Samsung is one of the companies that is highly effective in aligning its business strategy and operation model.
Although Samsung has been perceived as a mobile phone manufacturer to most consumers, Samsung’s core business is in semiconductor. Since 1993, Samsung has always been the number one market leader with 36.7% market share (2013).
Samsung’s business model has changed over time. Samsung’s semiconductor business can be divided into three phases: 1973 ~ 1993, 1994 ~ 2014, 2015 ~
During the first phase, Samsung’s mission was to become a fast follower. Samsung had limited experience in developing and producing semiconductors. Therefore, Samsung took a similar approach to BYD (TOM case) to reduce the gap with the first movers. All operation was optimized to learn and adapt the technologies and processes from the best players. Furthermore, product price was kept low by lowering the cost. Several actions were taken to achieve these goals.
Enhance knowledge and capabilities in technology
- Hire or conduct in-depth interview with retired Japanese semiconductor engineers
- Send visiting scholars to Japanese semiconductor factories
- Hire Korean Ph.D.s studying abroad in US and Japan
Obtain faster mass production capabilities
- Gain government approval and support to receive tax and policy benefits
- Build semiconductor factories 4 times the scale of Japanese factories
- Utilize cheap labors with strict training (similar to BYD case)
- Develop and test sample products in the production line
Acquiring proprietary knowledge from competitors was challenging. Samsung had to be creative and aggressive in its R&D spending. Samsung actively pursued experienced Japanese engineers with generous payment. In addition, executives personally visited Korean students studying abroad, persuading them to work for Samsung. Although the salary was lower than what they would have received working outside of Korea, many students were attracted and returned back to Korea, working for Samsung.
The most challenging task was learning the factory structure and operation process. Limited but a few employees were allowed to visit Japanese factories. Returning back, the engineers rebuilt the factory based on their memories with modification to compensate the limitation in Korea.
Samsung’s intention to become the leading semiconductor player was well received and approved by the government. The government had a mandate to improve the economy, and Samsung’s plan was well aligned with the government.
Under the government’s support Samsung acquired lands and tax benefit as well as financial support to build the semiconductor factory. Here, Samsung would hire and train workers similar to BYD case. Employees resided in dorms and socializing activities were encouraged by the company. Finally, to speed up the process, semiconductor samples were built and tested on the production line. This was possible because most R&D was focused on process than the fundamental technology.
As Samsung started to dominate the market, the business model also changed. By this time, Samsung had not only gained the capability to mass produce, but also had the best technology in memory semiconductor. Now, instead of focusing its R&D in processes, a hefty amount of R&D budget was spent on product, developing newer technologies 6 month to 1 year earlier than its competitors (even Hynix, the 2nd largest memory semiconductor company, was 6 months behind). Samsung tactically applied this advantage in its operation.
- Release the best performing memory semiconductor in the market 6 month to 1 year earlier than its competitors, charging high margin
- When competitors catch up, drastically lower the price, forcing the competitors to sell their products on a low margin
Today, Samsung is in the final phase, and many things has transformed. Samsung has created a global logistic and supply chain network, creating a bigger gap against its smaller competitors. Furthermore, to counter the increasing labor cost, Samsung has transformed its factories in Korea by replacing labors with robots, automatizing the process. In addition, Samsung is now actively pursuing more difficult technologies such as non-memory semiconductors, competing against Intel and QUALCOMM.
*All data were obtained from the following reference:
- Samsung Economic Research Institute (http://m.seri.org/doc/bok03.html?menucd=0306&pubkey=477&npage=16)
- Electronic News (enters http://www.etnews.com/20150327001806)
- Presentation by former head of Samsung Electronics Semiconductor Mask Rom
Student comments on Samsung semiconductor
Wonderfully illustrates how Samsung has become a global player by aligning its strategies over the years.
Recently atleast in the smartphones business with the advent of companies such as Xiaomi, Samsung has taken a hit. Do you think that the kind of alignment achieved by Samsung in the semiconductor business over the years can be used to reclaim its desired standing in the smartphone industry?
Or in your opinion should Samsung focus on acquiring companies and strengthening its business-operational strategy alignment sooner rather than leveraging its inhouse capabilities?
Thank you Sidharth 🙂
Hmm…well, honestly, I do not think Samsung can achieve the same level of dominance in the smartphone business. I may be wrong with this, but my thoughts are, for memory semiconductors, the specs that client companies are looking for are relatively similar and limited. On the other hand, consumers have various taste, and smartphone being a consumer product, I’m not sure if it possible to have the same dominance over a broad range of market segment.
Regarding acquisition strategy, Samsung has always been extremely conservative and preferred to develop things in-house (although there are a few cases, but they are rare). However, the company is going through a major change, transiting from 2nd generation to the 3rd generation (current chairman in a coma, and his son, the vice chairman will most likely succeed him). The 3rd generation is relatively more westernized, and thus we may see more acquisition than before. It will be interesting to see whether the company philosophy will change, and if it does how it will change.