Analysis of Samsung’s strategic management and business strategy

By | April 20, 2014

This Assignment Is Published With Permission From The Author For Online Review Only
All Rights Reserved @ ChinaAbout.Net

List of figures

Figure 1 Porter (1979)’s 5 Forces Analysis model 3
Figure 2 Ansoff (1957)’s product market growth matrix 6
Figure 3 The BCG growth-share matrix 7

Content page
List of figures 1
1. Introduction of Samsung Group & the semiconductor business sector 3
2. External analysis with Porter (1979)’s 5 Forces Analysis 3
2.1 Threat of New Entrants – Low 4
2.2 Power of Suppliers – Low 4
2.3 Power of Buyers – medium 5
2.4 Availability of Substitutes 5
2.5 Competitive Rivalry 5
3. Internal analysis 6
3.1 Ansoff (1957)’s product market growth matrix 6
3.2 BCG growth-share matrix analysis 7
4. Critical appraisal 8
5. Conclusion 9
6. Recommendations 10
6.1 Search for M&A opportunities 10
6.2 Focus on the R&D of substitutes 10
Reference 11

Analysis of Samsung’s strategic management and business strategy

1. Introduction of Samsung Group & the semiconductor business sector

With more than 70 years history, the Samsung Group is at present a South Korean multinational conglomerate corporation with the headquarter in Samsung Town, Seoul, South Korea, the company has been dedicated to making a better life for the world by engaging in a number of businesses (Samsung.com 2011). The businesses cover advanced technology, skyscraper, plant construction, and semiconductor and so on. This study will concentrate on the semiconductor business sector in which Samsung has won a global reputation. The most frequent seen semiconductor products that Samsung makes include flash SSD, fusion memory and DRAM. This assignment will explain into the current business strategies used by Samsung Group in the semiconductor business sector.

2. External analysis with Porter (1979)’s 5 Forces Analysis
Figure 1 Porter (1979)’s 5 Forces Analysis model
Source: adapted from (Currie 2004
The semiconductor business as an industry is usually described as a growth venue with the feature of having an above-average expansion, growing profitability together with intense competition and fast product innovation (House 2010). Below we will perform an industrial competitive analysis using the Porter (1979)’s 5 Forces Analysis model which proposed that an industry’s level of competitiveness is determined by the interaction of the five forces and such competitive level will in return design the attractiveness of an industry.

2.1 Threat of New Entrants – Low

The threat from new entrants will depend on the ‘height’ of the barriers to entry to an industry (Stonehouse & Campbell 2004, p.120). The threat of the new entrants is low in the semiconductor industry for two major reasons: firstly, though in the early days design engineers could use their idea and technology skills to set up a new company to compete with the existing players but with the gradual maturity of industry and also the increased business scale it is now quite difficult for individual designers to do this; secondly, the investment of the new plant will cost billions of fund and this will create high barrier to the possible new entrants; thirdly, as the investment of the business is large the exit cost would also be large when the existing players decides to leave the industry, such high cost will keep way many of the possible entrants.

2.2 Power of Suppliers – Low

The power of suppliers could be defined as the ability of the suppliers to raise input prices or to raise the cost of the industry (Hill & Jones 2008, p.54). Like many other large semiconductor manufacturers, Samsung semiconductor business sector has a number of suppliers and many of them of in small scale relying on Samsung for contract sale, and because of this the power of suppliers will be diffused and thus become little. When the suppliers tend to be in small scale and large in numbers, the supplied Samsung group will have more bargaining power because these small suppliers would need to compete with each other for the order of Samsung and also Samsung could change to other suppliers because with low cost incurred.

2.3 Power of Buyers – medium

The bargaining power of buyers determines prices and long-term profitability (Reynolds 2009, p.37). As we known the buyers of the semiconductor products could be business companies which buy the chips and make their own end products or individual customers. Individual customers are large in number and their bargaining power is small and the business buyers because of their large volume of purchasing will have bigger power to influence to price of the deals. Hence we have come to the conclusion that the buyer power is in a medium level.

2.4 Availability of Substitutes

A substitute is taken to be an alternative product that can do the same job and provide similar functions to the end users (Pressman 2011). The availability of substitutes or threat from the substitutes is high due to the it is expected that within a short period of time other companies would or already begin to produce similar substitutes products at lower prices by using new materials, even for Sam sung Group, it is looking for substitute products that are more cost effective and more functional and powerful in performance than the current chips. This high threat from substitutes is actually from the industry itself and is determined by the high innovation rate of the high technological products.

2.5 Competitive Rivalry

Rivalry among competitors is needed to continually assess the threat posed by competitors (Graham & Allan 2008, p.51). The intense competitive environment in the semiconductor market with high costs linked with the production technologies and also developing marketable products have caused obvious consolidation and stabilization within the industry and would tend to result in further consolidation in the near future (Wikinvest.com 2009). And because of this, the competitive level within the industry which is caused by the existing rivalry is intense and thus drives off many possible entries. Another view that support this conclusion is that the semiconductor has entered into the maturity stage of the product life which is featured with low market growth rate and intense competition because the product has already matured.

3. Internal analysis

3.1 Ansoff (1957)’s product market growth matrix

Figure 2 Ansoff (1957)’s product market growth matrix
Source: tutor2u.net 2010

The well known tool of Ansoff matrix is a frequently use marketing tool to analysis the internal environment and provide a basis for a company’s target determination process and also determines the base f directional policy for the company’s future (Bennett, 1994) by analyzing the options in two dimensions that a company has to expand: product and market.

In the case of Sam sung semiconductor business, the company has adopted a diversification strategic option to maintain the growth. On one hand, with the rapid technological changes and also the short product life cycle of the semiconductor products, it is understandable that the company has invested greatly in the new product development and technology research; on the other hand, the current semiconductor product also could find new markets to expand the business scale and bring revenue to the company as a result. Hence the company has used a diversification strategy featured by souring growth momentum via developing new products and also new markets.

3.2 BCG growth-share matrix analysis

Figure 3 The BCG growth-share matrix
Source: Netmba.com 2010

The BCG growth-share matrix is a portfolio planning model proposed by Bruce Henderson in the 1970s. And it is based on the assumption that the market share in mature markets is closely related with the profitability and market growth rate, and it helps companies to look into the product lines with a perspective to assist the decision making about how the product should be positioned within an internal analysis (Stonehouse & Campbell 2004, p.92).

In the case of the semiconductor of Samsung, it falls into the category of cash cow. Cash cow describes a business that falls into the low market-growth/high market-share cell of a BCG matrix (Lewis, Goodman, Fandt & Michlitsch 2007, p.168). According to the new reports, Samsung has been the world’s largest manufacturer of chips which account for 29 percent of its total sales based on the company’s earning report (Digitalcamerainfo.com 2007). Beside the large sale contribution, another fact that confirm the cash cow status of the semiconductor business the reduction in the facility and equipment investment, according to this year’s new report, the Samsung Group had planned to invest 43.1 trillion won ($US 38.35 billion) in 2011 for the overall businesses with a year on year 18 percent from the year 2010. Among this investment plan, about 10.3T won ($9.16B) would be in expenditures and equipment investments for its semiconductor business with a reduction from 2010’s ~12T won ($10.7B) (electroiq.com 2011).

4. Critical appraisal

Regarding the cash cow status of the semiconductor business in the Sam sung Group, with the analysis above, I believe that the company has made a correct decision by reducing the investment in the semiconductor business because the cash cow tend to have a slower growth rate without too much space for further development. It would be suitable and critical for the company to invest in other product lines and technologies to find out the new stars which would rise to become cash cow in the future and replace the semiconductor business to be the company’s cash cows. As mentioned above in the five forces analysis of the industry, the semiconductor market with high costs which is linked with the production technologies and also the development of the marketable products have caused obvious consolidation and stabilization within the industry and would tend to result in further consolidation in the near future (Wikinvest.com 2009), this actually shows a trend of transition of the industry from growth to maturity in the industry life cycle. But still the company need to monitor the changes happening in the industry since there could be factors such as technological innovations in the key fields that could bring significant changes to the company and also the industry. For example, in the past we have consider the pc industry as in the stage of maturity but the later appeared tablet has change the industry and brings rapid growth to the pc makers. This could happen to the Samsung as well.

5. Conclusion

Based on the analysis using the Porter (1979)’s 5 Forces Analysis model, we can conclude that the semiconductor industry is growing but without high attractiveness to the new potential entries, and also within the industry itself the high rivalry also drive down the profit rate that the existing players could have enjoyed. Based on this fact the company could divert the pressure to lower the price to the suppliers by bargaining with the price of the inputs due to the bargaining power of the suppliers is relatively low. And also because of the high substitutes, the company should search for and develop its own new substitutes to replace the current semiconductor products.

And based on the BCG growth-share matrix, with the cash cow status of the semiconductor business in the Sam sung Group and also the company’s attitude towards the semiconductor business. It is believed that the company has made large amount of profit from the business sector. But with the maturity of the industry and also faced by the fierce competition, the cash cow is not contributing as much as it did before.

6. Recommendations

6.1 Search for M&A opportunities

With this finding based our understanding of the feature of the maturity market., it is recommended that Sam sung should search for chances of merger and acquisition (M&A) to prepare itself with more market share and technology know how and make it in a more competitive position while the industry enter into the maturity stage in the industrial life cycle.

6.2 Focus on the R&D of substitutes

Based on the conclusion that semiconductor products are the cash cows of the company and hence the company should search for and develop its own new substitutes to replace the current semiconductor products.

Reference

Ansoff, I. 1957, Strategies for Diversification, Harvard Business Review, September – October: 113-24

Bennett, A. R. 1994, Business Planning: Can the Health Service Move from Strategy into Action? Journal of Management in Medicine, V8, No.2.

Currie, W. 2004. Value creation from e-business models. Burlington, MA: Elsevier Limited. 16 Nov 2011 [online]: http://www.digitalcamerainfo.com/content/Samsung-Speeds-Up-Memory-Chip-Production-after-Power-Outage-14820.htm

Digitalcamerainfo.com 2007. Samsung Recovers after Power Outage at Memory Chip Plant.

Electroiq.com 2011. Analysis: Samsung’s lower 2011 capex plans. 16 Nov 2011 [online]: http://www.electroiq.com/articles/sst/2011/01/analysis_-samsung.html

Graham, T. & Allan, W. 2008, CIMA Official Exam Practice Kit Management Accounting Business Strategy. p.51

Hill, C. W. L. & Jones, G. R. 2008, Strategic Management: An Integrated Approach. Boston, MA: Houghton Mifflin Company. p.54

House, A. G. 2010. Industry Analysis: Semiconductor. 16 Nov 2011 [online]: http://www.valueline.com/Stocks/Industry_Report.aspx?id=10175

Porter, M. E. 1979, How Competitive Forces Shape Strategy, Harvard business Review, March-April 1979

Porter, M. E. 1980, Competitive strategy, New York: The Free Press.

Reynolds, G. 2009, Information Technology for Managers. Boston, MA: Course technology. Cengage Learning. p.37

Lewis, P. S., Goodman, S. H., Fandt, P. M. & Michlitsch, J. F. 2007, Management: challenges for tomorrow’s leaders. Mason, OH: Thomson Higher Education. p.168

Netmba.com 2010. The BCG growth-share matrix, 16 Nov 2011 [online]: http://www.netmba.com/strategy/matrix/bcg/

Pressman, D. 2011. Patent It Yourself: Your Step-by-Step Guide to Filing at the U.S. Patent Office. United States: NOLO

Samsung.com 2011. About Samsung. 16 Nov 2011 [online]: http://www.samsung.com/my/aboutsamsung/index.html

Stonehouse, G. & Campbell, D. 2004, Global and transnational business: strategy and management. New York: John Wiley & Sons Inc. p.120

Stonehouse, G. & Campbell, D. 2004, Global and transnational business: strategy and management. West Sussex: John Wiley & Sons Ltd. p.92

Tutor2u.net 2010. Ansoff’s product / market matrix accessed on 16th Nov 2011 [online] http://tutor2u.net/business/strategy/ansoff_matrix.htm

Wikinvest.com 2009. The competitive environment of the semiconductor industry. accessed on 15 Nov 2011.[online] http://www.wikinvest.com/stock/Infineon_Technologies_(IFX)/Competitive_Environment_Semiconductor_Industry_Led_Consolidation_Face_Even