Samsung Electronics Case Analysis

Samsung Electronics Case Analysis

Introduction:

In 1974, Kun Hee Lee bought a small Semiconductor company that was facing numerous financial difficulties. In 1980s, Semiconductor Company became the core attention of the Samsung group. Since then the semiconductor company became the leading business for the group and they investment billions of dollar since they assumed that such investments offer higher growth rates as well as the chance to move beyond basic industry into the design and marketing of advance technologies. Semiconductor industry is a competitive industry with five Major player including Elpida Memory Inc, Hynix Semiconductor Inc, Infineon, Micorn, SIMC and Samsung itself. To survive in such a competitor environment, Samsung had to focus on their competitive advantages by lowering the cost or differentiation.

Major problem to be for Samsung electronics was the threat from its Chinese rivals that were benefiting from low cost labor access, government support, wide financial resources and other strong points.

In the following Case, as assigned I have looked in details about Chinese threats to Samsung and their competitive advantages. And in the end I have my own recommendations to Samsung electronics on how to deal with challenges comes from Chinese entrants to industry

1 - What kind of competitive advantage are the Chinese entrants seeking? How close are they to achieving that advantage?

Primarily, Chinese success in every business in past three decades has been all about cheaper labor and lower costs. It has not been innovation, it has not been of quality service delivery but the sole reason as already mentioned was low-wage manufacturing labor. Cheap labor source, however, was not the only advantage that the Chinese industries had access; plenty of financial resources on the other hand were another advantage of Chinese industries.

To answer the question, lowering cost and differentiation are one of the two sources of competitive advantage. Labor cost after raw material is the second largest contributor to the cost of goods sold, particularly in high-tech environments. Chinese entrants were gaining from this advantage and they could produce a product with low cost. The following table compares the cost of labor of different companies with a Chinese company, SMIC in semiconductor industry.

Chinese cost of labor in semiconductors industry is 4% of the cost of goods sold while on the other hand, Samsung cost of goods sold includes 12% of the labor cost, Micron 14%, Infineon 15% and Hynix 9% of the cost of goods sold.

Besides, government full support, low price debt, plenty of lands, subsidies and other cheap resources also contributes to Chinese competitive advantages specially in decreasing the cost of goods production.

But, lack of innovation, professional expertise and skilled workers in Chinese industries mainly in high technological business, is still a challenge facing by Chinese. Chinese lack of professional infrastructure and skilled workers to support cutting-edge semiconductor industry is a key obstacle in delivering a unique and differentiable product to the market. That is why in every area and of course semiconductor industry, Chinese does not develop own blueprint. Unlike they took other ideas and produces chips based on other blueprints. In other words, Chinese are improving not inventing products. But these obstacles are temporary and will not challenge Chinese industries for more that more one to two decades, Because Chinese entrants were patient and expecting market growth with delivering low prices in expense of profitability. Chinese cheap skilled workers, R&D investments, technology and professional infrastructure were increasing. And all this was guaranteeing that Chinese are growing in the semiconductor business. Their sales grew from $354 million in 2002 to $771 million in 2003. Their global market share was expected to increase from 4% of world's chip manufacture to 7% in 2007.

Second part of the question is asking; how close are the Chinese in achieving those advantages. Well, my understanding of the case, Chinese company are growing so fast, government is supportive in all dimensions, access to low financing is available, design capability has increased, infrastructures are developed. Therefore, this can grantee Chinese entrants that in 5 to 10 years they will have strong design capabilities that they can add unique values to their product in order to make them differentiable from other competitors in the industry. And once they achieve differentiation along with low cost, their strategic advantages will lead them to increase their pie in the semiconductor industry and will lead the industry for decades as Samsung has the lead for 13 years.

2 - Is Samsung's competitive advantage built around being low-cost, or being differentiated? Or both? For each basis of competitive advantage (low-cost or differentiation) identified above, discuss the underlying sources that contribute to this advantage. Using data from the case and the exhibits, quantify your answers to the extent possible.

Samsung operations were both low cost and differentiable. From the cost data given in the case, its low cost advantage comes from low price raw materials, multiple product architecture in production lines, R&D facilities and cheap labor. Differentiation comes when Samsung created new uses of DRAM product, extensive R&D of the product, high quality and reliability of