But the removal of Lee came at a tough time for Samsung, which has been seeking new avenues for growth as sales of its market-leading smartphones seem to be slowing down. A few months later, Samsung's chairman of the board, Kwon Oh-hyunk, shocked everyone in the firm by suddenly announcing his resignation. Kwon claimed that the firm need to turn to a younger generation of leaders who could search for new growth engines by studying future trends. "I believe the time has now for the firm to start anew with a new spirit and young leadership" he said." This led the firm to shake up its senior ranks in order to address concerns about a leadership vacuum. It replaced all three of its co-chief executives that were heading its main business lines-mobile, electronics components, and consumer electronics. Everyone at Samsung has been hoping these new appointments will bring fresh blood in order to help revitalize the C 168 firm. Analysts claim that the firm faces strong pressures because of its heavy reliance on competing with its hardware while other competitors, ranging from Apple to Xiaomi, offer software and Internet services that set their products apart from all others because it runs only on their devices. Samsung did introduce its own operating system, Tizen, but this is unlikely to challenge existing systems such as Google's Android. Executives at Samsung have claimed that the firm's strength lies in the diverse line of its products that include televisions, cameras, laptops, and even washing machines. Although smartphones have accounted for as much as two-thirds of their profits, they can also increase their revenues from their other offerings (see [LI Exhibit 4). Furthermore, unlike their rivals, Samsung makes most of their own components that allow it to offer better products with lower costs. They can generate profits even if profit margins on some of these products continue to decline. EXHIBIT 4 Revenue by Division (trillions KRW) Business Division 2018 2017 2016 Semiconductor 86.3 74.3 51.2 Display Panel 32.5 34.5 26.9 Consumer Electronics 42.1 44.6 45.1 IT & Mobile Communication 100.7 106.7 100.3 Source: Samsung Electronics Announces Fourth Quarter and FY 2018 Results. Samsung, January 31, 2019. Discarding a Failing Strategy Although Samsung chairman Lee Kun-hee had called for a shift in the firm's strategy, the transformation could 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 still making most of its profits from lower-priced appliances that consumers were likely to pick up if they could not afford a higher-priced brand such as Sony or Mitsubishi. It had also become an established low cost supplier of various components to such larger and better-known manufacturers around the world. Although they were making profits, Yun was concerned about the future prospects of a firm that was relying on a strategy of price competition with products based on technologies that had been developed by other firms. The success of this strategy was tied to the ability of Samsung to continually scout for locations that would allow it to keep its manufacturing costs down. At the same time, it would need to keep generating sufficient orders to maintain a high volume of production. In particular, he was concerned about the growing competition that the firm was likely to face from 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 financial problems that threatened its very survival. The company was left with huge debt as an economic crisis engulfed 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 deteriorating environment, Samsung continued to push for maintaining its production and sales records 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 belly-up within three or four years" Yun recalled. "He knew that he had to make some drastic moves in order to turn things around. Yun locked himself in hotel room for an entire day with nine other senior managers to try and find a way out. They all wrote resignation letters and pledged to resign if they failed. After much deliberation, Yun and his management team decided to take several steps to try and push Samsung out of its precarious financial position. To start, they decided to lay off about 30,000 employees, representing well over a third of its entire workforce. They also closed down many of Samsung's factories for two months so that they could get rid of its large inventory. Finally, they sold off about $2 billion worth of businesses like pagers and electric coffeemakers perceived to be of marginal significance for the firm's future. Developing a Premium 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 develop its own products rather than to copy those that other firms had developed. In particular, Yun placed considerable emphasis on the development of products that would impress consumers with their attractive designs and their advanced 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. In order to achieve this, Yun had to reorient the firm and help it to develop new capabilities. He recruited new C 169 managers and engineers, many of whom had developed considerable experience in the United States. Once they had been 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 would last all day. To create incentives for this new talent, Yun discarded Samsung's rigid seniority-based system and replaced it with a merit-based system for advancement.As a result of these efforts, Samsung began to start launching an array of products that were designed to make a big impression on consumers. These included the largest flat-panel televisions, cell phones with a variety of features such as cameras and PDAs, ever-thinner notebook computers, and speedier and richer semiconductors. The firm calls them "wow products" and they are designed to elevate Samsung in the same way the Trinitron television and the Walkman helped to plant Sony in the minds of consumers. Finally, to help Samsung change its image among consumers, Yun hired a marketing whiz, Eric Kim, who worked hard to create a more upscale image of the firm and its products. Kim moved Samsung's advertising away from 55 different advertising agencies around the world and placed them with one firm-Madison Avenues' Foote, Cone & Belding Worldwide- in order to create a consistent global brand image for its products. He also begun to pull Samsung out of big discount chains like Walmart and Kmart and place more of its products into more upscale specialty stores such as Best Buy and Circuit City. Yun also began a practice of working closely with retailers to get more information about the specific needs of prospective consumers. Samsung teamed up with Best Buy to create the Samsung Experience Shop, a store-within-a-store that allows customers to test the company's newest products as well as receive training in mobile products they already own. This has allowed them to better understand existing markets and innovating inside them. "We get most of our ideas from the market," said Kim Hyun-Suk, an executive vice president at Samsung. Speeding Up New Product Development Yun also took many steps to speed up Samsung's new product development process. He was well aware that he could only maintain the higher margins as long as his firm kept introducing new products into the market well ahead of its established rivals. Samsung managers who have worked for big competitors say they have to go through far fewer layers of bureaucracy than they had in the past to win approval for new products, budgets, and marketing plans, speeding up their ability to seize opportunities. Apart from reducing the bureaucratic obstacles, Yun was able to take advantage of the emerging shift to digital technologies. He made heavy investments into key technologies ranging from semiconductors to LCD displays that could allow Samsung to push out a wide variety of revolutionary digital products. Samsung has continuously invested more in research and development than any of its rivals-almost $15 billion by 2018. It has a assembled a large force of designers and engineers that work in several research centers spread all around the world. More recently, Samsung has started a C-Lab at its headquarters -an in-house incubation center that encourages employees to build and develop their own ideas for growing a business. Yun also forced its own units to compete with outsiders in order to speed up the process for developing innovative new products. In the liquid-crystal-display business, for example, Samsung bought half of its color filters from 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." As a result of these steps, Samsung claims that it has been able to reduce the time that it takes to go from new product concept to rollout to as little as five months, compared to over a year that it used to take the firm in 2000. In large part, this has resulted from the effort of the firm's top managers, engineers, and designers who work relentlessly in the ive-story VIP center nestled amid the firm's industrial complex in Suwon. They work day and night in the center, which includes dormitories and showers for brief rests to work out any problems that may hold back a product launch. This allows the firm to get its products to move quickly to manufacturing with minimal problems and at the lowest possible cost. Kyunghan Jung, a senior manager of the center explained: "Seventy to eighty percent of quality, cost, and delivery time is determined in the initial stages of product development." The speedier development process has allowed Samsung to introduce the first voice-activated phones, handsets with MP3 players, and digital camera phones that send photos over a global system for mobile communications networks. As an example of the firm's speed and agility, Charles Golvin of Forrester Research talked about its ability to create four different specifications of its Galaxy S smartphone for four varying wirelesss network types around the world and deliver them simultaneously. "They've had a long history of responding to market trends with a lot of alacrity," he remarked." Perfecting a Design Process As Yun was building the Samsung brand, he was already trying to position the firm to compete with all others on the basis of the irresistible design of its wide range of products ranging from home appliances to handheld computers to flat-screen televisions that, eventually, would all be linked to each other. In fact, the firm does seem to be well placed to develop attractive gadgets that straddle traditional technology categories. "We have to combine computers, consumer electronics, and communications as Koreans mix their rice with vegetables and meats," said Dae Je Chin, the head of Samsung's digital media division. Although Samsung tries to pack its products with various attractive features, it draws on the knowledge of over 1,500 C 170 designers with backgrounds in disciplines as diverse as psychology, sociology, economics, and engineering. These designers in turn draw on information that is collected by over 60,000 staff members working in 35 research centers across the globe in cities such as San Francisco, London, Tokyo, Mumbai, and Shanghai. Inside these centers, designers observe the way that consumers actually use various products. The wide Galaxy Note phone, for example, resulted from the responses of focus groups who wanted a device that was good for handwriting, drawing, and sharing notes. Asian consumers said that they found it easier to write characters on a device using a pen than typing on a keyboard. "The research process is unimaginable," said Chang Donghoon, an executive vice president of Samsung who has led the company's design efforts. "We go through all avenues to make sure we read the trends correctly." Samsung has therefore been sending its growing group of designers to various locations to spend a few months at fashion houses, furniture designers, and cosmetic specialists to stay current with trends in other industries. Designers of the latest Galaxy smartphone said they drew inspiration from trips to ruins in Cambodia, vistas in Helsinki, a Salvador Dali art exhibit in London, and even a balloon ride in Africa.Furthermore, Samsung appointed designers to management positions in order to make sure that they can get their ideas to top executives. In 2015, the firm managed to recruit Lee Don-Tae, who had been a top executive at a leading UK design agency. He joined Chang Don-Hoon, who was given charge of the firm's design strategy team, overseeing the design of products across all of the product lines. In the fall of 2014, Samsung unveiled a slick design website to shore up its self-proclaimed status as a design powerhouse. "Samsung strives to consistently lead the consumer electronics industry in product design and engineering innovation, " an executive said." As a result of these efforts, Samsung has managed to win several hundred design awards over the last years. In 2018 alone, the firm won 49 IDEA Design Awards, the most it has won in a single year thus far 10 Samsung has also been relying on the attractiveness of its products to make them the center piece of a digital home. In a showroom in the lobby of its headquarters in Seoul, the firm shows off many of its latest offerings ranging from tablet computers to digital cameras. Visitors can put on goggles to watch characters jump out on 3-D televisions or shuffle their feet on an interactive LED floor. Roger Entner, a wireless industry analyst 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 trendsetter like Apple?"11 Creating a Sustainable Model? Samsung has been trying to deal with the setback that its de facto leader's arrest may have caused to its efforts to reassert its reputation for building innovative products. Although there are some doubts about its prospects for continued growth, the firm is confident in its savvy investments in chipmaking over the years. By 2017, Samsung had surpassed Intel to become the leading producer of semiconductors in the world. " This leadership will allow it to move into new growth areas such as artificial intelligence, autonomous driving, and growing Internet-based applications. "Samsung can actually advance into new areas leveraging its strength in the existing chip business, as we embrace a new era where memory capacity will be really important," said Marcello Ahn, a fund manager at Quad Investment. 13 In the meantime, Samsung continues to invest into its existing businesses, such as its market-leading smartphone business. It has announced its plans to launch a smartphone with a foldable screen that folds like a book and opens to tablet size. The phone, whose screen would expand to 7-3 inches when opened, is expected to be launched in September 2019."# The hope is that the new offering will help Samsung compete with the growth of sales from lower-cost Chinese rivals. It could also lift sales, pushing consumers away from the recent trend of holding on to their handsets for longer periods of time. At the same time, Samsung has been building a reputation for its efforts to advance the push for more sustainability. The firm has been making all of its products more energy efficient, allowing it to earn awards for some of its products. Its latest initiative, Galaxy Upcycling, allows consumers to transform the Galaxy phones that they no longer need into smart devices such as LCTVs, gaming consoles, and personal computers. This new approach is being gradually expanded to reach more and more consumers around the world. Of all the new areas for growth of its chipmaking business, Samsung is most optimistic about the push for autonomous driving. According to Peter Yu, an analyst with BNP Paribas: "Autonomous driving will require huge data processing power, and Samsung can provide essential components such as sensors, storage chips, cameras, and display." But in spite of the opportunities that can arise from such new developments as autonomous driving, the firm does face competition from several existing and potential entrants. Analysts therefore believe that Samsung's success with its movement into these new growth areas is likely to depend on its ability to convert its expertise of one sort of mobile technology to others. Change everything except your wife and children. -Address to employees from Samsung chairman Lee Kun-hee to push for its transformation to a leading electronics brandC 167 CASE 21 SAMSUNG ELECTRONICS 2019* In February 2019, Samsung Electronics celebrated the 10th anniversary of its introduction of the Galaxy S line of smartphones by introducing several new models. The Galaxy Sio models ranged in sizes and price from a more compact model with a 5.8- inch display to a full-size model with a 6.4-inch one. It even launched a souped-up model with a 6.7-inch screen that featured G technology. These new models also feature a "Infinity-O display," which cuts a hole for the front camera in the upper right corner to allow the display to maximize the entire front of the phone. These anniversary models capped a period of two years during which Samsung Electronics had to cope with the conviction of its de facto leader, Lee Jae-yong, on charges of bribing South Korea's former president. Lee has been providing broad direction to the firm since his father, Lee Kun-hee, became incapacitated after suffering a heart attack in 2014. These troubles with its leadership have not diminished Samsung's status as an innovative-and highly profitable- powerhouse in the technology world (see [ Exhibits 1 and ( 2). It has gained in stature as the world's largest maker of memory chips, smartphones, and televisions among other electronic products (see [ Exhibit 3). EXHIBIT 1 Income Statement (billions of KRW) Years Ending December 31 2018 2017 2016 2015 2014 2013 Revenue 243,771 239,575 201,866 200,653 206,206 228,693 Gross Profit 111,377 110,284 81,589 77,171 77,927 90,996 Operating Profit 61,159 56,195 30,713 25,960 27,875 38,364 Net Income 43,890 41,344 22,415 18,694 23,082 29,821 Source: Samsung Financial Statements (2013-2018). EXHIBIT 2 Balance Sheet (billions of KRW) Years Ending December 31 2018 2017 2016 2015 2014 2013 Total Assets 339,357 301,752 262,174 242,179 230,422 214,075 Total Liabilities 91,604 87,260 69,211 63,119 62,334 64,059 Total Shareholders Equity 240,068 207,213 186,424 172,876 162,181 144,442 Source: Samsung Financial Statements (2013-2018). EXHIBIT 3 Smartphone Sales Worldwide Market Shares 2018 2017 2016 Samsung 19.0% 20.9% 18.1% Apple 13.4% 14.0% 18.3% Huawei 13.0% 9.8% 10.6% Xiaomi 7.9% 5.8% 3.6% OPPO 7.6% 7.3% 7.3% Others 39.1% 42.2% 41.8% Source: Gartner, 2019; Statista 2017.Answer following questions using concepts and theories covered in class (particularly chapters 1, 2, 3, 5, 11, and 12; i.e. Strategic Management Concepts, Porter's Five Forces, Resource Based View, Generic Business strategies, Leadership, and Innovation and Entrepreneurship) when you tackle following strategic questions. Main focus: Chapter 12- Innovation and Corporate Entrepreneurship You are encouraged to go beyond the information provided in the case (library sources, recent news articles about the company) when drafting your strategic analysis. 1. What competitive strategies did leadership adopt to turn Samsung around? How did Yun Jong Yong change the business strategy? (Chapter 5 Business level strategies; Chapter 3-4 developing internal resources and capabilities) 2. What is the corporate strategy of Samsung? (Chapter 6: Diversication) How has this strategy helped with their strategic goals? 3. What approach does Samsung's leadership have regarding innovation? How has Samsung been able to manage its innovation process? (Chapter 12 Types of innovation, managing innovation, challenges) 4. What are the key issues ahead, and what is your recommendation for Samsung going forward