Provide an actionable problem statement, identify and breakdown the key issues, decisions to make and by whom
Samsung is one the most renowned company for its electronics products all over the globe. With a legacy for more than forty years, the company has been surviving successfully for its electronics products. On the other hand, the electronics industry also got changed with the passage of time where demand patterns also completely changed. Also, the competition got fierce in this industry. Apart from electronic products, Samsung also jumped into semi conductor production for the usage of digital memory saving. Memory chips also got enhanced technologically with many key players emerging the market with innovation and better products. Samsung, once upon a time with greater market share was earning huge profits with electronics products as well as semi conductor chips. But due to greater competition, sales declined causing a drastic decrease in key profitability ratios. This was the most important issue faced by Samsung with the new millennium. Also, the new entrants particularly from China offered competitive prices than Samsung. The Chinese specifically picked to compete in DRAM market for which huge losses for Samsung are anticipated. Companies like Miceron Technologies, Infineon Technologies, Hynix, Worldwide, etc, which offered same products with low price causing a decline in market share of Samsung. The problem could be solved by having mutual production understanding with key Chinese players. But there is a strategic problem creating hindrance regarding Individual Property Rights and sharing Research and Development with Chinese who one day can be a competition to Samsung itself. On the other hand, Samsung did not want to destroy its unique Organizational culture which is completely opposite in same industries in China.
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Samsung also needs to establish it production links in emerging economies but will appropriate skills. This will also help the company to penetrate in new and potential markets with relevant demographics. This can also be very much helpful to boost the company’s sales and profitability figures. But the above calls for injecting more investment in cutting edge memory products in such times of decreasing profitability. Thus, it creates a cross road for the company to take strategic decision keeping long future in mind and act wisely in which they can retain their market share and profits. For the purpose, Chairman Lee has to take tough decisions. Penetrating in new markets which has human resources and technical expertise for the industry can be the best option, for example, India.
Analyze the issues identified above by utilizing relevant facts presented in the case and associated conclusions
In this competitive environment, there are many issues Samsung has been facing according to the case. Also, the company has been working real hard to work for it and analyze different situations and its pros and cons to get an effective and viable solution. On the whole, the company faces problems in the internal environment as well as the external environment. For the reason, it is important to define Strengths, Weaknesses, Opportunities and Threats of the company with SWOT Analysis.
Samsung is one of the most popular brand names in electronic products manufacturers. It has an inheritance of more than four decades in Asia as well as the western part of the world. One of the key strengths of Samsung is their diversified range of differentiated products line to meet the demand pattern of every kind of customer. Besides end customer, Samsung also dealt with Original Equipment Manufacturers like Sony, Toshiba, and Sony Ericsson for personal computers as well as cell phone manufacturers. Also, the products of Samsung are well defined with respect to demand patterns and trends. It keeps on evolving its product line which helped in retaining its market share in a competitive environment. The company also succeeded to retain higher brand value by having multiple sponsorships. Research and Development is another key aspect for the company since they are considered to be geeks in their filed which helped them produce a better product and services of customer of every kind. Their best human resource practices also helped them to establish one of a kind organizational culture and beliefs which also helped them establishing supreme productivity.
Samsung always focused on serving mass markets. Whereas the competition from countries likes China at all times looked on serving niches. This is an era of serving niches and micro-marketing. For the reason, Samsung also lost a greater portion of their loyal customer. Also, Samsung is looked as an expensive brand and that people also perceive the brands as nondurable.
Samsung can go for serving niche marketing. Also, wider range of serving demographics is another aspect by establishing production units in China. The company can also go for attracting good Chinese engineers who work on low pay grades. The demographic age bracket of teenagers could be focused with new technological gadgets.
Chinese production units are the greatest threat to Samsung as they are working on low profitability and believe in penetrating in market. DRAM technology is a competitive advantage to Samsung as they are reliable suppliers of many Original Equipment Manufacturers. If such Original Equipment Manufacturers go for backward integration with any cheap company in China, it will be the greatest loss for Samsung.
According to Porters five forces of competitiveness, the external problems are:
The threat of new entrant
The case explains that the Samsung has a long legacy as far as producing electronic products for consumers. It has a global identity with a good brand recognition and market share. Also, the product range is much diverse: that starts from LCDs to mp3 players, refrigerators, irons, air conditioners etc. So, the entry of a new firm in electronics totally depends upon the aspect which is subject to a competition by the new entry. In this regard, it is of much importance taking into consideration the marketing mix of the new company which should be more consumer-focused. Such marketing mix is also dependent upon the use of technology and bringing innovation in new products and services. This aspect makes it difficult for the new companies to enter in the market and compete with exiting giant companies like Samsung. The case specifies the story of memory chips. In this situation, Samsung even managed to get good sales in the hard times of cyclical turndown in FY 2005. But there was a greater threat of Chinese new entrants, since they have relevant expertise and technology to enter in the memory chip industry with innovation and lower prices. 2- The Threat of Rivalry
In such consumer electronic, there is a great deal of rivalry. There are giant companies like Apple, Song, Toshiba, etc. which have their existence since many years on global levels. They have great brand recognition and compete on the head-to-toe basis. The major rivalry in this regard is of technology and bringing innovative products in the market. By the end of FY 2005, there were many competitors present in memory chips industry. Companies like Elpida Memory, Inc. from Japan, Hynix Semiconductor, Inc. (Hyundai) from Korea, Infineon Technologies AG from Germany, Micron Technology from Idaho, Nanya Technology Corporation from Taiwan, and many more. Such companies also evolved with a great time of Research and Development and were giving their best in their form of good prices. On technological grounds, the industry needs huge investment were the end customer is price conscious. Chinese also came out to be the greater threat since they worked on economies of scale with greater innovation resulting in larger capacity with lowest prices. Such companies also sacrificed their operating profits just to grab the market share and penetrating the market on a global level. This also proved fatal for Samsung and end up with greater losses for them.
Threat of Substitutes
Memory chips are one of the greatest demands of customer of every nature in almost every country of the world. It is used for storing digital data and is easy to carry. There are many substitutes of memory chips including floppy drives, writeable CDs and DVDs. But, such substitutes are considered old and are not in use in contemporary times. Therefore, there are no direct substitutes for memory chips.
Bargaining power of suppliers
As mentioned above, the industry has powerful suppliers and on the other tail the customers are very price cognizant. As a matter of fact, semiconductors are very complex to manufacture and the raw materials involved are very complex, profound and difficult to supply. The most important aspect suppliers are the semiconductors which are difficult to manufacture it. So, the suppliers get concentrated by such electronics companies and that they enjoy greater bargaining powers in terms of supplying their products and services. For Samsung, there are only two to three key suppliers which include Applied Materials, Tokyo Electron and ASML. Such a supplier’s base is dangerous for Samsung; since such supplies are vulnerable to prices and that can directly hit Samsung and its Marketing mix. On the other hand, the suppliers are ready to offer a discount of up to five percent if purchases are made on bulk for high volume industrial buyers.
Threat of Customers (Buyers)
Most of the buyers Samsung targeted were the Original Equipment Manufacturers like Toshiba, Samsung, Sony Ericsson, Nokia, etc. The customer base was also categorized by two segments, Personal Computers and Mobile Phones. Original Equipment Manufacturers also had the capability to negotiate for prices with Samsung as such memory chips were around 12 percent of the entire personal computer and around 7 percent of a typical call phone. On the other hand, such Original Equipment Manufacturers also had to face severe competition on their manufactured products. So, to handle their financials, such Original Equipment Manufacturers like Sony, Nokia, etc as greater capability to negotiate prices with Samsung. Also, such Original Equipment Manufacturers are ready to pay just 1 percent premium for product reliability which is not a healthy percentage. Therefore the customer base gets exceedingly fragmented.
Develop strategic directions available to the firm and a description of choices available to the relevant decision makers.
Samsung as a good name in electronics industry have had great chunks of capital in their reserves. This shows their product quality and brand recognition in the global markets. By the end of FY 2004, the company managed to produce a net sales figure of more than $ 78 Billion. As a matter of fact, it is also revealed that the company managed to improve its brand value to 21st ranking in 2004 from 43rd in the worlds. This also proves that the company has been doing well in the consumer goods electronic industry worldwide. Also, semiconductors for digital storage chips had been Korea’s largest export due to Samsung. Therefore it explains that Samsung had a very good position in the industry.
By the end of FY 2003, Samsung worked on more than twelve hundred diverse variations of DRAM products. Also, the completion got fierce and the threat of Chinese entrants was a major source of disrupt for Samsung. As a matter of fact, it will not be wrong if we say that the DRAM products and its market got homogenous over the period of time. This is another potential problem faced by Samsung. For the problem, there is a dire need present for the company to differentiate its products from its Chinese and Taiwanese competitors in such a way that the Original Equipment Manufacturers can innovate something new and exciting for their end-users. On the other side of the coin, meeting the emerging product mix of such competitors is another challenge for the company to meet. The Chinese and Taiwanese manufacturers seem to be working in economies of scale and that they have been producing good chunks of profits out of their production practices foregoing profits. It is also mentioned in the case, that the Chinese are even ready to penetrate in the semiconductor and storage chip industry by keeping their product prices lower. It was possible for them by keeping their profits at the lower end. This is a lesson for Samsung that they should also be working on their cost structures and also look on their suppliers of raw materials. There is another need for the company to reduce their profit margin like the Chinese and no compromise on quality should be made on that.
There is another possibility of the company, as it is mentioned in the previous part of the report; which mentions that the company can get its manufacturing, Research and development and other Strategic Business Units (SBUs) in other parts of the world. This will help them to lower their prices due to cheap availability of labor and technical expertise. For the purpose, China seems to be the most noble and viable option but the country is already full of such key players which are trying to emerge in the semiconductor and storage chips market. Also, such players have the prior knowledge of Chinese low context culture, traditions and market. Therefore, China seems not to be a wise option strategically. The other reason in China is of patents and Intellectual Property Rights. A mutual collaboration with China cam hurt Samsung in the future by more competition based on Research and Development done by Samsung itself in Korea. In these situations, India seems to be a good option as the market there is flourishing in technological grounds as well as the government and environment is very supportive. Cities like Bangalore which are well known due to their advancement in software house productions can be an advantage for Samsung. It is also suggested that the production and Research and Development unit which is suggested to be established in India should be headed and completely looked by the Koreans of Samsung. It will be a good decision as it will help the company to maintain its quality, product mix and most importantly the mission and vision of Samsung with the help which they became one of the key players in the electronics market.
Also, in such circumstances, it is not a viable option to inject more investment in cutting edge technology to attract the niches of the markets. This is because; Chinese are producing DRAMs and other storage chips on a wider scale with low profit margin. They also have the philosophy of attracting small Original Equipment Manufacturers on a wider scale. This option may lead to huge losses to Samsung.
Give your recommendation(s) and a convincing rationale for it (them).
In this era of high competition, it is much difficult for Samsung to maintain is profitability and financial viability of a longer period of time until certain steps on a strategic level is not taken. As mentioned above that there are numerous threats in terms of increasing new entrants in the market, increasing bargaining powers of suppliers, Original Equipment Manufacturers as main client of Samsung has also been maintain a position to bargain on prices. Therefore, the competition is on technological innovation of new products and service which have good quality and are readily available on cheaper prices.
The case explains the possibility to have mutual collaboration with the Chinese players in order to create a win-win strategy. But this has implications for a wider scale and can be a fatal move for Samsung in the long term. There is a threat of Intellectual property rights and Research and Development done by Samsung which can be illegally used in the long term. Also, the partnerships with different companies in action are another bad move since it calls for dividing profits on agreed terms. In this era of competitiveness, division of such profit is not feasible if compared to initial and operational costs of the projects.
So, it is recommended that the company should be establishing production units in India. It will also help them to serve different demographic groups of the market as India is also another emerging economy where demand for technological products is on the boom. Also, the government of India is also supportive to such massive level projects since it brings foreign direct investment in the country. India also has strong technological expertise and has the infrastructure to support the cause. Labor costs are also on the lower side which completely helps Samsung to establish its new base in India. Transport from India will also be not a problem since India is a central place to eastern and western countries. Therefore, it exported; the products will get their destinations in time and are subject to greater cost cutting in freight charges on Samsung.
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