Samsung Electronics: Burned by success
(1) What makes Samsung a conglomerate? What type of diversification does Samsung pursue? Identify core competencies, economies of scale, economies of scope that were the basis of its past success? Why is Samsung struggling today?
The meaning of conglomerate is that an enterprise that diversifies into a market that has no connection to the market in which the enterprise is operating for the moment. Conglomerate is a financial strategy for an enterprise in order to increase shareholder value. The negative purpose of this strategy is that it increases risk along one or more markets, as well as reducing profit improvements, and sales company-wide. Today, Samsung is a widely diversified conglomerate that has over 80 standalone subsidiaries. The sprawling chaebol, which means a family-owned multinational company typical of South Korea, has 490,000 employees which is more than Apple, Google, and Microsoft combined. Samsung Electronics applied the 'follow first innovate second' strategy in every sector where they have kept their presence. Their strategy was to first identify the sector that has potential and proven market traction. Once they determine the sector, they would outspend their competitors in innovating products. The company was launching their products that are not related to each other in different points of time. Samsung launched batteries in 2000, flat television in 2001, flash memories in 2004 and then the smartphones. Samsung’s diversification was heterogeneous and conglomerate. Samsung has invested a lot in research and development, and the top management is always trying to bring new talent, and diverse leadership to their organization. That is why they recruit people from different countries and organizations. They have also improved employee skills by letting them learn best practices from different companies around the world. This has created competencies to understand different technology in a short period of time. The company had also worked against inefficiencies in operations and had established integrated manufacturing in its plants. This has given the economies of scale and scope. The strategy of following first and innovating second was a good approach when the company was growing, but now that they became one of the biggest electronics companies, and they are competing with companies like Apple, I don’t think that this is the best strategy. In order to remain a leader in this market, they have to focus more on innovation. The increased barriers due to intellectual property rights of top companies will not let the Samsung conglomerate apply their following strategy smoothly. That is why the conglomerate is failing.
(2) Despite being a widely diversified company, Samsung prefers vertical integration in contrast to Apple which follows a strategy of disaggregation. Do you think Samsung’s vertical integration contributed it its problems?
Remaining vertically integrated is definitely a challenge for Samsung to sustain the conglomerate. As I already mentioned in the first question, I think that Samsung needs to focus more on innovation and research and rather than following the trend. Their goal should be to create the trend as a market leader. Now, remaining vertically integrated makes the organizational structure more complex. The company designs and manufactures not only its phones, but many of the individual parts in them. As companies become their own suppliers and assume responsibility for the foundational elements of their products, they reduce their ability to find relief in the event of a recall. Without a supplier, the vertically integrated company like Samsung has no other entity to which to turn to offset either the reputational or financial damage caused by defective products. It is very difficult for the leaders to focus only on research and development and innovation, and make that their primary focus because they need to focus on production and operation as well.
(3) What is a Chaebol? What are some of the corporate governance challenges the Chaebols face? What are some of its advantages and disadvantages and what are some changes that American activist investors such as Elliott Management pushing for?
Chaebols such as Samsung are family-owned business conglomerates that dominate South Korea’s export-driven economy. They are typically built on one large corporation, though some are comprised of several smaller groups sharing the same name. Chaebols tend to be distinct in terms of corporate governance from other organizations in Asia. Many chaebols have experienced rapid growth and expansion on account of top-down decision-making from founders who are widely popular and charismatic. On the other hand, one of the main limitations of such tightly controlled top-down management is that senior managers can sometimes lack the proper skills, especially in the absence of the direction of their higher-ups. Lee Jae-yong who is a son of Lee Kun-hee that suffered a heart attack in 2014 which left him incapacitated, holds a relative small stake in Samsung Electronics, which is key to running the entire conglomerate. Activist shareholders such as Elliott Management are pushing to restructure the Samsung conglomerate to provide more transparency in its governance structure, and to break open the tight grip that some Korean families have over the chaebols, despite the small share holdings.
(4) South Korea has been rocked by scandal exposing long standing nexus between industry and politicians. Do you think reform will happen? Why? Why not?
Lee Jae-yong was involved in a political scandal in 2017. Prosecutors accused him of bribery, embezzlement, and perjury. In his case, prosecutors allege that he sought South Korean President Park Geun-hue’s support and influence in a controversial merger of two Samsung affiliates. Lee hold only 0.6 percent share in Samsung, and he needed the merger to go through to generate cash that was much needed. He also needed to strengthen his hold on Samsung Electronics in order to insure the smooth leadership transition. He also needed the cash to deal with the inheritance taxes relative to his share of Samsung. He turned to President Park who influenced Korea’s National Pension Service to cast the deciding vote in favor of the proposed merger within the Samsung conglomerate. The National Pension Service obliged, even though it was losing money in the transaction. In order to ensure a good relationship between politics and business in South Korea, Samsung made a $38 million “donation” to foundations that were held by a close friend of the president. I think that reform will happen, because the public is fed up with white-collar crime. South Korea’s unique blend of business, politics and top-down hierarchical management is looking increasingly untenable in a modern age of innovation, public dissatisfaction with the old order and cutthroat competition from China and the rest of the world. Because of this scandal, growing public perception is that the country’s business elite are in it only for themselves. The ensuing scandal threatens to topple South Korea’s government and lead to tougher moves against big business here.
(5) Why is Samsung Electronics encountering problems selling its flagship line of phones - Galaxy? How should the company compete against Apple and low cost leaders such as Oppose and Micromax. Do you think Samsung will make a comeback with its Galaxy line of phones? Why? Why not?
The new Samsung Galaxy Note 7 was introduced in the summer of 2016, and people loved it. However, just a few days after they launched it, reports of explosions and fires that the new smartphone was experiencing started to circulate in the media. Samsung blamed a faulty battery from a specific supplier. They decided not to use the same supplier anymore, and they replaced all the batteries. That didn’t solve their problem as there were more reports about explosions after they replaced the batteries. That resulted in banning these phones from flights. Samsung announced that they will stop with production and selling of Note 7 in October 2016. This bad reputation is one of the reasons that Samsung had problems with Galaxy phones. Another reason is that Samsung has been following its one strategy, “follow first, innovate second”. Following this strategy, the company has been copying the best features of the competitive products into their products. Galaxy series was one such product. Customers preferred Samsung’s smartphone initially, innovative products from Apple, and low cost products from Micromax and Oppose appealed to customers more. I think that they can make a comeback if they abandon the strategy “one size fits all”, offering Galaxy for all segments of the mobile market. Samsung may launch a range of smartphones that has distinct value proposition for each segment of the market.
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