Innovation: the case against

By Andrew Salmon

Various media have recently been running stories critical of Samsung’s attempted entry into the software business. Certainly, they seem to have a case. Why is a hardware company investing so many billions in software — notably, the creation of a smartphone operating system?

The industry is doing fine with existing systems, the primary ones being Apple’s iOS, Google’s Android and Blackberry’s Blackberry. Does the world need another one? Not really, particularly as the new system is not expected to make any significant technical breakthroughs.

Moreover, is this not diluting Samsung’s core competency? The firm is a hardware maker, not a software producer.

Indeed, one of the best things that happened to Korean chaebol was the 1997 financial crisis; they were forced to divest non-core lines and focus on core competencies. The end result was that they became global brands by being excellent in specific areas rather than being engaged in dozens of unrelated businesses they had formerly undertaken. (Top brands are focused firms, not diversified conglomerates: Coca Cola does soft drinks not shipbuilding; Microsoft does software not financial services; Ford does cars, not aircraft. And so on.)

This criticism does not really stand up: OS and smartphones are linked business lines, and Apple, for example, does both. Indeed, from a business perspective it makes a great deal of sense for Samsung to get its own OS up and running, as it would then stand to make truckloads of money from third-party apps and services.

Other stories fret that Samsung needs to be creating the “next big thing.” There is something to this. As the world’s largest electronics company by revenue, would Samsung not be doing the world a greater service by investing its R&D billions and thousands of engineers’ brains on something totally new, rather than reinventing the wheel with an unnecessary OS?

Perhaps. But this overlooks the core strategy that has underwritten the success of Korean companies over the last half-century.

None of the products which Korean companies are most competitive at producing — semiconductors, displays, consumer electronic devices, smartphones, cars, ships — have actually been invented by these companies.

Instead, they have followed the lead of “first movers.” A first mover has to invest huge amounts of R&D and managerial time on creating new product categories.

It then has to invest massively in marketing in order to educate consumers that this big new “something” they have not seen or experienced before is what they actually want/need.

Korean firms, instead, have focused on being fast, smart “second movers.” As the adage goes: “A fool learns from his own mistakes. A wise man learns from the mistakes of others.”

They don’t need to make all that expensive investment or swallow the huge risk entailed in creating a new product that, in the end, the world might not want.

Instead, they forge up pathways laid down by other companies. Their strengths are in leveraging their economy of scale and their fast, top-down decision-making processes to manufacture big and fast.

And they have a solid track record of tweaking existing technologies to make incremental innovations — a faster chip, a slimmer display, a larger screen, a gadget with more bells and whistles — and then marketing and distributing them through their global networks.

Conversely, look at the record of “innovative” companies. Motorola invented the cellphone and Apple invented both the smartphone and tablet computer. So what? Samsung outsells them both.

Sony invented the portable music player, the CD player and the portable CD player. So what? Samsung overtook Sony in brand value in 2005.

In short, Samsung’s business model works fine. Leave it as is: You can’t argue with success.

However, it is not a perfect company. Its shares are undervalued compared to its main rival: Samsung Electronics’ price to earnings ratio (PER) is 9.9717; Apple’s PER is 14.4918.

If you ask Korean regulators why this is so, they tend to say, “Oh, that is beyond our control: It is because of the North Korea risk.”

Then there is the related issue of how you deal with your company’s owners — i.e. its shareholders. Korean firms have customarily treated them poorly. As one indicator, look at dividend yields: Samsung’s stand at 1.10 percent; Apple’s at 2.24 percent.

In short, if Samsung wants to raise its game, it might be better advised to upgrade its governance and treat its shareholders better, rather than trying to create the “next big thing.”

Inventing is not a competitive advantage of any major Korean company, but that has not stopped them so far. There is more to business success than creativity.

Andrew Salmon is a Seoul-based reporter and author. Reach him at andrewcsalmon@yahoo.co.uk

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