Will Samsung Electronics innovate again?

Peter Corbishley analyses two recent books on the subject of the company that epitomises Korea Inc.

Samsung v Sony

In 2010 Tony Michell published his long awaited work on Samsung Electronics.¹ Sea-Jin Chang wrote Sony v Samsung² in 2008. The opposition between the two companies seems to be stimulated by the nationalistic perception that Samsung Electronics has been driven by a struggle with Sony for global pre-eminence. Certainly the two companies kept an eye on each other’s management styles and level of technological development, but in economic, as opposed to nationalistic, terms the comparison is somewhat more difficult.³ However, both authors raise the question as to whether Samsung can succeed where Sony failed, that is, whether Samsung can adapt to new technological trends in its role as a global corporation.

Differences

The two authors analyse growth to date from different perspectives. Mitchell concentrates on the external and internal political dynamics of Samsung Electronics almost to the exclusion of their innovations in technology and production. Chang meanwhile provides a more integrated account of the impact of changes in technology on the economy of the businesses while hardly commenting on the politics. Both justify their stance with market share and profits statistics but both authors underestimate the difficulty of making cross currency and historical comparisons with such figures. Disappointingly, neither author provides timelines for key events such as the development of new technologies, or the appointment of key figures to posts controlling the businesses, in turn linked to economic downturns and political crises. Both Samsung and Sony provide timelines of personalities and products on their company websites, but these lack the kind of interpretative commentary that an independent author can develop. Moreover, as the development of both companies did not stop on the publication dates of the books being reviewed, some of the comments below come from other sources.

Investment in Innovation

As has already been mentioned the primary focus across both books is Samsung Electronics with the history and development of Sony providing a useful foil. As Chang notes Sony has always been a business to customer (B2C) company in contrast to Samsung Electronics which produces for other businesses (B2B), including latterly its own subsidiary businesses who produce for consumers. In its heyday Sony aimed at innovative consumer products based on analogue technologies such as the transistor radio or the Walkman which contribute directly to a standard of living. Samsung Electronics gains competitive advantage by innovations in the organisation of production itself, integrating development and production processes, as well as in the parallel development of products. Such innovations speed up the production of a successive series of digitally-based products such as DRAMs in regular yearly time scales for use by other companies to produce for the consumer market. Only latterly has Samsung produced its own branded consumer goods, especially mobile phones. Sony’s Research and Development (R&D), that is, focussed on innovation on developing consumer products while, until the 2000’s, Samsung’s R&D focused on the innovative production of goods for other companies. As neither company invests in the development of source technologies such as the transistor, or blue skies research, then given their different places in the technological chain from producer to consumer the companies are not really comparable from a macroeconomic point of view.

Sony: from family to professional management

Sony and Samsung electronics also differ in their origins as businesses and in the length of time they have been in existence. Sony was a start-up business set up shortly after the Second World War in 1946 by Akio Morita with investment coming from his family. Morita came from a family of village headmen in an economy where villages were somewhat outside the political system and in a position to be entrepreneurial. Morita jointly founded Sony with Masaru Ibuka, an engineer, who stayed until 1994, Ibuka slightly longer until 1997. They were joined by Norio Ohga in 1976, when he reached seniority but was a company man who started in 1959. He also stayed until 1994. Overall the generation of founder members lasted some 30 years. But even when the cofounders were still active and the company still clearly successful the troubled and troubling relationship between Sony and the American entertainment industry is present, illustrated by the presence of Harvey Schein, for example, who worked in Sony from 1972 until 1977, or Mickey Schulhoff who joined Sony in 1968 but reached prominence from 1993 until 1995.⁴ The success of existing products and the continuing profits they secured led to Sony overlooking the commercial and technological importance of shift from analog to digital electronics taking place during the 1990’s. This failure coincides with the second generation of management that begins with Nobuyuki Idei, a company man who replaced Ohga in 1994, and who with his slogan of ‘digital dream kids’ stayed until 2005 to be replaced by Howard Stringer, another American, with whom we reach a third generation. With Idei, Sony moved out of an era where a manager’s personal relationship to the founders was all important. Both as a family firm and under professional management, successive attempts have been made to restructure national and global operations, whether on products or processes or by altering management strategies oriented to market share or profits.

No end to the family: a chaebol from 1938 till today

Samsung Electronics was founded and financed as a new company in 1969 with 330m Won by the Samsung Group, itself founded by Lee Byung-chull in 1938 as Samsung Sanghoe. The Samsung Group is a chaebol (재벌) a peculiarly Korean business structure born of the prohibition on holding companies and developing through an incestuous but antagonistic relation to the governments of the day. Lee Byung-chull ceased to be chair in 1987. He was followed by Lee Kun-hee, his third son, who resigned in April of 2008 convicted of trust violations and tax evasion. Chang ties the chair of the Samsung group closely to the continuing overall development of Samsung Electronics through the workings of the Office of Secretaries, renamed the ‘group strategic planning office’ in 2007. Michell argues that recently the relationship between the Samsung family and Samsung Electronics has become more distant and in fact does not even mention the existence of the Office of Secretaries. Michell believes that this mid to late 2000’s period was the moment to switch to professional management outside the family, but in 2010 the Economist reported that Lee Kun-hee’s only son Lee Jae-yong is regarded as the heir apparent, although at only 40 years old maybe not senior enough in Korean terms.⁵ What is clear is that the family remains in control of the Samsung Group, with the surviving daughters, Lee Boo-jin and Lee Seo-hyun managing leisure hotel and retail fashion businesses in the Samsung Group, and Lee Kim-hee’s wife Kang Ha-ra the family art museum.

The passing of the founder generation?

In 1983 Lee Kun-hee made the decisive decision to produce a 16K DRAM, and in 1984 purchased 64K DRAM technology through the ailing Korean company Micron, one of the few external acquisitions made by Samsung. Lee, too, produced the Frankfurt declaration of the New Management Movement in 1993 to reshape management practices. A key managerial appointment in 1996 was Yun Jong-yong, an engineer who developed a management philosophy of ‘continual crisis’ designed to repeatedly shake-up the practices of managers. He resigned in May of 2008, a month after Lee Kun-hee. The perception that a generation was bowing out is further strengthened by the departure of Eric Kim in 2010. Eric Kim, a Korean educated in the USA, joined Samsung Electronics in 1999 and had been highly influential in developing an international marketing strategy and brand. Then Dr Hwang Chang-gyu, who joined Samsung Electronics in 1989 and rose to become head of the semiconductor division, lost his internal prominence in July 2007. He had been responsible for doubling the size of DRAM memory chips every year from 64M in 1999 to2Gb in 2005. The speedy delivery of these continually upscaled products gained Samsung Electronics its competitive advantage. He joined the national government in 2010. The presence of Dr Hwang and the purchase of the Korean DRAM manufacturing company meant that Samsung Electronics had been well placed to take advantage of the shift to digital technologies. The above mentioned generational shift also coincided from 2007 with world-wide uncertainty as to where next generation memory technology is headed. Such uncertainty threatened Samsung’s policy of the continuous upgrade of technologies with clear evolutionary trajectories and industrial standards. The comparison with Sony further suggests that who succeeds and what they decide remain critical to Samsung Electronics’ future success, especially given the company’s weakness in software engineering and microprocessor technologies.

A Western style corporate bureaucracy?

Both authors query whether in the late 2000’s Samsung Electronics will be able to switch out of what Mitchell describes as a Confucianist vision and management which he equates with bureaucratisation. Michell argues that Samsung is moving from the aristocratic to the bureaucratic stage of a company life cycle, but he conflates Confucianism and bureaucracy. His model of the company life cycle is taken from Adizes⁶ where bureaucracy is the enemy of creativity. “The ossification of a company comes from many sources. More specifically it comes from those who try to impose rules on how the company operates and then preserve those rules after the circumstances have changed.”⁷ In turn Michell identifies the Korean Confucian tradition with bureaucracy. “Korean companies, in short, are bureaucracy prone.”⁸ Undoubtedly there are Confucian elements present in Samsung as Michell identifies in the 1980’s company motto (sahoon 사훈 modelled on the Yangban household motto – kahoon 가훈) even when remodelled in company documents of the mid-2000’s. The emphasis on recruitment from the best universities, the long induction period, the dropout of new employees and the internal training programmes, emphasised by Chang rather than Michell, are also reminiscent of the Confucian high valuation placed on learning and the examination system for entering government service. Samsung Electronics’ development post 1994, too, has been heavily reliant on the availability of Korean engineers trained in American universities, as well as on understanding the need to sell globally. Michell uses these facts to identify two voices inside Samsung, the Korean and the global, overlain by the opposition between engineers and brand marketers such as Eric Kim. But here too there are echoes of the conflict inside the Joseon dynasty between Confucian factions with differing attitudes to ‘western learning’ (sohak 서학). Michell overlooks, too, the possible parallels between Yun Jong-yong’s “continual crisis” approach to management and Shamanism, a continuing countervailing element within Korean Confucian-dominated culture.

Innovation and culture

As has been indicated above, Sony’s cofounder managers found success, profit and market share with analogue-based electronic goods. Samsung, in contrast recognised the emerging trend towards digitalisation and invested heavily to enter into the manufacturing of DRAMS and then flash memory. Chang argues further that there is a parallel between the B2C orientation of Sony and the B2B focus of Samsung with the management styles and business cultures of the two companies. For Sony the style is organic and the culture creative and innovative, while for Samsung Electronics the style and culture are hierarchical and conformist. The overall argument of Michell’s book places an opposition between creativity and bureaucracy. The play on such opposition is central to many aspects of the informal-formal, romantic-rational dialectic within Western culture, but the application of such contrasts to East Asian businesses can overlook key aspects of the businesses under discussion, as indicated above for Samsung. It could also be argued that Sony’s innovative approach to designing and producing consumer products fell into bureaucratic infighting between different product divisions not because of ‘bureaucracy’ but as a result of company hierarchies resting on the securities of existing profits from existing products while failing to see the need to invest in digitalisation. If so what is of major importance is how modern companies use the resources of their national cultures to respond to the continuous waves of technological development that in turn lead to new consumer goods.⁹ Sony drew on the resources of the Japanese customer-oriented B2C entrepreneurial culture background of the founders; similarly Samsung, until latterly much more closely tied to the national goals of economic development through building a technological infrastructure, capitalised on the resources of Korean culture to focus on B2B relationships.

Identifying the locus for change and innovation

The generational parallel with Sony suggests that the problem is not, as Mitchell suggests, that Samsung is becoming bureaucratised, rather that heavy investment in past successes which continue to be highly profitable do not open up organisations to what else is going on around them. In his new government job Dr Hwang Chang-gyu recognises the importance of doing precisely that as he will “send government officials in charge of research planning abroad as frequently as possible to help them learn new global trends.”¹⁰ Previously Samsung displayed a number of key creative adaptations to the manufacturing process that have proved critical to past and present success. Samsung Electronics, still anxiously placed between China and Japan, rather than simply adopting Western corporate forms needs to be able to spot the trends, perhaps by creating innovations in global organisational structures to parallel the earlier innovations in the manufacturing of DRAMs and flash memory.¹¹

Samsung: the future of consumer electronic technologies?

Samsung has now successfully made the move into creating consumers goods, especially mobile phones but also screens and white goods that use its own manufactured products. But in 2007 Samsung Electronics listed 6 potential ‘money sources’ as printers, system LSI units, WiBro mobile internet technologies, energy, biotechnologies, and healthcare and robots.¹² Yet unforeseen by this list came the arrival of the smartphone, where Samsung, as in the heyday of DRAM production, is re-designing an existing product, this time Apple’s iPhone, to whom ironically, from the point of view of spotting innovation, it was already supplying memory chips; and in the background there is the looming ability of China to produce chips at lower cost. In 2010 Lee Kun-hee, on his emergence back into Samsung Electronics noted that “Most of Samsung’s flagship businesses and products will become obsolete within ten years.”¹³ So the as yet unanswered question is whether Samsung Electronics’ second family generation can make the transition into emerging global communication technologies, for instance as clustered around search engines, social networking or the use of the internet for distance communication. If not, Samsung’s second generation will be like Sony’s second generation. Samsung Electronics’s profits will be eroded by companies who are utilising aspects of electronic technology where Samsung has a comparatively reduced, little or even no presence at all.

Links:

• Buy Sony vs Samsung at Amazon.co.uk | Amazon.com
• Buy Samsung Electronics and the struggle for leadership of the electronics industry at Amazon.co.uk | Amazon.com

1. Michell, T (2010) Samsung Electronics and the struggle for leadership of the electronics industry. John Wiley & Sons (Asia) Pte Ltd : Singapore [↩]
2. Chang, Sea-Jin (2008) Sony v Samsung: the inside story of the electronic giant’s battle for global supremacy. John Wiley & Sons (Asia) Pte Ltd: Singapore [↩]
3. For a more general comparison of Korean and Japanese companies cf Soonkyoo C, Jangho L, Roehl, T (2000) What makes management style similar and distinct across borders? Growth, experience and culture in Korean and Japanese firms. Journal of International Business Studies 31:4 pp631-652 [↩]
4. For some of the personal dramas and tensions cf Sony Nathan, J (1999) Sony : The Private Life Houghton Mifflin: New York. [↩]
5. The Economist (28th Jan 2010) Samsung’s leadership saga: All in the Family The article also reports Mr Lee’s senior pardon for the breach of trust and tax violation that led to his resignation in 2008. http://www.economist.com/node/15398293 Samsung’s leadership saga (accessed 21/02/2011)  [↩]
6. Adizes, I (1988) Corporate Life Cycles Paramus, NJ: Prentice Hall [↩]
7. p9 Michell op cit [↩]
8. p187 Michell op cit [↩]
9. The clearest contemporary analysis of the relation between investment, waves of technological development and production for consumption can be found in Lonergan, BJF (1999) Macroeconomic Dynamics: An Essay in Circulation Analysis University of Toronto Press: Toronto [↩]
10. Korea Focus interview with Hwang Chang-gyu There has been neither success nor failure in Korea’s R&D projects, Joo Yong-seok, Seo Ki-yeol The Korea Economic Daily 6 Feb 2011 http://www.koreafocus.or.kr/design2/interview/view.asp?volume_id=99&content_id=103108&category=J (accessed 17/02/11)  [↩]
11. In 2009 13th November the Korean Academy of International Business (KAIB) and the European International Business Academy (EIBA) organised a joint conference at Inje University Can Korean Companies Leapfrog globalization? David Boje, Thomas TH Joh, (2006): Can Chaebols become Postmodern? Problems and Perspectives in Management, 1, p200-222 [↩]
12. Kim Yoo-chul Korea Times (11/29/2007) Samsung Looks to Future With New Drivers. http://www.koreatimes.co.kr/www/news/biz/2010/06/234_14685.html (accessed 17/2/11)  [↩]
13. The Economist (31st March 2010) South Korea’s industrial giants: Return of the overlord. http://www.economist.com/node/15816702 [↩]