Samsung Economic Research Institute hp hp hp hp hp hp hp hp hp hp hp hp hp hp hp hp hp hp hp hp hp hp hp hp Jung, Ku-Hyun Samsung Economic Research Institute January 2005 Samsung Story

Samsung Economic Research Institute 2 Samsung Electronics joins ’$10billion club’. Samsung Group as a whole also made record profit in 2004.(Won 19 trillion) Members of this exclusive club include:

Samsung Economic Research Institute 3 ◈ Samsung vis-à-vis global competitors (2003) Significance of Samsung’s Rise Sales (bil. US$) ROE ROE Avg. (16.0%) ROE Avg. (16.0%) Sales Avg. (42.4) Sales Avg. (42.4) SEC ▲ HP

Samsung Economic Research Institute 4 ◈ Sales / Profit / Market Value -Sales : US$ 13.6 bil. → US$ 96.5 bil. (7-fold increase) -Profit : US$ 239 mil. → US$ 8.6 bil. (36-fold increase) -Market Value : approx. US$ 75.1 bil. (Mar. 2004) Samsung : 1987~2003 Profit Net sales (tril. Won)Profit before Tax (tril. Won) Sales

Samsung Economic Research Institute 5 ◈ Work force : 210,000 employees ( ) 135,000 (domestic) / 75,000 (overseas) ◈ Globalization: 67 countries / 287 branches (2004) ◈ 22 World best products (DRAM, Flash memory, TFT-LCD…) ◈ Brand Value ◈ Ranked the 32 nd for ‘The Most Admired Company’ (FT, 2004) Samsung Today Year Ranking Brand Value (bil. US$) Source: Interbrand / Businessweek ( , p.68)

Samsung Economic Research Institute 6 ◈ Business Portfolio : Electronics / Finance / Trade & service (64 companies) Samsung Today Sales(2003)Profit(2003) Electronics (51%) Electronics (90%) Finance (29%) Finance (-4%) Service (12%) Service (5%) Chemical (4%) Shipbuilding (4%) Shipbuilding (1%) Chemical (4%)

Samsung Economic Research Institute 7 ◈ Quantum leap -Domestic → Global company -Low → High value-added products -Manufacturing → Technology-driven company Significance of Samsung’s Rise Private Brand OEM IT industry Light industry Knowledge intensive Knowledge intensive Labor intensive Heavy industry Capital intensive PastPresent

Samsung Economic Research Institute 8 Paradox of Samsung Management ◈ Management of 4 paradoxes BigOrganization Small (speedy & flexible) DiversifiedStrategySpecialized FamilyGovernanceProfessional Japanese Management System American Legacy from the past Transformation since 1987

Samsung Economic Research Institute 9 Chairman Lee’s “New Management ( 新經營 )” ◈ The Beginning (1987) ◈ Paradigm Shift in the 1990s ◈ Launch of “New Management” in 1993 ◈ Economic Crisis in 1997~98 ◈ Lee’s Vision and Perseverance Restructuring Leading Global company in 21C Leading Global company in 21C Vision IT Revolution Paradigm Shift in the 1990s Paradigm Shift in the 1990s “New Management” in 1993 “New Management” in 1993 Globalization End of Cold War Economic Crisis In 1997~98 Economic Crisis In 1997~98

Samsung Economic Research Institute 10 ◈ Short history How It All Happened: the story of semiconductors Turning points 1974 Korea Semiconductor Co - acquired 1983 Entry into the VLSI Business 1987 Kun-Hee Lee appointed as Chairman 1992 No. 1 in DRAM market worldwide Developed world's first 64M DRAM 1993~2002 Top in the global memory chip market 2003 No. 1 in Flash memory market worldwide 1996 Unprecedented Worldwide depression in Semiconductor industry - SEC strengthened non-memory business 1996 Unprecedented Worldwide depression in Semiconductor industry - SEC strengthened non-memory business 2001 SEC declined Toshiba’s joint venture proposal in NAND flash memory M/S : SEC (26%), Toshiba (45%) M/S : SEC (65%), Toshiba (30%) 2001 SEC declined Toshiba’s joint venture proposal in NAND flash memory M/S : SEC (26%), Toshiba (45%) M/S : SEC (65%), Toshiba (30%) 1988 Samsung Semiconductor & Tele- communications Co. - merged with SEC 1988 Samsung Semiconductor & Tele- communications Co. - merged with SEC 1988 SEC Semiconductor business came out of the red. - US-Japan Semiconductor Agreement 1988 SEC Semiconductor business came out of the red. - US-Japan Semiconductor Agreement

Samsung Economic Research Institute 11 Technology driven Technology driven 1. Goal stretching 2. Aggressive investments 3. Technology-push 4. Emphasis on top talents 5. Self-driving org. culture 6. Speed (time to market) 7. Synergy from clustering Capital driven Speed driven How It All Happened: the story of semiconductors Global competition Global competition SEC’s Key Success Factors Semiconductor Industry Characteristics

Samsung Economic Research Institute 12 Core Competence Decision-to-action Time-to-market Major Factors R&D capability Manufacturing skills Management innovation Knowledge sharing Cost efficiency Digital convergence Core Competences Speed Innovative Learning Synergy Economies of scope

Samsung Economic Research Institute 13 ◈ Core Competence (1) - Speed Core Competence Decision-to-action Time-to-market - Ownership - Empowerment - Simple decision-making process - Goal stretching / Self-driving - IT infrastructures (SCM, ERP) - Vertical integration - Incentive system (PS, PI) - Passion of employees Culture & System Major Factors Speed

Samsung Economic Research Institute 14 ◈ Core Competence (2) - Learning Core Competence R&D capability R&D capability Management innovation Management innovation - Goal stretching / Self-driving - Attention to detail - Learning-oriented corporate culture - HR development system - Professional learning teams - Change agents (6 sigma) - Clustering Culture & System Major Factors Innovative Learning Manufacturing skills Manufacturing skills

Samsung Economic Research Institute 15 ◈ Core Competence (3) – Synergy: economies of scope Core Competence Knowledge sharing Knowledge sharing Digital Convergence Digital Convergence - CEO as a coordinator - Corporate culture: shared values - HQ’s control & monitoring function - Inter-organizational committees - Clustering - Knowledge management system Culture & System Major Factors Synergy Cost efficiency Cost efficiency

Samsung Economic Research Institute 16 Case study #1 – Mobile Phones: Developing intangible competitive advantages 1. Achievements  Design and product innovation becoming a key factor: Innovator in mobile phone market (watch phone, TV-phone, MP3-phone, ‘intenna’ phone..)  Global market leadership: High-end market across all markets  Samsung Brand Value: finally overcoming a ‘me-too product’ image

Samsung Economic Research Institute 17 Case study : Mobile Phones (cont.) 2. Key success factors  Speed: simple decision making process, cross functional meetings, short time to market  Innovative Learning: adopting American technology and improving it to commercial use.  Mass-customization: Maintaining multi-platform products and adapting to global market segments  Synergy: Knowledge, technology, information, know-how sharing with other business units in SEC

Samsung Economic Research Institute 18 Case study #2 – TFT-LCDs: Replication of SEC semiconductor success 1. Achievements  Similar product and technology characteristics as memory chips  No. 1 global leader in TFT-LCD as of 2003 : caught up with advanced rivals in a short period of time  Leading technological and market standards  Overwhelming cost leadership : excellent yield rate

Samsung Economic Research Institute 19 Case study : TFT-LCDs (cont.) 2. Key success factors  Synergy: resource transfer from semiconductor business unit  Innovative Learning: intra-firm knowledge transfer  Speed: Aggressive investments and time-to-market (going on now)  Preempt product standards: alliances with global top companies  Vertical integration and regional clustering

Samsung Economic Research Institute 20 Samsung Management System: Old and New Configuration [ Old Configuration ] Leadership Patriarchal Strategy Quantity-driven Structure Hierarchical Process Attention to detail Human Resource Internal Sourcing Compensation Seniority System Culture Pride [ New Configuration ] Strategy Quality-driven Structure Empowerment Human Resource Transfusion Compensation Performance -based Leadership Goal-stretching Culture Self-driving Process Speed

Samsung Economic Research Institute 21 Interpretation of Samsung Way ◈ Window of opportunity vs. Strategic thrust ◈ Unique system vs. Do It Better ◈ Pre-1987 vs. Post-1987 ◈ Samsung Electronics and Other Business ◈ Chairman Lee’s Leadership and Sustainability ◈ Core competence

Samsung Economic Research Institute 22 Who will be next ? CompanyRevenue Operating Income Operating Profit Margin(%) Samsung Electronics50,38710, Hyundai Motors24,0411, LG Electronics21,5601, POSCO17,3054, SK Corporation15,2131, KT Corporation10,4341, SK Telecom8,4842, Korea Gas8, S-OIL Corporation9, LG Philips LCD7,2811, $.mil. 2004