WEBSTER UNIVERSITY,SUMMER 2012

Samsung Analysis
Managerial Economics

Egzon Burri, Orkhan Maharramov and Srdjan Jankovic

7/13/2012
TABLE OF CONTENTS

Company Overview........................................................................................................................................................4

Samsung Core Business .............................................................................................................................................5

SAMSUNG Products ...................................................................................................................................................7

Competition/Market ..................................................................................................................................................8

Suppliers ..................................................................................................................................................................10

Customers ................................................................................................................................................................10

Porter’s five forces .......................................................................................................................................................11

Threat of New Entrants ...........................................................................................................................................11

Bargaining Power of Buyers .....................................................................................................................................12

Bargaining Power of Suppliers .................................................................................................................................13

Threat of Substitutes ...............................................................................................................................................13

Industry Rivalry ........................................................................................................................................................14

Utility ...........................................................................................................................................................................14

Utility of Form ..........................................................................................................................................................14

Utility of time ...........................................................................................................................................................15

Utility of Place ..........................................................................................................................................................16

Diminishing Marginal Utility ........................................................................................................................................16

Law of Marginal Utility ................................................................................................................................................17

Practical use of Law of Diminishing Marginal Utility ...................................................................................................18

Assumptions of Law of Diminishing Marginal Utility ...............................................................................................19

Limitations of Law of Diminishing Marginal Utility ..................................................................................................19

Diminishing Marginal Utility applied to Samsung ....................................................................................................20

Demand .......................................................................................................................................................................21

Determinants of Demand ............................................................................................................................................24

Price of the good .....................................................................................................................................................24

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 Complementary and Substitute Goods ...................................................................................................................26

Income .....................................................................................................................................................................29

Wealth .....................................................................................................................................................................31

Fashion, Trends and Preferences .............................................................................................................................32

Future expectations .................................................................................................................................................33

Advertising ...............................................................................................................................................................35

Size of the market ....................................................................................................................................................36

Price Elasticity of Demand ...........................................................................................................................................37

Determinants of Price Elasticity of Demand ................................................................................................................38

Substitutes ...............................................................................................................................................................38

Time .........................................................................................................................................................................40

Functionality of the Good ........................................................................................................................................40

Necessities and Luxuries ..........................................................................................................................................42

Comparative Size of Expenditure.............................................................................................................................43

Relative Permanence of Satisfaction .......................................................................................................................44

Supply ..........................................................................................................................................................................45

Determinants of Supply ...............................................................................................................................................47

Price of good or service ...........................................................................................................................................47

Price of related goods or services ............................................................................................................................48

Price and availability of inputs .................................................................................................................................49

The Level of Technology ..........................................................................................................................................52

Expectations of suppliers .........................................................................................................................................53

Joint supply ..............................................................................................................................................................55

The number of firms that supply the market ..........................................................................................................56

Price Elasticity of Supply ..............................................................................................................................................57

Determinants of Price Elasticity of Supply ...................................................................................................................58

The rate at which cost per unit rises as output increases .......................................................................................58

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 Time for suppliers to react to price changes ...........................................................................................................59

Current capacity usage ............................................................................................................................................61

Flexibility of production systems .............................................................................................................................62

Selling in different markets ......................................................................................................................................64

Law of Diminishing Marginal Returns ..........................................................................................................................66

Law of Diminishing Marginal Returns applied to SAMSUNG ...................................................................................67

Competition .............................................................................................................................................................69

Economies of Scale ......................................................................................................................................................69

Conclusions and Recommendations ............................................................................................................................71

Work Cited ...................................................................................................................................................................73

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COMPANY OVERVIEW

Founded in 1939, Samsung is one of the leading companies in the electronics market
with 206 offices and facilities in 68 countries globally. The company was founded by Lee Byung-
chull in a small city of Korea named Taegu operating as an export company (About Samsung-
History, par.1). Samsung has grown to become one of the most successful electronic companies
with a main focus on digital media and appliances, memory, semiconductors, and system
integration. Its profile is one that many companies would like to possess. Throughout the years,
the company expanded its product lines and grew its market share and profits. The company is
headquartered in Seoul and operates in over 100 countries across the world (About Samsung-
History, par.3). Samsung’s profile for 2011 shows that the company closed a very successful
year achieving 220 billion euro revenue, and employing 344 thousand people all over the world.

Fig.1 Samsung Profie– About Samsung

The strength and success of the company lies in its innovative and reliable products, talented
staff and employees, and responsible approach to business and global citizenship which are
shaping the world in completely new directions. The corporate philosophy is about making a
better world and enriching people’s lives in several manners. Their values are also important
factors which shape their performances and play a critical role to their business
(Values&Philosophy, p.1).

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Their working philosophies accompanied by strong values create their business principles which
are represented below.

Fig.2 AboutSamsung-Values&Philosophy

Samsung has its roots also in other types of businesses rather than electronics. This corporation
is comprised of many companies that are setting new life standards from electronics up to
petrochemicals.

SAMSUNG Core Business

Samsung’s business is separated into Set Business and Component Business. These two
portfolios create the Samsung products which had already taken our lives beyond the ordinary
(Business Area, par.1).

The Set Business is mainly comprised of Mobile Phones, Personal Computers, MP3 Players, and
the key driver in this portfolio TV Business. The Mobile Phones section of this portfolio is one of
the most successful ones especially over the last years. In this section, the company had lead
the standardization of mobile-phones technologies such as Mobile-WiMAX and High Speed
Downlink Packet Access (HSDPA) (Business Area, par.4). The TV Business is another key driver in
this portfolio. LED TV’s and LCD TV’s have maintained top positions in the market leaving now

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the road to further innovations such as 3D (Business Area, par.4). Other sections which seem to
contribute positively in the Set Business Portfolio are Printer and Camera which are being
developed even further with the most innovative technologies. Some of the products of this
portfolio are the ones listed below:

(LED TV-Samsung) (NOTE Pc-Samsung) (SGH-A867 Eternity-Samsung)

(TL 320-Samsung)

The second portfolio is Component Business which is a leader in memory and LCD
markets in product and technology development. This portfolio is divided into semiconductors
and LCD. The Semiconductor Business is divided even further into Samsung Memory Division,
System LSI Division, and Storage Systems Division (Business Area, par8-9). The System LSI
Division manufactures logic and analog integrated circuit devices. The Storage Systems Division
is a leader in producing high-capacity and high-performance hard disks for notebook and
desktop PCs, digital camcorders, MP4 players and other similar products (Business Area, par.9).

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SAMSUNG Products

The company is focused exclusively on the consumer electronics segment and given its
competitive edgeit has managed to garner the maximum market share for itself.As mentioned
above, Samsung Corporation manufactures a wide range of products which include different
industries such as electronics, machinery&heavy industries, chemical industries, financial
services and the like (2011 Sustainability Report, p.7). All these share a commitment to creating
high quality products which will create better life conditions for people and businesses.
Samsung still remains at the forefront of the digital revolution in which they contributed by
continually developing new products that not only meet the customers demand, but also
anticipate it.

Fig .3

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Because of the wide range of products that Samsung manufactures, our main focus will be in
these products, specifically on Mobile Phones and TV’s as they represent the main source for
the firm profits (2011 Sustainability Report, p.12). The chart below summarizes that the two
most profitable sections of Samsung Corporate are Digital Media and Telecommunications.

Fig.4

COMPETITION/MARKET

Samsung provides a product range that is marked by a high quality and high
responsiveness to consumer needs and preferences. This advantage puts the company at
forefront when compared to its competitors. With the initiation of innovative and unique
products, Samsung took the market by storm and managed to gather the maximum market
share. The table below summarizes the global market share of Samsung in comparison with its
competitors representing the success of the firm.

Samsung's Global Market

Products Competitors Year
Market Share Share

DRAM 34.3% Hynix 21.6% Q1 2009

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NAND Flash 40.4% Toshiba 28.1% 2008

Large-size LCD Panel 26.2% LG Display 25.8% 2009 February

PDP panel 30.5% LG Display 34.8% Q1 2008

Active-Matrix OLED 90.0% LG Display - Q2 2008

Lithium-ion battery 19% Sanyo 20% Q2, 2009

LCD Monitor 16.1% Dell 14.6% 2008

Hard disk drive 9.5% Seagate Technology 34.9% 2007

Multifunction printers 16.4% HP 19.2% Q1 2009

Q3'09 Revenue
Television sets (LCD, PDP, CRT) 23% LG Electronics 13.7 %
Share

French door refrigerator (U.S. market

18.79% Whirlpool 23.83% 2009 January
only)

Mobile phone 21% Nokia 37.8% Q3 2009

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Digital camera 9.1% Canon 19.2% 2007

Daewoo Shipbuilding &

Drillship 80% 20% 2000~2007
Marine Engineering

(Samsung Ranks #1 for Preliminary Worldwide LCD Monitor Market Share for Q1'08, p.1)

SUPPLIERS

For Samsung partner companies are an important asset that help the company generate
profits and operate successfully. The company carries several activities with which they help
and collaborate with their partner companies in order to create a stronger and more
competitive operating market. A strong supplier network is one of the factors that rank
Samsung as one of the top 6 worldwide most successful electronic companies (2011
Sustainability Report). Because of the crucial role that suppliers hold, Samsung has developed a
program known as “Seven Key Program for Mutual Growth” which is intended to strengthen
the ties between suppliers and the company, foster strong partnerships and enhance mutual
competitiveness (2011 Sustainability Report, p.2). Samsung has a lot of resellers around the
world. Some of the most companies that have this position are: A.J Madison, B&S Enterprises,
Atlantic Appliance,Inc., Bradley M Griffin, Best Buy, Casa Linda, Audio Enteriors, Dan’s
TV&Electronics, Dynamic Entertainment, Flowers Radio, Elite Media Solutions, DK Digital
Design, Gerhards, Systems and Excel Media Systems, DWR Inc., House of High Fidelity and much
more (Samsung Authorized Resellers, p.1).

CUSTOMERS

Customers are what make a company function and therefore are very much valued by
all the companies. Samsung pays a special attention to its relationship with customers. Its aims
are to be respected and admired by customers. In order to strengthen the ties with their
customers, Samsung has developed several presumes activities and social network services

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(2011 Sustainability Report, p.2-3). Through these activities tailored for customers, the
company won numerous awards for customer satisfaction. Keeping the customer satisfied is
very crucial to consistent success and profits that Samsung holds. The company aims to provide
products that will fulfill the customer needs. In order to create a better communication chain,
they have created different packages which are composed of different groups of people in TV
products or Mobile Phones products (2011 Sustainability Report, p.74).

PORTER’S FIVE FORCES

Threat of New Entrants

The success of Samsung, its loyalty towards its customers and mostly its distinctive and
innovative products are what make this company be listed in forefront. Because of these facts
mentioned, Samsung has found it very easy to enter in almost every market around the world.
The impact of market entry towards the company is very high because of the ease that
Samsung had when entering new markets. Samsung managed successfully to enter two major
markets such as China and India which had served positively to company’s profile by providing
the much needed volumes for its expansion. Additionally, Samsung has an economies of scale
advantage being one of the major producers of technological products that are not limited to
DRAM’s or semiconductors. As mentioned before, the company stands very loyal to its
customers and their preferences by producing products that satisfy their needs. This makes the
company be even more preferred and trusted by their clients. Several sources rank Samsung as
nr.21 worldwide and this trend is another factor which increases the difficulty of entering in the
market. Hence, a very good brand identity reduces the threat for strong companies such as
Samsung from new firms.

The electronics business requires a lot of effort and especially a lot of money to firstly be
developed and then succeed. To Samsung and any other similar successful company engaged in
such business, it required billions of dollars and a lot of time to achieve the minimum of just
reserving the place in the market, by not mentioning other costs such as operational costs and

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the like. The strong position that Samsung holds today and the high costs for the new entrants
is another factor which makes it difficult to enter such market. To add, a similar factor to capital
costs is the learning curve which seems also to reduce the risk from infant competitors.
Samsung had to learn how to develop such products for a long period of time and spend a lot of
effort to maintain the quality. A plus for this company was that it started in Korea where people
pay a lot of attention to school and education producing very talented engineers known
worldwide. Being composed of such a staff, shortened even more the learning curve for
Samsung and strengthened its roots in this market. Such a strong company in the market
lowers the possibility of any threat that might appear when new companies emerge.

Bargaining Power of Buyers

Based on the composition of this industry, buyers have good leverage when it comes to
bargaining. With so many companies competing in electronics and mobile phones, buyers have
several choices on which they can bargain. Hence, the impact of this power to company is a
little bit high. Since there are so many players in the fray, this market is essentially a buyer’s
market. This can also be reflected in the endless price wars that Samsung is engaged in with
other similar companies. Buyers will easily switch between these prices, choices of products or
features.

One advantage over this for Samsung is that buyers do not switch brands immediately
as first it takes time to adapt and adjust and only in times of complete dissatisfaction is when
switching brands takes place. Switching costs or products can be very high in some cases.
Different packages offered by different companies might affect customer’s choices and
preferences. For example contracts made between a company and a client to purchase a phone
for 2-3 years might affect the other phones on the market which are sold to its real price and
therefore the difference might be higher. But the risk for this choice is higher. For example, if
the customer wants to terminate the agreement before the contract is up, the fees for the
clients might be very large.

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Bargaining Power of Suppliers

The bargaining power of Suppliers for Samsung is relatively limited because of the form
how the company is composed. The fact itself that the company does not produce only mobile
phones or TV’s but many other products mentioned above, makes this element somewhat
limited. For example, there are over a thousand suppliers around the world for different kinds
of parts that the company needs for making the electronic appliances. Given the fact that these
parts are very essential for producing the right product, gives them a unique advantage which
cannot be ignored. Like in any other industry, Samsung depends on its suppliers for timely
delivery of its products and therefore their role is very crucial in company’s success.

However, this element is a little bit different when considering the mobile phone
industry of Samsung. In this case, the bargaining power of suppliers is low since Samsung
supplies its own components most of the time and most of the time supplies its own raw
materials.

Threat of Substitutes

The threat of substitutes is really high for a company like Samsung given the fact in
which industry operates. The propensity to switch to alternative products in response to price
differences is very high. The company needs to be very strong and keep up with its innovations
since the market is characterized by intense competition on a regular basis, introducing similar
products to those of Samsung. Also, the introduction of almost the same products, or better say
“clones” from other competitors, increases the threats for Samsung where the company must
continually produce innovative ideas in order to secure the forefront.

Nevertheless, one advantage over these facts for Samsung is that the customers who
are quality conscious do stay loyal to the company and reduce the threat which comes from
those that are price conscious.

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Industry Rivalry

This is another element that has a huge impact on Samsung because of the presence of
strong competitors like BenQ, LG, Nokia, Apple, Motorola and other. An industry with such
composition goes through an intense competition especially in the emerging markets like India.
From its boom, the mobile phone industry, especially that of smart phones has slowed down
and the competition turned into taking customers from other rivals. The risk is high because
everything seems to be short-lived firstly due to the emergence and fast adaption of new
technologies and second because of the extreme level of competition.

UTILITY

A representation of preferences that consumers have over some set of goods and services in

economics is called utility in economics. Because preferences are transitive, complete and continuous

they have a long utility of representation. Every customer expects to be satisfied by the purchase, and

the products or services that result higher satisfaction received by a customer have higher utility. The

mentioned, factor makes managers be more aware of the competition since customers will thoroughly

asses the product and buy the one that gives more utility. Talking about utility, one should mention

three different types of utility which are form, time and place. To add, manufacturers should try to

deliver a product that will satisfy the mentioned types of utilities and constantly improve them as the

overall product quality will change respectively. ("Investopedia")

UTILITY OF FORM

Utility of form results from changing in the main parts of the product or service. These altering

must be of such shape and composition that they will allow the satisfaction of the required

need. There are some products or services are more in a functional form than other which can

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be produced of better quality. An example of form utility can be wood. Wood can be altered in

order to satisfy different consumer needs, such as furniture, building and construction, paper.

The utility of form has a great significance for Samsung. Using mobile phone phones consumers

can satisfy various human needs such as the ability to access internet and gather information,

to take high quality photos. Samsung enables its users to alter the product from a monitor to a

projector. So, customer using Samsung monitors can present different types of materials on big

screen monitors.

UTILITY OF TIME

This related with the change in the usefulness which happens with the passage of time.

This passage of time can be either seasonal, or more long term changes. The manager of

company should be aware of providing the good and service at the right time for consumer. A

Ramadan Holiday can provide only once in a year, another examples can be winter clothes in

hot countries.

Time utility is so essential for Samsung products. As consumers are able and willing to buy gifts

during the holidays Samsung needs to satisfy demand in order not to lose the market share. In

case Samsung won’t be able to invent new products during the holiday time, the competition

might arise.

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UTILITY OF PLACE

Utility of Place refers to the fact that a product should be useful and useable in its target

location, which most often refers to a specific geographical place and the conditions that are to

be found therein. Utility of Place is a result of producing the product at the right place .It is very

important for the company, and manager might to know the place that operating business at ,

since if you are in a wrong place your products and service will give no utility at all or so little

utility. An example of place utility can be pork meet at Islamic world or a company that

manufactures shipping materials in countries which not bordered by ocean or sea.

In our case place utility is very important factor for Samsung. For example, offering TV monitors

or mobile phones in third world countries which people can watch TV only in restaurants or in

other public places. Sales efforts in poor countries for luxury mobile phones will be very low

because of low wealth level.

DIMINISHING MARGINAL UTILITY

Diminishing marginal utility is one of the important concepts in Economics.The law of

economics means that when a person increases consumption of a product- while keeping

consumption of other products constant- there is a decline in the marginal utility that person

derives from consuming each additional unit of that product. ("Financial Dictionary")

Summarizing this theory, as one acquires additional units of a good the marginal utility brought

about by each additional unit will decrease, and perhaps even become negative. In simpler

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words we could say that if we have more of something, we will attach the less value to each

additional unit we get.

LAW OF MARGINAL UTILITY

The Law of Marginal Utility was coined by a German economist Mr. H. Gossen and it describes

an important tendency of human behavior. Alfred Marshal has restated the law in the following

words: “The additional benefit which a person derives from an increase of his stock of a thing

diminishes with every increase in the stock that already has”. ("Economics")

We can see influence of this on the total utility, or the total value we have, of all of the goods of

that kind we have. The total utility will increase as a result of acquiring more of the good,

however, at smaller increments, until eventually we will have so many of the goods that the

total utility will actually start falling. Both of these relationships shown in the following graphs:

Total Utility
60

50

40
Total Utility
Utility

30

20

10

0
1 2 3 4 5 6 7 8 9 10 11 12
Quantity

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 Marginal Utility
10

6
Marginal Utility
4
Utility

0
1 2 3 4 5 6 7 8 9 10 11 12
-2

-4
Quantity

PRACTICAL USE OF LAW OF DIMINISHING MARGINAL UTILITY

There is a huge practical importance of the law of diminishing marginal utility in economics. The

law of demand and the law of diminishing marginal utility are closely and mutual related to

each other. If the price is fewer than the marginal utility of a commodity it is assumed that the

commodity would be purchased. In order the consumer to continue to buy more successive

units the prices have to fall. It means that the diminishing marginal utility and the law of

demand are inter-related laws. According to the theory, Consumers’ surplus is also based on

the law of diminishing marginal utility, since a consumer while purchasing the commodity

compares the utility perceived from the commodity with the price he would pay.

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ASSUMPTIONS OF LAW OF DIMINISHING MARGINAL UTILITY

The following certain assumptions are realizing the Law of Diminishing Marginal Utility:

 Constant Marginal Utility of Money - According to the theory that MU of money

perceiving goods is constant, we assume that the marginal utility of money changes with

the increase or decrease in income will differ the marginal utility of the specific good.

 Suitable quantity – We assume that the commodity units are not so small. Instead of

decreasing, the marginal utility may increase to a few units if the units are so small.

 Rationality- An important assumption is that customer is being rational.

 No change in the price of commodity – If more units are being consumed then a price of

the commodity should change.

 Constant customs, taste and fashion – There will be a sudden change in taste, custom,

or fashion if the law wouldn’t hold true.

LIMITATIONS OF LAW OF DIMINISHING MARGINAL UTILITY

Rare collection - Diminishing Marginal Utility does not hold true in case of collectors, because

since more they collect, the more they want. For instance, if there are only two unique models

of Rolex watches and you already process one of them the purchase of the second unique

model of Rolex will push up the marginal utility.

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Case of addicts - In the case of addicts the more would person drink the more utility would be

perceived from the following unit.

Application to money – in this case when DMU does not hold is the degree of accessibility to

market. The more access to money the consumer has, the more eager consumer is to get

additional unit of it. Marginal utility of money declines with richness but we can say that never

goes to zero.

The Law of Diminishing Marginal Utility resembling many other laws in Economics, is a

statement of tendency. It holds true only if other factors remain constant.

DIMINISHING MARGINAL UTILITY APPLIED TO SAMSUNG

Let’s look at an example where a consumer purchases Samsung monitor or mobile phone. In

this case a buyer perceives a certain utility from the product they purchase. After the first

purchase if a consumer decides to buy an identical product the utility perceived will diminish

and be less than the utility perceived from the first purchase. It can be explained by the fact

that buying another product of the same type doesn’t fulfill any additional need. If a person

buys the third product the utility will be decreased to zero (0) or even below (0>…..). Let’s look

at another example where an insurance company needs 4 monitors. When the company fulfills

its need to have 4 monitors they won’t have a need to buy additional monitors. Thus, the

marginal utility of the consumer will close to zero, and the company won’t find a use for a new

monitor.

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The law of diminishing marginal utility and the law of demand are interrelated concepts in

microeconomics. So in order to keep the sales always high the manager should drop the prices

of the product so that the customers perceive utility from buying them. So, managers have to

be careful so that customers perceive some additional utility.

DEMAND

Demand is the quantity of a good or service that customers are willing and able (i.e.

money) to purchase during a specified period under a given set of economic conditions.

Conditions to be considered include the price of the good in question, prices and availability of

related goods, expectations of price changes, consumer incomes, consumer tastes and

preferences, advertising and expenditures (Hirschey, pg. 77). Moreover, it is important to

recognize that demand always implies a price. When we analyze price, we look at the price-

performance ratio which shows us how much value we assign to the money vs. the value we

assign to the product. If a person can influence factors of demand, it can also influence the

market and therefore create demand.

Moreover, demand is shaped by what is called the law of demand. The law of demand is

the correlation between buyer’s demand for a product and the producer’s price for the

commodity. In other words, people will tend to buy larger quantities of a given commodity at a

lower price and vice versa –lower quantities of a given good at higher prices. Furthermore, the

law of demand it developed from two essential forces: substitution effect and income effect. As

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the cost of the commodity increases, in relation to income, buyers are unable to come up with

the money for items they purchased before, thus the quantity demanded for the product

reduces. As a result, when the cost of the commodity raises buyers begin to look for

alternatives – substitutes – for the merchandise and thus demand declines. Though, the

demand for substitutes increases enormously (van der Veen, Gordon).

For managerial decision making, a prime focus is on market demand. For example, sales

rely on market demand as well as planning future marketing strategy. Market demand is the

aggregate of the quantities of a product demanded by all the individual buyers at a given price

over a given period of time. Insight into market demand is determined by the value associated

acquiring and using any good or service and the ability to acquire it. Both are necessary for

effective individual demand. Market demand may be influenced by distribution of wealth and

income in the community, general standard of living, growth of the population, age

structure/ratio of the population, future expectations, and level of taxation. On the other

hand, there is also individual demand which is a single consuming entity’s demand. Individual

demand has different determinants than market demand (Hirschey, pg. 78). There are several

factors that determine the intensity with which buyers wish to purchase and consume good or

service; and consume good or service; those include: price of the good itself, price of

complementary and substitute goods, income, wealth, fashion and taste, advertising, weather,

and size of market or number of buyers . The underlying conditions of demand are the

conditions of demand other than the price of the good itself. Therefore, the underlying

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conditions have to change to change your value of the product and/or your value for money

(van der Veen, Gordon).

To summarize, during a specified period, the quantity of a good or service that

customers are willing and able to purchase depends on given set of economic conditions such

as the price of the good in question, prices and availability of substitutes and complementary

goods, consumer incomes, consumer tastes and preferences, the advertisement effect, changes

in number of buyers. When it comes to changes in prices, it will only make the changes in

quantity demanded which will create movements along a single demand curve. However,

changes in other variables besides price influencing demand will show changes in demand,

creating shifts of the entire demand curve (Janak, Deep). The ability of goods and services to

satisfy consumer wants is the basis for consumer demand. Consumers always prefer more to

less of any good or service. In addition, different consumers demand different kinds of goods

and services for direct satisfaction of their needs, and therefore, demand for commodities is

direct and based on marginal utility (Hirschey, pg. 115).

Samsung’s phones and TVs are considered as consumer goods. Therefore in electronic

industry, the main purpose for purchasing electronic devices is to satisfy some sort of a need.

Samsung products are used by the business people in firms as well as by individuals for

individual purposes. People often use the TV for entertainment and informal purposes but they

are also used in business settings, while the Samsung phone customers use it for business or

individual purposes. Whether they are used for business or individual purposes, the goal is to

acquire some sort of information and therefore the ultimate need that drives the entire

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industry is the need and ability to communicate ideas and thoughts via TV or phone. These

items are also considered as durable products, they can be used for a long period if used

properly and cautiously. However the demand for goods such as these depends on the

features, design, fashion, trend, and preferences of the product, advertisement, income levels

and the price itself. In the end, there are several factors that determine the intensity with which

buyers wish to purchase goods, these factors that influence the demand for Samsung’s TVs and

mobile phones will be examined below.

DETERMINANTS OF DEMAND

PRICE OF THE GOOD

Price is a very important determinant of demand. Therefore, demand is highly

dependent on the price of the good. As a result, price becomes a major aspect when looking at

the market and the value of the product. Since the price is one of the major conditions which

affect demand, it thus affects the ability of a customer to purchase a product and there demand

will change with price. For that reason, higher prices would lead us to expect lower quantities

demanded because customers would not be able to afford the good. On the other hand, if the

price is low then the quantity demanded would be higher. Therefore, there is an inverse

relationship between the price of a product and the quantity of that product which consumers

are willing and able to buy. This shows the significance of price on the quantity demanded

(“Factors Affecting Demand”). Samsung’s TVs price range is between $150 and $5500

American dollars. Samsung sells UN19D4003 19” Series 4000 LED HDTV for $150 and Samsung

UN65D8000 65" 3D Ready LED HDTV for $5, 5500. Therefore, if a person wants to purchase a

24
TV the least he/she would have to spend for the smallest TV would be approximately $150. In

209 Samsung held 90% of the global LED market, the company was also recognized as the

leader in the LCD TV Market. Samsung TVs are more and more preferred despite their higher

selling price, hence making them as premium products among competition (Harris, Janet).

Therefore, even though the price for Samsung TVs is high, there is still a high demand which

means that Samsung offers the value for the money people are willing to pay. As a result,

Samsung electronics had to raise the sales target in 2010 from 39 million units to 50 million

units in order to meet rising demand (Choi, Kyong-Ae)

Samsung also offer mobile phones and the price range is between $25 for Samsung

A117 Dual Band GSM and $1200 for Samsung i9300 Galaxy S III 64GB S3 (“Samsung Galaxy SIII

S3 I9300 Mobile Phone”). Although Galaxy model of Samsung’s brand is the most expensive

one, Samsung’s global sales of Galaxy S and Galaxy S II devices were more than 30 million. As a

result, the Galaxy S is the highest-selling mobile device in Samsung’s history up to date.

Therefore, even though the price of Galaxy model is high, Samsung has seen incredible sales

success and collected enthusiastic reviews from consumers and mobile industry watchers

across the globe. Although there is an inverse relationship between the price of good and the

quality demanded, based on the satisfaction from consumers and mobile industry watchers,

Samsung has offered maximum value for the money consumers were willing to pay (Albanesius,

Chloe)

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COMPLEMENTARY AND SUBSTITUTE GOODS

The price of complementary and substitute goods is another important determinant of

demand. Substitutes are goods and services that can be used to fulfill a similar need or desire

with a different product. For instance, going to a movie and renting a DVD are close substitutes.

Therefore, substitutes are products that serve the same purpose and thus the consumer sees

these products as alternatives (Hirschey, pg 120). Reduction can also be substitute as well as

the redesign of the process to eliminate the need, for example, housing insulation instead of

heating oil. Substitutes are significant because they can be good alternatives for the

wanted/needed product which buyers can smoothly adjust to if the differences in price are

minimal. If the substitute is available and the price difference comparing to the original product

is small then that allows consumers to make comparisons in terms of quality, performance, and

price. Typically, there is a relationship between the price of the substitutes and their demanded

quantities. As a result, when the price of a primary product increases it ultimately leads to an

increase in the quantity demanded of its substitutes. However it doesn’t necessarily always

have to be the price, it may also depend on other factors such as what the consumer values, for

example, the quality of the substitute and its ability to satisfy the actual need (van der Veen,

Gordon).

The fact that substitute products exist has a negative impact on the demand for

Samsung’s TVs and phones. For a TV, a computer monitor, projector, and an Ipad are

reasonable substitutes. Nonetheless, this depends on customers’ needs. Samsung customers

may use the TV for entertainment to watch news, music, sports, and/or movies at home.

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Therefore, these specific customers will be influenced by price and availability of computer

monitors, Ipads, TVs, and projectors as they may be used at home for personal purposes as well

as for watching entertainment. Even though computer monitors and TVs occupy larger space

and have smaller screens compared to projectors, ordinary people still choose TVs rather than

projectors for home entertainment. However, there is a variety of different computer monitors

and Ipads designed by different companies on the market, and as a result of competition, their

prices tend to be either in the same range as TVs or lower than TVs prices. Customers would

not have a hard time getting accustomed from TVs to computer monitors or Ipads if the size is

not important. Therefore, for individual purposes and/or home entertainment, customers

would not have a hard time adjusting and switching/substituting from their TV to a computer

monitor or an Ipad if the size is not important. However, in a business environment people tend

to have different needs and desires. In this case, Ipads, computer monitors and even TVs would

not be able to satisfy the need. In a business setting, projectors are most commonly used to

show a presentation on a large screen. Therefore, in really large meetings rooms lectures and

presentations cannot be shown on a small TV or monitor. As a result, projectors would have a

negative impact on the demand for TVs in larger meeting rooms and auditoriums because the

image produced from the TV is much smaller than from the projector. The demand for TVs

would also be negatively affected in small meeting rooms because a TV could be substituted

with a computer monitor or even with an Ipad.

There are not many good substitutes for a mobile phone; however, there are a few such

as land lines, Skype, and 2 way radios. For example, 2 way radios or walkie-talkies are good

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substitutes because they are useful on jobsites and places where a person has to speak to quite

a few people at the same time. Moreover, almost all the new radio models have telephone

interconnect, selective calling and caller ID technological innovation, just like mobile phones. In

general, 2 way radios will work when mobile phone is disrupted by disaster. Furthermore, 2

way radios typically have long warranty policies, 1-2 years compared to 90 days for mobile

phones. In addition, they are much more durable goods than mobile phones (“2 Way Radios A

Cell Phone Substitute”).

On the other hand, goods and services that become more desirable when consumed

together are called complements (Hirschey, 120).Therefore a complementary good is a product

that is used in relation to the main good or service. The demand will increase for a

complementary good when the demand of the main good increases and as the demand for a

substitute increases the demand for the main product will decrease. The complementary good

and the main product have a direct relationship. If the complementary good stands for a

considerable size of the entire package and impacts the price entirely then the demand for the

primary product will be affected due to a change in price of the complementary product. Thus,

it certainly depends on how much of a complement one product is to another (e.g. cars and

gasoline vs. steak and salt). When the price of fuel rises dramatically, demand for cars

decreases certainly. However, when the price of salt increases demand for steak does not

decrease because salt is a small proportion from the total cost of the package (van der Veen,

Gordon).

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 Some of the complementary goods to that of a Samsung mobile phone are such as

Bluetooth headsets, wired headsets, cases and holsters, batteries and covers, vehicle docks,

memory cards, data cables and desktop docks (“Cell Phones Accessories”). Nonetheless, a

phone charger is probably the most important complementary good because without a charger

a mobile phone would not be able to work for a long time. However, a rise in chargers price

would not influence the demand for a mobile phone, since this represents such a small

proportion from the total cost of the package. On the other hand, DVD players and remote

controllers are examples of complementary goods for TVs. Although a remote controller is an

important device when watching TV, an increase in remote controller’s price would not

influence the demand for TVs because the cost of a remote controller is small compared to the

total cost of the package. Another complement for a TV would be a TV stand/table where the

primary product would be placed, but the furniture would not affect demand for TVs

("Brainmates Product Management People »Blog Archive» Complementary Products.")

INCOME

Level of income (current and expected) of the customer is an important determinant of

demand. The ability of the buyer to purchase the product is based on their income. If the

person is employed and does not earn enough money to purchase the product then he/she will

most likely not buy the good. The customer makes the decision whether to buy the product or

not by looking at the current income. The purchaser may also look into its expected income in

order to make a decision whether or not to purchase a product. When focusing on income and

demand we distinguish between two main types of goods: normal and inferior. Normal goods

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are the products where the correlation to income is direct. If quantity demanded increases in

response to an increase in income, then the good concerned is a normal good. Therefore, as the

income increases the demand for the normal goods increases too. For example, phones and TVs

are considered normal goods and therefore people would purchase more of them as their

income rises. When it comes to inferior good, the relationship with income is not as direct as in

the example of normal good. Thus, if the quantity demanded decreases in response to an

increase in income, then the good concerned is an inferior good. Therefore, for inferior good as

income increases the demand will decrease. On the demand curve, a chance in income

represents a shift in the graph and therefore income can have a real effect on the demand for a

certain product (van der Veen, Gordon).

People buy goods and services based on the level of their income and earnings. Per

capita income in Luxembourg is $108,921, in Norway $84, 840, in Switzerland $66, 934, in

Denmark $55, 988, in Sweden $48,832, in the U.S. $47,184, in Canada $48,148, and in Austria $

44,863. These countries are considered as top per capita income countries in the world. In

general, people working in these countries would be able to afford Samsung products much

easier than the people in the countries where income per capita is as follows: Mozambique

$410, Eritrea $403, Niger $358, Liberia $247, Congo, $199, and Burundi $192. Per capita income

illustrates the standard or quality of life of country’s inhabitants. Therefore, the people in

countries with the lowest per capita income in the world would have a harder time purchasing

and obtaining the latest models of Samsung TVs and mobile phones. On the other hand, people

in countries with higher per capita income would be more willing to spend a part of their

30
income for a mobile phone or a TV simply because the percentage that he/she would lose from

his/her income would be much smaller than in poorer areas of the world. If a person is from

these poorer areas and decides to purchase a TV or a mobile phone for approximately $100

then that would take up almost an entire amount of income from many of those people

("Ranking of Countries with Highest Per Capita Income (2010)")

WEALTH

The wealth is also a factor that will shift the demand curve according to the demand. On

an individual customer level it means that as the wealth of a customer increases his/her

demand for a particular good will increase too. Moreover, wealth refers to accumulation of past

earnings, savings, and stock. In a way it is similar to income, it is the ability of a consumer to

purchase a particular good he/she needs/wants. However, the wealth is different from the

income in the sense that the consumer has the ability and willingness (in this case, extra

money) to afford the product. As a result, the wealthier the consumer the more expensive

goods it can manage to pay for and therefore the demand for that particular product will rise

(van der Veen, Gordon).

When it comes to purchasing Samsung products, there are 11 million “high net worth

individuals (NHWIs)” that are classified as having more than $1 million in free cash (not

considering pensions and property) which can at any moment purchase any of the Samsung

products. The wealth of HNWIs all together reached $42.7 trillion in 2010. The biggest number

of HNWIs lives in the U.S., Japan and Germany. Therefore, these three countries account for

53% of the world’s wealthy elite (Marsden, Chris). As a result, wealthy people from these

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countries but also people from other parts of the world that are wealthy are capable of

purchasing any kind of a TV or a mobile phone. As the world develops more and as more people

become wealthy, the more expensive products will be purchased and as a result the demand

for those goods will increase ultimately.

FASHION, TRENDS AND PREFERENCES

Human beings have different tastes and preferences which leads us to assign different

values to goods and services that are around us. Fashion and tastes may affect perceived value

of the product; it depends on the industry (fashion clothing vs. radiators). People have different

tastes and preferences and therefore each market is formed by individual and group tastes and

preferences. What might be trendy to one person doesn’t necessarily mean it will be to another

person and vice versa. Nonetheless, if a large group of people share identical preferences then

that ultimately adds value for the good and as a result maximizes consumer surplus (van der

Veen, Gordon). An individual may also have a large impact on others. For example, Jennifer

Lopez may influence many other women to follow her fashion trend. Although there are many

influential people when it comes to fashion and preferences that can influence what the

consumer will purchase, it is still buyer’s preferences that initiate the accomplishment and

length of the fashion trend through their demand and purchasing of certain products.

Samsung has become one of the most fashionable companies in the electronics

industry. Public opinion shows that Samsung has for the first time edged past Iphone in

consumer perception. This was measured by using a metric known as “Buzz score”, which is

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determined by asking respondents if they have heard anything about the company and the

brand in the last two weeks, through advertising, news or word of mouth, was it positive or

negative? Samsung’s rise in popularity and perception is commonly associated to the successful

launch of the Galaxy S II as well as the Focus S. Since November last year, iPhone’s buzz score

has dropped from 3 to 25, while Samsung went front 19 to 26 (“Popularity Contest: Samsung’s

Brand Perception Surpasses Apple as IPhone Scores Drop")

Moreover, Samsung’ s upward rise from 42 in 2001 to 34 in 2002 to its present position

at 25, this illustrates that the brand has gathered momentum against its competitors. Samsung

was seen as a low-quality brand in a consumer electronic industry, but it has managed to

reinvent itself as a brand of quality despite decades of consumer perception that it

manufactured low-end, cheap knockoffs. Therefore, today, consumers appear to take Samsung

seriously as a quality brand of TV’s, and even consider it a superior brand when it comes to

mobiles phones. As a result, the brand is perceived positively. Samsung used to produce middle

of the range mobile phones, now in many markets around the world they focus on the

premium high-end phones. Samsung tries to fit and adjust to customer’s needs. It creates

electronic devices that will be suitable and appealing for different purposes and this can shape

consumer’s taste because consumers like choices and options when purchasing a product

(Rusch, Robin)

FUTURE EXPECTATIONS

A future expectation is a significant determinant for demand when focusing on

technology. Individuals and groups base their actions on their perceptions and predictions of

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future developments or crisis. Thus, each individual has future expectations which are

distinctive to their particular life circumstances. People have both positive and negative future

expectations and typically are concerned about the future price of the product and their

employment status as well as the ability to pay for the product –income – related to the price.

In any case, when we look at the future expectations and its effect on the demand we must be

able to show what effect it has on the society in general.

Despite ongoing development in the technology industry, Samsung is insecure about its

financial stability and even existence because most of their flagship products will be outdated

within 10 years. The uncertainty arises as Samsung has to compete with rising low-cost Chinese

firms which are quickly catching up with South Korean companies ("Lee Kun-hee Returns to

Samsung"). Nonetheless, Samsung has launched the newest innovation which is the AMOLED

(active-matrix organic light-emitting diode) technology. AMOLED technology is used in Samsung

TVS and mobile phones. Therefore, future expectations of Samsung are significant factors for

the demand of their electronic products. It is expected that the AMOLED technology will be

soon implemented in all Samsung TVs and mobile phones because it provides better picture

quality and requires less power to run these devices compared to the LCD technology. Thus, the

introduction of AMOLED technology to provide better screen quality will attract customers to

purchase TVs and phones with the latest technology. Although AMOLED TVs and mobile phones

tend to be much more expensive compared to LCDs, people will demand more of it in the

future and the prices should drop eventually. Even now, it is common that companies use

AMOLED technology in smart-phones to offer better screen quality; however, the prices of

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these gadgets are very high even though they have smaller screens. It is expected that AMOLED

technology will ensure an increase in sales to reach approximately 20 billion by 2018, due to a

higher demand (Whittaker, Zack).

ADVERTISING

Advertising and marketing are designed to inform consumers of company’s presence in

the market and its uniqueness. Advertising may increase brand loyalty and demand for the

products sold by that particular firm. Therefore, companies develop advertising to inform the

consumers about their products and services and thus how these merchandises may satisfy

consumer’s needs. Additionally, advertising can increase demand for products by persuading,

encouraging and motivating consumers to recognize that they actually should posses that

product. As a result, as the supplier is capable of changing the customer’s perception of the

product, it is also capable of creating a unique value to merchandises and eventually locking the

consumer into purchasing it.

Creating a more appealing quality product is definitely one way to change consumer’s

perception, but Samsung has achieved this with a reliable and highly visible marketing and PR

effort across many channels of communication. Samsung has developed a “holistic brand

campaign” strategy to reposition the Samsung’s brand in consumers’ minds. Samsung is

committed to a single global advertising agency, which allows it to control consistency and

continuity in its communications across all markets. The brand owners have also made good

use of Internet advertising on websites used frequently, sponsorship and product placement in

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movies such as The Matrix: Reloaded, and sponsorship of popular sporting events such as the

Olympics. Samsung was one of the largest sponsorships of the Olympics in Athens 2004; it still

continues the global association with popular events. The attention to entertainment marketing

is a way to enhance brand familiarity. Therefore, by increasing its brand awareness, Samsung

attracts potential customers. As a result, Samsung has marketed itself much more efficiently in

the recent years than when it started, all those things help to push the brand forward (Rusch,

Robin).

SIZE OF THE MARKET

Size of the market or number of buyers is an important determinant of demand.

Therefore, the number of customers willing and able to buy products tremendously affects the

demand as a whole. The demand for goods is higher in the market with larger number of

customers. If the population in the world expands and the opportunity of reaching larger

number of customers increases, then that would shift the demand curve – the demand would

increase eventually. As a result, the link between number of customers and demand is positive.

As stated in the company overview, Samsung operates in over 100 countries across the

world. That being said, the company does business globally and has 206 offices and facilities in

68 countries around the world. As the population of the world increases, the number of

Samsung customers will increase, and thus demand will increase as well. Hence, it implies that

the number of buyers is an important factor of demand. Therefore, as the market grows,

Samsung will have to expand its production and employ more workers to take care of

customers who are willing and able to buy products.

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PRICE ELASTICITY OF DEMAND

The price elasticity of demand measures the sensitivity of consumers to price changes.

The higher the price elasticity, the more sensitive buyers are to price changes. If buyers have

strong reactions to price changes, for example, they significantly increase or decrease the

quantity they purchase, then we speak of demand being elastic. Price elasticity of demand is

calculated by using the following formula: the percentage change in quantity demanded divided

by the percentage change in price.

Moreover, the greater the reaction of a change in price is in regards of change in the

quantity demanded is the greater the elasticity of demand. Therefore, a high price elasticity

implies that when the price of a product increases, buyers will purchase less of that good or

service and when the price of that product decreases, buyers will purchase more of it. If price

increases, percent decrease in quantity is greater than the percentage in price. As a result,

there will be a reduction in total revenue if price increase; a decrease in unit price will obviously

then cause an increase in total revenue. For example, shoes have a price elastic demand.

Despite the fact that people have to wear shoes, the choices of different kinds of shoes are

enormously high and thus switching costs are small. Therefore at times when people are unable

to afford expensive shoes from popular brands they will either buy cheaper brands or have a

smaller collection of shoes.

There is also low price elasticity which basically means the opposite of high price

elasticity. Thus, the changes in price do not have a large impact on the quantity demanded.

Inelastic demand is a situation where the result of the numeral calculation is between 0 and 1.

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For instance, fuel has a price inelastic demand. People always criticize gas stations for

increasing the price of fuel; however, those same people still purchase the gas because they

really need it. Here, the owner of the gas station may technically benefit if price can be

increased without losing sales. Therefore, when prices increase, percent decrease in quantity

demanded is less than the percent increase in price; as a result, total revenue will increase.

Lastly, there is also another category of price elasticity which is called unit elasticity. In

unit elasticity there is a direct relationship between quantity demanded and price and a

percentage change in one of these will be precisely coordinated by a percentage change in the

other. In the case of unit elasticity, the changes in price will not have an impact on total

revenue of the firm (Riley, Geoff).

DETERMINANTS OF PRICE ELASTICITY OF DEMAND

SUBSTITUTES

When we look at the substitutes we are concerned about the availability and the quality

of substitutes. The greater the number of available substitute products on market, the greater

choice for choice for consumers to switch and thus greater the elasticity of demand. However,

when there is a small number (or no substitutes available), the response effect will be small and

the demand inelastic. Also, if the price of one good or service changes relative to others in the

market, buyers may switch to another product especially if there are perfect substitutes that

can satisfy the same need, then we would expect a much greater elasticity. However, less

quality substitutes which are inferior in their ability to satisfy the same need, or even better,

will result in a more inelastic demand. As a result, an essential aspect of having substitute goods

38
and services available is the price and cost of changing to these substitutes. Therefore, demand

is quite inelastic when high transaction costs are entailed in switching between different goods

or services. It is in the company’s interest to keep prices less elastic because they want to lock-

in customers by developing high entry barriers for competitors or simply charging high fees for

changing/switching products. A great example is the case of TV providers in the U.S. such as

Comcast or Qwest. These companies tend to charge high fees if the contract is terminated,

upgraded or downgraded. Once the customer signs the contract then it is much harder to

cancel it without being charged money.

As mentioned in the Complementary and Substitute Goods section, there are many

substitutes available for a Samsung TV such as computer monitors, projectors, and Ipads. With

all these substitutes available, the consumer has flexibility in choosing which product to

purchase to satisfy the same need and therefore the greater the elasticity of demand. However,

there are not many good alternative products for a mobile phone. There are some such as

landlines and 2 way radios (walkie-talkies), but to most part consumers would see these

alternatives as inferior in their ability to satisfy the same need and hence they would result in a

more inelastic demand. Nonetheless, the price and cost of changing to these substitutes would

be relatively low. Walkie-talkies tend to be cheaper than mobile phones and do not require any

contract from a provider, while landlines may be more expensive because of monthly fees and

if used for international calling but overall still cheaper than mobile phone contracts.

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TIME

In a short time span, the demand may be more inelastic because the satisfaction of the

need takes precedence over the price. It also takes time for buyers to notice the price

differences and then they can actually respond to price fluctuations. For example, if the price

of electricity increases, consumers cannot give up using it all of a sudden and also it is hard to

reduce its consumption is a short time. Though, in the long run if the increase in price

continues, people will look for alternatives to reduce consumption of the product. Thus,

demand is generally more price elastic as more time is given for consumers to respond to a

price change because consumers will look for substitutes as well as try to make right purchasing

decisions. For example, if the price change of fuel will remain for number of years, the

consumer will most likely plan substitution such as public transportation, hybrid card, and

motorcycle. Therefore, the elasticity of demand for fuel or electricity will be greater if the

customer is able to work towards eliminating the need, seeking for possible substitutes and

alternatives, or simply creating substitutes that will satisfy the same need as the primary

product (Riley, Geoff).

FUNCTIONALITY OF THE GOOD

Functionality of the good refers to the ability of the product which has multiple uses and

functions to satisfy a wide range of needs and desires. If a good is multifunctional, for example,

it can be put to many different and even unrelated uses. Thus, this means it will usually be

competing with several other products or substitutes in a larger number of markets. For

example, paper competes with computers/electronic documents, envelopes/boxes (packaging),

40
paint (wallpaper), and hygienic products like toilet paper. Nonetheless, paper is an example of

functional good and it can be used for writing, packing, decorating walls, and etc. If the price of

a primary product increases, the demand for various substitutes would be greater. People will

switch to an alternative product as long as the there are substitutes to satisfy the same need.

As a result, the more functional is the product the more it may have substitutes and therefore it

leads to more elastic demand. For example, phones are multifunctional. They can be used as

mobile phones, music players, cameras, calculators, portable TVs, and etc. On the other hand,

a less functional product that can be used in few applications is more price inelastic, due to a

smaller number of substitutes and the fact that it cannot be replaced by some other product to

satisfy the same need. A less functional product is the one that doesn’t have this ability of

multiple uses, for example, a heater or radiator has a single function – to warm up a place.

When it comes to Samsung, people purchase their mobile phones and TVs to satisfy

their needs. People use these devices for informational purposes and for entertainment. The

purpose of using these devices is to acquire some kind of information and communicate ideas

to somebody else. For example, TVs in airplanes used for entertainment may be substituted

with magazines and radios. Surveillance TVs in casinos or banks may be replaced by more

security personnel. Nonetheless, TVs used in hospitals is more difficult to substitute because

they are essential in providing details regarding patient’s health status and thus in these

circumstances the medical staff will not be price sensitive. For these reasons, it is illustrated

that TVs serve different purposes in different environments and therefore are exposed to other

substitutes. Depending on a situation, a TV can be replaced by an employee or by other items

41
such as magazines in the case of airplanes. As a result, these substitutes increase the price

elasticity of demand. On the other hand, Samsung mobile phones (latest versions) are

multifunctional with variety of different applications available to choose from. A Samsung

mobile phone can be used for calling, taking pictures, calculating, listening to music, watching

videos, and etc. As a result, Samsung phone has many functions and thus there are many

substitutes such as calculators and music players which satisfy the same need and therefore

create more elastic demand.

NECESSITIES AND LUXURIES

Products that are considered to be necessities have an inelastic demand compared to

luxuries which have a more elastic demand. The reason luxuries have a more elastic demand is

because buyers can refuse to purchase luxuries when their budget is low (Riley, Geoff). On the

other hand, a necessity means that the product is necessary and therefore it increases the

urgency of it. Nonetheless, in one market some products may be highly considered as

necessities whereas in another market those products may not be seen as necessary.

Therefore, we have to be able to understand the purpose and function of the product and who

the customers are as well as how important is the product to them. For example, a Boeing

engineer may need the most expensive computer on the market to operate and solve difficult

tasks required by the company and therefore this device would be considered a necessity for

him/her; however, this same computer would be a luxury for a person who simply wants to use

it for entertainment –to play games, listen to music, and surf the web.

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 Carrying a mobile phone 30 years ago was definitely a luxury. It is the similar case with

TVs; 60 years ago these products were considered a luxury. At the present time however, it is

normal for an individual to carry some kind of a mobile device as well as to possess a TV at

home. The reason for being able to afford these devices nowadays is due to lower production

costs as well as because of the development of technology used in these devices. Therefore,

with technological innovations, TVs and mobile phones today are practically necessities for

people. People rely on their mobile phones and TVs for information that satisfies their need and

therefore without these devices people would have a harder time functioning on daily bases.

However, only the people that do not see any reason in having a TV or a mobile phone would

see these devices as luxury. But, for example, a worker that is on a foreign assignment may

need to carry a mobile phone at all times and therefore this product would be a necessity for

this person. In a business environment, mobile phones are considered as necessities and thus

have an inelastic demand. However, TVs used by ordinary people at home are luxuries and

thus have a more elastic demand. TVs could be replaced by newspapers, magazines, and small

radios to satisfy the same need at a much lower price.

COMPARATIVE SIZE OF EXPENDITURE

Comparative size of expenditures means that purchases that are considered as small

value compared to the entire income tend to be more inelastic. For example, if a person earns

over 5000 Euros a month, a price increase of TVs or mobile phones from 200 to 300 Euros will

take up relatively a small part of this person’s pay check. Thus, the ratio of the price to income

will reduce the effect of the price and that’s why the consumers demand will be price inelastic.

43
However, if a person earns 100 Euros a month then a TV or a mobile phone (at 300 Euros)

would consume a significant percentage of their monthly income. Buyers in this group would

probably compare quality of Samsung products with other electronic brands but also prices

before purchasing it. 300 Euros for a Samsung phone or TV would be an extremely high price

for this group of customers. If Samsung electronics decided to increase the price of their

devices even more then these consumers would no longer be able to afford their products and

therefore would settle for cheaper ones with perhaps lower quality. As a result, this group of

consumers would be a lot more sensitive to price changes of electronic devices and therefore

the demand for TVs or mobile phones would be more price elastic (Riley, Geoff).

RELATIVE PERMANENCE OF SATISFACTION

Relative permanence of satisfaction means how long the customer will have its need

satisfied from the product purchased. Thus, the durability of products and the speed with which

the utility is being used up play an important role in the elasticity of their demand. Therefore, if

the product has a higher durability and whose useful life is relatively long the demand for that

product is inelastic, while the demand for less durable product is elastic. For example,

consumer durables are furniture and refrigerators. When people purchase these commodities

they want to use them for a long time before changing them. Consumers do not want to buy or

replace these commodities every other day or even once a year. Commodities such as furniture

and refrigerators have higher durability and therefore tend to be more inelastic to changes in

prices, while commodities such as Samsung phones have less durability and therefore tend to

be more elastic to price changes. Since mobile phones have lower durability than refrigerators,

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people replace them with another phone faster than refrigerators. Furthermore, there are two

types of buyers: first-time buyers and replacement buyers.

Samsung’s products can be categorized as durable products. Products such as TVs and

mobile phones need to be carefully examined prior to purchasing mainly because consumers do

not purchase them often. A business that requires its employees to carry a mobile phone at all

times would not feel the need to offer them another phone for a long time unless they

damaged or lost the phone. A firm would only upgrade the mobile phones if it receives some

sort of a promotion from a supplier or when the operating system is outdated. Moreover, if the

employees would not be able to operate day to day tasks via phone due to its obsolete

functions, then the employer would consider upgrading to a newer version of a mobile phone.

When it comes to individuals, people also wouldn’t change their phones frequently if not

necessary. However, in order to stay trendy people change their network providers and mobiles

phones often, but also because their phones do not satisfy their need or perhaps there’s

something wrong with the phone. Same rationale goes for Samsung TVs; once the person has

satisfied their need it will not feel the same need for a very long time. This principal makes

demand for phones and TVs (especially) inelastic.

SUPPLY
The supply in economics means the amount of some product that producers are willing

and able to sell at a given price all other factors being held constant. Usually, supply is

described through a supply curve that shows the relationship of price to the amount of product

businesses are willing to sell. Another concept called a supply refers to a table that shows the

45
amount of production that firms are willing to supply at particular prices. The supply schedule

shows the quantity of goods that a supplier would be willing and able to sell at specific prices

under the existing circumstances. Some of the more important factors affecting supply are the

goods own price, the price of related goods, production costs, technology and expectations of

sellers. ("Что такое предложение?")

There are two ways how to interpret supply:

 At each possible price supply shows the maximum quantity that would be supplied of

good X (given time period, ceteris paribus)

 At each possible quantity supply shows the minimum price (reservation price) sellers

could be paid for the good and still be willing to sell that quantity (given time period,

ceteris paribus)

A change in the quantity supplied is a change in the specific quantity of a good that sellers

are willing and able to sell. Change in quantity happens if there is a change in price, we move

along the curve to demonstrate what the response of suppliers is (change in quantity supplied).

If there is a change in some “other things” that affect the behavior of sellers, we have to shift

the entire supply curve (change in supply).

Increase in supply - at any given price more of the good is offered by sellers. Or, for any

given quantity, sellers are willing to accept a lower “reservation” price. Decrease in supply – at

any given price less of the good is offered by sellers. Or, for any given quantity, sellers require

higher “reservation” price.

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Determinants of Supply

PRICE OF GOOD OR SERVICE

What is more, when the consumer electronics and technologies are first brought up in

the market their prices will be high. However, their supply should be at its peak. In addition, the

value of consumer electronics decline faster than other products, since technology is advancing

so rapidly and every day something new comes out. This requires quick reaction of companies

to the fluctuating prices.

Overall, an increase in the price of such a product, in the maturity phase, would be

rather unrealistic. Let’s assume that, the price of the TVs increases then Samsung would want

to supply more of that product. In this case, the company will depend on Samsung Group to

increase the quantity assembled from that product. As a matter of fact, this process takes time,

as the manufacturing equipment are in Malaysia, Indonesia, China, and South Korea. It takes

three to four months to produce and ship finished products to Europe By that time, the

determined price for the TV monitors or mobile phones can fluctuate drastically. Recently,

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Samsung Group opened new storehouse/warehouse in Russia (Kaluj - closed to Eastern Europe)

which was in 2009. Thus, opening a new storehouse could be effective for Samsung Group.

What the manager of the company should remember is the fact that prices of electronic

goods change rapidly and they usually fall. The only exception would be the introduction of

some new technology related with the high-end products, which are the most expensive or

developed in the company’s range of products. When the output expands, it could lead to

higher costs of production. That is the reason why Samsung Brand uses some ways to shun it.

First of all, the company concentrates on strengthening its Research and Development and

particularly marketing research. Researching marketing helps Samsung Brand to keep up with

the pace of the new technology and enables it to supply what the consumers demand.

PRICE OF RELATED GOODS OR SERVICES

Under this condition we must first and foremost take into consideration that the usage

of the word “related” does not refer to complementary goods, but rather to groups of goods

that are manufactured by the same producer that utilize the same resources or factors of

production such as labor or machinery. If a manufacturer has ability to produce two or more

different products using the same raw material and similar plants and equipment, then he can

alternate supply of these goods depending on market prices. For example, the company

produces leather goods, and price for leather shoes increases. The manufacturer will diminish

production of other leather goods and increase supply of leather shoes to take an advantage of

the higher prices. This also applies to juice and soft drinks. If the prices for gas free soft drinks

48
increases, the producer will increase the supply for juice mixed with plain water and diminish

the producing soft drinks with gas or sparkling water.

Samsung Electronics Brand depends on its supplier – Samsung Group. Independent of

the change in price Samsung Electronics Brand will not be able to supply more or various

products if it cannot obtain them from Samsung Group. Samsung Electronics packages and

assembles different goods – TVs, computer monitors, mobile phones, projectors, photo

cameras ,etc. As mentioned above, Samsung Electronics is a part of Samsung Group and it can

easily switch its production to another one. In such a case, time plays a very important role in

switching production. Depending on the price of the other products produced by Samsung

Electronics, the company can focus its supply in that direction.

PRICE AND AVAILABILITY OF INPUTS

As is known, the main factors of manufacturing are.labor, land, raw material and

entrepreneurship Price and availability of inputs theory states that the availability and price of

factors of production of the goods or service, such as raw material or labor have a major impact

on supply. As the cost of the input goes up, the cost of production will increase too and

consequently supply will decline. Likewise, a decrease in the price of inputs leads to an increase

in supply. For example, a dairy company, if the soil is infertile and because of the weather

conditions the grass resources diminish, the cattle will not be fed properly and hence they will

not provide much milk. As a result of this, there will be an increase in price of raw milk due to

its lack and low level of availability, thus, there will be a high level of demand. The producers

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will have to raise their prices to be able to produce the same amount and would be reluctant

and able to sell their goods at the existing prices.

Looking at our company, Samsung Electronics we can see that it is precisely sells and

markets TVs and mobile phones. Thus, its supply would be affected if there is a change in the

production costs of Samsung Group as well. Should the price of raw materials, determined for

consumer electronics, change, Samsung Group will be the first to feel the difference. Samsung

Group would have to buy more costly parts for assembling its products and it will have to

provide the same amount for a higher price. For example, columbite – tantalite is a dull black

metallic or which is mining in Democratic Republic of Congo, is very important for

manufacturing electronic products. ("Coltan")

Columbite – tantalite are using in almost every kind of electronic goods. If the price of this

metal will increase it will impact for Samsung Electronics products, consequently this will affect

the supply of the Samsung Electronics.

Samsung Electronics utilizes numerous raw materials for producing TVs and mobile

phones. The housing of the TV set is made of injection-molded plastic, although wood cabinets

are still in use for some models. The audio system is comprised of metals and plastics as well.

The picture tube requires precision-made glass, fluorescent chemical coatings, and electronic

attachments around and at the rear of the tube. The tube is supported inside the housing by

brackets and braces molded into the housing. The antennae and most of the input-output

connections are made of metal, and some are coated with special metals or plastic to improve

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the quality of the connection or insulate the device. The chips, of course, are made of metal,

solder, and silicon. ("Television")

Phosphor and quartz are also using for TV monitors lighting in housing set, because it can

maintain its structure at high heat better than glass. The price of all these raw material would

affect the supply of Samsung Electronics products. For example, if the price of Silicon increases,

this would inevitably lead to higher production costs for Samsung Electronics.

Another determinant of the production cost could also be taxes and thus a determinant

of the supply. The higher the taxes the higher the production costs. Labor is a sufficient part of

Samsung Electronics costs. People in more 100 countries around the world are employed by

The company. Packaging materials for consumer electronic products has to meet a lot of

requirements, such as light weight, easy operability and resistance. For example, if the price of

paper soars, this would impact Samsung Electronics costs, as all the monitors and mobile

phones are packaged by the company with its logo. This will undoubtedly affect Samsung

Electronics costs. Packages are also designed in a way to not only help minimize the costs and

weight of the package, but also the design is important to help minimize storing space and

minimize transportation costs by sending more products.

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THE LEVEL OF TECHNOL OGY

The technology that is utilized by the company in its production operations makes a very

significant impact on the productivity of the company that is to say on the proportion of inputs

and outputs and the efficiency with which the inputs are utilized. This will be crucial in deciding

what the production capacity of the company will be as well as how the costs of production will

develop. Or else, productivity represents the value of output produced per unit of input (

productive resources) used. An increase in productivity means increase producing goods or

service without modifying the amount of resources, or producing the same goods or services

with fewer resources. As s result the productivity affects production cost per unit and capacity

level. A lower production cost per unit or increase in the capacity level would encourage the

manufacturer to boost supply on the market. In contrast, a high production cost per unit or a

low capacity level would reduce the supply. Samsung Electronics is not only selling and

marketing TV monitors and mobile phones, but it also is producing them. It denotes that the

level of technology would influence Samsung Electronics quality and quantity of TV monitors

and mobile phones provided.

AMOLED is a display technology for use in mobile devices and televisions. OLED

describes a specific type of thin-film display technology in which organic

compounds form the electroluminescent material, and active matrix refers to the

technology behind the addressing of pixels. ("How OLEDs Work ")

From the beginning of 2012 AMOLED is used for mobile phones and digital cameras.

Manufacturers have researched and developed in-cell touch panels, compounding the

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production of capacitive sensor arrays in the AMOLED module fabrication process. In case of in-

cell sensor AMOLED fabricators are AU Optronics and Samsung. Samsung has produced their

version of this technology as Super AMOLED. All of these technological advances in Samsung

Electronics reflect on the products that Samsung Electronics sells. If Samsung Group is able to

respond faster to any change in price or demand Samsung Electronics would be able to supply

their products faster in the market.

Moreover, Samsung group is a mix of different companies each of which focuses in

different areas then uses all these experiences and R and D researches to manufacture different

products. On top of that, Samsung Electronics uses a very modern information system

resembling the just on time system. Samsung Electronics, first of all, decides on how many TV

monitors and mobile phones the company should supply in the market. Samsung Electronics

sends this information to the Samsung Group which in return decides on what parts it needs

and orders them from its suppliers. These parts could include the parts required to produce the

panels or the electronic circuits or any major components needed in making the final product.

This system helps to decide on the timing these items should be sent since the location of the

factory is very close to many other competitor factories and suppliers. In the case of shortage,

some of its production could always be outsourced.

EXPECTATIONS OF SUPPLIERS

This clarifies expectations of suppliers about future, in demand, in price and etc. The

manager must choose right decision for selling products in right time. The decision to sell good

or service today or in the future depends on expectations of future prices. If the manufacturers

53
feel that the value of their product or service will be increase in the future, they have option of

holding on to their products. They are inclined to sell more. If they expect the price to rise in

the future, they are inclined to sell less now. Consequently, the supply level will decline in the

short-run following the speculative increase in prices in the future.

On the other hand, should prices be expected to decrease, producers are interested in

selling more and thus pushing up supply in order to maximize their profits. For instance, if

leather shoes producers expect that prices for leather will grow in the near future, they will opt

to supply less at the moment and save materials (leather) for the future and sell when the

prices increase. Moreover, supply can be also influenced by the expectation of suppliers

regarding other factors such as fluctuations in demand, availability of inputs, etc. For instance,

if you are an mobile phone seller and you have information that after one month HTC will sell a

new touchscreen and it will be revolutionary in mobile phone market, then you would want to

sell as many as possible before the new product comes to market. Hence, when people decide

to boost production today, they are increasing the current supply for mp3 players because of

what they expect to happen in the future.

In our case regarding electronics future expectations are tightly related to technology

developments. Because the company cannot expect the prices of monitors to go up if some

new feature is not introduced. Nevertheless, if such behavior is expected the company will hold

on the current supply and wait until the price rises and then put its product on the market.

Prices of electronic products would depend on the new technologies available on the market. It

is expected decreasing in the prices of LCD monitors, because the new Super AMOLED displays

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are introduced soon. In this case Electronic Brands might try to increase the supply until the

price of LCDs is still high.

The market for mobile phones is expected to continue to grow in the next few years due

to the development of technologies that realize more applications and lower prices. However,

the product has short lifecycle and market price distribution caused by growing number of

competitors. Meaning, that Samsung Electronics can easily predict what would happen to the

prices of projectors in the near future.

JOINT SUPPLY

Joint supply – under this condition supply refers to any product which could be used for

dual usage. For example, a cow “produces” not only milk, also beef and leather. If join supply

exists, increase in the output of one product will cause to an increase in the supply of the other

product. If farmers because of an increase in the price and demand for milk, will start raising

more cows in the future, after long run supply for meat and leather will increase.

In our case joint supply means using one electronic product for two or more reasons.

Samsung Electronics are producing TV monitors with inputs: antenna analog input, HTDMI, AVI.

It means that TV monitors which Samsung Electronics are offering to the customers can be used

for TV, or to connect media players, DVD an CD players, and etc. If the prices of LCD TVs go up,

then the company could market these LCD monitors as a direct competitor to PCs.

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THE NUMBER OF FIRMS THAT SUPPLY THE MARKET

In general, as more companies enter o exit a market, the market supply curve will shift

inwards or outwards, driving down or lifting up supply, respectively. If there is a big competition

in the market it will result decrease in price and hence reduction in supply.

We would expect that if a market has a large number of producers this will mean that

the total quantity supplied within the market will be very high and consequently that there will

be a strong downward pressure on prices. If competition is less, it gives the producer an

opportunity to keep or even increase prices, producing its products in a bigger market share

with a larger supply. For example, in the leather producing company, if there would be only one

distributor per region, the supply of shoes for the market (all regions) would be higher due to

their ability to charge higher price.

The electronics market is highly competitive and has many famous and big brand names

competing for market share. To add, the arts suppliers heavily compete in order to supply these

companies. As a result, the profit margins are small and many companies enter and exit the

market. The history provides us with examples such as Mitsubishi Group. The mentioned

company entered the market in the 1980 and introduced the first CRT TV. Soon in 1997 the

invented the first LCD TV, but recently the took a decision to exit the market.

The company didn’t have lots of exiting costs, because Mitsubishi Group outsourced all

of its production to Original equipment manufacturer manufactures. However, this is an

indication that this market has high competition and that even big companies are exiting the

market. In 1983 Motorola produced first mobile phone in all over the world. At the end of

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1990’s Motorola was the leader in mobile phones market. But in 2010 the percentage of the

sold Motorola mobile phones was only 4.7 . On the other hand, some Original Equipment

Manufacturers are moving from makers to sellers. Most of those companies are entering the

market by selling very cheap mobile phones and LCDs under unknown brand names.

PRICE ELASTICITY OF SUPPLY

Price elasticity of supply is the extent to which the quantity supplied of any product

responds to changes in price of that product – an increase or decrease in product’s price. The

higher the price elasticity, the more sensitive producers and sellers are to price changes

(Moffatt, Mike). We measure elasticity of supply as follows: percentage change in quantity

supplied over a percentage change in unit price. A commodity has high price elasticity when

sellers supply much less than earlier as the price of a product increases. While if the price of

that product decreases, sellers will tend to supply more. Now, a low price elasticity suggests the

opposite, meaning that the supplier is not capable to react quickly enough and adjust the

quantity supplied as the price changes. Therefore, changes in price have little influence on

supply ("Price Elasticity of Supply").

Let’s assume, for example, that the price of TVs or smart-phones increases by 10

percent from 200 Euros to 220 Euros. As the price increases then probably the quantity

supplied will increase as well. If the quantity supplied increases by more than 10 percent from

100 TVs or smart-phones to 150 smart-phones, then supply is elastic. An elastic supply means

that the quantity supplied is relatively responsive to changes in price. However, if the quantity

supplied increases by less than 10 percent from 100 Euros to 101 Euros, then supply is inelastic.

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An inelastic supply means that the quantity supplied is not very responsive to changes in price

("PRICE ELASTICITY OF SUPPLY”).

DETERMINANTS OF PRICE ELASTICITY OF SUPPLY

THE RATE AT WHICH CO ST PER UNIT RISES AS OUTPUT INCREASES

Price will be inelastic if the marginal cost increases rapidly and the rise in output is high

enough to cover production unit costs. However, if the unit costs of production increase only

slightly as output increases, small percentage rises in price will result in large percentage

increases in quantity supplied. As a result, supply for that product will be price elastic.

Therefore, small increases in price will allow sellers and producers to possibly make additional

gains. Thus, when the price of a product increases companies tend to produce more of that

particular product. Nonetheless, it typically takes start up businesses much longer to start

producing a product. Because of that, supply tends to be more elastic over time as possible

profits attract a larger number of sellers ("Price Elasticity of Supply"). Moreover, returns

increase until a company reaches an overcapacity and gain less out of each additional input. We

have to remember that returns increase because there’s a better balance between inputs (with

two employees there’s a better balance between amount of machines and ability to use them –

factors of production) making team more productive, but after a point, decline begins in

additional output. That happens because there are too many employees occupying a small

place and therefore the waiting time for using the machine becomes longer. If the costs rise,

marginal costs are greater than marginal revenues and therefore there is a low elasticity when

costs rise very quickly (van der Veen, Gordon).

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 For example, there is a company which produces backpacks. If there are no employees

in the company then obviously backpacks cannot be made. When there is one employee in the

factory 6 backpacks are produced per hour. When there are two employees, 11 backpacks are

created per hour. When there are two employees in the factory there is a marginal product of

labor of 5 compared to one employee. The increasing marginal product for the first few

employees shows increasing marginal returns. However, as the number of employees increases

the marginal product of labor may decrease which illustrates decreasing marginal returns.

Furthermore, the decreasing marginal product is linked to the law of diminishing marginal

returns, which is the key principle of short-run production ("MARGINAL PRODUCT").

TIME FOR SUPPLIERS TO REACT TO PRICE CHANGES

Time period involved in the production process is significant. The more time a producer

has to respond to price changes the more elastic the supply. For many agricultural products

there are time lags in the production process which means that elasticity of supply is very low in

the immediate time period. The supply is fixed and is determined mainly by planting decisions

and climatic conditions which affect the overall production yield. For example, a potato farmer

cannot immediately respond to an increase in the price of potatoes or French fries in the

market. Therefore, the supplier is slower in adjusting its production level and thus it is more

price inelastic. On the other hand, the shorter time the production process takes, the quicker

suppliers can adjust to their production activity, and thus increase supply. Industrial products

have shorter production lead time and therefore price is more elastic. For example, making a

hamburger means having a very short production lead time. It may take up approximately 15

59
minutes to cook the meet, prepare the salad (onions, lettuce, and tomatoes), and place the

cheese on the buns. Thus, if the price of buns, cheese, and/or meat increases, the owner can

immediately increase production and provide more hamburgers in a shorter span of time. Also,

the seller of hamburgers may have less inventory –on both ends raw/finished goods –than the

producer of agricultural products. Order fulfillment time is also essential, preparing and cooking

a hamburger is much quicker and therefore the customer doesn’t have to wait so long. In the

end, supply elasticity for a fast food restaurant chain is more elastic comparing to agricultural

products (Riley, Geoff).

In the case of our company, the bargaining power of suppliers is low because Samsung

manufactures both TVs and mobile phones itself. Samsung is among the 5 manufacturers of TVs

and among top 3 manufacturers of mobile phones in the world. Samsung Electro-Mechanics,

Samsung SDI, Samsung Coring Precision Materials and Samsung SDS are part of Samsung that

manufacture components for TVs and mobile phones. Thus, since Samsung does not have to

depend on other suppliers it can adjust its production activity and therefore increase the supply

of TVs and mobile phones when necessary. For example, in 2010, in a short period of time

Samsung was forced to increase production of TVs from 39 million to 50 million units in order

to meet rising demand (Choi, Kyong-Ae). Nonetheless, Samsung managed to increase

production and distribution of products because it doesn’t depend on suppliers and therefore

was successful in meeting high demand. Therefore, Samsung electronics have relatively short

production lead time and thus Samsung’s customers and resellers do not have to wait for a long

time until they receive the products. Samsung’s main resellers such as Best Buy, Dan’s TV &

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Electronics, and Systems and Excel Media Systems are anxiously waiting to make an enormous

number of orders. However, if Samsung was not quick enough to increase the quantity

produced it would not be able to satisfy such a high demand for electronic devices ("Samsung

Authorized Resellers").

CURRENT CAPACITY USAGE

The current capacity usage has a major influence over producer’s ability to supply a

particular good. A producer who has unused capacity, an adequate distribution network, and

enough raw materials should be able to increase its output without a rise in costs. Being able to

respond more quickly to price increase, supply will be more elastic in response to a change in

demand. For example, the supply of products is usually most elastic in a recession, when there

is plenty of unemployed resources to contribute to output as the economy recover ("Price

Elasticity of Supply"). However, if fixed factors of production have already reached its capacity

then a firm will have a harder time increasing its output and therefore supply will be inelastic.

For example, if the price of popcorn increases, suppliers would be willing to provide larger

quantities; however, they would be limited by the availability and supply of corn and corn

seeds. Let’s suppose stocks are depleted, suppliers would lack the ability to adjust their supply

of popcorn quickly to be able to take advantage of the increase in price and thus price would be

less elastic ("The Major Factors That Affect Elasticity of Supply").

Although Samsung has unused capacity and enough raw materials to increase its output

without a rise in costs, it has recently invested over 4 billion in expanding its production. In

Tangjeong near Seoul, Samsung built (on 2 million square meters) a new manufacturing

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complex in addition to the existing one. Samsung is capable of storing inventories in a

warehouse because each unit is so small; however, Samsung has expanded because LCD panels

require more storage space and if the new manufacturing facility was not built the previous

facility would have reached its capacity ("Samsung to Add LCD Cell Lines in Tangjeong").

However, the new factory allows new commercial production on a new LCD line and it even has

capacity for 4 more lines on top of today’s layout. Before, LCD lines had to operate 24/7 and

were not allowed to stop at any time otherwise the fixed factors of production would have

reached its capacity and thus the company would have had a more difficult time increasing its

output. The supply would have been inelastic. Although, the new factory made it possible to

increase production and thus Samsung is capable of processing up to 135,000 sheets of mother

glass per month instead of 60,000 previously, and still has unused capacity for more (Williams,

Martyn). The company is able to satisfy the demand, sell its products fast enough, and get rid of

its inventory otherwise it would not expand its manufacturing production. The supply is more

price elastic because there are shorter waiting times for products coming from the factory to

distributors and resellers. Since Samsung has adequate distribution network, it is able to

respond more quickly to price increase and therefore supply will be more elastic in response to

a change in demand.

FLEXIBILITY OF PRODUCTION SYSTEMS

Flexibility of production systems means the ability to use a common resource in two

products and be able to switch between one and the other when necessary. The more flexible

the production system easier will it be to respond to technical changes and therefore price will

62
be more elastic. For example, car washes are very flexible, services tend to be flexible but it

depends on skills of labor and the level of skills required –how widely trained labor force is?

Another example is flexible manufacturing/world class manufacturing (WCM); it builds

machinery to be able to handle different cars and different models. Therefore, if a company

sells different kinds of goods or services and is able to rapidly increase or decrease the

production of one of these products as the price increases or decreases, the supply will be price

elastic. The producer must be flexible in changing production levels; it has to be able to lower

the production of one product while at the same time raise the production of another product.

However if the producer is not so flexible in implementing changes in a short period of time, it

will have a difficult time in being responsive to price changes and so it would create a price

inelastic supply (van der Veen, Gordon).

Samsung is capable of using flexibility of production system; it uses the same technology

to provide different services. Price elasticity of supply is high because of the increased flexibility

in Samsung’s production system. Samsung applies the same 3D technology for different

purposes and needs. For example, with the launch of 3D Home Theater, Samsung also offered

other goods such as 3D television, 3D blue-ray play, 3D content, and 3D glasses. Therefore, with

the invention of 3D it allows the user to enjoy the 3D picture and surround sound at the same

time ("Samsung Introduce the World's First 3D Home Theater in Korea with the HT-C6950W").

Samsung launched variety of mobile phones including full-touch screen phones, premium

phones, and environmentally friendly phones. All of these phones were developed with the use

of its Super AMOLED display innovation that provides thinner form factor, and brighter image

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as well as real stripe matrix display ("Samsung Announces Super AMOLED plus Displays").

Moreover, many phone companies focus mainly on supporting one operating system, Samsung

on the other hand tries to support as many as possible operating systems. Even though the

Galaxy S adopts Google Android as the primary operating system, it supports other operating

systems as well, for example, Microsoft Windows Phone, Symbian, and Bada (Woyke,

Elizabeth). The technology and parts used for all of these phones (whether they are smaller or

bigger) is the same, it is also the case of the 3D entertainment. As a result, Samsung is able to

alternate the quantity produced depending on the demand of a particular product. Thus,

Samsung electronics can supply more of a particular product when the price of that product

increases in the market. Samsung may also decrease the supply of 3D Television as the price

decreases and increase the supply of 3D blue-ray play as the price of it increases.

SELLING IN DIFFERENT MARKETS

When a firm is selling their products in different markets, it should redirect its products

and quantities which it supplies from the market where the prices are low to markets with

higher prices. When selling in different markets, supply tends to be price elastic between

markets. For example, in the electronics industry, when releasing a new version of a phone the

price of a phone is typically higher than any other phones that already came out. Here, the

company targets consumers with higher income who are willing and able to spend money on a

new gadget to be trendy and updated with the latest technology. Technology evolves at a rapid

pace and as soon as a new device comes out, the current version of a phone (from a

technological perspective it is seen as old) will be sold at a cheaper price and perhaps with a

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better data, texting, and/or minutes plan. Now, the company targets those consumers with

lower income who were not able to afford the device when it first came out at a higher price.

As a result, a telephone company has a strategy to offer higher prices to customers with a more

price inelastic demand and much lower prices to those consumers with a more elastic demand.

Since the company is able to utilize at higher and lower prices, it will therefore boost its total

revenue and profits as a result.

Samsung sells its products all over the world. It also sells its parts and products to other

businesses in the electronic industry. Sony is its largest client, it purchases DRAM, NAND flash,

and LCD panels for over 3.7% of Samsung’s total sales. Apple buys AP (mobile processor), as

well as DRAM and NAND flash and accounts for over 2.6% of Samsung’s total sales. Then, Dell

purchases DRAM but also lithium-ion batteries, 2.5% of Samsung’s total sales come from Dell.

Hawlett-Packard purchases similar products as Dell and makes up 2.2% of Samsung’s total sales.

Lastly, Verizon and AT&T buy Handsets and each account for 1.3% of Samsung’s total sales

(Yoo-chul, Kim). These consumers receive components at lower cost as they are regular

consumers with a more elastic demand. Though, Samsung is also highly active in the consumer

market especially targeting individuals. If in this case the price of TVs and mobile phones

increases because of a high demand, Samsung will increase supply and therefore supply will be

more price elastic. If there was an increase in price, for example in Brazil and Mexico, and a

decrease in price in the U.S. and other markets, Samsung could easily divert supply to Mexico

and Brazil, especially because it has offices and representatives in these countries. When

looking at the American continent itself, there are five offices in Mexico and one in Brazil. In

65
Canada, there are two offices in Ontario region, one in Quebec and two in Western. There are

also representatives and distributors in the U.S. in almost every state ("Sales Offices").

Therefore, Samsung would be able to reduce inventory in the U.S. and increase sales in places

where prices have increased. The company would experience a high price elasticity of supply

because Samsung would be able to redirect its products and quantities which it supplies as

price increases or decreases.

LAW OF DIMINISHING MARGINAL RETURNS

The law of diminishing marginal returns states that by holding one factor constant and
adding more and more variable factors to a given quantity of fixed factors, the marginal
product will start to diminish (Law of Diminishing Marginal Returns, par1).

MP

This means that as the effectiveness of the variable input decreases eventually, the input of
production needs to increase in order to keep the output high which automatically increases
the production and supply costs. This direct relationship between price and quantity produced
is the essence of the law of supply. This law has a huge effect on the supply side especially on
the market supply, supply price and the law of supply.

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In order to understand this better it is important to make an illustration of it.

As seen, marginal product initially increases in response to the labor factor and eventually
starts to diminish (as the law states). The initial increase in marginal product reflects the
efficient use of the fixed input from the variable input. As more and more workers are added,
the number of workers relative to the amount of fixed workers is much higher and efficiency
starts to decline which leads to diminishing MP. The law of diminishing marginal returns is the
opposite of the law of diminishing marginal utility and directly related to the supply side (Law of
Diminishing Marginal Returns, par.1). Hence, this law helps in conceptualizing supply or the law
of supply which holds that as the production or selling increase the companies have to charge
higher prices. The high price comes as a result of the increase in the cost of production which
results from the decrease of the productivity of the variable input. Let us assume that the 5th
worker of a particular company produces 20 units, the 6th worker produces 12 and the 7th
produces 8 units. Because of the ineffectiveness of the two last workers, the company has two
workers who produce the same amount as one can. Consequently, the cost of production
doubles which results in an increase in price too.

Law of Diminishing Marginal Returns applied to SAMSUNG

It is very crucial to create a correlation or explain the law of diminishing marginal

returns based on production factors such as land, labor, capital, entrepreneurship and such. In
cases of companies such as Samsung, where the firm has many subsidiaries, it is hard to take
one point and analyze further. As outlined previously, Samsung sometimes manufactures itself

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the raw materials and products and sometimes uses a supplier. Since Samsung produces almost
all of its products, the effect of law of diminishing returns is of a crucial importance. In this case,
if Samsung decides to increase its production level, this means that it has to increase its inputs
which results in higher costs. As it was explained above, to produce and supply larger
quantities, higher prices are needed. Considering the fact that competition in this market is
fierce, it would be very harmful for the company to increase its costs. Furthermore, the
company already has established and trustful clients and it would not be a good action to take
such risks. Technology development had made the manpower be substituted with machines
where almost any function is completed by just pressing a button. Hereafter, if the company
decided to employ additional workers, the law of diminishing marginal returns will take place as
inefficiencies would take place and the costs of each additional worker would result in the end
price increase. Since additional employees require extra money, costs, space, DMR will set in
even faster decreasing the returns because of the presence of similar level of knowledge and
skills that do not add or improve the output. Instead, it would be more preferable for the
company to invest in machinery and technology or even in new entrepreneurs who would help
to boost the production and returns. New ideas to the company would result in new ways of
producing, new ways of functioning, new products and new customers. In our case, this is the
second most vital factor that might affect the company’s productivity as only one successful
and innovative entrepreneur might bring additional sales and an increase in market share. As a
result, it would be very difficult for DMR to take place if the company succeeds in finding the
right entrepreneurs. However the risks of fail in this subject are never disappeared, but
believing in their strengths, this could be overcome easily through several testing techniques.

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COMPETITION

The Porter’s five forces analysis already positioned Samsung to the type of industry competition
it pertains. Given the fact that the number of firms in the market is few with a large number of
customers makes the electronics market an oligopoly one. Besides the limited number of
successful firms present in this market, the barriers to entry are also relatively high because of
the presence of strong and trustful companies and also because of the high costs to start a new
business. Additionally, the strong and ongoing competition between the companies in this
market represents another characteristic of an oligopoly market. Moreover, the pricing strategy
is much controlled by all the firms operating in this market. The companies have a moderate
influence over market prices but not a pure influence. This is because of the similarity of the
products offered and also because of the size of the firms. In an oligopoly market, the firms do
not have much power in price changes. These factors are the main reason why we believe the
market electronics to be an oligopoly (Industry Structures, p.171-172).

ECONOMIES OF SCALE

Economies of scale had answered many questions related to economics in everyday life.
It has lowered the unit costs of production and provided lower prices for customers. By its
definition, “economies of scale are cost advantages that a business can exploit by increasing
their production scale” (Economies of Scale, par.3). Therefore, a firm faces an economy of scale
when the production cost of a single product decreases with the number of the unit produced.

69
The cost of producing one additional unit (marginal cost) decreases, while the volume output
increases.

There are two types of economies of scale: Internal and External. An internal economy
of scale is when the size of the individual firm estimates the cost per unit and not the whole
industry. On the other hand, an external economy of scale is when the size of the industry
estimates the cost per unit instead the size of the firm (Economies and Diseconomies of Scale,
par.2-5).

Economies of scale have also the dark side which is known as diseconomies of scale. As
businesses acquire economies of scale, the bigger that they become, the harder it becomes to
manage such a scale (Economies and Diseconomies of Scale, par.6). This complexity inquires
additional costs which outweigh savings benefited from greater scale.

Further, a business might analyze several factors of both economies of scale and
diseconomies of scale before taking action towards increasing its scale of operations. In our
analysis, Samsung must establish the net effect of the decisions which affect its efficiency
before deciding on further steps. A decision of increasing its output might result in lower
average cost of inputs but at the same time, it could raise the diseconomies of scale which
might bring additional costs for Samsung. Hence, when deciding on business expansion, a firm
must analyze both the factors of economies of scale and factors that might lead to
diseconomies of scale so that the average cost of any decision would be the lowest one and an
increase in efficiency would be the end result.

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CONCLUSIONS AND RECOMMENDATIONS

Samsung has a unique history as it was presented throughout our analysis in the paper.
In a short period of time, it managed to enter successfully the market and surpass its huge and
competitive rivals in many markets, especially that of United States and Japan. This success is
also shown in the field of technology requiring the company not only to adapt acquired
technologies but also to innovate and create its own. Samsung is nowadays considered as a
company which should be observed as its developing history makes it so. To observe the
successes and flaws of a company that progressed from a simple television production to state-
of-the-art semiconductors, provides important benchmarks and recommendations for the
study of new-entrants and also steps to follow in the path of success.

The market in which Samsung operates is characterized by fierce competition which

comes due to low product differentiation, low cost strategy and brand loyalty. The demand side
for Samsung is not highly affected by substitute goods as their presence is low and the ability to
satisfy the consumer needs is weak. However, one factor which affects the demand is the
availability of different types of technologies incorporated into similar and sometimes identical
goods. As technology advances and better production ways are found, the market will try to
incorporate the latest technology and benefit from it. As many companies cannot afford to
incorporate the latest technology, especially the new comers, big current companies will
benefit from this trend. After incorporating the new technology, the manufacturers will develop
new ways of lowering the production costs which automatically will lower also the selling price.
The advantage of this is that these cheaper products produced with the newest technology will
be afforded by the customers and hence, the demand for these companies will be larger.
Samsung products truly are manufactured with the newest technology and the demand for its
products is quite high as customers stay very loyal to this brand. Therefore, the demand of
Samsung is positively affected by its innovative technology which also contributes to a larger
market share. The company should continue walking on this path as this had led them to many
successes and profits already.

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 Furthermore, Samsung should try to incorporate new ways in its manufacturing process
as it competes not only on the TV sector but also on the mobile phones one. The competition
risk therefore is doubled and the company should focus and be careful on both these sectors in
order to survive the trends and succeed. As the world starts to recover from recession, the
consumer purchasing power will increase and therefore there will be more room for the
company to innovate without the fear of higher prices products. In the end, quality is what
matters and Samsung has shown to be very loyal to customer needs and wants. Additionally,
the company should adopt the strategy which is known as “Globalizing” (Friedman, 156) which
means that the strategy has to be global in conception and local in execution in markets in
which operates. Since the markets in the developed world have matured, it may be time for
Samsung to go global in an aggressive manner and tap the undeveloped markets. This might
necessitate a new strategy and adoption of lower price models in order to gain the customers
in such markets. Additionally, they should continue focusing on their core profitable products:
TV’s, Mobile Phones, PC and Cameras as these had shown to bring the biggest amount of sales
to the company (as presented above). Samsung should also push marketing even further and
advertise their products more on social networks (as these are the most frequent websites
visited by almost everyone nowadays). This is of a high importance as usually people who are
passionate about communication or electronics are the main consumers of communication
devices (mobile phones, Smartphone's, PC’s and such) and the receptive audience would be
targeted.

In conclusion, as we are witnessing the ongoing global economic crisis and the sluggish
recovery, it may be prudent for Samsung to go back to the basics to search for the right strategy
for both, the entrance on the new undeveloped markets and to survive the crisis and overcome
conflicts. Recently, the company had faced several conflicts and scandals and therefore today
more than ever, it should be very careful in every step undertaken in order to maintain its
current position and keep its customers. It may be time for the new management to re-invent
Samsung and what better time to do this than now with a paradigm shifts and trends that are
happening in the business and economic worlds.

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