samsung electronics scucarvers
TRANSCRIPT
Samsung Electronics
MGMT 619 – MW 7:20pmOctober 20, 2010
SCUCarvers:Anirvan Das
Girish NavalgundkarJakub CechKyle Kaido
Prashanth KalikaVivek Durairaj
Five Forces Analysis
Level 1 and Level 2 of the five forces analysis are explained in detail in Exhibit 1.
Barriers to Entry - The biggest barrier to entry into the DRAM industry is its huge capital
requirement. The cost of building a new fab is around $3 billion, while the DRAM market size is
approximately $20 billion1 in 2003. Market leaders with significant cost advantage can retaliate
against new entrants. Overall, there are high barriers to entry in the DRAM market.
The Power of Suppliers - Memory industry suppliers can be divided into two categories,
semiconductor equipment producers and raw material producers. There are only a few major
semiconductor equipment producers such as Applied Materials. Their supplier power is high
because of this concentration and a significant cost associated with switching vendors. Silicon
wafers are the main raw material for memory chips. Low differentiation between wafer designs
makes it easy to switch suppliers, minimizing their supplier power.
The Power of Buyers - DRAM customers2 are highly fragmented and consider memory
reliability as very important factor. This implies that buyer power is somewhat limited. On the
other hand, this industry has become commoditized and there is little differentiation. Buyers are
extremely price sensitive due to price conscious consumers and thin margins. These factors
suggest that buyers are powerful. The threat of buyer power appears to be neutral to the industry.
Threat of Substitutes - There is no viable substitute to the DRAM memory. Research is being
performed on nanotechnology, but it is not in production yet.
Rivalry Among Existing Competitors - Competitors in DRAM industry are highly committed
to their products. Some of them are sustaining consistent losses. Chinese competitors are new to
the industry and enjoy significant backing from their government. The DRAM industry is
1 58% of $33.7 billion global memory market in 20032 Since there is no data indicating differences in the buyer behavior, PC OEMs, telecommunication and consumer electronics manufacturers are treated as a single buyer group.
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expected to enter a cyclical downturn in 2005. These factors make the threat of rivalry very high
with an unfavorable effect on this industry.
Level 3 Analysis - Exhibit 1-h explains our Level 3 analysis. Significant barriers to entry exist
for potential new entrants to the DRAM industry. Despite these barriers, Chinese companies
supported by government backing continue to enter. The industry is facing a cyclical downturn
and has reached maturity stage. The supplier groups are relatively powerful and intense rivalry
conditions exist. This rivalry will intensify as Chinese companies continue to enter. The effect of
buyer power is neutral on the industry. The major favorable condition is the lack of substitutes
for DRAM. Overall, these dynamics have resulted in a slightly unfavorable environment for
competitors in the DRAM industry (with overall score of 2.9 and weighted score of 3.17).
Strategy of Chinese Entrants
Chinese entrants plan to gain market share with a low cost strategy. Refer to Exhibit 2 for
the comparison of costs. They have low cost structures and easy access to resources such as
cheap labor, talented engineers, land and investments. They also have strong government
backing and license technology from some of the more experienced incumbents. They have
access to Chinese market, which is expected to explode soon. However, they can only offer low
end products due to lack of manufacturing experience and tacit knowledge. They are quite
behind in developing frontier memory products. Chinese manufactuers are willing to price
below their own costs to gain market share. At the same time, they are in a better position to
sustain losses than their competitors. As Chinese firms become more efficient they pose a
significant threat because their approach will decrease margins even further and force many
companies to exit the market.
2
Business Level Strategy
Samsung has achieved a variety based strategic positioning by producing memory
products for manufacturers of PCs, cameras and many other consumer electronic products. In the
DDR and SDRAM category, Samsung follows a mixed strategy (see Exhibit 3). Samsung’s
primary strategy is cost leadership. Exhibit 3-b shows that Samsung has a better cost structure
than its competitors. Samsung’s brand and emphasis on quality allows for broad differentiation
as it is able to charge an average premium of 14.5% over competitors. Samsung also produces
specialty products including RDRAM and DDR2. These product lines display a focused low cost
strategy. A common core design allows Samsung to produce different products in a single
production line at a low cost. With a low cost structure and volume production, Samsung has
achieved a market share of more than 95% in RDRAM and DDR2 by volume.
Value and Cost Drivers of Samsung - Exhibit 4 shows Samsung’s resources and capabilities in
light of value drivers and cost drivers.
Resources - As a leader in memory products, Samsung has effectively taken advantage of its fab
capacity to achieve economies of scale. A long learning curve is inherent to this industry.
Samsung has continuously developed new process engineering capabilities and improved its
older processes to maximize operational efficiency. Samsung has its own in-house product
design and R&D which helps to quickly develop cutting-edge frontier products. The main R&D
facility and all fab lines are collocated, helping to build camaraderie among design and process
engineers. This collocation also results in faster resolution of design and process related
problems, while reducing overhead (fixed) costs. From 2000 to 2004, Samsung’s brand value has
more than doubled. Samsung’s large product portfolio enables it to utilize economies of scope.
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Capabilities - Samsung provides R&D support to other design houses. This collaboration has
helped develop new applications for DRAM as well as customized products for niche markets.
Samsung’s Regional Specialist Program also helps create these customized products based on
local customer needs. The company has also benefited from taking calculated risks in new,
unproven process technologies. In certain cases Samsung creates a competitive environment
among its R&D departments to capitalize on innovation. The company is able to attract talented
engineers through meritorious selection and evaluation. Its productivity incentives encourage
highly productive employees and aid in the retention of these employees. These benefits also
create a culture with common goals and decrease costs through higher productivity.
Value-Chain Analysis - Activities contributing to the value-chain of Samsung are shown in
Exhibit 5. The interaction or fit of activities shown in this framework suggests that it is a difficult
model to imitate and provides a considerable competitive advantage for Samsung.
V-C Analysis - Brand, Quality, Technology and Customization are the main value drivers for
memory products.
V-P= 1*Brand+2*Quality+3*Technology+4*Customization.
Due to lack of data, betas are assigned based on the importance of each value driver. For
example, as quality is considered to be more important relative to other value drivers, 2 is higher
than other beta values. We have used 1 = 0.25; 2= 0.3; 3 = 0.25; 4 = 0.2
Brand – A company’s history is an important factor contributing to its brand equity. The number
of years in operation is used to calculate the brand value factor.
Technology- Design rule technology is used to measure technology prowess.
Quality - Better R&D and process engineering results in better quality products. The level of
company investment in R&D is used as the measuring factor for the weight of Quality.
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Customization - RDRAM was produced through collaboration with Rambus and customized
accordingly. We used the percentage of RDRAM production as a measure for the weight of
customization.
Samsung has the highest V-C compared to its competitors (Exhibit 6). V-C analysis shows that
Samsung is both a cost and value leader. This enables it to create the highest buyer and firm
surplus in the industry. Both cost and value advantages are vital for Samsung’s performance.
VRIO Analysis - Based on the VRIO analysis (Exhibit 7), Samsung has multiple resources and
capabilities that provide a sustained competitive advantage. Threats from Chinese manufacturers
can become more significant in the long run if they catch up on value drivers in the temporary
sustained competitive advantage category. These include factors such as fabrication capacity,
quality and product mix/customization capabilities. Our analysis highlights Samsung’s value
drivers in terms of technological advantages and intellectual property in their frontier products.
These value drivers prevent imitation by new entrants. Samsung’s quality and reliability value
driver keeps customers from switching to competitors’ products.
Recommendations
Samsung needs to retain a leadership position in technology through R&D investment in
its frontier products. It has already been successful in building its brand reputation through these
products. R&D investment allows Samsung to introduce new products ahead of the competition.
This strategy creates a value driver because it increases Samsung’s breadth of product line for
customers. Customers value this new technology adoption, allowing Samsung to charge higher
prices. New products in the DRAM industry quickly become legacy products, which can be sold
in niche markets, creating a value driver for Samsung. Flash memory also shows significant
promise for growth. Investment in R&D will ensure that Samsung capitalizes on opportunities
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presented by Flash technology. Samsung should also invest in further improvements to its
manufacturing process. Samsung is the only major memory manufacturer currently using
0.11µm as its main design rule. This superior processing technology is a cost driver because it
allows for a smaller chip size, resulting in more output and lower per unit costs. A downside of
high R&D investment is the need to ensure the correct projects receive enough resources and
funding to be successful. This requires effective project management skills and executive
decisions. The DRAM industry is also expecting a downturn which can cause customers to
become more price sensitive, unwilling to invest in new products without significant cost
savings.
Samsung should also enact a partnership with Chinese entrants for low end memory
products. Chinese entrants are only at the beginning stages of building DRAM manufacturing
capability, and will need to undergo a steep learning curve in the next few years. This partnership
can be in the form of licensing, where Samsung licenses its technology for low end memory
products to a Chinese entrant. This strategy allows Samsung to direct its resources to next
generation products, thus creating more value. It also serves as a cost driver for Samsung since it
will be able to utilize China’s capacity and cheaper labor. A potential downside to this strategy is
the threat it poses to Samsung’s trade secrets. There are intellectual property protection concerns
since Chinese laws are loosely enforced or nonexistent. A more significant risk is the potential
impact a new strategic partner can have on Samsung’s current organization. Samsung’s
infrastructure is a cost driver due to increased efficiency. Introducing an outside manufacturing
partner can negatively affect this cohesiveness and productivity.
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EXHIBIT 1: Five Forces Level 1/ Level 2 Analysis
Exhibit 1-a: Barriers to entry
Barriers to Entry 1. Does the factor pose a Barrier to Entry (BTE)? Assess the strength of the BTE
2. Why? Use data/evidence to support your analysis.
Score(1-5)
Rank/Wt
Economies of Scale (Supply Side)
Exhibit 7a shows that with the exception of SMIC, there exist reasonable economies of scale. With an increase of production volume, we see a decrease in the fully loaded costs of companies, but not consistently. The suppliers give discounts to high volume purchasers.
2 3
Network Effects (Demand Side Scale)
DRAM market is commoditized, leading to minimal network effect.
4 7
Customer Switching Cost DRAM market has become highly commoditized and DRAMs can be replaced very easily. There is however some brand loyalty, mainly due to reliability factor.
3 6
Capital Requirement Very high capital requirements. Cost of building new fab was $3 billion in 2004 compared to $20 billion industry. Building manufacturing facilities is difficult and time consuming as the machinery is very sensitive to dust and electronic shock.
1 1
Incumbency Advantage Incumbents have significant advantage due to the importance of reliability and economies of scale. However, the customers are extremely price-conscious, indicating that the incumbency advantage may be lost to cheap DRAM supplier.
2 2
Unequal Access to Distribution Channel
The DRAM industry is highly concentrated. So a new entrant may not have access to distribution channels readily.
2 5
Restrictive Government Policy
There are no government policies that are restrictive. However, certain governments (e.g. U.S.) impose restrictions to foreign vendors that prevent them from selling to those countries.
4 8
Expected Retaliation The current players can give deeper discounts to suppress the new entrants.
1 4
Level 2 Conclusion: High barriers to entry, low threat - Favorable 2Most Significant Factors 1. Capital requirement
2. Incumbency advantage3. Economies of scale supply side
Exhibit 1-b: Supplier Power of semiconductor equipment suppliers
Factors underlying Supplier Power
Effect on Industry1. Does the factor increase or decrease Supplier Power? Assess the strength of the factor for each supplier group.2. Why? Use Data/Evidence to support your analysis
Score(1-5)
Rank/Wt
Concentration Ratio for each Supplier Group
Due to complex technology requirements, the equipment suppliers are more concentrated.
4 3
Strategic Importance of the Industry to the Supplier Group
The $20 billion DRAM industry is strategically important to this supplier group because it needs technology specific investments.
2 5
7
Switching Costs The semiconductor equipments need heavy investments and so there are significant costs associated with switching from one supplier to another.
4 2
Are the Supplier group’s products/services differentiated?
The semiconductor equipments from different suppliers can be somewhat differentiated (in terms of features, precision).
4 4
Are there Substitutes for the Supplier group’s products/services?
If DRAM companies go fabless, then the equipments are not needed. However, due to low margins, all companies have their own fab. Thus, there are no substitutes for the equipments.
4 1
Do the Suppliers pose a credible forward integration threat?
There is no forward integration threat from the suppliers.
1 6
Level 2 Conclusion: Strength of the Force (1-5)
Unfavorable (High threat from semiconductor equipment suppliers)
4
Most Significant Factors 1. No substitutes2. Switching costs 3. High concentration ratio
Exhibit 1-c: Supplier Power of raw material suppliers
Factors underlying Supplier Power
Effect on Industry1. Does the factor increase or decrease Supplier Power? Assess the strength of the factor for each supplier group.2. Why? Use Data/Evidence to support your analysis
Score(1-5)
Rank/Wt
Concentration Ratio for each Supplier Group
Many companies producing raw materials. 1 4
Strategic Importance of the Industry to the Supplier group
Exhibit 7-a shows that the raw materials cost is 20-25% of the total DRAM cost. Thus this $20 billion industry is strategically important to the suppliers of raw material.
2 3
Switching Costs Silicon wafers were standard and so switching cost could be negligible.
2 2
Are the Supplier Group’s products/services differentiated?
There is no differentiation between raw materials from different suppliers.
2 1
Are there substitutes for the Supplier Group’s products/services?
There are no substitutes to silicon. 4 6
Do the Suppliers pose a credible forward integration threat?
There is no forward integration threat from the suppliers.
1 5
Level 2 Conclusion: Favorable (Low threat from raw material suppliers) 2Most Significant Factors 1. Products not differentiated
2. Switching costs 3. Strategic importance
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Exhibit 1-d: Buyer Power
Factors underlying Buyers’ Bargaining Power
1. Does the factor increase or decrease Buyer Power? Assess the strength of the factor for each buyer group. 2. Why? Use Data/Evidence to support your analysis
Score(1-5)
Rank/Wt
Are Buyers concentrated or are there a few high volume Buyers?
Buyers are numerous and extremely fragmented. For example, no single OEM controlled more than 20% of the global PC market.
1 1
Are the products differentiated?
The DRAM market is highly commoditized, even though some firms are able to effectively differentiate by being more reliable than competitors.
3 4
Does the Buyer face low or high switching costs?
DRAMs are a highly commoditized market with very little differentiation. On the other hand, customers still give considerable importance to reliability, and were ready to pay a premium for a reliable supplier. This leads to moderate switching costs.
3 2
Do the Buyers pose a backward integration threat?
Given the high capital requirements to set up and maintain the facilities and equipment, it is difficult for buyers to integrate backwards into manufacturing memory chips.
1 7
Factors underlying Buyers’ Price SensitivityIs the product a significant fraction of the Buyer’s costs?
Memory represents 4%-12% of material costs for an OEM PC producer and 4%-7% of material costs for a mobile phone producer. PC manufacturers negotiate hard on prices due to intense rivalry.
4 6
Does the Buyer earn low profits?
Rivalry between manufacturers of PCs, mobile phones and consumer electronics is very intense, as they have to face very price-conscious consumers. This forces DRAM buyers to be very price-sensitive. There could be some very small groups of buyers such as video game manufacturers that may enjoy higher profits.
4 3
Is the quality of the Buyer’s product affected by the industry’s product?
A DRAM is critical to the functioning of the buyers’ products. If the DRAM does not work as expected, the buyers’ products will be useless.
4 5
Does the industry’s product affect the Buyer’s other costs?
DRAMs do not result in any cost savings by the buyer. As a result, there is no relation of this factor to the DRAM market.
3 8
Level 2 Conclusion: Neutral threat from buyers 3Most Significant Factors 1. Buyers not concentrated
2. Low switching costs3. Buyer’s low profits
Exhibit 1-e: Threat of Substitutes
Factors underlying Threat of Substitutes
1. Does the factor increase or decrease the threat? Assess the strength of the factor.2. Why? Use data/evidence to support your analysis.
Score(1-5)
Rank /Wt
Buyer’s propensity to substitute
No other viable substitutes 1 1
Price/Performance of the No substitutes 1 2
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substituteLevel 2 Conclusion Favorable (No threat from the substitutes) 1
Exhibit 1-f: Rivalry among existing competitors
Factors underlying Rivalry
1. Does the factor increase or decrease Rivalry? Assess the strength of the factor.2. Why? Use data/evidence to support your analysis.
Score(1-5)
Rank /Wt
Industry Concentration The DRAM market is very concentrated (CR4~90%). The industry is quite unpredictable and the rules of the game are unknown, leading to an increase in rivalry.
4 5
Demand Conditions /Industry Growth RateIs the industry growing at a decreasing rate or increasing rate?
The case states that the growth in the DRAM industry closely follows the PC market, which was becoming a mature single-digit growth market. Also, the memory chip industry is expected to enter a cyclical downturn in 2005.
5 4
Exit Barriers Exit barriers are very high due to the high fixed costs. 5 2High Commitment by Rivals Rivals are highly committed. While some companies are
bent on maintaining and gaining market share, the Chinese entrants are committed to establish market share at any cost.
5 1
Diversity of Competitors: Do firms have different goals/ideas about how to compete or are they playing by the same set of rules?
The competitors are very diverse, with different goals. Samsung wants to maintain a competitive advantage, while the Chinese entrants are sacrificing profits to gain market share. This results in unpredictability, leading to an increase of rivalry conditions.
4 7
Degree of Product Differentiation: Opportunities for Differentiation?
The DRAM market is highly commoditized. The only differentiation that players can offer is reliability. This leads to moderate switching costs for buyers and therefore is a neutral factor of the rivalry force.
4 3
Fixed Costs/Variable Costs Ratio
The industry has huge capital requirements and comparatively low variable cost (Exhibit 7).
5 6
Is capacity added in large increments?
Memory chip producers need to generate as many individual chips in a single production step as possible, and also minimize defects at the same time. As a result, capacity needs to be added in large increments in order to be efficient.
4 8
Level 2 Conclusion Unfavorable (Very high threat from rivalry) 5
Most Significant Factors 1. High commitment by rivals 2. High exit barriers3. Not much product differentiation
Exhibit 1-h: Five Forces Level 3 Analysis
Competitive Force Effect on Industry Score Ranking Reverse ranking
Weights Weighted score
Rivalry High rivalry, unfavorable 5 2 4 27% 1.33
Buyer Power Neutral threat 3 4 2 13% 0.40Barriers to Entry High barrier to entry 2 1 5 33% 0.67Threat of Substitutes Favorable, no threat 1 5 1 7% 0.07Supplier Power Little bit unfavorable 3.5 3 3 20% 0.70
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Overall 2.9 15 100% 3.17
EXHIBIT 2: Costs
Exhibit 2-a: Cost Comparison: Samsung vs. SMIC
Exhibit 2-b: Cost Structure: Samsung vs. SMIC
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EXHIBIT 3: Business Level Strategy
Exhibit 3-b: Comparison of financial ratios between Samsung and Competitorsfor DRAM in 2003 (256MB equivalent)
SamsungCompetitor's Average SMIC
Average Selling Price 5.68 4.96 4.43Raw materials 1.18 1.83 1.84Labor 0.54 0.74 0.23R&D 0.6 0.62 0.8SG&A 0.65 0.87 0.34COGSa/Selling Price 30% 52% 47%
COST LEADERSHIP BROAD DIFFERENTIATION
FOCUSED LOW COSTFOCUSED
DIFFERENTIATION
LOW COST UNIQUENESS
MAS
SN
ICH
E
Samsung’s commodity Samsung’s Emphasismemory products.Eg.512MB DRAM on quality and reliability
Samsung’s Speciality Products.(Eg. RDRAM)
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R&D/Selling Price 11% 13% 18%SG&A/Selling Price 11% 18% 8%Notes: (a) COGS is Raw Material + Labor
EXHIBIT 4: Value Drivers and Cost Drivers
Resources Value Drivers Cost DriversInfrastructure -- R&D and Fab lines in one location 1) increases collaboration between design engineers and process engineers - improving process efficiencies 2) helps in promoting Samsung's culture emphasizing on product quality and process effectiveness as it is under one roof 3) savings in fab construction costs.
Organizational Practices
Organizational Practices
Product Design Engineering – In-house product design unlike its Chinese competitors - helps in developing the cutting edge products.
Vertical Integration
Global Presence -- Multinational presence with customers all over the world.
Accessibility
Brand -- High brand value - $12.6Billion in 2004. Brand ValueProduct Breadth – 1,200 Variations in DRAMs. Variety Product Width -- Multiple product architecture with same core design. Frontier products to legacy products. Decreased volume production of legacy products would also affect economies of scale.
Economies of Scope
Production Capacity – Scale of fab Investment: Market leader with economies of scale.
Economies of Scale
Process Engineering -- Multiple product architectures on each production line- 0.11m Process Technology DRM rules- Better yield.
Learning Curve
Capabilities Value Drivers Cost Drivers
Ability to influence government --Samsung is part of Chaebol in Korea. High political influence.
Favorable Government Policies
Government Incentives
Ability to respond to the needs of regional customers - Regional Specialist Program.
Customization
Ability to take calculated risks – Early adoption of new technology like 12-inch process.
Technology Lead/Brand Reputation
Ability to instill competitive environment –separate competitive teams in different locations to produce frontier technology.
Technology
Ability to capture the most value out of products - legacy products into niche products.
Extended Product Life Cycle
Product Performance -- High reliability of the products with multiple industry awards.
High Quality
Ability to attract talented employees - Meritorious Evaluation/ Sponsoring of higher education.
Favorable Labor Conditions
Collaboration with design houses - Develop new uses for memory products.
Customization/ Product Extension
Ability to maintain productivity - Productivity Incentives.
Favorable Labor
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Conditions
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EXHIBIT 5: Value Chain Analysis
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EXHIBIT 6: V-C Analysis
TechnologyMain
design WeightCustomization
RDRAM Vol Weight
Samsung 0.11 5 Samsung 4.20% 5Micron 0.13 3 Micron 0 0Infineon 0.14 2 Infineon 0.40% 1Hynix 0.13 3 Hynix 0 0SMIC 0.5 1 SMIC 0.00% 0
BrandYrs of Opr. Weight
QualityR&D
Full cost Ratio Weight
Samsung 30 5 Samsung 0.6 4.31 0.139211 5Micron 26 4 Micron 0.57 6.61 0.086233 3Infineon 5 1 Infineon 0.71 5.02 0.141434 5Hynix 21 4 Hynix 0.58 5.33 0.108818 4SMIC 4 1 SMIC* 0.8 4.84 0.123967 4
As SMIC lags behind the industry by 10 years, its weight is discounted by 25%
Samsung Micron Infineon Hynix SMIC
Rating
Beta* Rating Rating
Beta* Rating Rating
Beta* Rating Rating
Beta*Rating Rating
Beta* Rating
Brand b1=0.25 5 1.25 4 1 1 0.25 4 1 1 0.25
Quality b2=0.3 5 1.75 3 1.05 5 1.75 4 1.4 4 1.4
Technology b3=0.25 5 1.25 3 0.75 2 0.5 3 0.75 1 0.25
Customization b4=0.2 5 1 0 0 1 0.2 0 0 0 0
Added Value 5.25 2.8 2.7 3.15 1.9
Price $5.68 $4.93 $5.05 $4.97 $4.43
Total Value $10.93 $7.73 $7.75 $8.12 $6.33
Cost $4.31 $6.61 $5.02 $5.33 $4.84
V-C $6.62 $1.12 $2.73 $2.79 $1.49
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EXHIBIT 7: Samsung’s VRIO Analysis
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Resources/Capability
Valuable? Rare?
Difficult to Imitate?
Exploited by the firm?
Competitive Implications
Semi-Conductor Process Technology (0.11μm)
YES YES YES YES Sustained Competitive Advantage
Technology and Production Line Capabilities
YES YES YES YES Sustained Competitive Advantage
Employee Selection and Retention Policies
YES YES YES YES Sustained Competitive Advantage
Quality YES YES YES YES Sustained Competitive Advantage
Brand Value YES YES YES YES Sustained Competitive Advantage
Product Mix & Customization
YES YES NO YES TemporaryCompetitive Advantage
Fabrication Capacity
YES YES NO YES Temporary Competitive Advantage
R&D and Production Facility at Same Location
YES NO - YES Parity
Partners and OEM Customers
YES YES NO YES Temporary Competitive Advantage