Ivan DimitrovDario MercadoRaul OrozcoSiddhi VakilMichael WathenArun Wright|
Samsung Case Study
Samsung, the current leader in DRAM technology, is facing a large threat by highly talented and resource-rich competitors in China. It must decide how to deal with this threat by considering how the industry has evolved up this point in time and then choose a path that will protect its position in the market. According to a Level 3 Analysis of Porter’s Five Forces model (see Exhibit 1), the DRAM industry carries a weighted score of 2.9 (neutral), which demonstrates that there is still a large amount of growth opportunity but also many points of caution. The most important factors influencing industry attractiveness are the cost and the speed of technological development, high customer switching costs that OEM’s face due to their dependency on customized DRAM design, and the overall decline of the PC industry, which is causing shrinkage in the overall demand growth of DRAM chips.
Chinese companies have started to pose a real threat to Samsung in the memory chip industry. Although initially underestimated, the Chinese entry is quickly making headway in an industry associated with high capital requirements and advanced technological expertise. The Chinese companies lacked the organization experience and the technological knowhow in that area but have been catching up. Since they were new to DRAM, the Chinese companies were sacrificing profitability by selling cheaper products in order to capture market share from the main competitors. Furthermore, Chinese companies were able to attract foreign investment to fund their capital requirements. As a result, Chinese chip makers could afford to sell their products at low prices and steal market share from Samsung and the other companies in this industry. Government intervention will be a key factor for keeping the Chinese memory business afloat. They depend on government support to build infrastructure for the chip manufacturing facilities. To overcome the challenge of developing the technology and kick off their low price offensive, the Chinese entrants licensed legacy technology from established chip makers. For example, SMIC lacked the design capabilities and produced chips based on blueprints. SMIC chips are not a match to Samsung’s reliable, high quality DRAM chips, but are known for being low cost. The Chinese entrants are potential contenders in the DRAM and possibly in the flash market if they can maintain low prices. The pressure on chip prices would erode profitability over time and will force the main competitors to differentiate their products and come up with new technologies. Samsung should not compete on price with the Chinese chip makers but instead focus their strengths on R&D and operations to build next generation memory products.
Samsung's business level strategy for DRAM is competing based on value. There is incredible pressure on cost throughout the industry, and Samsung holds an advantage for currently having the lowest costs in the industry. Samsung is a cost leader in DRAM industry and can charge 15% margins. Samsung plans to leverage their 1200+ varieties of chips and network of manufacturing facilities to provide high quality, state of the art, customized chips to help customers succeed with a wide variety of products. For products like SDRAM & DDR2 it follows a focused low cost strategy, while new products like flash memory are differentiators (see Exhibit 2).
Value Minus Cost Analysis
Key drivers that differentiate the competitors in this industry are: Quality, Brand, Customization, Technology, and Partnerships. Each driver is evaluated on a scale of 0-1 and has been assigned equal weights of 0.2. Afterwards this is compared to the weighted average. The DRAM industry is highly price sensitive, so our team added a 75% value premium to...