Samsung drives to change rigid corporate culture

Consumers explore the main features of a golf application installed in the Samsung Electronics’ Gear S2 smartwatch during a promotional event held in downtown Seoul, Sunday. Samsung is trying to change its rigid corporate culture by offering more autonomy to teams and divisions which develop software- and design-focused products such as the S2. / Courtesy of Samsung Electronics

Firm stresses converged products, profits over expansion

By Kim Yoo-chul

It’s no surprise that Samsung Electronics has been having a tough time maintaining its earlier strong profit levels over the last few years because all of its key businesses are increasingly challenged due to growing competition and weak demand in consumer electronics.

Samsung’s critical advantages lie in manufacturing and the spirit of manufacturing is how to deliver products with on-time deliveries, better pricing and commitment to output. However, the effects of such advantages are losing their luster given Samsung Electronics’ readiness for a major round of redundancies.

Power is currently shifting to a third-generation led by company chairman Lee Kun-hee’s only son Lee Jae-yong, who works as the company’s vice chairman. Samsung is trying to change its rigid corporate culture by shifting its focus on converged products and profits, rather than trying to grow its existing business any further, cutting the role of back-office.

“Samsung’s winning formula that was respected decades ago was to increase volume in products in the shortest time by pushing employees to finish their given work ahead of schedule. This paid off in terms of manufacturing; however, the company needs a new winning formula in an era of convergence,” a senior Samsung executive told The Korea Times last week.

He stressed the company’s latest decision to cut the role of back-office functions such as finance, legal, public relations and administrative units was intended to make the company more nimble in decision-making and effective cooperation between units and teams.

As Samsung is already a big company, the easiest way to cut costs is to streamline its top-down business structure, which has greatly expanded in the last few years.

Samsung is expected to cut the number of its executives in the year-end reshuffle from a year ago, according to people familiar with the issue.

Samsung is trying to find ways to maximize its existing hardware-focused strength with new services as the company manages its home appliances, memory chips, flat-screens and smartphone businesses.

Samsung said mobile payment, IoT with connected home appliances symbolized its push toward software and services, focusing on user experience on top of its traditional prowess and focus on hardware.

Such a strategy shift, however, needs more time to yield results. But investors aren’t skeptical about the results of the company efforts to change models.

“We believe Samsung is trying to achieve a self-reinforcing loop of growth between its traditional strength in hardware and emerging position in software & services. Samsung Pay has been positioned as a key element for the Samsung's high-end smartphone in the crowded market, with less focus on merely monetizing a profit center but more as a contributor to user experience and construction of the overall ecosystem,” Bernstein Research’s senior analyst Mark C. Newman said in its latest report to clients.

About Samsung’s focus on connected home services, the research firm said; “For SmartThings, in a much less developed and segmented industry of connected homes, we found the way it will be run post-merger is as an open-source-based platform with a high degree of autonomy and will be one of the more striking aspects of the presentation.”

More authority given to Samsung’s internal teams handling mergers and acquisitions (M&A) also corresponds with Samsung’s appetite to find new revenue sources with changes and adjustments.

Dedicated teams and companies within Samsung focused on acquisition growth include Korea-based Samsung Venture Investment and US-based Samsung Accelerator and Samsung Strategy and Innovation Center and numerous other groups.

Profits

Samsung Electronics said that the company will never stop exploring new chances for growth; however, the company is actually preparing to adjust its approach to focus on profitability rather than expand volume.

“For example, Samsung can’t expect to generate the high profits that we did in smartphones a couple years ago. This means its top priority is how to get profits in a sustainable way regardless of market volatility,” said another executive at one of Samsung’s technology affiliates on the condition of anonymity as he wasn’t authorized to officially to talk to the media.

Like he said, demand for TVs in which Samsung has lead the market since 2004 isn’t that strong as consumers have replacements such as large-sized tablets and smartphones. OLED TV is emerging as “something next,” however, it remains to be seen whether consumers are ready to pay more to purchase premium TVs.

Also, smartphones are being commoditized because of more agile rivals coming out of China such as Xiaomi which produces cheaper devices with competitive features.

“That’s why Samsung plans to cut its spending on memory chips next year and to delay its decision to manufacture large-sized OLED displays to be used in TVs as any oversupply in those parts will hurt its profitability,” said a source knowledgeable about the company business plans.

Despite corporate business and target shifts, Samsung still wants to make sure that any changes to its structure won’t negatively affect its current product lines. Samsung will continue investing more in research projects.

Also, experts say it will slow down or drop some of its business expansion plans to consolidate its focus on the current business divisions and boost their profitability.