Samsung Electronics Case
Samsung has a competitive advantage, which grew from its focus on the quality of its memory chips. The company’s early insistence on creating quality goods and constantly improving the production process allowed it to gain the largest market share among competitors. Samsung was able to build reliable products because its management fostered a culture that emphasized quality in the production process. The company reinforced this culture with an incentive program that rewards employees with cash bonuses after the successful completion of a project. As a result, Samsung’s was recognized as a company that produces reliable products. Samsung’s advantage of producing quality products increased their customer’s willingness-to-pay and the price of their products, which has allowed the company to profit when nearly all of its competitors are not. In each quarter of 2003, Samsung’s operating margin on DRAM’s was well above that of its competitors while its average selling price was also higher than competitors’ (Exhibit 3). In addition to increasing the price of its products, Samsung is also able to have consistently lower DRAM production costs than its competitors (Exhibit TBD3a). This is partially due to its concentration of R&D in one facility in South Korea, which saved the company on construction costs and increased the efficiency of the R&D process due to the benefits of collocation of production and R&D engineers. Samsung is creating added-value by widening the wedge between price and cost and is successful at capturing this created value. The company successfully drove down the costs of DRAM production and increased the price at which their products are sold.
OEMs pay upwards of 1% price premium for a reliable supplier (brand-driven, Samsung advantage). Samsung has integrated design process, meaning high technology products and higher margins. P
Cutting-edge technology products, higher margin.
Timely investments in DRAM technology (1980s).
More efficient use of input materials (wafers).
Correct choice in stacking vs trenching.
Common core design for products.
Geographically consolidated plants and optimal conditions (low dust, clean air), saved 12% on fab construction costs. Project-oriented compensation structure incentivizes managers. Effective, international talent recruiting.
Memory raw materials sold at lower cost (up to 5%) to high-volume purchasers.
Commodity-like product, widely-known technologies and designs. Fragmented industry.
Commodity-like industry (little to no design value-add).
Entry of Chinese competitors (2004-2005).
Less geographic consolidation; less ideal atmospheric conditions. Less efficient use of wafer materials.
Consolidated suppliers, with three major players controlling prices.
Summary: Samsung’s has minimized C (above an already lower WTS due to bulk orders), and maintains higher WTP/P from cutting-edge technology products and a strong reputation for reliability. This gives Samsung a bigger P/C spread than competitors, who experience higher WTS, do not minimize costs as efficiently, and produce a commodity-like product.
Samsung achieves higher WTP than its competitors due to the high quality of its products, with a brand that commands a 1% premium in the market due to the strong reliability of its chips. Additionally, Samsung´s in-house design and R&D facilities keep the company at the forefront of technological advances, and these new generation products demand higher prices and generate higher margins (Exhibit TBD 3a). Samsung has also been able to actively identify demand for memory products in niche markets, and to customize existing products to fit demand, generating higher margins by escaping the commodity-like market for later-generation memory....
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