I. Industry AnalysisThreat of EntryThreat of entry is moderate to high. The entry barrier is high because there is a high capital requirement to enter into the memory industry. Companies would either invest huge amount of money in R&D to design the products from beginning or get license of technology from other companies. Even though, the industry has moderate threat of entry from Chinese competitors who are willing to sacrifice profits for market share. Chinese competitors have easy access to outside finance and local engineers and they also have support from local government.
Threat of SubstitutesThe memory industry has low threat of substitutes. No product can substitute DRAM or Flash memory now. Maybe in the future, with the development of nanotechnology, new types of memory would substitute the current memory products. However, currently the nanotechnology is not mature.
Power of SuppliersThe power of suppliers is moderate. Three main suppliers Applied Materials, Tokyo Electron, and ASML dominate the equipment market. As Samsung is a very large buyer, these suppliers can offer up to 5% discount for raw materials due to high volume.
Power of BuyersThe power of buyers is medium. PC producers are the major buyers of memory, while telecommunications and communications products producers are growing consumers. OEM PC producers are moderately price sensitive because of the fierce competition among PC industry and because of price-sensitive PC consumers. Meanwhile, PC producers care about the memory quality, so they are willing to pay a price premium to reliable suppliers.
Rivalry among existing competitorsCompetition among existing competitors is moderate. Technologies as well as innovation are advancing every year, as every existing company has made huge investment on improving technology. According to Exhibit 7a, compared with major competitors Micron, Infineon, Hynix and SMIC, Samsung seems to be the industry leader with highest operating profit of 1.224 billion dollars.
II. Business StrategySamsung Electronics uses integration strategy. In the memory industry, Samsung has been able to differentiate itself from its competitors by offering customers reliability of products as well as variations and customization of products according to customer demands. Samsung puts quality first and has won reputation for reliability from most major customers. In addition, Samsung offers over 1200 different DRAM products.
According to Exhibit 4, Samsung has products ranging from 16Mbit to 1Gbit, while its competitors such as Infineon and Hynix only cover few of the production volume. Samsung also offers “specialty products” using customization targeting for niche market. Meanwhile, Samsung is able to maintain lowest cost of operation in the industry. According to Exhibit 7a, Samsung has the lowest fully loaded costs of $4.31 compared with competitors’ weighted average of $5.70 in total DRAM production.
Samsung’s value drivers:Product features: DRAM products are known for reliabilityCustomization: Samsung is able to offer specialty product according to customer demands Signals conveyed with the brandSupport Activities: Samsung takes care of employees’ burden so employees can focus on work
Samsung’s cost drivers:Economies of scalesCost of input factors: Samsung has lower input costs than its competitors
Samsung “widen the wedge” by both increase the selling price and decrease the cost. According to table 1, the price of product made by Samsung is higher than all of its competitors, and is 14.5% higher than the average selling price. And the cost such as labor, raw material and depreciation are much lower than its competitors. As a result, the profit margin of Samsung is 24.1%, defeating all its rivals (Graph1). And following are the reason why Samsung possess the superiority.
Price Premium:Samsung offered over 1,200 different variations of DRAM segment, and ranged them from cutting edge of technology “frontier products” to “legacy products”. It also provides customized “specialty products”. The successful product mix and customization strategy provides a large product portfolio for Samsung to address a very broad market and to avoid fierce price fighting in the most competitive sector of so called commodity DRAMs. The differentiation of products brings huge enormous advantages.
Moreover, the quality is definitely another unique advantage in the semiconductor industry, which was, generally characterized by little product differentiation, and where contained powerful suppliers and price-conscious customers. However, due to the outstanding quality and reliability of its products, Samsung had managed to achieve a position which justified paying premium for its products. Samsung even was named the supplier of choice by their competitor such as Sony Ericsson and Nokia.
Cost AdvantagesAccording to Table 1, it’s easy to find out that Samsung has much lower input cost than its competitors. Cost of raw materials is 15% lower than the competitors weighted averages, labor and depreciation cost is 5% lower, R&D is 2% lower and SG&A is 6% lower. The difference was illustrated in Graph 2, where the column represents the cost of Samsung is always lower than others. The cost of advantages related to raw materials may be explained by better negotiated agreements with suppliers due to large amounts of ordering or lower shipping and distribution costs since Samsung’s fab facilities are geographically collocated.
Although Samsung take care of 90% of employee’s burden the existence of several performance-based incentives, the cost on labor is still lower since the efficiency is improved because of the collaborative and arduous workers and the turnover is decreased. Samsung also has higher yield than that of rivals since the use of same core design for different products and the use of 12-inch Wafer that reduce the cost perchip.
Competitive AdvantagesThe implementation of business strategy is remarkably effective since it not only gains the largest market share in the memory industry but also has the widest gap between value and cost compare to its competitors. According to Exhibit 1, Samsung gained the revenue larger than the sum of revenue from several competitors in 15 consecutive years. Production volume of DRAM is also the largest. In addition, according to Exhibit 3 and Exhibit 7a-7k, both the data for whole company and data for separate products indicate that Samsung always have the highest price and lowest cost, thus gaining the largest operating margin among the industry.
There are several competitive advantages that enhance the effectiveness. Aggressive investment in R&D is one of the reasons since it developed Samsung’s dynamic capabilities to create and maintain technology leadership. It enables the firm to set high premiums at the initial stage of a new product to recover its initial investment and aggressively lower prices to make it difficult for follower to stay in the competition. Outstanding quality of products is also a distinct competitive advantage since it built the reputation and helps Samsung to maintain and attract customers. Economy of scope is also a competitive advantage since two different architectures DDR and Rambus DRAM shared a common core design, which lowering the cost.
The culture and routines such as internal competition in the firm is another advantage to help Samsung improve technology and make the optimal decision. Samsung also does a great job on protecting its competitive advantage in several ways, it has a good expectation of the future in Flash memory market, the earlier adoption of “trenching” and 8-inch wafer help Samsung to maintain the leadership, and its complex organizational structure and social system make competitors hard to imitate.
In details, Samsung has multiple resource and capabilities to provide temporary and sustained competitive advantage. Sustained competitive advantages include quality, brand name, production line capabilities, semi-conductor process technology, and human resource capabilities. These aspects are valuable since they enable the firm the exploit opportunities and neutralize threats such as economic downturn and entrance of Chinese competitor.
They are also rare since it’s difficult for other corporation to keep both low cost and high quality. Brand name and technology are hard to imitate since it need huge capital investment and long time to develop. The appropriate of complementary resources such as management control system an compensation policies make the organization exploit the full competitive potential.
Production mix and customization is a temporary competitive advantage since lots of other firms also has same production mix, making the resource easy to imitate. Partner and OEM customers are also temporary advantage because of the rapid growing Chinese manufacturers. Table 2 is the summary of VRIO model.
Table 2Resource/CapabilityValuable?Rare?Costly to Imitate?Exploited by Organization?Competitive ImplicationSemi-Conductor Process TechnologyYesYesYesYesSustained Competitive AdvantageProduction Line CapabilitiesYesYesYesYesSustained Competitive AdvantageHuman Resource CapabilityYesYesYesYesSustained Competitive AdvantageQualityYesYesYesYesSustained Competitive AdvantageBrand NameYesYesYesYesSustained Competitive AdvantageProduct Mix and CustomizationYesYesNoYesTemporary Competitive AdvantagePartners and OEM CustomersYesNoYesNoTemporary Competitive Advantage