Samsung Electronics

Operations Management – Samsung Electronics Case

How much of Samsung’s profitability is based upon its price premium advantage? What has Samsung done to achieve it?

Roughly 34% of Samsung’s profitability is based upon its price premium. Exhibit 7a demonstrates that Samsung had a $0.72 price advantage over the competitors weighted average in term of average sales. It also shows that Samsung had $1.39 lower costs per unit than the competitors weighted average. Thus the following calculation provides the relative importance of the price premium as part of total profitability:

(∆price advantage)/(∆operating profit)= 0.72/(0.72-(-1.39))= 0.72/2.11=34.1%

Samsung’s price premium is due to the reliability of its products. Samsung have the most advanced precision technology with lower deficiency among other suppliers. This could be evidenced by production yield Rate (80%, the highest rate in Exhibit 10c). From 1995 onwards Samsung won numerous awards for reliability from many customers. Before 1995, however, Samsung was not widely regarded as a supplier of reliable products. The key steps that Samsung took to make sure it provided reliable and quality products made it possible for the company to charge a price premium.

A key component in the shift towards reliability started with creating a company culture oriented at quality, championed by the president of Samsung, who even burned defective products in order to motivate employees. In addition the fabrication and R&D facilities were bundled into one location which helped engineers solve process and design problems together. The site is also located in the mountains where the air is clean and free of dust and other particles that have an adverse effect on the production of semiconductors.

The focus on reliability is also noticed in the strategic decisions when face with technological development. The 4Mbit generation of DRAM forced chip makers to choose between two different technologies. Samsung choice was to...