The Samsung Electronics Company was the largest conglomerate in South Korea. The total net sales of the Samsung Group were $135 billion in 2004. It has 337 overseas operations in 58 countries. Electronic, finance, and trade and services were the three core sectors within the Samsung Group. Semiconductor products were classified into two different categories of chips, which are memory and logic.
To focus on the global memory chip industry, the primary threat facing the firm contained suppliers and price-conscious buyer. Based on the Porter’s Five Forces Model, the powerful suppliers can squeeze the focal firm, the powerful buyers can lower profit the focal firm by demanding lower price and higher levels of quality and service. From the case, with different semiconductor equipment, the technology become more complex and the number of suppliers became more intensive.
Suppliers of raw materials would give discount of up to 5% for high-volume buyers. OEMs were the largest buyers. In the global PC market in 2005, because rivalry between PC producers was intense, there was no one controlling more than 20%. Also the memory industry had high entry barriers. Companies needed large amounts of capital investment and technology support. At the beginning of Korea’s semiconductor industry in 1974, without strong financing and proprietary technology, the start-up ran into financial difficulties.
The secondary threat facing the firm was rivalry in the industry. In 2005, with increasing number of large-scale entries by Chinese firms, the industry experienced fierce rivalry. Samsung had a sharply decreasing market price during late 2004. The price drop was due partly to an increase in industry capacity. However, the Chinese competitors lacked the necessary organizational experience and tacit knowledge required to master the design and production process. From the point of view of Samsung, this lack would be the opportunity for them.
Compare to the competitors such as Hynix Semiconductor, in the early 1990s, Hynix had some of the same cost advantages as Samsung, but Hynix lost the technological lead. In 1996, DRAM market began experiencing a cyclical decline, Hynix increased its capital investments into the downturn, at the same time, and Samsung maintained the minimum capital investments. To response market growth, Samsung significantly increased its investments, however, Hynix decreased its capital investment.
The most appropriate action for Samsung is technology development. In order to develop frontier technology for the next generation of DRAM, Samsung created an unusual internal competition across global R&D site. Through this way, company set up competing product development teams throughout its operations. As the company developed, Samsung wanted to be number one.
The senior manager planned to increase the size of the wafers used to cut the DRAM chips to eight inches. Samsung went ahead, no other company wanted to take the risk of investing 8-inch mass production. Samsung produced multiple product, over time; new DRAM products with product-specific applications in laptops and personal game players were developed by Samsung. In 2005, there were no perfect substitutes that could even challenge DRAMs or Flash memory. Despite the benefits of these new types of memory, Samsung was contemplating memory based on newer nanotechnology.
The competitive advantage of Samsung was the reliability of its products and its ability to customize products to customer demands. The first important mission for the employees in Samsung Company was quality first. During 1995 to 2003, Samsung Company won awards for reliability and performance from customer. Also, based on the resource-based view, the human resource policies in Samsung no longer used traditional seniority-based promotion. Beyond base salaries, Samsung had three different types of performance –based incentives. It was a useful method to encourage outstanding employees and gain competitive advantages for the company.
There were two options for Samsung Company. The first one was to collaborate actively with Chinese firms; China had become the world’s second-largest purchaser of semiconductors. With the corporation of Chinese firms, Samsung could expand joint investments. On the other hand, Samsung also would have a risk working with Chinese producers because of intellectual property rights. Sharing blueprints and expertise would change a partner to a rival sooner or later. Another consideration was to move production to China.
The unique culture at the site south of Seoul would be threatened. Another substitute option for Samsung was to change their market to high-value niche products. Because China lacked critical infrastructure to support a cutting-edge semiconductor industry, the government provided low cost and production to encourage semiconductor partners. Before Chinese competitors entered the market, Samsung was the leader of low cost and productions. Instead, Samsung was to increase its investment in cutting-edge memory products to focus on a different market.
Good strategy depends on how competition in the industry is likely to evolve and how that evolution can be exploited to earn a profit. Samsung Company can still focus on both technology development and product. Samsung can expect to enjoy a sustained competitive advantage because the firm is organized to exploit new resources.