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Samsung’s 'Smartworld' Challenge

Samsung

A corporate strategy article by Thunderbird students Patricia Breceda, Mandukhai Hansen, Nick Mohin, Ajay Mungara, and Aleksey Vlasov

In May 2010, Ajay Mungara (Thunderbird ’12) was visiting the headquarters of one of the fastest growing companies in the world, Samsung Electronics Corporation (Samsung) in Suwon, South Korea for the first time. As he passed through the high security visitor center, he looked forward to the exciting and challenging opportunity to get to work with the “Jewel[1]” of the Samsung Group. Over the past two years and many more visits, and meetings with Samsung representatives, Ajay has seen Samsungs success to forge full speed ahead, and its brand value rise to #17 on Interbrand’s 100 Best Global Brands of 2011 list.[2]

Ajay knew there’s more to Samsung than its focus on Research and Development, and was curious about knowing more. As coincidence would have it, he came upon a group of fellow Thunderbirds who have also been watching Samsung’s rise, and interested in exploring more in to how Samsung is taking lead in the global smartphone competition. Together they pondered about Samsung’s global strategy, and wanted find out how it was able to displace Apple as the world’s top selling smartphone maker by volume, and how it continued to take market share away from world’s top handset manufacturers such as Nokia and Motorola in most emerging markets. They also wondered about the challenges it could be facing as the collaboration of world’s leading software and mobile handset manufacturers continues, such as mergers of Google-Motorola, Windows-Nokia. Can Samsung sustain its success for the long term? Can it survive the battle for the most valued component, the operating “eco” system in the smartphone?

Samsung

A corporate strategy article by Thunderbird students Patricia Breceda, Mandukhai Hansen, Nick Mohin, Ajay Mungara, and Aleksey Vlasov

In May 2010, Ajay Mungara (Thunderbird ’12) was visiting the headquarters of one of the fastest growing companies in the world, Samsung Electronics Corporation (Samsung) in Suwon, South Korea for the first time. As he passed through the high security visitor center, he looked forward to the exciting and challenging opportunity to get to work with the “Jewel[1]” of the Samsung Group. Over the past two years and many more visits, and meetings with Samsung representatives, Ajay has seen Samsungs success to forge full speed ahead, and its brand value rise to #17 on Interbrand’s 100 Best Global Brands of 2011 list.[2]

Ajay knew there’s more to Samsung than its focus on Research and Development, and was curious about knowing more. As coincidence would have it, he came upon a group of fellow Thunderbirds who have also been watching Samsung’s rise, and interested in exploring more in to how Samsung is taking lead in the global smartphone competition. Together they pondered about Samsung’s global strategy, and wanted find out how it was able to displace Apple as the world’s top selling smartphone maker by volume, and how it continued to take market share away from world’s top handset manufacturers such as Nokia and Motorola in most emerging markets. They also wondered about the challenges it could be facing as the collaboration of world’s leading software and mobile handset manufacturers continues, such as mergers of Google-Motorola, Windows-Nokia. Can Samsung sustain its success for the long term? Can it survive the battle for the most valued component, the operating “eco” system in the smartphone?

Forget the Fruit and Finland, It’s the Rise of Samsung Electronics

News of third quarter report for 2011 revealed Samsung Electronics has shipped over 28 million smartphones globally, overtook Apple to become the world’s largest smartphone vendor by volume with 24 percent market share.[3] Reuters survey of analysts estimate the in the first quarter of 2012 report due to be out on April 27th, Samsung is expected to have shipped a record 44 million smartphones, up by almost 25 percent from October-to-December levels.[4] In similar news of the same period, Samsung Electronics also ended Nokia’s 14 year leadership of the global cell phone market, by outselling the struggling Finnish handset maker for the first time ever by 88 million to 83 million cell phones[5].Screen-Shot-2012-04-12-at-4-12-2_40_52-PM It was reported that Samsung already knocked Nokia in its largest emerging market India in previous quarter, gaining 41percent market share and growing5.

It seems as if Samsung just sprouted overnight, and caught everyone by a surprise. However, most industry observers and anyone who followed Samsung for some time can tell you, it is a result of over 20+ years of long-term strategy the company pursued relentlessly. If Samsung’s rise can be applied to existing academic models for Global Business Strategy, it can be considered the most effectively organized organization for worldwide effectiveness. The California Management Review series had identified the Organizing the Worldwide Effectiveness depends on two characteristics that were proven to be successful in building transnational capabilities for successful companies: 1) making central management flexible and 2) making local management effective. Samsung seem to have achieved in building these capabilities in series of developments it had pursued. It’s believed that in the early 1990s, Samsung Group’s Chairman Lee Kun-Hee “spotted an opportunity in the reluctance of Japanese companies- the analog market leaders- to adopt digital technology[6].” (Khanna 2011) He saw this opportunity as the potential to open the doors for Samsung Electronics to move up the value chain, and surpass its rivals. He launched several large internal initiatives to develop agility, and instill innovation and creativity to succeed in the new digital market. Slowly and steadily, Samsung has built a hybrid management system that incorporated combining of its traditional low-cost manufacturing practices with some of Western best practices that fit its organizational structure appropriately. The aim was to improve Samsung’s R&D, marketing and design, while retaining core strengths in manufacturing, continuous improvement, and plant operations6. In 2010 it was noted that Lee initiated to boost the investment in R&D and operations by 98%. As Ajay learned during one of his visits, today Samsung operates over twenty four Research and Development Centers (R&D) throughout the world (six in South Korea, and eighteen more in seven other countries, including USA, UK, Russia, Israel, India, Japan and China), and run these centers non-stop, multiple shifts, for 24 hours a day. Each of these research centers focuses on building Samsung’s competitive advantage in range of categories, from core technology research in the US to software and application design in India, to research on telecommunication systems in Europe, and various marketing researches. The result, Samsung Electronics has been delivering startling profitability year over year, with huge surge of profits expected to be announced by April 27th, 2012.

Talent development has been another crucial element and core strategy of Samsung. The efforts to open up company’s culture and pursue strategies for global growth, Lee pursued talent developments both within and outside the companies. Samsung invests heavily in its employees by sending high potentials to Japan for advanced degrees in engineering; to the United States for marketing and management; and to Singapore, Hong Kong, and New York for training in high finance. An unconfirmed source on Business Wiki speculated that one third of Samsung’s employees hold PhD degrees. Today, Samsung is considered to have the most efficient and important globalization program, called Regional Specialist Program6, through these trainings and programs, these employees become important change agents within the organization, while gaining strong regional connections and expertise. Through his experience, Ajay learned that as a result of this program, over the years Samsung has more local, regional leaders running the show of launching products in the toughest and highly competitive markets first, as opposed to the expats. Samsung Electronics aggressive expansion in to emerging markets of India, Brazil, China, and Middle East/Africa is an evidence of this implementation of programs.

In an effort to introduce outsiders in it homogenous workforce, Chairman Lee implemented radical change in its senior manager’s compensation package dependent on hiring and retaining S-level talent. In 1997, the efforts were combined to set up a unique internal management consulting unit called Global Strategy Group (GSG)6, [7] that they recruit high level, non-Korean graduates of top Western business and economics programs for two years, and seek to hire them full time. In his recent trips to meet with Samsung representatives, Ajay has met several members representing the GSG, and learned that Samsung deploys over 3000 employees on short and long term expatriate assignments globally.

Samsung’s Smartphone Challenges Samsung Galxy SII

In 2007, Apple’s launch of iPhone has marked the boom of smartphone, a new generation of mobile phone and internet device with the capacity of a personal computer and the convenience of a cell phone. Accelerating technological innovations, and ease of information processing, combined with increasing consumers desire to stay connected, and multi task on a single, mobile device has made the smartphone devices and operating systems in to multi-billion dollar industry. Samsung’s entrance in to the smartphone and its eventual success with Samsung Galaxy smartphones has been a combination relentless pursuit for innovation, long term strategic vision, and sheer luck.

12_02_07-IDCThe importance of the operating systems used in smartphones, and owning the eco-system of applications that is attractive to independent developers and users, has brought the battle of the smartphones to the next level. With the iPhone, Apple has created an eco-system of applications called Apps that attracts and keeps its customers to stay with the Apple products. The biggest challenges facing Samsung today as the device manufacturer, is that Samsung does not enjoy a long-term customer loyalty and additional sources of revenues these operation systems offer. Of course Samsungs tried, and launched its own operating system called ‘bada[8],’ however, it failed to create and attract independent developers to its eco-system.

The success of Samsung Galaxy has been somewhat lucky in attracting Google to launch its Android operating systems in its phones. Thanks to the large pool of independent Android app developers, combined with sleek and innovative design handsets, Samsung was able to capture the smartphone market share competing head to head with Apple iPhone, HTC, etc. However such huge dependency on Google’s operating eco-system put Samsung in a very vulnerable position. The recent partnership news of Google and Motorola, Microsoft and Nokia, are viewed as big threats for Samsung, who is dependent on both operating systems in its existing and about to launch new devices.

Just as Samsung was finally able to reach the top, Samsungs management is now faced with critical challenges of sustaining the momentum and continues to climb taller peaks, while figuring out how to survive the battle between three major mobile eco-systems without having a comparable product-service. The success it’s experiencing is looking to be very fragile, if it wasn’t for Samsung and Apple’s “secret” interdependency. It turns out Samsung is one of the key component suppliers for Apple providing chips, LCD screens, and flash memory for the famous iPhone product lines. As the only device manufacturer in the world who owns and produces all the key components of digital smartphones, and as the strongest emerging market leader in new emerging markets, Samsung is not yet a case to be lost. If Samsung can come up with an innovative and high performance, open source operating system with mass appeal for both the developers and for the consumers, Samsung has the potential to surpass Apple, Google-Motorola, and Microsoft-Nokia many times over.

Until that launch occurs, as observers, we’ll just wait and see if Nokia and Motorola can deliver on the expectations Google and Microsoft are betting on. In the meantime, we’ll know that Samsung’s researchers will be working at overcoming this challenge non-stop, 24 hours a day, in multiple shifts.


[1] Newman, Mark C. Samsung Electronics: The Jewel of the Samsung Empire- Secrets of Success and Future Growth Engines, Bernstein Research, 2011

[2]Interbrands,  http://www.interbrand.com/en/best-global-brands/best-global-brands-2008/best-global-brands-2011.aspx

Accessed, April 12, 2012

[3] Bloomberg News http://www.bloomberg.com/news/2011-10-28/samsung-beats-apple-as-no-1-smartphone-vendor.html

[4] “Samsung Posts Record Quarterly Profits” Reuters, April 6, 2012 http://www.nytimes.com/2012/04/07/business/global/samsung-posts-record-quarterly-profit.html

[5] Reuters , IndiaTimes , “Samsung knocks down Nokia from top,” 13 Apr 2012 AT 08:31:56

[6] Khanna, Tarun. “The Paradox of Samsung’s Rise” The Harvard Business Review. July-August, 2011.

[7] Samsung Global Strategy Group. http://gsg.samsung.com/

[8] Eunjeong, Choi. “Samsung’s Smartphone Operating System: bada” SERI Quarterly. January 2012.