CASE 21 SA:/15) 19 53 : TH2 l " ! In February 2019. Samsung Electronics celebrated the 10th in 2014. These troubles with its leadership have not diminished anniversary of its introduction of the Galaxy S line of smart- Samsung's status as an innovative and highly profitable- phones by introducing several new models. The Galaxy SIO powerhouse in the technology world (see Exhibits 1 and 2). models ranged in sizes and price from a more compact It has gained in stature as the world's largest maker of memory model with a 5.8-inch display to a full-size model with a chips, smartphones, and televisions among other electronic 6.4-inch one. It even launched a souped-up model with products (see Exhibit 3). a 6.7-inch screen that featured 5G technology. These new But the removal of Lee came at a tough time for models also feature a "Infinity O display," which cuts a hole Samsung, which has been seeking new avenues for growth for the front camera in the upper right corner to allow the as sales of its market-leading smartphones seem to be display to maximize the entire front of the phone. slowing down. A few months later, Samsung's chairman of These anniversary models capped a period of two years the board, Kwon Oh-hyun, shocked everyone in the firm by during which Samsung Electronics had to cope with the suddenly announcing his resignation. Kwon claimed that conviction of its de facto leader. Lee Jae-yong, on charges the firm need to turn to a younger generation of leaders of bribing South Korea's former president. Lee has been who could search for new growth engines by studying fu. providing broad direction to the firm since his father, Lee ture trends. "I believe the time has now for the firm to start Kun-hee, became incapacitated after suffering a heart attack 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 Case prepared by Jamal Shamsie. Michigan State University, with the all three of its co-chief executives that were heading its assistance of Professor Alon B. Eisner, Pace University. Material has been drawn from published sources to be used for purposes of class discussion main business lines-mobile, electronics components, and Copyright 2019 Jamal Shamsic and Alan B. Eisner consumer electronics EXHIBIT 1 Income Statement (billions of KRW) 2018 2017 Revenue Years Ending December 31 2016 2015 201,866 200.653 243,771 239,575 2014 2013 Gross Profit 111,377 206,206 110,284 228,693 Operating Profit 81,589 77,171 61,159 77.927 56,195 90.996 Net Income 30.713 25.960 43,890 27,875 41,344 38.364 Source: Samsung Financial Statements (2013-2018). 22.415 18,694 23,082 29,821 SEIT 2 Balance Sheet (billions of KRW) Years Ending December 31 2018 2017 Total Assets 2016 2015 339.357 2014 301,752 2013 Total Liabilities 262,174 242,179 91,604 230.422 87,260 214,075 Total Shareholders Equity 69.211 63.119 240,068 62,334 207.213 64,059 186,424 Ser: Samsung Financial Statements (2013-2018). 172.876 162,181 144,442 18.3% 7.3% EXHIBIT 3 Smartphone Sales Worldwide still making most of its profits from lower-priced appliances that consumers were likely to pick up if they could not Market Shares afford a higher-priced brand such as Sony or Mitsubishi. In 2018 2017 2016 had also become an established low cost supplier of various components to such larger and better known manufacturers Samsung 19.0% 20.9% 18.1% around the world. Apple 13.4% 14.0% Although they were making profits, Yun was concerned about the future prospects of a firm that was relying on a Huawei 13.0% 9.8% 10.6% strategy of price competition with products based on tech- Xiaomi 7.9% 5.8% nologies that had been developed by other firms. The suc- 3.6% cess of this strategy was tied to the ability of Samsung to OPPO 7.6% 7.3% continually scout for locations that would allow it to keep its manufacturing costs down. At the same time, it would Others 39.1% 42.2% 41.8% need to keep generating sufficient orders to maintain a high Source: Gartner. 2019: Statista 2017. 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 EXHIBIT 4 Revenue by Division (trillions KRW) up in other countries such as China. Yun's concerns were well founded. Within a year of his Business Division 2018 2017 2016 takeover, Samsung was facing serious financial problems Semiconductor 86.3 74.3 51.2 that threatened its very survival. The company was left with Display Panel 32.5 34.5 26.9 huge debt as an economic crisis engulfed most of Asia in 1997, leading to a drop in demand and a crash in the prices Consumer Electronics 42.1 44.6 45.1 of many electronic goods. In the face of such a deteriorat- IT & Mobile Communication 100.7 106.7 100.3 ing environment, Samsung continued to push for maintain- ing its production and sales records even as much of its Source: Samsung Electronics Announces Fourth Quarter and FY 2018 Results Samsung, January 31, 2019. 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 Everyone at Samsung has been hoping these new ap- gone belly-up within three or four years" Yun recalled. He pointments will bring fresh blood in order to help revitalize knew that he had to make some drastic moves in order to the firm. Analysts claim that the firm faces strong pressures turn things around. Yun locked himself in hotel room for an because of its heavy reliance on competing with its hard- entire day with nine other senior managers to try and find a ware while other competitors, ranging from Apple to way out. They all wrote resignation letters and pledged to Xiaomi, offer software and Internet services that set their resign if they failed. products apart from all others because it runs only on their After much deliberation, Yun and his management team devices. Samsung did introduce its own operating system, decided to take several steps to try and push Samsung out Tizen, but this is unlikely to challenge existing systems such of its precarious financial position. To start, they decided to as Google's Android. lay off about 30,000 employees, representing well over a Executives at Samsung have claimed that the firm's third of its entire workforce. They also closed down many of strength lies in the diverse line of its products that include Samsung's factories for two months so that they could get televisions, cameras, laptops, and even washing machines. rid of its large inventory. Finally, they sold off about $2 bil- Although smartphones have accounted for as much as two- lion worth of businesses like pagers and electric coffeemak- thirds of their profits, they can also increase their revenues ers perceived to be of marginal significance for the firm's from their other offerings (see Exhibit 4). Furthermore, un- future. like their rivals, Samsung makes most of their own compo- nents that allow it to offer better products with lower costs. Developing a Premium Brand They can generate profits even if profit margins on some of these products continue to decline. 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 Discarding a Failing Strategy began to push the firm to develop its own products rather Although Samsung chairman Lee Kun-hee had called for a than to copy those that other firms had developed. In par- shift in the firm's strategy, the transformation could not ticular, Yun placed considerable emphasis on the develop- have been possible without the ceaseless efforts of Yun ment of products that would impress consumers with their Jong Yong, who was appointed to the position of president attractive designs and their advanced technology. By focus. and CEO in 1996. When Yun took charge, Samsung was ing on such products, Yun hoped that he could develop Samsung into a premium brand that would allow him to ranging from semiconductors to LCD displays that could charge higher prices. allow Samsung to push out a wide variety of revolutionary In order to achieve this, Yun had to reorient the firm digital products. Samsung has continuously invested more in and help it to develop new capabilities. He recruited new research and development than any of its rivals-almost $15 managers and engineers, many of whom had developed billion by 2018. It has a assembled a large force of designers considerable experience in the United States. Once they and engineers that work in several research centers spread had been recruited, Yun got them into shape by putting all around the world. More recently, Samsung has started a them through a four-week boot camp that consisted of mar- C-Lab at its headquarters-an in-house incubation center tial drills at the crack of dawn and mountain hikes that that encourages employees to build and develop their own would last all day. To create incentives for this new talent, ideas for growing a business. Yun discarded Samsung's rigid seniority-based system and Yun also forced its own units to compete with outsiders replaced it with a merit-based system for advancement. in order to speed up the process for developing innovative As a result of these efforts, Samsung began to start new products. In the liquid-crystal-display business, for ex- launching an array of products that were designed to make ample, Samsung bought half of its color filters from a big impression on consumers. These included the largest Sumitomo Chemical Company of Japan and sourced the flat-panel televisions, cell phones with a variety of features other half internally, pitting the two teams against each such as cameras and PDAs, ever-thinner notebook comput-other. "They really press these departments to compete," ers, and speedier and richer semiconductors. The firm calls said Sumitomo President Hiromasa Yonekura. As a result them "wow products and they are designed to elevate of these steps, Samsung claims that it has been able to re Samsung in the same way the Trinitron television and the duce the time that it takes to go from new product concept Walkman helped to plant Sony in the minds of consumers. to rollout to as little as five months, compared to over a Finally, to help Samsung change its image among con- year that it used to take the firm in 2000. sumers, Yun hired a marketing whiz, Eric Kim, who worked In large part, this has resulted from the effort of the firm's hard to create a more upscale image of the firm and its top managers, engineers, and designers who work relentlessly products. Kim moved Samsung's advertising away from 55 in the five-story VIP center nestled amid the firm's industrial different advertising agencies around the world and placed complex in Suwon. They work day and night in the center, them with one firm--Madison Avenues' Foote, Cone & which includes dormitories and showers for brief rests to work Belding Worldwide-in order to create a consistent global out any problems that may hold back a product launch. This brand image for its products. He also begun to pull Samsung allows the firm to get its products to move quickly to manufac- out of big discount chains like Walmart and Kmart and turing with minimal problems and at the lowest possible cost. place more of its products into more upscale specialty Kyunghan Jung, a senior manager of the center explained: stores such as Best Buy and Circuit City "Seventy to eighty percent of quality, cost, and delivery time is Yun also began a practice of working closely with retail- determined in the initial stages of product development." ers to get more information about the specific needs of pro- The speedier development process has allowed Samsung to spective consumers. Samsung teamed up with Best Buy to introduce the first voice activated phones, handsets with MP3 create the Samsung Experience Shop, a store-within-a-store players, and digital camera phones that send photos over a that allows customers to test the company's newest prod- global system for mobile communications networks. As an ex- ucts as well as receive training in mobile products they ample of the firm's speed and agility. Charles Golvin of already own. This has allowed them to better understand exist. Forrester Research talked about its ability to create four differ- ing markets and innovating inside them. "We get most of our ent specifications of its Galaxy S smartphone for four varying ideas from the market," said Kim Hyun Suk, an executive vice wirelesss network types around the world and deliver them president at Samsung simultaneously. "They've had a long history of responding to market trends with a lot of alacrity," he remarked. Spezing Up New Product Development Yun also took many steps to speed up Samsung's new prod. Perfecting a Design Process uct development process. He was well aware that he could As Yun was building the Samsung brand, he was already only maintain the higher margins as long as his firm kept trying to position the firm to compete with all others on the introducing new products into the market well ahead of its basis of the irresistible design of its wide range of products established rivals. Samsung managers who have worked for ranging from home appliances to handheld computers to big competitors say they have to go through far fewer layers flat-screen televisions that, eventually, would all be linked or bureaucracy than they had in the past to win approval for to each other. In fact, the firm does seem to be well placed new products, budgets, and marketing plans, speeding up to develop attractive gadgets that straddle traditional tech- their ability to seize opportunities. nology categories. "We have to combine computers, con- Apart from reducing the bureaucratic obstacles. Yun was sumer electronics, and communications as Koreans mix able to take advantage of the emerging shift to digital tech- their rice with vegetables and meats," said Dae Je Chin, the nologies. He made heavy investments into key technologies head of Samsung's digital media division. Although Samsung tries to pack its products with various its reputation for building innovative products. Althoug attractive features, it draws on the knowledge of over 1.500 there are some doubts about its prospects for continued designers with backgrounds in disciplines as diverse as psy growth, the firm is confident in its savvy investments chology, sociology, cconomics, and engineering. These chipmaking over the years. By 2017, Samsung had surpassed designers in turn draw on information that is collected by Intel to become the leading producer of semiconductors in over 60,000 staff members working in 35 research centers the world. This leadership will allow it to move into new across the globe in cities such as San Francisco, London, growth areas such as artificial intelligence, autonomous Tokyo, Mumbai, and Shanghai. Inside these centers, design driving, and growing Internet-based applications. "Samsung ers observe the way that consumers actually use various prod- can actually advance into new areas leveraging its strength in ucts. The wide Galaxy Note phone, for example, resulted the existing chip business, as wc embrace a new era where from the responses of focus groups who wanted a device that memory capacity will be really important," said Marcello was good for handwriting, drawing, and sharing notes. Asian Ahn, a fund manager at Quad Investment." consumers said that they found it easier to write characters In the meantime, Samsung continues to invest into its on a device using a pen than typing on a keyboard. existing businesses, such as its market-leading smartphone "The research process is unimaginable," said Chang business. It has announced its plans to launch a smart- Donghoon, an executive vice president of Samsung who has phone with a foldable screen that folds like a book and led the company's design efforts. "We go through all avenues opens to tablet size. The phone, whose screen would ex- to make sure we read the trends correctly." Samsung has pand to 7.3 inches when opened, is expected to be launched therefore been sending its growing group of designers to in September 2019. The hope is that the new offering will various locations to spend a few months at fashion houses, help Samsung compete with the growth of sales from lower- furniture designers, and cosmetic specialists to stay current cost Chinese rivals. It could also lift sales, pushing consum- with trends in other industries. Designers of the latest ers away from the recent trend of holding on to their hand- Galaxy smartphone said they drew inspiration from trips to sets for longer periods of time. ruins in Cambodia, vistas in Helsinki, a Salvador Dali art At the same time, Samsung has been building a reputation exhibit in London, and even a balloon ride in Africa. for its efforts to advance the push for more sustainability. The Furthermore, Samsung appointed designers to manage- firm has been making all of its products more energy efficient, ment positions in order to make sure that they can get their allowing it to earn awards for some of its products. Its latest ideas to top executives. In 2015, the firm managed to recruit initiative, Galaxy Upcycling, allows consumers to transform Lee Don-Tae, who had been a top executive at a leading UK the Galaxy phones that they no longer need into smart de design agency. He joined Chang Don-Hoon, who was given vices such as LCTVs, gaming consoles, and personal comput- charge of the firm's design strategy team, overseeing the de- ers. This new approach is being gradually expanded to reach sign of products across all of the product lines. In the fall of more and more consumers around the world. 2014, Samsung unveiled a slick design website to shore up Of all the new areas for growth of its chipmaking busi- its self-proclaimed status as a design powerhouse. "Samsung ness, Samsung is most optimistic about the push for auton- strives to consistently lead the consumer electronics indus- omous driving. According to Peter Yu, an analyst with BNP try in product design and engineering innovation," an exec- Paribas: "Autonomous driving will require huge data pro- utive said. As a result of these efforts, Samsung has cessing power, and Samsung can provide essential compo- managed to win several hundred design awards over the last nents such as sensors, storage chips, cameras, and dis- years. In 2018 alone, the firm won 49 IDEA Design Awards, play." But in spite of the opportunities that can arise from the most it has won in a single year thus far. such new developments as autonomous driving, the firm Samsung has also been relying on the attractiveness of does face competition from several existing and potential its products to make them the center piece of a digital entrants. Analysts therefore believe that Samsung's success home. In a showroom in the lobby of its headquarters in with its movement into these new growth areas is likely to Seoul, the firm shows off many of its latest offerings rang-depend on its ability to convert its expertise of one sort of ing from tablet computers to digital cameras. Visitors can mobile technology to others. put on goggles to watch characters jump out on 3-D televi- sions or shuffle their feet on an interactive LED floor. Change everything except your wife and children. Roger Entner, a wireless industry analyst at Neilson said --Address to employees from Samsung chairman Lee Kun-hee to about Samsung's efforts: "With its resources and experi- push for its transformation to a leading electronics brand ence, it's trying to capitalize on the emergence of smart connected devices. The question is, 'Can they be a cutting- edge trendsetter like Apple?! ENDNOTES 1. Hacris B. and Song Jung-A. Samsung record profits mask looming crisis. Financial Times, October 14-15, 2017, p. 15. Creating a Sustainable Model? 2. Gibney, J. F. Samsung moves upmarket. Time, March 25, 2002. p. 49. Samsung has been trying to deal with the setback that its de 3. Chen, B.X. Samsung's strategy to brake Apple juggernaut. New York facto leader's arrest may have caused to its efforts to reassert Times, February 11, 2013. p. BI. C170 CASE 21 SAMSUNG ELECTRONICS 2019 1 definition of strategic management: a two perspective; b analysis, decision and action to create competitive c strategic vs. d stakeholder management: two views e social responsibility f vision, mission statement, strategic objective 2 external analysis: g forecasting: scanning, monitoring, competitive h SWOT i general environment analysis: demographic, social culture, j five or six: k strategic group analysis: 3 internal analysis: 1 value chain analysis: i primary:( ii support: procurement, technology development, human resource management, and general administration m RBV & VRIN iii Tangible: iv Intangible: v Capabilities: n SCA: VRIN 4 business strategy: o overall cost leadership, differentiation, and focus (competitive parity, experience curve) p industry life cycle: introduction, growth, maturity, and decline q turnaround strategy 5 corporate strategy: r related diversification: s unrelated diversification:portfolio analysis (BCG. t Three means