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Samsung Electronics

MGMT 619 ± MW 7:20pm

October 20, 2010

SCUCarvers:
Anirvan Das
Girish Navalgundkar
Jakub Cech
Kyle Kaido
Prashanth Kalika
Vivek Durairaj
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Œevel 1 and Œevel 2 of the five forces analysis are explained in detail in Exhibit 1.

ÿ


 

- The biggest barrier to entry into the DRAM industry is its huge capital

requirement. The cost of building a new fab is around $3 billion, while the DRAM market size is

approximately $20 billion1 in 2003. Market leaders with significant cost advantage can retaliate

against new entrants. Overall, there are high barriers to entry in the DRAM market.

u c cc
ccMemory industry suppliers can be divided into two categories,

semiconductor equipment producers and raw material producers. There are only a few major

semiconductor equipment producers such as Applied Materials. Their supplier power is high

because of this concentration and a significant cost associated with switching vendors. Silicon

wafers are the main raw material for memory chips. Œow differentiation between wafer designs

makes it easy to switch suppliers, minimizing their supplier power.c

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 - DRAM customers2 are highly fragmented and consider memory

reliability as very important factor. This implies that buyer power is somewhat limited. On the

other hand, this industry has become commoditized and there is little differentiation. Buyers are

extremely price sensitive due to price conscious consumers and thin margins. These factors

suggest that buyers are powerful. The threat of buyer power appears to be neutral to the industry.

u  cc ccThere is no viable substitute to the DRAM memory. Research is being

performed on nanotechnology, but it is not in production yet.c



cc  c c Competitors in DRAM industry are highly committed

to their products. Some of them are sustaining consistent losses. Chinese competitors are new to

the industry and enjoy significant backing from their government. The DRAM industry is
ccccccccccccccccccccccccccccccccccccccccccccccccccccccccccccc
c·
of $33.7 billion global memory market in 2003c


Since there is no data indicating differences in the buyer behavior, PC OEMs, telecommunication and consumer
electronics manufacturers are treated as a single buyer group. c

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expected to enter a cyclical downturn in 200·. These factors make the threat of rivalry very high

with an unfavorable effect on this industry.

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cc
 ccExhibit 1-h explains our Œevel 3 analysis. Significant barriers to entry exist

for potential new entrants to the DRAM industry. Despite these barriers, Chinese companies

supported by government backing continue to enter. The industry is facing a cyclical downturn

and has reached maturity stage. The supplier groups are relatively powerful and intense rivalry

conditions exist. This rivalry will intensify as Chinese companies continue to enter. The effect of

buyer power is neutral on the industry. The major favorable condition is the lack of substitutes

for DRAM. Overall, these dynamics have resulted in a slightly unfavorable environment for

competitors in the DRAM industry (with overall score of 2.9 and weighted score of 3.17).c

 cc c c

Chinese entrants plan to gain market share with a low cost strategy. Refer to Exhibit 2 for

the comparison of costs. They have low cost structures and easy access to resources such as

cheap labor, talented engineers, land and investments. They also have strong government

backing and license technology from some of the more experienced incumbents. They have

access to Chinese market, which is expected to explode soon. However, they can only offer low

end products due to lack of manufacturing experience and tacit knowledge. They are quite

behind in developing frontier memory products. Chinese manufactuers are willing to price

below their own costs to gain market share. At the same time, they are in a better position to

sustain losses than their competitors. As Chinese firms become more efficient they pose a

significant threat because their approach will decrease margins even further and force many

companies to exit the market.

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Samsung has achieved a variety based strategic positioning by producing memory

products for manufacturers of PCs, cameras and many other consumer electronic products. In the

DDR and SDRAM category, Samsung follows a mixed strategy (see Exhibit 3). Samsung¶s

primary strategy is cost leadership. Exhibit 3-b shows that Samsung has a better cost structure

than its competitors. Samsung¶s brand and emphasis on quality allows for broad differentiation

as it is able to charge an average premium of 14.·
over competitors. Samsung also produces

specialty products including RDRAM and DDR2. These product lines display a focused low cost

strategy. A common core design allows Samsung to produce different products in a single

production line at a low cost. With a low cost structure and volume production, Samsung has

achieved a market share of more than 9·
in RDRAM and DDR2 by volume.


c cc
cc ccExhibit 4 shows Samsung¶s resources and capabilities in

light of value drivers and cost drivers. c

ccAs a leader in memory products, Samsung has effectively taken advantage of its fab

capacity to achieve economies of scale. A long learning curve is inherent to this industry.

Samsung has continuously developed new process engineering capabilities and improved its

older processes to maximize operational efficiency. Samsung has its own in-house product

design and R&D which helps to quickly develop cutting-edge frontier products. The main R&D

facility and all fab lines are collocated, helping to build camaraderie among design and process

engineers. This collocation also results in faster resolution of design and process related

problems, while reducing overhead (fixed) costs. From 2000 to 2004, Samsung¶s brand value has

more than doubled. Samsung¶s large product portfolio enables it to utilize economies of scope. c

c c
  
 c- Samsung provides R&D support to other design houses. This collaboration has

helped develop new applications for DRAM as well as customized products for niche markets.

Samsung¶s Regional Specialist Program also helps create these customized products based on

local customer needs. The company has also benefited from taking calculated risks in new,

unproven process technologies. In certain cases Samsung creates a competitive environment

among its R&D departments to capitalize on innovation. The company is able to attract talented

engineers through meritorious selection and evaluation. Its productivity incentives encourage

highly productive employees and aid in the retention of these employees. These benefits also

create a culture with common goals and decrease costs through higher productivity. c


 c
 ccActivities contributing to the value-chain of Samsung are shown in

Exhibit ·. The interaction or fit of activities shown in this framework suggests that it is a difficult

model to imitate and provides a considerable competitive advantage for Samsung.c

c
 ccBrand, Quality, Technology and Customization are the main value drivers for

memory products.cc

V-P= u1*Brand+u2*Quality+u3*Technology+u4*Customization.c

Due to lack of data, betas are assigned based on the importance of each value driver. For

example, as quality is considered to be more important relative to other value drivers, u2 is

higher than other beta values. We have used u1 = 0.2· u2= 0.3 u3 = 0.2· u4 = 0.2

Brand ± A company¶s history is an important factor contributing to its brand equity. The number

of years in operation is used to calculate the brand value factor.

Technology- Design rule technology is used to measure technology prowess.

Quality - Better R&D and process engineering results in better quality products. The level of

company investment in R&D is used as the measuring factor for the weight of Quality.

c c
Customization - RDRAM was produced through collaboration with Rambus and customized

accordingly. We used the percentage of RDRAM production as a measure for the weight of

customization.

Samsung has the highest V-C compared to its competitors (Exhibit 6). V-C analysis shows that

Samsung is both a cost and value leader. This enables it to create the highest buyer and firm

surplus in the industry. Both cost and value advantages are vital for Samsung¶s performance.

 c
 c- Based on the VRIO analysis (Exhibit 7), Samsung has multiple resources and

capabilities that provide a sustained competitive advantage. Threats from Chinese manufacturers

can become more significant in the long run if they catch up on value drivers in the temporary

sustained competitive advantage category. These include factors such as fabrication capacity,

quality and product mix/customization capabilities. Our analysis highlights Samsung¶s value

drivers in terms of technological advantages and intellectual property in their frontier products.

These value drivers prevent imitation by new entrants. Samsung¶s quality and reliability value

driver keeps customers from switching to competitors¶ products.

  c

Samsung needs to retain a leadership position in technology through R&D investment in

its frontier products. It has already been successful in building its brand reputation through these

products. R&D investment allows Samsung to introduce new products ahead of the competition.

This strategy creates a value driver because it increases Samsung¶s breadth of product line for

customers. Customers value this new technology adoption, allowing Samsung to charge higher

prices. New products in the DRAM industry quickly become legacy products, which can be sold

in niche markets, creating a value driver for Samsung. Flash memory also shows significant

promise for growth. Investment in R&D will ensure that Samsung capitalizes on opportunities

c c
presented by Flash technology. Samsung should also invest in further improvements to its

manufacturing process. Samsung is the only major memory manufacturer currently using

0.11µm as its main design rule. This superior processing technology is a cost driver because it

allows for a smaller chip size, resulting in more output and lower per unit costs. A downside of

high R&D investment is the need to ensure the correct projects receive enough resources and

funding to be successful. This requires effective project management skills and executive

decisions. The DRAM industry is also expecting a downturn which can cause customers to

become more price sensitive, unwilling to invest in new products without significant cost

savings.

Samsung should also enact a partnership with Chinese entrants for low end memory

products. Chinese entrants are only at the beginning stages of building DRAM manufacturing

capability, and will need to undergo a steep learning curve in the next few years. This partnership

can be in the form of licensing, where Samsung licenses its technology for low end memory

products to a Chinese entrant. This strategy allows Samsung to direct its resources to next

generation products, thus creating more value. It also serves as a cost driver for Samsung since it

will be able to utilize China¶s capacity and cheaper labor. A potential downside to this strategy is

the threat it poses to Samsung¶s trade secrets. There are intellectual property protection concerns

since Chinese laws are loosely enforced or nonexistent. A more significant risk is the potential

impact a new strategic partner can have on Samsung¶s current organization. Samsung¶s

infrastructure is a cost driver due to increased efficiency. Introducing an outside manufacturing

partner can negatively affect this cohesiveness and productivity.

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Economies of Scale (Supply Exhibit 7a shows that with the exception of SMIC, there 2 3
Side) exist reasonable economies of scale. With an increase of
production volume, we see a decrease in the fully loaded
costs of companies, but not consistently. The suppliers
give discounts to high volume purchasers.
Network Effects (Demand DRAM market is commoditized, leading to minimal 4 7
Side Scale)c network effect.
Customer Switching Cost DRAM market has become highly commoditized and 3 6
DRAMs can be replaced very easily. There is however
some brand loyalty, mainly due to reliability factor.
Capital Requirement Very high capital requirements. Cost of building new fab 1 1
was $3 billion in 2004 compared to $20 billion industry.
Building manufacturing facilities is difficult and time
consuming as the machinery is very sensitive to dust and
electronic shock.
Incumbency Advantage Incumbents have significant advantage due to the 2 2
importance of reliability and economies of scale.
However, the customers are extremely price-conscious,
indicating that the incumbency advantage may be lost to
cheap DRAM supplier.
Unequal Access to The DRAM industry is highly concentrated. So a new 2 ·
Distribution Channel entrant may not have access to distribution channels
readily.
Restrictive Government There are no government policies that are restrictive. 4
Policy However, certain governments (e.g. U.S.) impose
restrictions to foreign vendors that prevent them from
selling to those countries.
Expected Retaliation The current players can give deeper discounts to suppress 1 4
the new entrants.
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Concentration Ratio for each
Supplier Group
Strategic Importance of the
Industry to the Supplier
Group
Switching Costs
Due to complex technology requirements, the equipment 4 3
suppliers are more concentrated.
The $20 billion DRAM industry is strategically 2 ·
important to this supplier group because it needs
technology specific investments.
The semiconductor equipments need heavy investments 4 2

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Are the Supplier group¶s
products/services
differentiated?
Are there Substitutes for the
Supplier group¶s
products/services?
Do the Suppliers pose a
credible forward integration
threat?
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and so there are significant costs associated with
switching from one supplier to another.
The semiconductor equipments from different suppliers 4 4
can be somewhat differentiated (in terms of features,
precision).
If DRAM companies go fabless, then the equipments are 4 1
not needed. However, due to low margins, all companies
have their own fab. Thus, there are no substitutes for the
equipments.
There is no forward integration threat from the 1 6
suppliers.
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1.c No substitutes
2.c Switching costs
3.c High concentration ratio

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Concentration Ratio for each Many companies producing raw materials. 1 4
Supplier Group
Strategic Importance of the Exhibit 7-a shows that the raw materials cost is 20-2·
2 3
Industry to the Supplier of the total DRAM cost. Thus this $20 billion industry is
group strategically important to the suppliers of raw material.
Switching Costs Silicon wafers were standard and so switching cost 2 2
could be negligible.
Are the Supplier Group¶s There is no differentiation between raw materials from 2 1
products/services different suppliers.
differentiated?
Are there substitutes for the There are no substitutes to silicon. 4 6
Supplier Group¶s
products/services?
Do the Suppliers pose a There is no forward integration threat from the 1 ·
credible forward integration suppliers.
threat?
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Are Buyers concentrated or
are there a few high volume
Buyers?
Are the products
differentiated?
Does the Buyer face low or
high switching costs?
Do the Buyers pose a
backward integration threat? maintain the facilities and equipment, it is difficult for
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Buyers are numerous and extremely fragmented. For 1 1
example, no single OEM controlled more than 20
of
the global PC market.
The DRAM market is highly commoditized, even 3 4
though some firms are able to effectively differentiate
by being more reliable than competitors.
DRAMs are a highly commoditized market with very 3 2
little differentiation. On the other hand, customers still
give considerable importance to reliability, and were
ready to pay a premium for a reliable supplier. This
leads to moderate switching costs.
Given the high capital requirements to set up and 1 7
buyers to integrate backwards into manufacturing
memory chips.
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Is the product a significant Memory represents 4
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of material costs for an
fraction of the Buyer¶s
costs?
Does the Buyer earn low
profits?
Is the quality of the Buyer¶s A DRAM is critical to the functioning of the buyers¶
product affected by the
industry¶s product?
Does the industry¶s product
affect the Buyer¶s other
costs?
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OEM PC producer and 4
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of material costs for a
mobile phone producer. PC manufacturers negotiate
hard on prices due to intense rivalry.
Rivalry between manufacturers of PCs, mobile phones 4 3
and consumer electronics is very intense, as they have to
face very price-conscious consumers. This forces
DRAM buyers to be very price-sensitive. There could be
some very small groups of buyers such as video game
manufacturers that may enjoy higher profits.
4 ·
products. If the DRAM does not work as expected, the
buyers¶ products will be useless.
DRAMs do not result in any cost savings by the buyer. 3
As a result, there is no relation of this factor to the
DRAM market.
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1.c Buyers not concentrated
2.c Œow switching costs
3.c Buyer¶s low profits

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Price/Performance of the No substitutes 1 2
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Industry Concentration
Demand Conditions
/Industry Growth Rate
Is the industry growing at a
decreasing rate or increasing
rate?
Exit Barriers
High Commitment by Rivals
Diversity of Competitors:
Do firms have different
goals/ideas about how to
compete or are they playing
by the same set of rules?
Degree of Product
Differentiation:
Opportunities for
Differentiation?
Fixed Costs/Variable Costs
Ratio
Is capacity added in large
increments?
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The DRAM market is very concentrated (CR4~90
). 4 ·
The industry is quite unpredictable and the rules of the
game are unknown, leading to an increase in rivalry.
The case states that the growth in the DRAM industry · 4
closely follows the PC market, which was becoming a
mature single-digit growth market. Also, the memory
chip industry is expected to enter a cyclical downturn in
200·.
Exit barriers are very high due to the high fixed costs. · 2
Rivals are highly committed. While some companies are · 1
bent on maintaining and gaining market share, the
Chinese entrants are committed to establish market
share at any cost.
The competitors are very diverse, with different goals. 4 7
Samsung wants to maintain a competitive advantage,
while the Chinese entrants are sacrificing profits to gain
market share. This results in unpredictability, leading to
an increase of rivalry conditions.
The DRAM market is highly commoditized. The only 4 3
differentiation that players can offer is reliability. This
leads to moderate switching costs for buyers and
therefore is a neutral factor of the rivalry force.
The industry has huge capital requirements and · 6
comparatively low variable cost (Exhibit 7).
Memory chip producers need to generate as many 4
individual chips in a single production step as possible,
and also minimize defects at the same time. As a result,
capacity needs to be added in large increments in order
to be efficient.
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1.c High commitment by rivals
2.c High exit barriers
3.c Not much product differentiation


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Rivalry High rivalry, unfavorable · 2 4 27
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Buyer Power Neutral threat 3 4 2 13
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Barriers to Entry High barrier to entry 2 1 · 33
0.67
Threat of Substitutes Favorable, no threat 1 · 1 7
0.07
Supplier Power Œittle bit unfavorable 3.· 3 3 20
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  -- R&D and Fab lines in one location 1) increases Organizational Organizational
collaboration between design engineers and process engineers - improving Practices Practices
process efficiencies 2) helps in promoting Samsung's culture emphasizing
on product quality and process effectiveness as it is under one roof 3)
savings in fab construction costs.
c c   ± In-house product design unlike its Vertical
Chinese competitors - helps in developing the cutting edge products. Integration
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c -- Multinational presence with customers all over the Accessibility
world.
ÿ  -- High brand value - $12.6Billion in 2004. Brand Value
cÿ  ± 1,200 Variations in DRAMs. Variety
c+  -- Multiple product architecture with same core design. Economies of
Frontier products to legacy products. Decreased volume production of Scope
legacy products would also affect economies of scale.
 c    ± Scale of fab Investment: Market leader with Economies of
economies of scale. Scale
c   -- Multiple product architectures on each production Œearning Curve
line- 0.11m Process Technology DRM rules- Better yield.
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c
 --Samsung is part of Chaebol in Korea. Favorable Government
High political influence. Government Incentives
Policies

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c - Regional Customization
Specialist Program.

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c *c± Early adoption of new technology like Technology
12-inch process. Œead/Brand
Reputation

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c±separate competitive teams Technology

in different locations to produce frontier technology.

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cccc- legacy products into Extended
niche products. Product Œife
Cycle
c c-- High reliability of the products with multiple High Quality
industry awards.

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c- Meritorious Evaluation/ Favorable Œabor
Sponsoring of higher education. Conditions


  c  c c  - Develop new uses for memory Customization/
products. Product
Extension

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c- Productivity Incentives. Favorable Œabor
Conditions

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Micron 0.13 3 c Micron 0 0 c c c
Infineon 0.14 2 c Infineon 0.40
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Hynix 0.13 3 c Hynix 0 0 c c c
SMIC 0.· 1 c SMIC 0.00
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Samsung 30 · c Samsung 0.6 4.31 0.139211 · c
Micron 26 4 c Micron 0.·7 6.61 0.0 6233 3 c
Infineon · 1 c Infineon 0.71 ·.02 0.141434 · c
Hynix 21 4 c Hynix 0.· ·.33 0.10 1 4 c
SMIC 4 1 c SMIC* 0. 4. 4 0.123967 4 c
c c c As SMIC lags behind the industry by 10 years, its weight is discounted by 2·

Samsung Micron Infineon Hynix SMIC

Beta* Beta* Beta* Beta* Beta*
Rating Rating Rating Rating Rating Rating Rating Rating Rating Rating
Brand
b1=0.2· · 1.2· 4 1 1 0.2· 4 1 1 0.2·
Quality
b2=0.3 · 1.7· 3 1.0· · 1.7· 4 1.4 4 1.4
Technology
b3=0.2· · 1.2· 3 0.7· 2 0.· 3 0.7· 1 0.2·
Customization
b4=0.2 · 1 0 0 1 0.2 0 0 0 0
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Semi-Conductor YES YES YES YES Sustained
Process Technology Competitive
(0.11ȝm) Advantage
Technology and YES YES YES YES Sustained
Production Œine Competitive
Capabilities Advantage
Employee Selection YES YES YES YES Sustained
and Retention Competitive
Policies Advantage
Quality YES YES YES YES Sustained
Competitive
Advantage
Brand Value YES YES YES YES Sustained
Competitive
Advantage
Product Mix & YES YES NO YES Temporary
Customization Competitive
Advantage
Fabrication YES YES NO YES Temporary
Capacity Competitive
Advantage
R&D and YES NO - YES Parity
Production Facility
at Same Œocation
Partners and OEM YES YES NO YES Temporary
Customers Competitive
Advantage
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