Samsungs 4,70,000 employees get no pat on the back from chairman Lee

Written by New York Times | Seoul | Updated: Dec 16 2013, 19:28pm hrs
Lee Kun-hee-SamsungSamsung Electronics Chairman Lee Kun-hee (Reuters)
Lee Kun-hee, the man who built the most successful, most admired and most feared business in Asia a $288-billion behemoth that is among the most profitable in the world had a message for his employees this year: You must do better.

At other companies, congratulations might have been in order.

His companies were headed to another extraordinary year. But this was Samsung, the South Korean industrial group that Lee, an elfin man with a stubborn will, transformed from a second-rate maker of household appliances into a conglomerate with a flagship electronics business that has left most rivals eating its silicon dust. There would be no pat on the back for Samsungs 470,000 employees. Instead, in June, he sent a company-wide email sternly urging them to raise their game.

As we move forward, we must resist complacency and thoughts of being good enough, as these will prevent us from becoming better, Lee, who is 71, wrote. Samsungs management, he said, must start anew to reach loftier goals and ideals.

Two decades earlier, having taken over the company from his father, Lee met with dozens of his executives and gave them a similar order, one that remains embedded in company lore: Change everything but your wife and children.

That message was effective. Samsungs sales are equal to about a quarter of South Koreas economic output. Samsung Electronics, the flagship, posted $190 billion in sales last year about the same sales as Microsoft, Google, Amazon and Facebook combined.

Last year, Samsung shipped 215 million smartphones, about 40% of the worldwide total, analysts estimate; this year, it is expected to ship more than 350 million. Interbrand, a marketing consulting firm, ranked Samsung as the eighth-most-valuable brand in the world. Lee is one of the worlds richest men.The companys sweet spot has become electronics: It makes chips, display panels and many other electronic parts, and then assembles its own smartphones and other devices.

This kind of vertical integration has fallen out of fashion in the West, where it is considered unwieldy. While Apple designs its hardware and software, for example, the company buys chips from other companies, including Samsung, and outsources the assembly of iPhones, iPods and iPads.

But many years ago, Lee prodded his lieutenants to see the companys deep reach into the supply chain as a competitive advantage, not a burden. So far, it has worked for Samsung.

I dont think people realise how effective a machine Samsung is in terms of how quickly they can turn around products in response to market change, said Chetan Sharma, an independent analyst who advises mobile carriers.

So why the crabby email What on earth is Lee Kun-hee so worried about

Lee is worried about what might be called the fast-follower problem. Samsung is a well-oiled machine: If it spots a trend and decides to compete, it can outspend and outpace practically anyone. Its everything-included, research-to-manufacturing-to-marketing model allows it to obliterate the competition.

But Samsung has become so good at executing that few moneymaking areas exist where it doesnt already dominate, particularly in electronics.

Suddenly, the company is the leader, with the onus of creating the next trend.

If you are on the peak and looking where to go next this is something new for them, said Chang Sea-jin, author of Sony vs Samsung: The Inside Story of the Electronics Giants Battle for Global Supremacy.

In the past, they didnt need a strategy because they always had somebody to look up to, he said.

Smartphones have been the major driver of Samsungs growth in recent years, and it doesnt take the instincts of Lee to grasp the fleeting nature of mobile phone leaders. The brands that plunged after reaching the summit are etched in the minds of everyone at the company: Motorola, Ericsson, HTC, Nokia, BlackBerry.

Moreover, upstarts from China are gaining ground with smartphones that cost hundreds of dollars less than Samsungs popular Galaxy S4 or an iPhone.

Theres a feeling of elation and paranoia at Samsung Look at how well we are doing, and look at what might happen, said Benedict Evans, an analyst at Enders Analysis in London.

So Lee is pushing the company to think more boldly. Developing new products is no longer enough; Samsung wants to create devices that define whole new categories. And it wants to develop the software that makes them work, something it has mostly left to others.

Much of that work is happening in Digital City, the Samsung Electronics headquarters campus at Suwon, about 40 km south of Seoul. Like all things Samsung, Digital City is massive: The size of 320 football fields, with room for 40,000 workers, not to mention the biggest parking lot in Asia. Inside its walls are many of Samsungs most tightly guarded secrets. The inner sanctum is R5, a pair of new 27-storey, glass-sheathed office towers, where the companys mobile research and development programme resides.

The R5 workers who pile into the building favour colourful polo shirts and dresses over the traditional Korean business uniform of black suit and white dress shirt, but R5 is all business. Samsung Electronics is expected to spend nearly $11 billion on research and development this year. This is where Samsung is plotting how to stay at the top of the lucrative electronics market.

A few months ago in an R5 conference room, Lee Young-hee, head of marketing for the mobile division, showed off some new products to The New York Times, including a new version of Samsungs Galaxy Note smartphone and a new smartwatch, the Galaxy Gear. This was before the devices were introduced to the public, but the real revelation was the talk about Samsungs overarching strategy.

We would like to create a new trend, Lee Young-hee said. If you wear Galaxy Gear, its a cool thing for young people.

Devices like the Galaxy Gear smartwatch are meant to position Samsung as a trendsetter, not a follower. Apple has been working on such a device, according to people briefed on the project, and it has registered iWatch as a trademark. But it has yet to show off a device bearing that name. With Galaxy Gear, Samsung beat Apple to the market.

But Samsung is finding that setting trends is not so easy. The company put its full resources behind the watch, making a major marketing push with slick TV ads showing smartwatch-like devices used in movies and television shows by characters like James Bond. But the ads received a far better reception than the device itself.

Technology reviewers largely panned it, criticising its design and software features, and questioned why it existed at all. Technology analysts and consumers often compare Samsung to Apple. But the elephant in the room in any discussion of the Korean giant is another American technology company: Google.

The vast majority of Samsungs phones run on Android, Googles operating system. Together, Samsung and Google have quickly taken over the global smartphone market. In the third quarter of the year, Android was installed on 81% of the mobile phones shipped worldwide, according to IDC, a research firm. That compared with 12.9% for Apples iOS and 3.6% for Windows, the nearest rivals.

Google created a product that helped Samsung make more money than all of Google, said Horace Dediu, an independent analyst in Helsinki, Finland.

That has been great for Samsung so far, but the downside is that the company has become more and more reliant on Googles software.