Parenting, Synergy and Diversification (Kateleen)

As stated by Porter (1989), the overall plan of a diversified company is called corporate
strategy which concerns two different questions: what businesses should the corporation be
in (“where to play?” and “where not to play?”) and how the corporation should manage the
array of business units. Through diversification, acquisition, resource allocation, sharing and
transferring knowledge and skills, and sharing value chain activities, Samsung achieved its
goal of being a global electronics and financial services company (Yu 1998).

Products

Initially, Samsung Electronics Co. (SEC) operated in a simple product structure mainly
focusing on television receivers and home appliances. The company started to diversify its
product range to information and communications equipment, computers and peripherals,
and semiconductors (Yu, 1998). Now, Samsung has a very diversified product lines from
HDTV to home appliances, computers, printers, cell phones, music devices and many more.
This resulted to its four business divisions that operate independently: CE (Consumer
Electronics), IM (Information Technology & Mobile Communications), DS (Device Solutions)
and Harman (Harman International Industries, Inc. and its subsidiaries) that produces
automotive electronics components (Samsung Business Report 2019). It follows a vertical
approach, adding of new products complementary to the existing ones, through the
company that is being shared in the four-business division to minimize procurement cost
and to strengthen the speed of design, development and production (Park et al, 2011).

Diversification

Samsung’s motive into operating in these businesses is because of product diversification

and the idea of a “core business” which is the ability to share resources among different but
related business (Hall & Lee 1999). This may lead to synergies that allows the firm to be
more efficient by exploiting its resources resulting to higher levels of performance. The
primary reasons for these acquisitions were:

 To strengthen and broaden its product portfolio

  To have a more balanced revenue structure
 To catch up on technology and product development
 To build competitive advantage to new competitive market

Having a diversified product portfolio allowed SEC to maintain its leadership stance being
first to market with leading-edge technologies in a wide range of configurations and
densities that will lower overall production cost (Moon, H.-C. & Lee, D., 2004). Another
reason of diversification is generation of synergies improving the market share across
different market segments in Samsung Electronics. The company can diversify its revenue
source reducing the exposure to risk of a particular segment (Park et al, 2011). In Samsung’s
case, the memory division could have not survived if it was not supported by the home
appliance and telecommunication division when it accumulated massive losses (Chang,
2008). It also makes it easier to engage in cross product cooperation. Samsung Electronics
can achieve internal cross product cooperation that will elude the challenges and delays on
working with external partners. This allows the company to create fast product decision and
reduces its new products’ time to markets (Chen & Li 2007). Lastly, Korea’s domestic market
and sizes of different product markets were small and limited. To have more new growth
opportunities it was important for Samsung Electronics to enter wider range of business
areas (Chen & Li 2007). By having differentiated products, the company is targeting a wider
market with more competitive advantage.

Where to play?

Samsung Electronics’ diversification is based on leveraging related resources rather than

products. According to Collis and Montgomery (1998), a great corporate strategy is driven
by the alignment of the firm’s resources which are its special assets, skills and capabilities.
The concept of relatedness has become fundamental due to the synergies a firm can take
out from transferring skills and resources which strengthens the competitive position of the
businesses that has advantageous effect on the firm’s performance (Hall & Lee 1999).

Samsung Electronics’ strategy shifted from focusing on developing its own technology
heavily relying on its own research and development, changing to M&A when better results
have been produced and seen (Hankyoreh 2016). This led to Samsung Electronics’
acquisition of Harman. Harman is a global leader designing and developing connected
products in the car systems, audio products and connected services that is in a highly
competitive and growing market (Samsung Business Report 2019). This acquisition allowed
Samsung Electronics’ to penetrate the connected car market speedily enabling the company
to grow and create more value for the company. Harman has the expertise and resources
that Samsung needed to develop and sell its products. Samsung will deliver significant
growth and benefits in Automotive, Audio and Connected Services - now having a wider
range of technology products at a faster pace (Leyman-Nicholls 2016). Samsung Electronics
was able to enhance its economy of scale, improve their technological expertise, reduce its
overall reduction costs and improve its revenues.

Where to not play?

On the other hand, to develop a corporate strategy, a company should identify all the
shared activities or skills in its existing portfolio. If there’s a lack of meaningful
interrelationships in the portfolio it is suggested to do a fundamental restructuring (Porter,
1989).

In 2016, Samsung Electronics’ sold its shares in four companies including ASML Holding NV,
Seagate Technology, Sharp Corp and Rambus Inc (Lee, 2016). It also sold its printing
business and patents to HP Inc. for $1.2bn to slim down and refocus on its core business
areas (Burke, 2016). By focusing on resources related to each other, the company can
concentrate on its core business areas and streamline to focus on resources which is
performing better and has potential for future growth. Samsung Electronics’ decision to not
play in these markets was a great decision for the company since it had no coherence with
the rest of the portfolio and it no longer adds value to the company. Through its strategy of
focusing on businesses where resources and skills are related allowed Samsung Electronics
to be the largest and leading electronics and information technology company.

Synergy
The parenting framework is a conceptual model that provides tools for an effective
corporate level planning process. The parent organization improve the businesses’ plans and
budgets, promote better linkages, provides competent central functions and make choices
on its own acquisition, divestments and new ventures (Campbell, Goold & Alexander 1995).

There are four concepts of corporate strategy which are portfolio management,
restructuring, transferring skills and sharing activities. These concepts create shareholder
value in a different way (Porter 1989). Samsung’s strategies Transferring Skills and Sharing
Activities that led them to be in their position they are in today will be examined.

Transferring Skills

Samsung Electronics used this strategy on their technology development. The rapid growth
of Samsung resulted to the development of technological capabilities with regards to the
philosophy of the top management. The R&D’s function for the competitive business
divisions was to develop more basic technologies and transfer them business development
groups for commercialization and serves as a research support for technologically
inexperienced business areas. Its R&D center Samsung Advanced Institute of Technology
(SAIT) is the central research institute of the company that helped lead the company to the
future and served as an incubator of cutting-edge technology. Furthermore, it also shared
business strategies and technologies by building close relationships within the business
divisions (Park & Gil 2006). SAIT implemented on the standardization and improvement of
its R&D process and was established for systematic storage and reutilization of knowledge.
It focused on storing and sharing of core research output and sharing and distributing of
information to affiliate companies. This resulted to an impressive rate on volume of
knowledge created (Suh, Sohn & Kwak 2004).

Samsung’s strategy revolves around creativity, partnership and talent which is the same
strategy applied throughout all the company’s divisions (Madani et al 2014) where same
technologies had been used in its business divisions such as the Consumer Electronics and
Information Technology and Mobile Communications. Samsung has maintained its
leadership in the smartphone global market since 2011. Due to the constant changes in the
trend and to respond to customer needs Samsung strengthens its competitive advantage by
innovating features like triple cameras, quad cameras, rotating camera’s, infinity displays
and 5G (Samsung Business Report 2019). Samsung also has retained its position on leading
the global LCD TV business. Sony which was once the leader of the HD business has faced
significant loss from their TV division that deeply affected their company (MarketLine 2013).

New services are also being developed like Bixby that provides users a more convenient and
more personalized information and services. This feature is also added not only on their
smartphones but also to consumer electronic products such as TV’s, refrigerators, air
conditions etc. to deliver a consistent, high-quality Multi-Device Experience by expanding
their ecosystem and strengthening their strategic partnerships (Samsung Business Report
2019).

Sharing Activities

This strategy enhances the competitive advantage of the company by lowering cost and
raising differentiation. Costs can be lowered if it achieves economies of scales, boosts the
efficiency or guides the company to move rapidly down the leaning curve (Porter 1989).

Samsung was able to orchestrate its value chain and effectively used its world-wide
vertically integrated research and development, procurement, manufacturing and sales
network improving its economy of scale. SEC created a speedy innovation ecosystem that
had close cooperation to primary suppliers as a strategic supplier partnership. This allowed
SEC to establish a unique production system that meets the global demand as quickly as
possible. With Samsung Electronics’ procurement, it has close cooperation and sharing
information with its suppliers via its own online portal that increased speed and reduced
delivery cost (Lee, Lee & Heo, 2015). With regards to logistics, Samsung Electronics Logitech
and Samsung SDC are subsidiaries integrated which look after the inbound and outbound
logistics. Samsung Electronics Logitech transports and distributes all products from all the
business divisions of Samsung Electronics to 120 countries (Pratap, 2020) which allows the
logistics cost to be lowered. Additionally, core competencies such as marketing, design,
software and supply chain management of the business divisions are shared in the whole
Samsung Electronics (Samsung, 2010). This allowed the company to build market
competitiveness by maximising operational, brand and technological synergies. Thus,
gaining benefit on the economies of scale and leveraging the company’s market leadership
position.

Porter’s 3 Essential Tests (Value creation)

According to Porter (1989), there are three tests for building shareholder value through
diversification. The attractiveness test stating that the industry should be attractive or is
capable to be attractive to be chosen for diversification, the cost-of-entry test where the
cost of entry should not capitalise the future profits and the better-off test if business units
can gain tangible advantages from other within the corporation. These three tests will be
used to see if Samsung Electronics created shareholder value after these diversifications.

Test Consumer Information Device Solutions Harman

Electronics Technology &
Mobile
Communications
Attractiveness? Yes: Already has Yes: Although Yes: Despite the Yes: It already
the brand and there is a declining market, has the
reputation in this stagnating it already has the reputation and is
industry with an smartphone sales, brand and a leading player.
expected strong it already is the reputation in the There is also a
growth rate. leading player in market. forecasted
the industry growth in the
having the brand market.
and reputation.
Cost-of-Entry? Ok: High cost of Ok: Samsung is Ok: Samsung is Ok: Acquired for
entry and already in the already in the $8 billion but has
building a brand market and has market and an potential
for new entrants good reputation. established profitability due
will be high. This will be player. Also to growing rate
Samsung already expensive for expensive for of automotive
is in the market new entrants. new entrants. component
with good business. Takes
reputation. time to develop
systems and
technology.
Better-off? Yes: Share value Yes: Sharing value Yes: Share value Yes: R&D and
chain activities in chain activities in chain activities in resource
R&D and R&D and R&D and synergies
branding with branding with branding.
IM. Consumer
 Electronics.

How attractive is the industry?

Consumer Electronics market is an attractive market that grew by 5.5% in 2018 reaching
$1.2 trillion. The compound annual growth rate of the market was 4.9% in 2014-18
(MarketLine, 2020). Also, looking at the Health Equipment & Supplies market there is a
strong growth rate peaking at 13.1% in 2018 and the market remains strong and is expected
to rise to 13.2% in 2020 (MarketLine, 2020).

Mobile Communications market on the other hand has stalled growth rate ranging from
-1.4% to 0.7% and a forecast of moderate acceleration of growth. The mobile phones
market saturated because of the increasing penetration of smartphones and infrequent
demand for upgrades (MarketLine, 2020).

Device Solutions or the semiconductor market also has experienced strong growth however
in 2019 the market value dropped in 2019 with further forecast of market declines. The
2019 Japan-South Korea trade dispute also affected the market growth. The ongoing trade
conflict will continue to weaken market growth and demand for this market (MarketLine,
2020).

Lastly Harman, a global automobile production closely related to automotive component

business decrease by 5-7% but on 2021 is expected to increase 1-2% annually. The demand
for connectivity and entertainment systems in the automotive industry also has been rising.
Another projected growth of 4% annually is also expected in the audio industry (e.g.
connected homes, headphones, smart audio) (Samsung Business Report 2019).

What is the cost of entry?

When Samsung Electronics was founded in 1969 started with home appliances, after a two
year plan it had an output of $0.14 billion and over the next twenty-five years it grew over
440 times to $62 billion (Yu, 1998). After Samsung Electronics’ growth, it already had
recovered its initial entry cost.

For Information Technology & Mobile Communications, Samsung is already among the big
brand names in the market resulting to a lower threat of new entrant. Started in the early
1980s, now with a projected shipment of 1.37 billion units (Samsung Business Report 2019)
therefore on this basis passing the cost-of-entry test.

The Device Solutions industry on the other hand showed a weak demand but is expected to
recover in 2020 and the memory market is expected to keep growing (Samsung Business
Report 2019). Additionally, Samsung Electronics is already an established player in this
industry being the market’s no. 1 memory maker. Again, passing the cost-of-entry test.

The acquisition of Harman for $8 billion was relatively low-risk entry to the automotive
component industry. If it tried to directly enter the market, the cost of entry for Samsung
Electronics would be too expensive than this acquisition. The future profits will also likely
surpass this cost through the value this created.

Will the business be better off?

Samsung Electronics related diversification on Consumer Electronics, Information

Technology & Mobile Communication and Device Solutions can be said to be a successful
diversification strategy that created value for Samsung Electronics’ shareholders. Samsung
shared the same strategy in all of the company’s decision in R&D, creativity and talent
through Samsung Advanced Institute Technology. It uses the same technology and expertise
in creating its own LCD-screens, camera sensors and has its own memory-plants and semi-
conductor plants (Madani et al 2014).

Its acquisition of Harman gained the company valuable and large customers for having
access to car manufacturers. Samsung will take the maximum advantage on the connected
car technology market for maintaining its control over the supply chain. This allows Harman
and Samsung share its technology (Leyman-Nicholls 2016).
Samsung’s Corporate Parenting

Samsung’s corporate parenting was effective as it did value-adding activities such as guiding
business unit management and facilitating synergies between business units. As a portfolio
manager, Samsung managed its portfolio by making the decisions over its diversification,
acquisition and divestment. Samsung acquired Harman and divested HP, Seagate
Technology, Sharp Corp and Rambus. The logic behind the acquisition and divestment was
to focus on activities that add more value to the businesses in the portfolio and to eliminate
irrelevant businesses with value destroying activities to concentrate on its core
competencies. By focusing on doing only the core competencies, this allowed Samsung to
be good on doing the things that really matter. As a synergy manager, SEC invested on its
R&D and was able to share business practices across its business units. Additionally,
Samsung was able to orchestrate its value-chain activities effectively on all its business units
as well. The logic of these operational synergies was to reduce its cost and increase its
revenue both resulting to creating value which exhibits that Samsung was a successful
corporate parent.
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