Samsung, uneasy in the lead; says management must start anew to reach loftier ... - Economic Times ~ Electronic Gadgets

By Eric Pfanner and Brian X. Chen

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 Samsung's 470,000 employees. Instead, in June, he sent a companywide 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. Samsung's 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. Samsung's sales are equal to about one-quarter of South Korea's 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 percent 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 world's richest men.

The company's 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 company's deep reach into the supply chain as a competitive advantage, not a burden. So far, it has worked for Samsung.

"I don't think people realize 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?

THE ULTIMATE FOLLOWER

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 doesn't 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 didn't need a strategy because they always had somebody to look up to," he said.

Smartphones have been the major driver of Samsung's growth in recent years, and it doesn't 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 Samsung's popular Galaxy S4 or an iPhone. Some of those Chinese brands have growing export ambitions; one, Xiaomi, recently hired a top Google executive, Hugo Barra, to lead its international expansion.

"There's 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 25 miles 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 Samsung's most tightly guarded secrets. The inner sanctum is R5, a pair of new 27-story, glass-sheathed office towers, where the company's mobile research and development program resides.

The R5 workers who pile into the building favor colorful 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, including a new version of Samsung's 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 Samsung's overarching strategy.

"We would like to create a new trend," she said. "If you wear Galaxy Gear, it's a cool thing for young people."

Lee Young-hee is one of the important actors in the plot to change Samsung's reputation. A stylish former executive at the cosmetics company L'Oreal, she wears colorful eyeglasses and a bobbed haircut. Her English is sharp. She speaks in animated fashion about the future of mobile technology and Samsung's role in that future - sometimes to the point that her public relations aides remind her to be more discreet.

"We will make all the celebrities and important people wear it," she added, tongue slightly in cheek. "If you don't wear it, you will be obsolete."

Before Samsung assumes that role, though, the company must shake its lingering reputation as a fast follower.

Samsung executives bristle at the notion that its products are imitations. Yet many of them acknowledge that their company followed Apple into smartphones.

Legal decisions have underscored that reputation. Apple has successfully argued in one major case in California that Samsung infringed on a series of its patents, and now Samsung must pay Apple $930 million in damages. Both companies are set to go to trial in California again in March, for a case in which Apple accuses Samsung of infringing on a separate set of patents on newer Samsung devices.

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.

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