Q1. Samsung Electronics strategy has successfully achieved both low-cost advantages and differentiated products.
Samsung is able to achieve and maintain its low cost position due to various factors. Samsung has always emphasized on process and production efficiency. The company places all its fab lines and R&D facility at a single site, so that engineers from various departments can come together to resolve any process or design issues as soon as possible. Benefiting from the collocation, Samsung achieved an average of 12% construction costs savings. Also, as seen in Exhibit 7a, Samsung is able to keep its fully loaded costs below that of competitors. The lower cost is mainly attributed to lower raw materials cost, perhaps due to better relationships with suppliers.
Moreover, Samsung, in its design and production of DRAMs, has always sought to design them around a core design. This enables Samsung to save cost since it does not have to invest additional capital for every new product that it develops. Lastly, as other competitors were reluctant to invest in larger wafers for DRAM production, Samsung went ahead to develop and master the new technology, and has stayed as a leader ever since. As seen in Exhibit 3, this has allowed Samsung to reap the benefits of the experience curve that comes early in the product life cycle, lowering their costs for DRAM production over time.
In differentiating its products, Samsung prides itself on its product reliability. To achieve high quality in its products, Samsung invests heavily on R&D and constantly achieves design innovation. In addition, the firm also set up competing product development teams to create healthy competition so as to ensure the production of premium products in terms of quality and design. Samsung also has the ability to customize its products to customer demands. Such unique ability to bridge technical knowledge with consumer experience has enabled Samsung to command average 34% price premium over its competitors (Exhibit 3).
Furthermore, Samsung values its human resource, invests heavily on its employees and base rewards on meritocracy. They, in return, gave their dedication to the firm, promising high productivity and innovation. This gives the firm its competitive advantage in terms of speed of new product development and superior product quality and design, which translates into brand value.
All in all, it is the interaction of the various activities and people of the firm as well as the visionary leadership of Chairman Lee that brought success to Samsung's strategy. Q2. Samsung needs to examine if the firm is able to sustain its low cost advantage in view of the Chinese's entry into the memory industry. Evidently, the Chinese are leveraging on low costs, its engineering talent and government subsidy for entry, delivering on prices which are valued by consumers, and in turn gain market share in the industry.
One option is for Samsung to collaborate with a Chinese partner. No doubt, expanding through joint investments in China would enable Samsung to achieve higher cost savings than at present. However, sharing of blueprints and technology know-how with the Chinese may pose potential intellectual property (IP) rights issue since the IP laws are still not as developed in China. Moreover, in the memory chip industry, in which high reliability of products is often associated with the branding of the producer firm, collaborating with Chinese partners may potentially degrade Samsung's long-standing premium branding in their product quality.
The growth in DRAM market, which is the target market of the Chinese, is beginning to see a slowdown. As seen in Exhibits 7b-7k and 9, the profits gained from low-end DRAM products lags behind that of customized "specialty products" such as the DDR2 SDRAM and Rambus. Hence, Samsung should move away from the low-end market and concentrate on the "specialty products" that bring about greater profit margin. In addition, since the Flash memory market is experiencing double-digit growth and that Samsung can maintain high prices at this initial stage of the technology, Samsung should focus its resources on this market.
Besides, as the Chinese begin to gain organizational experience and master the manufacturing in the memory chip industry in the near future, Samsung faces the threat of the Chinese's ability to develop new technology which may lock this Korean incumbent brand in its current production methodology. Hence, Samsung needs to take advantage of its head start and constantly innovate and invest more in their R&D activities to explore niche markets that remain untapped by competitors. Certainly, it was Samsung's ability to differentiate itself through innovation and customization of quality products that gave Samsung its competitive advantage.
Lastly, Samsung should strive to maintain its current culture of cooperative employees that help Samsung achieve its speed of new product development and reputation for quality products.