Internalization of Samsung

Final Report
Submitted to Sir Imran Quraishi

December 2009

Ashfaq Hussain Muhammad Safder Ali 3394 MBA 19 A 3401 MBA 19 A Graduate School of Management IIUI Islamabad, Pakistan

Table of content
Executive Summary.........................................................................................................................2

Executive Summary
Samsung has made itself noticeable as one of the most innovative and quality brands in the electronics industry. Samsung strives to be sustainable and achieve competitive advantage by remaining at the forefront of the digital market. Samsung policy is "We will devote out human resources and technologies to create superior products and services thereby contributing to a better global society. In todays digital era, speed is the essential competitive as new technologies constantly introduced to the market. Thus, Samsung spend lots of effort in expanding their R&D center. Samsung Corporation has become one of the world's leading memory producers in all types of PCs, digital cameras, game players, and other electronics products. Since Samsung bought DRAM technology from other company, they have developed and come up with better technology. Samsung has introduced many products with low price and high technology. Although Samsung has been very successful, they have a few issues that need to be looked at in order for them to stay up to date and maintain long term profits. Problems that have been identified with Samsung are; increased competition means decrease in Samsung's profits and market share because it generates oversupply and decrease in sales. Competition affects Samsung's market share because new entrants will segregate the market by offering lower cost products with a variety of functions. Furthermore, Samsung is also facing a Chinese DRAM company because of limitability of their resource. There are many competitors that produce similar products as Samsung; Samsung has to deal with competitors in five different industries. They are doing this by differentiating their products and adding different features into their products. The two possible solutions for the stated problems are 1) If Samsung wants to be the leading company within electronic industry, they need to differentiate their products enough from their competitors and introducing a new cell phone with touch screen and new features to stay current in the market. 2) Samsung is currently is one of the leading businesses in the electronic industry. In order for the company to stay competitive, they need to go to the different global markets and try to introduce their products to new demographics. In order for Samsung to be successful they need to go Global. This solution offers a physical presence and greater opportunity for talent buildup, and brand name establishment in foreign markets. The Global solution has many advantages in developing growth, pressure on competition, and international development.

South Korea
Korea regained its independence following Japan's surrender to the United States in 1945. After World War II, a Republic of Korea (ROK) was set up in the southern half of the Korean Peninsula while a Communist-style government was installed in the north. During the Korean War (1950-53), U.S troops and UN forces fought alongside soldiers from the ROK to defend South Korea from DPRK attacks supported by China and the Soviet Union. An armistice was signed in 1953, splitting the peninsula along a demilitarized zone at about the 38th parallel. Thereafter, South Korea achieved rapid economic growth with per capita income rising to roughly 14 times the level of North Korea. South Korea today is a fully functioning modern democracy. Korea is home to a set of large firms, so called chaebols, which can be classified as multinational enterprises (MNEs) In the list of the worlds largest 500 companies, ranked by sales for2001 found 12 Korean firms. In 2004, there were 11 Korean firms in the list of the worlds largest 500. These large firms are analyzed here as the basic set which will determine the success of Korea in
2

developing MNEs. The literature in international business analyzes the growth and foreign expansion phase of MNEs. The starting point of this theory of the MNE is the proposition that an MNE goes abroad to further expand on its firm-specific advantage (FSA).These can be technology based, knowledge based, or they can reflect managerial and/or marketing skills. The FSAs need to be distinguished from Koreas country-specific advantages (CSAs) where the latter are available to all firms located in Korea; in contrast FSAs are the capabilities of each specific firm.. The presence of Korean firms is at least as stable as the other large 500 companies. Two Korean firms among Koreas 12 largest firms in 2001, that is 17%, were unlisted in 2004, while 94 firms among the worlds largest 500 firms were unlisted in 2004, that is, 19%. It is important to note that four Korean trading firms, Samsung Corporation, Hyundai, LG International and SK Global, were listed in the worlds largest 500 companies. These firms make up 34% of the Koreas largest 12 firms revenue in 2001. In 2004, only two trading companies, Samsung Corporation and SK Global (Networks), were listed in the worlds largest 500 companies. Moreover, most of the revenue of Samsung Corporation and SK Global came from outside the trading segment in 2004. Over the same time period, Koreas international trade had increased more than 60%: from US $292 billion to US $478 billion. Rising from obscurity 25 years ago, Korean electronics companies have come to own a significant share of the world electronics market today. They are now the major DRAM suppliers in the world. They conduct state-of-the-art R&D projects, establish foreign ventures, and support world-class university science and technology (S&T) programs. Due to technologies, manufacturing procedures, capabilities, and infrastructure have made them so successful. This information, coupled with understanding of the future direction of the Korean electronics industry, is vital to U.S. competitiveness, to help U.S. businesses determine in which market sectors to compete and in which areas subcontracting, outsourcing, and partnership agreements would be beneficial. Natural resource Coal, tungsten, graphite, molybdenum, lead, hydropower potential GDP growth rate 2.2% (2008 est.) 5.1% (2007 est.) 5.2% (2006 est.) GDP - per capita (PPP) $27,700 (2008 est.) $27,100 (2007 est.) $25,900 (2006 est.) Industries Electronics, telecommunications, automobile production, chemicals shipbuilding, steel Export Semiconductors, wireless telecommunications equipment, motor vehicles, computers, steel, ships, petrochemicals Import Machinery, electronics and electronic equipment, oil, steel, transport equipment, organic chemicals, plastics

Country specific advantage (CSA)

It provides a legislative basis for growth of high technology industry through means such as national banking regulations, low interest rate loans, tax and tariff. It promotes education and R&D for high-tech industry by providing direct financial support to public and nonprofit institutes, universities, and other educational institutions, primarily through the Ministry of Science and Technology (MOST); the Ministry of Trade, Industry, and Energy (MOTIE); and the Ministry of Information and Communication (MOIC).It funds infrastructure development, including highways and transportation systems, rapid dissemination of Internet-type services, etc., and through construction of "science parks." The most prominent of these is Taedok, twenty miles outside Seoul. Infrastructure development still lags manufacturing growth, however. It uses its authority and leadership in cooperation with industry, the educational establishment, and the media, to promote development of a sophisticated technology culture in Korea.

Role of chaebols
Koreas economy, including its electronics industry, is dominated by the relatively small number of single-family-dominated industrial chaebols that often enjoy vertical monopolies. Chaebols also extend horizontally across diverse industries, similar to the Japanese keiretsu. In the immediate post-Korean War years, the chaebols took advantage of subsidized loans and tax breaks provided by the Korean government that allowed them to grow very quickly. By the early 1980s, the four most prominent chaebols, Samsung, LG, Hyundai, and Daewoo, were immense and were thriving. In essence, the story of the remarkable growth of Korea's economy is the story of the growth of its chaebols. Their success and the success of Korea's industrialization and modernization are inseparable. The chaebols have based much of their success on foreign trade, and exports continue to be essential to the stability and growth of the Korean economy. Electronics goods have been among the chaebols' most profitable exports. Korea expects to have steady export growth of 12.3% in industrial electronics, 11.7% in electronic parts, and 4.7% in consumer electronics. Semiconductors have been especially important to Korea's export earnings. A total of $10 billion worth of semiconductors was exported in 1994, of which $4 billion was attributable to Samsung alone. Korean semiconductor companies have made significant strides in capturing global semiconductor market share in the past ten years. At the time this report was written, Samsung had become the world's highest-volume DRAM supplier, and Hyundai and LG were in second and sixth places, respectively. Together they made up almost 30% of the revenues earned by the top 10 DRAM producers in the world. A major factor in this considerable success is that Korean manufacturers successfully implemented more efficient mass production techniques, allowing more competitive unit

Samsung
Samsung Electronics Company was established in Taegu, Korea in 1969 by Byung-Chull Lee. During that time the company only manufactured black-and-white TV sets. Since 1969, the company has enjoyed steady growth. At the end of 2004, Samsung had around $80 billion in net sales, $60 billion in assets and had 113 thousand employees worldwide. Also, in 2004 Samsung stood up ahead of many their competitors such as Phillips, Kodak, and Panasonic. By that time the company produced TVs, AV equipment, and computers; the Telecommunication Business, which manufactured mobile phones and networking equipment; the LCD Business, which made

LCD panels for notebook computers, desktop monitors, and HDTV; and the Digital Appliances Business, which produced and sold refrigerators, air conditioners, and washing machines . Samsung believes that the success of their contributions to society and to the mutual prosperity of people across national boundaries truly depends on how they manage their company. Kun Hee Lee, current chairman of the Samsung Group always teaches his employees: always demand superiority in product design and process efficiency. Under Lees leadership, Samsung Corporation has become one of the worlds leading memory producers in all types of PCs, digital cameras, game players, and other electronics products

External Analysis
The Industry type for Samsung is consumer electronics and entertainment. The market type is monopolistic competition because there are many producers and many consumers in the given market. Furthermore, when it comes to monopolistic competition, it involves a great deal of nonprice competition which is based on product differentiation. Also, the producers have a certain degree of control over price. The electronics industry is a very wide category and it contains many types of products. Samsung competes with other companies in providing customers with a wide array of products that are good quality and affordable price. What they don't do is specialize in a certain product and thus they can't make an expensive superior product. With intense rivalry and competition in the industry, Samsung is satisfying consumers who want modern reliable products ranging from cell phones to home electronics.

The threat of entry

The threat of entry to this industry depends on what part of the industry the company is trying to enter. If they enter a specific category of products such as mp3 players or cameras, Samsung will have a low threat level of entry from new companies. If a company decides to enter the same wide variety of product offering as Samsung then there will be a high threat level of entry. Therefore, for Samsung, the threat of entry is high. This is due to the fact that the Samsung Company is very widespread in terms of product offerings and service. Samsung offers a wide variety of products such as; mobile phones, television, mp3/audio, cameras, computers and home appliances. There are already many companies that are offering similar products and it is hard for the company to focus on a specific products. Technology is very important because the company has to keep up with latest trends and technology in all of its sections. It is difficult for new companies to enter the industry and compete with the larger companies specifying in an section because of already existing outstanding products in the electronic industry e.g. Apple's music entertainment products, or Sony's audio entertainment systems, or Canon's camera products. The new entrants of the electronic entertainment industry have to focus on whether to specialize in one area like music, TV, camera etc, or whether to have a wide variety of products for a affordable price. If they choose the latter, they will lost likely have to enter a price war. Samsung focuses on providing quality affordable price products for a wide group of people. Although with the rise of technology and high consumer interest in electronics, the industry is very popular and profitable for companies who have access to technology and capital. High capital is required to enter into electronic industry due to requirements of large investments on technology, distribution and marketing. New entrants in the industry have to spend a lot of money and time on branding and customer knowledge. The barriers to entry are high but are declining because of new technology and lower costs of production. The impact of new technology means that for content creation, the cost of digital cameras and video editing software is declining. The content

storage is not limited by physical shelf space and server costs are declining. For product distribution, the growing number of distribution channels and the internet provides global distribution. Furthermore, bandwidth costs are declining. This makes it more attractable for new companies to enter the electronics and entertainment industry market. According to Airborn electronics, a realistic development path for a startup company will usually involve designing a low volume high price version of their product first, and then moving to high volume designs as the market matures. This is only possible where the economic demand for the product is "elastic" - in other words there is some demand even when the price is high. Fortunately, high technology products usually exhibit elastic demand. The consumer product market on the other hand can be a little bit less elastic - This means that the demand goes down drastically when price is more than the consumer is willing to pay for. This means that it may be very difficult for a startup company to produce a new consumer product. Thus, the barriers to entry may be high in the industry depending on the economy. If the economy is good and people have more money to spend on electronics, it is better for the company, if not, there is a high barrier. In terms of product differentiation, there is a lot of specialization and increased value by companies to make their products stand out and gain competitive advantage. According to Chaffin, Apple has around 82% of the market share for mp3 players because they differentiate and specialize their mp3 products. A way for a new company to compete right now in the mp3 market is by price and lower quality alternative products or try to come up with new technology and features. For new companies to compete with Samsung they have to differentiate and specialize their products which can be very costly.

The threat of Rivalry

The threat of rivalry in the consumer electronic market is very high. Not only does a company have to compete on a level of technology and price, but they also have to keep track of what the competition is doing. There is a high intensity and constant competition in the electronics industry and usually the main competitors come up with new products very often. If a company does not keep up with trends and new products, they will lose their customers and profits. According to Barney and Hesterly, high levels of rivalry are indicated by such actions as frequent introduction of new products by firms in an industry. In the mp3 industry, Apple introduces new 'I' products very often. In TV/DVD markets there are fewer introductions of new products because they are more expensive. The mobile phone market comes out with new products very often. There is a huge competition and rivalry amongst these markets. According to Barney and Hesterly, rivalry tends to be high where there are numerous of firms in an industry and these firms tend to be roughly the same size. Such is the case with the laptop personal computer industry. Worldwide, over 120 firms have entered the laptop computer market and no one firm dominates in market share. Furthermore, rivalry tends to be high when firms are unable to differentiate their products from competitors in an industry. This can be seen in the personal computer and DVD industry. In the PC laptop industry, companies are focusing more on services that accompany the laptops and the designs of the computers. In the DVD industry the products are very similar and perform the same functions, thus it is hard to compete with existing companies. If a company decided to compete in this industry, they have to compete with intense price rivalry. Dell focuses their strategy on selling their computers online and providing excellent customer service. They save money on not having a physical store and focus on online distribution instead. This saves them money and they can compete on other levels. With the popular trend of the internet, companies are now competing with providing more services online

and expanding their online advertisement.

The threat of Substitutes

Substitutes in the consumer electronics industry are many and the different companies competing in this industry must apply many strategies in order to compete and make profits. The substitutes in the electronics market can be divided in to 4 categories. As will be mentioned the important factors in every industry of the general electronics market. Telecom - The substitutes in the telecom industry are landline phones and email. At the moment, landline phones are losing popularity because of lower prices and popularity of cell phones and internet calling programs. In the cell phone industry, Apple's I phone has the latest technology with its Touch screen, but companies are following and introducing new phones. Technology is very important in this market. Samsung has just introduced new line of innovative cell phones for 2008. Cell phones and PDA's have standard features and the only product differentiation lies with adding services such as Bluetooth, gaps and other communication applications and tools that are important for customers in the cell phone industry. it is important to know that there are several companies who compete based on price in the cell phone industry because it is a product that all kind of customers want. Samsung provides an affordable PDA with the modern features to satisfy the average telecom user. Apple and Nokia are selling mobile phones with new technology for a high price for customers who are willing to pay more. There are not many substitutes for PDA's. The main one is using a cell phone or computer, laptop to call someone using e.g. Skype. Laptops / PC - In the PC industry, the threat of substitutes is not very high because there are not many products that can do what a computer or laptop can provide. The only substitutes are portable and handheld devices. They are competing on price and trying to increase value based on service and customization. The major substitutes for computers are PDA's and cell phones for contacting other people. In terms of writing documents, portable devices are substitutes. Digital Cameras - In the digital camera industry, there are two major substitutes. The first one is the film camera, and the other one is the cell phone camera. Unfortunately, there is not much interest in film cameras because of outdates technology and cell phone cameras don't provide the same quality and storage as digital cameras. HD TV - Television have recently become very popular with the new HD technology. The substitutes for TV's are computers and laptops. For people who travel a lot, prefer to watch movies and favorite shows on their laptops because they can download or stream popular tv shows and movies from online sites. Furthermore, another substitute for TVs are going to the movies or watching videos on your Ipod. Because of the limited availability and space on Ipods and the smaller size of a laptop screen, TVs will still stay popular and be high in demand.

The threat of Suppliers

For companies, the threat of suppliers can be high depending on how many products they are selling and how differentiated they are. For example, in the HD and Blue ray competition, HD lost because the suppliers determined that they would go with blue ray instead of HD because of partnerships. Creating good supply chain management and a long term personal relationship with suppliers is very important for electronics companies. If they buy in bulks and have long lasting partnerships, they will reduce their costs by being more efficient in their SCM. Many suppliers work on integration and material-substitution projects to drive down costs. Technology has a very important factor in suppliers. By creating partnerships, suppliers can choose who they want

to supply and what price to take. If they create a good that is very new and trendy, they can chose to supply to companies that will provide them with easier SCM and better price. Suppliers also want companies who they know will buy a lot in the long term, they want to create partnerships with companies to earn profits in the long run. Although because of price wars, suppliers are more and more forced to cut their prices as their customers can go to other suppliers who may offer better components at a lower cost. Suppliers are also starting to lose power because more and more firms are starting to produce their own products and components in-house.

The threat of Buyers

The threat of buyers is very huge. The customer is the most important factor in the buying process. They decide where to buy the product and how much they want to pay for it. Most of the electronic entertainment products are created from wants, not needs, therefore the customer does not have to buy the product to survive. They can chose what to buy and from which company. Therefore it is important for the companies to create value and set a price that the customer is willing to pay for. In the consumer electronic industry, there are many products with different prices and different features. It is up to the customer to decide what features they need. Since there are a lot of buyers in the industry, there is not a large threat, but companies have to keep the buyer in mind and listen to what they want. Since the products are not very standard and differentiated, there is a lower threat of buyers. Furthermore, when the buyers are not earning significant economic profits, buyers may be very sensitive to costs and look for the lowest possible cost and highest possible quality of a product.

Firm specific advantage (FSA)

Since 1969 Samsung has become a large consumer electronic company that produces semiconductors, digital media, telecom, LCD and digital appliance products. Samsung achieved success from five different categories from their resources which it can divide into three parts; technology, human resource and corporate strategy. First, Samsung has innovative technology in R&D market. Samsung did not have technology to produce DRAM in 1980s; they bought technology from another company to manufacture DRAM. However, Samsung can produce DRAM based on that technology and established two teams for design DRAM. Second, Samsung has great human resource and policies. Samsung does not care about employees background; they only hire employees who have abilities. Therefore, Samsung can have employees from many other countries and talents people. Also, they tried to develop employees skills through place program. Samsung tried to hire and develop quality employees and rewarded those employees. Third, Samsungs corporate strategies bring success in their business. In 1980s, Samsung had to make important decision of DRAM style. There were two different DRAM styles and Samsungs Chairman decided to produce DRAM with stacking style which brings success to Samsung. Samsung could lose DRAM market depending on that decision, because both DRAM style were popular and it is hard to choose which style is better than the other. Another strategic challenge for Samsung was having partnership with Chinese DRAM Company in 2005. This Chinese company followed what Samsung did in 1980s, they expend their market and this was threat for Samsung. Became partner with Chinese company, Samsung would have access to China DRAM market in the future.

Issue: Competition is the causes of Samsung profits and market share declines. Increased competition means decrease in Samsungs profits and market share because it generates oversupply and decrease in sales. Oversupply is due to increase in supply while sales are decreasing. This happens because more than one company is offering the same product, therefore more selection to consumer in which creates demand in lower prices. Competition affects Samsung market share because new entrants will segregate the market by offering lower cost products with variety functions. SOLUTION: Samsung needs to go globally into new and different DRAM markets. Samsung is currently one of the leading businesses in the electronic industry. In order for the company to stay competitive, they need to go to the different global markets and try to introduce their products to new demographics. When entering into a new market and they would go as transactional and establish joint ventures in the country. Samsung should take advantage of local skills and try to produce their products in that country. That way, it would cost them less and would bring a new market at the same time. In order to go globally we are going to analyze different regions to select the required.

Country attractiveness
PEST analysis
Political risk: there is low political risk in china and is a socialistic country.
General stability there is no external aggression or internal revolution. There is no expropriation risk and contract revocation. Local rules and tax system encourage foreign firms to do the business. China has stable exchange rate as well Environment research: Product is according to the requirements of people and meets their cultural values and norms. Physical environment: the demand for the product is high due to huge consumer market in china. Socio-cultural environment has no big difference and is receptiveness of new entrant. There are some cultural differences in India. Both countries china and India have stable economy.

Entry evaluation procedure:

When competing in a global environment firms need to pay strict attention foreign competition build up. Samsung should have recognized the potential for Chinese threat many years ago. The buildup of Chinese manufacturing prowess, design capabilities, and heavy government aid and involvement has not been a 2 or 3 year spurt. Chinese build-up began in the early 90s and Samsung should have recognized the long-term potential for threats and reacted accordingly. Samsung now has the ability to enter into the China.
In-depth

Screening

For centuries China stood as a leading civilization, outpacing the rest of the world in the arts and sciences, but in the 19th and early 20th centuries, the country was beset by civil unrest, major famines, military defeats, and foreign occupation. After World War II, the Communists under MAO Zedong established an autocratic socialist system that, while ensuring China's sovereignty,

imposed strict controls over everyday life and cost the lives of tens of millions of people
Natural resources

coal, iron ore, petroleum, natural gas, mercury, tin, tungsten, antimony, manganese, molybdenum, vanadium, magnetite, aluminum, lead, zinc, uranium, hydropower potential (world's largest) GDP growth rate 9% (2008) Industries mining and ore processing, iron, steel, aluminum, and other metals, coal; machine building; armaments; textiles and apparel; petroleum; cement; chemicals; fertilizers; consumer products, including footwear, toys, and electronics; food processing; transportation equipment, including automobiles, rail cars and locomotives, ships, and aircraft; telecommunications equipment, commercial space launch vehicles, satellites Exports - commodities electrical and other machinery, including data processing equipment, apparel, textiles, iron and steel, optical and medical equipment Imports - commodities Electrical and other machinery, oil and mineral fuels, optical and medical equipment, metal ores, plastics, organic chemicals

Market size
The size of the market is very big because is china is going to be the heart of multinational corporations of computer industry. We can export our product from china as well

Final selection
So we have decided to enter Chinese market by considering above all

Marketing plan
Purpose
To provide value for shareholders and customer by producing high-tech product

Mission
To gain maximum market share in DRAM market by providing high technology based DRAM for consumer market in a suitable price

Situation analysis
In order to make situational analysis I have used following two tools in order to analyze the market and product SWOT PEST

10

PEST analysis
Political: Unstable political condition Strict govt. policies Social: awareness of the people Fewer tendencies to take innovative products. Economical: low cost of production low tax rates low interest rates other incentives Technological Change in technology is coming day by day. This has reduced the life cycle of the products.

SWOT ANALYSIS
Strengths sophisticated technology Strong brand name Country of origin effect Suitable price Economically sound company Weakness knew market Opportunities centralization of Chinese market growing demand Chinese Govt. incentives Threats Knew Chinese entrants in DRAM market. Low Cost advantage of Chinese firm. s Technology proliferation

Product
High-tech DRAM in 1200 different variations 64Mbit, 128Mbit, 256Mbit, 512Mbit

DRAM market analysis

All computer produces and users in Chinese as well as world wide Competitive analysis:

11

There are many companies operating world wide and in Chinese market as well. These are as Elpida Memory, Inc Hynix Semiconductor, Inc Infineon technologies AG Micron Technology SMIC

Financial analysis

Marketing objectives:
Strategy used in the sale of DRAM is un-differentiated as company is trying to target computer producers there for the same product will be used by all producers

Financial objectives:
Financial of the company is to increase sales by 15% within the period of 1 year and thats why company is coming with new idea and then minimum 12% increase in future.

Marketing objectives:
Marketing objective of the company for this product is to promote the DRAM in Chinese market. And this objective is achieved by price, distribution, promotion and marketing strategies. This is an old product which the company will sell in knew market with some innovations.

Tactical Marketing Program

Product tactics
Samsung is going to produce different versions of DRAM product with respect to capacity and use.
12

Promotional tactics:
Advertising: Promotion of the product is made through advertising on web and also through media. Sales promotion will be made by giving warranty to the customers of 1 year.

Distribution tactics
Online order on website Visit our website and then you can give us the order which is best suitable to you discussed in the pricing tactics. When you will give an order then payment will be made through credit card. Different pricing criteria are given which are included shipment charges.

Pricing tactics:
The price of the product will be the same for all customers.

13