Executive Summary
Samsung enjoys a competitive advantage due to leadership and strength in four key areas: cost leadership, superior products, research and development, and unique company culture. While these fundamental ingredients have led to Samsung’s domination of the memory industry, Chinese companies are threatening this position and attempting to enter the legacy product market by offering low prices to capture market share. In response to this threat, Samsung should: (i) cut prices on legacy products, (ii) invest in cutting edge memory products and (iii) consider a cooptation strategy with a competitor.
Samsung’s Competitive Advantage
Samsung enjoys a competitive advantage by being able to charge a higher price than its competitors due to its customers’ higher willingness to pay (“WTP”).
While it is unclear from the facts of the case whether Samsung’s suppliers in fact have a lower willingness to supply (“WTS”) to Samsung, it is clear that Samsung maintains a cost advantage over its competitors due to its ability to produce more products in a given run. Both the WTP and the price for Samsung memory products are higher relative to its competitors, thereby creating value. Samsung’s customers’ WTP is higher because of the reliability of Samsung’s products. In fact, customers would pay upwards of a 1% average price premium for a reliable product due to the risk that defective memory could destroy the entire product’s value. Also, Samsung has the ability to customize products to customer demands, thereby differentiating itself from its competitors. Due to the reliability of the products, the risks associated with defective memory, and Samsung’s ability to differentiate from competitors, consumers have a higher WTP for Samsung memory products.
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Samsung offered 1200 variations of DRAM products including “frontier, legacy and specialty” products. When market growth for DRAM shrunk to single digits, Samsung started to move to Flash, further demonstrating its ability to differentiate. Samsung has lower costs than its competitors and, as discussed above, may also enjoy a lower WTS. Exhibit 1, infra, is a value stick demonstrating a competitive advantage for Samsung by illustrating a higher customer WTP and lower supplier WTS vis-à-vis its competitors. Samsung also has lower costs than its competitors due, in part, to its ability to control production costs. Samsung’s use of a core design to develop customized products, collocation strategy to save 12% on construction costs, and technological advantage in production yield, afford Samsung a significant cost advantage over its competitors. In addition, labor costs in Korea offer Samsung a cost advantage over many competitors (e.g. USA, EG, and Germany companies, where labor costs are higher).
While Chinese competitors already benefit from reduced labor costs, Samsung appears well positioned to other competitors, Samsung’s location in Korea also affords an inherent cost advantage in salary over its competitors (e.g., Micron (USA) and Infineon (EU/German)).
This advantage is not applicable in the case of Chinese competitors who benefit from significantly reduced labor costs, but Samsung continues to be well positioned to compete on overall costs.While Samsung’s labor costs contribute to the company’s value by maintaining a low WTS, the ability to cultivate a business environment, which fosters innovation and productivity, is a unique characteristic of Samsung. compared to other industry players. Promotions and incentives are based upon performance rather than seniority. Through its Global Strategy Group, the company actively recruits foreign talent to solve key business problems and cultivate future leaders. to prepare the firm’s future leaders for important positions. Using these incentives and structures, Samsung has a corporate culture that drives high productivity, is valued by the customer, and which yields a high WTP. Duplicating this culture is nearly impossible,arduous since competitors are unable to determine which of Samsung’s strategies it would need to copy to match Samsung’s success.
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Samsung appears to have successfully increased their WTP without significantly increasing costs, a difficult concept for competitors to replicate,Additionally, competitors trying to copy Samsung’s culture may do so at the risk of trading off for an increase in input costs. While there are often trade-offs between WTP and WTS whereby increasing WTP may imply a higher cost and lowering costs may imply a lower WTP, Samsung appears to have successfully increased WTP without significantly increasing cost.Exhibit 2, infra, illustrates the threat of increased competition from Chinese competitors (illustrated through changes to theusing value stick analysis).
Other external threats to competitive advantage are discussed herein. Fierce rivalry associated with the new market entrants from China results in both a decrease in customers’ WTP and correspondingly, Samsung’s price. While Samsung does need to be mindful of the threat of Chinese competition in the DRAM market, it is important to note that the near-term threat is limited to legacy product lines. Frontier products, like Flash, are high growth opportunities and are more challenging for Chinese companies to replicate.
The Chinese companies do not possess the know-how required to produce frontier products efficiently and effectively, creating a higher barrier to entry in frontier products. Simplifying Samsung’s choice, it could choose to compete on price with these new market entrants for legacy products or focus on frontier products where it continues to enjoy a competitive advantage. There are several additional threats to Samsung’s competitive advantage, both external and internal, worth mentioning: [add nanotechnology as possible future substitute] Is Flash considered a substitute? Probably not a direct substitute to DRAM, but can they compete in the semiconductor industry without Flash?[add government as another external force – anti-trust lawsuits][add complements as another external force – cheap PCs may increase or decrease the value of memory][add price competition as another external force – price wars could lead to decrease in competitive advantage]Response to the China Threat and Our Action PlanChinese companies are attempting to enter the legacy product market by offering low prices to capture market share. As outlined in the Wexecutive summary, we believe the company should take three approaches to combat this threat, including heavily leveraging the existing DRAM market and pricing structure to focus production on high-value legacy and frontier products.: (i) cut prices on legacy products, (ii) invest in cutting edge memory products and (iii) consider a cooptation strategy with a competitor.
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Samsung should reduce its prices on its legacy DRAM products in order to protect its market share from Chinese competitors. Samsung is a market leader in terms of cost control and productivity, which enables it to achieve high operating margins. Chinese competitors, on the other hand, lack cost-effective production capabilities, resulting in higher cost structures and significantly lower margins, or in the case of SMIC, negative margins, (note that SMIC has a negative operating margin).
Samsung should leverage its cost advantage and reduce prices to such a level in which it becomes too costly for the competition and discourages entry into the market. Although Samsung would be giving up profit margin in the legacy market by reducing unit pricesWhile this sacrifices higher profit margins, some of the resulting loss in gross profit dollarsmargin could be offset by increased volumes in volume sold due to the lower prices. Samsung could also also make up the margin loss by focusing more on high-margin, high-growth frontier products (e.g., Flash, 1 Gb+ chips) to offset the aforementioned price reduction. Samsung should reduce its prices on legacy products without sacrificing quality and reliability.
Once Samsung has successfully fended off its competitors, it can look to raises prices on those products again. It is important to note that quality and reliability should never be sacrificed if this practice is adopted. Once Samsung has successfully controlled its market share, the company could consider raising prices. With Chinese companies entering the legacy product market and creating a “pricing war,” Samsung should shift more of its focus to the frontier product market, an area in which Chinese rivals lack the resources and know-how to compete. By focusing on new products, Samsung could develop new markets and users for its memory products. This could increase the value of Samsung’s products through a direct network effect. Additionally, Samsung could seek to create indirect network effects using its new frontier products. For example, Samsung could only offer frontier products to buyers that exclusively purchase (or exceed a significant purchase threshold) legacy products from Samsung. FinallyLastly, in order to maintain a strong market leadership position and combat the Chinese threat, Samsung should consider pursuing a cooptition strategy by forming an alliance with a competitor. An alliance with or acquisition of a key competitor(s) would serve two crucial objectives: (i) strengthen Samsung’s market position in areas where they will continue to lead and compete; and (2) deny Chinese competitors an entrée into the market.
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Infineon Technologies AG is an attractive target for Samsung for a number of reasons. First, Infineon has demonstrated a commitment to R&D surpassed in the industry only by Samsung’s commitment to R&D. Although there is some risk of de-centralization, their 25 global R&D locations would propel the competitive product development strategy that has been successfully employed at Samsung in the past. Second, Infineon’s product lines complement Samsung’s growth products, specifically frontier and specialty chipsets. With frontier products, Infineon’s capabilities have allowed them to be the only firm besides Samsung capable of producing 512 Mbit chips at a positive operating margin. Further, Infineon represents the only legitimate competition to Samsung in the specialty chipset market. Third, Infineon’s production capabilities could enhance Samsung’s current production processes. While Infineon utilizes a 0.14 micron design rule, Infineon owns the 0.11 micron process technology which Samsung uses as its main design rule. Additionally, 33% of Infineon’s current production volume is allocated to higher efficiency, 12-inch wafers. The ability to leverage these production resources would allow Samsung to enhance its competitive advantage by further lowering its costs while at the same time increasing their production output in the DRAM market.
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Finally, Infineon represents one of the largest threats to Samsung in the frontier and specialty chip market. Infineon’s current plans include a commitment to invest over $1.5 billion in Asian markets. Given their history of licensing manufacturing technology and joint ventures in the Asian market, it is not improbable that Infineon could license its frontier designs and production processes to its Chinese competitors. If Samsung chose not to form an alliance with Infineon, it could consider partnering with a Chinese firm to selectively outsource the production of its legacy products by licensing its process technology. Samsung could then use its newly uncommitted capital to invest more heavily in “frontier” R&D, with the goal of remaining at the forefront of new technology and being first-to-market with new products. While there is a risk that the Chinese producers will steal the intellectual property associated with producing the legacy products, the potential loss may be limited if the legacy products are in fact a dying breed. Samsung could also mitigate this risk by restricting the processing technology that is licensed. For example, licensing 0.15µm technology would benefit most Chinese competitors, but would not compete with Samsung’s 0.11µm efficiency.
Perhaps the greatest risk associated with shifting production to China would be compromising product quality and reliability , thereby as a result of eroding the corporate culture based, at least in part, on having the entire team housed under one roof. It could be argued, however, that the source of Samsung’s strong corporate culture is a result of their investment in employees and not the physical location of the employees. Continuing to incentivize people to be innovative and work toward a common goal could mitigate any risk to the company’s culture. Irrespective of the source of Samsung’s culture, it should be clear that any compromise in product quality and reliability could negatively impacting the entire Samsung brand, including its frontier products. One strategy to mitigate this impact, however, i of this is to limit exposure through the licensing of technology, but to and retain Chinese branding of the product. This strategy mitigates the both risk of comprising product quality and tarnishing the Samsung brand.
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