Samsung CaseSamsung Case What are the most important factors affecting industry What are the most important factors affecting industry

attractiveness? Conduct a 5 forces analysis of the DRAM industry.attractiveness? Conduct a 5 forces analysis of the DRAM industry.

What kind of advantage are the Chinese entrants seeking? How close What kind of advantage are the Chinese entrants seeking? How close are they to achieving that advantage? How might this affect the are they to achieving that advantage? How might this affect the industry conditions? industry conditions?

What is Samsung’s business level strategy in DRAMs in 2003? What What is Samsung’s business level strategy in DRAMs in 2003? What are the value and cost drivers underlying their strategic/competitive are the value and cost drivers underlying their strategic/competitive position? What matters more to Samsung’s performance, cost position? What matters more to Samsung’s performance, cost advantage or value advantage? Include a value chain analysis and advantage or value advantage? Include a value chain analysis and willingness to pay analysis (Value minus Cost) in your answer. willingness to pay analysis (Value minus Cost) in your answer.

Is Samsung’s position sustainable? Can Samsung’s position Is Samsung’s position sustainable? Can Samsung’s position withstand the Chinese threat? Include a sustainability analysis (VRIO, withstand the Chinese threat? Include a sustainability analysis (VRIO, preventing imitation, retaining customers) in your answer.preventing imitation, retaining customers) in your answer.

Based on your analysis, how might Samsung deal with the Chinese Based on your analysis, how might Samsung deal with the Chinese threat of entry? Identify 2 recommendations; discuss the threat of entry? Identify 2 recommendations; discuss the pros/cons/implications of one of the recommendations.pros/cons/implications of one of the recommendations.

Chinese Entrants: Chinese Entrants: Seeking a low cost Seeking a low cost advantageadvantage

The entrants have low cost finance & inexpensive The entrants have low cost finance & inexpensive engineers. engineers. SMIC’s costs/average unit = 2SMIC’s costs/average unit = 2ndnd lowest. lowest. SMIC is focusing on the most popular product in the SMIC is focusing on the most popular product in the

industry.industry. Looks like a direct challenge to Samsung’s Looks like a direct challenge to Samsung’s

advantage. advantage.

How much of Samsung’s Performance is based on its low How much of Samsung’s Performance is based on its low cost advantage?cost advantage? 2003: cost advantage = $1.39 per average unit.2003: cost advantage = $1.39 per average unit. 2003: price premium = $.72 per average unit.2003: price premium = $.72 per average unit.

Price minus Cost

C = $5.70

Samsung Competitor Average

CS = 4.31

PS = $5.68

PS- CS = $1.37

PC = $4.96

PC- CC = (-$0.74)

What is driving the differences in costs? - Differences in Input costs? E.g. Raw Materials, Labor, SG&A, R&D or - Differences in Productivity?

Is Samsung’s advantage cheap inputs (labor & Is Samsung’s advantage cheap inputs (labor & finance) or high productivity?finance) or high productivity?

Not cheap financing: Not cheap financing: Samsung is financing with internal cash (Ex. 1).Samsung is financing with internal cash (Ex. 1). SMIC has cheap financing but, all 3 major incumbents SMIC has cheap financing but, all 3 major incumbents

(except Hynix), are able to self finance with FCF.(except Hynix), are able to self finance with FCF.

Not lower labor wage rate:Not lower labor wage rate: Samsung’s annual wage = $44K > Competitors’ Samsung’s annual wage = $44K > Competitors’

average annual wage = $40,050average annual wage = $40,050

So, So, is the source of Samsung’s low cost advantage is the source of Samsung’s low cost advantage primarily high productivity?primarily high productivity?

So, is the source of the advantage primarily So, is the source of the advantage primarily high productivity?high productivity?

Cost advantage/unit =Cost advantage/unit =

Competitor Input Costs/unit Competitor Input Costs/unit Samsung’s ProductivitySamsung’s Productivity

Samsung’s Input Costs/unitSamsung’s Input Costs/unit Competitor ProductivityCompetitor Productivity

RelativeRelative Raw Materials Cost AdvantageRaw Materials Cost Advantage Relative (Total) Raw Materials Cost RatioRelative (Total) Raw Materials Cost Ratio

(Competitor’s RM cost/unit) / (Samsung’s RM cost/unit) = 1.551 (Ex. 7a)(Competitor’s RM cost/unit) / (Samsung’s RM cost/unit) = 1.551 (Ex. 7a) Relative Raw Materials Relative Raw Materials InputInput Cost RatioCost Ratio = [1/(1-.05] = = [1/(1-.05] = 1.051.05

Samsung receives an additional 5% vol. discount.Samsung receives an additional 5% vol. discount. 1.551 = (1.05) X Relative Productivity in Using Raw Materials1.551 = (1.05) X Relative Productivity in Using Raw Materials

Relative Productivity in Using Raw MaterialsRelative Productivity in Using Raw Materials = 1.4771.477 Samsung’s raw materials cost advantage is primarily a function of its Samsung’s raw materials cost advantage is primarily a function of its

productivity.productivity.

X

So, is the source of the advantage primarily So, is the source of the advantage primarily high productivity?high productivity?

Relative Labor Cost Advantage: Relative Labor Cost Advantage: Relative (Total) Labor Input Cost RatioRelative (Total) Labor Input Cost Ratio

(Competitor’s Labor cost/unit) / (Samsung’s Labor cost/unit) (Competitor’s Labor cost/unit) / (Samsung’s Labor cost/unit) = 1.370 (Ex. 7a)= 1.370 (Ex. 7a)

Relative Wage RatioRelative Wage Ratio = .919 = .919 (Competitors’ Average Wage) / Samsung’s Average Wage = (Competitors’ Average Wage) / Samsung’s Average Wage =

(40,050)/(44,000) =.919 (40,050)/(44,000) =.919

1.370 = (.919) X Relative Productivity in Using Labor1.370 = (.919) X Relative Productivity in Using Labor Relative Productivity in Using Labor Relative Productivity in Using Labor = = 1.4911.491

Samsung’s labor cost advantage is primarily a function of its Samsung’s labor cost advantage is primarily a function of its productivity.productivity.

ImplicationsImplications Productivity dominates input costs Productivity dominates input costs (1.477 & 1.491)(1.477 & 1.491)

SMIC does have dramatically lower labor input costs but Samsung SMIC does have dramatically lower labor input costs but Samsung makes up the difference more than 2.5 times with higher productivity.makes up the difference more than 2.5 times with higher productivity.

Suggests that Samsung should focus on defending its low cost advantage. Suggests that Samsung should focus on defending its low cost advantage.

But, is Samsung’s differentiation advantage more important or easier to But, is Samsung’s differentiation advantage more important or easier to grow & sustain, or both?grow & sustain, or both? Larger margins for frontier & specialty products vs. mass market Larger margins for frontier & specialty products vs. mass market

products.products.76% of their premium stems from catering to multiple product niches76% of their premium stems from catering to multiple product niches

And Samsung produces these products without damaging its overall And Samsung produces these products without damaging its overall cost structure relative to rivals.cost structure relative to rivals.

Sources of Samsung’s dual advantageSources of Samsung’s dual advantage Privileged access to human capital in Korea.Privileged access to human capital in Korea.

Organizational Practices Organizational Practices High Productivity High Productivity (contributing to an (contributing to an increase in V-C)increase in V-C) Co-location of R&D and productionCo-location of R&D and production to create a sense of community. to create a sense of community. Explicit mechanisms to facilitate cooperation/integration:Explicit mechanisms to facilitate cooperation/integration:

Project incentivesProject incentives to ensure that employees cooperate across to ensure that employees cooperate across functional linesfunctional lines

Monetary incentives at the division levelMonetary incentives at the division level to foster cooperation to foster cooperation up and down the hierarchyup and down the hierarchy

DebateDebate encouraged on major production decisions encouraged on major production decisions Culture requires post-debate unityCulture requires post-debate unity

Operational Effectiveness Operational Effectiveness Relative Cost AdvantageRelative Cost Advantage Plus, OE contributes to reliable products (reducing defect rate; on Plus, OE contributes to reliable products (reducing defect rate; on

time delivery, etc.) time delivery, etc.) Customer Retention Customer Retention

Why can’t more firms, in other industries, secure a Why can’t more firms, in other industries, secure a dual advantage? dual advantage? Key Points:Key Points:

A dual advantage may be effective when there are few tradeoffs. A dual advantage may be effective when there are few tradeoffs. Example:Example: Samsung’s Samsung’s focus on differentiation leads to focus on differentiation leads to

learning & yield improvementlearning & yield improvement which which results in lower costs results in lower costs and customer retention.and customer retention.

So, few tradeoffs, especially between differentiation So, few tradeoffs, especially between differentiation attributable to frontier products and low cost.attributable to frontier products and low cost.

Plus, the differentiation advantage stems from unique Plus, the differentiation advantage stems from unique activities that are more sustainable. activities that are more sustainable.

The Challenge is: The Challenge is: In most industries there are tradeoffs.In most industries there are tradeoffs.

And, most advantages based on scale economies, favorable And, most advantages based on scale economies, favorable access to human capital, and operational effectiveness can access to human capital, and operational effectiveness can be imitated in the long run.be imitated in the long run.

Why can’t more firms, in other industries, Why can’t more firms, in other industries, secure a dual advantage? secure a dual advantage? Key Points:Key Points:

The good thing is:The good thing is: The long run can take a long time to The long run can take a long time to occur.occur.

But, it’s risky to bet a firm’s future on a strategy that can But, it’s risky to bet a firm’s future on a strategy that can be easily imitated. be easily imitated.

Implication:Implication: Milk the dual advantage but invest more resources into Milk the dual advantage but invest more resources into

the strategy that is less easily imitated.the strategy that is less easily imitated.

Key PointsKey Points

Creating a Dual Advantage:Creating a Dual Advantage: Requires a complex set of Requires a complex set of organizational practices that supportorganizational practices that support combining a differentiation combining a differentiation advantage with large-scale investments in productivity.advantage with large-scale investments in productivity. For instance:For instance: Samsung’s organizational practices to facilitate Samsung’s organizational practices to facilitate

cooperation & create a sense of community among production cooperation & create a sense of community among production and design teams, etc. and design teams, etc.

Samsung’s success is not about technological determinism.Samsung’s success is not about technological determinism. Prior incumbents had failed to customize their products for Prior incumbents had failed to customize their products for

different niche applications.different niche applications. Samsung Samsung however, however, actively searched for opportunities to actively searched for opportunities to

customize their productscustomize their products to support to support multiple marketsmultiple markets.. Without this orientation, Samsung’s profits would not have Without this orientation, Samsung’s profits would not have

come so easily.come so easily.

Some options for dealing with the Some options for dealing with the Chinese ThreatChinese Threat

Move part of the firm’s wholly-owned operation to Move part of the firm’s wholly-owned operation to China.China.

Partner with the Chinese firms at the low end.Partner with the Chinese firms at the low end.

Put all available resources into research on and Put all available resources into research on and development of frontier & specialty products.development of frontier & specialty products.

Pursue frontier/specialty R&D and partner with a Pursue frontier/specialty R&D and partner with a Chinese firm at the low end. Chinese firm at the low end.

Key Points

A dual-advantaged incumbent faced with the threat of large scale entry should assess which advantage is more sustainable. And then, allocate resources to protecting the more

sustainable advantage.

Implications for Samsung at the time of the case: It makes little sense for Samsung to partner with one

of the Chinese firms, And, because the Chinese firms might eventually bring

down prices on low-end products, Samsung should focus most of its resources on frontier R&D.