Across the world, there has been a growing interest in developing high-tech firms. How to develop them is a strategic question. Mainly, how should developing countries succeed in doing so? Of course, America is highly successful in building a high-tech innovation economy. Its once farmland in California has become the home of iconic success stories like Apple, HP, or Google. Unfortunately, such a great success story does not appear to be a role model to follow. In fact, at the root of its growth is the USA defense-related R&D programs. Often, start-ups or corporations are in the race of picking up ideas, concepts, demonstrations, or prototypes from defense R&D programs, fine-tuning, and fusing them as civilian innovation success stories. In contrary to it, Samsung grew from a trader to a high-tech innovation powerhouse. The uprising of Samsung from trader to innovator seems far more replicable than American icons.
Samsung appears to be a textbook model of building high-tech firms in the industrial economy. It began the journey as a trader. Instead of picking up ideas from defense R&D and creating a big bang, it kept incrementally progressing. In addition to expanding horizontally, it remained intensely focused on advancing vertically. It kept building one after another floor of success of scraper. Upon succeeding as a trader, it focused on making a copy or replicating existing products. To create success in manufacturing, it focused on process innovation. Subsequently, it moved to create success out of acquiring the capacity redesign of products, which led to imitation. Ultimately, it has attained the capacity to add innovative features or improve existing ones to high-end innovations. Consequentially, it has succeeded in making its products like TV or smartphones highly competitive to the offerings or Sony and also Steve Jobs’ magical Apple.
The journey started as a Trader–subsequently to be an innovator
In 1938, Lee Byung-Chu established Samsung at Daegu city of South Korea. It began the journey with 40 employees to trade dried fish, locally-grown groceries, and noodles. The outbreak of the Korean war forced the founder to leave Seoul and established a sugar refinery in Busan. Still 1969, Samsung was known for trading fertilizers and sweeteners. It also established footprints in insurance, securities, and retail. It took the first 30 years for Samsung to establish itself as a trader. Over the next 30 years, the growth of Samsung from a trader to an innovator is remarkable indeed.
Entry in the electronics industry as replicator–followed by process innovation
In 1969, Samsung entered the electronics industry. The journey began to manufacture for Japanese companies for export. Low-cost labor was the primary strategic advantage for Samsung to be attractive to Japanese companies. As a matter of fact, before it, Samsung did not have any know-how related to electronics. The joint venture with Sanyo and Sumitomo corporation in December of 1969 broke the ground for Samsung to venture into the world of electronics. They started assembly televisions, calculators, refrigerators, and air conditioners of Japanese firms to export. Soon after it, Samsung expanded its joint venture with NEC Corporation to assemble home appliances and audiovisual devices. This partnership planted the seed for Samsung to grow from a trader to an innovator
Within just 4 years of starting the assembling journey, Samsung moved to manufacture parts. In 1973, Samsung and Sanyo created Samsung-Sanyo Parts. Within a few years of beginning parts manufacturing business, Samsung got into the semiconductor processing business in 1974. It began with the acquisition of Korea Semiconductor, which was on the verge of bankruptcy while building one of the first chip-making facilities in the country. Within just 05 years, Samsung’s success from assembling electronic products to component manufacturing to semiconductor processing appears to be spectacular. It offered Samsung much-needed vertical integration to be globally competitive. Subsequently, it helped Samsung to graduate from a trader to an innovator.
Process innovator–first step to graduate from trader to innovator
In the late 1970s, Samsung paid attention to process innovation, in addition to taking advantage of low-cost labor. It not only focused on the technology side but, most importantly, on how to organize the labor force for maximizing throughput and minimizing cost was a remarkable strategic success for Samsung. This strategy paid off for entering into a new industry on its own.
For example, as opposed to forming a joint venture as an entry strategy, Samsung entered the Microwave Oven segment by making it cost-competitive through process innovation and low-cost labor advantage. As opposed to GE’s assembly labor cost of $8 per oven, Samsung had only 63 cents. The most significant difference was in overhead. Samsung spent 73 cents per oven for overhead labor—supervision, maintenance, set up—as opposed to GE’s$30 per oven. Well, someone may say such a difference is due to a high wage differential. Of course, Samsung paid less for labor. On top of it, they also succeeded in producing more per unit of labor through process innovation.
For instance, while GE got four units per person each day, Samsung got nine—more than double per person throughput. Consequentially, Samsung’s $155 microwave oven outperformed GE’s $218 to make a typical microwave oven. Due to this process innovation, Samsung created this success by importing all the major technology components, mostly from Japan.
Another example of Samsung’s success in process innovation is in DRAM. In 1984, Samsung entered into DARAM by importing technologies and taking licenses of key patents from Micron Technology of the USA. It also licensed SRAM and ROM technology from Sharp Corporation of Japan. Its R&D center, established in 1979, focused on process innovation for making Samsung a market leader in the global DRAM business.
Product redesign–an effective move to grow as an innovator
The footing in electronics led to Samsung’s venture into the redesign of finished products. Starting from Washing machines to TV, Samsung started the redesign of many of the finished products. It also succeeded in redesigning DRAM Chips and Flash Memory. For the finished products, the focus was on changing electromechanical components with electronics. It also pursued the application-specific integrated circuits for its long list of products, among others. Its product redesign strategy was highly linked with the semiconductor and component manufacturing capability. Along the way, Samsung also started developing a key patent portfolio.
Stepping into imitation–subsequently top grow as an innovator
In the 1990s and in the early part of the 2010s, Samsung was still focusing on manufacturing and product redesign. There was no visible presence in innovation. The emergence of the iPhone brought an opportunity for Samsung to enter into innovation. As opposed to countering iPhone with its conventional design of feature phones, Samsung jumped into the race of imitating iPhone-like features with Android. On the one hand, it got a free OS to imitate. On the other hand, its strong manufacturing capability helped to produce components to support the imitation.
Incremental approach for sustaining innovation journey
As Apple was very aggressive to roll out successive better versions at frequent intervals, Samsung’s imitation strategy went under pressure. Moreover, Samsung started to face litigation from Apple for patent infringement. Hence, Samsung focused on developing the capability to add unique features or improve existing features of its smartphone series of products. Furthermore, China-based imitators like Oppo, Vivo, or Xiaomi were rapidly taking over Samsung’s initial lead as an imitator. To sustain its market position, the incremental innovation strategy was crucial. Its incremental innovation has also led to a big jump like adding a foldable feature.
Samsung’s emergence as the patent powerhouse
In less than just 40 years of establishment of Samsung R&D, Samsung has occupied the 2nd top position in the US patent office. As far as patent issuing is concerned from the US patent office, Samsung is among the most innovative companies in the world. In 2019, Samsung Electronics received 6,469 patents from the US patent office’s issuance of 333,530. Of course, it’s far less than top performer IBM’s 9,262. But Samsung is far above many high-tech behemoths like Microsoft, Google, Facebook, Sony, or Amazon. On top of it, Samsung claims a leading position in 5G patent holding. Samsung holds 2,633 declared 5G patent families.
The creative wave of destruction—Samsung yet to embark on
So far, Samsung’s success has been on improving existing products and processes. It has been in the race of incremental innovations of products and processes. This strategy has been paying off for entering into a new industry and sustaining a position. But Samsung has not succeeded in taking the radical step of changing technology for offering significant different alternatives. For example, Toshiba opened the path of providing an alternative to disk-based storage by inventing Flash memory. Similarly, Sony offered a digital camera as a substitute for a film camera. On the other hand, Apple took a radical step in changing the technology core of user interface for both PC and smartphones.
The journey of changing technology core leads to the growth of the creative wave of destruction of existing products. Sometimes, they also cause disruptive effects on dominant incumbent firms. In general, South Korea and Samsung have not yet succeeded in pursuing creative waves of destruction. The next challenge for Samsung is to embark on creating success through a creative wave of destruction. In the absence of it, Samsung’s spectacular success does not appear to be sufficiently strong. In the worst-case, Samsung Electronics may experience the fate of Nokia in its smartphone business.
Lesson from Samsung
So far, Samsung offers a manageable path for aspiring developing countries to succeed in the high-tech industry. The growing domestic market gives the opportunity to enter through assembling. But this assembling entry should be quickly scaled up towards manufacturing to redesign, reaching innovation. However, in addition to having a focused strategy, the speed of implementation highly matters. Samsung also offers a lesson in this regard. Once the owning family makes a decision, the implementation proceeds at the speed of light. Unfortunately, many trading houses in developing countries are failing to take a lesson from the journey of Samsung to graduate from a trader to an innovator.