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International Strategy: The Strategy of Samsung Group

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DOI: 10.13140/RG.2.1.5188.7440

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University of Geneva

International Strategy: The Strategy of Samsung Group

Dimitri Simonin

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“At Samsung, we follow a simple business philosophy: to devote our talent and technology to creating superior products and services that contribute to a better global society.”

(Samsung.com, Values & Philosophy)

International expansion

Samsung Group has a leading international market position in large scale business. It is composed of more than 30 affiliated companies with various activities. We can describe the Group as a big conglomerate. It is acting as supplier, manufacturer, engineering and also offering various services. We will concentrate our analysis on its high-tech company, Samsung Electronics (SE). Koreans call a big company owned by a family a “Chaebol”. With a growth of 5700% of revenues in 20 years, SE started as one of the biggest suppliers of international high-tech companies (Apple, Sony, IBM…) producing chip, battery and memory (see appendix 1). After a few years of experience, SE extended its activities for the public market by producing TV, screens, micro-waves and so on. SE is the world’s biggest producer of mobile phones and dominates the smartphones’ market. SE continues to be the most profitable entity in the Samsung Group. Its international presence offers SE diverse types of benefits. First of all, as SE takes advantage of synergies between activities, the company uses leveraging capabilities gained in a country to use them in others. It helps SE to adapt his products quicker and easier than its competitors. Also present in most of the countries, SE can compensate the risks of a failing market, balancing activities across the markets. But as the world globalization is getting stronger, it is more and more difficult for companies to count on this kind of diversification. In general, risk reduction will be reached with product diversification and not anymore geographic diversification. Furthermore, its international implantation is used as a location advantage. Indeed, SE selects locations as Porter calls “Clusters” (Moon et al., 2013). The company will choose USA (Silicon Valley) or England (London) for its R&D Centers and China (Shenzhen) or Brazil (Sao Paulo) for its manufacturing plants. On the one hand, SE will gain knowledge, knowhow and innovation spirit. In the other hand, China will be used for the cheap labor costs and smooth labor laws. These locations can also be used for HR recruiters. Indeed, they find in these clusters all the best educated employees with foreign knowledge they can import to the HQ in Seoul. This mixture allows SE to always have innovative ideas. Yet, SE is always keeping strongly the DNA of its corporate culture (Gupta and Govindarajan, 2000). Moreover, SE beneficiates global economies of scale. As matter of fact, the “Chaebol” uses synergies between products. Components as chips and LED screens are shared. They are not only manufactured for B2B business but also for all its own products for B2C business. Finally, as for all international brands SE can respond with ease to customer requirements. In the tech industry, needs are plentifully standardized. However, Samsung also faces big challenges due to its international presence. Firstly, SE must be able to be global and standardized to reach benefits of economies of scales but also to be local to reach local needs. SE works in an efficient manner. Indeed, from the moments which SE analyses the market until the product is out of the factory, the time is very short. Thanks to a strong R&D

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department, SE can fulfil the needs faster than its competitors. It allows SE to have a high degree of local responsiveness in most of the countries. Clearly, the company chooses product lines which need quite a low degree of adaptation and a high expected payoff. For SE they are the most attractive products (Gupta and Govindarajan, 2000). Anyhow, in the techno industry costs of distance are low given the high product standardization. Secondly, since SE hired foreign employees, a paradox of cultures emerged. On the one hand, Korean corporate culture is based on the respect of the seniority in the company. On the other hand, SE hires new people from western work culture based on meritocracy. SE had to adapt and find a compromise between these both sides. This mixture creates motivation for employees that did not exist before (Khanna et al., 2011). We can argue that liability of foreignness is not related to end customers but to local internal management. Additionally, as we read every day in newspapers SE is facing a big challenge concerning Copyrights and patents. Each country has different laws and it adds complexity in international trading. In fact, SE is spending a lot of money defending its interests, recalling products and paying fees. It causes, of course, damage to its brand image. Concerning macroeconomic risks, SE did not invest through retails shops. Products are sold through retail dealers. The company has only an administrative representation in main capital cities where the tax system is the most interesting. Also SE is geographically diversified enough. Hence there are quite low political risks. Yet the economic risk comes from forex markets. Korean Won is following the US Dollar, meaning that if the latter falls the revenues of SE drop. However, SE does not have the power to control this external risk and has to deal with it as all the international companies.

Entry decisions

Samsung Electronics expended his business in 3 main steps. In the 80’, it made a big investment in a global electronic industry, building plants in cheap labor locations such as Portugal for instance. SE also built huge R&D centers abroad, such as New York, Tokyo, England and Texas. It became one of the main worldwide suppliers of electronic components. Since 2000 the “Chaebol” started partnerships and Joint Ventures (with Sony for LCD screens) to reach more countries and enter them in an easier way. After that it started jumping into end customer products through an international strategy. SE overall entry strategy can be described along 3 dimensions, how/where/when. How often does SE enter a market? The “Chaebol” uses several ways to be competitive as fast as possible. First of all, as Barry Jaruzelski, senior partner at Booz&Co, said: “Samsung is neither a leader nor a follower but a fast follower”. Until now SE had never entered in a market as a leader. SE analyses the market through demand factors. It enters a market where a company is already in. And additionally the customers must be ready to welcome the new product; meaning that when the product starts to be in the growth product life cycle. SE sees the potential of growth of the niche and chooses a market where minimum efficient scale can be soon reached. High returns are possible

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although SE will not have the advantages of a leader. SE, 2nd to arrive, takes economic advantages of an early mover wanting the disadvantages of a leader. At that time, SE will invest massive amounts of cash in R&D and marketing communication to overtake its competitor. If it is needed, the Korean company uses cash from other Samsung product markets or even from other entities. This “assault” must be fast, efficient and powerful and, thanks to the experience of the leader, SE adapts its offer with more ease. As Gupta and Govindarajan (p. 7, 2000) say: “It is easy for the competitors to replicate your recipe for success.” It copies marketing communication, product attributes as well as product design. Using transfer of knowledge between its activities and adapting its products, SE has an undeniable advantage. As it happened for instance with the smartphone market in Western countries in 2010, SE waited until Apple, leader at this time, “prepared” the customers’ needs. After IPhone v1 and v2, most of the customers were ready to welcome a new technology. SE came with a product, the Galaxy line with same attributes and a bit less expensive. After 5 years, SE became the world leader in the smartphone market. Additionally, SE enters markets doing Joint Venture or partnerships. The partners often have already a technology that SE does not have or that could be too long and too costly to develop. For instance, SE used Android system that Google had already developed. Therefore, SE did not lose time to develop software. Also the “Chaebol” did not take the risk to fail in the market of smartphone because of shoddy software. It knew that it had not enough competences to be software developer at this point. This was a nice bet because more than 80% of smartphones are running on Android today. SE did not take any risks of imitation because Google was not planning at this time to commercialize smartphones. But now that the American company is ready for it, SE is working on its own OS. The Korean company wants to be independent as soon as it can be. After building a JV, SE reacted fast if it was a high possibility of technology competences imitation. For instance, on November 2011, SE bought the shares of S-LCD for almost 1 billion USD. S-LCD was a JV created in 2004 between Sony and SE. By being the only owner, SE surely wanted to protect itself from technology imitation. Acquisitions are most of the time done to acquire faster knowledge and technologies. Starting from 2000, SE newly focused on M&A: "We will expand our M&A strategy beyond a few target areas to pursue opportunities across a wide range of fields. M&A will aim to reinforce current businesses, secure talent and find new opportunities”, said Samsung's chief financial officer Lee Sang Hoon. Finally, SE also entered some markets by Greenfield investments. For instance, thanks to the Phablet market, SE created a totally new different line of smartphone products. It countered Apple strategy that was not expecting a market for that kind of needs. Even if it was a Greenfield strategy, SE did not take so much financial risks. This move was made with a maximum of control insuring ensure high potential return with medium to low investment. Only at the end of 2014, Apple will react with a Phablet line for next smartphone models. To conclude, we can argue that SE must carefully plan its next moves. The Korean company was pushed on the scene with the success story of its smartphones but it was partly due to the fact that SE is the world leader of chip manufacturers. Indeed, in this field SE is seen as a strong innovator since the beginning. Horace Dedui, CNN analyst, adds that “As one of the biggest component vendors to Apple and other hardware makers, Samsung got an early glimpse at the smartphone revolution and

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decided it was time to take the leap in 2009” (Bloomberg.com, 2014). For future market entry, SE will surely not have this huge advantage over its competitors. It will have to deal with less ease, more costs and environmental difficulties.

Global strategy

Samsung Electronics developed a global strategy. It can be described, on the one hand, as a high rate of global integration and cost efficiencies and on the other hand as quite a low responsiveness and differentiation (Raisch, 2014). These attributes are accompanied by benefits and challenges. First of all, SE makes economies by location choice. Indeed, the company builds manufactures and R&D centers in ideal places of each continent depending on local costs. China and Vietnam are used as cheap labor cost suppliers for the Asian market. In 2013, Samsung started the construction of the world's largest mobile phone plant in the Thai Nguyen, Vietnam. For the European market SE manufactures its electronic products in Poland where there is a good compromise between labor costs and sufficient knowhow. For R&D centers SE uses the high competencies of local employees but also economies of tax. When the company opened a center in the Silicon Valley, the Californian government granted a tax discount to attract the SE. "Here's a case where government and business work together—and everyone benefits." California Governor Jerry Brown, in a statement. (Forbes, Nov 2013), When the “Chaebol” keeps its HQ in Suwon, it is also because the Korean government gives huge tax discounts compared to other foreign companies such as Apple (see appendix 2). Thus, it allows SE to reduce tax and delivery costs. Keeping manufacturing, R&D and administration in specific spots, SE uses plenty of the advantages of a global strategy. Secondly, the Korean company develops experience curve economies using its experience from its different activities. Moreover, it learns from difficulties in some markets to apply the solutions found on the next challenge. For instance, the company had difficulties implementing the A/C machine business in Australia where SE did not have strong brand recognition. Marketing division used this experience to build the same business in Thailand. Finally, SE does massive economies of scale with standardized products. Regarding its activities, the “Chaebol” has the possibility to sell its product in every market with no modifications. For instance, chip and memory are standard for all its corporate clients. The products for end customers must have a minimum of local differentiations. With few investments SE ensures its presence everywhere. Differences in consumer tastes and preferences are very important if a company wants to reach customers. Yet it is very costly and unnecessary in industries such as the techno-electronics. Indeed, SE standardizes most of its end customer products to fit most countries. As a hardware supplier, SE works with global companies that sell electronic products which are also standardized. In fact, one of the main challenges is to reach local customer needs with minimum modifications and minimum costs. When a market has special needs SE adapts its products in a fast way. It only has to adapt few parts. “When we released the Galaxy S III, our research showed that, for some people in some markets, the handset was too big. So we were able to create the same phone with a 4-inch screen, and we called it the Galaxy S III mini. Getting the smaller device into production took about four to six

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months,” says DJ Lee. The part of the tech product that must absolutely be customized, is the software and the intern OS. In fact, SE has always been dependent on OS development. For the smartphone market it had to use Android from Google. Software development is the biggest challenge for a couple of years, for SE. With Tizen OS based on Linux, Samsung wants to reduce its lack of autonomy concerning software Despite a successful strategy, a few points could be discussed to find an alternative strategy. The strategy that implemented SE is working well as we can see performance in its last annual reports (see appendix 3). Yet, when SE decided to sell directly to end customers market, it faced more and more attacks as a patents and copyrights breaker. It spends billions per year in fees and its brand image of follower and copycat does not improve in a good way. To conclude, SE does not have to change its basic strategy but maybe adapt its strategy in certain markets for end customers. For instance marketing communication and advertising should not be the same everywhere. In Europe, the brand is seen as a medium range quality. SE must absolutely be considered as a high quality product brand if it does not want to remain always as the follower. It could solve some problems using tools that offer other basic strategies such as transnational strategy for marketing division (Raisch, 2014). As we can read on a Bloomberg’s report (2013), “from 2014 Samsung no longer wants to be seen as a fast follower”. It is one of the challenges SE set in its last strategy planning.

Corporate vision

In 1997, South Korea was hit by a huge Asian crisis. At that time, it was stuck because of the weakness of its financial fundamentals. After this crisis, South Korea launched a reform in its economy and Korean companies learned some lessons from economic difficulties. Hence, Samsung Electronics and Korean conglomerates were more prepared for the worldwide crisis of 2007. The right balance between promotion and prevention had to be found (Raisch, 2014). With its past experience, SE decided to think on short term and long term. For a short term growth, the “Chaebol” had reduced its costs and for long term growth it invested massively in R&D (Yun Jong-Yong, CEO SE in Raisch, 2014). The stock of SE suffered a huge downfall in 2008 due to the American banking crisis (see appendix 4). Indeed, at that time the main business of SE was still a supplier of semiconductors, chips and flat panels. If its clients went bankrupt, SE was not able to sell its products. Furthermore, in 2008, the price of these products was falling. In the end, SE’s stock reacted well when the company made the decision to adapt its strategy. On the one hand, the “Chaebol” restructured the entire organization. January 2009, SE reorganized its structure to better highlight each business sector, common technology and customers markets. It allowed SE to create more efficient synergies between activities. With 6 divisions previously, it was reorganized into 2 divisions: Digital Media & Communications (DMC) business unit and a Device Solution (DS) business unit (see appendix 5). Moreover, SE slowed down the construction of new infrastructures. Without dismissing employees, SE knew that letting knowledge out of the company could hit badly on a long term. Indeed, its strongest assets are technology,

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knowledge and innovation coming from employees. On its side, the Korean government helped Korean conglomerates by lowing taxes. It also adapted the national monetary market to have a weak KWN national currency. This surely helped for exportation knowing that South Korea is one of the countries that depends the most on the revenues of exportations. On the other hand, SE made the decision to invest in R&D . The “Chaebol” started with a huge investment of cash in innovation through its vast R&D centers. Having invested a massive amount of cash in new products in 2008, SE almost doubled its revenues in 2009. Every year, SE still dedicates 10% of its profits to this department. For instance, it developed a new AMOLED screen that was sold to all the smartphones’ companies. It also announced a “Green management” strategy. R&D allowed SE to diversify its products and to expand its activities on emerging markets. These moves kept SE out of the crisis. It came out with new products for new segments and new lines essentially for B2C: Smartphones and flat screen TVs. As it worked in 2000 with the mobile phone batteries market, in 2001 with the flat screen market and in 2002 with the flash memory market, SE entered new markets as a “fast follower”. It also added a B2C international business to its B2B international business. The Korean company used aggressive marketing, reproducing communication campaigns of its competitors. Product prices were also a bit lower than competitors and a great work was done on design development. We can argue that it was exactly what consumers were waiting for: cheap price and great design. The “Chaebol” knew exactly how it could reach mass consumers. In one point of view, it was very tactical to offer quality products at a low price. Yet until now, it has been difficult for SE to change its brand image due to a cheaper price than its competitors. Furthermore, the company diversified its activities investing more energy into emerging markets such as India or China. These two still have a great potential of growth particularly for the mobile phone market. “Until last year [2012], its annual growth rate for the Indian mobile phone market was 163%, surpassing that of markets in China (86%), Japan (24%), and the US (19%).” (businesskorea.co.kr, Sept. 2013)

“The chairman is saying all the time, ‘This is perpetual crisis,’ We are in danger. We are in jeopardy.” (Mobile marketing chief, DJ Lee)

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Appendix

Appendix 1:

Source: http://www.businessinsider.com/samsung-corporate-strategy-2013-3

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Appendix 2:

Source : http://english.hani.co.kr/arti/english_edition/e_business/623602.html

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Appendix 3:

Source: UBS Quotes

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Appendix 4:

Source :

http://investing.businessweek.com/research/stocks/financials/financials.asp?ticker=005930:KS&dataset=incomeStatement&period=A&currency=US%20Dollar

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Appendix 5:

Source :

http://originus.samsung.com/us/aboutsamsung/sustainability/sustainabilityreports/download/2009/2009%

20About%20Samsung%20Electronics.pdf

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