Samsung Electronics

Sean West, Swetha Vasu, Sarah Love, Matt West & Sammy Stalcup2:00 Section. Group G7

Introduction:Samsung Electronics is a global company that delivers a wide range of electronic hardware components and consumer products. Historically, the core competence of Samsung has been to provide cutting-edge technology as well as mastering manufacturing through vertical integration. Samsung first produced semi-conductors in 1974 and first developed 64Kb DRAM in 1983. In 1996, Samsung entered the global market and launched its first phone. Currently, its market capitalization is currently over $173bn. Samsung has four primary divisions: Semi-conductors, Display Panel, Consumer Electronics, and IT & Mobile communications; however, IT & Mobile Communications is responsible for 69% of the companies operating profits (Exhibit A). Smartphones specifically have increasingly become a focus of Samsungs product lines.Key Issues:In light of Samsung Electronics history and current market positions, we analyze four key issues to consider for the strategic future of the company:1. Where can Samsung win against Apple in the high-end smartphone industry? The release of the iPhone 6 this past fall has contributed to a significant decrease in Samsungs global market share (Exhibit B). Samsung continues to hold the largest global market share for smartphones but might need reconsider its approach to the market.

2. How does Samsung beat cheap manufacturers in emerging markets like India or China? Can they sustainably provide low cost and high quality solutions to these markets? Through significantly lower prices, localized manufacturers such as Xiaomi have increased the fierce competition in the global smartphone market.

3. How can Samsung strategically lower its operating expenses and become more focused internally? Samsung currently offers a myriad of phone models as well as a variety of product offerings.

4. How can Samsung diversify its revenue stream beyond the smartphone? What markets should Samsung target for the future? For example, Samsungs core competence of mastering manufacturing and cutting edge technology could be more fully applied to products serving the aging baby boomer demographic.

External AnalysisSamsung competes in the highly competitive smartphone industry. The competition is driven by a short product lifecycle, continual performance enhancements and the rapid adoption of advancements by competitors. The level of competition in the low-price smartphone market is expected to increase as new entrants like Xiaomi push industry leaders to undertake new and drastic pricing measures. Smartphones have the highest near-term purchase intent among all portable devices, and industry experts expect that smartphones will increasingly replace other connected devices especially in emerging markets.[footnoteRef:1] Not surprisingly, overall demand for smartphones is expected to increase substantially in the next five years; shipments were up 40% in 2013, totaling units worth $266bn.[footnoteRef:2] In this large market, Samsung currently has the largest global market share for smartphones despite significant decrease between the third and fourth quarter of this year (Exhibit B). [1: Financial and Strategic SWOT Analysis Review. Global Data. www.globalcompanyintelligence.com. December 2014.] [2: Chilkoti, Avantika. The future of smartphones is in EM: Gartner. Financial Times. December 10, 2014. ]

This expected market growth further drives competition among both industry leaders and new entrants. From a purchasing perspective, the smartphone product can be broken down into three parts: hardware, software (operating system) and brand. With regards to hardware, the smartphone has increasingly become a homogenous good; the product design has converged to sleek, metallic rectangles of varying size. Similarly, smartphone features (camera, GPS, touch screen, motion sensor) are diluted across manufacturers. The development of new and innovative features is largely stalled. However, the operating system continues to be an important factor for product differentiation. Building a proprietary operating system is the largest barrier to entry for the high-end market. The market leader Apples iOS is easy to use and customizable to user needs. Further, iOS is highly compatible with most popular mobile applications. Competitor Microsofts operating system is slick and well-regarded. Conversely, Samsung struggled to build its own propriety system, Tizen, which finally debuted in June 2014. Samsung has yet to produce a phone that operates with Tizen, opting instead to rely on a strategic partnership with Google and its Android operating system. Utilizing a non-proprietary operating system substantially cuts into a manufacturers profit margins.[footnoteRef:3] [3: Jung-a, Song. Samsung crown prince Lee Jae-yong poised to make mark. Financial Times. November 30, 2014.]

The third component of the smartphone product, brand, is both remarkably important and difficult to quantify and predict. The strength of the brand has a large impact on pricing, and consumer loyalty to a particular brand can increase switching costs. In the case of Apple, the strong brand equity convinces consumers to pay a premium and use multiple products to create a personal ecosystem of Apple hardware, software and content.[footnoteRef:4] With regards to the high-end market, Samsung has never been able to persuade users that its brand is as desirable as Apples, despite huge levels of spending on marketing and advertising.[footnoteRef:5] Further, Samsungs recent decision to pursue the low-end market may have an adverse effect on its brand equity as it appeals to luxury consumers. [4: Mundy, Simon. Fresh urgency for Samsung reinvention drive. Financial Times. January 27, 2014. ] [5: Pilling, David. How the smart went out of the Samsung phone. Financial Times. November 26, 2014. ]

Samsungs decision to pivot its focus is largely due to the fact that industry analysts view the high-end premium market as saturated. The next battleground for market share will be emerging markets, specifically those in Asia. Targeting emerging markets requires manufacturers to innovate downwards, producing low-cost phones for diverse and and price-sensitive consumers. New entrants, Chinese competitors Huawei, Lenovo and Xiaomi, have rapidly gained market share through reduced pricing. The pricing of Xiaomi phones in China undercut both Apple and Samsung options by half. Still, industry giants like Apple and Samsung have a notable comparative advantage when it comes to large-scale manufacturing. Samsung comfortably remains the volume leader, having shipped 79.2M smartphones in Q3.[footnoteRef:6] Both Samsung and Apple enjoy economies of scale with regards to manufacturing, producing high quality goods efficiently. While Samsung exercises a significant amount of control over its supply chain, Apple is a coveted client for most vendors, who adjust their capacity and operations at Apples discretion. This level of control vastly reduces the bargaining power of suppliers for both Apple and Samsung. [6: Mundy, Simon. Samsung to shift focus as handset profit collapses. Financial Times. October 30, 2014.]

The future of the smartphone industry is largely speculative. In emerging markets, it is expected that smartphones will come to replace most other personal, connected devices. In high-end markets, industry analysts predict an uptick in purchases of wearables, the fastest growing element in the internet of things. Analysts also anticipate a rise in demand for phablets, a combination of phone and tablets. Finally, the smartphone industry is highly litigious with regards to patent infringement, and that presents an added risk to firms who compete for market share. In 2012, a jury awarded Apple a $1.049bn settlement from Samsung for patent infringement on features like scrolling and zooming.[footnoteRef:7] The case is still under appeal. [7: Gallagher, Billy. Apple Awarded $1.049 Billion In Damages As Jury Finds Samsung Infringed On Design And Software Patents. TechCrunch. August 24, 2012.]

Ultimately, while the global smartphone market is complex, fiercely competitive and challenging (Exhibit C), Samsungs industry position and core competencies could position the company to take advantage opportunities inherent to a market of that size.Internal AnalysisSamsungs core strengths include its superior technology, efficient manufacturing, global brand innovative leadership and competence in new market entry. While their superior technology and efficient manufacturing are valuable short term advantages, their brand, leadership in innovation and competence in new market entry will drive the most value for them in the long term. While their technology might be currently superior and they do have efficient manufacturing, these advantages are very fluid in the competitive electronics market. Their competitors can imitate or substitute other technology and develop their own competence in manufacturing, and these strengths are almost prerequisites for playing in competitive electronics rather than a recipe for long term advantage.

In order to maintain market share in the highly competitive smartphone market, Samsung needs to leverage their brand, maintain leadership in innovation (both as fast followers and innovators in their own right) and be prepare to leverage their most valuable strength to achieve dominance in new markets. Specifically, we see Samsung is perfectly equipped to launch into the internet of things market for interconnected smart devices of all kinds, and the market for high end life care equipment. Both of these markets are growing very rapidly and require a company with strength in innovation, a trusted brand and competence in bringing value to a new market starting to define itself. We see Samsung as a perfect fit, as these are its strongest VRIN resources (Exhibit D).

FinancialsSamsung has a very strong balance sheet with significant cash reserves and a debt to equity ratio of .41. Samsung has a very strong balance sheet with significant cash reserves and a debt to equity ratio of .41. The revenue of the company had consistently grown over the past fifteen years, but has fallen this year and is anticipated to have a negative growth rate this year. While Apples revenue growth has decreased in the past two years as well, the comparative drop for Samsung is more significant and is causing many to call for a change in the Samsungs product strategy (Exhibit E & F). While Samsungs EBITDA percent margins have generally trended positively since 2008, the EBIDTA percent margin has similarly dropped in 2014. Furthermore, Apple achieves an EBIDTA percent margin 11.8% percent higher than Samsung (Exhibit G). While this margin could be explained through Samsungs integrated manufacturing as well as the scale and size of Samsungs global reach, this significant difference should be explored and lowered. Despite the recent drop in financial performance, Samsung still has a deep balance sheet; Samsung should utilize their financial health as well as their VRIN competence of successfully enter new markets to explore markets outside of the fiercely competitive mobile industry.Business level strategySmartphonesSamsung has for long played on the lines of product bifurcation, offering both premium and low cost phones. Its business strategy focusses on the shotgun approach of releasing many versions of the smartphone and testing the success of these models in various markets. This approach is in contrast to its competitor Apples approach of targeting the premium smartphone segment with lesser variety in models. This strategy has had mixed success at best in the competition against Apple (in the premium product segment) in terms of product design, innovation and brand loyalty. In light of Samsungs domestic brand position in relation to Apple (Exhibit H), Samsung will be challenged in winning the high cost value proposition with customers. Instead, Samsung should employ a differentiation strategy of high quality at lower cost while offering fewer product models, limiting this shotgun approach. Samsung could then leverage its vertically integrated manufacturing competencies to gain more operational efficiencies through more focused offerings. With these strategies in mind, Samsung could offer high quality phones at a lower price point than Apple while maintaining and even increasing profit margins through these efficiencies.Samsungs relationship with the internet search giant Google has been problematic. Samsung added its own layer to Googles Android operating system as a differentiating factor in its smartphone models. These models were well received in the global markets that resulted in Google being threatened by Samsungs market presence. However, this did not last for long as the Android operating system started gaining tremendous popularity globally. Despite this popularity, Samsung should be careful about its dependence on the Android system because the use of the Android system cuts into the profits of its smartphone line, especially for the low cost global units. Samsung has worked on developing its own operating system, Tizen, in order to reduce the dependency on Google; this system currently lacks the sophistication that high-end mobile users expect but could offer promise for the low-cost segments in global markets such as India and China. For their high end mobile products, the Android brand will continue to be a key part of the value proposition to consumers.Product differentiation on the basis of cost leadership could be a key factor in tackling the government moves and changing preferences of Chinese consumers. Since Samsung has the expertise to produce high quality phones for lower costs, Samsung could focus more on producing cost effective phones rather than the premium phones in countries like China. Additionally, in order to differentiate itself from the Chinese vendors, Samsung could rely on innovation to come up with a product that provides better services (over existing Chinese models) at low prices. Thus, Samsung could offer mobile products at a slightly higher price point but of much higher quality. China being a huge economy could bear long term benefits for this company if the market is targeted effectively.Internet of ThingsSamsung has created a unique ecosystem that supports product innovation in complementary products such as TVs, refrigerators, speakers, and other lifestyle products. Samsung should pursue these complementary products with greater focus, utilizing its competitive competencies integrate these cutting edge products in this new market the internet of things. As the next big thing in the technology sector, the internet of things should be Samsungs focus instead of engaging in direct product-to-product war with Apple that already has a focused and loyal target customer base.Corporate-Level StrategySamsungs corporate strategy has relied on the idea of being a fast follower. Over the years, they have been able to be second (or later) movers in a tech space, and copy the original product in a cheaper, more innovative way. Samsung has leveraged a ubiquitous set of corporate activities (Exhibit I), such as building a global brand and cutting edge hardware technology, to capture the largest market share of the smartphone market. However, Samsungs future corporate strategies, including the core activities, hinge on the succession of leadership from Lee Kun-hee to his son, Lee Jae-yong. Under Lee Kun-hee, Samsung has become a very complicated conglomerate, and many of its most profitable business units are using precious resources bailing out the others that are struggling.[footnoteRef:8] To remedy this issue, Samsung should consider divesting or dissolving less profitable units to lower these higher operational expenses so that the company will run leaner, therefore becoming more flexible to the change needed in its flagship unit, Samsung Electronics. [8: http://www.ft.com/intl/cms/s/0/e04d2684-7698-11e4-a704-00144feabdc0.html#axzz3LcFgWGoq]

One of the biggest issues facing Samsung today is that they are being beaten at their own strategy in the global market, specifically China. The Chinese company Xiaomi has been able to take similar consumer electronic devices, including mobile, and market them at a much cheaper price point. One of the ironies in this situation is that Xiaomi uses quite a few Samsung components in their devices.[footnoteRef:9] One of the possible judo strategies for Samsung to execute in the future would be to increase its grip on its opponents. It is no secret that Samsung is a device company, and other companies (including competitors) come to it for high quality products. By offering more hardware to competitors, Samsung will be able to cut into profit margins and increase leverage in the high tech hardware space. [9: http://www.mi.com/en/mitv#features]

In conjunction with the mobile market, Samsung appears to be entering in the home automation, or internet of things, healthcare, and software markets. First, with its recent acquisition of Smart Things (home automation) and Quietside (smart A/C), Samsung will leverage its strengths of cutting edge innovation and hardware technology to build a network of smart devices in the home. This will create additional value because these products can be used together to make the shift to home automation easier. SmartThings focuses on delivering high end technology at a low cost, all while being easy to use. These qualities fit in with what Samsung is already doing across its other resources. Second, in the healthcare market, Samsung has purchased companies like NeuroLogica, which offers innovative portable CT scanners. We believe that this is a value add as well because this device and technology can easily be integrated in Samsungs already robust healthcare device portfolio. Third, a dependent relationship with Google does not seem to be sustainable across all segments of the hardware/software mobile market, especially in emerging global markets. By relying on Google for all software needs, they become vulnerable to changes or power struggles. To increase leverage, Samsung could consider some sort of exclusivity agreement, or it could start the development of its own software for certain products. Through acquisitions like NVELO, Samsung has brought in the expertise to develop a new software platform, Tizen. This software is developed to not only run on mobile phones, but throughout the internet of things. It is yet to be seen whether this will add value the overall structure, mainly because up until recently, Samsung has been exclusively a hardware company. Important factors like the launch of the Tizen driven Z1 phone in India. The success of that launch will likely determine the overall value to the decision to enter into the software space.We also believe that its investment in healthcare may pay off in the future if it can move quickly in the consumer health market. There appears to be a growing demand for personal health devices that can do the job of machines that would normally be expensive of located in a healthcare facility. One example could be a smart A1C meter. By leveraging Samsungs expertise in the healthcare device and mobile markets, it will have the ability to add increased value by creating a meter that can sync to any Samsung device. This signal could alert the need to fill prescriptions, replenish foods suggested to keep blood sugar under control, etc. We believe that this is a very important move for Samsung because of the aging population in both in the US and in China. The need for smart medical devices is on the rise, and Samsung is in a unique position to add significant value to its company strategy.All of the above examples are something that Samsung appears to be entertaining. It is important that Samsung improve on these concepts and move fast in the spaces to increase market share. To accomplish this growth, Samsung runs a division called the Samsung Open Innovation Center. This is a space where immerging technologies can innovate and grow under the direction and support of the overall Samsung brand. Using these resources, it appears Samsung can increase future corporate value and increase market share in present and developing markets.Overall strategyAs a massive global competitor with a diverse set of product offerings, Samsung uses a number of different strategies. Samsungs integrated manufacturing, innovative leadership and global reach, and cutting-edge technologies allow the company to use a strategy as position for certain stable markets such as semiconductors and display systems. In other markets, Samsung utilizes its VRIN resources to deploy into attractive markets such as the internet of things and the growing healthcare market as well as to continue to be competitive in the mobile industry.RecommendationsBased on our analysis, we recommend the following: Samsung can compete against Apple in the high-end smartphone industry through providing high quality product lines but at lower price points than Apple, aligning their offerings more closely with their brand position. In this differentiated market position, Samsung can create a niche for itself for consumers looking for a high quality smartphone experience without the price tag of Apples products. Allowing marketing to drive product design and build more successes like the Note series must be a priority.

Samsung can win against cheap manufacturers in markets like India or China through slightly higher cost solutions with significantly higher quality products. Once again, Samsung can selectively reduce the features of the low-cost mobile product offerings but leverage its core competencies of manufacturing mastery and cutting edge-technology to still offer products of substantive quality. This, combined with reducing the overall number of phone models, will add operational competencies and allow them to significantly reduce waste, product obsolescence cost and costly inventories.

Samsung should channel its VRIN resources of integrated manufacturing, innovative leadership, global reach, and ability to master cutting-edge technologies to become a cost leader in its current markets as well as the new markets it chooses to enter. Given its new market entry competence, Samsung should move beyond its dependence on the smartphone by entering markets such as the internet of things, healthcare, and software. This diversified and effective strategy could allow Samsung to not be so dependent on the challenging smart phone market. In light of its healthy financial position, Samsung can continue to invest heavily in R&D but must be selective in its investments and simultaneously seek streamlined product lines, guided by better market research. By avoiding the shotgun approach, Samsung can more efficiently enter these new markets while striving to maintain its bottom line. Appendix

Exhibit A:

Exhibit B: Global market share of smartphone vendors (% of shipments)

Exhibit C:Porter's Five Forces - Smartphone Industry

Threat of New EntrantsHighEntry into the smartphone market requires proprietary knowledge (operating system) and large amounts of capital. Further, the smartphone industry is very regulated and mired by patent litigation. The market leader, Apple, has strong brand equity. However, new entrants like Xiaomi, Huawei, Lenovo and LTE have gained market share quickly through the promotion of low-cost options. Former industry giants like Nokia and Motorola have been driven out.

Bargaining Power of SuppliersLowMarket leader Apple, a coveted client for suppliers, changes vendors often and is able to pressure them to expand operations to meet demand. As the lead manufacturer, Samsung controls the component supply chain and has the ability to cut production costs.

Threat of SubstitutesMediumSmartphones have become a largely homogenous product, and cost has become the most important differentiator. Many products offer similar features, as development of new features has largely stalled. Switching costs for consumers can be high, and brand loyalty can be an additional barrier. Industry may be moving towards wearables and "phablets" - a combination of a phone and a tablet.

CompetitorsHighThere is increased competition among smartphone manufacturers due to the expected growth of the market. The next wave of growth will come from emerging markets; new consumer preferences in those regions for low-cost options may cut into revenue growth.

Bargaining Power of BuyersHighSmartphones have the highest near-term purchase intent of any portable device, and consumers are looking to replace all their portable devices with smartphones. However, consumers in emerging markets are increasingly price-sensitive and attracted to low-cost manufacturers.

Exhibit D:VRIN

Superior TechnologyEfficient ManufacturingGlobal BrandInnovative LeadershipNew Market Entry Competence

ValuableYes: Superior technology is needed to maintain market share in the smartphone industryYes: Efficient manufacturing contributes substantially to Samsungs profitsYes: Samsung branding allows them to command a premium.Yes: Samsung is a very competent fast follower, but also creates its own innovations. The combination leads to a valuable product offering.Yes: Samsung has used its expertise in new market entry to grow from a food products company to a titan in multiple industries.

RareYes: Very few firms have superior technology, Samsung and Apple are the leaders in smartphonesYes: Few firms have efficient manufacturing processes on the level that Samsung does.Yes: Samsungs brand is unique to them and one of the strongest in the industryYes: The culture of innovation present at Samsung is hard to build and rare in the industry. Yes: Very few companies in the world have demonstrated this competence to the degree Samsung has.

InimitableNo: In the electronics industry technological imitation is the norm.No: Electronics companies frequently imitate each others manufacturing practices.Yes: Samsungs brand cannot be legally or practically copied.No: It has taken years for Samsung to build this culture and competitors with lower costs still cannot match them here. Yes: Other companies can attempt to build this competence, but 64 years of experience is hard to imitate.

Non-SubstitutableNo: Substitute technology is constantly being developed.No: Efficient manufacturing means a lot in electronics.Yes: There is no substitute for strong branding in electronics.Yes: There is truly no substitute for leadership in innovation.Yes: This is needed to grow in multiple industries over such a long period.

Exhibit E:

Exhibit F:

Exhibit G:

Exhibit H: Perception Map of major players in the smartphone industry

Exhibit I: