Samsung, which started life flogging fruit and dried fish is at a crossroads with management now struggling to work out which road it should take to achieve success in the future.
Now one of the world’s biggest producers of computer chips, flat-screen televisions and mobile phones Directors are concerned that Samsung could become an Asian “basket case” if they do not initiate change now.
The South Korean company has become an international brand by being a copycat manufacturer, mimicking technological leaders and churning out products faster and cheaper than others. Unlike Sony’s Walkman and Apple’s iPod, Samsung has never produced a “killer app” — a unique product or application that creates its own market.
So now, after overtaking Sony as Asia’s most valuable technology company in recent years, Samsung is in a rut. Poor performances by two of its three main businesses — semiconductors and liquid-crystal display panels — dragged second-quarter operating profit down 36 percent from a year earlier to $964 million. It was the weakest showing since 2001.
This is forcing the company to embark on the most radical shake-up since the 1997 Asian financial crisis. “I think they are worried that they will become Sony in 10 years’ time,” says Rhee Nam-uh, head of research at Merrill Lynch in Seoul.
Lee Kun-hee, the Samsung chairman who is sometimes referred to as the Emperor, has told his company to brace itself for crisis, warning of “unpredictably rapid changes” coming to the electronics industry.
“It’s true that the competitiveness of Samsung products has grown, but they still lag behind the world’s best in areas such as design, software and finishing touch,” Lee told staff in July. “We had advanced companies as our guiding lights in the past, but we now must explore uncharted waters by ourselves,” he said, referring to the way Samsung had grown by following the likes of Sony, Panasonic, Nokia and Apple.
Adding to Samsung’s woes, six of Samsung’s semiconductor chip factories were shut down by a power failure in August, two executives have been convicted of breaching their financial duty by helping the chairman transfer control of the company to his children, and it has been the subject of hostile takeover rumors.
The first challenge Samsung faces is improving profitability and competitiveness in semiconductors and flat-screen televisions. It is now carrying out internal audits, an unusual move that analysts say may portend a wider restructuring, and has started an early-retirement program that could trim as much as 10% of top personnel.
But cutting costs will not make its businesses more competitive. “Samsung’s biggest problem is that the sectors it is in have become quasi-commoditized,” says Hank Morris, a business consultant and 25-year veteran of the Korean market.
Chu Woo-sik, Samsung’s head of investor relations, says the company’s fundamental competitiveness remains strong. “We’re still in a good position — but there is now some inertia because of our success, because we’ve come up to the top tier.”
Lee, the chairman, has taken to stressing “creative management,” ordering his managers to find profitable new businesses. “Creative management is really a big shift from the past, where we were very Korean and very focused on efficiency through uniformity,” Chu says.
This might be a greater challenge for Samsung than finding new areas of business growth. It is part of the wider Samsung Group, which is controlled by the secretive Lee family through a complex web of cross-shareholdings that give it disproportionate power. It is a hierarchical, top-down company in which Lee, the son of the group’s founder, is revered as a kind of demigod.
Former Samsung employees say the company’s culture is its biggest enemy. They describe a strict Confucian culture with the emphasis on discipline and hierarchy at the expense of creativity. “There’s no deviation allowed in any form, and there’s no free talk,” says one.
Rhee of Merrill Lynch agrees but credits Samsung for acknowledging the need to change. “That is why Samsung is a great company. They have recognized that they have some problems, and they are trying to address them,” he says.