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How Samsung Became the World’s No. 1Smartphone Maker

I’m in a black Mercedes-Benz van with three Samsung ElectronicsPR people head­ing toward Yongin, a city about 45 minutes south ofSeoul. Yongin is South Korea’s Orlando: a non­descript,fast-growing city known for its tourist attractions, espe­ciallyEverland Resort, the coun­try’s largest theme park. But the vanisn’t going to Everland. We’re headed to a far more profitabletheme park: the Samsung Human Resources Development Center, wherethe theme just happens to be Samsung.

The complex’s formal name is Changjo Kwan, which translates asCreativity Institute. It’s a massive structure with a traditionalKorean roof, set in parklike surroundings. In a breezeway, a mapcarved in stone tiles divides the earth into two categories:countries where Samsung conducts business, indi­cated by bluelights; and coun­tries where Samsung will conduct business,indicated by red. The map is mostly blue. In the lobby, anengraving in Korean and Eng­lish proclaims: “We will devote ourhuman resources and technology to create superior products andservices, thereby contributing to a better global society.” Anothersign says in English: “Go! Go! Go!”

More than 50,000 employees pass through Changjo Kwan and itssister facilities in a given year. In sessions that last anywherefrom a few days to several months, they

are inculcated in all things Sam­sung: They learn about thethree P’s (products, process, and peo­ple); they learn about“global man­agement” so that Samsung can expand into new markets;some employees go through the exer­cise of making kimchi together,to learn about teamwork and Korean culture. Samsung’s internalprac­tices and external strategies—from how TVs are designed to thecom­pany’s philosophy of “perpetual crisis”—all spring from thecodi­fied teachings of Lee Kun Hee, the 71-year-old chairman ofSamsung Electronics. Since Lee took control of Samsung in 1987,sales have surged to over $175 billion, mak­ing it the world’slargest electronics company. In 1993, Chairman Lee gathered hislieutenants and laid out a plan to transform Samsung, then asecond-tier TV manufac­turer, into the biggest, most pow­erfulelectronics manufacturer on earth. Today, Samsung is dominant inTVs and sells a lot of washing machines, but it’s smartphones thatmade Samsung as recogniz­able a presence around the world.

Samsung Electronics is the larg­est part of Samsung, aconglomer­ate that accounts for 17 percent of South Korea’s grossdomestic product. It employs 370,000 peo­ple in more than 80countries. Con­sider the disciplined way Samsung Electronics movesinto new prod­uct categories, the first step is to start small:make a key component

for that industry. Ideally the compo­nent will be something thatcosts a lot of money to manufacture, since costly barriers to entryhelp limit competition, such as micro­processors and memory chipsfacilities. Cnee the facilities are in place Samsung begins sellingits components to other companies. This gives the company insightinto how the industry works. When Samsung decides to expandoper­ations and start competing with the companies it has beensupplying, it makes massive investments in facilities andtechnologies, leverag­ing its foothold into a position that othercompanies have little chance of matching. Last year, SamsungElectronics devoted $21.5 billion to capital expenditures, morethan twice what Apple spent in the same period. In 1991, Samsungstarted making LCD panels it sold to other television brands. In1994 it started making flash memory for devices such as the iPodand smart­phones. Samsung is now the No. 1 makfer of LCDtelevisions and sells more flash memory and RAM chips than anyother company in the world. And in 2012 it passed Nokia (NCK) tobecome the world’s larg­est mobile-phone manufacturer. As Samsunghas risen, others have failed, often in spectacular fash­ion:Motorola was split up and its handset business sold to Google.Nokia watched its long-standing No. 1 position erode when it gotblindsided by smartphones. When

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it comes to mobile hardware, today
there’s only Apple. Samsung, and
a desperate crowd of brands that
can’t seem to rise above being
called “just average.”

Such striving for efficiency and
excellence wasn’t always a prior-
ity. In 1995, Chairman Lee was
dismayed to learn that cell phones
he gave as New Year’s gifts were
found to be inoperable. He directed
underlings to assemble a pile of

devices in a field outside
the Gumi factory. More than 2,000
staff members gathered around the
pile. Then it was set on fire. When
the flames died down, bulldozers
razed whatever was remaining. “If
you continue to make poor-quality
products like these,” Lee Keon
Hyok recalls the chairman saying,

“I’ii come back and do the same
thing.” The lesson stuck. In May
2012, three weeks before the new
Galaxy S 111 was to be shipped, a
Samsung customer told the com-
pany that the back covers for the
smartphone looked cheaper than
the demo models shown to clients
earlier. “He was right,” says DJ Lee,
the marketing chief of Samsung
Mobile. “The grain wasn’t as fine
on the later models.” There were

100.0 covers in thewarehouse
with the inferior design, as well
as shipments of the assembled
devices waiting at airports. This
time, there would be no bonfire-all

covers, as well as those on the units at the airports, werescrapped and replaced.

In 2010, Samsung introduced the GalaxyS line based on the momentous decision to use big­ger screens. TheGalaxy S’s screen was significantly larger than the original Galaxyand other Android models. “We settled on a 4-inch

screen, which people thought
was too big,” says DJ Lee. “There
was a lot of argument about that.”

But the bigger screens proved
to be a major selling point; they
grew larger still on the Galaxy S II
and S 111. Now, Samsung smart-
phones come in sizes ranging from
2.8 inches to 5 inches (to say noth-
ing of the company’s “phablets,’
which go up to 5.5). “Nobody had
any idea what the right screen
size was, so Samsung made ali of
them and saw which one worked,
says Benedict Evans, a researcher
at Enders Analysis. “When we
released the Galaxy S III, our
research showed that, for some
people in some markets, the hand-
set was too big,” says DJ Lee. “So
we were able to create the same
phone with a 4-inch screen, and
we called it the Galaxy S 111 mini.”
Getting the smaller device into
production took about four to six
months, says DJ Lee. “We watch
the market, and we immediately
respond,” he says; the Galaxy
S 4 came out only nine months

after the GS3.

“Samsung has taken differen-
tiation to a new art,” says Michael
Gartenberg, an analyst at Gart-
ner (IT). “If I want something in
between an iPad and an iPad
mini, 1 can’t get that from Appie.”
Maybe iPhones 6, 7, and 8 will
prove so beautiful and compelling,

not even Samsung will have an
answer. A likelier scenario is that
another company, probably from
China, will do to Samsung what it
has done to its competitors. “The
Chinese look like Samsung did five
years ago,” says Horace Dediu, an
independent mobile analyst. He
identifies Huawei and ZTE as par-
ticular threats (other analysts bring

up Lenovo). “Samsung makes less
profit per smartphone than Apple,
Dediu continues. “The Chinese
make even less. If the smartphone
is going to become a commodity,
how does Samsung play in that

game?” .

When the "mobile business

ceases to, be profitable, Sam-
sung will have to force its way into
some other industry that requires
a lot of upfront capital and exper-
tise in mass-manufacturing. The
company announced in late 2011
that it would spend $20 billion by
2020 to develop proficiencies in
medical devices, solar panels, LED
lighting, biotech, and batteries for
electric cars. And if Samsung bat-
teries or MRI machines don’t take
over the market, maybe the chair-
man will set a huge pile of them
on fire. “The chairman is saying all
the time. This is perpetual crisis,”’
says mobile marketing chief DJ
Lee. “We are in danger. We are in
jeopardy.”

Case Study: How Samsung became the World's No. 1 SmartphoneMaker (Page 151-152)

Thoroughly read the case study on pages 151-152 and fully answerthe three questions located on page 152. Do not use the questionsas Headings on your paper.

Question 1: What is Samsung's approach toward managing theglobal environment?

Question 2: What kinds of strategies did Samsung use to becomethe global leader in the smartphone industry?

Question 3: Search the internet. Is Samsung still the globalleader? Why? How have Apple and other smartphone makers changedtheir global strategies to better compete with Samsung?