SAMSUNG ELECTRONICS
CASE
Team 4:
Amos
Burch
Carter
Dodge
Einstien
2
SITUATION OVERVIEW
Upcoming cyclical downturn & threat of low-
cost Chinese entrants threaten Samsung’s
top position
Option 1 Option 2
Collaborate with Forego partnership; invest
in innovative
Chinese partner technology
Recommendation
Option 2: Maintain competitive advantage by keeping
production/cultural advantages in-house, invest in cutting
edge technology
RIVALRY SAPS INDUSTRY 3
Barriers to Entry
PROFITABILITY Buyer Power
• Large capital • Fragmented customer base
investments without major OEM player
required to build • Lack of substitutes lowers
a fab power
• Time to • Memory is a sizeable portion of
construct a fab total spend for OEMs
is significant HIG
LOW Industry Rivalry
H • Large number of players
High Industry • Entry of low-cost Chinese
Rivalry manufacturers driving
LO HIG down prices
W H
Substitutes Supplier Power
• Currently no • High supplier consolidation
alternatives for • More complex technology
memory chips reduces number of available
• Nanotechnology suppliers
memory is not a
viable option yet
4
ASSSUMPTIONS
• If we partner with China they will
have access to our 12-inch wafer
creation process
• They will have exposure to patented
processes
• We can still have access to Chinese
market without partnering with
Chinese company
• Competitors will continue to partner
with China and become more
competitive on profitability
5
STRONG INTERNAL CAPABILITIES
LIMIT THE THREAT
Inimitable/
Non- Exploita
Valuab Rar substitutab ble by
Resource/Capability Attribute le e le the firm Outcome
Culture: Yes Yes Yes Yes Sustained
• Quality, Reliability, Innovation Advantag
• Hiring/Promotions e
• Burden Sharing/Employee Loyalty
Single Site/Cross Functional Yes Yes No Yes Temporar
Employee Interaction y
Advantag
e
Production Line Flexibility - 1200 Yes Yes No Yes Temporar
DRAM Products y
Advantag
e
12” Wafer Production Yes Yes No Yes Temporar
y
Advantag
6
PARTNERSHIP WITH CHINA
Pros Cons
• Access to cheaper • Shift in company
resources culture
• Ability to divert • Regulatory issues
resources to more • Decreased quality
lucrative ventures control oversight
• China’s high market • Negative
potential ramifications on
strong brand if
quality slips
• Intellectual property
protection concerns
7
RECOMMENDATIONS & EXPECTATIONS
Do not partner with Chinese manufacturers
Protect production and culture efficiencies and competitive
advantages
Protect 12-inch wafer and technology patents
Continue to sell in China , consider cutting prices to remain
competitive
Use cash on hand to reinvest in organic and
inorganic growth
China attacks margins for low-end chips
Potential Losses from Chinese Competitors (2003)
Avg Operating
Product Line Current Volume (Millions) Profit/Unit Operating Profit (Millions) 15% Loss 30% Loss 45% Loss
16 Mbit DRAM 1.3 1.37 1.781 $ (0.27) $ (0.53) $ (0.80)
64Mbit DRAM 16.4 5.64 92.496 $ (13.87) $ (27.75) $ (41.62)
128Mbit DRAM 151.6 2.56 388.096 $ (58.21) $ (116.43) $ (174.64)
256Mbit DRAM 695.8 0.94 654.052 $ (98.11) $ (196.22) $ (294.32)
Total 1136.425 $ (170.46) $ (340.93) $ (511.39)
8
APPENDIX
9
CASE QUESTIONS
• What are the sources of Samsung’s competitive advantage in
the DRAM market in 2003? Here, you will want to run some
numbers to get a sense of how important each source of
advantage is.
• What is the extent and nature of Samsung’s cost advantage?
• Many of the DRAM lines Samsung is either the only one with a positive operating
margin or has a significantly higher margin
• In every single product line fully loaded costs are below competitors weighted
average
• Significantly lower cost for raw materials
• Lower per unit cost for labor and SG&A
• What is the extent and nature of Samsung’s differentiation advantage in DRAMs?
• Offer over 1,200 variations of DRAM products which is unprecedented to
competitors in the industry
• Reliable and cutting edge products including specialty products for niche markets
10
CASE QUESTIONS, cont.
• What activities are the drivers of each type of advantage?
• Multifaceted production line
• Single facility location Seoul South Korea that all the products are manufactured
in additional reduced fab cost by 12%
• Merit based promotion
• Encourage education and global education
• Provide 90% of distractions
• Family, health, education, retirement
• Tri-layered bonus structure
• Productivity incentives paid up to 300% of annual base salary
• Project based incentives ranged from a few thousand dollars to over $1million
for the project team
• Profit sharing program that paying up to 50% of annual base salary depending
on divisional performance as measured by economic value added
• Competing
11
CASE QUESTIONS, cont.
• How sustainable are each of these sources against rivals’ attempts to erode the
advantages?
• China can provide cheap credit, abundant land, cheap utilities, engineering talent,
tax incentives, and other essential resources to any one looking to build a semi-
conductor facility with a Chinese partner
• How vulnerable are these to the entry of the new Chinese rivals?
• Not going to be able to compete with China on price because of their government
subsidized prices
• If China starts to compete in the higher end of the market Samsung should be able
to keep on top of products with innovation
12
“Four C’s” Framework to Evaluate Alliance Opportunities with Chinese
Companies
• Complementarity—Yes, initially
• Samsung had expertise in technology that
would be valuable to Chinese companies
• Chinese companies were attracting billions in
capital to finance new operations
• Congruent goals—Yes, initially
• Chinese companies get expertise, Samsung
gets avenue into a fast-emerging market
13
“Four C’s” Framework to Evaluate
Alliance Opportunities with
Chinese Companies
• Compatibility—No
• Samsung has a definite advantage with
company culture which favors innovation
• Change
• Risk of Chinese companies becoming a major
competitor, in China and worldwide, after
they develop expertise by learning from
Samsung
14
R&D
R&D as a % of Sales over Time
25.00%
20.00%
15.00%
R&D / Revenue
Samsung
Micron
Infineon
Hynix
10.00%
5.00%
0.00%
1985 1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003
Year
15
PROFIT MARGIN
Profit Margin over time
60.00%
40.00%
20.00%
0.00%
1985 1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003
Samsung
Profit Margin
-20.00% Micron
Infineon
-40.00% Hynix
-60.00%
-80.00%
-100.00%
-120.00%
Year
16
CASH FLOW
Cash Flow / Sales over time
250.00%
200.00%
150.00%
Cash Flow / Sales
Samsung
Micron
100.00% Infineon
Hynix
50.00%
0.00%
1985 1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003
-50.00%
Year
17
PRICE PREMIUM TO
COMPETITORS
Price Premium of Samsung ASP over Competitors' ASP
80%
70%
60%
50%
Price Premium of Samsung ASP over
40% Competitors' ASP
30%
20%
10%
0%
00 00 00 00 01 01 01 01 02 02 02 02 03 03 03 03 04
1Q 2Q 3Q 4Q 1Q 2Q 3Q 4Q 1Q 2Q 3Q 4Q 1Q 2Q 3Q 4Q 1Q
18
OPERATING MARGINS TO COMPETITORS
Operating Margin of (Samsung - Competitors' Average)
120%
100%
80%
Operating Margin of (Samsung - Competi-
60% tors' Average)
40%
20%
0%
00 00 00 00 01 01 01 01 02 02 02 02 03 03 03 03 04
1Q 2Q 3Q 4Q 1Q 2Q 3Q 4Q 1Q 2Q 3Q 4Q 1Q 2Q 3Q 4Q 1Q