he Samsung Electronics Company has become the largest conglomerate in South Korea over the past decade. Net sales of the Samsung Group totaled $135 billion in 2004 and has 337 overseas operations in 58 countries. Electronic, finance, and trade and services are the three core sectors within the Samsung Group. Semiconductor products are classified into two different categories of chips, which are memory and logic. The net value of Samsung experienced rapid growth from 2000 to 2004, growing from $ 5.5 billion to $12.6 billion.
We will use Porter’s five forces to analyze the industry structure and performance which will help gauge Samsung’s growth against its competitors. Entry into the semiconductor industry can be very costly and difficult because of high barriers to entry. These barriers include, economies of scale, high entry costs, and the difficulty in obtaining industry knowledge. In addition, firms like Samsung have established a strong reputation for quality and reliable products which serve as powerful barriers to new firms hoping to enter the industry. The decreased chance of new entrants indicates a less competitive and more profitable industry.
There are many buyers within the semiconductor industry, each controlling a relatively small share of the market. Samsung has a huge range of products they produce and can afford to do so at a low cost. Since the buyers control the industry and what is produced they have a significant amount of bargaining power. Furthermore, even though the amount of producers in the industry is fairly low, they offer many of the same products forcing them to compete on price. Samsung has a little above medium bargaining power with its suppliers.
The semiconductor industry faces powerful suppliers but because defective memory is difficult and costly to identify, and could potentially destroy the entire value of Samsung’s product, it is very important for Samsung to establish a strong relationship with its suppliers. In doing so, Samsung usually pays a 1% price premium to its suppliers to ensure quality giving suppliers increased profit and more bargaining power in the industry.
However, Samsung consumes a large volume of sales for its suppliers and can still earn a 5% discount because of this large volume and this discount can offset that 1% price premium. In conclusion, Samsung has a little above medium bargaining power over its supplier. Substitutes in the conductor industry are high for three reasons. First, products in the semiconductor industry are highly standardized. Secondly, other major companies in this industry have the ability to produce a large volume of similar products at average costs. Thirdly, there is the threat of new companies from China. However, these companies from China lack the technology to make high quality and low cost products.
Therefore, at this point, Samsung does not need to worry about substitutes from Chinese firms. The semiconductor industry experiences fierce rivalry between the firms. Similar to substitutes, there are six main rivals within the industry. Also, even though the Chinese companies are young/inexperienced, they are becoming a potential rival. No company has the absolute leading market share or absolute technology to break other major companies within the industry. Even though Chinese companies are inexperienced, these companies are having little or no trouble raising money from local government and they are willing to sacrifice profit in order to fight for market share.
Over time, Samsung has established a strong competitive position relative to other firms in the semiconductor industry. Samsung’s emphasis on fast and efficient work has let them complete projects faster than other firms, giving them a competitive edge. An example of this occurred in the mid 1980’s when Samsung was able to complete their first large manufacturing facility, a task that was predicted to take 18 months, in just 6 months by working around the clock. Samsung also has a strength in their location, with Samsung’s main R&D facility and all its fab lines located at a single site they are able to save an estimated 12% on fab construction costs.
This advantage of location also allows their engineers to work closely together to quickly solve design and process engineering problems together, furthering their speed and efficiency advantage over their competitors. Samsung has also done a great job of identifying and seizing opportunities before their competitors, and taking risks that other firms may be unwilling to take. An example of this occurred in 1992 when Samsung decided to invest $1 Billion in increasing the size of the wafers used to cut the DRM chips to eight inches.
This investment paid off and gave Samsung a distinct cost advantage that allowed them to gain the number one market share in the DRAM industry for 13 years. Samsung also identified and seized the opportunity to gain high profits through product differentiation by customizing and catering to niche markets, offering over 1,200 different variations of DRAM products. In order to understand the internal Environment of the company. VRIO framework will be used to analyse the internal environment and to help further understand the strategic position in the industry. Relatively low power of suppliers and large production factories allow Samsung to keep their cost low.
Their low cost of production will enable them to enter into a price war with any company threatening to enter the market. They have the ability to lower their price to the point where it will become too costly for any other company to enter the market will deter additional entrants. Their low cost production ability also allows them to increase revenues and reinvest more money back into R&D. Additionally, having all of their engineers on site allowed for quicker design times and cut 12% of construction fabrication costs.
However, rarity is not really an issue within the industry. There are multiple companies all with similar technology. Once Samsung can keep the low cost production system and reinvest to their R&D, they could achieve sustainable competitive advantage in the industry. Most customers are willing to pay a higher value for their products because they perceive Samsung to have better performance and superior design, quality, and service. The brand loyalty, brand reputation and quality(reliable product) are costly for the competitors to acquire or develop. The competitors also face a cost disadvantage in cost structures since Samsung has an outstanding low cost production system.
Moreover, Samsung’s major competitors do not have the cutting edge technology to quickly overpass the quality of Samsung’s product. It would be difficult and costly for their competitors to imitate their technology.Samsung does a fairly good job exploiting their capabilities because of them building brand loyalty and a high quality product. With all of those advantages it becomes difficult for their competitors to capture Samsung’s market share.
Finally, Samsung invested heavily in its employees more than any other competitor allowing them to focus on innovation and productivity (Include HR policies). Answer to question 1. Samsung employees a hybrid model of business level strategy which consists of cost leadership advantage and product differentiation.
Samsung’s operating cost is $8.90 per unit and it is well below the industry average $10.3975 per unit. As of year 2003, samsung offers over 1200 different products. With a proper marketing strategy, Samsung built a high reputation and good brand image for its products allowing them to charge a premium price on most of its products.
Answer to Question 2: Samsung has implemented their business strategy very well. They were able to become not only the industry cost leader but obtain a large degree of product differentiation. Above, we conducted a VRIO analysis of Samsung and identified their competitive advantages. However, the advantages are only temporary because they are not rare and any company can imitate them by spending a large amount of capital. Until this point though, all of the competitive advantages that Samsung has created have created positive economic profit. These profits can be realized in the large growth in the company from 2000 to 2004.
Recommendations: Our recommendations are that Samsung continue to use their additional revenue from their low cost of production and higher margin to invest in R&D. This will ensure that Samsung has the best product on the market and continue to lower their production costs. By doing this, they will continue to make it costlier for new firms to enter the market. Investing into R&D is extremely costly/ high risk and could lead to failure if Samsung begins investing in the wrong type of products. However, if done properly, this investment can cement Samsung as the market leader and ensure high profitability for the future.