1. Does Samsung have a competitive advantage? If so, how are they creating added-value
compared to industry competitors?
b. Propose potential explanations for the higher WTP/P and/or lower C/WTS of Samsung.
(Recall that with Walmart we discussed the squeezing of suppliers vs. more efficient
operations as potential sources of their low cost advantage, while in Zara, we talked about
higher quality garments vs. faster response as possible drivers of their WTP advantage.)
Based on your analysis of the activities of the firm, and data from the case, what is the most
important driver of Samsung’s WTP/P and/or C/WTS advantage?
Samsung has a clear competitive advantage over their competitors in the DRAM and SRAM marketplaces
due to the fact they are able to sell their products at a higher price than the market while they are able to
produce their products at a lower cost than their competitors. In the emerging Flash market Samsung is
also forging ahead of competitors, including its closest rival Toshiba. While Samsung is unable to charge
a premium for their Flash products, average of $9.48/unit to Toshiba’s $9.51/unit, Samsung has relied on
its more efficient cost structure in order to produce its products at a significantly lower price due to
savings from labor and raw materials. Producing the Flash products at a lower unit price, $3.28/unit
compared to $4.55/unit at Toshiba, will allow Samsung a competitive advantage due to its ability to sell
their products at a significantly lower price and still have profit available. Samsung is able to have a two
prong offensive in its competitive advantage, both a higher WTP in certain product lines, and most
significantly a lower cost structure and WTS factor. In order to understand Samsung’s competitive
advantage both lower Cost/ WTS and higher WTP need to be analyzed.
FIGURE 1: Global DRAM Market1 (256Mbit equivalent)
Differences in
Value Stick
ΔWTP: +1%
Premium
WTP
Price
WTP
Cost
$5.70
$5.68
Industry Av.
Op. Loss:
($0.74)
ΔPrice2:
+$0.72
Samsung’s
Op. Profit:
$1.37
Cost
Industry Weighted
Average
ΔCost2:
+$1.39
$4.96
Price
$4.31
WTS
Same WTS
WTS
Notes: (1) Graphs without scale
(2) Difference between Samsung - Competitor (+ sign means additional Operating Profit for Samsung related to Competitor)
FIGURE 2: Global SDRAM Market1 (256Mbit equivalent)
Differences in
Value Stick
Industry Weighted
Average
ΔWTP: +1%
Premium
WTP
WTP
$5.61
Price
$5.19
2
Samsung’s ΔPrice :
Op. Profit: +$0.61
$1.04
ΔCost2:
+$1.45
Industry Av.
Op. Loss:
($1.02)
$4.59
Cost
WTS
Cost
Price
$4.15
Same WTS
Notes: (1) Graphs without scale
(2) Difference between Samsung - Competitor (+ sign means additional Operating Profit for Samsung related to Competitor)
WTS
FIGURE 3: Global Flash Market1 (512Mbit equivalent)
Differences in
Value Stick
WTP
Price
$9.48
ΔPrice2:
($0.03)
$9.51
WTS
$3.28
Price
Toshiba’s
Op. Profit:
$4.97
Samsung’s
Op. Profit:
$6.20
Cost
WTP
Same WTP
ΔCost2:
+$1.27
$4.55
Same WTS
Cost
WTS
Notes: (1) Graphs without scale
(2) Difference between Samsung - Competitor (+ sign means additional Operating Profit for Samsung related to Competitor)
Lower Costs:
The most important driver of Samsung’s value generation is its cost effectiveness. An analysis of
company’s financial and operational activities reveals that it has created most of its value through
efficient performance at the lower end of the value stick model i.e., the C/WTS.
Samsung has mostly generated value through leveraging its vertical integration and investment in
innovation
Collocation: Success in semiconductor industry depends on the synergy between design and process.
Samsung achieved this by collocating production and design centers in Seoul while its main rivals failed
to do so. Collocation of R&D facilities near Seoul saved Samsung 12% on fab construction.
Labor Cost: Samsung managed per unit labor cost more efficiently (Figure x) than did its major
competitors which contributed to the bottom line of the company. Samsung’s average relative labor cost
was 57.4% of its major rival Micron.
Raw Materials: Raw materials cost also played a major role in value generation as Samsung’s cost were
less than those of its competitor. Samsung was a global volume leader in memory chips production, hence
had the ability to negotiate better rates from the supplier that contributed to lowering WTS.
2.5
2
1.5
1
0.5
0
Samsung
Micron
Infineon
Hynix
SMIC
Figure: Cost of raw materials for memory vendors.
WTP is higher, why?:
Product Premium: Memory products are considered commodities, but Samsung was able to capture
premium price because of its high product quality, superior reliability, and customized products.
Company designed high end products and customized designs using advanced process technology to
increase WTP. For example in 2003, Samsung was using 0.11 micron technology while its competitors
were using 0.13/0.14 micron technologies which were one or two generations back, a competitive edge
for Samsung that contributed to the P/WTP end of the value stick.
In the DRAM market (FIGURE 1) and SDRAM market (FIGURE 2), Samsung is able to charge 17% and
12% more, respectively, compared to the industry average due to superior product customization, faster
time-to-market, and stronger brand recognition.
R&D: Samsung’s competitive advantage also stems from its heavy investment in R&D and new product
development. In 2003, Samsung invested ~60% more in R&D than all their closest competitors
combined. In the fast-changing semiconductor industry, innovation allows for Samsung to have a firstmover advantage and it also introduces switching costs to consumers.
While Samsung, per unit, spent less on R&D than did its competitors, this information is rather
misleading because of the large volume that the company sold which in essence lead to more spending in
absolute term than in relative term (Figure x)
Samsung ($500 million)
Micron ($377 million)
Infineon ($359 million)
Hynix ($318 million)
SMIC ($55 million)
It is rather this significant commitment to innovation, in combination with management’s strategic vision
for the company that ultimately generated value for the company. Samsung consistently employed diverse
and talented pool of engineers. In its early days, Samsung did not have the technological skills to design
memory chips, but it went around the world searching for the necessary technological skills to design
memory chips; such persistence and dedication added value to the company in the long run.
Samsung’s competitors relied on industry alliance in geographically distant locations for production while
Samsung had it in one location, a tremendous advantage for semiconductor industry. This is rather a key
factor for success in semiconductor business because design engineers must communicate with
production folks to efficiently integrate technological innovation and production together to create
synergy. Samsung was very successful in creating synergistic value through vertical integration while its
competitors’ failed to achieve that level of success.