Samsung Changes Its Business Model Again and Again In the 2000s, Samsung, based in Seoul, Korea, has risen to become the most profitable consumer electronics company in the world. Since 1999, its revenues have doubled, and it has become the second most profitable global technology company after Microsoft.20 The story of how Samsung’s business model has changed over time explains how the company has reached its enviable position. In the 1980s, Samsung watched as Japanese companies like Sony and Matsushita (the maker of Panasonic and JVC products) turned out thousands of innovative new consumer electronics such as the Walkman, home video recorders, high-quality televisions, and compact disk players. Samsung’s strategy was to see which of these products and which of their specific features, such as a TV with a hard disk that can store movies, customers liked the best. Then Samsung’s engineers would find ways to imitate this technology, just as Japanese companies had imitated U.S. electronics companies in the 1950s when they were the world’s leading electronics makers. Samsung would make a low-cost copy of these products and sell them at lower prices than Japanese companies. While this strategy was profitable, however, Samsung was not in the league of Japanese companies like Sony, which could charge premium prices for their electronics and then continually plow their enormous profits back into research to make ever more advanced state-of-the-art electronics—and thus increase their profitability. Samsung continued to pursue its low-cost strategy until the mid-1990s, when its chair, Lee Kun Hee, made a major decision. Sensing the emerging threat posed by China and other Asian countries whose cheap labor would rob Samsung of its low-cost advantage, Lee realized that Samsung needed to find a way to enter the big leagues and compete directly against the Japanese giants. The question was: How could Samsung do this, given that companies like Sony, Panasonic, and Hitachi were leaders in electronics research and development? Lee began his new strategy by closing down thirtytwo unprofitable product divisions and laying off 40% of Samsung’s work force. Having lowered its cost structure, Samsung could now invest much more of its capital in product research. Lee decided to concentrate Samsung’s research budget on new-product opportunities in areas like microprocessors, LCD screens, and other new kinds of digital components that he sensed would be in demand in the coming digital revolution. Today, Samsung is a major supplier of chips and LCD screens to all global electronics makers, and it can produce these components at a much lower cost than electronics makers can because it is farther down the experience curve. The focus of Lee’s new strategy, however, was on developing research and engineering skills that would allow the company to quickly capitalize on the technology being innovated by Sony,Matsushita, Phillips, and Nokia. His engineers would take this technology and rapidly develop and improve it to create new and improved products that were more advanced than those offered by Japanese competitors. Samsung would produce a wider variety of products than competitors but only in relatively small quantities. Then, as its new products were sold in stores, newer electronic models that were still more advanced would replace them. One advantage of speeding products to market is that inventory does not sit in Samsung’s warehouses or stores, nor does Samsung need to stock large quantities of components because it needs only enough to make its budgeted output of a particular product. So by making speed the center of its differentiation strategy, Samsung was able to make more efficient use of its capital even as it introduced large numbers of new products to the market. At the same time, Samsung’s ability to innovate a large number of advanced products attracts customers and has allowed it to build its market share. Today, for example, while Nokia can claim to be a leading cell phone innovator, Samsung was the first to realize that customers wanted a color screen for their phone to allow them to play games and a built-in camera that would allow them to send photographs to their friends. Both these incremental advances have allowed Samsung to dramatically increase its share of the cell phone market. To compete with Samsung, Nokia has had to learn how to innovate new models of cell phones rapidly. Although in the 2000s Nokia has introduced new phones more quickly, Samsung has been able to do so even faster.21 By making speed of new-product development the center of its business model, Samsung also was able to move ahead of its other major competitors like Sony. Because of its focus on developing new technology and because of the slow speed of decision making typical in Japanese companies, Sony was hard hit by Samsung’s success, and its profitability and stock price declined sharply in the 2000s. Today, Samsung is not just imitating Sony’s leading-edge technology but is also developing its own, as shown by the fact that in 2004, Sony and Samsung announced a major agreement to share the costs of basic research into improving LCDs, which run into billions of dollars. Today, Samsung is in the first tier of electronics makers and is regarded by many as one of the most innovative companies in the world. Almost a quarter of Samsung’s 80,000 employees work in one of its four research divisions semiconductors, telecommunications, digital media, and flat-screen panels. Because many of its products require components developed by all four divisions, it brings researchers, designers, engineers, and marketers from all its divisions together in teams at its research facility outside Seoul to spur the innovation that is the major source of its success. At the same time, it can still make many electronic components at a lower cost than its competitors, which has further contributed to its high profitability. Given the rapid technological advances in China, however, it appears that Chinese companies may soon be able to make some of their components at a lower cost than Samsung, thus doing to Samsung what Samsung did to companies like Sony. Samsung is relying on the speed of its research and engineering to fight off their challenge, but all global electronics makers are now in a race to speed their products to market.

Case Discussion Questions

1. How has Samsung’s business model and strategies changed over time?

2. What is the basis of Samsung’s current business model? In what ways is it trying to improve its competitive advantage? (Go to the Internet and update the case.)