Samsung Case Analysis
Samsung Electronics:
A Case Study of Market Entrants
of the Memory Industry
By: Skye Archer, Billy Davidow, Taylor Jacobs,
Rachel Massey, & Trevor Siu
Samsung Electronics has been a leader in the memory chip industry since the 1980s. It has survived cyclical downturns, intense rivalry, and increasing capital requirements. By analyzing Porter’s Five Forces, we are able to see what is taking place within the global memory chip industry. There is a relatively high threat of entry based off customer switching costs and high capital requirements. The costs of building a new fabrication plant has risen from $200 million in 1985 to $3 billion in 2004. With the complexity of memory chip raw materials, there is a concentrated group of suppliers. This gives the suppliers a lot of power, raising costs for fabricators. There is a fragmented customer base for memory chips. The OEM PC producers negotiate for low prices because of their price conscious customers and competitive industry, creating high buyer power. These buyers also require high quality chips. Having a high defect rate can have a huge negative effect on the fabricator.
One of the most powerful forces is rivalry among existing competitors. They’re all competing against each other to gain market share before the latest memory chip becomes a legacy. The industry itself is also cyclical and naturally declines, kicking out struggling companies. Overall, Porter’s Five Forces are strong, keeping the profit potential low in the memory industry.
An internal analysis of Samsung Electronics will allow us to see the major strengths and weaknesses of the firm. Samsung has strong tangible and intangible resources. One of the major requirements for being successful in the industry is access to capital. Samsung Electronics is one of five divisions of Samsung Group. Being a subsidiary of a larger conglomerate allows them to easily and quickly gain access to capital. This gives them the ability to react quickly to changes in the market. Samsung only has two fabrication facilities. Their fabrication lines and research and development facilities are located together allowing for quicker production and better communication. These facilities also give them the capability of high capacity production lines.
The patents that Samsung holds have value, are rare, and for a time can be inimitable. The main success of their business revolves around their ability to innovate better memory chips, and their patents help to protect those innovations. The people and culture that the firm has recruited and created is something all competitors should envy. Samsung has gone against the hiring norms of Korea, and hires based on aptitude scores and looks all over the world for its potential employees. The culture celebrates innovation, opinions, and dissent and doesn’t punish failure. This has allowed them to be first movers on new advances in memory chips.
Samsung’s main capabilities are product innovation, mass customization of products, and high production capacity. Samsung focuses its research and development efforts in innovation to be a lead in the semiconductor industry. It has also been able to create customized products for key customers such as Nokia. Samsung took the lead in increasing the size of the wafer used to cut DRAM chips, so that more chips could be cut at the same time. The human resources at Samsung are their greatest competency. The leaders of Samsung strive to create a culture where success is always rewarded and failure is never punished.
Samsung has a vertically integrated value chain. They have invested directly in their own plant and production equipment unlike other incumbents who subcontracted with manufacturers who use outdated technology. In the primary activity of operations, Samsung researched ways to make more products at a time by increasing the wafer size used to cut DRAM chips. In the secondary activities of research and development and human resources they focus on the treatment of their employees. Housing is provided for all research and development and production engineers so they can solve problems together quickly. They also have internal competitions to encourage innovation and design.
A strengths, weaknesses, opportunities, and threats (SWOT) analysis of Samsung reveals several key points about the company. Their strengths include the firm’s culture, focus on research and development, reputation for quality products, and the size of their product line. The main weakness that Samsung faces is their premium price point. Externally, Samsung faces the opportunity of expanding into the niche markets in which they already have a high profit margin with few competitors. They face a threat from the Chinese competitors who are willing to take losses to gain market share in the semiconductor industry. Another threat is the cyclical nature of the industry, which Samsung has been able to overcome so far, but there are no guarantees for future downturns.