BW: Samsung's "Sashimi Theory" of Success

BusinessWeek: CEO Yun Jong Yong says getting hot products to market before they become "dried fish" lets the electronics giant fetch high prices

Yun Jong Yong has a vivid way of describing his survival strategy in today's hypercompetitive consumer-electronics market, where today's hot-selling novelty can become a cheap commodity within months. The vice-chairman and CEO of Samsung Electronics calls it the "sashimi theory." When prime fish is first caught, it's very expensive at a top-notch Japanese restaurant. If some of the fish is left over, it sells the next day for half the price at a second-tier restaurant. By the third day, it goes for one-fourth the price. "After that," Yun says, "it's dried fish."

So the secret to success in consumer electronics is getting the most advanced products onto retail shelves ahead of the competition. That way, you can charge premium prices -- until the rest of the pack catches up and the product is no longer fresh. "In our business, there's money to be made if you can reduce the lead time to customers," Yun says. "If I can reduce that time by one week, it makes a big difference. If you're two months late to the market, the game is finished."

Few electronics companies are doing a better job than Samsung at keeping their products from turning into yesterday's sashimi. Samsung has been consistently hitting global markets with cutting-edge cell phones, wide-screen TVs, memory chips, and video cameras ahead of its main rivals, enabling it to charge some of the highest prices in the industry (see BW Cover Story, 6/16/03, "The Samsung Way").

FIRST BIG CHALLENGE. It's a dramatic change for a company that just six years ago was in perilous financial shape and whose brand was mainly associated with low-end TVs and air conditioners. In a recent interview in Seoul with BusinessWeek editors, Yun, a 30-year veteran of Samsung, explained its turnaround since he took the helm in 1997 -- just seven months before the onset of the Asian financial crisis.

Yun recalls that Samsung's first big challenge in his tenure was having to decide whether to proceed with a multibillion-dollar investment in new memory-chip capacity in the fall of 1997. At that time, Samsung was one of the world's biggest manufacturers of dynamic random access memory chips. DRAM prices had plunged the previous year, hammering the sales and earnings of chipmakers. But if Samsung held back on investing in new capacity, it risked losing market and technology leadership.

"Samsung Electronics was nearly bankrupt," Yun explains. "We had severe liquidity problems. [South Korea's] Kia Motors had gone bankrupt, and the International Monetary Fund was coming in. All our staff were afraid of recession. Nobody in the industry wanted to invest."

SCRAPING UP CASH. Samsung decided to go ahead with the investment after a five-hour meeting of top executives summoned by Chairman Lee Kun Hee, who also heads the parent Samsung Group -- a widely diversified conglomerate founded in the 1930s by his late father. Lee had recently returned from a tour of Japan, where he learned that other memory chipmakers were also holding back due to weak finances. So Samsung saw a chance to leap ahead.

Making the decision was easy compared to finding the money to finance the plan. Samsung had nearly $11 billion in long-term debt in 1997, and it was cut off from new conventional loans by both Korean and foreign banks. It managed to scrape together about $2 billion by putting up all of its accounts receivable to get an asset-backed security and by getting equipment suppliers to offer credit.

More important, Yun took aggressive measures to clean up Samsung's finances. He laid off 24,000 employees -- about 30% of Samsung Electronics' payroll -- and sold off $2 billion worth of corporate assets. In another break from tradition, Yun ordered Samsung's consumer-appliance factories shut for several months.

CLEARANCE SALES. Like most chaebol, or big Korean conglomerates, Samsung had always been obsessed with boosting production and sales volume. After the Asia crisis, it took careful stock of where all the output went and discovered it had four months' worth of inventory of TVs, computers, and other products sitting in offshore warehouses. The value of the excess inventory was more than $2 billion. Yun declared Samsung would make no more of these products until the inventory was sold.

"Before that, our factories operated fully whether we were in recession or in an economic boom," Yun recalls. Many Korean managers were stunned by the decision. Some even argued that the company should increase production to take advantage of the won's late-1997 crash, which made Samsung's products cheaper in the U.S. and elsewhere. "My managers didn't understand that the additional output would only end up in warehouses as well," he says.

These radical moves were just the beginning. Yun also focused on ways to increase prices. "We were taking huge losses in 1997" on many products, he says. "I figured that if we could somehow increase selling prices by 10%, we could make a $600 million profit. I started thinking of the concept of getting the right pricing for the value of our products."

UP-MARKET MOVE. The first step: reducing inventory cycles. At one point in 1996, prices of DRAMs -- which then accounted for 60% of Samsung's exports -- were dropping by 1% every week, or by 50% each year. The longer the chips sat in inventory, the lower the price they fetched on the market. By dramatically shrinking the period between which an electronics product is made and the time it's sold, therefore, Samsung was able to reap higher average prices.

Within two years after the crisis, Samsung Electronics was again profitable. One measure of success: Its output of electronics products increased nearly five-fold from 1996 to 2002, while its headcount only rose 12%. Samsung's long-term debt has plunged to less than $2 billion, and net margins have risen from near-nothing to a very respectable 12%.

Another key to the turnaround was Samsung's decision to recreate itself as an up-market brand. Not only would it spend heavily on more sophisticated marketing and focus on producing high-end phones and appliances but Yun also declared that Samsung would completely abandon low-end products, even if that meant passing up easy opportunities for big sales.

"THE FACE OF SAMSUNG." Again, Yun made his point dramatically. In several European countries, where Samsung hadn't yet introduced expensive digital TVs, he ordered low-end TVs pulled from retail shelves. Why? "TVs are the face of Samsung Electronics," Yun explains. "If we keep selling low-end products, it damages our corporate image. We'll leave those opportunities to latecomers or to Southeast Asia. We believe that 5 to 10 years from now, our future will depend on our brand equity."

To bolster management and research and development, Samsung also has recruited more aggressively overseas. "Even during the financial crisis, we invested a lot in human resources," Yun says. Samsung has hired an additional 800 PhDs in the past five years (bringing its total to around 1,900) as well as about 300 MBAs from Western universities.

Yun concedes that a historical shift in the electronics industry is another major reason why Samsung has been able to bridge the technology gap with such established electronics powers as Mitsubishi (MIELY ), Sony (SNE ), Philips (PHGZF ), Motorola (MOT ), and Sharp (SHCAY ). That shift was the migration from analog technologies to digital in everything from telecom gear to cameras to home appliances.

PLUSES AND MINUSES. "In the analog era, experience and technology were needed," Yun says. "If you were a latecomer, it was hard to catch up. But in the digital era, the field is wide open because most players can gain access to similar technologies. What's most importan