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SAMSUNG ELECTRONICS: INTERNATIONATIONAL SUCCESS
AND ITS GLOBAL STRATEGY
Pablo Acuña
The success of the innovation-driven company Samsung has its foundations tied to its
vision- ‘Inspire the World, Create the Future’. Samsung Electronics (SEC) has been driven by
the need to develop new and innovative technologies; from its beginnings in 1969 has
grown into a global information-technology leader (Samsung, 1995). SEC is a product of
diversification made by its parent company the Samsung Group. The manner in which this
MNC has strategized its international development is the key to their success. These
strategies can be understood through the analysis of the works of Stephen Hymer, Raymond
Vernon, Peter Buckley and Mark Casson, as well as John Dunning. These theorists have
provided frameworks which enable the understanding of the internalisation strategies of
the Samsung Group which have facilitated the global success of SEC.
This report discusses and analyses product development strategies of SEC, the benefits has
created by internalising markets as well as the benefits it has acquired through the
developments made by its parent company the Samsung Group. Furthermore, the
ownership, location and internalisation advantages shall be analysed for further
understanding of SEC current global strategy through John Dunning’s OLI paradigm.
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THE HISTORY OF SAMSUNG ELECTRONICS CO.
Founded by the Samsung Group (1938) Samsung Electronics was product of a diversification
strategy which originated after the Korean War. The political situation affected the prior
strategy of the Samsung Group, which was based on food exports and shifted it into
manufacturing, retailing and the media sector (Lee, 2006). By the end of the 1960’s
Samsung was one of the biggest conglomerates in South Korea. The Group officially
incorporated SEC in 1969 because Lee understood that the electronics Industry was a value-
added industry, and saw the potential benefits of the company in the home nation, as well
as abroad. The company, has developed to become a major partaker in the competitive
world of electronics, however, it was not a pioneer in the industry. Entering the electronic
industry as a latecomer, SEC turned to borrowing technology through Joint Ventures from
Japanese companies such as Sanyo (Samsung-Sanyo Electronics) and Nippon Electric
Company (NEC). It was in 1970 that Samsung-Sanyo Electronics began the production of
black-and-white TV; this was followed by the production of a range of home appliances
including refrigerators, ovens and air conditioners (Samsung Tomorrow, 2012).
Samsung Electronics undertook a ‘follow-the leader’ strategy relying on foreign
technologies, driven by the need of foreign knowledge to advance the Korean company.
Prior to the crystallization of Samsung-Sanyo Electronics, SEC had considered the
introduction of American technologies, however finally decided to partner with Sanyo and
NEC due to the benefits of geographical proximity. Having lived and been educated in Japan,
Lee had the advantage of being fluent in Japanese. Referring to Raymond Vernon’s work it is
incorrect to assume that access to a scientific principle –namely technological know-how-
means the successful application of such principle into the generation of a marketable
product, because responsiveness to an opportunity is a function of ease of communication,
which in turn is a function of geographical proximity (Vernon, 1966). It could be argued that
even if Samsung had access to the technology and know-how, it would be useless if there is
a gap between the scientific principle and the embodiment of the principle in a marketable
product. To depict this theory- from September 1969 to February 1970 sixty-three Samsung-
NEC employees were trained in NEC (Japan) to master techniques of assembling
technologically simple products (Kim, 1997). At this time, Samsung was introducing itself
into the electronics industry, and the advantages that the Japanese companies offered
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outweighed those of the Americans; for example, similar culture and easier communication.
Were SEC to venture with an American company the ease of communication would have
been problematic, and the relationship potentially challenging. Vernon argues the US is the
prime location to introduce products to the market, due to its increasing economy,
welcoming market to new products and higher-than-average disposable income (Vernon,
1966). Consequently, it could be argued that a Joint Venture with an American company
would have been beneficial for Samsung. However, as Samsung entered the market as a
follower, rather than a pioneer, it adopted a ‘follow-the-leader’ strategy, imitating
competitors rather than innovating.
LOCATION OF A PRODUCT
SEC’s production of Black-and-White televisions started in Korea in 1970, began the export
of this product to Panama in 1971, and the mass production on televisions in 1972
(Samsung Tomorrow, 2012) . Raymond Vernon’s Product Life Cycle Theory (PLC) (Vernon,
1966) seeks to understand the reasons why a product is produced in its chosen location
throughout its life. He analyses the life of a product by dividing it in three main stages,
referred as ‘new’, ‘maturing’ and ‘standardized’ product. However, this theory is strongly
focussed on the U.S. and its market, which results in the lack of understanding of foreign
nations and the life of its products.
Vernon’s new product argues that the first years of production is when producers are faced
with the biggest challenges due to a number of locational implications. Because the product
needs to be unstandardized production requires freedom and flexibility regarding inputs,
processes and final specifications. The producer needs to be able to make changes to the
product, and there must be an effective communication between the producer and its
customers and suppliers. Vernon argues that it is likely for a company to start production
locally in order to minimize the risks and the uncertainty of introducing a new product to
the market. As depicted in Appendix A, Vernon’s new product in advanced nations such as
Korea claims that the industry is likely to manufacture, as well as import the product in
order to meet the needs of the market. Subsequently, exports will occur in order to increase
the downwards consumption curve of the local market (Vernon, 1966).
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It could be argued that the Vernon’s new product does not necessarily apply to Samsung’s
new product because Vernon’s theory assumes the early stages of production will introduce
of a new and innovative product- Samsung however, followed the leader through foreign
technology, which avoided the uncertainty of a new product. This enabled Samsung to focus
factors such as specialization and quality of the product. Although to a certain degree it
does require flexibility and freedom to amend the pilot product (if required), SEC enters the
industry as a late-comer, imitating the products that are already being sold by companies
such as LG and Sony. Instead of solely producing for the local market, Samsung started
exporting to Panama only two months after the beginning of production (Samsung
Tomorrow, 2012a).
Raymond Vernon argues that after the local market consumption starts to decline, the
following stage of the product is known as the ‘Maturing Product’. In this stage
standardization takes place and the need for flexibility and freedom declines; these qualities
are substituted by specialization and variety of the product, which occur in order to increase
sales and avoid a cost leadership strategy .Vernon further argues that to meet these new
strategy companies will seek cheaper mass production facilities, and will become less
concerned with the characteristics of the product, therefore the company is likely to find
new production location facilities (Vernon, 1966). It could be argued that SEC’s product was
born in the maturing stage because from the beginning SEC exported the product; however
unlike Vernon’s ‘maturing product’ exports were not necessities, but a strategy undertaken
by the company. From 1972 until 1982 production remained local, as SEC continued to be
dependent on supplies and foreign technology. Throughout the maturing stage of a product,
Vernon claims the company will expand its market as a result of high product demand. If the
cost of production plus the transport costs are higher than production cost in the new
location, the company should prefer to invest in an overseas production facility. Samsung
chose to invest overseas 1982 when it established a production facility in Portugal. This
location was chose due to its low-cost work force and its fruitful geopolitical status amongst
the European Union.
The final stage of Vernon’s PLC is the stage referred to as the ‘standardized product’. In this
stage Vernon argues that the original competitive advantages of the company become
eroded, and the main focus of the company is cost reduction, which leads to a mass
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standardization of the product. This suggests that a company will locate its production
facilities in lower-cost production and lower-income countries, and import the product back
from developing countries. It is also argued that these products are likely to be labour-
intensive. This last stage of the product does not apply to Samsung Electronics for a number
of reasons: firstly, its products are based around innovation and development rather than
standardization and decline. Secondly, developing countries do manufacture Samsung
products, but not because they are labour-intensive products -as stated in Vernon’s PLC- but
due to its low cost strategy and geographical proximity. Samsung does not relocate the
production facilities; it chose the locations from the start, developing a global network with
production facilities in strategic sectors, having a large share of manufacturing facilities
located in Asian Pacific (Samsung Group, 2012). The production facilities located in lower-
income countries do not necessarily target its demographics of that area; instead it chooses
low-cost manufacturing facilities from where SEC disperses its products into its targeted
markets. SEC constantly innovates and release new products, consequently discontinuing
the production of older products.
INTERNATIONALIZATION
Samsung Electronics manufactured locally for over ten years in South Korea. During this
period it built competitive advantages that enabled the company to go abroad and target
wider markets. Its first sales subsidiary took place in the U.S. in 1978 (Samsung Village,
2012) and its first manufacturing facility in Portugal in 1982 (Samsung Tomorrow, 2012a). In
1960 Stephen Hymer applied the industrial organizational approach to the theory of foreign
production (Dunning & Lundan, 2008) in which he argues that a firm must possess
innovatory, cost, financial or marketing advantage in order to own and control foreign
value-adding facilities. Consequently, these advantages must outweigh the disadvantages
that a MNC finds abroad. SEC’s developments prior to its global expansion enable the
understanding of the advantages it created for its international success; the most significant
developments may be internalisation of markets through the establishment of affiliated
companies which produce Samsung Electronics’ key intermediate goods.
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Samsung Electronics first started expanding in 1977, when it acquired Korea Semiconductor
Co. which drove the company to be the leader of the Semiconductor Industry in Korea by
internalising the flow vital supplies. As shown in appendix B the Samsung Group diversified
into different business areas to the decades of 1970 and 1980 (Samsung Elctronics, 2014).
The expansion of the Electronics Industry gave SEC the advantage of having affiliated
companies dedicate solely to produce intermediate products which would improve the
quality of its product; innovation and R&D have become SEC’s prime competitive advantage.
INTERNALISATION
The benefits of internalising a market can be understood by relating to the theories of Peter
Buckley and Mark Casson better known as ‘Location and Ownership Effect (Buckley &
Casson, 1979)’. In their studies they relate to the ‘Orthodox Theory of Location’ which
assumes constant returns to scale, freely available and standardized technology and that all
MNC’s are price takers; based on these assumption one could argue that the MNC would
choose its production facility based on where it is cheaper to produce each stage. However,
this theory is complicated by market factors such as increasing returns to scale, changes in
production costs due to non-routine costs such as marketing and advertising, as well as
imperfect markets and government interventions.
Buckley and Casson argue that a firm should bring the market under common ownership to
bypass these market imperfections of intermediate products - also known as the
internalisation strategy. There are market imperfections that will further encourage the
MNC to internalise the market, for example: production time lapses, discriminating pricing,
bilateral concentration of power, buyer uncertainty, and government interventions. After
1977 SEC developed competitive advantage based around semiconductors which provided
advantages against competitors. The acquisition of Koran Semiconductor also empowered
the company in aspects such as coordination of key operations as a result of known time
lapses, reduction of unstable bargaining situations, avoidance of buyer uncertainty and the
ability to discriminate prices. These benefits further developed the capabilities of SEC,
which –one could argue- outweighed the risks and uncertainties of doing business abroad.
These advantages encouraged SEC to establish a manufacturing facility in Portugal in 1982,
to further distribute its products in the western market.
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However, internalising the market does not only bring benefits upon the company, as
Buckley and Casson argue. Some costs in organizations are fixed, regardless of the amount
of transactions, thus when a single external market is split up and internalised with a
number of firms, the costs for each firm will tend to rise. Communication costs may rise
depending of the location of each firm, and external markets may need to be adjusted,
forcing the company to produce at a less efficient rate.
OWNERSHIP, LOCATION & INTERNALISATION (OLI)
Benefits can also arise from the parent enterprise or nationality of the company, the
distribution of assets, endowments and markets. In 1980 John Dunning developed a
paradigm which seeks to explain the effects of the ownership, location and internalisation
advantages over MNCs. John Dunning claims that the paradigm depends on four conditions:
first, the firm must possess unique and sustainable Ownership advantages (O) serving
particular markets. Assuming that this condition is satisfied, the company must perceive it is
in its best interest to maintain and add value to this advantage rather than sell it- he refers
to these as Internalisation advantages (I). He further argues, that assuming these two
previous conditions are met, the global interest of the MNC is being served by accessing or
utilizing its O advantages, creating a competitive advantage in the foreign location, referred
as Location advantages (L). Finally, taking the three OLI advantages are met, the extent to
which the MNC believes the foreign product contributes to the overall goal of the company
(Dunning & Lundan, 2008).
John Dunning further developed its ownership advantages and categorized them in those
ownership advantages that arise from property rights and intangible assets (Oa), those that
arise from common governance (Ot) and those that come from institutional assets (Oi).
Samsung Electronics’ Oa are one of key advantages for its international success. Its long
business history has granted Samsung experience in the exporting business. The group
originally started as an exported company of dried fish in 1938 and by 1950 it had become
one of the biggest companies in South Korea (Lee, 2006). Samsung Electronics’ marketing
strategy was developed to become one of the biggest and most expensive advertising
campaigns spending over $14 billion in 2013 (Mick, 2013). This marketing-focussed strategy
contributed to triumph over Sony, with the creating of a stronger brand value and higher
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market capitalization. Its marketing strategy substantially developed in 1988 when it
became sponsors of Seoul Olympic Games (Mitchell, 2010). Marketing is one of Samsung
strongest ‘property rights’ advantage, as it builds a strong brand recognition, which is
supported by its high quality products.
Samsung has developed strong advantages that arise from common governance (Ot). As
shown in appendix B, the Samsung group developed its Chemical Industries; laying
foundations for the global success of SEC. the Samsung-Total Joint venture has grew to
become a major player in the petrochemical industry; the complex structure is formed by 13
plants of naphtha cracking, employing 1,460 people (Samsung Total, 2013). Naphtha is the
raw material for the plastics used in the production of Samsung products, thus, owning a
naphtha cracking facility avoids the outsourcing of the production stage of this vital
intermediate-good. As shown in appendix C Samsung Petrochemical has three main areas of
production; the products of Samsung-Total such as EO/EG 125 and PP 700 are raw materials
for the creation of Samsung Electronics plastic products (Prospector, 2014). The advantages
of common governance are a product of diversity and experience of enterprises. These may
provide exclusive or favoured access to products, may also create productive and
cooperative inter-firm relationships, and may also provide access to the resources of the
parent company at marginal cost (Dunning & Lundan, 2008).
The location advantages have been a huge propeller for the success of the MNC. In its home
country South Korea, it received special treatment from the beginning, as the government
developed the electronic industry, because they understood it was a value-added industry.
In its early years the government blocked the entry of Japanese electronics to create an
external competition-free environment (Mitchell, 2010). Currently, Samsung Electronics has
a global network of forty production facilities, ten Research and Development centres and a
Sales Network constituted by sixty-two global centres (Samsung Group, 2012). These are
located in strategic locations, having production facilities located in lower-income countries,
and sales facilities in well-connected cities (Samsung Group, 2012).
Finally, the Internalisation advantages include those discussed under Buckley and Casson’s
Location and Ownership effects, as well as the advantages that arise from the diversification
of the parent company. Not only those that come from Samsung-Total petrochemicals, but
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the advantages from its affiliated companies in the Electronic industry, displayed in
appendix B. These companies produce vital intermediate products for Samsung such as Li-
ion batteries, energy storage systems and liquid-crystal display (LCD (Samsung Group, 2012).
John Dunning claims that these affiliated companies compensate the potential absence of
future markets; protect the quality of the intermediate products- which provides
reassurance of the quality and may also avoid costs of broken contracts.
CONCLUSION
Samsung Electronics has developed to become a leader in innovation and one of the most
influential players in the Electronics Industry. International Business theorists have provided
theories and tools which enable the analysis of its internationalisation strategies. There are
a number of internal and external factors that have propelled its success. The internal
factors such as acquisitions and internalisation strategies have provided a number of
benefits which strengthened the competitive advantages of SEC. The reduction of risks and
uncertainties that internalisation provides may be the reason for Samsung Electronics
internationalisation. As Stephen Hymer claims a company must have competitive
advantages that outweigh the risks in order to internationalise; Peter Buckley and Mark
Casson provided theories which enable the understanding of the strategic movements made
by Samsung which provided this advantages that led to internationalization in the decade of
1980. John Dunning developed the theory of Internalisation and further added Ownership
and Location advantage. These theories provide an understanding of the key characteristics
of the company that provides its competitive advantages which have driven Samsung
electronics to lead the Electronics Industry.
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REFERENCES
Buckley , P., & Casson, M. (1979). A Theory of International Operations. In M. &. Ghertman, uropean
Research in International Business (pp. 55-59).
Dunning, J., & Lundan, S. (2008). Theories of foreign direct investment. In J. a. Dunning,
Multinational Enterprises and the Global Economy (pp. 79-86). Edward Elgar.
Kim, Y. (1997). Technological Capabilities and Samsung Electronics' International Production Network
in Asia.
Lee, D. (2006). Samsung Electronics: The Global Inc. YSM.
Mick, J. (2013, December 3). Samsung Breaks the Bank with $14b in Advertising. Daily Tech.
Mitchell, A. (2010). Samsung Electronics and the Struggle for Leadership of the Electronics Industry.
Singapore: John Wiley & Sons (Asia).
Prospector. (2014, September 19). Samsung Total PP Plastic Materials Supplied by SAMSUNG TOTAL
PETROCHEMICALS Co., Ltd. Retrieved from Prospector:
http://plastics.ides.com/materials/2595/samsung-total-pp
Samsung Elctronics. (2014). 1989 - 1980 Entering the Global Marketplace. Retrieved from Samsung:
http://www.samsung.com/nz/aboutsamsung/samsungelectronics/history/history_06.html
Samsung Group. (2012). 2012 Samsung Electronics Annual Report. Suwon-si.
Samsung Heavy Industries. (2014). Overview. Retrieved September 12, 2014, from Samsung Heavy
Industries: http://www.shi.samsung.co.kr/Eng/Product/ship_overview.aspx
Samsung Tomorrow. (2012, April 18). The History of Samsung Electronics (1): Paving a New Path
(1968~1970) . Retrieved from Samsung Tomorrow:
http://global.samsungtomorrow.com/?p=13544
Samsung Tomorrow. (2012a, April 25). The History of Samsung Electronics (2): Diversification and
Expansion (1971~1974). Retrieved from Samsung Tomorrow:
http://global.samsungtomorrow.com/?p=13722
Samsung Total. (2013). About the company. Retrieved from SamsungTotal:
http://www.samsungtotal.com/EN/Info/company/company.aspx
Samsung Village. (2012, June 1). The Success Story of Samsung Electronics: How It All Began.
Retrieved from Samsung Village:
http://www.samsungvillage.com/blog/2012/06/01/samsungblog-the-success-story-of-
samsung-electronics-how-it-all-began/
Vernon, R. (1966). International Investment and International Trade in the Product Life Cycle. The
Quarterly Journal of Economics, Vol 80, No. 2, 190-207.
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Appendix B- Diversification of the Samsung Group
SAMSUNG GROUP
CHEMICALS
INDUSTRIES
HEAVY
INDUSTRIES
ELECTRONICS
INDUSTRY
FINANCIAL
SERVICES
SERVICES AND
OTHERS
Samsung Total
Petrochemicals
Samsung C&T
Engineering and
construction Group
Samsung
Electronics
Samsung Life
Insurance
Samsung C&T
Trading and
Investment Group
Samsung
General
Chemicals
Samsung Heavy
Industries
Samsung SDI Samsung Fire
& Marine
Insurance
Cheil Industries
Samsung Fine
Chemicals
Samsung
Engineering
Samsung Electro-
Mechanics
Samsung Card Hotel Shilla
Samsung BP
Chemicals
Samsung Techwin Samsung SDS Pamsung
Securities
Cheil Worldwide
Samsung Display Samsung Asset
Management
S-1 Corporation
Samsung Corning
Advanced Glass
Samsung
Venture
Investment
Samsung Media
Center
Samsung Economic
Research Institute
Samsung Biologics
Samsung Bioepis
Samsung Welstory
