Samsung Essay

Question 1:

Samsung finds itself in an enviable position. Its competitive advantages in memory span all parts of the company and its production process. As seen in the graphs below, Samsung has a low Willingness to Supply (WTS) as measured by its raw materials cost of just $1.18, which is 36% lower than the competitors’ average. Its capital efficiency is superior by roughly 18% with a per unit depreciation cost of only $1.35. This efficiency largely stems from the high yield rates and productivity at Samsung, with average yields reaching 80% while competitors’ levels are in the mid 60% range. Additionally, Samsung’s quality and reliability allow it to achieve a price premium of at least 15% over its rivals. The graphs depict Samsung’s advantages in various components.

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To summarize, the significant price premium and the absolute advantages in terms of material sourcing and capital efficiency allow Samsung to enjoy operating margins of 24%(based on 256Mb equiv.) while other firms remain in loss territory.

There are many activities at Samsung that give rise to such dominance in profitability.

1) Pricing: Samsung is able to charge higher prices mainly because of its superior quality and reliability. Typically, a faulty memory chip will cause huge losses for IT manufacturers. This makes them more willing to pay an extra dollar or two for Samsung chips compared with other memory chip makers

2) Depreciation: Samsung is able to cut down per unit depreciation costs by having much more efficient production lines. The yield rate at Samsung of 80% is significantly higher than that of competitors. For the same amount of capital expenditure, Samsung is able to produce more memory chips thereby lowering per unit depreciation costs

3) R&D: Samsung creates fierce internal competitions among its workforce to accelerate research and development. This works, ensuring the company is the first to develop and market the latest designs. In addition to the concentration of R&D workers at one site, Samsung can maximize its R&D efficiencies and shorten the time it takes to produce its latest, cutting edge products. This is vital to maintaining Samsung’s competitiveness since Samsung’s strategy is to be the first firm to introduce advanced products and enjoy premium prices until other memory chip makers catch up.

4) Materials: Because of Samsung’s dominant market share and buying power, it commands significant power in negotiating prices for major components. Typically, its suppliers favor volume sales.

5) Labor: The obvious advantage compared with western companies is the comparative wage differences between countries, which favors Korea. However, apart from wages, Samsung primarily uses a competitive pay system based on productivity and profits which allow employees to earn as much as 50% of their annual income on bonuses. In addition, it also provides adequate company housing and an environment where workers can freely communicate and interact with others on-site. This leads to an improved and motivated workforce.