Competitive Strategy Samsung Electronics Samsung has a clear cost advantage over its competitors
We have identified the following key sources of cost advantages: Economies of learning, production techniques, input costs and residual efficiency. Economies of learning Samsung has demonstrated economies of learning. While in the 80’s Samsung had to acquire outside technology to begin production, Samsung soon lead industry with important breakthroughs such as “stacking” technique or successes in implementing the 8- and 12-inch wafer mass production. 12-inch wafer versus its predecessor yields a 10% lower cost per chip (Exhibit 10a) thanks to a greater output per step of production. Production ...view middle of the document...
We have not included economies of scales as a source of advantage because we do not know actual capacity of current fabs. Nevertheless, we do consider than any capacity that Samsung might be losing because of its flexible production line might be compensated with the savings of concentrating plants (the case states 12% of fab’s construction costs).
Samsung is also able to charge a price premium
The company’s ability to charge a price premium driven by 3 factor: technologically advanced products, high product reliability and availability. In the period 1Q00 to 1Q04, this price premium was 34% on average, and varied between 11% (3Q03) and was as high as 75% (1Q01).
Samsung Price Premium over competitors (%)
80% 60% 40% 20% 0% 1Q00 2Q00 3Q00 4Q00 1Q01 2Q01 3Q01 4Q01 1Q02 2Q02 3Q02 4Q02 1Q03 2Q03 3Q03 4Q03 1Q04 Figure 1: Samsung ASP vs competitors ($)
High-Tech Products Figure 1 shows two trends regarding Samsung’s price premium relative to competitors. Firstly, the price premium follows a downward trend. This is mainly due to a declining market for SDRAM starting in 1999 due to the rise of flash memory, and competitors, such as Micron Technology (SDRAM represented 96% of sales) increasingly focusing on the SDRAM segment. Secondly, the price premium varies within the years. Although the information provided does not state exact dates of new generation product launches, case exhibit 6 shows that 2001 and 2003 mark the launch of the 512 and 1Gbit SDRAM chips respectively. According to figure 1, Samsung was able to increase its price premium in both those years which suggest that it was at the forefront of these new technological launches. High Product Reliability Samsung is known for its high product reliability and quality, and OEM’s are willing to pay upwards of a 1% average price premium for a reliable supplier which might explain a portion of the average price premium of 34%. Moreover, Samsung actively sought to customize its products around a core design, which allows it to better adapt to changing product requirements from emerging application such as personal game players. Suppliers might value this ability to customize products, and for lack of substitutes, be willing to pay a premium. This ability is enabled by Samsung’s highly trained R&D engineers who are collocated with the production engineers to maximize knowledge sharing problem solving skills. High Product Availability Samsung offers 1200 product; given that SDRAM products were conventionally thought of as commodities, the ability to produce 1200 different varieties was unprecedented. As the bulk of the industry’s production capacity focuses on the mainstream SDRAM chip (256Mbit), the ability to provide a large variety of memory products might also explain an increased willingness to pay.
Low cost and high prices translate into higher than average profit margins
% Operating Margin (avg 1Q2000-1Q2004)
Hynix Infineon -13% Micron Samsung 44% 6% 6%