The Success Story of Samsung: Competitive Strategy, Business Climate and Innovation

Samsung’s Competitive Strategy

Samsung Electronics, the flagship company of South Korea’s Samsung conglomerate, is a company most competitors in the electronics sector fear from Nokia, which has seen Samsung mobile phones grab market share to become the number 2 globally, to flatscreen TV makers who envy Samsung’s number 1 position. It has overtaken prestigious Japanese rivals such as Sony, which have struggled in recent years.

Its chief domestic rival, LG, which is older and larger, has seen its share of the TV market overtaken by Samsung. In a country that comes near the top of league tables for its depth of engineering education, the brightest and most talented graduates aspire to join Samsung. It has built a global reputation as a quality brand, although ‘Korean’ is hardly equated with ‘German’ in brand image. The brand seems to have remained untarnished despite the fact that its CEO, who has driven its global strategy, has been convicted of corruption and recently served a two-year jail sentence, returning to the helm only in 2010.

Samsung’s success has rested largely on the vision of its founder, Lee Byung Chull, which, since his death in 1987, was enhanced and revised by his son, the current CEO, Lee Kun-Hee. Although more court cases for financial irregularities continue, it is likely that the second Mr Lee’s son will take over to carry on the family empire. And ‘empire’ is the best way to describe the conglomerate, or, in Korean business terms, chaebol.

From its founding in 1938, Lee B.-C. built the family fortunes on a range of businesses, from commodities to insurance. The electronics business dates from 1969, and was perhaps out of line with the others. With no background in technological industries, the company had to acquire technology while also seeking to build its own innovation capacity. A valuable asset was close ties with the government and friendly state-owned banks able to lend money cheaply.

It thus manoeuvered to buy technology from foreign competitors. During the 1970s and 80s, when South Korea enjoyed rapid economic growth, Samsung was able to expand in a protected domestic environment where it could make the most of its government links, and where foreign competitors were barred.

A turning point for Samsung came in 1978, when, again with little technological background of its own, it entered the semiconductor industry, manufacturing low-cost memory chips. With the intervention of the government, it obtained foreign technology from companies in the US and Japan, in return for access to the Korean market.

Samsung went on to become the world’s biggest producer of memory chips, used by computer manufacturers everywhere. It had produced its first TV in 1969, and was able to build up manufacturing capability in its protected home market, but aspired to become a global leader in TVs. Its first European assembly plant was opened in Portugal in 1982. Samsung’s reputation for innovation rests heavily on the priorities of Lee K.-H., who, when he took over as CEO in 1987, invested heavily in R&D. Between 1987 and 1992, the company’s profits more than doubled,  and much of this money was ploughed into R&D, including buying firms to acquire their technology.

Although the company’s fortunes foundered in the Asian financial crisis, it has relied on its semiconductor business to sustain its financial position. In this respect, it differs from rivals such as LG. For a company in a sector that relies on innovation for competitive advantage, it is perhaps strange that the production of chips, which has now become commoditized, should be crucial. LG sold its chip business in 1999 after the Asian crisis.

With fanfare appropriate for royal status, Samsung executives unveiled its new memory-chip plant near Seoul in 2010. The global fall in memory- chip prices, however, is causing the company to rethink its strategy once again. Another cloud on the horizon is that financial irregularities might threaten the Lee family’s control.

1. What are the main elements of Samsung’s competitive strategy?

2. How has the business climate in South Korea aided Samsung?

3. What is Samsung’s innovation strategy, and why has it been so successful?