Samsung Electronics

Sean West, Swetha Vasu, Sarah Love, Matt West & Sammy Stalcup
2:00 Section. Group G7

Introduction:
Samsung Electronics is a global company that delivers a wide range of electronic hardware
components and consumer products. Historically, the core competence of Samsung has been to
provide cutting-edge technology as well as mastering manufacturing through vertical integration.
Samsung first produced semi-conductors in 1974 and first developed 64Kb DRAM in 1983. In
1996, Samsung entered the global market and launched its first phone. Currently, its market
capitalization is currently over $173bn. Samsung has four primary divisions: Semi-conductors,
Display Panel, Consumer Electronics, and IT & Mobile communications; however, IT & Mobile
Communications is responsible for 69% of the companies operating profits (Exhibit A).
Smartphones specifically have increasingly become a focus of Samsungs product lines.
Key Issues:
In light of Samsung Electronics history and current market positions, we analyze four key issues
to consider for the strategic future of the company:
1. Where can Samsung win against Apple in the high-end smartphone industry? The release
of the iPhone 6 this past fall has contributed to a significant decrease in Samsungs global
market share (Exhibit B). Samsung continues to hold the largest global market share for
smartphones but might need reconsider its approach to the market.
2. How does Samsung beat cheap manufacturers in emerging markets like India or China?
Can they sustainably provide low cost and high quality solutions to these markets?
Through significantly lower prices, localized manufacturers such as Xiaomi have
increased the fierce competition in the global smartphone market.
3. How can Samsung strategically lower its operating expenses and become more focused
internally? Samsung currently offers a myriad of phone models as well as a variety of
product offerings.
4. How can Samsung diversify its revenue stream beyond the smartphone? What markets
should Samsung target for the future? For example, Samsungs core competence of
mastering manufacturing and cutting edge technology could be more fully applied to
products serving the aging baby boomer demographic.
External Analysis
Samsung competes in the highly competitive smartphone industry. The competition is driven by
a short product lifecycle, continual performance enhancements and the rapid adoption of
advancements by competitors. The level of competition in the low-price smartphone market is
expected to increase as new entrants like Xiaomi push industry leaders to undertake new and
drastic pricing measures. Smartphones have the highest near-term purchase intent among all
portable devices, and industry experts expect that smartphones will increasingly replace other

connected devices especially in emerging markets.1 Not surprisingly, overall demand for
smartphones is expected to increase substantially in the next five years; shipments were up 40%
in 2013, totaling units worth $266bn.2 In this large market, Samsung currently has the largest
global market share for smartphones despite significant decrease between the third and fourth
quarter of this year (Exhibit B).
This expected market growth further drives competition among both industry leaders and new
entrants. From a purchasing perspective, the smartphone product can be broken down into three
parts: hardware, software (operating system) and brand. With regards to hardware, the
smartphone has increasingly become a homogenous good; the product design has converged to
sleek, metallic rectangles of varying size. Similarly, smartphone features (camera, GPS, touch
screen, motion sensor) are diluted across manufacturers. The development of new and innovative
features is largely stalled. However, the operating system continues to be an important factor for
product differentiation. Building a proprietary operating system is the largest barrier to entry for
the high-end market. The market leader Apples iOS is easy to use and customizable to user
needs. Further, iOS is highly compatible with most popular mobile applications. Competitor
Microsofts operating system is slick and well-regarded. Conversely, Samsung struggled to build
its own propriety system, Tizen, which finally debuted in June 2014. Samsung has yet to produce
a phone that operates with Tizen, opting instead to rely on a strategic partnership with Google
and its Android operating system. Utilizing a non-proprietary operating system substantially cuts
into a manufacturers profit margins.3
The third component of the smartphone product, brand, is both remarkably important and
difficult to quantify and predict. The strength of the brand has a large impact on pricing, and
consumer loyalty to a particular brand can increase switching costs. In the case of Apple, the
strong brand equity convinces consumers to pay a premium and use multiple products to create a
personal ecosystem of Apple hardware, software and content.4 With regards to the high-end
market, Samsung has never been able to persuade users that its brand is as desirable as Apples,
despite huge levels of spending on marketing and advertising.5 Further, Samsungs recent
decision to pursue the low-end market may have an adverse effect on its brand equity as it
appeals to luxury consumers.
1 Financial and Strategic SWOT Analysis Review. Global Data. www.globalcompanyintelligence.com.
December 2014.
2 Chilkoti, Avantika. The future of smartphones is in EM: Gartner. Financial Times. December 10,
2014.
3 Jung-a, Song. Samsung crown prince Lee Jae-yong poised to make mark. Financial Times.
November 30, 2014.
4 Mundy, Simon. Fresh urgency for Samsung reinvention drive. Financial Times. January 27, 2014.
5 Pilling, David. How the smart went out of the Samsung phone. Financial Times. November 26, 2014.

Samsungs decision to pivot its focus is largely due to the fact that industry analysts view the
high-end premium market as saturated. The next battleground for market share will be emerging
markets, specifically those in Asia. Targeting emerging markets requires manufacturers to
innovate downwards, producing low-cost phones for diverse and and price-sensitive consumers.
New entrants, Chinese competitors Huawei, Lenovo and Xiaomi, have rapidly gained market
share through reduced pricing. The pricing of Xiaomi phones in China undercut both Apple and
Samsung options by half. Still, industry giants like Apple and Samsung have a notable
comparative advantage when it comes to large-scale manufacturing. Samsung comfortably
remains the volume leader, having shipped 79.2M smartphones in Q3.6 Both Samsung and Apple
enjoy economies of scale with regards to manufacturing, producing high quality goods
efficiently. While Samsung exercises a significant amount of control over its supply chain, Apple
is a coveted client for most vendors, who adjust their capacity and operations at Apples
discretion. This level of control vastly reduces the bargaining power of suppliers for both Apple
and Samsung.
The future of the smartphone industry is largely speculative. In emerging markets, it is expected
that smartphones will come to replace most other personal, connected devices. In high-end
markets, industry analysts predict an uptick in purchases of wearables, the fastest growing
element in the internet of things. Analysts also anticipate a rise in demand for phablets, a
combination of phone and tablets. Finally, the smartphone industry is highly litigious with
regards to patent infringement, and that presents an added risk to firms who compete for market
share. In 2012, a jury awarded Apple a $1.049bn settlement from Samsung for patent
infringement on features like scrolling and zooming.7 The case is still under appeal.
Ultimately, while the global smartphone market is complex, fiercely competitive and challenging
(Exhibit C), Samsungs industry position and core competencies could position the company to
take advantage opportunities inherent to a market of that size.
Internal Analysis
Samsungs core strengths include its superior technology, efficient manufacturing, global brand
innovative leadership and competence in new market entry. While their superior technology and
efficient manufacturing are valuable short term advantages, their brand, leadership in innovation
and competence in new market entry will drive the most value for them in the long term. While
their technology might be currently superior and they do have efficient manufacturing, these
advantages are very fluid in the competitive electronics market. Their competitors can imitate or
substitute other technology and develop their own competence in manufacturing, and these
strengths are almost prerequisites for playing in competitive electronics rather than a recipe for
long term advantage.
6 Mundy, Simon. Samsung to shift focus as handset profit collapses. Financial Times. October 30, 2014.

7 Gallagher, Billy. Apple Awarded $1.049 Billion In Damages As Jury Finds Samsung
Infringed On Design And Software Patents. TechCrunch. August 24, 2012.

In order to maintain market share in the highly competitive smartphone market, Samsung needs
to leverage their brand, maintain leadership in innovation (both as fast followers and innovators
in their own right) and be prepare to leverage their most valuable strength to achieve dominance
in new markets. Specifically, we see Samsung is perfectly equipped to launch into the internet
of things market for interconnected smart devices of all kinds, and the market for high end life
care equipment. Both of these markets are growing very rapidly and require a company with
strength in innovation, a trusted brand and competence in bringing value to a new market starting
to define itself. We see Samsung as a perfect fit, as these are its strongest VRIN resources
(Exhibit D).
Financials
Samsung has a very strong balance sheet with significant cash reserves and a debt to equity ratio
of .41. Samsung has a very strong balance sheet with significant cash reserves and a debt to
equity ratio of .41. The revenue of the company had consistently grown over the past fifteen
years, but has fallen this year and is anticipated to have a negative growth rate this year. While
Apples revenue growth has decreased in the past two years as well, the comparative drop for
Samsung is more significant and is causing many to call for a change in the Samsungs product
strategy (Exhibit E & F). While Samsungs EBITDA percent margins have generally trended
positively since 2008, the EBIDTA percent margin has similarly dropped in 2014. Furthermore,
Apple achieves an EBIDTA percent margin 11.8% percent higher than Samsung (Exhibit G).
While this margin could be explained through Samsungs integrated manufacturing as well as the
scale and size of Samsungs global reach, this significant difference should be explored and
lowered. Despite the recent drop in financial performance, Samsung still has a deep balance
sheet; Samsung should utilize their financial health as well as their VRIN competence of
successfully enter new markets to explore markets outside of the fiercely competitive mobile
industry.
Business level strategy
Smartphones
Samsung has for long played on the lines of product bifurcation, offering both premium and low
cost phones. Its business strategy focusses on the shotgun approach of releasing many versions
of the smartphone and testing the success of these models in various markets. This approach is in
contrast to its competitor Apples approach of targeting the premium smartphone segment
with lesser variety in models. This strategy has had mixed success at best in the competition
against Apple (in the premium product segment) in terms of product design, innovation and
brand loyalty. In light of Samsungs domestic brand position in relation to Apple (Exhibit H),
Samsung will be challenged in winning the high cost value proposition with customers. Instead,
Samsung should employ a differentiation strategy of high quality at lower cost while offering
fewer product models, limiting this shotgun approach. Samsung could then leverage its
vertically integrated manufacturing competencies to gain more operational efficiencies through
more focused offerings. With these strategies in mind, Samsung could offer high quality phones
at a lower price point than Apple while maintaining and even increasing profit margins through
these efficiencies.

Samsungs relationship with the internet search giant Google has been problematic. Samsung
added its own layer to Googles Android operating system as a differentiating factor in its
smartphone models. These models were well received in the global markets that resulted in
Google being threatened by Samsungs market presence. However, this did not last for long as
the Android operating system started gaining tremendous popularity globally. Despite this
popularity, Samsung should be careful about its dependence on the Android system because the
use of the Android system cuts into the profits of its smartphone line, especially for the low cost
global units. Samsung has worked on developing its own operating system, Tizen, in order to
reduce the dependency on Google; this system currently lacks the sophistication that high-end
mobile users expect but could offer promise for the low-cost segments in global markets such as
India and China. For their high end mobile products, the Android brand will continue to be a key
part of the value proposition to consumers.
Product differentiation on the basis of cost leadership could be a key factor in tackling the
government moves and changing preferences of Chinese consumers. Since Samsung has the
expertise to produce high quality phones for lower costs, Samsung could focus more on
producing cost effective phones rather than the premium phones in countries like China.
Additionally, in order to differentiate itself from the Chinese vendors, Samsung could rely on
innovation to come up with a product that provides better services (over existing Chinese
models) at low prices. Thus, Samsung could offer mobile products at a slightly higher price point
but of much higher quality. China being a huge economy could bear long term benefits for this
company if the market is targeted effectively.
Internet of Things
Samsung has created a unique ecosystem that supports product innovation in complementary
products such as TVs, refrigerators, speakers, and other lifestyle products. Samsung should
pursue these complementary products with greater focus, utilizing its competitive competencies
integrate these cutting edge products in this new market the internet of things. As the next
big thing in the technology sector, the internet of things should be Samsungs focus instead of
engaging in direct product-to-product war with Apple that already has a focused and loyal target
customer base.
Corporate-Level Strategy
Samsungs corporate strategy has relied on the idea of being a fast follower. Over the years,
they have been able to be second (or later) movers in a tech space, and copy the original product
in a cheaper, more innovative way. Samsung has leveraged a ubiquitous set of corporate
activities (Exhibit I), such as building a global brand and cutting edge hardware technology, to
capture the largest market share of the smartphone market. However, Samsungs future corporate
strategies, including the core activities, hinge on the succession of leadership from Lee Kun-hee
to his son, Lee Jae-yong. Under Lee Kun-hee, Samsung has become a very complicated
conglomerate, and many of its most profitable business units are using precious resources bailing
out the others that are struggling.8 To remedy this issue, Samsung should consider divesting or
8 http://www.ft.com/intl/cms/s/0/e04d2684-7698-11e4-a70400144feabdc0.html#axzz3LcFgWGoq

dissolving less profitable units to lower these higher operational expenses so that the company
will run leaner, therefore becoming more flexible to the change needed in its flagship unit,
Samsung Electronics.
One of the biggest issues facing Samsung today is that they are being beaten at their own
strategy in the global market, specifically China. The Chinese company Xiaomi has been able to
take similar consumer electronic devices, including mobile, and market them at a much cheaper
price point. One of the ironies in this situation is that Xiaomi uses quite a few Samsung
components in their devices.9 One of the possible judo strategies for Samsung to execute in the
future would be to increase its grip on its opponents. It is no secret that Samsung is a device
company, and other companies (including competitors) come to it for high quality products. By
offering more hardware to competitors, Samsung will be able to cut into profit margins and
increase leverage in the high tech hardware space.
In conjunction with the mobile market, Samsung appears to be entering in the home automation,
or internet of things, healthcare, and software markets. First, with its recent acquisition of
Smart Things (home automation) and Quietside (smart A/C), Samsung will leverage its strengths
of cutting edge innovation and hardware technology to build a network of smart devices in the
home. This will create additional value because these products can be used together to make the
shift to home automation easier. SmartThings focuses on delivering high end technology at a low
cost, all while being easy to use. These qualities fit in with what Samsung is already doing across
its other resources. Second, in the healthcare market, Samsung has purchased companies like
NeuroLogica, which offers innovative portable CT scanners. We believe that this is a value add
as well because this device and technology can easily be integrated in Samsungs already robust
healthcare device portfolio. Third, a dependent relationship with Google does not seem to be
sustainable across all segments of the hardware/software mobile market, especially in emerging
global markets. By relying on Google for all software needs, they become vulnerable to changes
or power struggles. To increase leverage, Samsung could consider some sort of exclusivity
agreement, or it could start the development of its own software for certain products. Through
acquisitions like NVELO, Samsung has brought in the expertise to develop a new software
platform, Tizen. This software is developed to not only run on mobile phones, but throughout the
internet of things. It is yet to be seen whether this will add value the overall structure, mainly
because up until recently, Samsung has been exclusively a hardware company. Important factors
like the launch of the Tizen driven Z1 phone in India. The success of that launch will likely
determine the overall value to the decision to enter into the software space.
We also believe that its investment in healthcare may pay off in the future if it can move quickly
in the consumer health market. There appears to be a growing demand for personal health
devices that can do the job of machines that would normally be expensive of located in a
healthcare facility. One example could be a smart A1C meter. By leveraging Samsungs
expertise in the healthcare device and mobile markets, it will have the ability to add increased
value by creating a meter that can sync to any Samsung device. This signal could alert the need
to fill prescriptions, replenish foods suggested to keep blood sugar under control, etc. We believe
9 http://www.mi.com/en/mitv#features

that this is a very important move for Samsung because of the aging population in both in the US
and in China. The need for smart medical devices is on the rise, and Samsung is in a unique
position to add significant value to its company strategy.
All of the above examples are something that Samsung appears to be entertaining. It is important
that Samsung improve on these concepts and move fast in the spaces to increase market share.
To accomplish this growth, Samsung runs a division called the Samsung Open Innovation
Center. This is a space where immerging technologies can innovate and grow under the direction
and support of the overall Samsung brand. Using these resources, it appears Samsung can
increase future corporate value and increase market share in present and developing markets.
Overall strategy
As a massive global competitor with a diverse set of product offerings, Samsung uses a number
of different strategies. Samsungs integrated manufacturing, innovative leadership and global
reach, and cutting-edge technologies allow the company to use a strategy as position for certain
stable markets such as semiconductors and display systems. In other markets, Samsung utilizes
its VRIN resources to deploy into attractive markets such as the internet of things and the
growing healthcare market as well as to continue to be competitive in the mobile industry.
Recommendations
Based on our analysis, we recommend the following:

Samsung can compete against Apple in the high-end smartphone industry through
providing high quality product lines but at lower price points than Apple, aligning their
offerings more closely with their brand position. In this differentiated market position,
Samsung can create a niche for itself for consumers looking for a high quality
smartphone experience without the price tag of Apples products. Allowing marketing to
drive product design and build more successes like the Note series must be a priority.

Samsung can win against cheap manufacturers in markets like India or China through
slightly higher cost solutions with significantly higher quality products. Once again,
Samsung can selectively reduce the features of the low-cost mobile product offerings but
leverage its core competencies of manufacturing mastery and cutting edge-technology to
still offer products of substantive quality. This, combined with reducing the overall
number of phone models, will add operational competencies and allow them to
significantly reduce waste, product obsolescence cost and costly inventories.

Samsung should channel its VRIN resources of integrated manufacturing, innovative

leadership, global reach, and ability to master cutting-edge technologies to become a cost
leader in its current markets as well as the new markets it chooses to enter. Given its new
market entry competence, Samsung should move beyond its dependence on the
smartphone by entering markets such as the internet of things, healthcare, and software.
This diversified and effective strategy could allow Samsung to not be so dependent on the
challenging smart phone market. In light of its healthy financial position, Samsung can
continue to invest heavily in R&D but must be selective in its investments and

simultaneously seek streamlined product lines, guided by better market research. By

avoiding the shotgun approach, Samsung can more efficiently enter these new markets
while striving to maintain its bottom line.

Appendix
Exhibit A:

Operating Profit By Division (2014 Q1 & Q2)

32%
Semiconducters

Display Panel

62%

Consumer Electronics

1%
5%

IT & M obile communications

Exhibit B: Global market share of smartphone vendors (% of shipments)

Global market share of smartphone vendors (% of shipments)

49%
50.00%

43.20%

45.00%
40.00%
35.00%
30.00%

32.50%

24%

25.00%
20.00%

12.90%
12%

15.00%

5%

10.00%

2.10%

5.00%
0.00%

Samsung

Apple

Xiaomi
Q3 (2014)

4.70%5%

4.60%5%

Lenovo

LG

Q4 (2014)

Others

Exhibit C:

Threat of New Entrants

Bargaining Power of Suppliers

Threat of Substitutes

Competitors

Bargaining Power of Buyers

Porter's Five Forces - Smartphone Industry

Entry into the smartphone market requires proprietary knowledge (operating
system) and large amounts of capital. Further, the smartphone industry is very
regulated and mired by patent litigation. The market leader, Apple, has strong brand
High
equity. However, new entrants like Xiaomi, Huawei, Lenovo and LTE have gained
market share quickly through the promotion of low-cost options. Former industry
giants like Nokia and Motorola have been driven out.
Market leader Apple, a coveted client for suppliers, changes vendors often and is
able to pressure them to expand operations to meet demand. As the lead
Low
manufacturer, Samsung controls the component supply chain and has the ability to
cut production costs.
Smartphones have become a largely homogenous product, and cost has become the
most important differentiator. Many products offer similar features, as development
Medium
of new features has largely stalled. Switching costs for consumers can be high, and
brand loyalty can be an additional barrier. Industry may be moving towards
wearables and "phablets" - a combination of a phone and a tablet.
High

There is increased competition among smartphone manufacturers due to the

expected growth of the market. The next wave of growth will come from emerging
markets; new consumer preferences in those regions for low-cost options may cut
into revenue growth.

High

Smartphones have the highest near-term purchase intent of any portable device, and
consumers are looking to replace all their portable devices with smartphones.
However, consumers in emerging markets are increasingly price-sensitive and
attracted to low-cost manufacturers.

Exhibit D:
VRIN
Superior Technology

Efficient
Manufacturing

Global Brand

Innovative
Leadership

New Market Entry

Competence
Yes: Samsung has
used its expertise in
new market entry to
grow from a food
products company to a
titan in multiple
industries.
Yes: Very few
companies in the
world have
demonstrated this
competence to the
degree Samsung has.

Valuable

Yes: Superior
technology is needed
to maintain market
share in the
smartphone industry

Yes: Efficient
manufacturing
contributes
substantially to
Samsungs profits

Yes: Samsung
branding allows them
to command a
premium.

Yes: Samsung is a
very competent fast
follower, but also
creates its own
innovations. The
combination leads to a
valuable product
offering.

Rare

Yes: Very few firms

have superior
technology, Samsung
and Apple are the
leaders in
smartphones

Yes: Few firms have

efficient
manufacturing
processes on the level
that Samsung does.

Yes: Samsungs brand

is unique to them and
one of the strongest in
the industry

Yes: The culture of

innovation present at
Samsung is hard to
build and rare in the
industry.

Inimitable

No: In the electronics

industry technological
imitation is the norm.

No: Electronics
companies frequently
imitate each others
manufacturing
practices.

Yes: Samsungs brand

cannot be legally or
practically copied.

Non-Substitutable

No: Substitute
technology is
constantly being
developed.

No: Efficient
manufacturing means
a lot in electronics.

Yes: There is no
substitute for strong
branding in
electronics.

No: It has taken years

for Samsung to build
this culture and
competitors with
lower costs still
cannot match them
here.
Yes: There is truly no
substitute for
leadership in
innovation.

Yes: Other companies

can attempt to build
this competence, but
64 years of experience
is hard to imitate.
Yes: This is needed to
grow in multiple
industries over such a
long period.

Exhibit E:

Percentage Annual Revenue Growth

80.0%

60.0%

40.0%

20.0%

0.0%

1999

2000

2001

2002

2003

2004

2005

2006

2007

(20.0%)

(40.0%)
Apple

Samsung

2008

2009

2010

2011

2012

2013

2014

Exhibit F:

EBITDA (Millions)
70,000.0
60,000.0
50,000.0
40,000.0
30,000.0
20,000.0
10,000.0
0

1999

2000

2001

2002

2003

2004

2005

2006

2007

(10,000.0)
Apple

Samsung

2008

2009

2010

2011

2012

2013

2014

Exhibit G:

EBITDA Percent Margin

40.0%
35.0%
30.0%
25.0%
20.0%
15.0%
10.0%
5.0%
0.0%

1999

2000

2001

2002

2003

2004

2005

2006

2007

(5.0%)
Apple

Samsung

2008

2009

2010

2011

2012

2013

2014

Exhibit H: Perception Map of major players in the smartphone industry

Exhibit I: