Samsung Case Study

Samsung ElectronicsSummarySamsung Electronics is the world's leader in DRAM and has been since 1992 when they overtook Hitachi. Samsung Electronics began in 1969 manufacturing black and white televisions.

A small startup company called Korea Semiconductor Company began manufacturing wafers in 1974 but had weak financial backing and didn't have proprietary technology and began to struggle. Kun Hee Lee, the third son of Samsung's founder, decided to purchase Korea Semiconductor with his own personal savings, believing that the industry would experience huge growth and desiring to move into more advanced technology.

Lee ended up merging Korea Semiconductor and Samsung Electronics, attempting to create a global powerhouse for semiconductors and consumer electronics. In the 1980's, Kun Hee Lee convinced his father Byung Chull Lee that semiconductors was where the growth would be and that it would be financially advantageous for the company to move in that direction. Samsung Electronics became the golden child of the company and the Lees poured most of their resources into the electronics portion of the business.

Samsung needed outside expertise and technology so they forged an agreement with Micron to teach them how to produce 64K DRAMs. They were so convinced that their decision was a sound one that even when the semiconductor market went into a recession and Samsung Electronics was losing money in their memory chip segment, they continued to invest in it to gain market share.

Samsung's research and development was unique in that they actually had segments of this business development segment competing against each other. Teams in the U.S. and South Korea were asked to design 256K DRAM and to cooperate somewhat with each other but to see what they could come up with separately. In one instance the California team was successful and for the next generation the Korean team's product was chosen. The system seemed to serve Samsung well.

Samsung was very successful but faced stiff competition globally. Companies such as Elpida (Japan), Hynix (South Korea), Infineon (Germany), Micron (United States), Nanya (Taiwan), and Semiconductor Manufacturing International Corp. - SDIM (China) were main competitors. Infineon was a strong competitor and tended to be towards the top of the pack. SDIM and other Chinese companies were interesting because of the way they did business.

China's ThreatWhile Infineon and others were strong competitors of Samsung's, China was becoming a huge concern to Samsung. The semiconductor industry in China was similar to that of Samsung early in their venture into this market in that they were willing to take losses for a number of years to gain market share. In addition, while SDIM wasn't at the forefront of technology development or frontier products, they were very aggressive in the market for legacy or older more established products.

Basically, China was doing toSamsung what Samsung had done to the Japanese a number of years back. They were a threat to their global position in the semiconductor market.

The Chinese semiconductormarket had a number of players but only SDIM had any kind of significant share of DRAM products. The rest of the Chinese market produced logic memory. This didn't mean that Samsung could forget about those companies.

There was a fear that at any time many of the companies producing SRAM could enter the storage memory market and make huge waves. In 2004 China had 4% of the world's chip manufacturing capacity and that number was expected to rise to 9% in 2007. Many outside observers believed that China would have a huge impact on the semiconductor market in the years to coma end would upset the current balance of power in the industry.

Samsung's StrengthsSamsung had to face the challenge of Chinese competition and its desire to move strongly into an area that Samsung had dominated for quite some time. Samsung had a huge advantage over any company in China and the rest of the world for that matter.

They had brought R&D in this industry to a great art form. Samsung seemed to make wise decisions as the industry moved forward. Where in the past, Korean companies often hired employees from good schools or regions and based promotions on seniority (as did Japan and much of the world), Samsung decided to base promotions on merit (a novel concept). This resulted in those who were hungry and wanted to work hard moving up quickly in the organization. Many of the top executives in the companywere in their 40's and they had moved quickly past older employees who weren't as motivated.

Research and Development was a major strength of Samsung. The company knew that if they were to maintain their leadership position in the industry they had to stay on the cutting edge. Having competing teams, as mentioned earlier was one concept that served them well. Samsung also kept the majority of their R&D facilities on a single site just south of Seoul, South Korea while most of their competitors' were scattered throughout the world. They had their engineers live together in company-owned housing, sharing meals, ideas, and allowing them to quickly and efficiently work through new designs and problem shoot potential troubles.

Where many other companies were reluctant to hire from outside the country, Samsung chose to look world-wide for talent. They had a Regional Specialist Program to place employees with great potential in other countries to gain valuable experi3ence and help Samsung gain a better understanding of world markets. Samsung also actively recruited talent from other countries, as well as Koreans who had gone to work in the United States and throughout the world.

Samsung compensated their employees very well, with Lee declaring that the company will help take care of employees and their families, freeing them up to devote their time to innovation and productivity. Lee's philosophy was to reward outstanding performance and not punish failure. Samsung was one of the leaders in the industry with respect to annual salaries, lagging behind Infineon. WhereSamsung was pretty close in salaries to some of the other companies, they blew by them in total compensation.

In addition to their base salaries, Samsung employees had the opportunity to earn extremely substantial bonuses on three levels. First, they could receive cash bonuses on individual projects. Second, they could obtain Productivity bonuses at the division level. These paid up to 300% of employees' annual base salary. A profit sharing program was also given to employees worth about 50% of their base salaries. With salaries and incentives like these, Samsung was able to maintain a strong employee base.

What to Do?One of the biggest potential problems facing Samsung is what to do with China. They were making moves to increase market share in the older products and were seeking to move into a competitive position in the entire memory industry. Samsung had some big decisions to make. Should they move strongly into China? Should they collaborate with a Chinese partner? How should they interact with China? These were significant issues that Samsung had to face, and to ignore China's threat could be a huge mistake.

Samsung needs to steer clear of any kind of partnership with China. As was stated in the case, intellectual property rights were not really honored in China and sharing any kind of information could lead to a partner becoming a competitor. The decision to forgo a partnership brings a bit of a risk in that other global companies might be lured into partnering with a Chinese company to take advantages of incentives offered by theChinese government.

They were offering cheap land, credit, utilities, engineers, and tax incentives to companies who would be willing to partner with a Chinese company, and the risk another company might be willing to take could pay off big time. The potential down side to such a partnership was too big for Samsung to take. Samsung needs to assert its leadership in the industry and continue to innovate and be a leader. They have cutting edge R&D, the top experts in the industry and are operating from a position of strength.

Samsung must continue to be at the forefront of new product development. They must continue to take smart, calculated risks. Like the risk they took when they devised a plan to increase the size of wafers used to cut the DRAM chips to eight inches, Samsung must continue to look for ways to lead the industry and innovate.

That's what has made them great. Continuing to launch new DRAM products that are product-specific is also an area that Samsung should focus on. While many of these types of applications share a common core design, Samsung can continue to develop DRAM with subtle differences to operate more efficiently in specific products. This is a niche that Samsung can develop that can continue to set it apart from the rest of the industry.

Samsung should also continue to invest in flash memory technology. DRAM is a fairly mature industry that still has the potential for some growth, but flash memory was expected to grow at a double digit rate for the next five years. This was expected to keep flash memory prices high relative to DRAM prices. Samsung needs to spend timeand money focusing on flash memory while maintaining its position in the DRAM market. Research and Development must continue to be stressed and Samsung should fight to be the first to develop new, cutting edge technology.

Focusing on what they do best, Samsung will maintain its leadership in the industry. While China poses a threat to Samsung and the rest of the industry, Samsung has built a well deserved reputation as the leader and an innovator in the semiconductor industry. They need to proceed cautiously, but from a position of strength. If Samsung continues to innovate, if they hire the top experts in the world, if they compensate their employees well and they keep their edge, they will be able to withstand the Chinese threat and maintain their global market leadership.