Samsung Case What are the most important factors affecting industry attractiveness? Conduct a 5 forces analysis of the DRAM industry. What kind of advantage are the Chinese entrants seeking? How close are they to achieving that advantage? How might this affect the industry conditions? What is Samsung’s business level strategy in DRAMs in 2003? What are the value and cost drivers underlying their strategic/competitive position? What matters more to Samsung’s performance, cost advantage or value advantage? Include a value chain analysis and willingness to pay analysis (Value minus Cost) in your answer. Is Samsung’s position sustainable? Can Samsung’s position withstand the Chinese threat? Include a sustainability analysis (VRIO, preventing imitation, retaining customers) in your answer. Based on your analysis, how might Samsung deal with the Chinese threat of entry? Identify 2 recommendations; discuss the pros/cons/implications of one of the recommendations.

Chinese Entrants: Seeking a low cost advantage The entrants have low cost finance & inexpensive engineers. SMIC’s costs/average unit = 2nd lowest. SMIC is focusing on the most popular product in the industry. Looks like a direct challenge to Samsung’s advantage. How much of Samsung’s Performance is based on its low cost advantage? 2003: cost advantage = $1.39 per average unit. 2003: price premium = $.72 per average unit.

Price minus Cost Samsung Competitor Average PS- CS = $1.37 PC- CC = (-$0.74) PS = $5.68 C = $5.70 PC = $4.96 CS = 4.31 What is driving the differences in costs? - Differences in Input costs? E.g. Raw Materials, Labor, SG&A, R&D or - Differences in Productivity?

Is Samsung’s advantage cheap inputs (labor & finance) or high productivity? Not cheap financing: Samsung is financing with internal cash (Ex. 1). SMIC has cheap financing but, all 3 major incumbents (except Hynix), are able to self finance with FCF. Not lower labor wage rate: Samsung’s annual wage = $44K > Competitors’ average annual wage = $40,050 So, is the source of Samsung’s low cost advantage primarily high productivity?

So, is the source of the advantage primarily high productivity? Cost advantage/unit = Competitor Input Costs/unit Samsung’s Productivity Samsung’s Input Costs/unit Competitor Productivity Relative Raw Materials Cost Advantage Relative (Total) Raw Materials Cost Ratio (Competitor’s RM cost/unit) / (Samsung’s RM cost/unit) = 1.551 (Ex. 7a) Relative Raw Materials Input Cost Ratio = [1/(1-.05] = 1.05 Samsung receives an additional 5% vol. discount. 1.551 = (1.05) X Relative Productivity in Using Raw Materials Relative Productivity in Using Raw Materials = 1.477 Samsung’s raw materials cost advantage is primarily a function of its productivity. X

So, is the source of the advantage primarily high productivity? Relative Labor Cost Advantage: Relative (Total) Labor Input Cost Ratio (Competitor’s Labor cost/unit) / (Samsung’s Labor cost/unit) = 1.370 (Ex. 7a) Relative Wage Ratio = .919 (Competitors’ Average Wage) / Samsung’s Average Wage = (40,050)/(44,000) =.919 1.370 = (.919) X Relative Productivity in Using Labor Relative Productivity in Using Labor = 1.491 Samsung’s labor cost advantage is primarily a function of its productivity.

Implications Productivity dominates input costs (1.477 & 1.491) SMIC does have dramatically lower labor input costs but Samsung makes up the difference more than 2.5 times with higher productivity. Suggests that Samsung should focus on defending its low cost advantage. But, is Samsung’s differentiation advantage more important or easier to grow & sustain, or both? Larger margins for frontier & specialty products vs. mass market products. 76% of their premium stems from catering to multiple product niches And Samsung produces these products without damaging its overall cost structure relative to rivals.

Sources of Samsung’s dual advantage Privileged access to human capital in Korea. Organizational Practices  High Productivity (contributing to an increase in V-C) Co-location of R&D and production to create a sense of community. Explicit mechanisms to facilitate cooperation/integration: Project incentives to ensure that employees cooperate across functional lines Monetary incentives at the division level to foster cooperation up and down the hierarchy Debate encouraged on major production decisions Culture requires post-debate unity Operational Effectiveness  Relative Cost Advantage Plus, OE contributes to reliable products (reducing defect rate; on time delivery, etc.)  Customer Retention

Why can’t more firms, in other industries, secure a dual advantage Why can’t more firms, in other industries, secure a dual advantage? Key Points: A dual advantage may be effective when there are few tradeoffs. Example: Samsung’s focus on differentiation leads to learning & yield improvement  which results in lower costs and customer retention. So, few tradeoffs, especially between differentiation attributable to frontier products and low cost. Plus, the differentiation advantage stems from unique activities that are more sustainable. The Challenge is: In most industries there are tradeoffs. And, most advantages based on scale economies, favorable access to human capital, and operational effectiveness can be imitated in the long run.

Why can’t more firms, in other industries, secure a dual advantage Why can’t more firms, in other industries, secure a dual advantage? Key Points: The good thing is: The long run can take a long time to occur. But, it’s risky to bet a firm’s future on a strategy that can be easily imitated. Implication: Milk the dual advantage but invest more resources into the strategy that is less easily imitated.

Key Points Creating a Dual Advantage: Requires a complex set of organizational practices that support combining a differentiation advantage with large-scale investments in productivity. For instance: Samsung’s organizational practices to facilitate cooperation & create a sense of community among production and design teams, etc. Samsung’s success is not about technological determinism. Prior incumbents had failed to customize their products for different niche applications. Samsung however, actively searched for opportunities to customize their products to support multiple markets. Without this orientation, Samsung’s profits would not have come so easily.

Some options for dealing with the Chinese Threat Move part of the firm’s wholly-owned operation to China. Partner with the Chinese firms at the low end. Put all available resources into research on and development of frontier & specialty products. Pursue frontier/specialty R&D and partner with a Chinese firm at the low end.

Key Points A dual-advantaged incumbent faced with the threat of large scale entry should assess which advantage is more sustainable. And then, allocate resources to protecting the more sustainable advantage. Implications for Samsung at the time of the case: It makes little sense for Samsung to partner with one of the Chinese firms, And, because the Chinese firms might eventually bring down prices on low-end products, Samsung should focus most of its resources on frontier R&D.