Bcg Strategy

The author would like to thank Dieter Ernst (University of California, Berkeley), Sung-Tack, Park (Korea Institute for Industrial Economics & Trade), Mike Hobday and Keith Pavitt (University of Sussex), S. J. Nicholas (University of Melbourne), Ken Iijima and Dennis Tachiki (Sakura Institute of Research), Ian Vertinsky (University of British Columbia), C. A. Bartlett and D. J. Collis (Harvard Business School), John Cantwell (University of Reading) and Tetsuo Abo (University of Tokyo) for their helpful assistance and comments. Special thanks go to Peter Drysdale, Hal Hill and Mark Dodgson (The Australian National University) for their special guidance and kind support. The author is also grateful to Tack-Myong Kim and Chang-Sik Yoon for their assistance. The author is indebted to Samsung Economic Research Institute and Samsung managers interviewed in China, Korea and Southeast Asia. The views expressed, and any remaining errors, are solely the responsibility of the author.

Abstract

Discusses the Korean conglomerate Samsung in the context of world and regional business and economics. Presents a case study and rationale for the growth of Samsung, tracing its history and progress to the present day. Discusses particularly international production capability and decision making.

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Article Type: Case study

Keyword(s): Case studies; International trade; Korea; Production.

Management Decision

Volume 36 Number 8 1998 pp. 517-527

Copyright © MCB UP Ltd ISSN 0025-1747

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Korean electronics firms have been aggressively involved in learning and knowledge accumulation over the past two decades. Their consumer products, including color television sets (CTVs), video cassette recorders (VCRs), and microwave ovens, were able to remain competitive in the low-end segment of world markets until the late 1980s, generating the cash flow needed to support development of more advanced technologies. In recent years, however, Korean firms are meeting increased competition, particularly from Japanese producers that have recovered their competitiveness by investing in low-cost offshore production.

Increased overseas production has been a major component of Korea’s strategic response. Korean production networks in Asia now extend beyond the ASEAN region to China and India. The ratio of overseas production to total production has increased sharply in recent years, from 19 to 27 per cent for CTVs and from 16 to 17 per cent for VCRs during the period 1992-1994. However, those of their Japanese electronics counterparts increased even faster, from 67 per cent to 86 per cent for CTVs and from 36 to 71 per cent for VCRs during the same period (see Table I), keeping competition intense in the cost-driven struggle for low-end markets.

Perhaps a better comparison would be with another newly industrialized Asian country. Outward foreign direct investment (FDI) by Korean electronics firms lagged behind their Taiwanese rivals. The cumulative FDI by the former amounted to $US 0.85 billion (EIAK, 1993), while for the latter it was $US 1.05 billion[1].

In 1993, the three major Korean producers, Samsung, Goldstar and Daewoo, announced their intention to increase their overseas production ratio from an average of 20 per cent in 1993 to 60 per cent by 2000 (Korea Economic Daily, 1993). This paper will focus on the experience of Samsung, which has the highest overseas production ratio of the three[2].

The paper is arranged chronologically, focusing both on the forces driving Samsung to develop offshore production networks and on the struggle to adapt the nature of its networks to its technological capabilities. Particular attention will be placed on the networks connecting its offshore affiliates in East Asia.

The firms involved are all part of the Samsung Group, a highly diversified conglomerate. The core electronics producer is Samsung Electronics Co. (SEC) and its affiliated firms are Samsung Electron-Devices Co. (SED), Samsung Electro-Mechanics Co. (SEM) and Samsung Corning Co. (SC). The sources for this study are primarily internal Samsung publications, including monthly bulletins relating to international production, technological development, and organisational processes, as well as interviews that were conducted at Samsung in Seoul during November 1994. The organisation of Samsung’s international production networks in ASEAN were also reviewed during July 1995.

The first section examines the 1970s, following Samsung’s entry into the electronics sector. The focus was on the development of mass production capability, and international linkages were used to acquire product designs and marketing outlets, allowing Samsung to concentrate its resources on the development of mass production capability. The second section looks at the Samsung’s OEM business in the 1980s. Because the majority of the group’s resources were channelled into the highly demanding production of advanced semiconductors, OEM was inevitable. While the OEM strategy was successful, it appears to have retarded the development of design and marketing capabilities for its mass-production goods, leaving the group dependent on foreign sources of product design and distribution. The decade also saw the company’s initial foray into international production to cope with trade pressure in its major markets, and explores how the group’s internal organisation was poorly adapted to the needs of overseas operation and to the task of organisational learning. The third section considers Samsung in the 1990s. Samsung has been pursuing rapid expansion of offshore production, and improvement of R&D capabilities.

Table II provides an overview of the profile of the group in each decade.

The fourth section examines Samsung’s Asian production networks in detail. Initial investments were for consumer goods for both export and local markets. The networks were promptly integrated backwards and linked to the networks of other producers in the region. A final section provides a brief summary of the findings about