Read the Samsung Production Network case study. Based on the case study answer the following questions i. Sketch in a diagram Samsung's production network ii. How is the production network coordinated and managed? iii. Samsung is involved in the whole production process, from design, manufacture of components and parts to final product assembly. Discuss the pros and cons of this approach CASE STUDY 2. Samsung's smart phones production network Facing fierce competition and rapidly changing market demand, a manufacturing company has to continuously seek for improvement in the way that it makes products. Keys for success lie not only in technology improvement but how to organize and manage a production network. We will explore how Samsung Electronics organize and manage its global production network from three key angles (i) how production processes are organized within Samsung Electronics (ii) where their factories are located; (iii) how their global production network are coordinated and managed. About Samsung Electronics Founded in 1969 as a division of Samsung Group, Samsung Electronics started as a TV producer. In the early and mid-1990s, Samsung Electronics began producing memory and hard drives for personal computers. Nowadays, Samsung Electronics is a global IT leader. Samsung Electronics consists of three main divisions: Consumer Electronics, IT \& Mobile Communication, and Device Solution. Each division is responsible for its own factories and assembly plants. No outsourcing of assembly takes place (Samsung, 2013). IT \& Mobile Communication is Samsung's best income generator. It accounted for 54% of Samsung annual sales in 2013 (Samsung 2014a). This is largely due to Samsung's mobile phones in a new position as a global market share leader. Since launching its first Android smart phone in 2010, Samsung Electronics' annual sales and operating profit have signficantly increased. The phone is now in its fifth generation and regarded as one of the best smart-phones in the global market. This enables Samsung to boost its share in global smart phone market from 8% in 2010 , to 19.9% in 2011, 30.4% in 2012, and 32.3% in 2013 (Samsung, 2013; Samsung 2014a). However, in 2014, Samsung's sales figure in its Business Report 2014 Quarter 1 signals a declining trend in its mobile business. Rising to dominate the global smartphone market in the past four years, Samsung faces a tough battle where its flagship Galaxy S5 handset is not selling as well as the previous year's model; Chinese and Indian low cost rivals are eating its market share; and Apple is moving toward large-screen premium phones. Samsung's Asia Production Network The success of Samsung's smart phone arises from its successful production network in Asia. Although Asia was not Samsung's first attempt in off-shoring production, it soon became a major destination for Samsung's direct investment. Samsung's earliest overseas production efforts were a Portuguese joint venture set up in 1982 and a US subsidiary founded in 1984. But after unsatisfactory results with US production, Samsung focused on establishing low-cost manufacturing plants in Asia, and Eastern Europe. Among Samsung's total of 37 production sites around the world, 21 factories are in Asia (Samsung, 2014f ). Samsung's production network in Asia spread rapidly since 1989, when it opened a TV assembly plant in Thailand. Samsung's production in Asia ranges from components to consumer products, and has spread from Southeast Asia to China and India. Southeast Asia and China are Samsung's important sub- production networks with the two central nodes located in Singapore and Beijing. Samsung's operations in Southeast Asia initially focused on assembling consumer goods for exports. Samsung's factories set up in South East Asia aim to utilize the low-cost resources but also to pursue some of the major customers for its components as well as access some of the world's most dynamic markets. The experience of its network creation in Southeast Asia undoubtedly led to the subsequent creation of other Samsung production networks in China and in Europe. Samsung's production presence in China and India is increasingly connected to marketing objectives. The firm has established ties with local partners, typically as a pre-requisite for market entry, in addition to establishing its own distribution channels in these vast markets. Interaction between Samsung's two Asian sub-networks occurs through a flow of components sent from Malaysia to an affiliate in China and then Chinese-made components sent to Thai and Vietnamese subsidiaries. The key intermediary is the Singapore-based purchasing office, which purchases and distributes a large amount of components among the Samsung affiliates and those from their Korea based components suppliers. Having built on the company's past history of OEM relationships with Japanese companies, Samsung's Asian networks are now the most important part of the Samsung global production network, supplying a considerable number of components to Samsung affiliates in Europe and America. For example, Samsung Electronics Thailand has supplied parts to Samsung Electronics in Europe, Brazil and Korea (Kim, 1997). Samsung's locally-oriented operations have achieved local and regional linkages between production and marketing activities. For design and product development activities, although Samsung Electronics has set up a number of research regional centres in its strategic markets, the Korea-based plants still play a central role in Samsung's regional technology network. Samsung's Smart phone production Most of Samsung smart phones have been made by Samsung's Asian production network. As a part of Samsung's production network, the production of Samsung smart phones is facilitated by its existing supply network of components and parts. The heart of the Samsung production network is its plant in its home country, Samsung Electronics Gumi, a multimedia complex in Gumi, Gyeongsang Province in South Korea. The Galaxy Samsung smart phones have been designed, extensively tested and produced in Samsung Electronics Gumi (Business Insider, 2014). Samsung keeps most of the process of producing its smart phones in-house. Unlike some of its rivals, Samsung is in the unique position of being able to control all aspects of its smartphone production from chips, to screens, to software, to assembly. Samsung uses its own hardware components to produce its handsets, rather than sourcing them from third parties. Manufacturing of all components for Samsung handsets is conducted in Samsung's factories in Korea, Malaysia, and China (Samsung2010). Samsung's component strategy is the operational efficiencies gained by placing manufacturing facilities and R\&D offices in the same plant (Samsung, 2014e). Key components including processors, to screen of Samsung smartphones have been developed in Samsung's manufacturing plants and research centres in South Korea and mass produced in Samsung factories in China. In 2010 when the first Samsung smart phone was launched, the major locations for assembling Samsung mobile phones were Korea, China and Vietnam. The assembly point would depend on the volume required and the ultimate customer. For products for most of the world, the assembly point would be Korea or Vietnam. This might be either Seoul Commtech, Samsung Mobile Media Division or Samsung Electronics Vietnam. For Chinese customers, the assembly point would be China. This might be either assembled at Tianjin Samsung Telecom Technology or Shenzen Samsung Kejian Mobile (Samsung 2011, 2013b). For India customers, since 2011, smart phones have been assembled in India by Samsung's factory located in Noida although most of the devices built in India stay within the country rather than being sold elsewhere (Samsung 2014d). Recently, Samsung has tended to shift most of its smart phone production base in China to Vietnam. In 2013, Samsung expanded an existing mobile phone assembly plant and is building another huge plant in Vietnam. According to a manager at Bacninh factory of Samsung Electronics Vietnam, by the time the Samsung's second handset factory in Vietnam reaches full production in 2015, Samsung factories in Vietnam will be making more than 40 percent of the phones and may eventually produce as many as 80 percent of Samsung handsets. Components are transported from Samsung factories in China to Vietnam for assembling. Logistics for components are arranged through three key centres: Tianjin, Shanghai, and Hong Kong. Samsung Electronics expects "Vietnam to play the central role of global mobile-phone production. The company chose to invest in Vietnam because it is politically stable, has a good labor environment and supports the industry. The government is very proactive", said HyukJoong Kwon, Samsung Electronics' managing director, in an interview with Bloomberg(2014). "Samsung and its units will pay no tax for the first four years and half the full rate the following nine years" said Mr. Duong Ngoc Long, chairman of the local People's Committee in an interview with in an interview with Bloomberg (2014). Does Vietnam's location close to Samsung production bases in China and South Korea provide an extra incentive which stops Samsung from shopping around for low cost production base where tax breaks and cheap workers are offered? In 2014, Samsung Electronics is considering producing smartphones in Indonesia. "Samsung has been discussing with the Government of Indonesia to produce smartphones to meet domestic market demand, so that local consumer needs can be met in an effective manner," said a Samsung spokesman in an interview with Wall Street Journal (2014). Will Samsung leave Vietnam and chose Indonesia as its major assembly site for smart-phones? Currently, Vietnam remains a good location for Samsung's smart phone assembling. Vietnam is in strategic location in the marine route connecting East Asia to South East Asia, close to China, Thailand, Malaysia where almost of components and parts for Samsung's smartphones are made. It offers skilled labor at competitive cost and attractive tax incentives. Indonesia is further away from Samsung's supply network and key markets. Producing in Indonesia to serve Samsung other major markets will result in higher logistics cost than producing in Vietnam to serve Samsung major markets. Therefore, Samsung's likely move to open cell-phones assembly lines in Jakarta is most probably to avoid the Indonesian government's policy of imposing a high sale tax on luxury imported goods like smartphones rather than to reconfigure its global production network. The strategies and management approaches which Samsung applied to organize and manage its smart phone production network which lead to its huge achievements in the period from 20102014 provide good implications for both the academic and managerial communities. Key literature in strategic management in 1990s (Porter, 1990, Barney 1991) suggests that to stay competitive, a firm should focus on high value added activities or core competences and outsource low value added activities or non-core competences. In 2000 s, a large number of firms in apparel and electronics industries have focused on design and product development and outsourced production to Asia. Samsung's major rivals such as Apple outsource the production of components and assembly of finished products but Samsung has been doing things differently. Samsung is involved in the whole production process, from design, manufacture of components and parts to final product assembly. Thanks to its involvement at all stages of the production process, Samsung was therefore able to produce the display for Apple. Learning by producing components for Apple's smart phones, Samsung soon caught up with Apple in smart phone production and has then outcompeted Apple in terms of market share. Manufacturing enables Samsung to develop capability in producing different product lines. This is an important capability in the high tech industry because in this industry market demand changes rapidly, so the capability of doing different things enables the firm to quickly create different product lines, and avoid the risk of overproduction in one product line. Samsung's achievements prove that making, rather than outsourcing, is still an effective business model in consumer products manufacturing sector. Setting up subsidiaries in low labour cost countries to produce components and assemble finished products helps Samsung to save production costs and also to have good control over its whole production process and technology knowhow. With vertical integration or hierarchical governance, Samsung takes full control of its subsidiaries. The risk of creating future rivals due to sharing technology knowhow with suppliers is negligible for Samsung because almost of components and parts are produced by Samsung's subsidiaries. The success of Samsung proves that in the technology industry, hierarchical governance is an effective approach to govern production networks. The key determinant for Samsung's choice of governance method is the return on investment and degree of control over production network, rather than the determinants suggested by the key literature in Global Value Chains. Gereffi et al (2005) proposes that three factors, including the complexity of transactions, the codifiability of transactions, and the capabilities of suppliers required to a specific transaction, determines a firm choice of governance of its production network. Samsung choice of hierarchical governance is different from the verdict of Gereffi et al (2005) that a firm invests to set up subsidiaries to produce a product because product specifications cannot be codified, products are complex and supplier capabilities are low. Smart phones' specifications are codifiable and the capability of the supply base in Samsung's key production sites like China, Thailand and Vietnam is not low. Clearly, return on investment and degree of control over production network are critical determinants of firm choice of production network governance but are omitted by key literature. The decision on locating production sites needs to be taken in conjunction with market expansion strategy. Samsung's choice of location for production investment is closely related to Samsung's market entry strategy. Among two strategies to configure a firm's production network suggested by Harrison and Hoek (2011) are "focused market" and "focused factories"1. The Samsung case suggests that "focused market" not "focused factory" is an efficient strategy for configuring production networks when a firm wishes to distribute its products in highly protected markets. A firm should consider "focused market" strategy, setting up a factory in a local market to serve that market if a local government imposes high import duty on the firm's products. Samsung's choice of location for investment lends a support for the eclectic paradigm also known as OLI model'2, a key theory of firm's internationalization developed by Dunning (1988). All the countries which Samsung invested in setting up factories have location advantages including low wages, geographical positions, and special tariffs. By engaging in foreign direct investment rather than exporting or licensing, Samsung successfully blend two different motives including efficiency seeking and marketing seeking and effectively exploit their ownership specific advantages in these markets. To keep production cost low, a firm needs to be open to the possibility of relocating a factory to a new location which offers lower production cost. With rising labour costs, China is no longer a low cost production site. By relocating an assembly factory from China to Vietnam, Samsung obtained production costs lower than the expenditures which its rivals have to pay to have their product assembled in China. The case of Samsung has much to contribute to our understanding how in reality a firm organize and manage its global production network. Outsourcing in which a lot of firms are involved, is not the only winner. Setting up factories in the countries with location advantages of low cost labour, geographic position, enables the firm to achieve high efficiency in the supply chain, contributing to the firm's competitive advantages and market share improvement. However, it provides a useful illustration of some of the opportunities and challenges that internationalizing organizations may face with regards to their distribution strategies, and demonstrates the importance of strategic fit between such strategies and the local environment in which the organization operates