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Group Coursework Submission Form

Specialist Masters Programme

Please list all names of group members:
(Surname, first name)
1. COSMIN STAN
2. GUPTA PALLAVI
3. KAPOOR RADHIKA
MSc in: MANAGEMENT

Module Code: SMM880

Module Title: STRATEGY ANALYSIS


Lecturer: Dzidziso Kamuriwo

Declaration:

4. STAGNETTO MATTHEW
5. VERMA SHUBHAM
6.
7.
GROUP NUMBER:

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Submission Date: 20.11.2015

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1.

Using Porters five forces model (Figure 1) to analyze the attractiveness of the

DRAM Industry, it can be seen that there were high barriers to entry due to very high fixed
costs, economies of scale involved, complex production technology and high switching costs.
However, there was still a large-scale entry by Chinese firms in 2005. Buyer bargaining
power was high since customers were price conscious and the cost of switching suppliers for
them was significantly low. Suppliers bargaining power was also high as over the years
suppliers became concentrated and only two or three big players dominated. The industry did
not face much competition on account of substitute products owing to the uniqueness of the
DRAM functions. However, there was intense competition among existing firms in regard to
price in this fast moving market. Therefore, it can be concluded that the DRAM industry is
not the most favorable and attractive option for new entrants.
2.

Samsung Electronics as a DRAM provider has maintained its leadership in the

DRAM market through leading technology and production capacity since the 1990s.
Samsung continuously tried to reduce the cost of production by innovation of process. It
utilized old fabrication for developing new products and lines. According to (Exhibit 1),
Samsungs costs per (256MBit equivalent) unit are lower by $1.46, or 26.02%, than those of
its average competitor. They are lower by 14.25% than SMICs costs, which is Samsungs
lowest-cost competitor. Samsungs competitive advantage in the market can be seen by its
ability to charge higher prices than the market rate. According to Exhibit 2, Samsungs prices
per chip are on an average higher by $0.72 (14.51%) than those of competitors.
Samsungs higher prices do suggest that customers have a higher WTP for Samsungs
chips.
Samsungs major R&D facility and fab lines are located at a single site in comparison to its
competitors that are scattered across the globe. Through collocation and large scale of fab
investments, Samsung was estimated to have saved an average of 12% on fab construction
costs. Samsungs first mover advantage to invest in building 8 inch wafer fabrication
helped it establish a major presence in the DRAM market with efficient production
capability.

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Moreover, on account of being one of the largest and most prestigious companies in South
Korea, Samsung can employ the most talented people in the country and elsewhere in Asia
can without overpaying them.
3.

Samsung faced threats from Chinese entrants who were targeting the DRAM market

by using partnerships to learn from industry incumbents, like Infineon and Elpida, and they
were attracting billions of dollars from outside financing. The Chinese firms are not as
efficient as Samsung. In DDR SDRAM chips (Exhibit 3) the only one produced by SMIC,
Samsungs operating margin is a full dollar (20%) more than SMICs, reason being the use of
old technology by SMIC. The Chinese benefit from their low labour costs. Salaries at SMIC
are much less than those at Samsung, yet labour costs per unit of SMIC, even though less
than those of Samsung, are still high comparatively on account of high labour productivity of
Samsung. SMICs is already Samsungs lowest-cost competitor (Exhibit 2) and Chinese firms
may partner with a firm like Infineon, which is Samsungs lowest-cost competitor in DDR
SDRAMs (Exhibit 3). This could give competition to Samsungs market share through price
war but cannot be seen as outdoing Samsung in the long run.
To conclude, it can be seen that the competitive threat by the Chinese may be mitigated by
the fact that Samsung still has a benefit advantage and customers are willing to pay more for
their chips, thereby enabling Samsung to withstand competition from Chinese firms.
4.

Samsung has maintained its cost leadership through innovation of process and focus

on advancement of technology. They added value to the product by focusing on improvement

in speed, density and power consumption. Power consumption is a crucial element as these
are usually wireless products used without a plug for a long time. To optimize this, Samsung
developed a low power function for every generation of products. This creation of value for
the customers allows Samsung to enjoy a premium through product differentiation. Samsung
has also kept its lead in ensuring the density and speed of DRAM, which helped capture
value in the initial stage of the new product market.
Many customers, including rivals, named Samsung the supplier of choice. For instance, the
company simultaneously developed a new Flash memory chip for Sony Ericsson and a Flash
memory chip customized for Nokia. The Price premium charged by Samsung is on account
of the variety of products they offer, allowing customers to source different chips from the
same supplier and thus save on transaction costs. Samsung, therefore, capitalized on all
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sectors of the DRAM market through differentiation in product lines and strategys and on
account of the reliability of its products, Samsung could demand a price premium, which
helped maintain profitability even during market depressions.
5.

If Samsung collaborates with a Chinese partner it benefits from access into Chinese

markets which are witnessing unprecedented growth as well as enjoying investments

procured by Chinese firms at low debt rates. It can further capitalize on their joint venture by
obtaining incentives from the Chinese government and avoid creating a market driven by
price war because of intense rivalry. Moreover, this can be a potential long-term solution, as
on account of strong government support, the probability of Chinese firms entering the
memory chip market is fairly high. However, by doing so, Samsung risks its proprietary
knowledge and expertise and exclusive technical leadership.
Alternatively, if Samsung increases its investment in cutting-edge memory products for new
niche markets it can maintain its exclusivity over its expertise and further focus on
technological advancement, improving production processes and optimizing high value niche
products. It can even avoid the cultural change the company may face associating with the
Chinese. Although, Samsung may have to alter its pricing policy and reduce margins in order
to compete with Chinese products and avoid losing a considerable share among the mass
market that is majorly driven by price sensitivity. In the short run in particular this is seen as
a more viable approach as the need for collaboration is not urgent on account of the degree of
threat being minimalistic. It is advisable to work in coherence with Infineon and Elpida
instead to prevent their collusion with Chinese firms and to capitalize on their competitive
advantage in research and technology to exploit the high value niche markets.
Therefore, the foremost emphasis should be placed on remaining independent and improving
production and research and horizontally associating with Chinese firms only in markets
where they have significant cost leadership.

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APPENDIX
Figure 1. Porters Five Forces Chart

Exhibit 1. Cost breakdown of 256Mbit DRAM in 2003

Exhibit 2. Comparison of Operating Profit of DRAM in 2003

Exhibit 3. Cost Breakdown of 256 Mbit DDR SDRAM in 2003

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REFERENCES

1. http://www.anderson.ucla.edu/faculty/marvin.lieberman/publications/FMA1SMJ1988.pdf
2. http://sloanreview.mit.edu/article/evolving-from-value-chain-to-value-grid/
3. https://www.mindtools.com/pages/article/newTMC_08.htm
4. http://dspace.mit.edu/bitstream/handle/1721.1/59138/659514510MIT.pdf?sequence=2