This report investigates how Samsung was able to build a competitive advantage in the global memory chip industry and what steps it should take to sustain its advantage in the face of the imminent threat of Chinese competition.
Analysis of Samsung’s business strategy and competitive advantage
Porter’s 5 forces model in Exhibit 1 is used to analyze the global memory chip industry and Samsung’s strategy to date. Samsung had become the dominant player in the global memory chip industry and was able to increase the gap from other competitors in terms of technology and market share by following the below strategy.
1.Aggressive investments in R&D
The memory chip industry is technology driven. A significant investment is required in R&D at the product design stage. As illustrated in exhibit 1 Samsung Electronics had maintained its technology leadership by outspending its rivals in R&D by over 1.5 to 20 times from 1998 to 2003 (Exhibit 3), which was possible thanks to the Samsung group’s diversified portfolio that allowed it the take calculated financial risks.
Since Samsung was able to create and maintain technology leadership it was able to earn a very high premium at the initial stages of a new product to recover its initial investment and if competitors began producing the same product it could aggressively lower prices to make it difficult for followers to stay in the competition.
Faced with the challenge that the DRAM industry might fall into a commodity trap and therefore be subject to cutthroat price competition and price fluctuations, Samsung developed the below classification of broad product differentiation. •Frontier: Cutting edge products with the highest margins •Legacy: Current products, potentially manufactured using technology used to develop the frontier products resulting in cost savings •Specialty: Products to target niche markets
Samsung was able to command better operating margins as compared to its competitors because of •Cheap labor: 35% cheaper as compared to non-Chinese manufacturers •Use of new design rules: This allowed Samsung to produce more chips per wafer (the key raw material in chip manufacturing). •Better sourcing: Raw materials cost 37% less than its competitors probably due to volume discounts and better bargaining power •Better manufacturing processes
oYield rates were are at 80%, as compared to 50-67% for the competitors oSamsung was able to get 2.4 times the amount of die’s by using 12-inch wafers as compared to 8-inch wafers, at 90% of the costs per chip leading to better gross margins •Lower depreciation costs: By collocating and scaling its fab investments, Samsung saved an average of 12% of the fab construction costs 4.Price advantage
Samsung was able to command a higher average selling price as compared to its competitors because of its
•Ability to offer customized memory chips that no other manufacturer could offer allowed them to command premium pricing on these products •Better quality control that lead to reliability enabled Samsung to obtain an average price premium of 1% average price
5.Human resource policies
Samsung was able to maximize its advantages in technology by creating a company culture that was unique to Samsung in the following ways:
•Talent hiring: Samsung actively recruited the best global people •Talent development
oSponsored employees to gain further knowledge by sponsoring their MBA/PhD studies oMerit based promotions to motivate new hires
oForeign assignments to develop global skills
oVery generous benefits package allowed the employees to focus on work oPerformance and productivity based profit-sharing incentives oTolerance for mistakes
Exhibit 2 illustrates how Samsung is able to use its capabilities relating to manufacturing, R&D and quality control to create value. Analysis of options to react to the threat of...