CM09 Strategy I

Individual Assignment for Session 3

Question 1
Samsung had a signi cant cost advantage in all the product categories o ered in 2003: compared
to its competitors, the company was able to sell more, as shown in the Production Volume Units
(million) lines, and at a lower cost as shown in the lines of the Fully loaded cost (Exhibit 7a). In
particular, the company had a $1.39 lower cost unit. Samsung managed to have lower costs than
the competition in almost all product categories. It had the highest cost advantage in raw
materials (35.52% lower than CWA): this can be explained, rst, by Samsung’s investment in
manufacturing in the previous decades when it decided to adopt the stacking method and also
when it placed $1B into the wafer production line. Also, Samsung had the highest cost advantage
in depreciation (17.68% lower than CWA), meaning that its machinery and equipment had better
utilization or the investment in them was low. Indeed, one of the success factors is the common
core design which enabled the company to reduce the costs of equipment. Moreover, Samsung
had not signi cant costs in R&D because it strategized the R&D laboratory well: while the other
competitors had facilities all over the world, Samsung had it in just one location making the
research more e cient in terms of costs. Finally, labor is a key cost component explaining
Samsung’s success compared to the other brands. It employed expert engineers and managers
from other countries at a lower salary: Samsung’s average salary was $44,000 while, for example,
In neon’s was $72,400. At the same time, the company invested a lot in the well-being of its
employees, for example through incentives and training, and in developing a company’s culture of
cooperation, commitment, and innovation and, therefore, encouraging, a more productive work
environment.
Samsung also showed to have a signi cant cost advantage in 2003: compared to its competitors
the company had a $0.72 unit cost advantage. Despite the higher price, Samsung was able to sell
more, rst of all, because of its products’ exibility, customization, and, therefore, variety. The
products shared a common design which allowed the company to then customize it based on the
customers’ preferences and to have di erent product categories (frontier products, legacy, and
specialty products) that could address more target customers and niche markets; the products
had also many applications. Not only Samsung was able to o er a great variety of products but
also to produce in very higher volumes (e.g. 71.9% more than Hynix as shown in Exhibit 4): lower
costs combined with high volumes led to excellent economies of scale. Furthermore, Samsung
wanted its products to have the highest quality in terms of reliability: this pushed customers to
pay more for the products as they lasted longer and better. As stated before, quality was also
achieved by investments in employees who, besides being the best foreign talents chosen with a
strict selection process, were all brought to work together at the one-site R&D lab where they
could easily cooperate and focus on delivering the best quality. All these elements, allowed
Samsung to be more pro table than its competitors in 2003, as also proven by Samsung’s
Operating margin line in Exhibit 7a which shows to be the highest (24.1%).

Question 2
Before 2005, Samsung was the undiscussed leader in the semiconductor industry. After that, the
challenge of Chinese entrants in the industry concerned the company on how to keep its
leadership position. In particular, the greatest threat is represented by the company SMIC which is
growing enormously. My recommendations for Samsung are as follows. First, the case tells us
that Chinese companies lack the critical infrastructure to support a cutting-edge semiconductor
industry but the Chinese government is willing to o er incentives to foreign players partnering with
local companies. I would recommend Samsung uses this opportunity to help Chinese players in
building the necessary infrastructure to bene t from the government’s cheap credit, abundant
land, cheap facilities, engineering talent, and tax incentives and, therefore, reduce its costs. I
would suggest Samsung either engage in a joint venture or charge a revenue fee for the basic
semiconductor products sold by the Chinese partners. This will enable the company to increase
its market share. Second, we know from the case that Samsung is able to produce a wide variety
of products and address many target customers and niche markets. I would recommend,
therefore, the company invest more in special products: this means investing in R&D and
developing innovative products that no competitors sell or that have particular features that can
address niche customers. As consumers are more and more concerned about environmental
policies, I would also recommend Samsung develop the lowest polluting products and make
sustainability a recognizable symbol of the company.
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