Case Study - Samsung Innovation Strategy – Struggling to innovate, shifting focus to software

Samsung market cap has fallen by over US$ 6 billion recently as the company struggles to innovate new products which the company had been doing successfully for past many years. Samsung Electronics' chairman, Lee Kun-hee decades ago called Samsung management to "change everything except for your wife and children” which led to company not exactly innovating but copying and then tweaking the innovations of others, producing alternatives in the market and add-ons for software rather than developing useful, original features for consumers itself. Its strengths lie in its ability to quickly and cheaply research, develop, and manufacture hardware in an amazing broad range of product categories, but company has trouble in software development for its hardware. Despite the enormous amounts of money Samsung spends each year on research and development, Samsung is struggling to innovate which is having a significant effect on company’s revenues and brand image. Lee said Samsung must "get rid of business models and strategies from five, ten years ago and hardware-focused ways and wants the company's massive research and development centers to "work around the clock, non-stop." A report released by leading global consulting firm Booz and Company highlighted the fact despite Samsung spending US$10.4 billion  on R&D in the fiscal year ended June 2013, that included spend of all business divisions including mobile. Forecast for current year is to surpass $11 billion, and around $10 million or so is said to have been spent on developing Samsung’s flagship smartphone model.

Despite the heavy spending, Samsung ranks third as the world’s most innovative companies, following Apple and Google with Apple being major competitor in smartphones and Google a big software partner as Android is owned by Google and it is operating system for most of the Samsung mobiles. Samsung companies had successfully changed their strategy earlier as they made transition from volume focus to quality focus in the past two decades and they must now transition to upgrade the value and "class" of the products and services they provide to consumers. Samsung chairman pointed out that greater opportunities exist when companies and economies slow down and the conglomerate needs to look beyond competition and innovate new technologies and enter new markets which can only be achieved through convergence of industries and technologies. "There is a great need to build up competitiveness that cannot be copied by rivals. Old strategies, hardware-oriented processes and corporate cultures should be boldly thrown away," the chairman emphasized. Samsung can only overcome uncertainties only through initiatives that will lead to market and technological breakthroughs. Samsung also needs to complete the setting up of a global management system that can fuel change and innovation, he said. Samsung is the world's largest mobile device, television and semiconductor producer, but developing software  is critical for the company to compete with firms such as Apple and Google -- both of which have made a number of acquisitions to improve the software they offer. Samsung CFO Lee Sang Hoon said in November, 2013 that the company will aggressively search to secure valuable startups and SMBs that could improve its own products.

Blue Ocean Strategy @ Samsung – Galaxy Note Series created Phablet Segment

Samsung has adopted successfully Blue Ocean Strategy and company has profited through this strategy in the past few years. Samsung has invested heavily in Research & Development that helps the company to innovate and create new products that helped the company to grow into a Global powerhouse. Samsung’s team of researchers and engineers include over 50,000 employees across 42 global research facilities—each one collaborating on strategic technologies to forge new market trends and set new standards of excellence. Blue Ocean Strategy visions the creation of uncontested markets with no competition through new product innovation leading to creation of new demand. Samsung Galaxy Note Series of phablets highlights the Blue Ocean Strategy of Samsung that created an uncontested phablet market and dominates it with its Galaxy Note II and Galaxy Note III with Galaxy Gear smart watch. Market Research Firm IHS reported that 25.6 million phablet devices were sold in 2012 and estimated that these figures would grow to 60.4 million in 2013, and 146 million by 2016. Wikipedia definition of Phablet, is a smartphone form factor describing tablets with a screen over 6.5 inches in size and has normal phone calling functions ,designed to combine or straddle the functionalities of a smartphone and tablet, eliminating the need for two devices. As of October 2013, Samsung has sold over 40 million Galaxy Note devices over the past two years. 30 million were of the Note II, while the Note (Original) sold around 10 million.

Value innovation is at the heart of blue ocean strategy. Value Innovation is defined as creating value for both the buyer and the company and the innovation (in product, service, or delivery) should be such that it raises and create value for the market and company and at the same time reduces or eliminates features or services that are less valued by the current or future customers. Samsung Galaxy Note phablet is a classic example of value innovation where it eliminates the need for two devices smartphones and tablets, raises the product utility through big screen that enhances the browsing and multimedia experience and Stylus that facilitates sketching, note-taking and annotation. In its latest Galaxy Note 3 Samsung added a smart watch Galaxy Gear that adds even more functionality. Stylus reduces the need for carrying the notebooks or papers for note taking during meetings and conferences. Galaxy Note phablets with accessories like stylus and Gear smart watch created a need for new applications which also allowed developers of apps to create innovative new apps that best suited for phablets. Samsung Galaxy Note phablet series created the phablet market that also encouraged its competitors like Sony, Lenovo, Nokia, Asus, Acer, etc. also enter the market with their own version of phablets. Competition has picked up in the phablet market but Samsung still dominates the market. Samsung Galaxy Note phablet series is focused on giving Apple Inc. a tough competition, as Apple dominates the smartphone market with iPhones and Tablet market with iPads. Samsung has been hugely successful with this strategy and is giving a tough competition for Apple and also launching timely upgraded versions of the phablet series and phablets are critical part of Samsung global mobile strategy. Phablet sales are slowly crossing the tablets and laptops sales in some markets like Asia as reported by IDC highlights that Samsung Blue Ocean Strategy is highly successful.    

Case Study – Infosys 3.0 Non Linear Revenues priority for future growth

With a focus to improve operating margins and an aim to delink revenue growth from headcount growth, Indian IT Services vendors have been investing in non linear revenue models and despite their focus on improving their non linear revenues for the past few years non linear revenues comprise less than 10% of total revenues. With employee headcounts for major Indian IT Service Vendors expected to reach 2 Lakhs in near future, there is a worry in the Industry that raising headcounts will be difficult to manage and the vendors will have difficulty in training, hiring and retaining employees and delivering quality output to the clients. All the vendors have realized the need to decouple revenue growth from employee headcounts and non linear revenue models help them to increase revenue per employee, employee productivity and also operating margins as non linear models have scope for charging higher prices for services. Top Indian IT Vendors have adopted following models Intellectual Property/Products, Cloud Computing, Platform BPOs, Non Linear Pricing Models, Delivery Accelerators, Branding of products and services/solutions and Merger & Acquisitions to increase the non linear revenues.

Infosys had been investing millions of dollars in R&D and have exclusively set up Infosys Lab that focuses on applied research in software engineering and other areas of Enterprise IT. Infosys is the largest spender on R&D among the Top Indian IT Service vendors and recently announced plans to invest about $50 million to develop and create Intellectual Property (IP) in the mobile commerce platform, following a deal from India’s Leading Telecommunication player Bharti Airtel. Infosys also announced doubling its Product Research and Development Center in India to 1000 engineers in next two years and is expected to develop Products and Platforms leveraging technologies in the areas of cloud computing, mobility, analytics, and social media. This Research and Development Center in Bangalore has played a crucial role in development of various products, platforms and solutions in Infosys. Most of the products revenue comes from Finacle, which is the core banking offering and also has five other products that contribute fewer revenues. Infosys is increasing its R&D spend on its Finacle line to develop new cloud, mobility and analytics solutions for the banking product to counter competitors.  Infosys has so far commercialized about 12 platforms and there are other platform offerings that are under development.

Infosys launched cloud based business platforms and applications for functions like HR, procurement, social commerce, digital marketing. Cloud based offerings include a mobile app store platform Flypp, iEngage for social media, mConnect, Infosys HIMI, and TalentEdge, a cloud platform for enterprises to streamline HR function. Platforms are a major non-linear strategy for Infosys and it has more than 20 clients on platforms. Infosys’ biggest BPO platform play is its FY10 acquisition, McCamish Systems (a platform-based insurance processing solution provider). Smaller platforms such as Newspaper-in-a-box, HR outsourcing (Hire-to retire), Shopping Trip 360 (retail analytic solution) generate very limited revenues. Infosys BPO is significantly gaining revenues through platform BPOs and in FY 2011 added $75 million in incremental revenues while adding only about 300 employees and gets 15-20% of its revenue from platforms. Infosys had embedded a Products Platforms and Solutions unit in each of its four businesses—banking, financial services and insurance; manufacturing; retail and life sciences; and energy and utilities during a recent reorganization.

Infosys has seen good growth in its cloud computing offerings in past couple of years and cloud business contributes about 2% of its total revenue which it has identified it as a major growth driver. Company also tied up with Microsoft to co-create and architect cloud environments for large companies in seven geographies US, UK, Australia, France, Germany, Middle East and India. It has also partnered with over 30 cloud providers and is looking to work with clients as an end-to-end cloud ecosystem integrator, provide professional services and business platforms in the cloud. Infosys have data centers in Europe, the US, India and in Australia and presently offering private cloud from their own data centers or working with other clients. Infosys has more than 2000 resources working on the cloud computing and it also started offering Indian cooperative banks a cloud version of its core banking product Finacle, tapping into a Rs 2,000 crore market. Infosys is also offering its Infosys Edge cloud based platform offerings and other platforms on the outcome based pricing model and plans to get over 30% of its total revenue from such higher-end services.

Infosys has invested millions in branding products, platforms and solutions and Finacle is the core product offering and lot of banding activity is centered on it. Infosys is also branding all its products and is looking to create a unique awareness and proposition. Branding helps in creating a relationship with clients and also increases their understanding of the product functionalities, uniqueness, differentiation and its positioning. Infosys had launched 'InfosysEdge', a family of platforms that enable customers to buy software on a pay-as-you-go model and it presently has 12 platforms and couple with its Building Tomorrow’s Enterprise branding strategy intends to create awareness for clients and position its platform and products accordingly. In 2011 the brand positioning statement has been changed from 'Win in the flat world' to 'Building tomorrow's enterprise' as part of the new Infosys 3.0 strategy. Infosys is branding its products, platforms and solutions as part of its non linear revenue growth strategy and it is looking to charge clients higher prices based on usage or license as these are intellectual property based offerings.

Infosys had been criticized for not being active in M&A game and as a matter of fact in 2011 it had acquired two companies. First in June, it acquired Gen-i the software solutions division of Wellington- headquartered Telecom Corporation of New Zealand (TCNZ) to strengthen its outsourcing services foray in Australia and New Zealand. In December, it has acquired Australia-based sourcing and category management services firm Portland Group which enhances service offerings and takes sourcing and procurement functions to a higher level as Portland Group has over 100 procurement specialists with domain expertise. In 2009, it acquired the US-based McCamish Systems to expand its presence in the insurance and financial services sector and it is known for platform based offering where standardized offerings for multiple clients. In 2007, company signed a $250-million deal with Royal Philips Electronics of the Netherlands and acquired three shared service centers located in India, Poland and Thailand. All these acquisitions helped Infosys to increase its capability, entry into new geographies, enhance its service offerings and acquire new clients. Infosys is looking at acquisitions for the non linear revenue growth and its sits on billions of dollars of cash and looking to acquire particularly in Europe to reduce dependency on the North America Market.

Infosys is aiming for 33% of its revenues to come from non-linear business by 2020 and it has invested significant amount of resources both monetary and human for increasing its non linear revenues. To further increase its non linear revenues Infosys adopted a strategy of developing of products platforms and solutions involving internal research and development teams; co-creation with clients; partnering with a start-ups or a large software vendor such as SAP AG or Oracle Corp. Infosys has set up a separate unit for non linear initiatives and embedded units for this purpose in its key vertical businesses like BFSI, Manufacturing, Retail, etc. Infosys is also looking to recruit more domain specialists that help in creating the products, platforms and solutions based on the clients needs. The company is also looking to delink the revenue growth from employee headcounts and this effort has been successful in the Infosys BPO. There has been volatile economic environment in North America and Europe which are the major markets for Infosys and clients are demanding innovative offerings that will improve the return on their investments. With this scenario Infosys is forced to look at non linear revenue growth models for sustaining revenue growth and profitability.

Discussion Points:

•  How to increase the non linear revenues for Infosys?
•  How will mobility, cloud computing, digitalization, big data, etc effect the future business environment?
• Will the non linear revenue strategy adopted by Infosys deliver in the changing future business environment?
• Will the products, platforms and solutions strategy lead to innovation of new products and service offerings based on clients needs?