Samsung Electronics Innovation Dilemma

Samsung Electronics Innovation Dilemma

By
James Jung
(363183)

Trinity Western University

MBA 571: Operation Management
Instructor: Dr. Mark McKay
November 5, 2016

Samsung Electronics Innovation Dilemma

INTRODUCTION
Innovation is very important for companies regardless of the type of industry they are
belong to, the size of the company, the number of employees, and types of products they have,
because it significantly affects the future of the company. Especially, the effect of innovation
becomes greater in the industries that are competitive and change fast such as the electronic
industry. The electronic companies spend a tremendous amount of money for R&D investment in
order to produce innovative products that satisfy the demand of the consumers. The companies
that failed to innovate themselves can shut down anytime regardless of how long they have been
operated in the market. For instance, Nokia was one of the largest mobile phone companies in
terms of volume, sales, market share and profit in the 1990s and early 2000s, but it lost its
market position in a short term because it failed to make the transition to the smartphone market
in the early 2010s (Bouwman, et al., 2014). In contrast, Samsung Electronics was known as the
electronic company that manufactures cheap and decent quality products until 1990s (Seongjae,
1999). However, now, it is not only the largest electronic company in Korea, but also the leading
global company in the world. It is considered as a company that manage to go beyond mere
imitation of global competitors, leverage resources, accelerate the pace of organizational learning
and manage to attain seemingly impossible goals (Alston, 1989). By widening product line
ranges from components to smartphones, semiconductor, TV, LCD and LED display, SEC has
been experiencing a successful growth in highly competitive environment. For this reason, many
companies around the world refer SEC as the benchmark in development of business strategies.
However, Samsung Electronics is currently experiencing a biggest risk in its history, which is
called, Galaxy Note 7 crisis and its reputation as an innovative technology company has
suffered. According to CNN (2016), it forecasts that Samsungs expected losses from the Galaxy
Note 7 catastrophe will be above $5 billion dollars (Samsungs losses from Note 7 mounting).
How the innovation lead Samsung Electronics to be successful and to crisis situations can be
observed and analyzed through the book called, The Innovators Dilemma When the New
Technologies Cause Great Firms to Fail written by Clayton M. Christensen.

Samsung Electronics Innovation Dilemma

BRIEF OVERVIEW OF SAMSUNG ELECTRONICS AND ITS

HISTORY
The global electronics market can be characterized with intensified competition, shortended product life cycle, and reduced trade barriers. In this fast business environment, companies
aggressively try to obtain and maintain their competitive advantages. This competitiveness
becomes more apparent in high technology industry such as communication, computers, and
consumer-electronics. Samsung Electronics Company (SEC), founded in 1969, is not only
known as the largest manufacturing company in South Korea, but also one of the leading global
competitors worldwide (Seongjae, 1999).
Samsung Electronics is a multinational company headquartered in Geyonggi-do, South
Korea and has divisions in Asia, Europe, and North and South America (Seongjae, 1999).
Samsung Electronics originally produced televisions and then, expanded its product lines to
household appliances such as refrigerators. SEC expanded its operations to the United States,
Portugal, France, and China by forming a joint venture and building its plants in order to become
a global electronics company (Seongjae, 1999). After it introduced monochrome television sets
in 1971, SECs revenue has increased on average 38 percent a year (Seongjae, 1999). Due to the
success of home appliances and simple consumer electronics, SEC expanded its product lines to
communication equipment, computers, and semiconductors (Seongjae, 1999). SEC formed
strategic alliances with Microsoft, IBM, and Yahoo; while it formed a joint venture with Sony
and Toshiba.
In 2011, the sales of Samsung Electronics exceeded 165 trillion Korean Won (US $150
billion), a 7% increases over 2010. According to Samsung Sustainability Report (2010), it
employed 190,560 employees directly and 8,000,000 globally through subcontracts in 2010.
Currently, SEC is the worlds biggest suppliers for digital CDMA phone hand-sets with 28% of
the market share and leading producer of DRAM (Dynamic random access memory) chips and
SRAM (Static random access memory) chips, LCD TVs, and computer monitors (Kim, 2007).
This is a great achievement because those markets were dominated by the foreign competitors

Samsung Electronics Innovation Dilemma

such as US, Europe and Japan. This clearly shows that a business initial resource endowment is
not a good predictor of future business success.
In the next ten years, SEC is planning to increase the market share in the new potential
markets such as solar panels, energy-saving, LED lighting, medical services, batteries for electric
cars, and biotech drugs by aggressively investing about $20 billion (Korea Associates Business
Consultancy, 2012). SEC believes that demand of these products in emerging markets will be
increased significantly, and the continuous investment would give them the benefit of lowering
costs. Moreover, SEC predicts that the sales of the new areas will be reached to $400 billion by
2020 (Korea Associates Business Consultancy, 2012).

SAMSUNG ELECTRONICS INNOVATION

SEC has changed their strategies for several times based on their position in the market,
which help SEC to become one of the most innovative electronic companies in the world. In the
1970s and 1980s, SEC was known as a company that catches up Western and Japanese
companies, so it was easy for SEC to design the strategic planning of what they have to do and
how to do them (Yu, 1999). For instance, in the 1970s, SEC used the best pricing strategy to
win the market by focusing on the advantage of low cost production. Then in the 1980s, they
changed their strategy to manufacturing efficiency and competence to develop competitive
advantage in the quality (Yu, 1999). By mid 1990s, SEC caught up major industry competitors
with high technological advancement, and now SEC is a global market leader in various major
market segments. During the technological development, SEC has changed its strategic planning
from what they used to use before (Yu, 1999). For example, SEC currently has 8 different
business segments in order to maintain market competitiveness such as display, mobile
communications, printers, system LSI, mass storage, and air control system (Yu, 1999). In other
words, SEC diversified their business horizontally and its strategic planning has changed into
providing innovative technologies and products continuously in these areas (Yu, 1999).
Moreover, SEC developed strategic planning with emphasizing technological leadership in its
business operation (Yu, 1999). However, SEC still uses the original strategic intent that
emphasizes on becoming a major global competitor in the global market since the beginning of
its existence.

Samsung Electronics Innovation Dilemma

Samsung Electronics uses two approaches to achieve competitive innovation. The first
approach is to build layers of advantages. It focuses on continuous expansion of competitive
advantage from low wage costs to adding global brands. This approach has been used by SEC
continuously for past three decades. Due to the poor resources endowment, SEC set up initial
strategic platform for growth (Yu, 1999). In 1970s, SEC focused on catching-up the foreign
competitors in Western countries and Japan by investing in production systems, technology, and
knowledge (Yu, 1999). SEC initially targeted on television segment, but it was at the declining
stage. However, SEC took advantages of its abundant labor force and cheap labor costs, then
introduced color television sets, and it was very successful. In 1980s, SEC narrowed the
technology gap from competitors by producing VCRs and microwave ovens that were at growth
stage. In 1990s, SEC successfully moved into DRAMs and DVD industry which were at the
introductory stage (Savage, 2005). During this period, SEC used pricing strategies accordance to
its position in market. It means that SEC was considered as low end and low quality producer
because SEC was depended on the low price strategy. It decided to change itself from a lowprofile manufacturing-oriented company to a marketing-oriented company after they realized the
importance of changing its brand and corporate image in the global market. In 2001, SEC
significantly increased its marketing budget by 30%, which is about $400 million, in order to
raise SEC brand equity in the world (Savage, 2005).
The second approach that SEC used to achieve competitive innovation is to use
collaboration, which is observing competitors strengths and weaknesses. Initially, SEC entered
the consumer electronics market with limited technology and data. Therefore, SEC decided to
form the licensing agreements with foreign companies such as Philips and Toshiba that has
several patents, manufacturing rights, technology and data. In order to redeem its weaknesses,
SEC decided to conduct the following actions:
1) Strategic alliance with other competitors to obtain technology improvement and
development. For instance, SEC made technology sharing arrangement with Siemens,
Motorola, and Toshiba (Samsung, 1996). Since 1990s, SEC was able to form strategic
alliance on a more equal basis while removing the companys image as a junior
partner (Hobday, 1997).
2) Acquisition of companies in advanced countries that has high technology and talented
labor forces.

Samsung Electronics Innovation Dilemma

3) SEC launched Samsung Institute of Advanced Technology (SAIT) centre in 1987,

which is a central R&D facility. There are three major roles of SAIT by organizing
and checking: 1) R&D contribution to business performance; 2) R&D efficiency and
speed; 3) the quality and quantity of patents that SEC owned (Samsung, 1996).

GALAXY NOTE 7 CRISIS

Due to the aggressive investment on R&D and innovative products, Samsung Electronics
has been successfully dominating the global smartphone market with Apple, since it initially
launched first smartphone, Galaxy S, in June 2010. It increased its market share by 34% in the
global mobile market. The mobile division is the most important divisions in SEC that generates
major amount of revenue, as it generated 55% (27.60 trillion KRW) of the total revenue (49.78
trillion KRW) in Q1 2016 (Samsung Electronics, 2016). However, the nightmare started when
the SEC ambitiously released its Galaxy Note 7 in September before the release of iPhone in
order to protect its market share from Apple. Initially, Galaxy Note 7 was reviewed positively
and favoured by numerous analysts, customers, and media, as the most innovative smartphone in
the history. However, it was found out that the devices have serious a battery defect. An official
investigation revealed reports of 13 burns and 47 reports of property damage caused by the
defects of Galaxy Note 7 (Gadgets 360, 2016). Due to continuous explosion of devices, Samsung
Electronics was forced to discontinue the production of its latest flagship Galaxy Note 7
smartphones and recalled every device that has been sold. According to CNN, it forecasts that
Samsungs expected losses from the Galaxy Note 7 catastrophe will be above $5 billion dollars.
The economic loss can be greater, including the damage of brand image and reputation, and the
opportunity cost (Samsungs losses from Note 7 mounting). How would this happen to Samsung
Electronics which is one of the most innovative companies in the world?
The answer can be found by reading a book called, Innovators Dilemma, written by
Christensen. He proposed a framework of what he called principles of disruptive innovation.
These principles are significant for managing innovation as managers decision to against these
principles often leads companies to failure. Understanding these principles of disruptive
innovation enables managers to manage even most difficult innovations in effective ways
(Christensen, 1997). The last two principles of Christensen clearly shows the fundamental
reasons of Note 7 crisis.

Samsung Electronics Innovation Dilemma

The fourth principle is that an organizations capabilities define its disabilities.

Christensen illustrates that the bigger the company is, the harder to slower their response before
(Christensen, 1997). Samsung Electronics is one of the biggest electronics companies in the
world, as it has approximately 370,000 employees and 80 affiliated companies (Samsung
Electronics, 2016). It is difficult for Samsung to readily define its disabilities. Unlike Apple,
Samsung Electronics manufactures most components of its products through its affiliated
companies. In case Note 7, Samsung Electronics designed it, and Samsung SDI supplied the
batteries for Note 7. This is the reason that Samsung Electronics failed to detect the problems
with batteries produced by its affiliated company.
The last principle is technology supply may not equal market demand (Christensen,
1997). As the smartphone market becomes extremely competitive and saturated, the producers
feel the greatest pressure than ever to produce innovative and creative products in order to
protect their market share. Samsung Electronics also experiences a huge pressure for protecting
its market share from Apple and Chinese companies. When SEC released Note 7, it was observed
that SEC tried to put as many functions as customers demanded, including an iris scanner, waterresistance, higher resolution screen, luxurious/slim design, and increased battery capacity. Some
analysts suggested that Samsung Electronics did not have enough technology to include all these
functions in one device.
Innovation is very significant tool for companies regardless of the type of industry they
are belong to, the size of the company, the number of employees, and types of products they
have. The case of Galaxy Note 7 crisis clearly shows that it is very difficult for companies to
achieve suitable innovation regardless of how long they have been operated in the market. A
book, The Advantage-Maker, explains that great leaders see opportunities where others see only
problems. Samsung Electronics is currently facing a huge problem, but if they solve this problem
wisely and effectively, it would be a great opportunity for them to innovate themselves greater
than ever before.

Samsung Electronics Innovation Dilemma

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