An Industry Analysis of Samsung

Question 1) How attractive is Samsung’s primary (core) industry? Conduct an industry analysis. Five Forces Model: 1. Barriers to Entry Because of the extremely intricate and sophisticated nature of manufacturing semiconductors, a competitor should expect high initial capital requirements to build facilities needed for production. Cost to build a new semiconductor fab has gone up from $200 million in 1985 to $3 Billion in 2004.

Incumbent companies have capabilities to design newer generations of semiconductors with greater amounts of memory and processing abilities that make older generations obsolete. Older generations tend to drop half their amount in price one year after a new model is reduced (exhibit 6). The United States and Taiwan governments restricted domestic producers from shipping semiconductor equipment to China.

China’s government began to subsidize all semiconductor infrastructural needs to local producers in hope of making China competitive in the market. Micron was granted amnesty in an April 2005 price fixing charge against Hynix, Infineon, and Samsung for bringing the alleged wrong doing to the US Department of Justice. This type of coordination is prevalent among firms in an Oligopoly, in which Barriers to Entry are categorized as high. 2. The Power of Suppliers

With each generation of semiconductor equipment, the technology grew more complex and the number of suppliers became more concentrated. Although these suppliers are concentrated and hold a lot power on the raw materials industry, they lack the incumbent specialization knowledge to compete with incumbent firms.

Samsung spent billions in research to develop their current stacking strategy to fit more cells into a semiconductor chip; technology suppliers cannot compete with. Applied Materials, Tokyo Electron, and ASML dominated key segments of the equipment market. Suppliers of memory raw materials would provide discounts of up to 5% for high volume buyers. This shows that suppliers rely on the buyers business so heavily they want to entice repeat business by offering a discount, resulting in low switching costs to change suppliers. 3. The Power of Buyers

Customers in the memory industry are much more highly fragmented than suppliers. No single OEM controlled more than 20% of the global PC market in 2005. Products in the memory market are differentiated by the amount of memory provided by the semiconductor and how reliable the memory would be. OEMs would pay upwards of a 1% average price premium for a reliable supplier of memory, therefore creating high costs from switching to a reliable supplier to one who hasn’t proven itself yet.

As previously mentioned, due to the amount of resources spent on R & D in the memory industry there is a lack of threat from backwards integration. Memory buyers lack the technological education, know how, and resources to compete with the incumbent firms they purchase memory from. 4. Threat Of Substitutes

The memory industry has very low threat of substitutes. Some firms are pursuing the use of nanotechnologies, but these are nowhere near refined and it is likely that if they emerged Samsung would be able to catch up quickly. The various types of memory offered by Samsung are a core part of computers, which is an industry that experiences extreme growth every year and shows no signs of decreasing success. It is very unlikely that PC manufacturers will shift away from these core parts. 5. Rivalry Among Existing Competitors

In 2005, despite the extremely inflated cost of building a new fab, Chinese firms rushed to enter the industry, unconcerned about sacrificing profits for market share because of their ease in raising funds. Concurrently, Samsung was finding great success in marketing new types of cutting edge memory chips designed for emerging technologies (mobile phones, game devices, and other consumer electronics).

Regardless of this success Samsung had to be very concerned about the fierce rivalry they suddenly found in their original industry of DRAM, SRAM, and Flash memory. The business level strategy of Samsung’s memory chip business unit is an integrated strategy.

Remarkably, they have both a cost advantage and a value advantage over their competitors. In this section we will describe how Samsung “widens the wedge” through cost and value drivers. The data presented in Appendix 1 shows that Samsung’s cost advantage accounts for majority of their competitive advantage. Value drivers: quality/reliability; large product mix including frontier products; customization; HR Policies; and employees.

Cost drivers: economies of scale; learning and experience curve; product design; and single production Site. Learning and experience Curve: Between 1983 and 1985, Samsung allocated more than $100 million in into DRAM technology, even paying another firm to teach them how to produce 64k DRAMs. As the market grew, firms tried to catch up to where Samsung already had a foothold. To further make advancements efficiently, Samsung has had separate R&D groups compete within their company to come up with the same solution.

Product Design: The chairman chose a stacking design that proved be advantageous over companies that chose a trenching design. A core design was also used for their customized products. Economies of scale: Samsung invested $1 billion dollars to create a production process that made a 12 inch wafer. A larger wafer meant more chips could be cut at the same time. See A2 Single production Site: It is estimated that this saved Samsung on average 12% on fab construction costs.

Quality/Reliability: Samsung’s quality and reliability are huge factors in its growth in the industry. Between 1995 and 2003, the company won awards for reliability and performance from most of its major customers. Large product mix: As of 2003, Samsung offered over 1200 different variations of DRAM products. Samsung offered product that ranged from “frontier products” at the cutting edge of technology to “legacy products” after the company had moved on to later generations. See exhibit 4 from the case Customization: Samsung offered within each product generation, “specialty products” using customized architectures for niche markets.

See exhibit 5 from the case. HR Policies: Samsung hired employees who passed an aptitude test, and allowed opportunity for promotion each year after if certain testing requirements were met. This eliminated the old way of employees rising to the top based solely on seniority as was common among other competitors in the region. Samsung also put in place programs to invest in its employees’ global business skills by sponsoring employees’ MBA and PH.D. studies in foreign countries.

Samsung also recruited foreign talent and more recently created the Global Strategy Group to attract talent from around the world to focus on helping global managers with decision-making business problems. Employees/innovation: Samsung provided company housing to engineers in order for them to live together at their single R&D facility site in South Korea. Their workstations are placed close together in order for the R&D engineers and production engineers to more quickly solve design and process engineering problems with one another.

Q3) Samsung’s business strategy in the semiconductor business consists of using an integrated strategy that draws on both cost and differentiation tactics. We believe that Samsung has been fairly effective in its business strategy. They have the second-largest net profit of any electronics company outside of the US while maintaining a large variety of products. However they struggle to remain cost competitive as they are above their competitors weighted average for SDRAM + DRAM products.

Since the company was initially taken over by Kun Hee Lee in 1974, Samsung has been able to dominate the memory business over its Japanese rivals in both size and profits. However, despite Samsungs recent success the company is facing competition from Chinese companies that are sacrificing profit to take away market share. Samsung’s competitive advantage is being challenged by a similar strategy that Samsung initially used in the memory market. In order to justify Samsung’s business strategy verses its competitors, we analyzed some of Samsung’s resources and capabilities using the VRIO analysis. Resources/Capabilities

Facilities – Samsung’s main R&D facility and all of its fab lines were located in a single area, whereas its competitors’ facilities were spread out. This benefited Samsung by saving an estimated 12% on fab construction costs. The location allowed the companies engineers to geographically be near each other to solve issues quickly as well as providing a unique environment with dust free air to help yield the purest wafers. Brand name – Through Samsungs long history, the company has been able to create a household brand that is known globally.

The company’s brand value increased to $12.6 billion in 2004 from $5.2 billion in 2000. Given Samsungs complex social resources and important history, competitors will find it very difficult to imitate its brand. Reputation – Samsung has prided itself on the reliability of its products and being able to meet customer tastes. After what Lee thought of as shoddy products, he launched a massive campaign to get the company to regain its focus on quality.

From 1995 to 2003, Samsung won numerous awards for reliability and performance from major customers, including rivals customers. Managerial Skills – From Samsung’s deal with Micron in the 1980s giving the company knowledge on how to produce 64K DRAMS, to its $1 billion investment in a 8-inch DRAM production technology in 1990s, Samsung has repeatedly made timely investments that have allowed the company to lead the memory business for over a decade. Culture – Unlike their competitors Samsung recruits foreign talent.

This adds a unique perspective and culture to their management, design and engineering teams giving them a human resource advantage. Their culture values innovation so much they are structured to allow several independent R&D teams to each separately develop solutions to make sure they inspire alternative thinking and problem solving. In general their Chairmen characterized it by saying “we reward outstanding performance; we don’t punish failure.” They have a corporate culture which drives competition and promotes based on merit. This is key to continuing to innovate and perform competitively.

Exhibit 1A: Summarization of Five Forces Model FORCE| DESCRIPTION| STRENGTH| BARRIER TO ENTRY| High Capital Requirements, Relatively Few Firms, Price Coordination among Firms, Strong Incumbency Advantages Independent of Size| HIGH| POWER OF SUPPLIERS| Concentrated Suppliers, Heavy Supplier Reliance on Buyers, Lack of Threat of Forward Integration| LOW| POWER OF BUYERS| Fragmented Segments, Product Differentiation, High Switching Costs, Lack of Threat of Backwards Integration| LOW| THREAT OF SUBSTITUTES| No effective challenge to DRAMs or Flash memory(Minor, future threat of nanotechnology)| LOW| RIVALRY AMONG EXISTING COMPETITORS | 2005 – Large scale entry by Chinese firms. Fierce rivalry caused by Chinese willingness to sacrifice profits for market share| HIGH|

A1: Using exhibit 7a from the case, we made a graph (apendex1) to show Samsung’s cost advantage and price premium relative to its competitors in 2003. Samsung has an ASP of $5.68 per 256Mbit equivalent chip compared to $4.96 ASP of the competitors’ weighted average -- a price premium of $0.72. The difference in cost is even more significant. Fully loaded costs for Samsung are $4.31 per 256Mbit equivalent chip compared to $5.70 for the competitors’ weighted average – a cost advantage $1.39. In fact, all the major competitors were losing money. There costs are more than what they can sell for (except for Infineon that had a measly $0.02 operating profit).

A2: Using the 12 inch wafer method, the cost of a single chip was 90% of that of the 8 inch wafer method (exhibit 10a from the case). Not only were they able to produce more chips at once, but Samsung’s Yeild rate was 80% whereas the next best yield rate among its competition was 67% (exhibit 10c from the case)