CASE 9

Samsung
Overtaking Philips, Panasonic, and Sony as the Leader
in the Consumer Electronics Industry

During the past century, industry leadership in the global consumer electronics industry (e.g.,
radios, TVs, movie and music players) has changed, with Philips (Netherlands), Panasonic, Sony
(Japan), and Samsung (Korea) emerging as leaders at di erent times. Indeed, each company
achieved leadership with a di erent international strategy, a di erent organization design,
and a di erent set of organizational capabilities. Philips built a worldwide federation of inde-
pendent national organizations able to gain access to the company’s renowned technological
prowess and then to apply and adapt it to meet local market needs. Philips was the world-
wide leader in consumer electronics from the early 1900s until the late 1970s. During the 1980s,
Panasonic used overseas expansion to leverage its centralized, highly e icient operations in
Japan, exploiting global-scale economies in R&D and production to o er lower-cost products
and overtake Philips as the world leader in consumer electronics. In similar fashion, Sony lever-
aged its centralized operations in Japan to produce standardized products around the globe.
Sony invested far more in R&D than Panasonic did, though, and it was typically the techno-
logical and innovation leader in the industry, if not the sales leader, from 1980 to 2005. By
2009, Samsung had seemingly come out of nowhere to become the world leader in consumer
electronics, however. Like Sony, Samsung made large investments in R&D so that it emerged
as a technological leader in TVs, DVD players, and smartphones. But rather than just making
standardized products that were sold around the globe, Samsung took a more decentralized
approach than Panasonic and Sony, which allowed it to do some customizing of products for
specific markets. By 2014, Samsung’s lead continued to grow. Observers wondered whether the
pattern of leader replacement would continue or if Samsung was on top to stay.

Philips Leadership Era: 1900–1980

Philips was founded in 1891 in Eindhoven, Netherlands, by Dutch engineer Gerard Philips and
his brother, Anton. The two brothers initially focused on the light bulb business, with Gerard
in charge of product development and Anton in charge of sales. Gerard and Anton began a
friendly competition in which Gerard would try to produce more than Anton could sell and vice
versa.1 The two agreed that strong basic R&D and product development e orts where vital to
the success of Philips, so the company made R&D and product development high priorities.
The Philips emphasis on research and product development helped it to become a leader in its
field, rivaling General Electric in the early 1900s in the electric lamp industry.
In 1914, Philips established its first research laboratory dedicated to developing break-
through technologies in lighting. This investment helped the company create some of the
world’s leading innovations in lighting, such as the tungsten metal filament bulb—a superior
advancement over the common carbon-filament lamps. Moreover, the Philips emphasis on
research led the company to experiment and develop new technologies that allowed it to
C-100
expand its product portfolio. For example, in 1918, Philips started to produce electronic vacuum
 Philips Leadership Era: 1900–1980 C-101

tubes, and soon a er that, it was producing X-ray tubes, electric shavers, and small generators.
Philips’ most successful new products were arguably its radios, which, by 1936, a mere ten
years a er the device’s introduction, had captured a nearly 20 percent world market share.2
Due to the small size of the Netherlands, Philips was forced to expand internationally in order
to leverage its investment in R&D and develop economies of scale in production. By the early
1900s, Philips had begun selling in a wide range of countries, including the United States, France,
Russia, Brazil, Canada, Australia, and Japan.3 With such a diverse group of international opera-
tions, Philips decided to adopt English as the company language, requiring its use across all of
its management ranks. In anticipation of what would become World War II, Philips shi ed assets
away from the Netherlands and further decentralized management control to the national orga-
nizations (NOs) in each country. Anton Philips and much of the top management team fled to the
United States, and its main research lab was moved to England. The decentralization of Philips
during the war enabled the NOs in each country to become more independent, thus allowing
them to respond to their local market conditions. Each of the larger country NO presidents con-
trolled multiple functions for their countries, including R&D, product design, manufacturing, and
sales and distribution (see Exhibit 1). In order to succeed in each local market, the NOs tailored
the Philips products to meet consumer preferences in each di erent country market. For example,
some countries, such as the United States, preferred large furniture-encased television sets, but
other countries, such as India, demanded inexpensive, small TVs—o en placed inside closable
shutters to keep the dust away. Additionally, di erent countries had di erent ways to penetrate
the market, such as through establishing a TV rental business or selling through department
stores or discount retailers.4 The NOs had the flexibility to address the local market as they saw fit
while drawing upon Philips’s technology and financial resources. For example, Philips of Australia
made the first stereo TV, and Philips of the United Kingdom created the first TV with teletext.5
Other countries could then access those technologies and adapt them to their local markets.
As time went on, Philips matured into its postwar organization. Fourteen product divisions
(PDs) with responsibility for each product’s development, production, and global distribu-
tion were established in Eindhoven. The product divisions were created to better coordinate
across country markets. But the real power remained with the NOs.6 The NOs were highly

CEO and Management

Board

International Concern
Council

National Organizations
Administration
(U.S., U.K., Germany, Product Divisions
-Finance, Legal HR
Japan, etc.)

Product Development
R&D Manufacturing Marketing
Development

Production

Distribution

EXHIBIT 1 Philips Organization Structure in the 1950s

C-102 Samsung

autonomous and reported directly to the management board (o en sending proxies to repre-
sent their interests). But a er the European Common Market broke down trade barriers during
the 1960s and 1970s, Philips’ competitors—especially Panasonic (then named Matsushita) and
Sony—started to gain the upper hand. Products started to become more standardized across
markets. Whereas Panasonic and Sony were producing large volumes of standardized prod-
ucts in low-wage countries in Asia, Philips was producing smaller volumes of more tailored
products in many di erent countries. Over time, Philips’ products could not compete with
the products of its Japanese competitors on price or reliability. As a result, Philips’s market
share in various consumer electronics products started to fall. The company made numerous
attempts to centralize the company in order to compete against its large-scale competition.
Such attempts included consolidating production to a smaller number of high-volume plants
called international production centers, closing ine icient operations, shi ing production to
low-wage countries, and reorganizing the company into core and noncore businesses. But
Philips’s market share and profitability continued to decline.
Other problems outside of production also arose for Philips as a result of its decentral-
ized organization structure. In the 1970s, Philips lost the battle as the provider of the preferred
videocassette technology when its V2000 format had to be abandoned due to its North
American NO deciding to license and sell Panasonic’s VHS format (originally developed by JVC,
a subsidiary of Panasonic).7 Despite being a technologically superior format, V2000 was unable
to capitalize on world market demand because it sold only in Europe on the PAL standard,
whereas its Japanese competitors sold globally. VHS would eventually become the market’s
preferred format, surpassing both Philips’s V2000 and Sony’s Beta formats, and it would lead
Panasonic to the top of the consumer electronics industry in the 1980s.8 By 1987, Philips was
one of only two non-Japanese consumer electronics companies in the world’s top ten (the
other was General Electric). Its profit margins of 1 to 2 percent lagged behind its Japanese
competitors’ 4 to 6 percent (see Exhibit 2).
Between 1990 and 2005, Philips continued to reorganize to centralize operations in an
attempt to gain greater e iciencies. In the early 1990s, CEO Jan Timmer reduced headcount by

E XH I BIT 2 Philips Group Summary Financial Data, 1970–2016

In millions of dollars: 1970 1980 1990 2000 2005 2010 2013 2014 2015 2016
Net Sales $4,163 $16,993 $32,996 $35,253 $25,628 $19,228 $31,209 $33,423 $29,335 $29,664
SG&A N/A N/A N/A N/A N/A $556 $1,270 $9,173 $8,499 $8,147
Cost of Sales N/A N/A N/A N/A $4,006 $3,968 $6,789 $20,602 $17,409 $16,824
As % of net sales N/A N/A N/A N/A 16% 21% 22% 61.6% 59.3% 56.7%
R&D Expenses N/A N/A N/A N/A $2,152 $1,192 $2,318 $2,555 $1,463 $1,022
As % of net sales 8.4% 6.2% $0 7.6% 5.0% 3.4%
Advertising Expenses N/A N/A N/A N/A N/A $1,235 $1,355 $1,427 $1,210
Income Before Taxes N/A N/A −1414 2814 1500.0% 1562.0% $2,664 $759 $754 $1,681
Net Income 123 247 −2631 N/A 1097.0% 1085.0% $1,568 $642 $797 $1,804
As % of net sales 3% 2% −8% N/A 4.3% 5.6% 5% 1.9% 2.7% 6.1%
Total Assets $5,273 $18,440 $30,530 $35,885 $28,551 $24,409 $35,530 $44,300 $37,481 $39,087
Employees (in thousands) 359 373 273 219 159 119 116 1,12,959 1,13,678
Labor Costs 1,627 7,134 10,404 7,895 5,760 N/A N/A
As % of total employees 39% 42% 32% 22% 23% 24% N/A
Net Income per Employee $13,761
Exchange Rate (fiscal period 3.62 2.15 1.69 1.074 1.186 1.322 1.25 1.25 1.1 1.1
end; guilder or euro/dollar)

Source: Annual reports.

 Panasonic and Sony Leadership Era: 1980–2000 C-103

68,000, or 22 percent, earning him the nickname “The Butcher of Eindhoven.”9 Due to European
laws that require substantial compensation for layo s (typically 15 months of pay), the first round
of 10,000 layo s cost Philips $700 million. However, a er three years of cost cutting, a McKinsey
study estimated that the value added per hour in Japanese consumer electronic factories was still
68 percent above that of European plants. In 1996, Cor Boonstra replaced Timmer and announced
that “There are no taboos, no sacred cows” and “The bleeders must be turned around, sold, or
closed.”10 Within three years, he sold o 40 of Philips’ 120 major businesses, including well-known
units such as Polygram and Grundig. While closing 100 of the company’s 356 factories worldwide,
he argued, “How can we compete with the Koreans [new competitors Samsung and LG]? They
don’t have 350 companies all over the world. Their factory in Ireland covers Europe and their man-
ufacturing facility in Mexico services North America.” He also increased advertising by 40 percent
to raise awareness of the Philips brand and de-emphasize most of the other 150 brands it sup-
ported worldwide—from Magnavox TVs to Norelco shavers to Marantz stereos (many of these local
brands had been acquired to strengthen Philips’s position in specific local markets). These and
other actions helped Philips become more e icient and improved profitability from losses in the
early 1990s to profit margins typically in the 4-6 percent range from 2000 to 2010 (see Exhibit 2).
During the first decade of the new century Philips continued the trend of closing fac-
tories in high wage countries, outsourcing most of the production of its consumer electronics
lines and moving in house production to China, Poland, or Mexico. Still, by 2012, Philips had
118 production plants in 24 countries
In addition to looking for savings in manufacturing, Philips also cut back on its advertising
budget and focused its channel management on 200 large chains (as opposed to 600 prior to
2001). These moves bore fruit as Philips’ net margins increased to 4.3 percent in 2005 and 5.6
percent in 2010, but the increasingly intense competition cut their margins to 1.9 percent in
2014. In response, Philips increased its advertising but cut its R&D budget by 60 percent by
2016. That revived the bottom line, bringing it up to 6.1 percent in 2016, but at what cost for a
firm that was known for its innovation? The cost turned out to be very steep indeed.
Philips decided to restructure its company in fundamental ways. In 2011 net profit had
dropped 85 percent, and in response Philips laid o 4,500 workers and vowed to cut costs by
$1.1 billion dollars.11 To meet that goal, they sold their television manufacturing operations,12 their
audio and video businesses,13 consumer electronic operations,14 and even divested themselves of
their lighting business15—the business that launched Philips in 1891. This move was highlighted
by a change in the name from Philips Electronics to just Philips.16 Their new focus was on medical
equipment, consumer lifestyle products,17 and products for emerging markets (e.g., they acquired
Preethi, a leading India-based kitchen appliance firm in 2011). Philips had gone from being the
undisputed market leader in consumer electronics and lighting to exiting both businesses. With
such fundamental change it was anyone’s guess as to whether Philips could turn things around.

Panasonic and Sony Leadership

Era: 1980–2000
In 1918, a 23-year-old Osaka Electric Company inspector named Konosuke Matsushita (a ec-
tionately known as “KM”) invested a mere 100 yen to start Matsushita Electric Industrial
(MEI). KM started MEI in a two-room house with his wife, brother-in-law, and two employees.
The company’s first product was a light bulb attachment plug, and KM aimed to produce
products 30 percent cheaper than its competition. MEI was e ective at e icient production,
and, by 1931, it had grown to employ 1,200 people in 10 plants, producing more than 200 prod-
ucts. KM argued that “what manufacturers should aim for is to produce as abundantly and
as cheaply as tap water; when this is achieved poverty will be conquered from the face of the
earth.” A public o ering in 1935 allowed Panasonic to diversify further into domestic fans, light
bulbs, small motors, and a variety of domestic appliances. Soon the wave of new products
became a flood: black-and-white TV sets in 1958; transistor radios in 1959; color TVs, dishwash-
ers, and electric ovens in 1960. By 1968, Panasonic produced 5,000 products compared to
C-104 Samsung

80 for Japanese rival Sony. Capitalizing on this broad product line, the company opened
25,000 domestic retail distribution outlets. With more than six times the number of outlets than
Sony, the ubiquitous “National Shops” represented about 40 percent of all appliance stores in
Japan in the late 1960s.

Panasonic’s Organization Structure

KM organized MEI into product divisions and forced each division to become self-su icient in
various activities including product development, production, and marketing (see Exhibit 3).
This structure allowed KM to easily measure each division’s profit performance because each
was a semiautonomous business unit. If a division needed additional funding, it needed to
make a loan request to headquarters; a loan request was then received and reviewed, and,
if granted, it was accompanied by an interest rate comparable to market rates. Headquarters
received 60 percent of each division’s earnings and expected high performance from its division
managers (a drop in operating profits to below 4 percent of sales for two consecutive years
led to the replacement of the product division general manager). As a result, internal rivalry
among the 36 divisions was intense—a characteristic that was believed to fuel the company’s
focus on e iciency and rapid growth. Even the central R&D laboratory was underfunded, which
forced it to go directly to the product divisions to ask for R&D projects that would be funded by
the product divisions. These management practices helped MEI e iciently produce low-cost
products, and by the 1960s, MEI was a dominant player in Japan. As the company looked for
growth options, it decided to expand internationally and leverage economies of scale from
its large-volume factories in Japan. It wasn’t long before MEI was exporting a diverse set of
products, including transistor radios, color TVs, dishwashers, and electric ovens under the
Panasonic brand.
As MEI expanded internationally, the strategic direction and product development for the
company remained closely regulated by its headquarters in Japan. For the most part, prod-
ucts were researched, designed, and manufactured in Japan, and then foreign managers
came and tried to negotiate for changes to accommodate the products for their region’s pref-
erences. Headquarters, however, ultimately had the final say as to whether these proposed
changes were approved. In order to ensure e icient control of international operations, the

Matsushita Electric
Industrial Co., Ltd (MEI)

Matsushita Electric
Trading Co. (METC)

Tape Radio Television Corporate Personnel Financial and

Recorder Division Division Overseas Division Accounting
Division Management (COM) Division

Europe Asia I Middle East and Planning Foreign Relations

Department Department Africa Department Department Department

North America Asia II Latin America Overseas

Department Department Department Advertising
Department

Overseas Overseas Overseas Sales North America

Sales Sources and Manufacturing Sales
Companies Companies Companies Companies

(ex. N. America)

EXHIBIT 3 Panasonic’s (Matsushita) Headquarters Organization for International Companies in 1987

Source: Adapted from Sumantra Ghoshal and Christopher A. Bartlett, “Matsushita Electric Industrial (MEI) in 1987,”
Harvard Business School Case 9-388, 1990.
 Panasonic and Sony Leadership Era: 1980–2000 C-105

company sent hundreds of expatriate Japanese managers and technicians abroad to oversee
international operations and to report back candidly on the state of the company in their
assigned areas. As one senior executive noted, “Even if a local manager speaks Japanese, he
would not have the long experience that is needed to build relationships and understand our
management processes.”18 As such, Panasonic maintained centralized control of local opera-
tions around the globe.

Panasonic Overtakes Philips

The birth of the videocassette recorder (VCR) propelled Panasonic into first place in the
consumer electronics industry during the 1980s. In 1975, Sony introduced the technically
superior “Betamax” format VCR, and the next year JVC (a subsidiary of Panasonic) launched
a competing “VHS” format. Whereas Sony decided to maintain full control over its Betamax
format, Panasonic aggressively licensed the VHS format to a host of other manufacturers,
including Hitachi, Sharp, Mitsubishi, GE, RCA, Zenith, and, eventually, Philips. The company
quickly built production facilities to meet its own needs as well as those of OEM customers,
such as GE, RCA, and Zenith, who decided to outsource production to Panasonic or other
Japanese manufacturers. Between 1977 and 1985, capacity increased 33-fold to 6.8 million
units. Leveraging the distribution channels and brand names the company had established
with earlier products (e.g., Panasonic, National, JVC), the new VCRs met with huge success
abroad. Panasonic’s overseas sales growth increased a remarkable 52 percent in 1980 and then
by a further 35 percent in 1981. In 1985, VCR sales comprised an estimated 43 percent of over-
seas revenue. Increased volume enabled Panasonic to slash prices 50 percent within five years
of product launch, while simultaneously improving quality. By the late 1980s, VCRs accounted
for 30 percent of Panasonic’s sales and 45 percent of profits.
It wasn’t until the late 1980s and a change in CEO that Panasonic looked to move toward
a more decentralized strategy. CEO Toshihiko Yamashita launched “Operation Localization” in
hopes of dispersing innovation development and increasing local customization of products;
however, for a company so entrenched in a centralized mentality, the change was met with
resistance. By 1995, only 250 of the company’s 3,000 R&D scientists and engineers were located
outside of Japan, and this was viewed as a problem given the emergence of lower-cost sources
of high-quality engineers and scientists outside of Japan. Panasonic did establish numerous
factories in countries such as Malaysia where wage rates were significantly lower than they
were in Japan.
Due to low-cost competition and Panasonic’s di iculty in decentralizing operations,
Panasonic spent nearly 20 years in decline. Overall profit margins were 3.9 percent in 1990 but
steadily declined until they hit rock bottom at −9.8 percent in 2013 (see Exhibit 4). The decline
in profits were accompanied by exiting the analog TV business (30% of Panasonic’s TV business)
in 2006,19 exiting the HDTV segment in 2008,20 and much of the rest of its television manufac-
turing businesses in 2011.21 CEO Kazuhiro Tsuga stated in its annual report, “Our status is one of
deep crisis. If we fail to act now, we will lose our standing in the eyes of the world.”
In 2009 Panasonic merged with Sanyo in a bid to increase market share.22 It did increase
sales temporarily but resulted in overlapping businesses. Panasonic laid o 40,000 workers in
201123 and another 10,00024 in 2012 a er their stock dropped to its lowest point since 1975.25
Clearly something was not working.
Finally, Panasonic made the decision to build more plants in low wage countries,
starting with a factory in Vietnam in 2013.26 Following that move, Panasonic began a series of
projects and joint ventures including a stake in a Slovenian household appliance business,27
the acquisition of a video surveillance service,28 a joint venture to make personalized digital
store signs,29 entry into Africa,30 an indoor vegetable growing factory in Singapore31 and the
acquisition of a satellite communication service provider.32
The jewel of the scattered approach to recovery was the 2014 announcement of a joint venture
with Tesla to build a “GigaFactory” in the United States to manufacture batteries for Tesla’s electric
cars.33 This joint venture went so well that in June 2016 Tesla named Panasonic its sole supplier of
batteries.34 In response Panasonic raised $3.86 billion in bonds to complete the Gigafactory.35
C-106 Samsung

E XH I BIT 4 Panasonic Summary Financial Data, 1970–2016

In millions of dollars: 1970 1980 1990 2000 2005 2010 2012 2013 2014 2015 2016
Net Sales $2,589 $13,690 $37,755 $70,864 $73,847 $89,373 $80,889 $73,497 $64,035 $69,494
SG&A N/A N/A N/A N/A $18,890 $22,723 $11,945 $17,029 $14,989 $16,459
R&D Expenses N/A $479 $2,176 $5,107 $5,220 $5,747 $5,363 $4,549 $3,795 $4,138
As a % of net sales 6.2% 5.9% 6.0%
Advertising Expenses N/A N/A N/A N/A $207 N/A $21,000*
Cost of Sales $53,569 $45,876 $49,128
As a % of net sales 72.9% 71.6% 70.7%
Income Before Taxes $408 $1,521 $3,597 $2,126 $2,093 −$349 $451 $1,959 $1,514 $1,997
Net Income $194 $587 $1,484 $971 $492 −$2,060 −$7,961 $1,144 $1,490 $1,769
As % of net sales 7.6% 4.3% 3.9% 1.4% 0.7% −2.3% −9.8% 1.6% 2.3% 2.5%
Total Assets $2,042 $11,638 $49,377 $77,233 $68,280 $100,699 $68,052 $49,523 $49,443 $51,492
Employees (units) 78,924 107,057 198,299 290,448 334,752 384,586 293742 271789 254084
Overseas Employees N/A N/A 59,216 143,773 184,110 231,733 175000 150000 147387
As % of total employees N/A N/A 30% 50% 55% 60% 59.6% 55.2% 58.0%
Exchange Rate (fiscal 360 213 159 103 118 83 0.0125 0.0103 0.0095 0.0083 0.0092
period end; yen/dollar)

*Advertising expenses are for 2012.

Note: Data prior to 1987 are for the fiscal year ending November 20; data from 1988 and a er are for the fiscal year
ending March 31.
Source: Morningstar.com & Panasonic Annual Reports.
Source for advertising expenses: http://www.wikinvest.com/stock/Panasonic_Corporation_(PC)/Data/
Advertising_Expenses/2010.

Despite the scattered approach, all of these moves, particularly the alliance with Tesla, revived
Panasonic’s fortunes. Profit margins slowly rose. By the end of 2016 they were at 2.5 percent (see
Exhibit  4). And perhaps the cherry on top of the cake was that in 2016 Panasonic was able to
re-enter the television market with a transparent TV.36
Both Philips and Panasonic had been leaders in consumer electronics. Both su ered deep
losses and, in order to survive, ended up divesting themselves of consumer electronics and
re-creating themselves in other businesses. While Philips focused on a few businesses where it
was a market leader, Panasonic struck out in dozens of directions from vegetables to satellites.
Which approach will pay o ? Or will both companies decline again?

Sony Enters the Fray

In 1946, Masaru Ibuka and Akio Morita launched Sony (originally Totsuko) as a radio repair
business and short-wave converter manufacturer.37 Although the company had humble
beginnings, during the inauguration of the company, Ibuka prophetically declared that the
company would create technologies that large corporations could not match. Ibuka said, “The
reconstruction of Japan depends on the development of dynamic technologies.”38 The found-
ers then set out to use the surplus of electricity le by the wartime factories to create consumer
electronics. The founders hired engineers with a desire to create new products and focused
the company on innovation. Some products, such as the vacuum-tube voltmeter and the
electrically heated cushion, “sold like hotcakes,” but others, including the primitive electric rice
cooker, were memorable failures.39 The company learned from its successes and failures, how-
ever, as the founders guided their employees with the slogan “Research Makes the Di erence.”
Sony’s focus on innovation motivated its leaders to invest a much higher percentage of
their revenues on R&D, an amount typically estimated to be two to three times higher than that
invested by Panasonic. The innovations that followed included Japan’s first transistor radio,
 Panasonic and Sony Leadership Era: 1980–2000 C-107

the first all-transistor TV, the first VCR (Betamax), the first personal stereo (Walkman), the first
CD player, the PlayStation game system, Blu Ray, and many other products.40 Panasonic was
usually content to reverse engineer Sony’s products and to be a fast follower with a “me-too”
product that was lower priced. Consequently, Panasonic would wait and see how the market
responded to Sony’s new products before imitating them.41 Sony, on the other hand, was an
industry pioneer. Sony’s innovative new products allowed it to successfully expand on a global
scale, particularly to major industrialized nations looking for innovations, such as the United
States. In 1960, Sony established Sony Corporation of America (SONAM) in the United States
and Sony Overseas, S.A., near Zurich, Switzerland.42 Sony followed that with overseas product
development and production facilities in San Diego, California, and Bridgend, Wales. How-
ever, these represented a small percentage of Sony’s product development and production
activities because Sony’s operations, like Panasonic’s, were largely centralized and conducted
in Japan. The main di erence between the two companies was that Sony’s R&D focused more
on breakthrough technologies that would lead to new products, whereas Panasonic’s focused
more on process technologies that allowed for low-cost and reliable production of products.
Although Sony and Panasonic were leaders in the industry in 1990, the following ten years
brought new challenges. Most significantly, Japan’s domestic market for consumer electronics
collapsed due to a recession—from $42 billion in 1989 to $21 billion in 1999. Excess capacity
drove down prices, and profits evaporated (see Exhibits  4 and  5 for Panasonic and Sony
financial information). Although o shore markets were growing, the rise of new competition—
first from Korea, then China—created worldwide overcapacity. Samsung had become a partic-
ularly e ective new competitor by focusing on design and innovation as a way to di erentiate
its products. By 2005, Samsung was rivaling Sony as a leader in innovation and design and its
brand had surpassed Panasonic’s in terms of general desirability by consumers.

E XH I BIT 5 Sony Summary Financial Data, 1970–2016

In millions of 1970 1980 1990 2000 2005 2010 2013 2014 2015 2016
dollars:
Net Sales $414.37 $4,191.38 $22,745.39 $66,301.00 $56,718.00 $75,957.00 $70,111.87 $73,789 $68,192 $74,573
SG&A $89.31 $1,010.69 $5,583.48 $15,660.86 $3,675.00 $18,094.00 $15,027.07 $16,421 $15,035 $15,566
R&D Expenses N/A $220.54 $1,294.26 $4,045.71 $4,545.00 N/A N/A $3,740 $3,332 $3,771
As % of net sales N/A 0.2% 1.7% 5.3% N/A N/A 5.1% 4.9% 5.1%
Advertising $4,507 $3,689 $3,600
Expenses
Cost of Sales $56,584 $43,784 $55,887
As a % of net sales 76.7% 64.2% 75.0%
Income Before Tax $56.58 $573.55 $1,900.51 $2,187.83 $(532.00) $2,407.00 $2,372.16 $245 $413 $2,801
Net Income $28.51 $322.27 $735.38 $16,754.00 $(569.00) $(3,128.00) $443.65 −$1,220 −$1,037 $1,360
As % of net sales 7.6% 4.3% 3.9% 1.4% −1.0% −4.1% 0.6% −1.7% −1.5% 1.8%
Total Assets $445 $4,119 $28,946 $75,999 $90,665 $85,089 $146,300 $145,670 $131,425 $153,395
Employees (units) N/A N/A N/A 36,700 158,500 N/A 91,500 140,900 131,700 125,300
Overseas N/A N/A N/A 22,387 N/A N/A 62.50%
employees
As % of total N/A N/A N/A 61% N/A N/A
employees
Exchange Rate 0.0360 0.0213 0.0159 0.0103 0.0118 0.0083 0.0097 0.0095 0.0083 0.0092
(fiscal period
end; yen/dollar)

Note: Data prior to 1987 are for the fiscal year ending November 20; data from 1988 and a er are for the fiscal year
ending March 31.
Source: Sony Investor Relations Historical Data; Morningstar; Sony Form 20-4 SEC Filing.
C-108 Samsung

Samsung Leadership Era: 2000–Present

Samsung group was founded in 1938 by Lee Byung-chul as a simple trading company in Taegu,
Korea that exported basic goods such as dried fish, vegetables, and fruit before expanding
into several business lines, including insurance, securities, and retail.43 In 1969, Lee decided to
enter the electronics industry and established Samsung-Sanyo. The new unit would undergo
several name changes due to joint ventures with foreign companies and mergers with other
units, but it would eventually settle with the name Samsung Electronics Company (SEC).44
At first, SEC was primarily a low-cost manufacturer of black-and-white televisions, which it sold
to other companies that would then resell them under their own better-known brand names.
The company followed a neo-Confucian culture that led engineers and designers to imitate the
masters of their industry, Japanese firms such as Panasonic and Sony.45 However, Samsung
was exceptional in at least one area—manufacturing. By 1976, the company had produced their
millionth black-and-white TV, and two years later, SEC produced its 4 millionth black-and-white
TV, which made it the market share leader in units produced.46 Shortly therea er, SEC started
mass production of several products, including the successfully reverse-engineered designs of
the Panasonic microwave oven and VCR. A couple of years later, SEC entered the telecommuni-
cations and semiconductor businesses, and by 1985, it had started mass production of its own
DRAMs and integrated circuits.47

Samsung New Management Initiative

In 1987, Lee passed away of lung cancer and was succeeded as chairman by his youngest son,
Kun-Hee Lee. The younger Lee had been involved in Samsung’s leadership since he started at
the company in 1968.48 When he took his father’s place, Samsung had already established itself
as Korea’s undisputed leader in most of its markets, which were largely components such as
semiconductors (DRAMS), TV screens, hard drives, and batteries. In some product areas, such
as DRAMs from the semiconductor business, Samsung emerged as the worldwide market-share
leader.49 But the Japanese, notably Panasonic and Sony, were still the clear leaders in most
consumer electronics products, including TVs, VCRs, DVDs, and cameras. Lee saw an opportu-
nity when Samsung’s Japanese competitors faced recession in their home market, however.
The Japanese, leaders in analog technology, which was used in most products, were reluctant
to adopt digital technology due to the large investments that would be required to displace
analog. The market, however, seemed to be moving in the digital direction in the form of
cameras, audio equipment, and other electronic goods.50 Lee knew that this was a chance
to overtake the competition. But, in order to take advantage of its rivals’ hesitancy, Samsung
needed to not only act quickly but also to prepare itself for the digital transformation. As the
leader of a Korea-centric company, Lee felt that a change was needed.51 That change came
in 1993 when Lee introduced the new management initiative, which emphasized four issues:
decentralization, innovativeness, globalization, and outward-looking management.52 The aim
was to retain core competencies in manufacturing and production processes while improving
R&D, design, and marketing. The company decentralized by establishing more production and
R&D centers around the globe. Although most of Samsung’s manufacturing had been done in
Korea, the company established a number of new factories in China, India, Hungary, Slovakia,
Mexico, and Brazil. Samsung also established new R&D centers in Japan, Frankfurt, and the United
States—each working on the development of products for their respective regions of the world.53
Additionally, SEC hired IDEO, a US-based innovation design firm, to help in the design
process for their consumer products.54 Designers and design thinking were introduced to the
company. Before this time, the engineers controlled the design process.55 This resulted in prod-
ucts that were imitations with no distinct design. The new management initiative, however,
empowered designers by requiring them to take a yearlong course in mechanical engineering
so that they could properly defend their ideas.56 Engineers were also taught basic ideas in
design in order to better work with designers. At first, progress was slow. For example, Gordon
Bruce, a veteran design consultant who helped Samsung set up the $10 million state-of-the-art
 Samsung Leadership Era: 2000–Present C-109

Innovative Design Lab of Samsung (IDS), was teaching a class to designers and engineers and
asked what they considered to be a perfectly designed object. He suggested a banana and
said, “Nature is the best designer. The banana fits in your pocket. It comes in its own sanitary
package. It’s biodegradable. And the color indicates when the fruit is ripe.” A er he explained
there was a confused silence in the class. Then one a student asked, “You mean you want us to
design a cell phone in the shape of a banana?”57 Gradually, SEC started to see improvement in
their product designs.
Through the new management initiative, Lee created a “hybrid management system” that
imported Western best practices and combined them with their existing Korean management
practices.58 This implementation was done sensitively. Only practices that needed change
were implemented in a process that employees could understand and embrace. Some of
those changes were adopted faster than others depending on the level of resistance from
employees. For example, Samsung slowly added into its seniority-based pay structure a
merit-based compensation system like those of General Electric and Hewlett-Packard. Some
changes such as stock options were abandoned completely when resistance was too strong.59
The new system challenged key fundamentals and established a long-term commitment to
investment in premium products and brand value—an area that had troubled Samsung in the
past. The company had su ered from an image of “cheap Korean goods” due to its low-cost
mass production methods that made it successful during the 1980s.60 To the chagrin of Lee,
that image was sometimes validated. For example, as a New Year’s gi in 1995, Lee sent out
some of Samsung’s newest phones, only to be informed shortly a erward that the phones
didn’t work in the way they were meant to.61 However, the new management initiative aimed
to correct such problems with the adoption of General Electric’s Six Sigma, which was custom-
ized to involve not just management but every Samsung employee.62 The new management
initiative started to internationalize Samsung so that it was no longer a completely Korea-
centric organization.

E ects of the Asian Financial Crises

In 1997, the Asian financial crises took a large toll on South Korea’s economy. For example,
a er the Asian market downturn, Moody’s lowered South Korea’s credit rating from A1 to A3.
The Seoul stock exchange experienced historic one-day drops (7.2 percent). The South Korean
won weakened from 800 per US dollar to 1,700 per dollar, and many large businesses crashed
or were bought up by foreigners.63 The e ect of the crisis was both bad and good for Samsung.
SEC had to cut its domestic and foreign workforces by 26 percent and 33 percent, respectively
(a total of about 29,000 workers), and it had to sell nearly $2 billion in corporate assets that were
not directly related to its core electronics businesses.64 The crisis forced Samsung to focus on
core businesses and to think carefully about how it would o er unique value to customers. Eric
Kim, who acted as executive vice president for global marketing operations at SEC, explained,
“The economic crisis in my view, impressed upon people the need for a system that could
create a resilient and enduring value proposition unique to Samsung—products that would
distinguish us from our competitors.”65 In other words, the crisis proved to those involved with
SEC that the firm needed to di erentiate itself from the competition with premium products.
In the wake of the crises, SEC dropped its debt from $15 billion in 1997 to $4.6 billion by 2002. In
the same time frame, net margins went from –3 percent to 13 percent.66

Samsung’s Continued “Global Localization”

The post-crisis initiative was again about increasing R&D, design, and brand value. In 1999,
SEC began its “Samsung DigitAll: Everyone’s Invited” campaign in order to solidify its posi-
tion against rivals as the premier consumer electronics company.67 Furthermore, from 1999 to
2007, SEC spent an average of 3 percent of net sales on changing its image as a producer of
cheap products.68 Additional investment was put into R&D and design, with the construction
of seven additional regional design centers located in Seoul, London, Los Angeles, Milan,
C-110 Samsung

New Delhi, Shanghai, and Tokyo (IDS being the corporate design center).69 This “Global
Localization” strategy, as some called it, enabled designers to develop “product design blue-
prints according to global design standards and themes, while remaining flexible enough to
allow local design centers to accommodate specific market needs and cultural contexts.”70
For example, in India, where inexpensive but clunky cathode-ray-tube televisions were more
popular due to their a ordability, Samsung didn’t try and push its more expensive LCD flat
screen televisions. It relied on its design centers in emerging economies, such as New Delhi and
Shanghai, to design a broad range of products, including some for price-sensitive customers. As
a result, Samsung captured a quarter of the market for TVs in India while its Japanese competi-
tors fought for a collective 13 percent of market share.71 The same was true for mobile phones.
Although typically known for its higher end smartphones like the Galaxy series, Samsung devel-
oped di erent low-end smartphone models for Africa, Eastern Europe, Central America, Russia,
India, and the Middle East. Between 1992 and 2005, Samsung also established high-volume
manufacturing operations in di erent parts of the world, with North and South America primar-
ily serviced by plants in Mexico and Brazil (with one large semiconductor plant in Austin, Texas)
and Europe largely serviced by plants in Hungary, Slovakia, and the Czech Republic. Asia and
much of the world was serviced by more than a dozen plants in China (which by 2007 made up
20 percent of Samsung’s worldwide workforce), as well as plants in India, Malaysia, Indonesia,
the Philippines, Thailand, and Vietnam (See Samsung’s organization structure in Exhibit 6).

Samsung Leadership
Samsung Institute
of Advanced 9 Regional
Technology Headquarters

Consumer IT & Mobile Device

Middle East
Electronics Communication Solutions
Global R&D Center
New Delhi RDC*
Mobile
Visual Display Communication Memory
Europe

Digital Appliance Europe RDC

Network System LSI
Latin America
Printing Solutions Digital Imaging LED
LA RDC

Health and Media Solution Product & North America

Medical Center Development
Equipment Team

Southeast Asia
Product & Product &
Development Development Tokyo RDC
Team Team
China

Shanghai RDC

CIS* and Baltics

Milian RDC

Africa

Southwest Asia
*RDC: Regional Design Center
*CIS: Commonwealth of Independent States
Seoul RDC

EXHIBIT 6 Samsung’s Organization Structure in 2013

Source: Samsung, S.D.I. Sustainability Report, 2013.
 Samsung Leadership Era: 2000–Present C-111

Samsung Becomes the World Leader in Consumer

Electronics
Samsung’s international strategy began to really bear fruit a er 2000. For four consecutive
years, from 2000 to 2003, Samsung posted net earnings higher than five percent (see Exhibit 7
for Samsung financial information). This was at a time when 16 out of the 30 top South Korean
companies ceased operating in the wake of the unprecedented crisis. In 2005, Samsung
Electronics surpassed Japanese rival Sony for the first time to become the world’s twentieth
most valuable consumer brand, as measured by Interbrand. By 2013, Samsung’s brand was
valued at $39.6 billion, making it the eighth most valuable global brand.72 Samsung became the
world’s largest maker of LCD panels in 2002, the world’s largest television manufacturer in 2006,
and the world’s largest manufacturer of mobile phones in 2012. Samsung has also become
a leading producer in a broad array of other products, including tablets, laptops, printers,
cameras, and refrigerators. In 2009, Samsung achieved total revenues of US $117.4 billion,
overtaking Hewlett-Packard to become the world’s largest technology company measured by
sales. And that was just the beginning. By 2013 they reached over US $207.9 billion in sales,
almost doubling their record setting sales in just four years and then maintaining that pace year
a er year. Additionally, in 2013, 26 percent of SEC’s employees (approximately 235,868) were
made up of R&D personnel.73 By 2015 SEC had been granted more US patents than any other
company—that includes Google, Apple, Microso , and IBM. By December of 2015 SEC had 7,679
US patents.74 Moreover, SEC set the goal to triple its foreign R&D personnel (reaching 30,000)
within the headquarters in Seoul, South Korea by 2022.75 Despite Samsung’s success in research,
design, and innovation, it continued to stay true to its initial core strength in manufacturing
and components. Samsung had long been a major manufacturer of electronic components
and continued to be a leader manufacturing lithium-ion batteries, semiconductors, chips, flash
memory and hard drive devices for clients such as Apple, Sony, HTC and Nokia. As of 2014,
it operated 37 production facilities throughout the world, including Asia, Eastern Europe, the
United States, and other regions.76 It continued to look for low-cost production sites, and in
2013, SEC announced that it would invest $2–4 billion to build 40 percent of its smartphones

E XH I BIT 7 Samsung Electronics Corp. Summary Financial Data, 1970–2016

In millions of dollars: 1995 2000 2005 2010 2013 2014 2015

Net Sales $20,917 $27,230 $56,720 $135,771 $207,902 $195,883 $203,302
Cost of Sales $12,122 $17,469 $39,642 $90,145 $125,178
SG&A $3,262 $3,856 $9,121 $23,042 $19,372 $22,404 $23,128
R&D Expenses $3,137* $1,596 $5,434 $7,990 $13,018 $13,561 $13,887
Advertising Expenses $3,398 $4,080 $3,557 $3,903
Cost of Sales $121,857 $125,112
As a % of Net Sales 62.2% 61.5%
Income before tax $3,884 $6,434 $8,756 $16,971 $33,441 $26,480 $26,304
Net Income $3,237 $4,777 $7,542 $14,177 $27,110 $22,223 $18,942
As a % of net sales 15.5% 17.5% 13.3% 10.4% 13.0% 11.2% 9.3%
Total assets $51,595 $21,362 $49,890 $117,911 $194,614 $203,680 $214,072
Labor Costs $3,491 $16,907 $16,682 $18,609
Employees 96,898
Employees overseas
Exchange Rate 1.035 0.9795 0.9427 1.0132

*Reported as 15% of total sales for 1995

Source: Morningstar.com; Samsung Annual Reports.
C-112 Samsung

in Vietnam, where wages were one-third of those in China. Of course, as with any business, not
everything went as planned. In 2012 a US court ruled that Samsung had violated six of Apple’s
patents. Samsung had to pay Apple $1.05 billion in damages.77 Even worse, in August 2016 SEC
unveiled their newest, high-end smartphone, the Galaxy Note7, only to discover that there was
a defect in the battery that caused some phones to catch fire or even explode. Ultimately SEC
had to recall every Galaxy Note7 worldwide and permanently end production of that model.78
Despite those di iculties, Samsung’s future still looked very bright because it retained its
position as the world leader in consumer electronics. The real question, though, is what did
Samsung do right and what did the other three do wrong? Each of the other three companies
had been the worldwide leader in consumer electronics—each with a di erent model and dif-
ferent responses to crises. Why Samsung? And if the others lost their footing and fell from the
number 1 position is Samsung destined to follow in their footsteps?

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