9/02/2014

The Death of Samsung by Tom Coyner

Recently, there has been a great deal of press about the unexpected downturns in Samsung Electronics profits. Commonly and correctly, the disappointments have been traced to increased Chinese competition. But I dare say that the Korean media has covered just half of the real story. That is, even highly respected Samsung Electronics may be caught in a Korean mentality.

Consequently, it could take more time and effort than outsiders may imagine for the company to free itself to be able to move out and up in the international arena. During my decades in high tech sales and marketing, including in Korea and including selling to Samsung companies, one of the most striking aspects of doing business in Korea was - and still remains - the fixation on price over value. This is not to say that Korean managers and executives are unable to understand a reasonable value proposition. They often do. But for major decisions, individual understanding is subordinated to systemic review that often apparently cares less about value than price.

Sources of this mentality are several. But just to name a few, paperwork for almost everything crosses several desks of often neurotic middle managers who are anxious about the future of their careers as they approach their mid to late 50s. These men (and almost always they are men) worry about whether they will be forced into early retirement the coming December. Furthermore, given the annual or biannual department rotations, often these middle to senior managers have, at best, only a cursory understanding of major purchases, product sales, etc. But two things they clearly understand are price and cost. And that is what they focus on in both purchasing and selling.

Moving from the micro to the macro, Korean products tend to be sold from a Korean buyer’s perspective - namely being extremely price competitive. This approach is often applied to overseas marketing strategies. And offering good to excellent quality at very competitive pricing, of course, is not a bad strategy. But there are some very real drawbacks.

To implement this strategy means operating on very thin margins, which means cutting costs in areas such as sophisticated marketing. This is a game that the Chinese, too, fully understand. And for now, they can undercut Korean price marketing strategies. The problem is the Chinese are doing to the Koreans what the Koreans were doing to their Japanese and Western competitors. So, what can be done? Consider Apple, which operates on smaller sales volumes with vastly greater gross margins that allow it to funnel significantly more money into marketing, including distribution, to cultivate a buzz among consumers and pundits.

Furthermore, it is easier to come down in price when strategically required. But it is almost impossible to move up, once a company has established its brand and products at specific low price points. To justify significant price increases, the company must either offer truly extra value or do something extraordinarily innovative.

To date, no Korean company has created a product that has defined a product category, such as Kleenex, Xerox, Walkman, etc. Not to knock Korean companies, they often provide the best value alternatives to the market trendsetters. However, while Korean companies’ boasts about selling the most units may be commendable, those claims are subordinate to other companies’ claims of leading the marketplace and, of course, garnishing the largest net profits. Finally, not even the Japanese have ever really gotten over their software weakness compared to their superior hardware products.

Outside of gaming software, both the Japanese and Koreans do much better in developing hardware. The difference in software and hardware innovation mentalities begs a separate essay, but for now, let’s assume there is definitely a cultural issue working against development labs in this part of the world. But to get back to the central challenge of Samsung Electronics, the company must find the means to come up with much better product and marketing innovation. They might somehow do that internally - or have the confidence to do it externally from outside Korea by allowing non-Koreans in foreign markets, be they on the payroll or on outside contracts - to assume greater control of product marketing. Samsung, like other Korean companies, has long recognized this. And it has taken some measures along those lines, but usually only superficially.

More often than not, even when they are able to access superior external talent, Korean executive confidence has faltered, favoring central office decision making and overruling external recommendations. At the same time, Korean automobile manufacturers have proven more adept at applying innovative product marketing schemes, such as shocking the industry with “ridiculously generous” product warranties or by adding expensive “options” as standard equipment. In other words, someone - Korean or of another nationality - came up with the classic maneuver of not competing by playing the same old game but beating out much of the competition by changing the game. The name of Samsung has rightfully risen to international prominence.

But, in the face of Chinese and eventually other developing countries’ cheap products, if the company cannot adopt more sophisticated marketing fast enough, the name Samsung may be eventually be regarded as “Same Sung,” as if it belongs with other developing countries’ short-term miracle companies. Other Korean companies have demonstrated that need not be the case. I’m sure Samsung will find a new path for yet greater success.

But the clock is ticking.

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by Tom Coyner.  Senior Advisor for IPG and Managing Director of Softlanding Korea.