Trade and Innovation in the Korean Information and Communication Technology Sector
This includes the strategy of the organisation, the innovation strategy, the culture in the organisation towards risk-taking and change, the motivation of employees, cross-functional learning, knowledge management and the use of internal and external networks. “Employees’ willingness to take risks very much depends on the existence of a ”noblame” culture.
A strong culture fosters innovation only if it is built on norms such as accepting failure…” (Goffin & Mitchell, 2005, s. 265). ”Multifunctional learning fosters innovative and learning by doing on the part of the employees and help them keep up to date with the latest developments. It also serves as a basis for creating a climate that can bring about organizational transition” (Takeuchi & Nonaka, 1986). “Organizations need to increase their innovative capacity and one powerful mechanism for doing so is to extend participation in the process to a much wider population.
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Mobilizing high levels of participation in the innovation process is unfamiliar and, for many organizations, relatively untested and apparently risky” (Bessant, 2003, s. 767). ”Mobilizing and managing knowledge becomes a primary task and many recipes offered for achieving this depend on mobilizing a much higher level of participation in innovative problem-solving” (Bessant, 2003, s. 767) ”Companies increasingly cannot expect to warehouse their technologies, waiting until their businesses make use of them” (Chesbrough, 2003, p. 32). Thirdly, the 7-S framework contains the very process of innovation. The process is divided into a series of relatively well-known steps in the “funnel” approach that seems to be standard in theory and praxis these days. However, it has been chosen to illustrate this differently than conventionally, because:”… The assumption of a sequential progression without feedback loops and recurring tasks is unrealistic …” (Saren, 1994, s. 633). Hence, the illustration of the process circling the innovation fundamentals.
So what is contained within the process element of the 7-S framework?
Again this can be illustrated by using a quotation from some of the state-of-the-art literature:” … There is no doubt that for managers to increase the success rate of their new product efforts, they should master techniques for the planning, development, deployment, evaluation and control of necessary competencies throughout the new product (NPD) process, i. e. , from the generation of the new idea to the launch of the product to the marketplace …” (Tzokas et al. , 2004, s. 619).
In other words, the innovation process is measured by looking at project management, project planning, top management involvement, project managers, and the application of innovation fundamentals across the seven stages of the process. Companywide, we will build a content-rich business structure that fosters innovation in hardware and software. Building from our creative platform, we will develop new businesses in health, the environment, and renewable energy. A company that epitomises the transformation of the Korean ICT sector is Samsung Electronics.
Samsung Electronics is one of the world leaders in semiconductors, in particular DRAMs and flash memories. Liquid Crystal Displays (LCDs), mobile phones, and digital appliances such as flat panel TVs. While Samsung had quickly grown from an assembler of black and white TVs in the 196()s to one of the market leaders in DRAMs in the late 1980s, making use of foreign technology and based on foreign markets, it was generally a market follower rather than an innovator even in the late 1980s. Changes in the business environment in the early 1990s, i. . greater competition at the lower end of the market due to the increasing use of evolving production networks in the Asian region by Japanese producers, increased competition in the Korean domestic market due to progressive trade and investment liberalisation, and withdrawal of the generalised system of preference (GSP) privileges in export markets, triggered a transformation of Samsung with a greater emphasis on technology, increased global production and sourcing, and enhanced international sales and distribution.
The fact that Samsung now has research facilities not only in Europe, US and Japan but also in Russia, India and most recently China, that it now has 27 manufacturing facilities in 12 countries, with overseas production reaching 35. 9% in 2007, and that it has doubled its sales network from 32 sales organisations in 23 countries in 2000, to 60 in 48 countries it all regions, shows how global Samsung's operations have become as a result which has become one of the leading firms in the ICT industry worldwide from a modest position in the past two decades. The study assesses how regulatory, trade, and investment policy choices have helped, alongside other key policies, to provide the right framework conditions for technology absorption and innovation. In addition, it examines how the private sector, and more particularly Samsung, has taken advantage of those conditions to enhance its innovation capacity. The objective of this study is not to provide a comprehensive history of Korea's development or to evaluate Korea's innovation policy.
Rather it is an attempt to shed some light on the relationship between trade and innovation from the recent rapid growth of Korea's ICT industry in the past 15 years. focuses on Samsung's strategies in international R;D, manufacturing, sourcing, supply chain management, sales and distribution. (Other key determinants of Samsung's success include its strong branding and marketing strategy, its investment strategy of investing in large capacity when other companies are cautious, and effective human resource management.
The Samsung Group is today the largest chaebol in Korea, which has businesses pning from electronics and electro-mechanics, shipbuilding and engineering, petrochemicals and fine chemicals, life insurance and securities to trading and constructions. Samsung Electronics is its largest company with 2006 consolidated sales of USD 92 billion and net income of USD 8. 5 billion.
It employs 128 000 people in more than 120 offices in 57 countries, and is organized into five major businesses: semiconductors (memory chips, system LSI devices and hard disc drives), LCDs (TFT LCD products in various applications). Telecommunication networks (mobile phones, telecommunication systems), digital appliances (washing machines, refrigerators, air conditioners and stoves) and digital media (TVs, audio/video products, PCs and computer peripherals) (Samsung. 2006). It is among the global leaders in semiconductors such as DRAM.
SRAM chips, and flash memory. CDMA mobile handsets, and digital media technologies such as Liquid Crystal Displays (LCDs), and has fast become a truly global multinational company. For example, value of the Samsung brand was USD 16. 1 billion in 2006 in the Brand Value Survey conducted by Business week magazine and Interbrand, or 20"' among all corporations in the world and 7"' in the IT sector. Samsung Electronics is also ranked 27'" in the world on Fortune magazine's list of Global Most Admired Companies.
Samsung's success in particularly noteworthy in light of two factors: first, the company's medium sized domestic market (Korea has a population of 48 million) and, second, its origins and recent history. Samsung started off in 1938 as a trading company, and while it entered two manufacturing sectors (i. e. sugar and textiles) in the mid-1950s, it was not until 1969 that the firm entered the electronics industry with the incorporation of Samsung Electronics Co. One major characteristic of Samsung's entry into the electronics industry was its reliance on foreign technology.
Dependence on foreign technology
Given its lack of experience in electronics, Samsung had no choice but to turn to foreign sources of technology in management, production in marketing and Samsung established a close relationship with Japanese and US firms. It created several joint ventures with foreign technology suppliers such as NEC, Sanyo, Corning Glass Works and other companies. It reached numerous agreements to assemble electronic products for foreign original equipment manufacturer (OEM) buyers, who provided it with design and engineering support as well as with an international market. Samsung also relied extensively on outside suppliers for the purchase of core components. However. Samsung and its affiliated partners have increased its capabilities for parts supply and for some parts even began to ship parts to Korean and Japanese customers. Samsung electronics expanded and improved its assembling capacity, producing ten million black and white TV sets by the end of the 1970s.
Most sales were through OEM channels. OEM buyers provided Samsung with product design, quality control and engineering support, leaving Samsung to increase its manufacturing capability. Samsung continued to increase access to other international distributors and was able to renegotiate TU and ease initial geographical restrictions imposed by its joint venture partners. " Samsung expanded its OEM channels and capabilities by adding two new products - VCRs and microwave ovens. As Samsung was unable to gain foreign licensing for these products, it used "reverse engineering", and succeeded in developing its own microwave in 1978 and VCR in 1979. Samsung further diversified into the telecommunication sector through a 1977 JV with GTE of the US. In 1974, Samsung acquired Korea Semiconductor Co. (KSC), a joint venture between Korea Engineering & Manufacturing Co. and Integrated Circuit International, a US firm, which manufactured simple integrated circuits for electronic watches, which formed the basis for Samsung's entry into the dynamic random access memories (DRAMs) business.
Upgrading of technology - entry into DRAMs
The 1980s was the period of expansion and diversification for Samsung. As Samsung began to experience limitations on growth in the CTW and VCR markets due to lack of component availability. Samsung made a decision to enter the IC business. To achieve its objective, Samsung once again tried to learn foreign technology through a broad range of formal and informal contacts, and decided to enter the DRAM market which was considered more suitable for Samsung which had familiarity with incremental process innovation and large scale manufacturing efficiency both of which could become sources of competitive advantage in this sector.
In 1983, Samsung licensed a DRAM design from Micron Technology, a US company, and entered the merchant market for DRAMs which require the most advanced manufacturing technologies and huge capital outlays. In 1983, Samsung successfully developed a 64K-DRAM, followed by a 256K in 1984. and a lM DRAM in 1986. Samsung continued to upgrade its technology and decreased its reliance on outside technology, except for capital equipment and thus rose from a virtually zero share in memory chips in 1984 to be the world market leader in DRAMs by 1992.
By the late 1980s, Samsung was able to produce a wide variety of semiconductors for use in phone sets, computers, private automatic branch exchanges (PABXs). acsimile machines, and VCRs (Kim. 1997). As a result, it was able to reduce dependency on Japanese suppliers for core components. Nonetheless the majority of the DRAMs produced in Korea were exported to foreign countries and the other non-memory chips required (I. e. microprocessors) continued to be imported from other countries (Kim, 1998). The strong resource shift to semiconductors meant that development of other capabilities suffered to some extent. While Samsung Electronics Co. had a minor change capability, it remained weak in major change capability (Kim, 1997).
As a result, it continued to use license technology from foreign companies for its main export products in this period. ' OEM channels remained dominant in the company sales at over 65% of total sales even in 1988. and Samsung maintained close relationships with OEM buyers such as JC Penney, Sears Roebuck, GTE, Toshiba, IBM, Hewlett Packard, RCA and Crown Corporation (Kim. 1997). It was towards the end of the 1980s that Samsung slowly started to build its own technological capability with the acquisition in 1988 of Micro Five Corporation, a US company, and with the establishment of Samsung Infonnation Systems America Inc. SISA) in Silicon Valley to support export activities as well as to gather information on ICT products. It was also in this period that Samsung began its search for foreign talent as a means to compensate for its lack of internal expertise (Box 3). It was also in the 1980s that Samsung started to internationalize its production for certain products such as colour TVs, audio products and microwave ovens. Samsung also sowed the seeds of its telecom business at this time, acquiring Korea Telecommunications in 1980 and started production of a cellular phone in 1986.
One of the ways Samsung has overcome its lack of technical capabilities has been through recruiting top-level engineers from world-leading competitors. ^" In early days, Samsung focused on recruiting Korean engineers working at foreign companies. Hwang Chang-gyu, a former president of Samsung Electronics, was recruited from Intel, and Chin Daeje, another former president, worked at IBM's Watson Research Center before being hired by Samsung, to name just a few.
These people have significantly contributed to the transformation of Samsung from a me-too memory producer to the world leader by bringing cutting-edge technical knowledge and managerial skills. Samsung also hired foreigners in order to fill the gap it identifies to upgrade its technical capabilities. It is widely known that Shigeo Fukuda, who was hired from Kyocera, played a critical role in the Samsung's new initiative in 1993 known as "New Management. " It is believed that his critical comments on Samsung during the 1980s pushed the company to enhance its product development processes and design capabilities.
More recently hiring has become increasingly diverse from all over the world including David Still (US), David Henri (France). Roman Sepeda (US). Nelson Allen (US). Hao In (China), and Tung Wang (China).
Transformation into a global company - 1993 and onwards
Several changes in the business environment faced Samsung in the early 1990s. First, lower trade barriers and transportation costs and enhanced ICT from the latter 1980s and the 1990s resulted in greater fragmentation of the ICT industry.
In the late 1980s, Japanese producers rapidly increased overseas production in response to increased competition from Korean competitors and the rapid appreciation of the yen, which led to greater competition at the lower end of the market. Secondly, Korea's domestic electronics market which had long been protected from foreign competition was gradually liberalized as Korea prepared to join the ranks of industrial nations. In 1989. import quotas on consumer electronics were removed. By 1993 there was a plan to cut the average tariff rate below 10% for all imported electronics goods.
The number of items subject to the import diversification program which shielded the Korean market from Japanese competitors was steadily decreased with a schedule put in place for abolition in 1999. Thirdly, on the export side, the generalised system of preferences privileges were withdrawn from Korean electronics goods by the US and EC in 1988. The Won also started to appreciate against the dollar making exports from Korea less attractive. The above changes in the business environment led to a strong initiative headed by the Chairman Kun-Hee-Lee in 1993 to become a truly global company. ' Under this new initiative, Samsung began its transformation from a successful company to one of the global leaders in the industry. There was a renewed emphasis placed on quality, and several new products were subsequently introduced such as the TFT-LCD and CDMA mobile handsets. The Asian financial crisis presented a further challenge as the domestic market plunged, and Samsung had to undergo a fundamental restructuring of its activities, exiting from numerous businesses, cutting 30% of its workforce and cutting its debt-to equity ratio from 300% to 30%.
However, the Asian crisis also presented an opportunity for Samsung to consolidate its domestic market as competitors weakened their positions, while shifting more of its resources to the Liquid Crystal Display (LCD) and mobile phone businesses which has allowed it to diversify its revenues. The growth has been particularly strong in the CDMA mobile handset market, where Samsung has leaped from almost a negligible share in the global market to number one in CDMA phones with a share of about 30%, and number two in the global market overall behind Nokia.
Below we focus on three main strategic responses of Samsung: greater emphasis on technology, global productions and sourcing, and international sales and distribution. Greater focus on technology (globalization of R&D and strategic alliances) Samsung's R;D expenditure in Korea has continuously increased both in terms of amount and as a percentage of sales, on average 18% annually from 2002 to 2006, and now approaches 10% of total sales (Figure 21). The proportion of R&D staff has jumped from 16% in 1997 to 24% in 2006, and the company plans to push it up to 32% by 2010.
The number of scientists and engineers at various research centres in Korea has increased by 70% since 2001. Table 23 indicates how Samsung has aggressively recruited scientists and engineers with graduate degrees; the number of Ph. D. 's is up by 50% and the number of Master's degree holders has been more than doubled. Samsung has also changed its patenting activities since the early 1990s. While Samsung only bad 1 704 patents for applications made before 1994, it was granted over 2 600 patents for applications made in the three-year period 1994-1996 and has consistently been granted over 1 000 patents since then. This shows how Samsung has become aggressive in the application of patents in the United States as part of its technology strategy.
Samsung's efforts to strengthen its research capabilities have not been limited to Korea. In order to improve responsiveness to the local demand conditions and tap into the pool of cutting-edge scientists and engineers, the company established R&D centres in various parts of the world. Samsung started by setting up Samsung Information Systems America (SISA) in Silicon Valley in 1988, followed by Samsung Electronics Research Institute in London in 1991. These two research facilities are typical examples of R&D facilities set up to monitor abroad as is the case with the Dallas and Yokohama facilities in 1997. More interestingly, the company has rapidly expanded its global network of research centres with the objective of utilising the foreign pool of research talent starting with Russia (1993), India (1996) and the three recently added research centres in China focusing on semiconductor, mobile telecommunications, and electronics. Samsung has also seriously increased the size and capabilities of the foreign research centres: its research centre in Moscow had only one Ph. D. and seven Masters in 2001 and now has ten Ph. D.'s and 29 Masters; its Bangalore software facility had no Ph.D., 17 Masters, and 37 Bachelors in 2001 and now hires four Ph. D.'s, 179 Masters, and 164 Bachelors.
While Samsung had already begun to use strategic alliances especially for acquiring technologies, the increasing R;D capabilities of Samsung is allowing it to benefit from strategic alliances in developing new cutting-edge technologies. Because there is an increasing convergence of technologies, for example between telecommunications and broadcasting, mobile phones and personal computers, telecommunication equipment and household appliances, it is becoming increasingly difficult and expensive to conduct the research and development necessary to cover all technology areas in one company.
Samsung, therefore, has been using its technology base to conduct strategic alliances to build new strategic capabilities.
Co-develop and market technologies for industrial printer solutions
Co-develop UMPCs Cooperate on high-definition contents Co-develop new built in products combining household electronics and furniture Cooperation in solution business and next-generation business computing systems Cooperate in commercialisation of terrestrial DMB Co-develop cable broadcasting receiver and set-top box for digital TV Full Duplex service Partner in home theatre business Co-develop display technologies Cooperation in MDDI (Mobile Display Data Interface) technology Develop and market optical storage devices
Establish joint venture for 7th generation LCD (1870 x 2200 mm) line Co-develop nano-logic process technologies Supply multi-functional laser printers Share technology for ink-jet printers Supply "Movie Beam" set-top box for VOD Co-develop and market SAMSUNG-Napster player Expand and consolidate memory stick business Cooperate in high-end business computer systems Standardise technology, co-produce and jointly market DVD recorders Co-develop digital household electronics.
Globalization of the production network and global sourcing Samsung Electronics began to build its global production network in the early 1980s when it established its first manufacturing facilities in the U. S. and Portugal. It went on to establish a subsidiary in the UK (1987). Mexico (1988) and Thailand in 1988. Since then, the company has continued to expand the network by adding new countries to the network as well as setting up new facilities in countries where it has already established its production facility. In 1989, Samsung further set up production subsidiaries in Spain, China, Hungary and Turkey.
The major products manufactured in overseas facilities are consumer electronics products such as TVs, VCRs, refrigerators, and microwave ovens. The company's Mexican production subsidiaries produce flat-screen TVs and LCD TVs and export them to the US and other Latin American countries. As Mexico is a member of NAFTA, Samsung's exports to the U. S. from Mexican plants are exempt of import tariffs. Samsung Electronics Hungarian Co. Ltd.. established in 1989, produces 3.2 million TVs annually and exports them to Western and Eastern Europe, and Central Asia". Recently, Samsung announced to increase its production capacity of the mobile phone manufacturing plant in Haryana, India from one million to three million units per year.
In addition to the importance of the local market, India is considered as a strategic alternative to China to hedge the uncertainty from relying heavily on Chinese operations. In the semiconductor sector, Samsung pursues a triad strategy: Giheung complex in Korea as the R&D and frontier semiconductor manufacturing hub. the American facilities in Austin. Texas as a strategic manufacturing hub for the Americas, and the Suzbou complex in China as the global testing and packaging hub.
Samsung's initial expansion of international sales was through Samsung Corporation, the group affiliate involved in general overseas trading in the early 1970s. While this may have aided Samsung initially, it blocked Samsung Electronics" further expansion and in 1978, Samsung established its own sales affiliate in the United States for the first time. Since then, Samsung Electronics has continuously expanded its sales and distribution network around the world. In 2000, the company had a network of 32 sales organizations in 23 countries and its primary emphasis was on North American and European markets.
However, the company doubled its sales subsidiaries to 60 in 48 countries over six years, and it is now paying more attention to emerging markets, including Asia Pacific. Middle East, Africa. CIS, and South America. According to Samsung Electronics' homepage as of 2008, Samsung had a total of 53 sales subsidiaries and branch offices in 36 countries. Samsung has achieved over three-quarters of its sales overseas in recent years.
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