Global Strategic Management:

Samsung Case Analysis

Jaclyn Crews
Jingxian Luan
Hannah Mizrahi
Michael Raffaelli
Samsung’s Competitive Advantage

In total, Samsung has a 24.4% lower fully loaded costs than its competitors’

weighted average, referring to Exhibit 7a. The cost advantage can be further explained in

five parts: raw materials, labor, depreciation, R&D and SG&A. First, Samsung incurred

55.1% lower in costs of raw materials than its competitors on average, which is mainly

achieved by investments in new technologies. Samsung was among the first to invest in

new technologies and invested $1 billion to increase the size of wafers used to cut the

chips. The larger the size of the wafers, the more chips could be cut at the same time. As

a result, Samsung achieved an economies of scale by pushing down the per unit cost of

raw materials. From Exhibit 1 we got that Samsung has a 15.3% return on assets while

other competitors got negative results.

Second, Samsung’s labor cost was 27.3% lower than its competitors. The average

salary at Samsung in 2003 was $44,000; which is in the middle among its major

competitors, but it achieved a higher personal productivity rate through a series of

investments in human resources. For example, it held the internal competitions inside the

R&D department, which not only gave the employees the incentives to innovative but as

avoided careless decisions. It has a meritocratic and performance-based evaluation

system to better promote the young, talented, high-potential employees. Samsung also

takes care of 90% of its employees’ burden so the employees can better focus on work.

All the investments in human resources helped with the cost saved in R&D as well as

SG&A.

Samsung incurred a 17.7% depreciation cost lower than its competitors partly due

to its adopting new technology to achieve the economies of scale. In this way, Samsung
can produce as many chips as it wants with the most efficient use of its facilities. Another

reason is that Samsung quickly learned new design rules and applied those rules towards

the production of all product types, so it can produce multiple product architectures on

each production line.

On the other hand, Samsung enjoys a price premium. Exhibit 3 shows that

Samsung’s customers pay a 34% higher price than the products offered by

competitors. Thanks to new technologies, Samsung can offer as many as 1,200 different

variations of DRAM products while its competitors only produce a few, according to

Exhibit 4&5. Moreover, Samsung is known for the reliability and performance of its

products. Customers are willing to pay a higher price in order to get a better quality.

Samsung also offers the service to customize the product according to customers’ needs,

which adds to their satisfaction.

Comparison of Samsung’s Value Stick to Competitor’s Industry Average:

As one can see from the images below, Samsung has a clear advantage in all three

areas discussed: DRAM, SDRAM, and Flash. Samsung’s ability to sell their products at a

higher price while maintaining a lower cost granted them a clear advantage against its

competitors in DRAM and SDRAM. In regards to the Flash market, Samsung has an

advantage due to their more efficient cost structure. They can maintain a lower purchase

price, which is attractive to customers, because their production costs are significantly

less than Toshiba’s, leaving them a larger profit. Even though the Flash products

represent few of Samsung’s products that do not charge a premium, their competitive

advantage was preserved by selling the products at an average price of $9.48/unit

compared to Toshiba’s $9.51/unit. Samsung achieved this by saving resources from labor
and raw materials. When analyzing the images below, it is revealed that most of

Samsung’s value comes from the highest and lowest parts of the value stick, WTP and

WTS, respectively.

Displayed in Figures 1 and 2, the WTP for Samsung is slightly higher than the

WTP for its industry competitors. Reasons to explain this include products premiums and

R&D. Due to its high product quality, superior reliability, and customized products,

Samsung can capture the market and sell their products at a premium price. As stated in

part a., Samsung has a competitive advantage in R&D from its heavy investments in new

product developments. These heavy investments lead to a first-mover advantage in the

semiconductor industry. Holistically, Samsung spent less per unit on R&D than its

competitors, but this is solely due to its large volume of products sold.

Although the higher WTP gives Samsung a competitive advantage, it’s true

advantage lies in its cost effectiveness, which directly relates to WTS. In the

semiconductor industry, success correlates with synergy between design and production

process. Samsung succeeded in this area by having a central facility in Seoul, while it’s

competitors had numerous facilities instead of just a central one. Another contributing

factor to low WTS is reduced labor cost, which was emphasized in section a. as well.

And finally, overall size of Samsung permitted them the ability to negotiate for better

rates from its suppliers, adding to its cost advantage.

Figure 1: Global DRAM Market Comparison

Figure 2: Global SDRAM Market Comparison

Figure 3: Global Flash Market Comparison

Value Chain Activities

Chairman Kun Hee Lee ushered in a new era for Samsung that led them to be a world

leading memory producer. Porter’s value chain analysis serves as proper model to

identify and measure the activities that led to Samsung’s value capture.

Figure 4: Samsung Electronics- Value Chain

Samsung’s Primary Activities:

Operations: Samsung vertically integrated its manufacturing facility of semiconductors,

which provided tremendous value as they could get to market faster than competitors.

Their facility could produce multiple product architectures on one production line, so

they could alter the equipment for changes in design. Their highly technological

production process allowed them to achieve incredible speed and timing with a yield rate

of 80% compared to their competitors at Hynix at 50%, Infineon at 60%, and Micron at

67%.

Marketing & Sales: Samsung created a strong brand name of quality products. They had

multiple revenue streams as they differentiated their products with slight variations. They

offered “frontier products” featuring cutting edge new technology as well as “legacy

products” featuring older technology. Samsung utilized its legacy products to develop

niche markets and further differentiate.

Services: Samsung customized its products to the demands of the customer, so they were

continually meeting their next need.

Samsung’s Support Activities:

Infrastructure: Samsung has a state of the art R&D facility and a fabricating unit in

Seoul, which allowed for R&D engineers and production engineers to help each other

quickly design and solve problems. The inclusion of the R&D and fab unit at the same

location helped to save an average of 12% on fab construction costs.

Human Resources: Samsung altered their human resources policies to attract more

foreign talent to the company by eliminating hiring based on region and promotion based
on seniority. They offered competitive pay salaries and fostered an innovative work

atmosphere. Samsung created a program that nurtured employee’s global business skills

by placing qualified employees in another country to learn the culture and language. All

of these human resource strategies allowed Samsung to aggregate research and foreign

knowledge to create a knowledge database that aided them in understanding their global

customer base’s needs.

Technology: Samsung chose to use the stacking method in its production of the DRAM,

which made it easier to spot and fix mistakes in chip production. By investing in this

design method, Samsung pushed ahead of their competitors when competitors had to

switch technologies later on. Samsung’s investment into a mass production wafer allowed

them to cut more chips at one time. It was a risky technology, but it allowed Samsung to

bring more products to market faster.

3 Possible Responses:

Option 1:

Samsung positions itself as a high-end provider focusing itself on new market

opportunities through investments in cutting-edge technologies, while continuing their

efforts in the customization space. Under this approach, Samsung could maintain their

low-cost advantage, while allowing the Chinese producers to take over the lower end of

the market. Through investments in Flash memory, specifically research and

development, Samsung could emerge as the leading Flash provider to mobile phone

producers. According to Exhibit 9, Samsung has already asserted their competitive

advantage in Flash, with a lower selling price than its competitor Toshiba, lower

production costs, and a higher operating profit. With strategic investments in R&D

(Samsung spends 70.9% less than Toshiba on Flash R&D), Samsung could take a large

portion of the 32% of industry sales that are accounted for by Flash memory.

Option 2:

Samsung responds by competing with the new Chinese entrants strictly on their

cost and productivity advantage. Samsung would increase output thereby lowering prices,

and making it unprofitable for the Chinese competitors to remain in the market.

Essentially, instead of assisting the Chinese in becoming more low-cost, Samsung would

compete directly on this advantage. Additionally, this strategy would entail heavy

promotion activities on the sales side, and purposeful targeting and recruiting of China’s

top talent on the human resources side. However, as illustrated in the Decision Matrix

above, a downfall of this strategy is that Samsung would not be making investments in

new markets and product development.

Option 3 (Strategic Recommendation):

Samsung partners with a Chinese producer in the form of a joint venture. The joint

venture approach would involve constructing a new production site in China modeled
according to the facility in Seoul. Furthermore, Samsung would license the use of its

technology to the Chinese partner in exchange for exclusive purchase of the production

capacity. Although this strategy involves significant upfront investments in terms of the

new facility in China, we believe the potential benefits outweigh the costs as it is

extremely important for Samsung to have a physical presence in China to compete

directly with the Chinese producers. Not only would Samsung gain pivotal relationships

and support from the Chinese government, but they would have an established local site

to quickly penetrate the market with the new and current products. It is important to note

that the company culture established at the Seoul site would be impacted in the short-

term, however, by constructing a new site in China that models the main facility,

Samsung would mitigate this risk. Moreover, with an additional production site and more

production line availability, Samsung could produce their lower end business in China,

and shift focus in Seoul to investments in new market opportunities such as Flash. In

short, we have chosen to recommend this strategy because in order to gain significant

market share in the growing Chinese market for semiconductors, Samsung must have a

physical presence in China, an aspect that the other alternative strategies lack.