The analysis of key success factors that contribute to

Samsung Electronics' performance improvement in

the world market: based on Porter’s value chain.

Briza Alves de Freitas

Ewha Womans University
8316, Graduate Student Dormitory,
11-1 Daehyun-dong, Seodaemun-gu, Seoul, 120-750
[email protected]

Karmun Chin
Ewha Womans University
208-53, Bukahyeon-dong, Seodaemun-gu, Seoul, 120-821
[email protected]

ABSTRACT
This paper analyzes the key factors for Samsung Electronics’ performance improvement in
the last years. The analysis is made based on Porter competitive advantage theory. Porter
states that a company which follows both strategies (differentiation and cost leadership) is
condemned to be stuck in the middle. However, we propose that a company which follows
both can achieve competitive advantage and, consequently, have better performance than the
average within its industry.

Keywords: Samsung Electronics, competitive advantage, differentiation, cost leadership,

value chain.
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1. INTRODUCTION

In this paper we analyze the key success factors that contribute to Samsung Electronics'

(SEs) performance improvement in the world market based on Porter’s value chain. This

research is important because it can identify specific strategies that a firm implements to gain

competitive advantage and if proven, these strategies can be adapted by other firms to

achieve superior performance as well.

Yun (2005) brings a good contribution for the understanding of Samsung Electronics’

mobile phone division performance improvement. The author highlights, according to Porter

theory, some factors that explains SEs’ success in this division. Taking Porters’ theory as

background, and also showing some limits of his theory, she brings an important comparison

with Samsung Electronics and its biggest competitors in the mobile phone market. The author

demonstrated how SEs, with high differentiation in its product and low cost production,

achieved the highest profit in mobile phone market.

Although Yun brings a good input for the understanding of SEs’ performance, we believe

the paper have some limits that we can help to extend. First is the fact that the analysis

doesn’t include the idea of value chain. As you may see below, Samsung Electronics’ value
chain linkages is a very important tool on understanding the company success. Second is the

fact that the paper only considered mobile phone division. However, it is actually true that

Samsung Electronics’ performance improved as whole, not only on mobile phone matter. The

upgrading of one sector helps to understand the improvement in other divisions. That is why

we consider it important to analyze SEs as a whole

Competitive advantage is a central concept in business literature and corporate strategy

practices. Firms can achieve competitive advantage through generic strategies, which are cost

leadership, differentiation and focus; and value chain is analyzed to identify source of

competitive advantage (Porter, 1985). The competitive advantage literature states that both

cost leadership and differentiation strategies are mutually exclusive. It ignores the possibility
that a firm can achieve both yet not get stuck in the middle.
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This paper reveals if it possible to follow cost leadership and differentiation strategy at

the same time and manage to achieve competitive advantage. First we introduce relevant

theory and present some limits it has. Second, we operationalize our hypothesis for testing by

setting relevant evaluation criteria. Next, we carry out a comprehensive data analysis by

using Samsung Electronics as our detailed case study. Finally we state what we learn from the

research and conclude.

2. THEORY

The book Competitive Advantage (1985), written by Michael E. Porter, became a

reference in business studies. The expressions created by the author became commonplace in

any discussion about business strategy. His book has become a tool of extreme importance on

understanding business competitiveness. For that reason, it is common to look for Porter

words when trying to understand a successful performance of a company or when trying to

draw a well-succeed one.

Because it holds such a relevant position on business strategy we also try to analyze
Samsung Performance with the “glasses of Porter’s theory”. We believe that Porter’s

competitive advantage premise helps to highlight the key factors that contribute to Samsung

Electronics’ performance improvement.

The value chain, and its linkages, premise developed by Porter, as you may see below,

explain much about SEs structure. The value activities within SEs’ chain seem to be highly

linkages. And so are the vertical linkages (those with suppliers’ and channel’s value chains).

We try to analyze the result of this high integration on this paper.

Although Porter’s competitive advantage theory is an important tool for understanding

SEs’ performance, it also presents some limits. As you may see below, this paper tries to

discuss this limits and present new paradigms.

.
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In the following subtopics we will try to summarize Porter’s competitive advantage

theory and define the important terms for our analysis. In the very end of this section we

present the limits of his premise and we try to propose what we believe to be a better solution.

2.1. Porter’s competitive advantage theory

Porter (1985) is trying to answer how firms can achieve a relatively greater performance

in the industry they are embodied in. The author’s goal in his book is to show a way to

implement a successful competitive advantage. In the following paragraphs we try to

summarize his ideas. We focus specially on his book: Competitive Advantage, Creating

and Sustaining Superior Performance, 1985.

According to Porter (1985) all companies are embodied in a certain industry. Being a

firm which produces services or products, which play domestically or globally, in any

situation these firms are part of a certain industry environment. Each industry holds a singular

dynamic and this dynamic will influence much on the firms’ performance and profitability.

Any firm is looking to be well-succeeding in their performance. Firms’ goal is to find a

way to establish a profitable and sustainable position in their industry arena. They seek to
build a competitive strategy which, according to Porter, is

(…) the search for a favorable positive position in an industry, the

fundamental arena in which competition occurs. Competitive strategy
aims to establish a profitable and sustainable position against the forces
that determine industry competition (Porter, 1985:01)

To achieve the purpose of a great performance Porter states that firms should

consider two things when building a competitive strategy: industry attractiveness and

competitive position of a firm. As the industries, in which firms are embodied, have unique

dynamic they also bring different opportunities or limits to the firms’ performance. It is, not

all industries offer a favorable environment to the firms’ great performance. The second
consideration is the relative position of a firm within its industry. Even thought firms are
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embodied in highly or lowly competitive industry, their performance will hugely differ from

one another. It demonstrates that their positioning is also important when considering firms’

performance.

Taking into consideration that industry attractiveness and competitive position of a firm

are the main determinants of firm performance and profitability, we will closely look at these

factors. Let’s first consider about the industry attractiveness.

2.1.1. Industry attractiveness

According to Porter every industry is molded according to five forces: the entry of new

competitors, the threat of substitutes, the bargaining power of buyers, the bargaining power of

suppliers, and the rivalry among the existing competitors.

These forces are the rules of the industry competitive. Each industry brings a unique

interrelation of these forces. And as a result they (industries) will be more or less competitive.

The pressure of one or more of these factors has big influence on the firm performance. The

combination of these factors in a determinate industry can be favorable and thus, those firms

would be likely to have great return. On the other hand, pressure from one or many of these
forces drive firms to lower return.

competitive strategy must grow out of a sophisticated understanding of the rules

of competition that determine an industry’s attractiveness. The ultimate aim of
competitive strategy is to cope with and, ideally, to change those rules in the
firm’s favor (Porter, 1985:4).

These five forces determine cost of the raw materials, or price the buyers are willing

to pay for a certain product or service, and others. That is why they have huge influence of

industry profitability.

Buyer power influences the prices that firms can charge, for example, as does the
threat of substitution. The power of buyers can also influence cost and investment,
because powerful buyers demand costly service. The bargaining power of
suppliers determines the cost of raw materials and other inputs. The intensity of
rivalry influences prices as well as the costs of competing in areas such as plant,
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product development, advertising, and sales force. The threat of entry places a
limit on prices, and shapes the investment required to deter entrants (Porter,
1985:5).

These facts show the importance of these forces on firms’ profitability. The five

forces “influence the prices, costs, and required investment of firms in an industry – the

elements of return on investment” (Porter, 1985: 5). The pressure of these forces molds the

industry creating its structure. It is why Porter states that,

Industry profitability is not a function of what the product looks like or

whether it embodies high or low technology, but of industry structure.
Some very mundane industries such as postages meters and grain
trading are extremely profitable, while some more glamorous, high-
technology industries such as personal computers and cable television
are not profitable for many participants. (Porter, 1985: 5)

However, it is important to highlight that, according to Porter, firms are able to change

these forces. Firms are able to build competitive strategy and tackle these forces’ constraints

in order to achieve better profit. Although the five forces are “surely important tasks for any

firm, and are the essence of competitive strategy in some industries, a firm is usually not a

prisoner of its industry’s structure” (Porter, 1985: 7). Firms – if they understand well the rules

of the industry they are in – are able to influence these forces and achieve a great

performance. “If a firm can shape structure, it can fundamentally change an industry’s

attractiveness for better or for worse. Many successful strategies have shifted the rules of

competition in this way” (Porter, 1985: 7).

2.1.2. Positioning

The second determinant of a firm’s profitability is its position within its industry. The

relative position of a firm in a certain industry will determine if it is gaining a bigger or

smaller parcel of the industry profit.

Positioning determines whether a firm’s profitability is above or below the

industry average. A firm that can position itself well may earn high rates of return
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even though industry structure is unfavorable and the average profitability of the
industry is therefore modest (Porter, 1985: 11).

To cope with this firms build sustainable competitive advantage which, redundantly

saying, give the firm a relative advantage positioning against its competitors in the long run.

Competitive advantage “grows fundamentally out of value a firm is able to create for

its buyers that exceeds the firm’s cost of creating it.” (Porter, 1985: 3). Figure 1 summarizes

firms’ profit (or margin) formula. Firms’ profit is defined, according to Porter (1985), as the

value that buyers give to a certain product (or service) minus the cost of producing it. From

that we can imply that a margin of a firm can increase if the company is able to increase the

value buyers give to its production or if it is able to decrease its cost of production (or both).

**************INSERT FIGURE 1*****************

To achieve a relatively better positioning, firms need to increase the value buyers

give to their products or services. In other words, they need to make their minuend on the

formula higher. And/or decrease the production cost; reduce the subtrahend on the formula.

According to Porter, it is possible for firm to build it based on two general strategies:

cost leadership, and differentiation. Cost leadership strategy affects the cost of production and

thus, enables a firm to achieve a bigger margin. Differentiation strategy is able to do the same

for it influences the value buyers give to a product or service.

We imply that firm needs to be able to build a competitive advantage, relative to the

others competitors, in order to achieve a greater performance (better positioning). It is

possible to achieve, according to Porter, if firms can differentiate their products and,

consequently, influence the value the buyers give to it. This strategy allows the company to

achieve a premium price. It is denominated as differentiation strategy. Firms can also increase

their profit by decreasing the cost of producing. It is defined as cost leadership strategy.

Porter deploys these strategies into three by adding a third one, denominated focus
strategy. He states that it is possible to achieve competitive advantage through three generic
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strategies: cost leadership, differentiation and focus.

Focus strategy is when a firm narrowed down its target group. It has two variants:

cost focus and differentiation focus. When choosing to follow this strategy a firm “selects a

segment or a group of segments in the industry and tailors its strategy to serving them to the

exclusion of others” (Porter, 1985:5). Let’s say, for example, that in the shoes industry in

Korea a firm decides to focus on the big size shoes group. When doing so the firm is focusing

in a specific group. And if there are not many others companies doing same in the industry,

the firm has a big chance to succeed.

In cost focus a firm is interested in building a competitive advantage targeting a

group according to their price behavior. While in focus differentiation the firm is trying to

supply a special need of a certain group.

Figure 2 tries to summarize the idea of how to achieve competitive advantage. It

demonstrated that, according to Porter (1985), there are three generics strategy that allows

company to achieve better positioning relative to its competitors within an industry. They are:

cost leadership, differentiation, and focus.

**************INSERT FIGURE 2*****************

Focus strategy is not the focal point of this paper. For that reason we concentrate

more on defining cost leadership and differentiation strategy. We believe that focus strategy

is a variant of the two other strategies. Thus, the understanding of them both already helps to

clarify focus strategy.

We will, in the next subtopic, define value chain, for it is crucial to understand how

firms achieve cost leadership and differentiation. After that we will define cost leadership and

differentiation in details.

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2.2. Value chain analysis

We have analyzed that all firms look to build a sustainable competitive advantage in

their industry. And these competitive advantages have two general strategies: cost leadership,

and differentiation. You will see later that Porter states that firms must choose one of these

generics strategies to succeed1. However, for now, we will try to analyze how firms achieve

the strategies. How do they build a cost leadership strategy or differentiation strategy? This

process of building a competitive advantage is answered trough the value chain.

All firms have a chain of activities in which it adds value to their product or service.

Basically, a raw material is bought and transport from suppliers. It is operated and changed

into the final product and distributed, and so on. These activities (and others which are part of

the value chain) are value activities. Porter states that competitive advantage cannot be

understood by looking at a firm as whole. The effective way of achieving it is looking at the

value activities. It is because these activities are the source for the firm to lower their

production cost or states a differentiation. “The value chain disaggregates a firm into its

strategically relevant activities in order to understand the behavior of cost and the existing

and potential sources of differentiation” (Potter, 1985: 33).

Note that Porter is talking about value because these activities help to increase the

value that buyers give to the final product or service. And in doing so, the buyers are willing

to pay for the product or service more than it cost of production. In other words, the firm is

increasing its margin.

We can imply that: if competitive advantage is the goal, cost leadership and

differentiation are the way in which value chain is the source. Figure 3 summarizes this idea.

The value chain is like the motor which generates cost leadership and/or differentiation. The

analysis of the value chain allows the firm to figure out its potential sources to achieve

differentiation and/or cost leadership.

1
Point in which we don’t agree and this paper is trying to analyze.
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**************INSERT FIGURE 3*****************

Each firm has its own value chain. The way the value activities are performed is a

reflection of the firm “history, its strategy, its approach to implementing its strategy and the

underlying economics of the activities themselves” (Porter, 1985: 26). And it is in the

difference among the firms’ value chain that will lay the tools for building a competitive

advantage. However, the structure of the firms’ value chain is similar and it is represented on

the Figure 42.

**************INSERT FIGURE 4*****************

Figure 4 shows the value activities which add value to the good and generate the

firm’s margin. Note that the value chain is structured on primary activities and support

activities. The primary activities are those related to physical structure to create a product and

distribute it. According to Porter, in any firm these primary activities can be divided in five

generic categories or blocks. We summarize them below:

 Inbound logistic are those activities related to receiving, storing, and disseminating inputs
to the production. Here we can mention the transportation of raw material, warehousing,

scheduling.

 Operations are activities associated with manipulating the inputs into the final product.

Here are those activities such as machining, equipment maintenance, packaging, and others.

 Outbound Logistics is related to physical distribution of the product. It is activities such as

delivering, scheduling, material handling.

 Market and Sales are activities associated with creating a meaning to induce the buyers to

purchase the product or service. Advertising, promotion, sales force, pricing are some of the

activities.

2
The picture was extracted from Porter, M. E. 1985 Competitive advantage: Creating and sustaining superior
performance, New York: The Free Press.
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 Service is related to providing activities for maintenance of the product or service.

In the value chain there are also support activities. These are those activities which

support the primary one. They are blocked in four. We summarize them below:

 Procurement is the function of acquiring inputs useful in the value chain. It includes from

raw material to machinery and buildings.

 Technology development is those activities related to the efforts of the improvement of the

product or service and the production process.

 Human resource management is related to recruiting, hiring, training, development, and

compensation of all personnel.

 Firm infrastructure consists of all activities associated with management, planning, finance,

accounting, legal, government affairs, and others.

All these activities are important sources of creating lower cost or/and differentiation.

The firm responsibility is to identify those activities and maximize their implementation. As

all firms build their value chain differently, according to their own history and background, it

is important to the firm to recognize its strength and weakness and how to use it to improve

its performance.

The value chain structure is maximized specially through linkages within the value
chain and also with the suppliers and channel value chain. Although these value activities are

divided in distinct blocks they are correlated. And the firm’s performance will highly depend

on how well the company links these activities.

Instead of isolating the activities on the value chain, firms need to try to link them.

The connection between the firm’s value activities is denominated as linkages within the

value chain. The flow of information within the value chain is a very important tool on

building competitive advantage. The firm capacity to spillover the learning is very important.

And it is only possible with a high connection of the activities. Just to make an example, we

can imagine an MP3 company producer. The sales and marketing activity find out that buyers

value more colorful product than a white or black one. If the firm has a sharing information
system (that allows feedback) it has a big chance to improve its performance by applying the
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demand in its operation activities.

The linkage between the value chain activities is not the only important source to

achieve competitive advantage. The connection with the suppliers and channel value chain is

also an important tool. This is called vertical linkages, according to Porter (1985). Suppliers

and channel have their own value chain. The ability of the firm to create linkage with these

value chains is also an important potential for the firm’s performance.

When suppliers have low bargaining power it is easier to negotiate conditions that

facilitate the production. For example, a high inspection, from the suppliers in the raw

materials provided to the firm, guarantees a high quality and is less time consuming for the

firm. And so the vertical linkages with the channels are important. It is also important to keep

the link with the channels where the firm products passes through. A combination of the

firm’s channel value chain and firm activities can decrease the firm cost with advertisement

or sales force, for example.

We saw then that firms’ value chain is essential to diagnose the firms’ strategy to

build a competitive advantage. The value chain not only shows the potential/strength of the

firm, but also the way the firm can make it. It is essentially important to the firm to maintain

high linkages within its value chain as well as the suppliers’ and channels’ value chains.
These are very important tools to build and maintain competitive advantage.

In the next section we try to underline the use of this source, value chain, to achieve

cost leadership.

2.3. Cost Leadership

According to Porter, in this strategy a firm “sets out to become the low-cost producer

in its industry” (Porter, 1985: 12). It builds an advantage against its competitors by being the

lowest cost producer. Note that, the firm tries to increase its margin by decreasing “the

subtrahend” of his profit formula: production cost.

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The firm extent and aptitude is an important feature on building this strategy. And it is

essential to look at the value chain to implement a cost leadership strategy. The sources of a

cost advantage may vary according to the industry. But the focus of this strategy is to identify

the cost behavior of the value chain. And, in turn, it will depend on the cost drivers, which is,

according to Porter, “a number of structural factors that influence cost”(Porter, 1985: 70).

The cost drivers, which determine the cost behavior of a value chain, are majoring ten:

economies of scale, learning, pattern of capacity utilization, linkages, interrelationships,

integration, timing, discretionary policies, location, and institutional factors.

“Cost drivers are the structural causes of the cost of an activity and can be more or

less under a firm’s control” (Porter, 1985: 70). We believe cost drivers are important tools not

only for achieving cost leadership, but also to identify if a firm follows this strategy. As you

may see below, these are important variables for our analysis. For that reason, Table 1

defines each one of the cost drivers.

**********INSERT TABLE 1**************

Cost behavior of a firm value chain can be determined by one or more cost driver.
“While one driver may exert the strongest influence on the cost of a value activity, several

drivers often interact to determine cost.”(Porter, 1985:84??) The firm’s duty is to identify the

cost drivers in its production in order to maximize the efficiency and lower the cost.

Note that, the linkages within the value chain and the vertical ones are very important

tools to achieve cost advantage. They are not only important cost drivers itself, but they also

enable and potentiate the other ones. Learning and spillover, for example, is highly more

potential through linkages that enable the spread of knowledge within all the activities on the

value chain.

When defining cost leadership it seems to be the clearest strategy. Porter even

affirms so (Porter, 1985:12). However, when pointing out the implementation of this strategy
Porter wrote that “identifying cost drivers and quantifying their effect on cost may not be
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easy, and a number of methods can be employed” (Porter, 1985: 87). He then postulates a

range of way that a firm can identify its performance on achieving cost leadership. But they

are mainly focusing on observing the progress within the firm, not in its positioning relative

to the other competitors. Porter indicates methodologies that show the improvement of the

firm within itself, but not relative to its competitors. When comparing the position of the firm

with its competitors Porter affirms that “in practice it is often extremely difficult to assess

competitors’ cots because the firm does not have direct information. (…) the costs of some of

the competitor’s value activities can be built up to yield an accurate but partial picture of the

competitor’s costs” (Porter, 1985: 98).

This fact can be understood. We know that firms do not release the information about

their production. It’s a way to keep their competitiveness. Furthermore, firms do not produce

exactly same goods. What this means is that a straight comparison between their production

cost numbers might miss the true meaning.

However, this fact brings a discomfort when analyzing firms’ strategy. It is because

it is impossible to determine who the low production cost in an industry is. As a relative

comparison is not impossible, it is difficult to identify a firm’s production cost positioning. It

is also important to notice that a cost leadership does not necessarily leads to a lower price
(the firms increases its margin by decreasing their cost, not by decreasing the price). For that

reason, price is not a variable possible to measure the success on a company on cost

leadership strategy.

When analyzing a firm, however, we need to clearly define what we mean by stating

that a firm is following a cost leadership strategy. It seems unlikely to affirm that a firm is the

lowest cost producer. Thus, we found it reasonable to define cost leadership as a relative

lower cost producer within the industry instead of the low-cost producer. And for making

possible to measure if a firm is following this strategy we found it reasonable to use the cost

driver as criteria. Thus, as you may see below, economies of scale, linkages each drives to

lower cost, and others are indicators that a firm is following cost leadership strategy. In the
next subtopic we define differentiation in details.
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2.4. Differentiation

Differentiation is the capability of a firm to create something unique that is valuable for

the buyer. Firms normally understand differentiation as a power of marketing or physical

product. These are also source of differentiation, but are not all.

Firms can differentiate their products or service through any block of the value chain. For

example, carefully choosing the raw materials for production can be the differentiation of a

firm. As this will probably result in a higher quality of the final good, it is likely that the firm

will creates a bigger value perceived by the buyers. A firm can also differentiate its

production by packing or even delivering on time. Anything that adds value on the product or

service, from the point of how buyers perceive it, can work as differentiation. In other words,

it should affect the buyer value of the product or service. For that reason, according to Porter,

differentiation results in premium price. The firms are able to charge a higher price due to the

fact that the value generated is higher.

Such as in cost leadership, in differentiation there are also the drivers, denominated as

uniqueness drivers. Uniqueness drivers determine the firms’ singularity of a value chain.
Once more the value chain is the source for achieving the goal. And a strategy which focus

on differentiation should look at the possibility its value chain enables.

The uniqueness drivers are mainly eight. They are: policy choices, linkages, timing,

location, interrelationship, integration, scale, and institutional factors. Table 2 describes all

the uniqueness drivers.

**********INSERT TABLE 2**************

When focusing on differentiation the firm should recognize the purchasing criteria of the

buyer and create differences that match to those criteria. If a firm generates a differentiation
which is not value by the buyer, which does not follow his criteria, it is likely to be
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unsuccessful.

Creating differentiation is normally costly. That is why Porter states that a firm cannot

follow both strategy (cost leadership and differentiation), as you see in the following topic.

They are contradictory according to Porter.. However, as you may see in the next section, we

believe that a firm can follow both, differentiation and low cost, and still achieve great

performance.

We define differentiation strategy as the creation of a uniqueness that is valuable to

the buyers. As the number of uniqueness is uncountable it is difficult to point out all the

criteria to measure if a firm is following differentiation strategy or not. However, base on the

Porter theory review, we tried to indicate some of the criteria that we believe are important.

They are: brand value (reputation or image), product innovation, packaging, customer

relationship service, and timing. These will be explained in detail below.

2.5. Competitive advantage theory’s limit

The previous sections summarized Porter’s theory about sustainable competitive

advantage. We know that every firm is looking to increase their margin. Firms’ purpose is to
create products or service which generates a value for their buyers that exceed the cost of

producing it. For this they have to be concerned about two things: industry attractiveness and

positioning. Firms should build competitive strategy to tackle the constraints the industry’s

rule forces bring. As well as focusing to build a competitive advantage in order to position

itself relatively better than other firms.

Competitive advantage allows the firm to achieve margins bigger than the average in the

industry. There are three generic strategies to reach this goal: cost leadership, differentiation

and focus. As mention before, as focus is a variation of the two other strategies (and even

Porter doesn’t bring much detail about it) we will be talking only about the two main

strategies: cost leadership and differentiation.

According to Porter (1985), a firm should focus on one of the two strategies to gain
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advantage in its industry. If a firm pursues more than one strategy it is likely to be below-

average and stuck in the middle3. The firm should, according to Porter, make a choice

between the strategies. The author states that a firm should differentiates itself from the others

competitors by strongly emphasizing one strategy, not only on the short term, but also on the

long one.

The notion underlying the concept of generic strategies is that competitive

advantage is at the heart of any strategy, and achieving competitive advantage
requires a firm to make a choice – if a firm is to attain a competitive advantage, it
must make a choice about the type of competitive advantage it seeks to attain and
the scope within which it will attain it. Being “all things to all people” is a recipe
for strategic mediocrity and below-average performance, because it often means
that a firm has no competitive advantage at all. (Porter, 1985: 12)

Porter seems to believe that a firm should create one identity which distinguishes

itself from the others. It is a decision for the long term. Although he states that a firm should

not forget totally about one strategy when pursuing another, he believes that a firm cannot

reach advantage relatively to its competitors when using more than one strategy. Figure 5

illustrates this idea. We have that, according to Porter (1985) a firm should choose one way to

course and achieve competitive advantage and going through one way eliminates the other.

They are mutually exclusive ways.

**************INSERT FIGURE 5*****************

This paradigm has been a common believe on the business area. “Whilst this

technique has been taught in business schools since the beginning of the 1980s and has been a

landmark in strategic thinking, it is starting to come under pressure under the current dynamic

environment” (Yun 2005: 5).

We believe that the premise stated by Porter, that firms cannot succeed when

pursuing both strategies, is limited. We do believe that a firm can follow both strategies, cost

3
Porter states some exceptions for when a firm can pursues for more than one strategy and be well-succeed. It
is when the other competitors are stuck in the middle or cost is strongly affected by share or interrelationships or
a firm pioneers a major innovation (for more detail, see Porter, 1985).
 17

leadership and differentiation, and still do better than the average within its industry. Thus we

offer the following proposition:

Proposition: The more a company follows a cost leadership and differentiation strategy, the

more successful the performance.

. Taken that a value chain is the source for building a competitive advantage we

believe this source can not only lower cost but also induce differentiation and vice-versa. The

linkages, tools that maximize the value chain potential, can create an effect of spillover which

may generates relative lower cost and differentiation for a firm. That is why we believe that

when searching for one goal (differentiation, for example) a firm can also find ways to

achieve other (cost, for example). And we believe that this fact (follow two strategies),

instead of leading to a below-average performance, can demonstrate to be a better strategy. In

other words, the firm, when pursuing both strategies, can achieve a performance better than

the average in its industry.

We will then analyze Samsung performance and try to understand the factors that

made this company well-succeeded in its industry. We try to localize which strategy the
company is using, whether it is cost leadership or differentiation or both. And whether this

strategy has lead the company to great performance or not.

In our proposition there are three important variables: cost leadership strategy,

differentiation strategy (independent variables), and successful performance. Both

independent variables have been already defined. Table 3 add successful performance and

defines what we mean by each of these variables.

**********INSERT TABLE 3**************

For analyzing a firm we should first create criteria of evaluation. We will try to

explore this topic on the next session. What are the facts that show a company is pursuing
cost leadership or differentiation is one of the questions we try to answer on below.
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3. EMPIRICAL TEST

3.1. Operationalizing the hypothesis for test

As we mention before our proposition is that the more a company follows a cost

leadership and differentiation strategy, the more successful the performance. We already

define the three variables of our hypothesis (cost leadership strategy, differentiation strategy,

and successful strategy) in Table 3. However, to put the hypothesis to test, we have to

perationalize our hypothesis by defining the evaluation criteria used to examine the

hypothesis. In other words, it is necessary to create measurable criteria that define if a

company follows cost leadership strategy, differentiation strategy and what indicates that a

company achieved successful performance. Table 4 is a breakdown of each individual

variable and also the respective evaluation criteria used to determine the measurements of our

variables.

**********INSERT TABLE 4**************

To get a better understanding of what constitutes our evaluation criteria, we will first

define each of them. In differentiation strategy, brand value means an intangible asset that

increases the financial value of a brand name due to customer’s perceived value towards the

brand. Product innovation means constantly improving existing products or services or

creating and developing new products or services to cater to existing and changing customer

demands. Packaging involves the process of using creativity to communicate the image and

brand identity of the final finished product or services to end users. Customer relationship

service is the methods that a firm employs to organize and maintain two-way communication

and relationship with their customers. Timing is any implementation by the firm that makes it

quicker than competitors.

In cost leadership strategy, as mention before, we used the cost drivers introduced by
 19

Porter, as our criteria. In this sense, economies of scale are cost advantages that a firm enjoys

through mass production. Learning is the cumulative growth of knowledge within the firm

which can be stored and shared across the firm. The pattern of capacity utilization refers to

the degree that a firm uses its production capacity. Linkages are connections between the

individual parts in the value chain of a firm. Interrelationships are cross communication and

interdependency among sister business units within the same business group. Integration is

about generating organic synergies from interrelated infrastructure, facilities, functions,

technologies and software, as well as maximizing competitiveness and efficiency. Timing is

to be the first in every action or to be one step ahead of competitors. Discretionary policies

refer to company-wise policies which are set by the firm itself. Location is the geographical

placement of labour, management, scientific personnel, raw materials, energy and other

resources. Institutional factors include any government and union policies and incentives.

To measure successful performance, we evaluate market share, profitability, sales and

brand value. Market share is simply the proportion of total market size that is being served by

a company. Profitability is a measure of operating income divided by sales. Sales measures

the revenue of a firm, which is price multiply by quantity sold. Brand value here is the

monetary amount of brand equity in a firm, reflected in dollar terms.

We believe that fulfilling one single criterion is enough to indicate that a certain

company fits with the variable. In other words, a company with a high brand value reputation,

for example, is already an indication of differentiation strategy. It is not mandatory that the

company fits the entire criterion. If we think about luxury brand such as Prada and Louis

Vuitton we can easily conclude that their brand name is the source of their differentiation and

is what creates value for the buyers. People buy Louis Vuitton because it is Louis Vuitton. If

there is another brand with same quality and even product, people will pay much more for the

one which has Louis Vuitton written on it. And this one criterion is enough to indicate Louis

Vuitton that Louis Vuitton follows a differentiation strategy. In other hand, the fact that a

company meets more than one criterion reinforces the fitness on that variable.
To validate our testing, data were sourced from the channels showed in Table 5. Our
 20

preferred data are majority qualitative as quantitative data are usually confidential

information that firms try not to expose to their competitors. Therefore, purely direct

numerical comparisons might not bring out the best results because of those reasons. Instead,

we analyze the variables in absolute terms with minimal comparison to other corporations

who are in the same industry. Stated below are the sources of data used in this paper and also

the advantages that come with those data source.

**************INSERT TABLE 5*****************

3.2. Data Analysis

3.2.1. Samsung Value Chain

As mentioned before the source of achieving competitive advantage is in the value

chain. The analyses of the value activities show the firm potential and viability on building a

competitive strategy. And, in the context of the value chain, one of the most important tools

the company can have is the linkages within the value chain activities and vertical ones. For
that reason, we first look at Samsung Value Chain in order to figure out the possible linkages

it creates and if the value activities are creating low cost and/or differentiation.

However, first, for better understand of Samsung Electronics, it is important to

highlight its belonging to the Samsung group. Samsung group is Korea’s biggest Chaebol.

Chaebol is a Korean expression for business group 4 . We use this expression because,

although it have similar characteristics with other business group (such as diversification),

Korean business groups (chaebol) have peculiarities that help to understand Samsung

Electronics’ value chain as we may below.

In 1994, Chairman Lee initiated the New Management Movement (Chang, 2008) that

emphasized quality over quantity. The Chairman wanted Samsung Electronics to be not just a

4
For better understanding of business group please refer to Cazurra, 2006.
 21

domestic player but a global one as well. Samsung Electronics’ management and planning

team in the firm infrastructure foresaw that the future of a digitalized new century means

many related sectors will need semiconductors and components for electronic goods.

Therefore the firm decided to change the overall structure of their products from generic, low

value products to high-end, multifunctional goods that are desired by customers. The change

in Samsung Electronics’ mindset, in this case the firm’s infrastructure, gave rise to the

possibility of the firm to benefit from an increased brand value, image and reputation.

The analysis of Samsung Electronics’ value chain shows that the firm has a special

work culture in which production, design and test engineers are usually put together to work

on developing new products. This fact creates high linkages within Samsung value activities.

Support activities and primary activities are interconnected and this has lead Samsung to

significantly cuts down product development time and also cut down costs by reducing

possibility of errors. Furthermore, because all the key engineers from different departments

are put together, this forms a synergy that enhances product creativity and innovation, which

leads to product differentiation. The analysis allowed us to conclude that Samsung

Electronics’ value chain activities are highly linkages. This is especially true when we

technology development, human resource and operations activities in the value chain. These
linkages have potentiated Samsung innovation.

Furthermore, the value chain linkages have show to be also an important source on

Samsung Electronics’ timing. This fact, together with strict timelines established for these

teams, has proven to be a valuable tool on time savings and at the same time, ensuring that

new products are always available to be marketed to customers before its competitors launch

it.

Samsung Electronics was faster than other firms in time-to-market

because it not only increased its R&D investment but also pursued a
“parallel development strategy” in which it initiated the development for
next-generation products such as 64M and 256M DRAMs while
developing and mass producing the current generation. (Chang, 2008:36)

In our opinion, technology development plays a very important role in contributing to

 22

the successful performance of Samsung Electronics. Due to the fact that the firm is in the

technology industry, constant technological advances are required to stay at the top of the

game.

Samsung Electronics’ started its business by literally begging some Japanese

company technology and knowhow. It launched its business with black and white TV in a

time that it was already outdated technology. However, as the firm evolves in time, acquiring

more technological know-how through patents and collaboration with other companies,

Samsung Electronics absorbed the new knowledge and enabled the cumulative growth of

knowledge within its firm. Once more the linkages within the value chain have been a

valuable tool for the company. The collected knowledge is shared across different products

and operations, leading to the possibility of innovative products and cost saving methods.

Thus, Samsung Electronics is able to create a spillover effect in its learning curve. As the

knowledge is not withheld in one value activity the learning is spread over the chain activities.

Due to the fact that learning is a cost driver, as mentioned before, we see that the linkages

enable a cost reduction not only in a singular value activity but in the value chain as a whole.

Also, as the firm elevates its technological standing, efficient machineries cut down operation

times and costs. New machineries, like those that can cut down wafer size by half, cut
production time by half and enhance product attractiveness due to smaller sizes.

Another example that demonstrates linkages within the value chain is the case where

Samsung Electronics set up overseas production complexes in places like Malaysia, China

and Brazil (Lee, 2006). These complexes house the whole value chain, from the inbound

logistics to the sale of finished products to customers. Housing each primary activity together

under one roof results in sharp increases in efficiency, significantly cutting down transfer

time and therefore enables higher production. It also allowed internal problems to be solved

in shorter time and efficiently.

Gathering all the core activities of the value chain under the same group also enables

Samsung Electronics to practice economies of scale, as products can be mass manufactured

while spreading overhead costs to more units of production, reducing per unit cost of goods.
 23

As we said before, Samsung Electronics is a company under Samsung group, a

Korean chaebol. One of the features of Chaebols is its intense vertical linkages. Despite the

subsidiaries being considered as individual firms, subsidiaries under the same Chaebol

normally share technology, know-how, and brand management (Chang, 2003). One of the

reasons of these intense linkages is the ownership of these groups. They are normally family-

owned with highly centralized control and management as well as human resource.

Chaebol are highly diversified. It is normal that within a Chaebol a subsidiary is

another one supplier, channel or related unit. And, due to the intense vertical linkages, this

fact can be a source of competitive advantage to a firm within this group.

As part of a Chaebol, Samsung Electronics' has enjoyed the benefits of the vertical

linkages. Through vertical integration, other subsidiaries in Samsung Group make internal

components and parts which are then used by Samsung Electronics in its electronic goods.

This structure cuts down on input costs and cuts down time due to reduced need to negotiate

with individual, unrelated suppliers outside. Also due to the fact that Samsung Group is such

a diversified business group, the subsidiaries help each other out in different areas as they all

belong to group.

Vertical integration also has a big role to play in creating cost savings and efficiency
in inbound logistics. The transportation of raw material becomes efficient and time saving

through this integration, and can cut a lot of costs in warehousing due to quick delivery of

raw materials, also at the same time being able to have a better coordination in scheduling

when it is done with close affiliates rather than outside suppliers. It also has similar effect in

outbound logistics; it is because the vertical linkages allow cutting down costs and increasing

efficiency in transportation.

In terms of operations, Samsung Electronics’ move to establish electronics

manufacturing complexes in other countries entitled it to capture lower labor costs and also

capture knowledge sharing with those respective countries. The firm’s ability to be closer to

part suppliers’ helps this expansion.

As defined before, marketing and sales are activities associated with creating a
 24

meaning to induce the buyers to purchase the product or service. Samsung Group, as a

Chaebol, has also the singularity that the affiliates share the same brand name. Consequently

the market plan of one affiliate also helps the others. Samsung Electronics has enjoyed the

belonging in this linkage. The efforts of Samsung Group, as a brand, to invest heavily in

advertising, have great result on Samsung Electronics’ marketing. Furthermore, Samsung

Electronics is using promotion such a sponsoring blockbuster movies like The Matrix, the

firm differentiates itself from its competitors. Enhancing retail presence through a stronger

sales force in many new regions entices customers to buy Samsung Electronics products. A

comprehensive after sale service for Samsung Electronics’ customers is also a source of

differentiation for the firm as it shows appreciation and gratitude for buying their products.

After analyzing Samsung Electronics’ Value Chain we concluded that the firm’s value

chain activities are highly linkages. And so are the vertical linkages. This high integration

within the value chain as well as the vertical linkages has seems to be a source of

differentiation and cost leadership in Samsung Electronics’ performance.

The next subtopic is dedicated to identify Samsung Electronics’ strategy and if it is

true that the company has achieve a successful performance. Due to the criteria mentioned

before we believe we are able to identify if Samsung fits in a differentiation strategy, or cost
leadership strategy, or both. And it will be also to evaluate Samsung Electronics’

performance, if it is successful or not.

3.2.2. Identifying Samsung’s strategy in Porter’s model

After analyzing Samsung Electronics’ value chain we are then ready to test our

proposition. In the following paragraphs we try to measure our proposition independent

variables: Cost leadership strategy, and differentiation strategy; and the dependent variable,

successful performance. The intent is to identify if Samsung Electronics is following the cost

leadership strategy, differentiation strategy, none of them or both. After this, we try to get a
conclusion about its performance. We start by checking if SE fulfills the cost leadership
 25

strategy criteria.

3.2.2.1. Cost Leadership strategy

The criteria to define if a firm follows a cost leadership strategy are: economies of

scale, learning, pattern of capacity utilization, linkages, interrelationships, integration, timing,

discretionary policies, location, and institutional factors.

 Economies of scale

As the major producer of key components used in digital consumer electronics (such as

DRAMS, flash memories, LCD panels and mobile phone parts), Samsung enjoys huge cost

advantages. While Sony, Samsung’s largest competitor, pays more attention to producing

very unique and differentiated product, Samsung Electronics has focused on manufacturing

core parts, mainly commodities, to achieve economies of scales. Production facilities in

Samsung Electronics not only produces components and parts for its use in other Samsung

products but also produces to sell to outside buyers, including its rivals. Due to this huge

demand, the firm is able to perform mass production in its plants, therefore achieving

economies of scale.
 Location

Often, the part suppliers of Samsung Electronics can be found at close proximity to its

divisions to reduce costs in terms of transportation and also initiatives in research and

development. In the New Management Movement initiated by Chairman Lee in 1994, he

strongly voiced his effort to make Samsung Group global. This leads to the construction of

electronics manufacturing complexes in other countries that created savings in labor costs and

components purchases. Sharing local expertise and knowledge also means savings in training

and educational costs. These complexes were located in countries with cheap labor and

production costs, such as China, Brazil and Malaysia. Other facilities that were located far

away were also relocated to enhance cost savings and benefit other synergies.
 Pattern of Capacity Utilization
 26

We could not find any data that proves that Samsung Electronics fulfill this criterion.

 Integration

Integration is about generating organic synergies from interrelated infrastructure, facilities,

functions, technologies and software, as well as maximizing competitiveness and efficiency

(PORTER, 1985). In Samsung Electronics, the Research & Development team work

alongside each other, a huge contrast to a normal production process where approved designs

go to the production engineers and finished products then go to the test engineers. This

environment creates a platform for knowledge sharing and those knowledge formed, gathered,

and shared by these employees are stored and applied to new products or production lines,

saving redundancy from repetition and creates a synergy that helps cut costs and time.

Vertical integration in Samsung Electronics is a major source of competitive advantage. The

commodities that the firm manufactures, such as DRAMS, flash memories, mobile phone

chips have been used in the white goods appliances, computer, digital home appliance, and

communication and living home appliance divisions of Samsung Group. This structure of

vertical integration lowers procurement costs in the value chain. Other benefits also flow

from this integration, which is the speed of design, development and production, giving rise

to competitiveness in other parts of the value chain too. Supplies integration also ensures that
Samsung Electronics get cheaper parts from their affiliated suppliers but also achieve low

inventory cost through fast delivery. Samsung Electronics’ electronics manufacturing

complexes established overseas under the New Management Movement was structured to

have the entire value chain in the complexes, from the production of components to the sales

of completed items to customers. The synergy produced an estimated $7 million in savings

from logistic costs, and joint activities such as customs clearance, purchasing, tax,

promotions and logistics.

 Learning

“Parallel development strategy” initiated by Samsung Electronics, in which the mass

production of current generation products are done at the same time as the development of
new generation products (Chang, 2008) allowed Samsung to apply new technologies they
 27

learn to existing products. Technology shared across different products and also across

different generation of products gives rise to an opportunity to spread technology capital over

a larger production base, hence lowering cost per unit. As Samsung Electronics encourage

integration within their departments, knowledge built as time progresses can significantly

enhance their existing technology when applied, resulting in time and cost savings. The

cumulative growth of knowledge from the initial DRAM business has allowed Samsung

Electronics to expand into related areas such as flash memory and LCDs.

Linkages

Linkages within the value chain are very important factors that create internal synergies in the

firm. For Samsung Electronics, building electronics manufacturing complexes that houses the

whole value chain is a reflection of this synergy. Having the whole value chain together at

one location saves logistic costs, and linkages help reduce redundancy in operation, therefore

decreasing labour costs. Internal problems can also be solved easily, saving time and money

tied to solving human resources issues.

Timing

In the technology business, time translate to money. Firms always strive to save time because

time savings equal to cost savings. Samsung Electronics’ implementation of the “parallel
development strategy” in which current generation products are mass produced at the same

time while future generation products are developed cut down product development time

tremendously and saved the firm a lot of money. Similarly putting engineers from different

departments to work together ensure efficiency that results in less employee work time,

therefore reduce wages and salaries. The firm’s ability to establish DRAM production line in

six months instead of the two to three years industry norms demonstrated a savings of nearly

two years of time and effort, which can be invested in other projects.

 Institutional Factors

In the 1960s and 1970s when the Korean government then were aggressively promoting

industrialization, Samsung Electronics has benefited a lot from the government in terms of
advance technology transfer. Also, because the government wanted to turn South Korea into
 28

an industrialized nation, the government stopped foreign firms from selling electronics in the

local market, allowing Samsung Electronics to be protected from the market and perhaps

allowed it to grow so rapidly without stiff competition. The Korean government’s initiative of

changing from GSM (Global System for Mobile Communication) to the designated CDMA

(Code Division Multiple Access) communication technology allowed Samsung to develop its

technology and catch up with the market. Needless to say, Samsung Electronics’ mobile

phone division enjoyed a boom because it opened up the huge market for second-generation

digital mobile phones. Nowadays, government subsidies and support might not be so

apparent anymore as Samsung Electronics gains its financial and economic freedom.

 Discretionary Policies

We could not find any data that proves that Samsung Electronics fulfill this criterion.

The evaluation of Samsung shows that the firm fulfills the cost leadership strategy

criteria. This guides us to the conclusion that Samsung follows cost leadership strategy.

As we mentioned before, even according to Porter, is difficult to make a relative

competition among the competitors. That fact make almost impossible to figure out which

firm is the lowest cost producer. That’s why we didn’t simple showed here the cost
production of Samsung Electronics and its competitors5 in order to find the lowest producer.

Our decision on choosing criteria that show a relative lower cost production is due to this fact.

And this seems to be the decision of other researcher as well.

We already demonstrated that Samsung Electronics follows the cost leadership

strategy. SE electronics have a relative lower cost production than its competitor on the

electronics industry. However, we are also likely to affirm that SE has also the lowest cost

production. And this idea only reinforces our conclusion.

5
We simply don’t have access to it.
 29

3.2.2.2. Differentiation Strategy

The criteria to define if a firm follows a differentiation strategy are: Brand value

(reputation or image), product innovation, packaging, customer relationship service, and

timing.

 Brand value (reputation or image)

Until the early 1990s, nobody saw Samsung Electronics’ products as being highly valued, and

because of that there was no reason for consumers to pay a high price for something that they

do not perceive as being high value. Especially in the initial market in the United States, due

to lack of technological know-how, Samsung only managed to produce poor quality products

that can only sell at low prices. It was a generic brand and was being sold in the lower shelves

of K-Mart, Sears and Wal-Mart. It was during the period of Chairman Kun-hee Lee that there

was an overhaul of Samsung Electronics’ brand image, and the New Management Movement

that was implemented in 1994 was a proof that Samsung is taking brand value as a

differentiation strategy very seriously. Samsung foresees that in the future, digitalization will

mean that technology will experience rapid evolution but because technologies are mostly
similar, the thing that can differentiate the brand which customers choose is brand value. To

enhance customers’ perception about the Samsung brand, Samsung emphasized on increasing

their quality and not quantity, even though they sacrificed some sales in the beginning. To do

so, they cut down on their product range, and invested heavily in their marketing, especially

sports marketing. Through sponsoring the Olympics and other sports, Samsung managed to

enhance its brand awareness globally due to the media coverage during these events.

Samsung also introduced a Global Marketing Team, and with US$400 million invested in 10

emerging markets for marketing (Chang, 2008), elevated its brand equity significantly.

Samsung’s brand value demonstrated a strong growth. Referring to Graph 1, in 2001 it was

placed 43rd among 100 global brands and by 2006, has been moved up to the 20th spot.
According to Chang, this shift in position was made possible because Samsung Electronics
 30

had fully capitalized on the opportunities made possible by the digital revolution in marketing

and technology.

***********INSERT GRAPH 1**********

Product innovation

To differentiate itself, Samsung cannot have a broad range of generic products. It must focus

on a few individual products, and Samsung chose to focus on their mobile phone business

because they identified them as the product with the highest ROI (return on investment) in

advertising (Chang, 2008). Samsung mobile phones have been very crucial in uplifting the

overall Samsung brand because of their highly valued multifunctionality and high end

product image by customers. Also, as manufacturers in China catch up with Samsung, it

cannot beat the cheaper Chinese producers, so that leads to focus on product innovation.

Samsung realized that in the new era, consumers are characterized by their needs to be

technologically-savvy, emphasizing on design and also functionality at the same time. Fast

changing trends also mean designs have to always be perceived as cool and sleek and

boasting the latest technology too. However, Samsung Electronics also sell its hand set
components to competitors, allowing it to be a low cost producer despite its innovations. In

the DRAM business, the firm develops new generation semiconductors at the same time that

they are selling current generation semiconductors. Samsung Electronics do this because

semiconductors have very short product life cycle and also to ensure that they are always up

to the date with the latest products to offer to their clients. Samsung Electronic differentiates

its product innovation by putting designers, engineers and product development planners

together to work on a product. By putting them together, Samsung not only manage to come

up with purely aesthetic and functional product, but also improve their quality and reduce

costs as 80% of these are determined in the initial stage of product development (Chang,

2008). Designers can tell engineers what design they want, and engineers can work with
product development planners to see if it is cost efficient to do so. This environment creates a
 31

lot of synergy from direct interaction among them and Samsung’s innovative product has

been a result of this practice. Also, because Samsung believes that design will be the ultimate

source of corporate competitiveness in the new century, Chairman Lee has emphasized on

“creative management” (Chang, 2008), bringing in talents from around the globe to make up

for the lack of local talents and also to ensure creative talents are transferred locally.

 Packaging

We could not find any data to show that Samsung Electronics gained any differentiation from

its product packaging.

 Customer relationship services

Samsung Electronics business model focuses more on B2B (business-to-business) rather than

selling directly to consumers. Their customers are retailers or electronic stores which sells

many brands together. In order to gain brand equity and distinguish itself, Samsung

Electronics in the North American market began to withdraw its products from large discount

stores and shift its focus to specialty stores to create a prestigious value to customers.

Samsung’s elevated image is a result of careful selection of distribution channels (their retail

customers) that enabled Samsung to position its product as high price and quality. Also,

having a selected few retailers to distribute their products can result in better deals during
negotiations. In terms of end customer, Samsung Electronic also has a global customer

service centers, providing Samsung Electronic product users with satisfactory after sales care.

Timing

Samsung Electronics forecasted that in the new century, digitalization and technological

evolution will mean that semiconductors will be an important component for many sectors

needing them, and has invested heavily in semiconductors, which have paid off well for

Samsung. In the semiconductor industry, timing is very crucial due to the product’s generally

short life cycle and volatility in demand. When other semiconductor manufacturers like Intel

were exiting the DRAM business, Samsung Electronics refused to do the same and hung on

to the business, which eventually paid off for the firm. What contributed to Samsung
Electronics being able to always be faster than other firms is their implementation of “parallel
 32

development strategy” in which current generation products are mass produced at the same

time that future generation products are developed. Also, when the market was shifting from

CRT to LCD and PDP, Samsung managed to capture this trend and due to its ability in good

timing, managed to capitalize in this area (Chang, 2008). Also, putting designers, engineers

and product development planners to work together can save a lot of time from redundancy

and also from having to go back and forth between departments when changes have to be

made. Samsung also has a very strict time line when it comes to creating and developing new

products. According to their “strategic product system” (Chang, 2008), Samsung has

predetermined time for employees to generate new ideas, present them to the presidents and

CEO and finally for product inception. In its DRAM business, Samsung Electronics manage

to set up their production line in record time of six months (Chang, 2008), in contrast to the

normal two to three years needed to establish a DRAM production line. This quick move

enabled Samsung Electronics to catch up with its competitors significantly in terms of

technological age. Similarly in the mobile phone division, teams of design and production

engineers also take only half the time needed by competitors to come up with a new product,

enabling a steady stream of new products to be offered to customers.

An analysis of the evaluation criteria demonstrates that Samsung Electronics fit most

of the criteria. This brings us to a conclusion that the firm is indeed practicing a

differentiation strategy in the firm.

In our analysis we can identify that differentiation really brings a lot of competitive

advantage to the firm that practice that strategy. Differentiation is also easier to implement

than cost leadership because there is a wider scope to differentiate. Where else in cost

leadership the only thing that can be competed for is the cost. Due to this Samsung and its

competitors may differentiate in different areas and still compete aggressively in the same

industry.

However, since we do not have relevant data on competitors, we can only conclude
that we know Samsung Electronics follow a differentiation strategy.
 33

3.2.2.3. Performance

 Market share
Samsung Electronics’ market share has shown steady increases in size and is attributed to
several segments. Those segments include the digital media business, telecommunications
network business and semiconductor business. Table 6 shows that SEs’ performance in the
international market in the digital media business is very encouraging with approximately 96%
market share in June this year for Samsung Electronics’ LED TV market in the United States.

***********INSERT TABLE 6**********

In 2002, Forbes magazine had a write up about the rise of Samsung Electronics in the
handset industry, which reported netted 30 cents in operating profit on every dollar of sales.
"It's not a question of will Samsung become No. 2 but when," says Per Lindberg, a telecom
analyst for Dresdner Kleinwort Wasserstein in London6, comparing to No.1 Nokia and No.2
Motorola.
Seven years later SEs’ telecommunications network business, the handset division
managed to grab 20.8% of global market share, exceeding the 20% mark for the first time in
the firm’s history. Chart 1 demonstrates this improvement and also how SEs beaten Motorola
to become No.2 in the world spot of handset producers. This indicates how much the firm has
grown in a relatively short span of time.

***********INSERT CHART 1 **********

Samsung Electronics has also demonstrated the largest market share for its DRAM
and flash memory market in 2005 for its semiconductor division, taking approximately 30%
of market share when the second largest competitor is only taking half of that (Refer to Chart
2 and 3). Major products that have contributed to Samsung Electronics’ growing market
shares are its DRAMS in semiconductors, televisions and monitors in the digital media

6
Forbes Magazine 11th November 2002 write up
 34

business and handsets in the telecommunications network division. A growing market share is
a big indication that Samsung Electronics’ performance on the whole is escalating and looks
promising for the future.

***********INSERT CHART 2**********

***********INSERT CHART 3**********

 Sales and Profitability

Although Samsung Electronics’ profitability has demonstrated some volatility, in absolute
terms it is still doing much better than its competitors. The fluctuations in profitability
recorded by the firm are due to economic and cyclical reasons and are not contributed by a
decline in performance from Samsung Electronics. Due to the fact that Samsung Electronics’
income comes mainly from the sales of DRAM which is a commodity and highly volatile, the
sharp decrease in profitability in 1996 and 2001 as we see in Graph 2 is contributed by a
sharp fall in the price of DRAM in the market.

**************INSERT GRAPH 2***************

Other than the DRAM, Samsung Electronics’ performance is also affected by its
sales and profitability from the handset division. Samsung Electronics reportedly shipped
60.2 million handsets globally during the third quarter of this year. Last year’s shipping figure
was 51.8 million in the same quarter, and this shows a 16 percent increase in worldwide
shipping. In view of this, Samsung Electronics’ market has become the first vendor other than
Nokia to have shipped more than one-fifth of the world’s handsets. Samsung’s growth in
sales, as we can see in Graph 3, and profitability in the handsets division has been largely
attributed by a portfolio of technology savvy touch phones and also spreading retail outlets
aggressively across different continents.

**************INSERT GRAPH 3**************

“Despite the global economic downturn in 2008, systematic oversight and effective
action enabled us to generate continued growth in our core businesses as we delivered yet
 35

another solid financial performance. We will take the next step toward being one of the

world’s top companies, intelligently rising above the current crisis by strengthening our

leadership in core businesses and capabilities in key growth fields as we drive creative

innovation”,7 said Yoon-woo Lee, the Vice-President and CEO of Samsung Electronics,

indicating strong confidence in the future performance of the firm.

 Brand value
Brand value has a significant role to play in creating brand awareness among Samsung
Electronics’ customers. Such is the power of brand value that from a worthless brand of low
grade electronics, Samsung Electronics has outgrown its old image to turn into a high equity,
high performance brand name. Thanks to its aggressive move to reposition its product and
also the enormous amount of money heavily invested in marketing, the firm enjoys the
positive coverage of the mass media and is now a global brand which recorded significant
increase in brand value in as short as five years. The brand equity created by Samsung
Electronics has enabled it to create desire in the minds of customers, instantly suggesting that
their products are of quality, design and innovation. Aggressive advertising campaigns helped
create this desire and instantly Samsung Electronics’ performance rose due to its perceived
brand value. The Businessweek magazine, which has an annual publishing of the world’s top
100 global brand ranking, has placed Samsung among the top quarter of the world’s most
valuable brand names for many consecutive years. From Table 7, we can see that Samsung’s
brand equity demonstrates a stable growth each year in amount and its ranking has been in
the top 25 for the past five years, well surpassing its major competitors who are in the same
industry.

******************INSERT TABLE 7********************

From the analysis of market share, profitability, sales and brand value of Samsung

Electronics, we can see that the data met the evaluation criteria of our variable. This leads us

to a conclusion that the firm’s performance can be considered successful.

The data analysis does not only look at comparisons of Samsung Electronics’

7
Samsung Annual Report 2008
 36

performance with other competitors, but also its own individual growth as a company. In both

cases there were strong indications of positive and stable growth. We also take economic

downturns into consideration when we analyze some negative performance by Samsung

Electronics given that these factors are external and every firm in the economy is not

protected against it.

4. CONCLUSION

Samsung Electronics has emerged as an important player in the Electronics’ industry.

The company were able to, in short period of time, beat its competitor and gain relevant

position in its industry. Our analysis demonstrates that Samsung enjoys today a successful

performance. The company increased significantly its market share and is the sales leader and

important goods. But not only this, Samsung has achieved this numbers with a high

profitability. The company has aim to be the most profitable one in division such as mobile

phone. Furthermore, SEs has also demonstrated significant improvement on its brand value.

Graph 1 shows that Samsung Electronics brand value is ranked on the 20 spot in the year of
2006.

All this data demonstrates that Samsung Electronics has a successful performance in

the last years. However, how has Samsung Electronics achieved this improvement?

Our analysis demonstrates that Samsung Electronics’ value chain linkages are a very

important source of this success. The linkages within Samsung Electronics’ value chain are

very high. The integration of the value activities has demonstrated to be an important tool of

timing saving and cost reduction as well as innovation.

Samsung Electronics’, as a company which belongs to Samsung Group, has also

enjoyed the benefits of high vertical integration. The subsidiaries of this group are highly

linkage. They share know how, technology and human resource. This fact has help Samsung
 37

Electronics to fast and efficiently be supplied. And this is to the fact that many of its suppliers

also belong to Samsung group.

These linkages (within the value chain and vertical ones) have proven to be an

important source of reducing cost and generating innovation.

Our analysis reveals that Samsung Electronics follow cost leadership, achieving a

relative lower cost than its competitor. It also demonstrates that Samsung Electronics creates

uniqueness valuable to their buyers, indicating that the company also pursues differentiation

strategy. Following both strategies has proven to be, in the case of Samsung Electronics, a

key to its success.

This fact allows us to conclude that Porter’s premise – that firms which follow both

strategies, differentiation and cost leadership, stuck on the middle – is refused. Based on

Samsung Electronics’ case we can state that the more a firm follows both strategies, the more

successful its performance.

Limitations

Our analysis proved to be very interesting and productive. After reading papers and
testing our hypothesis we are truly convinced that a combination of both strategies is a

decision better than following only one.

We can already affirm that a firm that follows both strategies is not condemned to be

is stuck in the middle. However, it is necessary to conduct more analysis to be sure that

following both strategies is always better than following a single. A plan for the future is to

compare the raise of Samsung Electronics and the decline of Sony. We are already

demonstrated that Samsung Electronics has successfully improved its performance following

both strategies. We can then analyze if Sony decline is due to the fact that it has followed

only one strategy or if it has failure even though it followed both.

Other limitation is the doubt about Samsung performance in the long run. It is necessary
many rounds to know who is truly “the winner”.
 38

The dependency of Samsung Electronics on commodities was a point of vulnerability

during the crisis. We believe that Samsung Electronics has made an important decision when

investing on mobile phone market. It helped the company to be less vulnerable to crisis,

feature that is very strong in some other products commercialized by Samsung (because they

are commodities).
39
 40

APPENDIX 1: Samsung Electronics background

We conducted one case study which is a detailed examination of Samsung Electronics, the

largest and best performing subsidiary of the Samsung Group. Samsung Group is the largest

Chaebol in South Korea and its subsidiary Samsung Electronic is the largest South Korean

company and also the largest electronics company globally. Samsung Electronic rose from a

cheap brand, low quality products company in the early 1990s to become a well known top

quality manufacturer that fetches high prices for its products as we know it today. Many

people has been especially puzzled how Samsung as a late comer into the electronics
company, trailing behind well-established Sony in the industry, could beat its competitor

aggressively and manage to overcome the leader in the field. We analyze how Samsung

Electronics achieve a successful performance through competitive advantage by examining

the value chain of the company, which is a systematic way to look at all the activities that a

firm performs to see how they interact with each other and then analyze the source of

competitive advantage. Through the value chain we can examine the source of cost leadership

strategy or differentiation strategy, which eventually leads to a competitive advantage in the

industry and translates to successful performance.

 41

REFERENCES

Chang, S. J. 2008. Sony vs Samsung: The inside story of the electronics giants’ battle for
global supremacy, Singapore: John Wiley & Sons

Chang, See-Jin. 2003. Financial Crisis and Transformation of Korean Business Groups:
the rise and fall of chaebols. Cambridge University Press. Lee, D. 2006. Samsung
Electronics: The Global Inc., Seoul, Korea: YSM, Inc.

Cazurra, A. C. 2006. Business groups and their types. Asia Pacific Journal of Management,
23: 419-437

Orr, D. The rise of Samsung <http://www.forbes.com/global/2002/1111/023.html> Accessed

in December 15, 2009

Porter, M. E. 1985. Competitive advantage: Creating and sustaining superior performance,

New York: The Free Press.

Woyke, E. Samsung Goes Full Throttle <http://www.forbes.com/2009/04/22/samsung-

cellphones-mobile-technology-wireless-samsung.html> Accessed in December 15, 2009.

Samsung Electronics Grabs Large LED TV Market Share in US

<http://www.koreaittimes.com/story/4333/samsung-electronics-grabs-large-led-tv-market-
share-us> Accessed in December 15, 2009.

Samsung posts Q3 report, exceeds 20 percent market share

<http://www.gsmarena.com/samsung_posts_q3_report_exceeds_20_percent_market_share-
news-1233.php> Accessed in December 15, 2009.

Samsung Electronics. Annual Report.

<http://www.samsung.com/us/aboutsamsung/corporateprofile/download/SE2008_eng_final.p
df> Accessed in December 15, 2009.

Interbrand, Best Global Brands 2009 <http://www.interbrand.com/best_global_brands.aspx>

Accessed in December 15, 2009
 42

 TABLES

TABLE 1
Cost Drivers Definition

COST DRIVER DESCRIPITION

Economies of Scale The ability to perform activities differently and more efficiently at
larger volume, or from the ability to amortize the cost of
intangibles such as advertising and R&D over a greater sales
volume

Learning and spillovers Experience curve effects. The learning increases the efficiency

Linkages Linkages within the value chain and vertical linkages with the
value chains of suppliers and channels

Interrelationships Interrelationships with sister business units.

Timing To be the first-mover. To be among the first to take a particular

action.

Location Location of labor, management, scientific personnel, raw

materials, energy and the facilities to get them.

Institutional Factors Government policies and incentives

Integration Integration is about generating organic synergies from interrelated

infrastructure, facilities, functions, technologies and software, as
well as maximizing competitiveness and efficiency.
Pattern of capacity
Discretionary policies Refer to company-wise policies which are set by the firm itself
 43

TABLE 2
Uniqueness Drivers Definition

UNIQUENESS DRIVER DESCRIPTION

Policy choices Policies choice about what activities to performance and how
to performance them. For example, service provide: deliver,
repair

Linkages Within the value chain as well as suppliers and channel. For
example, training channels in selling or coordination on
develop a new product with the suppliers

Timing Being the first to launch a policy or technology or innovation,

others

Location The viability and facility of how a client can get the product or
service can be also a stem of differentiation

Interrelationship Sharing activities with sister units.

Integration Integration of the firm which leads to better control of

coordination and performance

Scale Big volume can allow firms to perform in a unique way that is
not possible in a small scale

TABLE 3
Proposition’s Variables Definition

Variable Y/X Definition

Competitive advantage strategy Independent Relative lower cost producer within the
industry instead of the low-cost
producer.
Differentiation strategy Independent Creation of a uniqueness that is
valuable to the buyers.
Successful performance Dependent Increase of its own margin as well as
relative higher margin than its
competitor within its industry.
 44

TABLE 4
Evaluation Criteria to Measure Variables

Measuring the variables

Variables Evaluation Criteria

Differentiation Strategy Brand value (reputation or image), product innovation,

packaging, customer relationship service, timing

Cost Leadership Strategy Economies of scale, learning, the pattern of capacity

utilization, linkages, interrelationships, integration, timing,

discretionary policies, location, and institutional factors.

Successful performance Market share, profitability, sales, brand value

TABLE 5
Data Sources and Their Advantages

Data sources Advantages

Internet Fast and easy access

Books Reliable data

Company Report Overview of company’s business

Business Magazines Third party’s point of view
 45

TABLE 6
Samsung Electronics’ Market Share for Handsets

Period (`09) Market Share (%)

February 76.4

March 90.5

April 96.4

May 96.7

June 96.1
Source: Korea IT Times

TABLE 7
Samsung Electronics’ 100 Global Ranking and Brand Value

Year 2005 2006 2007 2008 2009

Ranking 20th 20th 21st 21st 19th
Brand Value (US$mil) 14,956 16,169 16,853 17,689 17,518
Source : Interbrands
 46

 FIGURES

FIGURE 1
Firms Profit Formula

- =
VALUE GIVEN BY PRODUCING COST MARGIN
THE BUYERS

FIGURE 2
Strategies to Achieve Competitive Advantage within an Industry

Cost Leadership strategy

Differentiation strategy COMPETITIVE

ADVANTAGE

Focus strategy
 47

FIGURE 3
Value Chain: The Source Generating Cost Leadership and/or Differentiation

Differentiation

Cost
Leadership

Value Chain

FIGURE 4
The Value Chain

Source: Porter, 1985: 37

 48

FIGURE 5
Competitive Advantage: Two Mutually Exclusive Ways to Achieve It.

Cost Leadership

COMPETITIVE
Differentiation ADVANTAGE
 49

GRAPHS

GRAPH 1
Samsung’s brand value

Samsung's brand value

20 20th 20th
25th 21st
(US$ billion)

15
34th
10 43rd 42nd

0
2000 2001 2002 2003 2004 2005 2006
Year

Source : Chang, 2008: 66

GRAPH 2
Samsung Electronics’ Profitability

Sales

70
60
50
(US$ billion)

40
Sales
30
20
10
0
1991
1992
1993
1994
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006

Year

Source: Chang, 2008: 3

 50

GRAPH 3
Samsung Electronics’ Sales figure

Sales

70
60
50
(US$ billion)

40
Sales
30
20
10
0
1991
1992
1993
1994
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
Year

Source: Chang, 2008: 3

 51

 CHARTS

CHART 1
Global Handset Market Shares in 2009 3rd quarter

Source: Strategy Analytics

CHART 2
DRAM Market Share in 2005

DRAM Market Share in 2005

Others, 3%
ProMos, 3%
Samsung
Powerchip, 5%
Hynix
Nanya, 6% Samsung, 30% Micron
Elpida, 7% Qimonda
Elpida
Nanya
Qimonda, 3%
Powerchip
Micron, 16% Hynix, 17% ProMos
Others

Source: Chang, 2008: 10

 52

CHART 3
Flash Memory Market Share in 2005.

Flash Memory Market Share in 2005

Others, 4%
SST, 2%
Sharp, 2% Samsung
Micron, 2% Toshiba

Renesas, 5% Intel
Spansion
STMicroelectronics Samsung, 33%
Hynix
, 7%
STMicroelectronics
Hynix, 7%
Renesas
Spansion, 11% Toshiba, 15% Micron
Intel, 12% Sharp
SST
Others

Source: Chang, 2008: 10