The Samsung Way, by Song and Lee (2014)

"Change everything, except your wife and kids"- Samsung Chairman Lee Kun-Hee's
directive to executives.
The Samsung Way, by Jaeyong Song and Kyungmook Lee, is a brilliant work that
will go into the annals of Eastern Management Practices.

Critique of the book

The book is an earnest attempt to throw light on the factors that make Samsung
(Electronics) one of the fastest and most successful innovation driven firms in the
world. Based upon 10 years of research and interviews with 80 of the company's top
leaders, the authors have identified the essential features and practices of the firm,
calling it the 'Samsung Way'.
Two of the chapters that I found fresh and very informative are on 'The evolution of
Samsung's management system', and 'Evolutionary Innovation'. However, one of the
weakest chapters of the book is on the 'Future of Samsung Way', where the authors
depict why the evolutionary innovation (sustaining innovation) can't take the company
too far into the future, and propose ways to develop creative innovation leadership.
The rhetorical suggestions include Samsung considering real-options, and
M&As, attempting to become total solution provider and platform provider, and
invest even further on basic research. Thought that was a ceremonial fit.
Here's the shortest possible summary of the book.
History
Samsung has a worldwide leadership in semiconductors, TVs, smartphones, and
display panels. Founded in 1938 in Daeug by Lee Byung-Chul, Samsung could be
seen as a conglomerate growing through four stages: 1) founding (1938- mid 50s);
2) expansion (mid-50s to late 60s); 3) domestic leader (late 60s to late 80s); and
4) global leader (late 80s to 2000s). Founder Lee emphasized on the virtues
of 'contribution to the nation through business', 'people first', and 'pursuit of
rationality'. Under the state's policy of import substitution and export promotion, the
company entered into manufacturing commodities in 1950s, and soon diversified into
unrelated areas. Impressing upon establishing formal management principles learnt
from Japan, in 1957 Samsung also institutionalized 'open competitive recruitment',
much the American way. In 1959, the company formed a secretariat as a central
coordination organization, and advanced human resources management practice,
based on principles of fairness, job fitment, and incentives. On the heels of such
management institutions, Samsung Electronics was born in 1969, and it entered into
memory chip business in 1983, as a latecomer (by 1992, they were world leaders).
Samsung adopted a divisional form in 1975, making each division independent with a
CEO, often with no stake of Samsung Corporation. In the decade of 70s, the company
became vertically integrated in electronics business, and founded Economic Research
Institute and Advanced Institute of Technology.
When Lee Kun-Hee became the Chairman in 1987, after his father's death, he laid the
foundation for taking the company global. He built a technology-centered
management to catapult the company to its new heights. The company in 1997
founded Global Strategy Group for attracting and nurturing foreign talent,
introduced Great Workplace Program in 1998, and opened a Design Management
Centre in 2001, to further its investments in 'soft' competencies.

Here's a very good summary of Samsung's History.

Leadership initiatives
Company's fortune changed after Lee Kun-Hee's accession in 1987. In 1988, he
introduced the Second Foundation, to propel company to one of the top five
electronics players in the world. The tenets of the campaign were: autonomous
management, respect for humanity, and focus on technology. In 1993, the new ethos
were to: be with the customer; challenge the world; and create the future. Yet the
system remained bureaucratic, micro-managed and quantity-focused. However, the
success of firm's semiconductor business became a template for success, for its was
driven with bold targets, least micro-management, was crisis driven, and had a focus
on top talent.
Lee later introduced his New Management Initiative in June 1993, famously known as
the Frankfurt Declaration, which was to 'be a world-class company in the twenty-first
century that contributes to the development of human society'. Along with a shift from
a quantity driven mindset to a quality driven (for people, products and management),
came in the focus on intangibles, such as brand, design, and technology competence.
A lot of fresh-blood was introduced in the organization, along with downsizing of the
secretariat, and bringing new rules, such as '7 to 4 working system', 'line-stop' and
'grace period' for reporting non-performing assets. The famous public burning of over
100,000 cordless phones at Samsung Gumi factory on March 9, 1995 was a
spectacular exhibition of how serious Lee was on quality.
The Asian Economic Crisis of 1997 further bolstered the belief in building
proprietary, quality-driven assets, and Samsung used the opportunity to restructure
itself, by massive cost cutting, adopting multifaceted integration, IT-based
reorganization, cutting the number of affiliates, reducing debt, trimming workforce by
30%, and globalizing its business. The company invested in electronics, trade, finance
and services. 'Digital Management' became the new mantra. It was based upon the
broad trends of globalization, democratization, and digitization, and acknowledging
that the new rules of the game were creativity, speedy adaptation, and technology
convergence. The company classifies business into seed business (5-10 years to
maturity), seedling business (potential flagships), fruit trees (current growth), and old
trees (pruning required).
In 2000, Chairman Lee urged a shift in the company culture from a 'Well-manager
Samsung' to a 'Creative Samsung'. Riding the wave of 'technology convergence', the
company aggressively invested in digital technology, noticing the shift from analog to
digital, where Sony was a pioneer in the former. These initiatives led Samsung's
growth to global leadership in DRAM, and later in LCDs, smart-phones, and TVs. In
2010, Samsung identified five areas to focus on: LEDs, rechargeable batteries for
automobiles, solar cells, medical equipment, and biosimilars.

Three paradoxes of Samsung

Samsung is an exemplar of a company pursuing multiple, often conflicting goals, such
as cost-leadership and differentiation. For example, in the memory-chips business,
Samsung maintains very low-costs, yet keeps coming up with newer products. These
paradoxes could broadly be categorized into:

1. Size and speed: Being Korea's largest conglomerate, with 75 affiliate

employing 500,000 associates, located at 600 facilities in 63 countries,
Samsung remains highly agile in terms of decision making and new product
delivery. This could be attributed to innovations in IT processes, and very
efficient supply chain management.
 2. Diversified but specialized: Samsung has high levels of unrelated
diversification and vertical integration, yet it is globally a leader in many of the
sectors. This could be sourced to its ability of achieving economies of scale and
drawing costs down, building intangible assets, and creating systematic
cooperation between affiliates.
3. Japanese and American management styles combined: The firm has
demonstrated excellent learning capabilities, where it benchmarks itself with
GE and Toyota, equally. The hard skills from Japan, and soft capabilities from
America are integrated into Samsung Way. The company achieves
organizational loyalty, yet employee participation at the same time.

Management principles
Some of the key elements of Samsung Way that help manage the paradoxes could be
summarized under the following categories:

 Leadership and governance: The critical role is of Chairman Lee in forming a

far-reaching vision based on talent and technology. He achieved this by
maintaining a constant sense of crisis, preemptively seizing business
opportunities, incentivizing performers, nurturing core talent, prioritizing
technology, and focusing on intangible assets and proprietary technology.
Further, the company experiences a harmony between owner-manager and
professional managers, even after reduced power with the owner-manager. The
Corporate Strategy Office (CSO) helps translate Chairman's vision into
autonomous CEO's execution,, and reduces the principal-agent conflict. In
terms of governance, 17 of 75 affiliates of Samsung are publically traded with a
large equity by external stakeholders; apart from complex cross-equity
investments among group affiliates.
 Sophisticated management system: Samsung's focus on quality (often at the
cost of quantity) for people, management, and products; preemptive investment
on in-house manufacturing (line sharing, flexible and modular manufacturing);
launching new products faster ushered by digital convergence strategy;
building large cooperative alliances; spinning-off or consolidating non-core
business; vertical integration to upgrade the subsidiaries into high-value-add
segments; hiring Korean engineers from leading western firms; producing
regional specialists from Korean labor pool and hiring more foreign talent;
giving hefty compensation and exceptional rewards for performance;
productivity incentives and profit-sharing bonuses at collective levels; fast-
track promotions; management by numbers through heavy investment in Six
Sigma, and adopting a single group-wide IT system, including ERP and SCM
applications; strictly following the needs of customers and market, and ability
to quickly adjust production quantities; adoption of modular and cell
 manufacturing coordinated by Global Operations Centre; co-creation with
vendors and customers; and having a 'Single Samsung' spirit.
 Co-opetition: The inflection point in the company came with the introduction
of New Management initiative in 1993. Emphasis was on striking a balance
between competition and cooperation between affiliates and divisions. This
stems from having a strong leadership base in owner-manager structure,
ensuring independence between units. Affiliates compete with external buyers
on equal footing when dealing with other affiliates for purchases. There is a
'winner take all' culture amongst the divisions. Also internal restructuring, after
1997 and 2008 crisis, keeps its executive on the edge, and helped market
validation.

The elements of Samsung's success

The core competencies of Samsung are speed, synergy through convergence, and
evolutionary innovation. Each of these are detailed out in what follows:

 Competence in creation of speed: This comes from ambitious goal setting,

creating a sense of urgency, delegation of authority, use of common language
and systems, employee work ethics and sense of sacrifice, and making large
preemptive investments to seize opportunities. For its digital business, the
company formed principles of foresight, moving fast, preemption, and seizing
opportunities first. Another pillar is 'on the spot decision making', with an
approval process taking three steps or less. The management systems
supporting speed are: preparedness and advanced development (10 yr
roadmap), clustering (co-location of R&D and production sites to reduce
logistics cost), vertical integration (inter-affiliate collaboration), goal-driven
R&D (internal competition, and leapfrogging technology using a logo-
style R&D) and advancement in R&D processes (concurrent
engineering), and IT infrastructure.
 Synergy through convergence: Led by the owner-manager and orchestrated by
the CSO, the groupwide cooperation offers Samsung enormous flexibility, for
the firm has entire value chain of electronics under one roof. This is further
facilitated by horizontal diversification and vertical integration, unified
marketing network, digital convergence of products and services, and regional
clustering of important operations. The group builds strong internal financial,
product and labor markets. Examples include leverage of semiconductors
capabilities to get into LCD products; leadership in mobile phones based upon
advancements at Samsung Displays, and Samsung TV coming from
collaboration between component and set divisions. Also adoption of shared
services, for knowledge, information, best practices and brand, result into
significant cost reduction, especially with the HR Development Centre catering
 to group's people related needs. Industry and market level intelligence is
closely shared amongst affiliates.
 Evolutionary innovation: Samsung has excelled in significantly improving on
existing technologies, while not so much in creating new generation of
technologies. The firm promotes systemic and long-term knowledge creation,
by setting stretched goals that could only be met through innovation, and active
pursuit of external knowledge. It seeks external knowledge through technology
licensing, reverse engineering, strategic partnership, and hiring foreign
educated, experienced engineers. Some of the tenets of technology
management at Samsung include Lego-style R&D, long-term technology
roadmaps (10 year roadmap revised every quarter), product-lifecycle
management (PLM) system, Creative-Labs in each Business Unit, Samsung
Tech Conference, Value Innovation, Samsung Fellows, and TRIZ. Samsung
updates its 5 to 10 years technology targets on a quarterly basis as new issues
emerge, and works on three-generations of technology. The company
practices Open Innovation while participating with product-vendors,
universities, even startups for new product development.

Keys to success on semiconductors:

1. Challenging vision (designing 64K DRAM for the global customers and
competitors)
2. Bold and speedy investment decisions (Chairman taking full responsibility to
any failures)
3. Emphasis on technology (building and hiring technology-aware management)
4. Core talent (abandoned internal promotions for hiring the best from outside)
5. Sense of crisis (to meet the high stakes and volatile nature of business)
6. Speed (being a 'fast follower' by adopting concurrent engineering, co-locating
R&D and production facilities, and embracing flat hierarchies)

Samsung's Trinity of Values:

1. Management philosophy: Samsung will devote its human resources and

technology to create superior products and services, thereby contributing to a
better global society
2. Business Principles: Complies with law and ethical standards; maintains clean
organizational culture; respects customers, shareholders, and employees; cares
for environment, health and safety; and is a socially responsible corporate
citizen.
3. Core Values: People, Excellence, Change, Integrity, and Co-prosperity
The most important value Samsung holds is- 'pursuit of excellence based on a sense
of crisis'

Insights on innovation capability development at Samsung

1. Aggressive, preemptive investment. For example, Samsung was the first

company to move from analog to digital technology.
2. Ability to manage paradoxes
3. Strategic alliances, first as a second fiddle, and then as a leading partner.
4. Setting stretch goals, and subordinating all management resources to those.
Examples include the Second Foundation introduced in 1988, and New
Management Initiative of 1993, that led to Samsung ascend in the global digital
space.
5. Internal competition, between R&D teams located in Korea and other
parts of the world for speed and features.
6. Turning crisis into opportunities, whether these are introduced exogenously, or
manufactured by the leadership to drive people.
7. Investment in systematic management practices, based on meritocracy and
transparency.
8. Owner-leader bringing about the transformation.
9. Select-and-focus principle. Identify core technologies to make preemptive
investments.
10. Making long-term investments on talent, especially through programs like
Regional specialist program, where top talent is exposed to international
culture in a rapid way, and given autonomy to devise own projects. And Global
Strategy Group to systematically sources high-quality talent from top schools
and PhD programs.
11. Massive investment in IT infrastructure to make fast, accurate decisions. Using
SCM systems of information gathering, and ERP for executing.
12. Inter-affiliate cooperation and regional clustering of operations that enables
convergence of technologies and products.

Here's a summary of Samsung's core competencies and elements of management

(pp.225)
Dimensions Speed Synergy Evolutionary innovation
Leadership  Stretch goals  Collaboration centered on  Stretch goals
and  Bold decision making the owner-manager  Creating a sense of crisis
governance  Delegation and  Coordination by the  Knowledge transfer and
empowerment Corporate Strategy Office diffusion by the CSO
(CSO)
Strategy  Preemptive investment  Vertical integration  Emphasis on technology
 Select and focus  Sharing of knowledge, and innovation
 strategy information and brand  Being first to market
 Focus on quality
HR  Employee loyalty and  CEO and executive  Scouting core talent
Management commitment rotation  Recruitment of
 Diligence  Collaboration as a criteria outstanding foreign talent
 Group incentive in CEO evaluation  Performance-based
schemes evaluation and
compensation
 Group incentive schemes
Management  Macro-management  Collaborative R&D  Regional clustering
Control  Innovation in IT (SCM among divisions and  Lego-style, leapfrog, and
and ERP) affiliates in pursuit of preemptive R&D,
 Regional clusters convergence parallel development
 Lego-style, leapfrog,  Regional clustering  Collaborative R&D
and preemptive  Coordination by CSO among divisions and
R&D, parallel and SAIT affiliates
development  Inter-affiliate committees
Culture and  Pursuit of excellence  Single Samsung  Pursuit of excellence and
values  Sense of crisis leading innovation
 Leading innovation  Pursuit of rationality
 Embracing change  Sense of crisis
 People first