1. Introduction: Samsung Electronics Company, henceforth called “Samsung” in this case, was established in 1969 to manufacture black-and-white TV sets. In 1974, Samsung, which was a producer of low-end consumer electronics, purchased Korea Semiconductor Company and began its semiconductor industry.
Under the leadership of the chairman of Samsung Group, Kun He Lee, Samsung has risen, with a remarkable speed, to become the world’s leading memory producer, ranking 2nd just behind Intel. Meanwhile, Samsung used the earnings from memory division to invest in various technology products like mobile phones, liquid crystal displays and so on.
These businesses made Samsung generate the second-largest net profit of any electronic company outside the US. In spite the current success, Samsung was facing the competition from Chinese producer that would sacrifice profits for market share by providing cheap DRAM products. So what should Samsung do? There are 3 potential options: 1. Directly confront the competition from Chinese companies, perhaps by driving down DRAM prices, offer favorable service or coalescing with other memory producers. 2. Cede the DRAM market and shift to other businesses.
3. Collaborate actively with Chinese companies, maybe by expanding joint investment in China. And at the same time, increase its investment in cutting-edge products, particularly for new niche markets. The following paragraphs will first focus on analyzing memory market of the time, the advantage and weak point of the incoming Chinese produces. Then, we deep into the 3 potential options and give a detailed explanation why we choose the third option for Samsung. Finally, a conclusion for this article will be drawn.
2. Market analyzing based on Potter’s model of generic competitive strategies Potter’s model was proposed in 1980s. It has had an extremely deep impact on enterprise strategies and has been widely used in analyzing the firms’ competitive environment. In light of Porter’s analysis, the competitive environment has a common structure, consisting of five competitive forces. These forces, which are viewed as the determinants of the industry’s overall competitiveness and profitability, are: * Bargaining power of suppliers
* Bargaining power of buyers * Intensity of rivalry among existing firms * Pressure from substitute products * Threat of new entry We now look through the 5 forces and combine them with DRAM memory business: 1. Bargaining power of suppliers Supplier bargaining power refers to the ability of providers to determine the price and terms of supply. Suppliers can exert power over the market by raising prices or reducing the quality of purchased goods and services, so reducing profitability. Semiconductor market is dominated by a small number of companies, including Samsung.
These companies firmly control the market and make it difficult to enter. As a basic part of a variety of electronic products, DRAM is indispensable for buyer’s business, putting the buyers in an inferior situation in drawing price.
As of 2003, Samsung offered over 1200 different varieties of DRAM product. This could satisfy the need of various buyers and thus covered the market comprehensively. The possibility that major companies forward integration further made the semiconductor market difficult to access. Thus, the bargaining power of suppliers in this industry is very strong. 2. Bargaining power of buyers
Buyer bargaining power refers to the pressure consumers can exert on businesses to get them to provide higher quality products, better customer service, and lower prices. It is a normal occasion that bargaining power of buyers and suppliers is sort of the reverse relation to some extent. DRAM is required by many firms of electronic producers.
These buyers are less concentrated than suppliers and give the large number of buyers; threat of backward integration of buyers is low. Since DRAM is the major memory product offered to large quantity of electronic product, substitutes are unavailable at least nowadays. Off course, buyers could choose to switch to other memories like SRAM or FLASH. However, given the distinct function of DRAM, the switching costs are high. Thus, the bargaining power of buyers in the industry is very weak. 3. Intensity of rivalry among existing firms
There were 6 major competitors in the memory chip industry in 2005. Since Intel exited the DRAM market in the 1980, Samsung gradually has become the largest DRAM producer, with a market share of 30%. The intensity of rivalry was rather low, and for Samsung, it was easy to hold the leading position so long as it conducted continuous innovation. 4. Pressure from substitute products
As is mentioned above, there was no mainstream substitute of DRAM. This market would be very stable in the predictable future. Keeping in this industry will be beneficial. 5. Threat of new entry Since 2000 to 2004, there was a decline in DRAM market, with many firms in financial loss. Though Samsung had achieved profits despite of the reverse DRAM environment, it had reduced the price (a combined result of both strategy adjustment and periodic cycle of the industry). In 2005, the competitive environment changed dramatically. Samsung faced the challenge from Chinese entrants who were attacking the DRAM market in much the same way Samsung did 20 years ago.
From the analysis of the Porter’s 5 forces in DRAM market, it is not difficult to find that Samsung had great advantage in the first 4 factors. The only factor Samsung had to take into account seriously was the threat from new Chinese competitors. The following part will discuss the advantage and disadvantage of Chinese competitors.
Chinese competitors – threat or not? In 2005, Chinese enterprises entered the DRAM market. Though these enterprises lacked critical infrastructure and the cutting-edge technology in DRAM industry, they drove down the price to compete with the existing DRAM enterprises, much the same way that had been successfully used in acquiring market share by Samsung. Moreover, Chinese enterprises had the following advantage: 1. A strong support from the Chinese government
In recent years, Chinese government invested much in the development of high-tech products. Some Chinese enterprises could get funding from the government as capital to conduct the so-called “price war”. They were patient enough to endure years of losses to gain significant market share.
Although such kind of low price is not sustainable, but it would certainly have a considerable impact on Samsung for at least 5 years, during which time Samsung may have successfully turned to other businesses already. 2. Availability of large number talented technicians
China is a country never short of talented people. The government emphasized on cultivating technical talents these years, making more Chinese enterprises from labor intense to skill intense. The number of people who went to study in developed countries was increasing dramatically. These people would greatly promote R&D, and thus competitiveness of technical enterprises. 3. Seeking for cooperation with existing DRAM enterprises
While the US government forbade US producers from shipping advanced semiconductor equipment to China, and so did Taiwan, China could simply went to other countries. In fact, a number of countries were willing to trade their part of their advanced technology for, say Chinese Market, human recourses and capital. With the existing technology and experience, Chinese DRAM firms would grow into mighty rivals of Samsung. 4. Cheap original materials for the production of DRAM
The production cost in China was rather low, that is why China had gradually become the “world factory”. For this reason, Chinese DRAM enterprises could be put in a favorable position in reducing price for market share. Nevertheless, there seemed to be way to make the matter the other side of the coin.
That is, collaborating actively with Chinese firms. Samsung could set sub-firms in China, increase the investment in Chinese DRAM business, or offer some technical support. Samsung could me itself more competitive by reducing cost due to cheaply priced materials. Considering the collaboration relation, it would be easier to have access to Chinese market. In the long run, this would benefit Korea because Korea needed such a big incompletely explored market.
One important concern was the risk of losing the protection of intellectual property rights if working with Chinese producers. Samsung would unconsciously make the partner into a rival some day. Moreover, since Samsung’s competitive advantage partly owned to its unique culture in Korea, it was possible that moving production to China would threat the survival of the unique company culture. What should Samsung do?
Now we can get down to the 3 options Samsung could possibly adopt. 1. Directly confront the competition from Chinese companies. I think it is an extremely unwise option choosing to compete with Chinese producers toughly.
These producers have the support from the mighty government and can easily draw fund from many other countries. The cheap materials in China also give them great price advantage and it is quite reasonable. Unlike the situation in 1980s, I believe Samsung would be accused of violating the law against competition by inappropriate means. Since Samsung now had a high brand value among the world, conducting price war would harm the brand for sure.
At the same time, other rivals such as Elpida Memory, Micron Technology, and SMIC may seize the chance to shake Samsung’s leading position when Samsung is in confrontation with Chinese producers. Once Chinese producers become mature and acquired core technology, due to some sort of patriotism, I believe they will take up the whole mainland business, which is second only to US market. Samsung’s price competition may never pay off. 2. Cede the DRAM market and shift to other businesses.
This is even worse an idea than previous one. It took Samsung nearly 40 years to become the leading semiconductor producer and this market is still profitable. Samsung cannot quit the market just because of the competition of other strong rivals. Someone would argue that Samsung could then focus on other electronic products. But the development and success of these products largely depend on the support from its DRAM industry. It is the fundamental business of Samsung and cannot be readily given up. 3. Collaborate actively with Chinese companies. Meanwhile, increase its investment in cutting-edge products, particularly for new niche markets.
If Samsung collaborate with Chinese companies, it will knock open the door of the vast market of China. Samsung could move part of its manufacture to China. Then, it can reduce the production cost, thus making more profit. There is a risk of leaking out core technology considering the inevitable employment of Chinese talents. However, in our point of view, traditional DRAM technology has reached a bottle-neck position and the further development allows of no optimist.
Conversely, Samsung should use the money from Chinese manufacture base to invest in cutting-edge products, in another way of saying, committing to creating High Tier Brand. In fact, in the semiconductor industry, Samsung once set a requirement that it must be at least 3 to 6 months head of Japanese rivals in R&D at any time. Devoting on the newest technology has always been a key for Samsung’s success.
And there are also some new niche markets that have not been explored yet, which is a great chance for Samsung to widen the disparity with its rivals. This transformation is in accordance with the remakes by Kun Hee Lee which appropriately represents Samsung’s culture: “Everything has to be changed except wife and children.” Such focus on new high-technology will ultimately benefit Samsung in the long run for sure.
Conclusion: In the case study, we have analyzed DRAM market using Porter’s model and dept into the advantages and disadvantages of the new Chinese competitor. Based on the result, we have drawn a conclusion that Samsung should seek for collaboration with Chinese enterprises and meanwhile focus on other cutting-edge products, particularly for niche market. The success of Samsung is a result of many factors, for instance, emphasizing on R&D, unique enterprise culture, diversity of products and perhaps, chance. It cannot be completely covered in a short case study. When it comes to real world, enterprise strategy should be made based on more detailed analyses on wild aspects.