A Critical Evaluation of The Strategic Direction of Samsung Mobile Communications

MKT3007: Strategic Marketing for Competitive Advantage
A Critical Evaluation of the Strategic Direction of
Samsung Mobile Communications
Syed Tahmid Zaman Rashik
BSc. Marketing Newcastle University Business School Newcastle University 10 December 2013
Contents
Introduction............................................................................................................................................ 3 Company Background ......................................................................................................................... 4 Rise of Samsung Mobile ..................................................................................................................... 5 Samsungs Competitive Advantage & Strategic Direction ............................................................. 6 Competitive Environment .................................................................................................................. 10 Rivalry among competitors ........................................................................................................... 11 Threats of new entrants................................................................................................................. 12 Threats of substitutes .................................................................................................................... 13 Bargaining power of suppliers ...................................................................................................... 14 Bargaining power of buyers .......................................................................................................... 15 Internal Analysis ................................................................................................................................. 16 Samsung Mobiles go-forward strategy .......................................................................................... 17 Conclusion ........................................................................................................................................... 18 References .......................................................................................................................................... 19
Introduction
Samsungs supremacy in the global mobile phone industry is no surprise. Since 2012, Samsung is dominating the industry through strategies that companies like Apple and Nokia cannot match. From a marketing perspective, this gives an insight to understand how the market leader has created and is still maintaining a competitive position over its rivals. This paper aims to use Porters (1980 cited in West, Ford and Ibrahim, 2010) generic competitive strategies to comprehend Samsungs strong competitive advantage within the industry. As the competitive advantages are regarded as temporary (Sirmon, Hitt, Ireland and Gilbert, 2011), the author decided to further identify the current forces in the competitive industry and exploit the internal capabilities and weaknesses to recommend future strategic direction for the company which will help them to main the competitive advantage over time. Due to positive growth prospect of smartphones, much of this papers emphasis is on this type of mobile devices. Corresponding to Porters competitive strategy, it was found that Samsung outperformed its key rivals through its cost leadership strategy and ability to differentiate its products based on customer requirements in different markets. It has also been found that a major weakness of Samsung is its dependency on Googles Android mobile Operating System (OS) and thus future recommendation has been centred on innovation and differentiation in OS software.
Company Background
Samsung Mobile Communications is one of the three main business division of Samsung Electronics - a multinational electronics company established in 1969 and a flagship subsidiary of the Samsung Group based in South Korea. Samsung Electronics is one of largest information technology companies in the world (Financial Times, 2010) which employs 425,000 people across the globe (Samsung Electronics, 2012). Samsung Mobile Communication (will be referred as Samsung Mobile/Samsung) has contributed for most of Samsung Electronics success in last few years, mainly due to its Galaxy range of smartphone which has become a direct competitor to Apples iPhone.
Rise of Samsung Mobile

Despite the economic recession and increasing competition in the global phone industry, Samsung Mobile had remarkable success worldwide in 2012. It became the global market leader in mobile phones (in both sales and market share), leaving behind Apple Inc. and Nokia Corp. It had the best growth rate in the industry with 16 per cent rise in sales revenue compared to last year (Samsung Electronics, 2012). Samsung Mobile sold 213 million units in 2012 making it the bestselling mobile manufacturer of the year. In the past decade, Samsung Mobile has almost undergone a true evolution as it challenged and overtook both Nokia and Apple who were the market leaders in their flagship mobile phone categories. Now, it has become imperative to recognize the growth strategy Samsung Mobile had for which they are now dominating the mobile phone market.
Samsungs Competitive Advantage & Strategic Direction

The unprecedented growth of Samsung explains a competitive advantage it had and still has over its rivals like Apple and Nokia. Kotler (2003: p.22) creatively defined competitive advantage as having a gun in a knife fight which theoretically means an advantage over competitors. According to Porter (1980 cited in West, Ford and Ibrahim, 2010) competitive advantage is obtained by pursuing only one of the following generic strategies- cost leadership, differentiation or focus. Among these three strategies, the strategy that matches best with Samsung is the cost leadership which is mainly a low-cost competitive strategy pursuing cost reduction from experience, capacity utilisation, linkages, degree of integration and many other cost drivers (Hooley, Piercy and Nicouland, 2013). The cost driver that has mostly benefitted Samsung in seeking cost advantage is vertical integration within its production facilities (Reuters, 2013). In microeconomics and management, vertical integration is referred to a strategy used by manufacturers to gain more control over the production chain, instead of outsourcing various processes in the production chain to different suppliers (The Economist, 2009). Although supply chain management literatures have identified two forms of vertical integration: forward and backward integration (Barreyre, 1988; Rangan et al., 1993), for Samsung, it is rather difficult to state exactly which way they have integrated their supply chain as their strategy does not follow the mainstream conventions. Samsung achieves its cost leadership (vertical integration) through manufacturing major components of its mobile devices such as Mobile DRAM, NAND Flash, Application Processor, LCD/OLED panels. However, Samsungs integration strategy is rather different from many other electronics manufacturer. Firms usually start the vertical integration through making the end product first and then they start producing components to cut costs associated to their end products (Guan and Rehme, 2012). But Samsung stepped into the industry with the components business where it performed remarkably well and then commenced production of its end products mobile devices. Samsung Electronics used similar strategy to enter the Television industry also (Samsung, 2013a). According to Ramstad (2013), Samsung does not compromise profitability of its component business for the purpose of its mobile business; they treat each business as separate entities. This is reflected in the fact that Samsung outpaces several global companies in manufacturing key mobile components. Furthermore, Apple, Samsungs arch rival in smartphones gets one of the major components of their own devices manufactured by Samsung. Apple also lists Samsung as one of its top providers of raw material and components (Apple Inc., 2013).
Although Samsungs vertical integration does not follow the conventional path, the worlds largest mobile phone maker is indeed relishing the generic benefits of vertical integration. Vertical integrations help manufactures to achieve lower production cost, reduced inventories, lower distribution and transportation cost and obtain control over the supply chain (Troyer and Russell, 1995; Simatupang et al., 2002; Richey et al., 2010). Thanks to its vertical integration, Samsung has gained significant ability to control costs and also control the supply of the critical components which its rivals, to a certain extent, cannot achieve. Nevertheless, vertical integration, of course, does pose some risks. For example, as mentioned earlier, Samsung is one of the largest component suppliers of its rival Apple. This means, no matter how strongly Samsung competes with its rival, there is always one side of the main business which depends on Apples continued success and furthermore, reduction of Apples component order can be negative for Samsung. Then again, a Reuters (2013) report states that Apple has previously cut substantial orders for components and Samsung was not harmed by it because of the internal demand that kept on rising. Looking at Porters (1980 cited in West, Ford and Ibrahim, 2010) generic strategy matrix in Figure 1, it can be clearly seen that Samsungs generic strategy is definitely not only cost leadership. In the high end smartphone market, Samsung has managed to produce devices that out performs its competitors products through product differentiation in terms of display screen and customized Android OS (TechRadar, 2013). Samsungs high end flagship devices like Galaxy S and Note have very different product features which allow them to charge premium prices for these devices. On the other end, low end devices like Samsung Wave and Omnia which are mainly targeted towards the emerging economies reflects the cost leadership strategy of the company (Figure 1). Contradicting to Porters (1980 cited in West, Ford and Ibrahim, 2010) theory of pursuing only one generic strategy, Samsung manages to implement both cost leadership and differentiation strategies based on high and low end devices. From a literature point of view, this can be justified by Millers (1992: pp.37) statement that focusing on one generic strategy may leave serious gaps or weaknesses in product offerings, ignore important customer needs, be easy for rivals to counter, and, in the long run, cause inflexibility and narrow an organization's vision. In case of Samsung, the company spends huge amount of money in R&D to understand the specific requirements of not only one segment, but various different segments of consumers around the globe and act accordingly, something similar to Robertsons (1994) Glocalisation concept. Through this strategy, Samsung has flooded the emerging markets with varieties of mobile devices (currently 56 models in India, 132 models in China) suitable for those markets and has gained significant market shares in countries like India, China and other African countries. Samsung is
definitely aware of the fact that Apple is making much higher profit than Samsung through their differentiating strategy focusing on a narrow customer market. This is also one reason why Porters (1980 cited in West, Ford and Ibrahim, 2010) proposed for only one strategy, however, Samsungs way is certainly the broader way and they will try to serve every customer segments and achieve larger market share. Nevertheless, in order to sustain this competitive position, Samsung has to be aware of how the competitive environment is changing and revise their strategies appropriately.
Figure 1: Generic Strategy Matrix for Global Mobile Phone Industry
Competitive Environment
This section is aimed at analysing the major structural elements of the competitive environment in which Samsung operates. In order to do so, Porters five forces model (1979) has been used to determine the five competitive forces that shape the industry. Understanding these forces is essential to provide effective strategic recommendations (Porter, 2008; West, Ford and Ibrahim, 2010; Hooley, Piercy and Nicouland, 2013). In the following analysis, each competitive force is rated as high medium, or low in strength. The key buyers are considered as network operators and retailers and key suppliers are taken as firms providing parts, mobile OS (Android) and applications, equipment and technology for mobile device manufacturers.
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Rivalry among competitors

The strength of this competitive force is assessed as Moderate and the determinants of the strength are demonstrated in Figure 2.
Key Issue: The global mobile phone industry comprises of small number of large renowned brands like Samsung, Apple, Nokia, LG and HTC creating intense rivalry. Most of the large players are offering similar products but they also put considerable efforts in creating products that has not existed in the market. Firms like Samsung, LG and Sony and other successful operations in electronics businesses, thus, exiting from the industry will not be unfeasible for them. Samsung, Apple, HTC, Sony and other mobile phone manufacturers are most likely to face more difficult battle in the future from Google and Microsoft as both the software giant is set to compete more fiercely after acquiring hardware manufacturers like Motorola and Nokia respectively (Telegraph 2011; BBC, 2013)
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Threats of new entrants

The potential for new entrants to emerge is assessed as Moderate and the determinants are demonstrated in Figure 3.
Key Issue: The worldwide mobile phone market, especially in the emerging economics, is expected to grow mainly in smartphone section and thus several newcomers are attracted to enter the market. However, in the developed economies, the unprecedented growth of the mobile industry in past few years has come to a stable phase, according to Mintel (2013). Due to excessive issues of patents (Gillmor, 2013) companies are heavily investing in intellectual property which decreases the threat of new entrants significantly.
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Threats of substitutes
The strength of this competitive force is assessed as Weak as demonstrated in Figure 4.
Key Issue: Possible substitute for mobile phones are fixed line telephones or laptops which provides similar features, however, they cannot be considered as a strong substitute, as they cannot provide the benefits of mobile phones such as portability, size and weight.
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Bargaining power of suppliers

The strength of this competitive force is assessed as Moderate as demonstrated in Figure 5.
Key Issue: The primary inputs to the mobile phone industry involve the hardware components (e.g. integrated circuit) and the software components (e.g. Operating System or OS). As part of the Open Handset Alliance (led by Google), major manufacturers use the popular open source Android mobile OS (around 80% market share, 40% runs on Samsung devices) under free license. However, Google Play, from where almost all Android users download the mobile applications (apps) is fully owned and controlled by Google, not the manufacturers.
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Bargaining power of buyers

The strength of this competitive force is assessed as Moderate and the drivers of buyer power are demonstrated in Figure 6.
Key Issue: There are small numbers of large network providers like O2 in the UK, which strengthen their position while bargaining. However, they are also required to have enough mobile phone in their stock to match the demand of their end-users which can be created by manufacturers using pull marketing strategies.
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Internal Analysis
In order to provide effective strategic recommendations, it is very essential to ensure that Samsungs internal capabilities (Strengths & Weaknesses) are matched with the competitive environment issues as found earlier (Hooley, Piercy and Nicouland, 2013). Additionally, Samsung Electronics vision and mission related to mobile division needs to be taken on board also. Thus it is required to perform an internal analysis of Samsung as shown in Table 1 below.
Inspire the World, Create the Future To inspire the world with innovative technologies, products and designs that enriches peoples lives and contributes to a socially responsible, sustainable future Objectives (Target for 2020) Strengths (What is Samsung good at relative to competitors) Weaknesses (What is Samsung bad at relative to competitors) Achieve USD 400 billion in sales, predominantly No.1 in the global IT industry & Global top 5 Be regarded as an innovative company an ensure top 10 position in list of worlds best workplaces Build new markets and attract worlds best talents Global leader in mobile devices market and subsidiary of one of worlds top conglomerate Largest market share for devices running on Googles Android operating software. Strong position in emerging markets Efficient large-scale production facilities and massive investment in Research & Development 8th Global Brand in terms of brand value Heavily relies on Googles Android operating system. Found guilty after violating patents of Apple Inc. No major milestone in innovation and technology.
Vision
Mission
Sources: Samsung (2013b), Marketline (2012), Interbrand (2013), Belic (2013), Mail Online (2012)
Table 1: Internal Analysis of Samsung Mobile
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Samsung Mobiles go-forward strategy

Whether it is cost leadership or differentiation strategy, Samsungs route to competitive advantage has been strongly relying on hardware. From both the external competitive and internal analysis, one thing is very clear that Samsung definitely needs to innovate and differentiate in terms of software. To Samsungs top rival Apples credit, they have successfully managed to innovate in software and create a thoughtful integration of both hardware and software. Apple or even Nokia do not rely on Googles Android OS software and are strongly competing with their own OS software. In order to Inspire the World, Create the Future, Samsung definitely needs to stop relying on Android completely; especially after the threat Google brings in through entering the hardware industry by acquiring Motorola. To some extent, Samsung does understand the importance of having their own OS and this has been reflected in Samsung partnering with Intel to launch Tizen OS in 2014 (Boxall, 2013), however, it has to first match the standards of Android or iOS (Apple) and then differentiate itself from the existing OS in the market. Samsungs massive Research & Design team is required to support Samsung in solidifying its leadership by placing top priority on OS. In the developed market like the UK where the smartphone market is saturated, it is very essential for Samsung to differentiate its mobile devices based on excellence in developing state of the art products like Apples iPhone and integrating it with phenomenal OS. Both ambition and capability exist within the company to make it happen. In the emerging economies like India, China or Indonesia, Samsungs cost leadership strategy shall continuously give them the edge over their competitors if they can translate their lower costs into lower prices in the marketplace and continue their efforts in flooding the market with huge quantity of different models of mobile devices which will eventually minimize the threat of new entrants entering the lucrative market.
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Conclusion
When the mobile business will eventually lose its profitability, Samsung may surely pave its way to another industry, but the legacy of Samsungs rapid business growth in this industry shall live forever. Outpacing industrial leaders like Nokia and Apple is something the conglomerate will cherish evermore. This paper has connected Samsungs successful strategies with the theories of competitive advantage. Samsungs success story is found to be partly due to both of its cost leadership and hardware differentiation strategy. However, because competitive environments change frequently, an analysis of the competitive environment followed by an internal analysis was performed to suggest strategies that are well tuned to both current competitive forces and internal capabilities. Samsung is recommended to innovate and develop its software component through continuous R&D process which they have brilliantly used in the past to produce excellent hardware. However, one question that will still remain unanswered is that, even if Samsung implements Porters differentiation strategy for competitive advantage through outstanding software innovation and actually develops its own mobile OS, the smart phone users who are already trusting and giving their personal photos or information to Google or Apple, will they be able to trust Samsung on this aspect?
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MKT3007: Strategic Marketing for Competitive Advantage