the cost of most digital devices are accounted for by the chips and displays. Getting the cheapest but best-practice inputs is important. Samsung believes it can outcom- pete others through a nomadic strategic, that is, a strategy wherein it moves on when the area becomes overpopulated. A stress on technical advance allows it to do this. A stream of improvements and innovations will support such a strategy. 0 Product dijferentiation, aiming to increase prices and profit margins by going upmarket, selling high-quality 756 Strategic Analysis and Audit products and gaining a reputation for doing this. It has not only put an emphasis on new technology but also on design. It needs a strategy of successful disruptive innov- ation, a stream of new and exciting products. CEO Yun has decreed that Samsung will sell only high-end goods, so it is investing an enormous amount in research in order to place it at the cutting edge of best practice. This applies not only to final consumer products, but to the necessary inputs. By going upmarket Samsung is able to ride the recession better than its competitors. For example, in 2002 Samsung sold more memory chips than Micron Technology, Hynix Semiconductor and Infineon Technologies combined, each of which made a loss. Samsung’s memory-chip business produced as much as US$2 billion in profit. Samsung has succeeded by avoiding the mass market and going for niches that command higher prices and larger profit margins. Something like 70% of profits comes from specialty products: graphics chips for game consoles, high- density memory modules for powerful servers and flash memory chips for hand-held computers, mobile phones and camcorders. Whereas Samsung gets two-thirds of its memory business from DRAM, its competitors get as much as 90%. Diversity has helped Samsung in difficult times. By 2006 it is hoping to get half of its memory business from flash chips, sales of which have been growing rapidly. There was a deliberate attempt to upgrade the general image of Samsung, particularly in the USA. In this Sony was used as the benchmark model. In the words of Idei, Sony’s CEO, Samsung ‘found Sony a model or a bench- mark of their brand image’. Sony sees Samsung rather as a supplier, from whom it can purchase semiconduc- tors or display units, rather than as a threat or a com- petitor. This view seems to be a mistaken one, and represents a basic misunderstanding of what Samsung is trying to do. 0 A ‘digital-convergence strategy’, which again is similar to the goal of Sony and other operators in the area of electronic products. It appears that Samsung may win the race. How coherent is this strategy? How risky is this strategy? What are the sources of incoherence or risk? Realizing the strategy The first step in the rebranding of Samsung Electronics was to reduce the 55 advertising agencies working for Samsung to just one. Samsung signed a $400 million contract with a Madison Avenue firm, Foote, Cone & Belding Worldwide, whose task was to create a global brand image for Samsung Electronics. An expensive marketing campaign was undertaken, the cost of which in 2002 was $450 million. The aim was to take Samsung upmarket, rebrand it as a maker of stylish best-practice products. Samsung pulled out of the cheap distribution outlets, such as Wal-Mart and Target, and moved upmarket to chains such as Best Buy and Circuit City. Why is it important to have just one company control- ling all the aspects of brand creation? At the same time there was a move to effect a partner- ship with American technology, or the main purveyors of American technology. At the beginning of 1997 Samsung had almost no presence in mobile phones outside South Korea, but later that year Samsung won an order for 1.8 million handsets worth $600 million from Sprint PCS Group, an order which most might have expected to go to Nokia or Ericsson. The service was based on the CDMA standard in which Samsung had an early lead due to a strategic alliance with Qualcomm Inc. Not only did Samsung complete the order but it did it in 18 months, half the contracted time. Its silver, clamshell- shaped model the SCH-3500 was an instant hit and Samsung became world leader in CDMA technology. As a consequence the partnership with Sprint has grown, involving the new 3G Sprint wireless system. Samsung now has a reputation for high-end mobile handsets. It is growing in importance as a supplier in this industry. This example showed a happy knack of making the right partnerships. How far can Samsung's success be explained by its strategic alliances? Are such alliances more a matter of good timing in finding a helping hand rather than one of a continuing partnership? How important are they likely to be in the future? Three years ago Samsung had no significant retail pres- ence in the USA. It has changed that by forging new partnerships, like those with Best Buy, Radio Shack and Circuit City. In these stores there are often lavish dis- plays highlighting Samsung’s products. In 2001 it sold $500 million worth of products, and targeted sales of $1 billion for 2002. The best sellers are its DVD/VCR players and the mobile phone, which also serves as a PDA. Since 1999 Samsung’s total sales in the USA have doubled to $2.8 billion. Mobile phones have more than doubled the revenue generated, to over $1 billion, DVD players quadrupled to $129 million. Why is it important to establish a position in the American market? The company has succeeded in upgrading the brand name of Samsung very well. Samsung, for example, became a regular and reliable supplier to the main computer companies in the USA, supplying digital com- ponents to Dell and forming a $US16 billion R&D partner- Samsung Electronics: a dramatic turnaround 757 ship with that company, supplying set-top boxes to AOL Time Warner, digital products to Microsoft and compo- nents to both the giants, IBM and Hewlett-Packard/ Compaq. These links have helped Samsung stay at the frontier of best-practice technology. The key to success has been design. Samsung sought to rank alongside Sony and Motorola as premier brands, not to outcompete them by undercutting them through price. Its technology and design have been excellent. Over the past few years only Apple has won as many design awards as Samsung. Even with the TVs and the DVDs it has deliberately moved upmarket. As early as 1996, but accelerated by the crisis of 1997, it has aimed to differentiate its products on the basis of design. There are 300 talented designers in Seoul and four design bureaus in the USA, Europe and Japan. The emphasis has been on style, best practice, simplicity and a quick response to market changes. Why is design so important to a company like Samsung? Samsung Electronics is the most dynamic part of Samsung. While it generates only a quarter of total revenue, it accounts for three-quarters of net income. In 2001 net profit was W2.95 trillion, on a total revenue of W324 trillion. In US dollars the profit is 2.41 billion, an impressive figure by any standards. The capitalization of Samsung is now, at US$48 billion, just below that of Sony at US$52 billion, poised to overtake it. Would Samsung Electronics be better off on its own, without the other parts of the chaebol? In the restructuring of the late I990s three strategic business units were created within Samsung Electronics — digital media, telecommunications and semiconductors (memory chips), to go alongside the domestic or digital appliances which were the tradi- tional area of sales, but one which had a poor profit potential, if the standard products with low profit margins were considered. The biggest advance was in the first business unit, which now stands alongside handsets and semiconductors for sales, but not yet for profits. Tables C.3 and C4 show the relative proportions of sales and profits. Is this product structure a suitable one for Samsung? The home market of South Korea gives Samsung an advantage in a number of the product areas in which it operates. It is a good test market for new products. Fifty- six per cent of South Koreans have mobile phones. Typi- cally they upgrade their phones about every eight months. This creates a market for the most up-to-date products. More than 70% are already broadband sub- scribers, way above comparable figures in developed countries. Samsung has also participated in an early 3G project which allows users to download and view up to 30 minutes of video and watch live TV. Is it important to have a sophisticated and technology- sensitive domestic market? If so, in what ways? One result was a combined mobile phone and hand-held computer, the NEXIO (Next Generation Internet Office), which was in direct competition with Nokia’s Commu- nicator. It has produced a sophisticated refrigerator with a screen on the door and potential connections with other devices. It has also perfected new digital and plasma TVs. It continues to produce less expensive and more conventional products, such as the i330 or i500 Smart phones, in partnership with Sprint. Samsung in China During the mid-I990s many South Korean companies entered China. Samsung was one of them, incurring, like the others, huge losses. The crisis of 1997 led to a change of policy, even in China. Every individual factory was now required to break even. Attention was concen- trated on the ten main cities. Within a short period the situation changed dramatically Overall sales grew by more than five times between 1998 and 2001. The goal was to push them up even further, from US$I .8 billion in 2001 to US$7 billion by 2005. In 1998 Samsung was still 758 Strategic Analysis and Audit making a loss in China, but by 2001 this had been turned into a profit of more than $200 million, and an increase of 160% in 2002. China has enormous potential for a company such as Samsung. Why was it so important for Samsung to be in China? Why have so many companies failed initially to make a profit in China? China neatly illustrates the attempt by Samsung to stress quality rather than quantity. Even in China the strategy was a differentiation strategy, based on the attempt to establish a reputation for high quality. Many of the sales in China were still of the conventional elec- trical products, such as home appliances like washing machines or refrigerators. Often these were produced in China by joint ventures involving a Chinese partner. Yet Samsung still wanted to go upmarket. It believed that there was a growing middle class in China with rapidly increasing purchasing power and extremely willing to buy higher quality products. The market was becoming segmented and Samsung was happy to encourage this process of segmentation. What is the best mode of entry into China by Samsung? Does the likely size of the market for high- quality white goods justify the Samsung strategy? There are two examples which show this strategy at work: 0 The first involved a plant producing washing machines in Suzhou which in 1998 had lost over US$2 million. Instead of reacting to competition by reducing prices or trying to slash costs, in 2000 Samsung began to produce a stylish but rather pricey alternative model. Within a short time the plant was profitable and annual sales rose from 32,000 to 170,000, showing that Samsung’s reading of the market was quite correct. 0 The second involved the mobile phone. Samsung sold models in China which were not cheap by Chinese stan- dards: the A-288 of which it managed to sell 300,000, the N-628 and even the NEXIO, whose starting price was as high as US$800. Every few months Samsung introduced a new model. By this strategy it managed to capture 8% of the mobile phone market. One of the secrets of success was a good distribution system, which was made possible by the high profit margins. Samsung is aiming to put in place a range of global brands which impress by their advanced technology and design. In 2003 the Global Digital Tour, an extrava- gant exhibition of Samsung’s products in the USA, has four stops, the first at the Guggenheim Museum in New York. It is the American market which is the key to increasing the brand value. On one valuation it has more than doubled since 1999, to US$8.3 billion. Samsung is rapidly acquiring a brand name based on the quality of its products. How does having a valuable brand name help a company like Samsung? What mechanisms are there for using this brand name? How quickly can a brand name be won? Today Samsung is the world’s largest producer of memory chips and flat-panel monitors, number two in DVD players, number three in mobile phones, well behind Nokia but catching up on Ericsson. It is most def- initely by reputation a high-end maker of mobile phone handsets, DVD and MP3 players, and digital television sets. It has emerged as a leader in the linking of wireless technologies with gadgets ranging from PDAs to refrig- erators. From virtually nowhere a decade ago Samsung has moved into a prominent position in a whole range of areas in the new economy. This reflects success in using the technical advances made by Samsung and applying them to its own products. Table C.5 Products in which Samsung now holds number one spot in the world Market share (%) Other players DRAM (dynamic RAM) 32 Micron 19%, Hynix 13%, Infineon 12% SRAM (static RAM) 27 Flash memory 14 Intel 27% CDMA mobile handsets 26 All mobile phones 10 Nokia 36%, Motorola 15% TFT—LCDS 18 LG Philips 17%, AU Optronics 12%, Sharp 9% Computer monitors 22 Big-screen TVs 32 Sony 25%, Mitsubishi 25%, Hitachi 11% VCRS 17 DVD players 11 Toshiba 15%, Sony 14% MP3 players 13 Sonicblue 18%, Apple 17% Microwave ovens 25 LG 22%, Galanz 19% Table C.5 shows how Samsung is well placed in a number of advanced areas — from semiconductor chips to screens for TVs and computers, from microwave ovens, mobile handsets to MP3 or DVD players. Samsung is definitely prepared to take a bet on the pattern of future demand. It is assuming that there is a Samsung Electronics: a dramatic turnaround large potential demand for thin-screened television and computer screens. It believes such televisions may be the next ‘must-have’ appliance. Samsung is already number one in the ultra-thin screens used in most high- tech computers and televisions. It intends to reinforce this lead and has announced a W20 trillion (US$16.75 billion) programme through to 2010 to build a flat- panel, liquid-crystal display production complex in Asan north of Seoul, which by 2005 will have monthly Key strategic issues 759 capacity of two million units. By that stage it is highly likely that the cost and the price of production of such display screens will have fallen under the twin influ- ences of significant economies of scale and increased competition. Samsung wishes to derive first-mover advantage from being ahead of the field, using best- practice technology which it has developed itself. It has another such plant under consideration if demand war- rants its construction. In many ways Samsung is trying to repeat the success of Sony in generating a whole range of disruptive innovations in the period up to the 19805. It is trying to retain the emphasis on hardware and technology. Can this be done in the changed conditions of the current business context? Can it be done at the new Strategic analysis and audit level of technology? ls Samsung trying to do too much in vertically integrating and producing itself many of the basic inputs in the digital world of communi- cation, despite the high cost of R&D and investment in manufacturing? Is the strategy of going upmarket likely to stave off the impact of commoditization? Carry out a full strategic audit on Samsung Electron- ics. In particular compare the financial performance of Samsung with that of Sony and relate this to the Reading Edwards, C., Moon, I. and Engardio, P., ‘The Samsung way’, Business Week, June 16, 2003: 56. Hwang Chang Gyu, President, Memory Division, Samsung Electronics, South Korea, Business Week, no. 3836, June 9, 2003: 48. Larkin, ]., ‘Samsung tries to snatch Sony’s crown’, Far Eastern Economic Review, December 10, 2001: 36—43. Marketing Magazine, ‘Samsung’s fairytale’, 108(23) June 16, 2003: 22. difference in strategies adopted. How has this finan- cial performance changed recently? Moon, 1., ‘The secrets of Samsung’s success’, Business Week, no. 3816, January 20, 2003: 70. Wall Street Journal (Eastern edn), ‘Business brief: Samsung Electronics Company’, June 12, 2003: 1. Ward, A., ‘Samsung invests $17bn in flat screens', Financial Times, June 12, 2003: 29. Ward, A., Nakamoto, M. and Hille, K., ‘Gambling on flat screen revolution’, Financial Times, June 14/ 15, 2003: 14. www.5amsung.com ...
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kaskus-samsung - Samsung Electronics: a dramatic turnaround...

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