Samsung Overview & KSFs for Taiwanese Businesses

By Frank Gilliam

Working Inside 1 Samsung HQ in South Korea

Strategic Planning Business Development Business Restructuring

Key Success Factors 3 for Taiwanese Businesses

Frank N. Gilliam - Overview

Recruited to join Samsung upon completion of MBA from the University of Chicago. First non-Korean recipient of the CEOs Phoenix award for operational excellence directing restructuring programs turning around poor performing business units. Among first foreigners appointed to lead a new program for creating new products and businesses focused on emerging markets. Directed strategic planning initiatives as a member of the Chairmans Office GSG.

Samsung Electronics, South Korea: Strategic Planning, Business Development & Turna

Turnarounds, Interim Management & Corporate Finance

Performed various interim management roles at both high growth and distressed
businesses working to stabilize operations during crisis situations. Consultant at KPMG, Oracle and PwC advising CFOs of the Fortune 1000. Work history includes:
Orchestrated turnaround of a $2 billion Korean electronics business serving wireless, consumer electronics & PC end-markets outperforming industry by 140% CAGR5 years post implementation. Resolved liquidity crisis after assigned CFO responsibilities by the board of directors restructuring working capital & short-term debt. Recovered clients equity through interim management of a distressed mid-cap, 1,200 workforce, Taiwanese corporation implementing financial and operational restructuring plans. Interim CEO and CFO for high-growth financial services business in Chengdu, China. Directed operations and established control over corporate finance & accounting functions.

Todays Discussion
Franks Experiences at Samsung Electronics

Presentation Agenda
Company Overview Strategic Planning New Business Development Turnaround & Restructurings Key Success Factors and Q&A

First - The Disclaimer

The views in this presentation are the perspective of one person. Samsung is a huge company different people with different roles working in different parts of the organization will come to different conclusions.

General Observations Not Necessarily Good or Bad

Samsung Overview
Excels as a fast follower competing on price, speed to market and product features in large established markets Strong engineering, cost control, Korean culture, prefers execution risks over new market risks Struggles in markets outside of these core strengths

Quick Comparison of Two Great Companies with Strong and Very Different Cultures

Meetings Employees View of Management Promotions

Confrontational Management is incompetent Seniority largely irrelevant High

Less hierarchy, flexible work schedules, home offices, casual & informal

Quiet / Respectful Management knows best Seniority a key consideration Low

Strong hierarchy, inflexible work schedules, group and team focus

Autonomy

Major Management Obstacle

Personality issues among team members in high pressure environments

Encouraging junior team members to contribute

Samsung is Not
A Marketing Company
Until recently, has struggled to build effective brands after investing billions

Entrepreneurial

Nurtures Creativity
Samsung culture often not compatible with fostering creativity

Not comfortable seeding emerging businesses that have new market risks

Samsung does Control Costs!

Layers of Cost Controls Dominate Throughout the Organization
Strong enforcement within budgetary systems Executive promotion / demotion tied to ability to control costs

Awards given to teams for cost reduction efforts. E.g., tough supplier negotiations

Back-office processes capable of accurately tracking costs down to product line level

On the other hand, it does get in the way at times

Example 1
CEO of $20 Billion business forced to approve $250,000 to create a new program - 3 times!

Example 2
Will resist throwing out an approach with accumulated costs to start over despite becoming increasingly impractical
COUNTER PRODUCTIVE

Example 3
Project with lower overall costs that exceed initial budget versus one padded to be higher then completed under budget
APPEARANCE VS. REALITY

MANAGEMENT INEFFICIENCY

Top Down Korean Management Culture

Organization responds very quickly to commands from the top Employees expected to carry out their orders with minimal resistance No standard 360 feedback process
Example 1st Encounter CEO instructed team and Korean SVPs on our next project He unintentionally placed his hand over his mouth while informing us of his primary objective No one could understand him. Yet, none of the SVPs would ask for clarification

Samsung Work Ethic

We Work Hard!
Senior Manager of the Year
Awarded by CEO Best Example of Samsung Work Ethic Notorious for long work days - started with 15 employees, 10 quit!

We Work Hard and Creatively?

Not always an easy fit
Seasoned Samsung Manager

HR struggled to recruit & retain imported talent

Brilliant (eccentric?) Software Engineer

Values conformity, punctuality, dedication to the job, following rigid project plans, neat & tidy work conditions

Values freedom, social interaction, complicated problems to solve, extra sensitive & quirky

Dominant Engineering Culture

Resistance to 1st CMO
Strongly supported by Chairman Lee Funded with $500m to increase acceptance

Senior Mgmt
EE, Hard Science, R&D Backgrounds

Marketing Idiots
Considered home for poor performers that couldnt design

Data / HW Focus
Excels when product features can be quantified: speed, density, resolution

Software Deficiencies
More difficult to quantity (e.g., UI) & separate into discrete parts for development

Presentation Agenda
Company Overview Strategic Planning New Business Development Turnaround & Restructurings Key Success Factors and Q&A

Strategic Planning

Strategic Plannings Multiple Functions

Strategic Marketing Identifying trends, TAM, KSFs & emerging markets Corporate Strategy Develop 3-5 Yr strategic plan, forecasting future trajectories of current businesses Benchmarking Intel, TI, TSMC, Applied Materials Corporate Finance Capital investments, budgets & M&A, VC, JVs due diligence

Intra-company Conflicts Provided independent evaluations & assessments

Various Strategic Issues

Analysis of excess cash, stock appreciation, vendor management

Strategic Plannings Dual Purpose

Development of Strategy & Foreign Management Talent

Late 90s Chairman Lee believed culture was too Korean to become thriving internationally company producing higher value products

Recruited MBAs from top 10 B schools, moved to Korea for hands on training by senior executives then rollout to manage businesses internationally

Program had many problems initially high turnover, cultural issues improved gradually over time: separate HR tracks, rotations, assigned mentors

Presentation Agenda
Company Overview Strategic Planning New Business Development Turnaround & Restructurings Key Success Factors and Q&A

New Business Development

Stage 1 Select High Level New Business Development Areas

Stage 2 Identify, Screen & Evaluate New Opportunities

Stage 3 Complete Design & Development Assessment

Stage 4 Kill Project or Go to Market Execute Full Scale Production

Western IT Firms
Decentralized Bottom Up

Lacked Skills in New Business Development

Typical Business Origination Standard Process Employees Incubate New Ideas Specialized Resources Comfort Level with Failure

Samsung
Centralized Top Down

Yes Yes Yes

Part of entrepreneurial process

No No No
Potentially career ending

Launched Our Own New Business Development Program

1 2 3
Reported to CEO of Semiconductors utilized mix of dedicated and shared resources

Purpose to develop Prior project revealed weakness new businesses internally focused in core markets forecasting severe on new emerging downturn in 3-5 markets as part of diversification years strategy

Overview of Our Process

Stage 1 Select high level areas to investigate WHO? CEO, SVPs, NBD
Prioritize where new business WHAT? development resources should be focused Approve budget and assign BU resources to assist NBD*

Stage 2 Identify, screen & evaluate NBD & BUs

Develop pipeline Prioritize projects and allocate resources Outline work plan, milestones, required resources and responsibilities

Stage 3 Complete design & development CEO, SVPs, NBD, BUs

For the most promising opportunities complete design and development Outline work plan, milestones, required resources and responsibilities Technical feasibility, DD costs, BOM, roadmap, specs Quarterly Reviews

Stage 4 Kill Project or Go to Market CEO & SVPs

Make proceed/stop and investment decisions Define sponsors role going forward

DELIVERABLES Business cases for selection by CEO Completed strategic, market and financial evaluations Quarterly Reviews Assign program manager, establish operating budget & performance metrics Ongoing

WHEN?

Annually

Stage 2 Understanding the Market

Identify, Screen & Evaluate New Opportunities
1. Establish Proof of Demand 2. Outline Industry 3. Define Value Dynamics Proposition
Customer Areas to Analyze Where Company Competitors How

4. Recommend 5. Analyze Financial Strategy Implications

Demand proof Evaluation of alternatives TAM

Industry Participants/web

Customer care Where to compete Required resources abouts by segment How to compete Deployment Control points Competition Competitively economics Partnerships Industry evolution advantaged value Follow through proposition scenarios

Market Attractiveness

Position Attractiveness

Financials

Ran into Numerous Obstacles

Constantly Changing Process to Fit Samsung
Extensive Data Requirements Engineering First Culture Strong Cost Controls

Strong Aversion to New Market Risks

Established Markets
Late entrant to large market with flat industry profits and full of competitors

New Markets
Zero competitors in new market that does not yet exist

Invest $500 million for 5 years before receiving $1 in profits?

Invest $250,000 to develop 5 new businesses?

YES!

More research: Need more data

Pressure to Build First

Forced to complete preliminary technical design before figuring out if anyone wants it
Stage 1: Select high level new business development areas Stage 2: Identify, screen & evaluate new opportunities
Stage 3: Complete assessment of design & development Stage 4: Kill project or go to market
Preliminary Technical Analysis Produce product diagram illustrating: Key IP Preliminary component selection / technical specs Planned software / HW partitioning Technical feasibility identifying top 3-4 unknowns / obstacles Preliminary Cost Estimates BOM To complete next stage of development Go to Market

Spent Time Learning How to Work Effectively

New Business Development Team

Personnel from Business Units

Culture Clash
Business development team versus business units
New Business Development Background & Culture Mostly westerners recruited from business schools Marketing professionals, strategy consultants, engineers Stronger external networks with weak internal networks Market-focused, big stories BUs lack vision, see the world as half empty. Hung up on small details Business Units Koreans recruited locally from engineering programs Design & development, R&D

Prior Positions
Networks

Limited external contacts strong internal networks

Product focused, conservative NBDs too fuzzy, pie in the sky. We need firm idea of product specs before can evaluate it

Focus

Thinks of the Other

Surprisingly common in many organizations besides Samsung

Cross-functional Teams Worked Best

Product planning personnel had right mix of internal networks, technical skills and openness to new ideas to compliment business development team

Customer
Marketing Sales

Business Focus

Logistics / Distribution

Data Sheets Latency, Voltage, Density, Mhz, Cache Reference Packaging Designs Product Focus Firmware Circuit Diagrams Development Tools PIN Outs Process Tech CMOS, Analog, Mixed Signal

Manufacturing

New Business Development

Business Units

Presentation Agenda
Company Overview Strategic Planning New Business Development Turnaround & Restructurings Key Success Factors and Q&A

Restructuring Programs
Turning around poor performing business units

Management Focus by Phase

Three General Phases

RED

Manage for Cash

Emergency Planning

YELLOW

Manage for Margins

Stabilization Planning

GREEN

Manage for Growth

Quality of Earnings Planning

Restructuring & Turnarounds

Traditional Client Projects
Restructure operations around profit drivers Position for sustainable, quality growth

Evaluation & Analysis

Manage cash flow & increase liquidity

1
Strategic & Operational Health Assessment

2
Liquidity Improvement Planning

3
Stabilization Planning

4
Quality Earnings Planning

Phase by Phase Approach

Samsung Turnaround Projects

Key Differences
Clients
Return to positive cash flows & margins Financial then operational Direct: Interim CEO, CFO, CRO Indirect: Adviser to BoD

Samsung Objective
Return to positive margins & improve strategic positioning Operational & strategic then financial Group consensus through directing steering committee

Approach Control Team Backgrounds Timeframes

CFOs, corporate finance & accounting

SVPs from S&M, DD, HR, product & strategic planning depts.
Months & years

Weeks & months

Operational & Strategic Assessment

The First Step
Samsung relied heavily on benchmarking to complete their internal assessments STRATEGIC ASSESSMENT OPERATIONAL ASSESSMENT Operations, Accounting, Finance, HR, S&M

Industry Growth, Profitability & Current Positioning

Strong Average Weak Strong Average Weak

Phase 1 - Tools for Improving Liquidity

Cash flow analysis & control
Balance sheet cleanup 1 2 Preliminary expense reduction analysis

3
4

Investment thesis development to attract new financing

Debt restructuring planning

Working capital improvement programs

Working Capital Improvement Programs

Unlocking Instant Liquidity

Aggressively Managing Working Capital

Strong fit with Samsungs process improvement culture
AREA: BILLING, AR & RECEIPTS
Sales Avg. Sales/Day

Industry Avg.
-

FY 1 Current
100 million

FY 1 Potential
100 million

DSOs
AR

Billings, Accounts Receivable33 & Receipts 45 40

Sales Order Copy Bill Lading Copy

Work Stream277,000 277,000

11% of sales

9% of sales

Liquidity Improvement
BILLING, AR & CASH RECEIPTS Item
1

Customer Purchase Order Copy Prepare Sales Invoice YES NO

$1.9 million
Credit Approved?

Access Online Shipping Log

Result
5 days DSO decrease 50% decrease in bad debt 2 days DSO decrease

Comments
Review of online shipping log shows invoices are sent 5 days after products are shipped as bills of lading are hand delivered at the end of the week. Credit dept. reviewing less than 10% of invoices due to legacy issues before upgrading to automated credit check system. Company is not actively managing float. Review of settlement dates shows 2 day delay due to aggressive value dating by companys bank.

Notify Credit Dept.

Prepare Sales Invoice

Sales Invoice 3 Sales Invoice 2

Debits Accounts Receivable into AR System

Sales Invoice 1

Credits Sales into Sales Journal All sales issued with 30 days of credit

CUSTOMER

Bank Receives Customer Payment Bank Post Funds to Our Account

Debits Cash Management System

Credits AR System

Phase 2 - Restructuring Around Profit Drivers

Tools for Stabilizing Operations

Profit analysis tracing margins to core set of activities Strengthening controls across the organization Revising metrics, standard costs & budgets

Retention and divestment planning

Product line audit and pruning Headcount reduction planning

Phase 3 - Return to Growth Planning

Tools for Achieving Sustainable, Quality Growth
Corporate Strategy Development
Communicate path forward setting hard targets: CAGR, margins, ROIC

Quality of Strategy Review

Align firm resources to winnable higher-margin, growth markets

Financial Restructuring
Optimize capital structure lowering cost of capital
- Clients Only Samsungs CFO Office handled these issues

Sales & Marketing Audits

Measure gap between customer needs & performance

External Growth Toolset

Build capabilities to grow through M&A, JVs and strategic alliances

New Business Development

Institutionalize standard process for developing new business

Traditional Restructuring Obstacles

Samsungs strong back office & proactive culture largely eliminated these issues GOAL

PATH FORWARD

Barrier 2 - MARGINS
Lack of quality accounting data and/or company not properly segmented for useful reporting

True sources of margins not known

Barrier 1 - LIQUIDITY
Unable to accurately forecast cash flow
Few effective liquidity controls installed throughout the organization

Samsungs Biggest Restructuring Obstacle

The CEO (Top Down Management Culture)
Case Study
Project Objective
Identify and fix main issues preventing success no tier 1 design wins

Analysis Revealed
Delivered poorly functioning samples lacking items required by customer technical reference designs, software stacks, supporting documentation etc. CEO moved up deadlines and cut budgets forcing VPs to deliver bad products early

Reason

How to fix it?

Managing higher-value solutions business same as core business focusing on price and speed SVPs would not argue to the CEO he was using the wrong metrics to run the new business

Benchmarking
The safe way to tell your boss he is wrong
Tell the Korean CEO of a $20billion business in front of his vice presidents that the main problem is him?

Option #1

Benchmark a respected company facing a similar situation Show how that CEO used the wrong metrics for managing the new business

Option #2

Presentation Agenda
Company Overview Strategic Planning New Business Development Turnaround & Restructurings Key Success Factors and Q&A

Know Yourself
Strengths, weaknesses, obstacles to change

Do or Do Not
Few things done half way - changing business models, entering new markets..

Focus on Core
Continual focus on improving core business

Routinely Ignored So-called Experts

Know their own strengths & weaknesses better than strategy consulting firms, investment banks and government officials

Dont enter cell phones mature market, falling profit margins, full of competitors with better tech.

Must embrace large scale M&A to keep up with Intel & TI. Cant continue to grow organically

Acquire Hynix to build market share and contribute to strong Korean economy

Want to Move Upstream from Commodity Products to Higher Value Brands?

But anticipate resistance from traditional engineering culture
Create new CMO position on par with CTO, CFO, R&D

Brand Estimated at $10 Billion in Corporate Value!

Threaten to harm your employees
Chairman Lee interview I will kill those that get in the way Fastest Growing Brand Today!

Fully fund new function

Generous budget to recruit & hire experts Unprecedented $500m media budget New premium offices

Constantly Improving Performance

In good times and bad
Continually Restructuring
Restructuring around profit drivers, actively managing liquidity & working capital

World Class Back-office

Knows where profits are coming from not based on history and hunches but data

Blunt Performance Reviews

VPs improved poor businesses or help was sent. Annual reviews shuffling out poor performers.

Financial Hurdles
Strategic decisions still had to pass financial reviews - M&A, operating poor performing business etc.

Q & A time

Thank you for your time & consideration

Frank Gilliam www.frank-gilliam.com frankgilliam@gmail.com