Porter’s Five Forces Analysis of Samsung

Porter’s Five Forces Analysis of Samsung

The extensive and diverse product portfolio of Samsung Electronics has made it one of the major players in the consumer electronics industry and the greater tech sector. It is also one of the largest smartphone manufacturers in the world. However, because of the existence of other incumbents and the arrival of newer players, its established presence and favorable market position are not guaranteed. This article explores the industry and actual competitive positions of Samsung Electronics using the Five Forces model of Michael E. Porter.

An Analysis of Samsung Electronics Based on Porter’s Five Forces Framework: Understanding Its Industry and Competitive Positions

1. Industry or Competitive Rivalry

Samsung has an established presence and reputation in the consumer electronics industry and the greater technology sector. However, despite its stature, it is important to note that it is not the most dominant player. It also caters to different markets within the consumer electronics industry. The level of competition in each market is intense.

Competitive rivalry is a strong force for Samsung Electronics. It compels the company to allocate resources for research and development, to compete for talent in the global labor market, and spend billions of dollars in marketing to build and maintain its strengths and other specific sources of its competitive advantages. The following are more specific details:

• Moderate Degree of Differentiation Potential: The products of Samsung have some unique selling points but this does not mean that consumers are left with no choices. Android smartphones offer the same base functionalities. The same is true for home appliances like smart TVs and refrigerators. Some of their differentiating qualities are passable and can be considered a mere marketing gimmick.

• High Level of Marketing Activities and Expenses: Most consumer electronics companies spend billions of dollars each year to increase or retain brand awareness and push their products to their target consumers. Apple spends more than USD 1 billion in a year on different marketing activities. LG Electronics also spends around the same amount to promote its various consumer electronics products.

• Moderate Level of Entry and Exit Barriers: Entering the industry is a capital-intensive pursuit but it is doable as evident from the emergence of newer players in countries like China and India. This intensifies the level of competition further. Exiting the industry is somewhat easier. The level of entry and exit barriers is moderate. This level somewhat eases the level of competition in the industry.

• High Level of Research and Development Activities: Innovation is critical to tech companies. Incumbents in the smartphone market like Apple have allocated billions in their budget for research and development. Chipmakers like Qualcomm and MediaTek are also spending billions of dollars to design newer semiconductors with better instruction set architectures and processing capabilities.

• Moderate Rate at Which the Market Grows: The consumer electronics industry is expected to continue to grow further in the next decade. It is still important to note that the industry is large and complex because of the presence of different product categories that correspond to a particular market. The smartphone market is becoming saturated while the home appliance market expects a slight slowdown

• High Significance of Brand and Customer Loyalty: Another factor that affects the competitive position of Samsung and the overall intensity of competition in the consumer electronics industry is the importance of brand reputation and customer loyalty. Take note that one of the competitive advantages of Apple is its legion of steadfast customers and its established reputation as a premium and dependable brand.

• Moderate Firm-to-Customer Concentration Ratio: The size of the global target market for consumer electronic products is about 3 to 5 billion people. The number of consumer electronics companies is thousands. Take note that this concertation ratio seems low but it is important to note that less than a hundred incumbents and newer entrants collectively hold a greater portion of the entire market share.

2. Threat of Substitutes

Substitute products are products that can be purchased and used in place of another product to meet the same need. An example would be tablet devices as a substitute for laptops. Another example are electric fans for air conditioners. This is a notable threat for some consumer electronics companies with limited product offerings.

The threat of substitutes represents a moderate force for Samsung Electronics due to its diverse product portfolio. Its diverse product portfolio is an emerging product ecosystem composed of different products that range from computing devices such as laptops and smartphones to home appliances and other smart devices.

Of course, considering its diverse product offering, this threat should be a negligible force. However, the fact remains that other alternative brands from other consumer electronic companies can offer substitute products. Some might purchase an iPad from Apple as a substitute for a Windows-based laptop from Samsung. Below are the details:

• Low Switching Cost for Customers: There is little to no reason that can stop consumers to switch from one consumer electronics product to its substitute. Market information is readily available and accessible to guide purchasing decisions. This increases the threat of substitutes but Samsung manages it through its diverse product offering to prevent its customers or target customers from purchasing from another brand.

• Low Relative Price of Substitutes: Consumers can choose substitutes from within the product ecosystem of Samsung. They can choose a Samsung Galaxy Android tablet if they would not want to purchase a Windows-based laptop. However, because of the presence of competitors that utilize competitive and penetration pricing strategies, there are substitute products that have low relative prices.

• High Ease of Choosing Substitutes: Remember that customers can readily get details about possible substitutes and choose or purchase them due to the availability and accessibility of market information and the presence of options. Substitutes can be purchased through different distribution channels. This is influenced further by low switching costs and the relative price of the possible substitutes.

• High Number of Substitute Products: There are some overlaps across the different product categories within the greater consumer electronics market. The substitutes for desktop or laptop computers are tablet devices and smartphones. The substitutes for OLED and QLED televisions are IPS LCD smart televisions. This fact increases the threat to substitute for companies like Samsung.

3. Threat of New Entrants

Entering the consumer electronics industry is capital-intensive. A possible new entrant has to invest in technological resources, talent, and marketing capabilities. The required capital increases if this entrant intends to cater to different markets within the industry similar to companies like Samsung Electronics, Xiaomi, and LG Electronics.

The threat of a new business entering the business might be low if capital is the only factor. It is still important to underscore the fact that Xiaomi is a newer player in the industry but it has managed to become one of the biggest smartphone manufacturers in the world and its product portfolio has been expanding across different product categories.

Capital is not the only factor that defines the barriers to entry and the threat of new entrants. This is still a moderate force for Samsung Electronics but it tries to manage this threat through huge investments in research and development, improving its manufacturing capabilities, and pushing further its marketing activities. The following are the details:

• High Level of Capital Requirement: Establishing and operating a consumer electronics company requires a significant amount of capital resources needed to acquire other relevant resources. These include technological capabilities such as infrastructure, facility, talent pool or human resource, and intellectual properties, as well as operational capabilities like business leadership and aggressive marketing activities.

• High Importance of Economies of Scale: New entrants also need to scale up their production capabilities to develop and introduce their products at a lower cost and maximize their earning potential. Samsung has achieved economies of scale from the expansion of its manufacturing capabilities, vertical integration, optimization of its organizational structure, and established marketing practices.

Moderate Effect of Distribution Channels: A notable factor that eases the barrier to entry into the consumer electronics industry is the emergence of newer and more inexpensive distribution channels. Newer companies from China have taken advantage of electronic commerce through their online storefronts or third-party online stores to interface with customers and complete the entire sales process.

• High Importance of Brand Equity: Incumbents like Samsung, as well as other established competitors like Apple and LG Electronics, have recognizable and reputable brands. Samsung and Apple also have existing customer bases that are loyal to them. Brand equity is another obstacle for new entrants because it forces them to allocate resources to creating brand awareness and marketing their products.

• High Impact of Cost Advantages and Leadership: Samsung Electronics have taken advantage of its established brand equity and marketing capabilities, economies of scale, and proven distribution strategy to achieve cost advantage and cost leadership. These two are important factors that raise the entry barriers for entities that want to produce and market their own consumer electronics brands.

4. Bargaining Power of Buyers

Samsung Electronics is both a producer of consumer goods and a supplier of electronic components. It caters to both end-use consumers and business customers. This business model diversifies further its business and its sources of revenues. However, despite this two-fold income stream, this also means that it competes in a wider landscape.

The bargaining power of buyers in the consumer electronics industry is high due to the presence of different firms offering alternative products. Sony and LG Electronics provide alternative home appliance products while Apple and Google sell alternative smartphone and tablet devices. Qualcomm and MediaTek are alternatives for the semiconductor business of Samsung and LG Electronics provides an alternative for its OLED products.

Nevertheless, to manage this strong competitive force, Samsung invests heavily in research and development to develop differentiated products and in marketing to maintain and expand further its brand equity. It is also strengthening its product ecosystem to add further value to the selling propositions of its individual products. Below are the specific details:

•  Moderate Buyer-to-Seller Concentration Ratio: Remember that the consumer electronics industry has a moderate level of firm-to-customer concentration ratio. A further look at the industry would reveal that the actual buyer-to-seller concentration ratio is also moderate. This should lower the bargaining power of the customers but the intense competition from a few dominant companies renders this negligible.

• High Availability of Alternatives and Substitutes: The threat of substitutes for Samsung Electronics is a moderate force but the specific threat from direct alternative products is a strong force. The company caters to different saturated markets. Each of its products has viable alternatives. Its Galaxy line of Android devices alone competes with different Android device manufacturers and Apple.

• Low Cost of Switching to Alternative Products: Adding to the bargaining power of buyers is the low cost of switching to alternative products. It is important to note that Samsung products are pricier than the products of most of its competitors. These alternative products are also readily accessible. Switching to inexpensive options will even provide customers with substantial cost savings.

• High Sensitivity of Consumers to Prices: There are established segments for mid-range and top-tier or flagship products but the entry-level segment is the largest across the different consumer electronics markets. Remember that Samsung products are more expensive than their counterparts. This means that it would have a hard time capturing larger market segments composed of budget-conscious customers.

• Moderate Selling Points of Alternative Products: It is also important to note that most consumer electronic products offer the same base functionalities and features. Some have differentiating features but they can be negligible if their real-world applications are not important. The moderate level of product differentiation increases the bargaining power of customers which compels companies to innovate further.

• High Level of Accessibility to Market Information: The high levels of marketing activities among consumer electronic companies and the established media attention directed toward tech and specific tech products mean that consumers have free access to market information. This increases their bargaining power because market information enables them to make informed purchasing decisions.

5. Bargaining Power of Suppliers

Some tech companies are dependent on suppliers. Consider the product strategy of Apple as a prime example. It designs its own products but depends on companies like TSMC and Foxconn for manufacturing. Outsourcing can be a source of competitive advantage but it also means that too much dependence can increase the bargaining power of suppliers.

Other companies have their manufacturing capabilities. Some even produce critical inputs. Samsung Electronics is a good example of both. Vertical integration moderates the bargaining power of its suppliers because it can produce its own products in its own facilities and even produce inputs such as semiconductors. Take note of the following details:

• High Level of Forward and Vertical Integration: Companies that have implemented forward integration and vertical integration in their value chain have weakened and eliminated the bargaining power of their suppliers. Samsung uses homegrown supplies. It even operates a mineral management system and has developed recycling and upcycling programs as part of its supply chain management strategy.

• Low Degree of Differentiating Production Inputs: Most inputs used in manufacturing consumer electronic products are virtually similar. There is a low degree of differentiation except for critical components such as processors and patented communication hardware. The basic inputs can be sourced from different suppliers and switching from alternatives would not affect the overall quality of the product.

• Moderate Level of Supplier-to-Firm Concentration: Remember that there are thousands of consumer electronics companies around the world. There are also a moderate number of suppliers. This means that the bargaining power of these suppliers can be a moderate to strong force for a particular company that lacks some degree of forward integration and vertical integration in its supply chain.

• High Impact of Inputs on Cost and Differentiation: It is still important to note that access to inputs or supplies can determine production cost and even differentiate product features. Suppliers with inexpensive and innovative supplies have higher bargaining power. Samsung manages this through its established market share which translate to better business for some of its suppliers.

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