Vertical Integration and Samsung

Business- And Corporate-Level Strategies

Samsung Business-Level and Corporate Level Strategies

Business organizations employ business-level and corporate-level strategies to compete in the marketplace. Business-level strategies are strategies aimed at creating value for the customer and achieving competitive advantage in the marketplace. Corporate-level strategies on the other hand are strategies that affect the organization as a whole -- they inform the overall strategic direction of the firm (Hill & Jones, 2012). This paper analyzes Samsung Electronics' (Samsung) business-level and corporate-level strategies. Following a brief background of the company, the paper describes the business-level and corporate-level strategies the company uses, and which strategies are most important for the long-term success of the company. The paper also compares Samsung to its major competitor (Apple Inc.) and considers the implications of business strategy in slow-cycle and fast-cycle markets.

Company Background

Samsung Electronics is a division of the Korean global business conglomerate Samsung Group. The conglomerate has business interests in diverse industries, including electronics, home appliances, textiles, shipping, food processing, financial services, and retail. This paper focuses specifically on Samsung Electronics. Samsung was founded in 1969. With its headquarters in South Korea, the company has operations in more than 80 countries around the world. The company is involved in the design, development, manufacturing, and marketing of a broad array of consumer electronics, including mobile phones, computers, LCD panels, televisions, cameras, and semiconductors. Samsung accounts for about 70% of its parent company's total revenues, hence a critical division in the Samsung conglomerate. With revenues in excess of $174 billion as of 2016 (Samsung, 2016), Samsung is the largest producer of smartphones, LCD panels, and televisions in the world, giving the firm a major competitive advantage in the fiercely competitive global electronics industry.

Business-Level Strategies

Decisions relating to business-level strategy are primarily aimed at enhancing a firm's core competencies in specific products or markets. In other words, business-level strategies help an organization to enhance customer value and competitive advantage in the marketplace. Broadly speaking, there are two forms of business-level strategies: cost leadership and differentiation (Beard & Dess, 1981). Cost leadership essentially involves delivering products or services at a lower price than competitors. This is mainly achieved by reducing production and operational costs. For cost leadership, a firm may focus on the general market or a niche market. If the focus is on a niche market, the strategy is referred to as focused cost leadership. Differentiation on the other hand involves generating value for the customer by offering unique product characteristics. These characteristics may relate to not only the product itself, but also how the product is delivered to the customer, for instance, customer service and warranty conditions. With differentiation, a firm may also focus on a niche market, resulting in focused differentiation. While some firms may use either cost leadership or differentiation, others may combine the two strategies -- integrated cost leadership/differentiation (Hill & Jones, 2012).

Samsung's business-level strategy can largely be described as cost leadership. This is particularly evidenced by the firm's lower prices compared to its major rival Apple Inc. For instance, the latest iPhone (iPhone 7) retails for as high as $769 per handset, compared to Samsung's Galaxy S8, which is about $40 cheaper. Samsung's low-cost strategy has enabled the firm to appeal to lower income consumers. This is unlike Apple, which focuses on premium consumers. For Samsung, a low cost strategy has been a significant source of competitive advantage in the global smartphone market. Today, Samsung smartphones can be found in virtually every country across the globe -- from North America and Europe to Africa, Asia, and Latin America. By delivering products at a lower price, the firm has been able to attract a much larger audience throughout the world. Today, Samsung is the largest producer of smartphones in terms of units shipped.

How has Samsung managed to pursue a cost leadership strategy? This is an important question to consider. First, Samsung targets a much broader global audience, enabling the firm to benefit from economies of scale. Samsung has also managed to reduce costs by pursuing vertical integration. While most of its competitors outsource the production of major components such as memory chips, Samsung produces most of its components through its own subsidiaries. Other strategies the firm uses to achieve cost leadership include better sourcing of raw materials, better manufacturing practices, and better quality control.

While Samsung's business-level strategy is cost leadership, differentiation is also remarkably evident. With extensive investment in research and development (R&D), Samsung has delivered significantly unique products to the market (Samsung, 2016). For instance, compared to most rival products in the market, Samsung's smartphones offer a larger touchscreen display, better photo and video taking capabilities, more app compatibility, and better functionality. On the whole, Samsung employs both cost leadership and differentiation, enabling the firm to simultaneously deliver unique products at a relatively low cost.

Both cost leadership and differentiation have important advantages in the marketplace. Cost leadership enables a firm to gain market share as well as protection against rivals, while differentiation is important for achieving positive customer outcomes such as customer satisfaction and customer loyalty (Hill & Jones, 2012). For Samsung, an integrated cost leadership/differentiation strategy is crucial for long-term success. The global smartphone market, for instance, is experiencing a boom, with majority of the growth occurring in developing countries in Africa, Asia, and Latin America. For these markets, a low cost strategy is important. In the near future, these markets are expected to experience even greater smartphone penetration, presenting a lucrative opportunity for low cost firms. Furthermore, the global electronics market is a rigorously competitive space. In such a space, it is imperative for a firm to offer not only lower prices, but also differentiated products. Without differentiated products, Samsung cannot compete effectively. This is particularly true given the influx of competitors in the marketplace. More importantly, differentiation overcomes the challenge of imitation, which can negatively affect a firm's position in the marketplace (Hill & Jones, 2012).

Corporate Level Strategies

Whereas business-level strategies are aimed at create value for the customer, corporate-level strategies affect the organization as a whole. In other words, corporate-level strategy dictates a firm's strategic direction in terms of its scope of operations, the markets it pursues, diversification of product portfolio, and strategic partnerships (Beard & Dess, 1981). There are many types of corporate-level strategies. These include mergers and acquisitions, strategic alliances, horizontal integration, vertical integration, restructuring, and product diversification, discontinuation. Corporate-level strategies may also involve whether a firm focuses on the local market or the global market.

Samsung pursues a number of corporate-level strategies. First, Samsung is a global company. With assembly plants and marketing networks in over 80 countries, the company targets consumers in virtually every corner of the globe (Samsung, 2016). The market scope of Samsung's operations has given the firm important cost advantages. Samsung is also a true embodiment of diversification. Diversification basically involves producing different types of products, which may either be related or unrelated (Hill & Jones, 2012). Compared to most of its rivals, Samsung designs, develops, manufactures, and markets a much wider variety of products, including smartphones, tablets, laptops, televisions, LCD panels, LCD monitors, memory chips, application processors, digital cameras, storage devices, and lithium-ion batteries (Samsung, 2016). In the context of corporate-level strategy, the important of diversification cannot be overemphasized. Diversification increases a firm's revenue streams and helps a firm overcome market saturation and product life cycle challenges (Hill & Jones, 2012).

Samsung also pursues strategic partnerships. Strategic partnerships are inter-firm associations or coalitions aimed at facilitating the sharing of knowledge, resources, and customers, among other aspects (Hill & Jones, 2012). For instance, Samsung partners with telecommunication carriers such as AT&T and Verizon to distribute its handsets (Samsung, 2016). In addition, Samsung partnered with Best Buy, a consumer electronics retailer, to introduce the Samsung Experience Shop. Through the shop, Samsung customers can test the firm's latest products and get information about the products. Samsung also has strategic relationships with Apple, Sony, Dell, Hewlett Packard (HP), and IKEA.

An even more remarkable corporate-level strategy for Samsung is vertical integration. Vertical integration is where a firm controls or owns it's entire or a significant portion of its supply chain, especially upstream operations (Hill & Jones, 2012). Vertical integration is one of the major features that differentiate Samsung from most of its competitors. The firm produces most of its components -- from memory chips to touchscreen displays (Samsung, 2016). This helps the firm to overcome the pressure component suppliers can impose on a firm.

Acquisitions have also been crucial for Samsung's growth. In the 1970s, the firm entered the semiconductor industry through the acquisition of Korea Semiconductor. Samsung also acquired Korea Telecommunications in 1980, thereby venturing into the production of electronic switching systems. More recently, the firm has acquired Boxee (a media streaming producer), Joyent (a cloud computing firm), and Harman (an automobile equipment producer) (Samsung, 2016). A major advantage of acquisitions is that they accelerate strategic growth by eliminating the complexity of pursuing a given market from scratch (Hill & Jones, 2012).

Each of the above corporate-level strategies has been important for building for Samsung's competitive advantage in the global electronics market. Nonetheless, vertical integration is arguably the most important strategy for the long-term success of the company. Indeed, vertical integration is one of the major strategies that have enabled Samsung to deliver products at a relatively low price. With control over its supply chain, the firm is in a position to avoid the bargaining power of suppliers, which can often pressurize prices. As Samsung expands its global presence, cost leadership will be essential. Vertical integration places the firm in a better position to sustain this strategy.

Competitive Environment

As mentioned earlier, Samsung operates in one of the most competitive spaces. The firm competes with giants like Apple, Sony, LG, Huawei, Xiaomi, HP, Dell, and Lenovo. Nonetheless, Apple is Samsung's most significant competitor. Indeed, Samsung has been fighting to completely overtake Apple, particularly in the smartphone market. Today, Samsung is the largest smartphone producer, with Apple coming second.

There are notable differences between Samsung's and Apple's business-level and corporate-level strategies. For business-level strategy, Samsung employs an integrated cost leadership/differentiation strategy. Apple, however, primarily pursues a differentiation strategy. Apple creates values for its customers by differentiating its products as opposed to cost leadership. For instance, compared to Samsung, Apple's smartphones support only the iOS and have better encryption features. Differentiation largely explains why Apple uses a premium pricing strategy. This also explains why Apple mainly focuses on consumers in developed markets, while Samsung focuses on consumers in developing markets.