This week you are required to submit a case study analysis. Your paper analysis should be between 3 – 5 pages, not counting the title and reference page. No submission should be fewer than 1050 words.
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In Janualy 2015. executives from Samsung Electronics, the South Korean elecrronics giant. declaied that they were making a bi-e bet on the so-callecl Internet of things. This represented a return to the firm,s concept of a digi_ ta1 home. where all of the firm's gadgets and appliances would be connected to the Internet. Samsung was just one of many players vying to sl.rape the connected home of the future. and it was far fl-om clear whose vision would pre_ vail or even il it would be profitable.
The bet seemed to be necessary fbr Samsung because it faced profit pressures and strong competition from price- cuttin-9 Chinese start-ups such as Xiaomi and Huawei in the smartphone business (see Exhibits I and 2). Samsung had been a leader in sales of mobile phones. but its posi_ tion was being challenged in a growing number of markets
" Case prcpared by Jamai Shamsic. Michigan State University, l,ith the assistance o[ Prolcssor Alan B. Eisner. pace University. Matcria] has been drawn liom published sources to be used lbr purposes o[ class discussron. Copyri_rht O 2015 Jamal Shrmsic ard Alan B. Eisner.
by lower-priced smartphones. At the same time. Samsung was facing stiff-er competition from Apple, which hacl been matching Galaxy phones, tablets. ancl phablets by inrr.o- ducin-e larger and cheaper. versions of its own highly popu_ lar iPhones (see Exhibits 3 and 4). Analysts claimed that the problem lay with Samsung's reiiance on selling hardware while other competitor.s. rang_ ing liom Apple to Xiaomi, offered exclusive software ancl Internet services for their devices that set their products apart from all others. Some competitors were also begin_ ning to generate l'evenues from of1'ering these services through their own app stores. Although Samsung off-ered some customized versions of the Android system that it used. they did not help dilfbrentiate its offerings from those of others that atio offerert Android ,rnu.fl,on.r. "That's really the difficult part for them,,, saicl Ben Baja_ rin, a consumer technology analyst. ,.Their customers are actually Google's, they're not necessarily theirs."l Executives at Samsung claimed that the t)rnr,s strength lay in the diverse line of its products, which included
Revenue 136,323,670 i 54,630,328
Gross profit 41 ,128,806 51 ,963,504
Operating income 10,309,038 16,352,670
165,001,771 201,103,613 228,692,661
52,856,651 14,451,682 90,996,358
15,861,224 29,049,338 36,785,013
13,734,067 23,185,375 29.821.215
lncome Statement (in billions of KRW)
Balance Sheet (in billions of KRW)
Net income
Source: Samsung
Total current assets
Total assets
Total current liabilities
Total liabilities
Total stockholders' equity
Source: Srmsung.
9,57 1,598 15,799,035
54,211 ,297 61 ,402,589 71,502,061
112,179,188 134,288,143 155,631,25.1
34,204,424 39,944,121 44,319,014
42,734,204 48,B 18,652 58,1 50,956
72,925,734 89,229,623 101,725,852
87,269,017 110,760,271
181,07 1,570 214,075,018
46,933,052 51 ,31 5,409
63,977,518 69,632,402
121,480,206 150,016,010
t CASI:8:: SAMSUNG ELECTRONTCS C2O* Smartphone Sales Worldwide, 2014 Global Market Ranking, 2014
Samsung
Apple
H uawel
LG
Lenovo
Xiaomi
r",*,iiir-i,",'
Xiaomi
Samsung
Coolpad
Lenovo
Huawei
Source: Canalys. Woll Street lourrwL
televisions, cameras. laptops, and even washing machines
(see Exhibit 5). Although smartphones accounted for as
much as two-thirds of its profits. Samsung could have
increased its revenues from its other offerings. Further-
more. unlike all of its rivals. Samsung made most of its
own components, which could have allowed it to offer bet-
ter products with lower costs. This would have enabled the
firm to generate profits even if profit margins on some of
these products continued to decline.
In spite of its emphasis on hardware. Samsung was
aware of the clear shift in electronics away from hardware
to software. In 2014. the firm introduced its first smart-
phone that ran on Tizen, an operating system that it had
developed with lntel and other partners. Although the
system was not likely to challenge existing mobile operat-
ing systems such as Google's Android, Samsung was hop-
ing that it would provide it with a platfbrm on which to
build its own services. The firm was well positioned to
bring Tizen to the mass market by installing the software
on televisions. cameras. and watches. Eventually. it might
also become the system that Samsung could use to con-
nect all gadgets and appliances to create the lnternet of
things.
eXO CASI 38 :: SAMSUNG ELECTR0NICS
Memory chips
Digital televisions
Mobile phones
Side-by-side refrigerators
DVD players
Washing machines
Camcorders
Digital cameras
i;,;;;;;,;;;,
Discarding a Failing Strategy
Although Samsung chairman Lee Kun-hee had called for
a shift in the firm's strategy, the transformation would not
have been possible without the ceaseless efforts of Yun
Jong Yong, who was appointed to the position of president
and CEO in 1996. When Yun took charge, Samsung was
stil1 making most of its profits from lower-priced appli-
ances that consumers were likely to pick up if they could
not afford a higher-priced brand such as Sony or Mitsubi-
shi. It had also become an established low-cost supplier"of
various conlponents to larger and better-known manufac-
turers around the world.
Although the firm was making profits, Yun was con-
cerned about the future prospects of a firm that was rely-
ing on a strategy of competing on price with products that
were based on technologies developed by other firms. The
success of this strategy was tied to the ability of Samsung
to continually scout for locations that would ailolr' it to
keep its manufacturing costs down. At the same time, it
would need to keep generating sufficient orders to tnain-
tain a high volume of production. In particular, Yun was
concerned about the growing competition that the firn-t
was likely to face tiom the many low-cost producers that
were springing up in other countries. such as China.
Yun's concerns were well founded. Within a year of his
takeover, Samsung was facing serious tinancial problems
that threatened its survival. The company was ieft with
huge debt as an economic crisis engulf'ed most of Asia in
1997, leading to a drop in demand and a crash in the prices
of many electronic goods. In the face of such a deteriorat-
ing environment. Samsung continued to push for maintain-
ing its production and sales recolds even as much of its
output was ending up unsold in warehouses.
By July 1998, Samsung Electronics was losing millions
of dollars each month. "If we continued, we would have
gone be11y-up within three or fbur yeals." Yun recalled.2
He knew that he had to make some drastic moves in order
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Smartphone Sales in China, 2014 to turn thin-9s around. yun locked himseif in a hotel room fbr a whole day with nine other senior ntanagers to try to find a way to save the firm. They all wrote reiignation let_ ters and pledged ro resign if they failed. After much deliberation. yun and his management team decided to take several steps to try to push Samsung out of its precarious financial position. To begin with. they decided to lay otT about 30,000 employees, well over one_ third of the lirm's entire workfbrce. They also closed down many of Samsung's factories fbr two months so that they could eiin'rinate its large inventory. Finally. they sold ofT about $2 billion worth of businesses like pagers and elec_ tric cotfeemakers that were perceiveO to Ue of marginal si-{nif icance for the firm's tirture.
Developing a Premiurn Brand
Having managed to stem the losses. yun decided to move Samsung away from its strategy of competition based largely on the lower price of its offerings. Consequently. he began to push the firm to deveJop its own products rather than to copy those that other firms had deveioped. In par_ ticular. Yun placed considerable emphasis on the devel_ opment of products that would impress consumers with their attractive designs and their advancecl technology. By focusing on such products, yun hoped that he could develop Samsung into a premium brand that would allow him to charge higher prices.
To achieve this, Yun had to reorient the firm and help it to develop new capabilities. He recruited new managers and engineers. many of whom had developed considerable experience in the U.S. Once they were recruited" yun got them into shape by putting them through a four_week boot camp that consisted of martial drills at the crack of dawn and mountain hikes that lasted all day. To create incen_ tives for this new talent. yun discarded Samsung's rigid seniority-based sysrein and replaced it with a merit_based :1 stern ltrl atlvancemenl.
As a resr-rlt of these efTorts, Samsung started launch_ ing an array of products that were designed to make a big impression on consumers. They included the largest flat-panel televisions, cell phones with a variety of f.ea_ tures such as cameras ancl pDAs, e
er-thinner notebook contputers, and speedier and richer semiconductors. The flrm calls them "wow products.,,and they are designed to elevate Samsung in the same way the Trlnitron television and the Walkman had helped to planr Sony in the minds of CONSUInCIS.
Finally. to help Samsung chan-ee its image among consumers, Yun hired a marketing whiz, Eric Kim, who worked hard to create a more upscale irnage of the firm and its products. Kim moved Samsung's adveitising away from 55 diff'erent advertising agencies around the worlci and placed it with one firm, Madison Avenue.s Foote, Cone & Belding Worldwide. in order to create a consistent global brand image for Samsung,s pro
Kmart and place more of its products into more upscale specialty stores such as Best Buy and Circuit City. Yln initiated rhe pracrice of working closely wirh retailers to get more information about the specific needs ofprospective consunters. Unlike Apple, Samiung focused heavily on studying existing markets and innovating inside them. "We get most of our ideas fiom the market.,, said Kim Hyun-suk. an executive vice presiclent at Samsung.i The firrn was able to develop strong relationships with retailers because of this practice. Over the years, Samsung also attracted many wireless carriers becairse of its will_ ingness to work with them on tiguring out what to ofTer in their smartphones and tablets.
Speeding Up New Product Development
Yun took many steps to speeci up Samsung,s new prod_ uct deveiopment process. He was well aware that he woulcl be able to maintain the higher margins only as long as his firm kept introducing new products into the market well ahead of its estabiished rivals. Samsung managers who had^worked for big competitors said they had to _eo through far fewer layers of bureaucracy than they had to ln the past to win approval for new products. budgets, ancl marketing plans. speeding up their nbility to seize opportunities. Apart from reducing the bureaucratic obstacles. yun
took advantage of the emerging shift to digital technolo_ gies.. He made heavy investments in key technolo-eies. ranging from semiconductors to LCD displays, that could allow the firm to push out a wide variety of revolution_ ary digital products. Santsung continuously invested more than any of its rivals in research and clevelopment, with the investmenr rising to almost $i2 billion ty 1Ol+. tt naa assembled a large force of designers and engineers who worked in several research centers that were spread arouncl the world (see Exhibit 6). Yun fbrced Samsun-9's own units to compete with out_ siders in order to speed up the process fbr developing inno_ vative new products. In the liquid-crystal-display business. fbr example. Samsung bought half of its color filters fiom Sumitomo Chemical Company of Japan and sourced the other half internally, pitting the two teams against each other. "They really press these departments to compete,., said Sumitomo president Hiromasa yonekura.4 As a result of these steps. Samsung claimed that it had reduced the time required to go from new product concept to rollout to as little as flve months. comparetl to over a year in 2000. In large part. this resulted from the effor.t of the fir.m,s top managers, engineers, and desi-qners, who worked relentlessly in the five-story VIp center nesrled amid the firm's industrial complex in Suwon. They workecl day and night in the center, which included clormitories and show_ ers fbr brief rests. to work out any problems that might hold back a product launch. The progress macle by ihe teams that pursued new product designs in the VIp center enabled Samsung to reduce complexity in the early stages of the design cycle. This allowed the firm to move irs
I
I
I eA$! IS :: SAMSUNG ELECTRONTCS (;.11 Designers EmPloyed
2014
2012
2010
2008
2006
2004
2002
2000
1 998
Source: Samsung.
products quickly to manufacturing with minimal problems
and at the lowest possible cost. Kyunghan Jung, a senior
manager of the center, explained: "seventy to eighty per-
cent of quality, cost and delivery time !s determined in the
initial stages of product development."5
The speedier development process allowed Samsung to
introduce the first voice-activated phones. handsets with
MP3 players, and digital camera phones that sent photos
oue, a gtobul system for mobile communications networks'
For an example of the firm's speed and agility, Charles
Golvin of Forrester Research talked about Samsung's abil-
iry to create four different industrial designs of its Galaxy
S smartphone for four varying wireless network types
around the world and deliver the phones simultaneously'
"They've had a long histoly oi lesponding to market trends
with a lot ol alacrity." he remarked."
Perfecting a Design Process
As Yun was building the Samsung brand, he was also try-
ing to position the firm to compete with all others on the
Uusis o1 the irresistible design of its wide range of prod-
ucts, from home appliances to handheld computers to
flat-screen televisions that would all be eventually linked
to each other. ln fact. the firm seemed to be well placed
to develop attractive gadgets that straddled tladitional
technology categories. "We have to combine computers'
"nnrr*"i electronics and communications as Koreans mix
their rice with vegetables and meats," said Dae Je Chin, the
head of Samsung:s digital media division.T
Although Samsung triecl to pack its products with vari-
ous attractive features, it drew on the knowledge of about
900 designers with backgrounds in disciplines as diverse as
psychotogy, socioiogy. economics. and engineering These
O.ilgn.tt, in turn. drew on information that was collected
by over 60,000 staff members working in 34 research
azl: CAS$ ?8:: SAMSUNG ELECTRONICS
centers across the globe, in cities such as San Francisco,
London, Tokyo, Mumbai, and Shanghai. lnside these cen-
ters, designeis observed the way that consumers actually
used various products. The wide Galaxy Note phone, for
exan'rple, ."rult"d from the responses of focus groups who
wanted a device that was good for handwriting. drawing'
and sharing notes. Asian consumers said that they tbund it
easier to write characters on a device by using a pen rather
than typing on a keyboard (see Exhibit 7)'
"Thi research process is unimaginable," said Chang
Dong-hoon, an executive vice president of Samsung who
had ied the company's design eftorts' "We go through all
avenues to make sure we ,.Id th" trends correctly'"8 Sam-
sung had been sending its growing group of designers to
,uriou. locations to spend a few months at lashion houses'
furniture designers, and cosmetic specialists to stay cur-
rent with trends in other industries. Designers of the latest
Galaxy smartphone said they drew inspiration fiom tlips to
ruins in Camboclia, vistas in Helsinki, a Salvador Dali art
exhibit in London, and even a balloon ride in Africa'
Furthermore. Samsung appointed designers to execu-
tive positions in order to make sure that they could get their
icleai to top managers. In 2015' the firm recruited Lee Don-
tae. who had been a top executive at a leading U'K' design
agency. He joined Chang Dong-hoon' who was recently
glren-churg" of the firm's design strategy team, which had
6""n ore..ieing the design of products across all of the prod-
uct lines. In the tall of 2014, Samsung unveiled a slick design
website to shore up its self-proclaimed status as a design
powerhouse. As a result of these zrnd earlier efforts, Samsung 'had earned 210 design awards since 2006 at contests in the
United States, Europe, and Asia. Afier the firm won awards
at a recent U.S. consumer elecffonics show. an executive said:
"samsung strives to consistently lead the consumer electron-
ics industly in product design and engineering innovation "q
Samsung was relying on the attractiveness of its prod-
ucts to make them the centerpiece of a digital home' In a
showroom in the lobby of its headquarters in Seoul' the
firm showed off many of its latest offerings, ranging fi'om
tablet computers to digital cameras. Visitors could put on
goggles to watch characters jump out on 3-D teievisions ot'
.ouiA .num" their t'eet on an interactive LED fioor' Roger
Entner. a wireless industry analvst at Neilson, said about
Samsung's efforts: "With its resources and experience' it's
trying to capitalize on the emergence of smart connected
devices. The question is, 'Can they be a cutting-edge
trentlsetter like APPIe?"' r 0
Creating a Sustainable Model?
Samsung recently launched a l0-year Vision 2020 corpo-
rate goai fbr the firm to join the ranks of the top 10 globa1
companies by achieving $400 billion in sales' Although it
already ranked as the largest technoiogy company in the
world by revenue, Samsung was determined to continue
to grab market share from competitors across a wide
range of product categories. To reach its targeted sales
900
Bs0
750
600
s50
475
300
200
115 Samsung Milestones
1969 Samsung Electronics established as maker of televisions with technology borrowed from Sanyo.
1977 Samsung introduces its first color tejevision.
1981 Samsung begins to focus on undercutting Japanese rivals with me-too products, with little emphasis on design.
1988 Samsung launches first mobile phone.
1993 Samsung begins to reinvent the firm through design.
1994 samsung hires design consurtancy IDEO to herp deverop computer monitors.
1995 samsung sets up in-house design schoor, the rnnovative Design Lab ofsamsung.
1 996 Yun Jong Yong takes over as cEO; he declares "Year of Design Revolution," stressing that designers should lead in product planning. '1998 Asian financjal crisis dents samsung's ambitions, forcing it to cut design staff by 2B%.
2000 Samsung once again focuses on design, and CEO Yun Jong Yong calls for design- led management.
2001 Yun initiates quai'terly design meetings for top executives and opens design labs in Los Angeles and London.
2002 Samsung's "usability laboratory', inaugurated in downtown Seoul.
2004 Market value ofSamsung rises above $j00 billion.
2008 Lee Yoon Woo takes over as CEO from yun.
2009 Samsung is set to announce its first loss since 2000; the firm announces major reorganization.
2010 Gee Sung Choi takes over as CEO.
2013 New co-leader team is formed.
Source: Samsung
goal. Sarnsung was reorganizing to focus more strongly on each of its bLrsinesses, enconpassing several cliffbrent businesses. that were allocated to three major divisions: consumer electronics. IT and mobiie communications. and device solutions.
However. after l-ee Kun-hee. the chairman of Samsung Electronics who had helped transform the complny into a technology giant. suft-ered a heart attack in May 20111, analysts began to question how the firm would perfbrm when he stepped down. The flrm had already changed its CEO a couple of times since 2008. after yun's departure. before settling in 2013 on a team of co-CEOs. Lee,s health issues had 1ed the firm ro consider a major shake_up in its management ranks. Among other possibie moves, Sam_ sung was considerin,e combining the smartphone and the appliance divisions under B. K. yoon, moving away from the unusual arrangement of dividing diff'ereni brrin"rr", among three co-CEOs. If yoon was siven this added responsibiiity, he would be well positioieci to help Sam_ sung compete in the so-called connected home referred to as the Internet of things. He had been one of the main proponents of the company,s push in this direction and was responsible fbr Samsung's 20121 acquisition of U.S. connected-home start-up SmartThin-qs.
In the meantime. Samsung continued to push on advances in hardware. It deveiopecl a foldable video dis_ play screen that could be used in smartphones or other devices. Kwon Oh-hyun. the firm,s chief executive. said that it planned to start bringing devices with fbldable display screens to the maltet. Late in 20 14, Samsung released a smartphone with a display that curvecl around one side of the phone. along with a virtual reality heacl_ set. as the firm looked beyond the traditional modei. The headset. calied the Samsung Gear"VR Innovator Eclition. was a nylon strap that allowed users to mount the Galaxy Note in front of their eyes. enabling users to play games and watch movies.
But Samsung's biggest strengrh possibly lay in its leading position in memory chips. As chip technology improved more incrementally, Samsung *r, or" of the few companies left that could make investments in new genera_ tions of semiconductors. As a result. it could become one of the biggest suppliers to other smartphone manufacturers. It was already one of the major suppliers of chips. among other components, for lirms such as Apple. Sony. and HewletrPackard. "Then Samsung will have greater control orrer the whole ecosystem," said Sundeep Bajikar, a securi_ ties analyst. "The benefits of that can be enormous ,,i1
t C&!f 2E:: SAMSUNG ELECTR0NTCS e21i
