Does Facebook Have a Strategy?

FACEBOOK WAS FOUNDED in a dorm room at Harvard popular social networking site. Facebook’s new chal-
in 2004 by 19-year-old Mark Zuckerberg and three lengers in the social media space include Google1,
college pals. What began as a hobby to let college LinkedIn, Pinterest, and Twitter.
students socialize online is now the world’s largest Facebook’s business model is based on three pillars:
social networking site, with more than 1.1 billion users
1. News Feed. Launched in September 2006, this
and over $5 billion in revenues (in 2012). As of summer
quickly became a core feature of Facebook. It
2013, Facebook is the most popular website globally,
is at the heart of a user’s homepage and pro-
even more popular than Google. Zuckerberg sees online
vides regular updates of friends’ posts, photos,
social networking as the “most powerful and
events, group memberships, and other subjects.
transformative social change” in recent history, and the
The priority of items displayed in the News
biggest invention since Gutenberg’s printing press. 1
Feed is based on a complex algorithm.
Indeed, it’s made him the world’s youngest billionaire.
2. Timeline. This is an updated version of the
Before Facebook became a global phenomenon, it
profile pages and was launched in September
had to overcome the first-mover advantage held by
2011. It allows each user to paint a complete
Myspace. Launched in 2003, Myspace was an early
life story on his or her profile. Users can select
leader in social networking. Its success attracted the
what information is shared and with whom
attention of News Corp. and other media outlets. News
they share it.
Corp. acquired Myspace for $580 million in 2005. As a
3. Graph Search. Zuckerberg calls the network of
subsidiary of a publicly owned company, Myspace’s
connections between people the “social graph.”
revenues and profitability became more pressing issues
Graph Search is an attempt to map the global
after the acquisition. Myspace’s busi- ness model
social graph in the form of a massive database.
shifted from accumulating more users to growing
Introduced in January 2013, it is a search bar
revenues and profits by focusing on a few ad-heavy
that hovers at the top of Facebook’s web page,
markets such as the U.S., UK, Germany, France, and
acting as a title for the content of that page
Japan. Myspace was hit hard by the global economic
and allowing a user to query the portion of the
downturn that began in 2008. A year later, it laid off 45
social graph that is connected to and filled in by
percent of its staff.
the user.
Facebook, on the other hand, remained a private
company until May 2012. Among other investors, As Exhibit MC1.1 shows, in May 2012 Facebook
Microsoft purchased a $240 million equity stake in went public with an initial share price of $38, making
2007, and a Russian investment group added $200 the company worth more than $100 billion. Just a year
million in 2009. Facebook’s managers had less pres- later, in the summer of 2013, Facebook was valued at
sure to produce bottom-line results than did Myspace. around $60 billion. In an interview, Mark Zuckerberg
This allowed the company to pursue a different busi- conceded, “The performance of the stock has obvi-
ness model: more users first, profits later. While ously been disappointing.”2
Myspace concentrated on a few developed markets, Frank T. Rothaermel prepared this MiniCase from public sources. It is devel-
Facebook pursued a truly global strategy. More than 70 oped for the purpose of class discussion. It is not intended to be used for
any kind of endorsement, source of data, or depiction of efficient or inef-
percent of its users are outside the United States. In ficient management. All opinions expressed, and all errors and omissions, are
2008, Facebook displaced Myspace as the most entirely the author’s. © Rothaermel, 2014.

406
 MINICASE 1 Does Facebook Have a Strategy? 407

EXHIBIT MC1.1 / Facebook’s Share Price May 18, 2012, at IPO ($38.00) to July 4, 2013 ($24.52)
SOURCE: MSN Money, [Link]

May 18, 2012 - Jul 04, 2013 Facebook

38.00
$38.00 36.00
34.00
32.00
30.00
28.00

$24.52 26.00
24.00
22.00
20.00
18.00
May Jul Oct 2013 Apr

DISCUSSION QUESTIONS Endnotes

1. “Facebook CEO in no rush to ‘friend’ Wall Street,” The Wall Street
Journal, March 3, 2010.
1. Why is Facebook the number-one social media 2. Quote from: “Zuckerberg admits to missteps,” The Wall Street
Journal, September 11, 2012.
company, and not Myspace which enjoyed a first-
mover advantage?
2. Given the hallmarks of good and bad
strategy, do you think Facebook has a good Sources: This MiniCase is based on “Facebook’s land grab in the face of a
downturn,” Bloomberg Businessweek, November 20, 2008; “A special report
strategy? Why or why not? on social networking,” The Economist, January 30, 2010; “Facebook CEO in
no rush to ‘friend’ Wall Street,” The Wall Street Journal; “The world’s
3. The first step in creating a good strategy is to diag- billionaires,” Forbes, March 10, 2010; “Facebook wants to know more than
nose the competitive challenge. What do you believe just who your friends are,” The Wall Street Journal; “Facebook’s Washing-
ton problem,” Bloomberg Businessweek, May 13, 2010; “Lives of others,”
is Facebook’s number-one competitive challenge? The Economist, May 20, 2010; [Link]; [Link];
4. What top-three recommendations would you give and [Link]. For an in-depth discussion of Facebook, see: Case
Study MHHE-FTR-0021 “Facebook: Will Wall Street hit the ‘Like’ button?”
Mr. Zuckerberg? Why? Support your arguments. by Frank T. Rothaermel and Seth Taylor (2014).
The Wonder from Sweden:
Is IKEA’s Success Sustainable?

THE WORLD’S MOST SUCCESSFUL GLOBAL RETAILER, in

terms of profitability, is not Walmart or the French Region (2012)
grocery chain Carrefour, but IKEA—a privately owned
home-furnishings company with origins in Sweden. In 2012” ([Link]).

2012, IKEA had more than 330 stores worldwide in 38

countries, employed some 140,000 people, and earned
revenues of 33 billion euros. IKEA’s revenues by
geographic region are 70 percent from Europe, with the
rest from North America (16 percent), Asia and
Australia (8 percent), and Russia (6 percent) (Exhibit
MC5.1). Although IKEA’s largest market is in
Germany (14 percent of total sales), its fastest-growing
markets are the United States, China, and Russia.
Exhibit MC5.2 shows IKEA’s growth in the number of
stores and revenues worldwide since 1974. Known
today for its iconic blue-and-yellow big- box retail
stores, focusing on flat-pack furniture boxes combined
with a large DIY component, IKEA started as a small
retail outlet in 1943 by then-17-year-old Ingvar
Kamprad.
Though IKEA has become a global phenomenon, it
was initially slow to internationalize. It took 20 years
before the company expanded beyond Sweden to its
neighboring country of Norway. After honing and Asia accounts currently for only 8 percent of its sales,
refining its core competencies of designing modern IKEA sources 32 percent of its inputs (mostly timber)
functional home furnishings at low prices and offer- ing from this region. To drive costs down further, IKEA has
a unique retail experience in its home market, IKEA begun to implement production techniques from auto
followed an international strategy, expanding first to and electronics industries, in which cutting-edge
Europe, and then beyond. Using an interna- tional technologies are employed to address complexity while
strategy allowed IKEA to sell the same types of home achieving flexibility and low cost.
furnishings across the globe with little adap- tation Despite its success, IKEA faces significant chal-
(although it does make some allowances for country lenges going forward. Opening new stores is critical
preferences). Because IKEA focuses on low cost, it
shifted more recently from an international strategy to a Frank T. Rothaermel prepared this MiniCase from public sources. It is devel-
global-standardization strategy, in which it attempts to oped for the purpose of class discussion. It is not intended to be used for
any kind of endorsement, source of data, or depiction of efficient or inef-
achieve economies of scale through effectively ficient management. All opinions expressed, and all errors and omissions, are
managing a global supply chain. Although entirely the author’s. © Rothaermel, 2014.

413
414 MINICASE 5 The Wonder from Sweden: Is IKEA’s Success Sustainable?

EXHIBIT MC5.2 / IKEA Stores and Revenues, 1974–2012

SOURCES: Author’s depiction of data from “The secret of IKEA’s success,” The Economist, February 24, 2011, and various IKEA “Yearly Summaries” ([Link]).

400 35

350 30

300
25

Revenues (billion euro)

Number of Stores

250
20
200
15
150

10
100

50 5

0 0
1974 1984 1994 2004 2005 2006 2007 2008 2009 2010 2011 2012

to drive future growth (see Exhibit MC5.2). Finding Besides these external challenges, IKEA also faces
new sources of supply to support more store openings, significant internal ones. Since the compa- ny’s
however, is a challenge. Although demand for IKEA’s founding in 1943, no strategic decisions have been
low-cost home furnishings increased during the global made without Mr. Kamprad’s involvement and explicit
financial crisis as more customers became price con- approval. In 2013, Mr. Kamprad (now in his late 80s)
scious, IKEA’s annual store growth has slowed to less announced he is stepping down from chairing Inter
than five new stores a year. This is because its sup- ply IKEA, the foundation that owns the company. Many
chain has become a bottleneck. IKEA has diffi- culty observers compare Mr. Kamprad’s influence on
finding suppliers that are a strategic fit with its highly IKEA’s culture and organization to that of the
efficient operations. Related to this issue is the fact that legendary Sam Walton at Walmart. Mr. Kamprad’s
wood remains one of IKEA’s main input fac- tors, and three sons will take on stronger lead- ership roles at
the world’s consumers are becoming more sensitive to IKEA, with one of them now chairing Inter IKEA.
the issue of deforestation and its possible link to global Moreover, IKEA is privately held (through a
warming. In the near future, IKEA must find low-cost complicated network of foundations and holding
replacement materials for wood. In addition, powerful companies in the Netherlands, Lichtenstein, and
competitors have taken notice of IKEA’s success. Luxembourg). This arrangement provides benefits in
Although IKEA is growing in North America, it holds terms of reducing tax exposure, but also creates con-
less than 5 percent of the home- furnishings market. In straints in accessing large sums of capital needed for
some European markets, IKEA holds 30 percent market rapid global expansion. IKEA will need to address these
share. To keep IKEA at bay in the U.S., Target has challenges in order to live up to its strategic intent of
recently recruited top designers and launched a wide doubling its number of yearly openings in an attempt to
range of low-priced furnishings. Kmart, likewise, has capture a larger slice of fast-growing mar- kets such as
enrolled Martha Stewart to help with the design of its the U.S., China, and Russia.
offerings of home furnishings.
 MINICASE 5 The Wonder from Sweden: Is IKEA’s Success Sustainable? 415

DISCUSSION QUESTIONS 4. What can IKEA do to continue to drive growth

globally, especially given its strategic intent to
double annual store openings?
1. List IKEA’s external and internal challenges.
Looking at IKEA’s challenges, which ones do you
think pose the greatest threat? Why? How would
you address the challenges?
2. Walmart entered a period of difficulties after Sam
Walton stepped down. Do you anticipate IKEA
having the same leadership transition challenges?
Why or why not?
Sources: This MiniCase is based on “IKEA: How the Swedish retailer became
3. Did it surprise you to learn that both a developed a global cult brand,” BusinessWeek, November 14, 2005; “Flat-pack
country (the United States) and also emerging accounting,” The Economist, May 11, 2006; “Shocking tell-all book takes aim
at Ikea,” Bloomberg Businessweek, November 12, 2009; Peng, M. (2009),
economies (i.e., China and Russia) are the fastest- Global Strategy, 2nd ed. (Mason, OH: South-Western Cengage); “The secret
growing international markets for IKEA? Does this of IKEA’s success,” The Economist, February 24, 2011; “IKEA to accelerate
expansion,” The Wall Street Journal, September 18, 2012; “Ingvar Kamprad
fact pose any challenges in the way IKEA ought to steps back,” The Economist, June 5, 2013; and various IKEA Yearly Sum-
compete across the globe? Why or why not? maries ([Link]).
Competing on Business Models:
Google vs. Microsoft

RIVALS OFTEN USE different business models to com- in the value of a product or service as more people use
pete with one another. Due to competitive dynamics and it. Google can charge advertisers for highly targeted and
industry convergence, Google and Microsoft pro- effective ads, allowing it to subsidize other prod- uct
gressively move on to the other’s turf. In many areas, offerings that compete directly with Microsoft.
Google and Microsoft are now direct competitors. In As indicated by the opposing arrows in Exhibit
2012, Microsoft had $73 billion in revenues and Google MC9.1, Microsoft’s business model is almost the
$50 billion. Although Google started out as an online reverse of Google’s. Initially, Microsoft focused on
search and advertising company, it now offers software creating a large installed base of users for its PC
applications (Google Docs, word processing, operating system (Windows). It holds some 90 percent
spreadsheet programs, e-mail, interactive calendars, market share in operating system software for
and presentation software) and operating systems personal computers worldwide. As shown in Exhibit
(Chrome OS for the Web; Android for mobile appli- MC9.3, roughly 50 percent of Microsoft’s rev- enues
cations), among many other online products and ser- are based on the Windows franchise. Moreover, the
vices. In contrast, Microsoft began its life by offering users are locked into a Microsoft operating system
an operating system (since 1985, called Windows), then (which generally comes preloaded with the computer
moved into software applications with its Office Suite, they purchased), and then want to buy applications that
and into online search and advertising with Bing, as run seamlessly with the operating system. The obvious
well as online gaming with Xbox One. The stage is set choice for most users is Microsoft’s Office Suite
for a clash of the technology titans. (containing Word, Excel, PowerPoint, Outlook, and
In competing with each other, Google and Micro- Access), but they need to pay several hundred dollars
soft pursue very different business models, as detailed for the latest version. This application soft- ware
in Exhibit MC9.1.1 Google offers its applications segment (called “Microsoft Business Division,” see
software Google Docs for free to induce and retain as Exhibit MC9.3) contributes roughly one-third of
many users as possible for its search engine. Although Microsoft’s total revenues. This implies that over 80
Google’s flagship search engine is free for the end user, percent of Microsoft’s revenues are either tied directly
Google makes money from sponsored links by or indirectly to its Windows franchise.
advertisers. The advertisers pay for the placement of As shown in Exhibit MC9.1, Microsoft uses the
their ad on the results pages and every time a user clicks profits from its application software business to sub-
through an ad (which Google calls a “sponsored link”). sidize its search engine Bing, which is—just like
Many billions of mini-transactions like this add up to Google’s—a free product offering for the end user.
a substantial business. As shown in Exhibit MC9.2, Given Bing’s relatively small market share, however,
advertising revenues account for close to 90 percent of and the tremendous cost in developing the search
Google’s total revenues.
As indicated in Exhibit MC9.1, Google uses part
Frank T. Rothaermel prepared this MiniCase from public sources. It is devel-
of the profits earned from its lucrative online advertis- oped for the purpose of class discussion. It is not intended to be used for
ing business to subsidize Google Docs. Giving away any kind of endorsement, source of data, or depiction of efficient or inef-
ficient management. All opinions expressed, and all errors and omissions, are
products and services to induce widespread use allows entirely the author’s. The author is grateful for research assistance by Vivek
Google to benefit from network effects—the increase Viswanathan (GT MBA and MSc.). © Rothaermel, 2014.

424
 MINICASE 9 Competing on Business Models: Google vs. Microsoft 425

EXHIBIT MC9.1 / Competing Business Models: Google vs. Microsoft

Medium High Free for User

Cost for Cost for (Loss Leader)
OEMs Users
Windows Office Suite Bing

Microsoft

Google

Chrome OS Google Google

& Android Docs

Free for User Free for User Free for User,

High Cost for
Advertisers

search. The logic behind Google Docs is to

Business Segment, 2009–2012 create a threat to Microsoft’s dominant posi-
tion in application software. Moreover, the
Revenues computing industry is undergoing a shift away
($ in millions) 2012 2011 2010 2009 from personal computers to mobile devices.
Although Microsoft set the standard and
Google Websites $31,221 $26,145 $19,444 $15,723
dominates the industry with Windows, Google
Google Network 12,465 10,386 8,792 7,166 holds some 75 percent market share in mobile
Members’ Websites operating systems software with Android,
Total Advertising 43,686 36,531 28,236 22,889 while Microsoft’s market share is less than 5
Revenues percent. These tactics create multipoint com-
Other Revenues 2,354 1,374 1,085 762 petition between the two technology firms.2
Total Google 46,040 37,905 29,321 23,651 Taken together, Google and Microsoft com-
Revenues pete with one another for market share in sev-
Total Motorola 4,136 NA NA NA eral different product categories through quite
Mobile Revenues different business models.
Total Consolidated 50,175 37,905 29,321 23,651
Revenues DISCUSSION QUESTIONS
Review Chapter 5: Competitive Advantage,
Firm Performance, and Business Models.
1. How is a strategy different from a business
model? How is it similar?
engine, Microsoft, unlike Google, does not make any
2. Why are Microsoft and Google becoming
money from its online search offering; rather, it is a big
increasingly direct competitors?
money loser.
The logic behind Bing is to provide a countervail-
ing power to Google’s dominant position in online
426 MINICASE 9 Competing on Business Models: Google vs. Microsoft

EXHIBIT MC9.3 / Breakdown of Microsoft’s Revenues by Business Segment, 2009–2012

Revenues ($ in millions) 2012 2011 2010 2009

Windows and Windows Live Division $18,373 $19,033 $19,491 $14,712

Server and Tools (Windows) 18,686 16,680 15,109 14,126
Online Services Division 2,867 2,607 2,294 3,088
Microsoft Business Division 23,991 22,514 19,256 18,894
Entertainment and Devices Division 9,593 8,915 6,079 7,753
Unallocated and Other 213 194 255 145
Total Consolidated Revenues 73,723 69,943 62,484 58,718

Works, and Shapes Our Lives (New York: Simon & Schuster); Adner,
R. (2012), The Wide Lens. A New Strategy for Innovation (New York:
Portfolio); and “The quest for a third mobile platform,” The Wall Street
1. What recommendations would you give to the CEO Journal, May 6, 2013.
of Microsoft to compete more effectively against 2. Chen, M. J. (1996), “Competitor analysis and interfirm rivalry:
Toward a theoretical integration,” Academy of Management Review
Google?
21: 100–134; Gimeno, J. (1999), “Reciprocal threats in multimar-
2. What recommendations would you give to the CEO ket rivalry: Staking out ‘spheres of influence’ in the U.S. airline
industry,” Strategic Management Journal 20: 101–128; and Gimeno,
of Google to compete more effectively against
J., and C. Y. Woo (1999), “Multimarket competition, economies of
Google? scale, and firm performance,” Academy of Management Journal 42:
239–259.
Endnotes
1. Anderson, C. (2009), Free: The Future of a Radical Price (New
York: Hyperion); Levy, S. (2011), In the Plex: How Google Thinks,
China’s Li Ning Challenges Nike and adidas

ALMOST EVERYONE IN CHINA knows Li Ning Com- just behind Nike (Exhibit MC11.2). Fueled by seem-
pany Ltd. The eponymous sportswear company was ingly unstoppable success, Li Ning began to expand
founded in 1990 by former star gymnast Li Ning, in Southeast Asia. In a brazen move, Li Ning even
who won six medals (including three golds) at the 1984 opened a specialty store across the Pacific in Portland,
Los Angeles Olympics. Riding on the fame of its Oregon, the hometown of Nike.
founder, Li Ning quickly became the largest and best- Li Ning soon found that its local Chinese competi-
known Chinese sportswear company. In parallel with tors were pursuing a similar expansion strategy. To
China’s incredible economic rise, Li Ning did make matters worse, even Nike and adidas joined the
exceptionally well. fray to compete aggressively in second- and third-tier
The company decided that the 2008 Olympics in cities. This was a departure from the usual business
Beijing would mark the beginning of overtaking the model where the two world leaders would focus on
world leaders in sports shoes and apparel, Nike and high-end markets such as Shanghai and Beijing. As the
adidas. This would happen first in the Chinese market post-Olympic shopping enthusiasm gradually faded,
and then globally. To symbolize the company rise, its competition further intensified. Realizing that the
founder Li Ning, still a popular folk hero, was chosen expansion-fueled growth was not sustainable, Li Ning
to light the Olympic flame during the Beijing open- ing began fine-tuning its business model: consoli- dating
ceremonies. With its home turf advantage, every- thing distributors, upgrading product offerings, and focusing
seemed to be going in Li Ning’s favor. In March 2013, on serving higher-end markets and younger consumers.
however, Li Ning shocked the business world by Li Ning even changed its logo and slo- gan to promote
announcing a worse-than-expected annual loss of the new image. Almost overnight, Li Ning’s brand
$315 million. This was Li Ning’s first ever loss since marketing campaign swept China’s air- waves, towns,
going public in 2004. Just two years earlier in 2010, Li and cities.
Ning reported an all-time-high revenue of $1.5 billion, Despite its best marketing efforts, Li Ning’s inven-
with $182.3 million in net income. What happened? tory kept piling up. Against the backdrop of declin- ing
Li Ning’s strategic intent had been from the very sales, Li Ning’s cash flow soon drained. Given its
beginning to overtake Nike and adidas. The Beijing financial squeeze, Li Ning had to raise funds from a
Olympics were to be the turning point in this “epic private equity group and the Government of Singapore
battle” for market dominance. In anticipation of the Investment Corporation. This led to a shake-up of Li
enormous business opportunities that would come with Ning’s board of directors, which subsequently put a
the 2008 Beijing Olympics, Li Ning pushed its new top management team in place. The top priority of
penetration into China’s second- and third-tier cit- the new management was to tackle Li Ning’s inven-
ies via aggressive channel expansion through its dis- tory problems. Its management took several drastic
tributors, adding almost 1,000 stores a year (Exhibit steps to revive the sales channel by freeing up distrib-
MC11.1). In 2008 and 2009 alone, more than 80 per- utors’ cash flows for introducing new products. Dis-
cent of the new stores were opened in China’s second- tributors were further consolidated and Li Ning added
and third-tier cities.
Frank T. Rothaermel and Carrie Yang (GT MBA, MSc.) prepared this Mini-
China’s rapid urbanization and the post-Olympics Case from public sources. It is developed for the purpose of class discussion.
effects echoed Li Ning’s vision: from 2005 to 2010, Li It is not intended to be used for any kind of endorsement, source of data, or
depiction of efficient or inefficient management. All opinions expressed, and
Ning tripled its revenue and seemed to be overtaking all errors and omissions, are entirely the authors’. © Rothaermel and Yang,
adidas to become number two in the Chinese market, 2014.

429
430 MINICASE 11 China’s Li Ning Challenges Nike and adidas

EXHIBIT MC11.1 / Li Ning’s Financials, 2005–2012 ($ figures in millions)

SOURCE: Li Ning’s Annual Reports; financial data are converted from Chinese RMB to U.S. dollars.

2005 2006 2007 2008 2009 2010 2011 2012

Total stores at year-end 3,373 4,297 5,233 6,245 7,249 7,915 8,255 6,434
YoY store change 751 924 936 1,012 1,004 666 340 21,821
Revenue $395 $512 $700 $1,077 $1,351 $1,526 $1,438 $1,085
YoY revenue growth 30% 30% 37% 54% 25% 13% 26% 225%
Operating profit $44 $65 $98 $155 $216 $249 $102 2$256
Net income $30 $48 $76 $117 $156 $182 $66 2$315
Gross profit margin 47% 47% 48% 48% 47% 47% 46% 38%
Operating profit margin 11% 13% 14% 14% 16% 16% 7% 224%
Average inventory turnover (days) 86 70 70 61 53 52 73 90
Average receivable turnover (days) 44 55 53 48 47 52 76 93
Average payable turnover (days) 68 67 69 69 70 71 97 112

more factory outlets and discount stores to speed up based on their own judgment of retail demand six
inventory clearance. All stores underwent careful per- months ahead at quarterly trade fairs, and so Li Ning
formance evaluation. Eventually, Li Ning closed 1,821 would arrange production, deliveries, and marketing
underperforming stores. campaigns. Under the new plan, Li Ning introduced
In addition, Li Ning started implementing a trans- “A1” Stock Keeping Units (SKUs), as well as cus-
formation plan to gradually shift away from the dis- tomer group–specific SKUs, helping distributors make
tributor-driven business model to a market-oriented sound ordering decisions. Once these SKUs hit the
one. In the past, Li Ning’s distributors made orders stores, Li Ning would collect and monitor

EXHIBIT MC11.2 / China’s Sportswear Market Share by Brand Owner

SOURCE: Authors’ depiction of data from “Li Ning scaling back after 2012 loss,” The Wall Street Journal, March 27, 2013.

14%

12%
Nike

10%
adidas

8%
Li Ning

6%

4%
2007 2008 2009 2010 2011 2012
 MINICASE 11 China’s Li Ning Challenges Nike and adidas 431

real-time sales data and make inventory adjustments sportswear business, which is estimated to grow at 15
accordingly. Li Ning launched fast-response products to 20 percent for the next three years. In contrast, Li
that could easily be ordered in between trade fairs in Ning is in deep downsizing mode: stores, distributors,
response to changes in market trends. It also rede- and business segments are all up to be cut in 2013. Its
signed product lines and changed pricing based on proud Portland venture and other overseas stores are
the needs of its target customers, which had not been long gone, and the company is now refocusing on the
clearly defined before. Chinese market only.
The new management team at Li Ning believed that
there was a big market between the higher-end Nike and DISCUSSION QUESTIONS
adidas, on the one hand, and most of the low-end local
brands, on the other. New products with a wider price
range would be launched to capture the consumer in the 1. At the close of the case, why was Li Ning experi-
“middle.” Li Ning’s transformation is nonethe- less encing a competitive disadvantage?
costly: revenue in 2012 declined by a whopping 25
percent to $1 billion (versus $26 billion for Nike and 2. What are the strategic positions of Nike, adidas,
$20 billion for adidas). Li Ning’s market share ranking and Li Ning? Do you see a link between
in China has dropped to number four from number three strategic position and firm performance? If so,
(now held by a local competitor, Anta). To avoid what explains that link?
bankruptcy, Li Ning had to ask for another round of 3. Why is it so difficult for Li Ning to challenge Nike
liquidity injection by its recent backers. and adidas even in China? Would you expect that
Li Ning’s problem of overexpansion is not unique. the Chinese consumer would be more loyal to a
Slowing sales and high inventories have burdened other Chinese brand? What moves could the company
sportswear brands in China, including Nike and adidas. make that would build customer loyalty? What
The two global brands have gained back their market recommendations would you give Li Ning to
shares, presumably at Li Ning’s expense. Nike and achieve a successful turnaround? Explain.
adidas were faster in responding to changes in the
market environment. They also further differentiated Sources: This MiniCase is based on Li Ning’s Annual Reports, 2004–2012;
themselves from the pack through continued innova- “Nike, adidas readjust marketing strategy,” China Daily, August 30, 2010; “A
year of rebuilding for China’s Li Ning,” The Wall Street Journal, Decem- ber
tion and sophisticated marketing. For example, adidas 2, 2012; “China’s sportswear brands nurse Olympics hangover,” China Daily,
introduced fashionable sportswear such as high-heeled July 2, 2012; “Nike notes: Weak China results part of broader strat- egy,”
Portland Business Journal, December 20, 2012; “Li Ning stumbles over costly
sports shoes in China. makeover plan,” South China Morning Post, January 26, 2013; “Nike soars
The only sportswear brand in China to post posi- tive but China is its Achilles heel,” Financial Times, March 21, 2013; “Li Ning
scaling back after 2012 loss,” The Wall Street Journal, March 27, 2013;
growth in 2012 was adidas, and it seems best positioned “adidas sportswear is hot on Nike’s heels in China,” The Wall Street Journal,
to gain from the country’s $24 billion March 7, 2013.
The Rise of Samsung Electronics

IN 2012, SAMSUNG, with $248 billion in revenues, was chairman, Mr. Lee, sent out mobile phones as New
one of the largest conglomerates globally and the largest Year’s gifts to hundreds of key business partners. A
chaebol1 in South Korea. A rough compari- son would public embarrassment occurred when Mr. Lee later
be the U.S. conglomerate General Elec- tric, which had learned that the phones he had send out as personal gifts
$147 billion in revenues in the same year. Established didn’t work properly. Mr. Lee ordered drastic changes.
in 1938 by Lee Byung-chul as a trading company In front of Samsung’s Gami factory with 2,000
selling noodles and dried seafood, Samsung has since employees watching, Mr. Lee set fire to a pile of
diversified into various industries, such as electronics, 150,000 mobile phones to show his disappointment and
chemicals, shipbuilding, financial services, and determination alike. Many Samsung employ- ees
construction. In particular, Samsung is widely credit this day as the beginning of a successful
diversified with 83 standalone subsidiaries. The turnaround.
conglomerate accounts for a fifth of all South Korean Samsung Electronics increased spending signifi-
exports. In 1987, Lee Kun-hee, the youngest son of the cantly on R&D as well as on marketing and design.
founder, took over as chairman of the con- glomerate Meanwhile, Mr. Lee was undertaking a complete
after the death of Lee Byung-chul. By that time, overhaul of the conglomerate’s structure in order to
Samsung had become an industry leader in many of its change Samsung’s culture. To a culture that deeply
markets. values seniority, Mr. Lee introduced merit-based pay
Samsung Electronics, the flagship subsidiary of and promotion. Mr. Lee (who holds an MBA degree
Samsung (and best known in the U.S. for its Galaxy line from George Washington University) hired Western
of smartphones and tablets), was initially set up in managers and designers into leading positions and
1969 to produce home appliances. In 1988, Lee Kun- sent home-grown talent to learn the best business
hee merged Samsung Electronics with Samsung practices of other firms around the globe. Mr. Lee also
Semiconductors to integrate manufacturing. By 1992, it set up the Global Strategic Group to assist non-Korean
had become the worldwide market leader in DRAM MBAs and PhDs with a smooth transition into their
(dynamic random access memory). Samsung Elec- positions in a largely homogenous cadre of employees.
tronics, however, aspired to be more than a leading Mr. Lee appointed a new CEO for Samsung Elec-
supplier and OEM (original equipment manufacturer). tronics in 1996, Yun Jong-Yong. Mr. Yun aggressively
Its strategic intent was to be the leader in branded con- trimmed costs and sold off unproductive assets during
sumer electronics. the Asian Financial Crisis in 1997, making the com-
Samsung’s image, however, was overshadowed by pany leaner and more agile. Subsequently, through
Sony and Motorola, the undisputed world leaders in improved operational efficiency and an integrated
consumer electronics and mobile phones during this manufacturing process, Samsung Electronics short-
time. In 1988, Samsung Electronics launched its first ened the time needed to respond quickly to changes in
mobile phone in the South Korean market. It flopped market trends. It chose to be a fast follower, investing
because of the phone’s poor quality. In the early 1990s, only after a new product category had proven market
Samsung Electronics’ market share in mobile phones in
Frank T. Rothaermel and Carrie Yang (GT MBA, MSc.) prepared this
South Korea was a mere 10 percent compared to MiniCase from public sources. It is developed for the purpose of class discus-
Motorola’s 60 percent. sion. It is not intended to be used for any kind of endorsement, source of data,
or depiction of efficient or inefficient management. All opinions expressed,
The pivotal moment in redefining Samsung Elec- and all errors and omissions, are entirely the authors’. © Rothaermel and
tronics’ strategic focus came in early 1995. Samsung’s Yang, 2014.
438 MINICASE 14 The Rise of Samsung Electronics

traction. Once such categories were identified, how- difficult for a number of reasons. First, Samsung’s
ever, Samsung vastly outspent competitors in order to competitive advantage was built in large part by fol-
develop leading electronics products. For example, the lowing its “follow first, innovate second” rule. To keep
company started making batteries for digital gadgets in its number-one spot in the world’s technology indus- try
2000. Ten years later, it became the world’s largest may be a challenge for a company that intends to be a
producer of this critical component. In 2001, Samsung follower rather than a leader. Second, Chinese
started to invest in flat-panel televisions. Just four years technology companies such as Lenovo and Huawei are
later, Samsung was the world’s leader in flat- panel also looking to join the battlefield in smartphones.
TVs. In 2002, Samsung Electronics bet on flash Third, Apple and Samsung have been locked in ongo-
memory, the technology that runs Apple’s iPads and ing court battles about who infringed the copyrights of
iPhones. Providing not only batteries but also flash whom and in what type of smartphone models. Sam-
memory, Samsung is Apple’s largest supplier today. sung has already lost a high-profile case against Apple
Samsung Electronics applied the same “follow first, in a California court, where damages were reduced later
innovate second” rule to smartphones. Being a key com- to some $500 million.
ponent vendor to other leading technology companies To provide new avenues for future revenue growth,
including Apple, Samsung was able to see easily what chairman Lee laid out five new business areas in which
directions other companies were taking. It made a range Samsung plans to invest some $20 billion by 2020. The
of smartphones tailored to customers in different price five areas include (in order of size of invest- ment): LED
categories. Within two short years, it had overtaken lighting, solar panels, e-vehicle batteries, biotech drugs,
Motorola, HTC, BlackBerry, and eventually even Apple and medical devices.
to become the number-one vendor of smartphones in Succession planning is another challenge Sam- sung
the world and the largest technology company by rev- is facing. The family of the late founder, Lee Byung-
enues globally (see Exhibits MC14.1 and MC14.2). Chul, still controls a majority of the shares. At 71,
Although Samsung has gained a temporary com- Lee Kun-hee has long-groomed his eldest son Jay Y.
petitive advantage, sustaining it will be even more Lee (43) to be his successor as chairman of

EXHIBIT MC14.1 / Global Smartphone Shipment by Vendor (2009–2012, in millions)

SOURCE: Authors’ depiction of data from “How Samsung’s rise is reshaping the mobile ecosystem,” Business Insider, March 14, 2013.

70

60
Samsung
50

40
Apple
30

20 BlackBerry
HTC
10 Motorola

0
 MINICASE 14 The Rise of Samsung Electronics 439

EXHIBIT MC14.2 / Samsung Electronics’ Revenues (left vertical axis) and Operating Profits (right vertical axis),
in $ billions, 1997–2012
SOURCE: Authors’ depiction of data from Samsung’s Annual Reports, 2008–2012.

$200 $30

$160 $24

$120 $18

$80 $12

$40 $6

$0 $0
97 98 99 00 01 02 03 04 05 06 07 08 09 10 11 12

Samsung. It remains to be seen whether the younger Mr. 3. What type of global strategy is Samsung Electron-
Lee, as grandson of the founder, can maintain ics pursuing?
Samsung’s momentum. 4. What can Samsung Electronics do to sustain its
competitive advantage in smartphones? Should
DISCUSSION QUESTIONS Samsung change its “follow first, innovate second”
approach as it seeks to build a competitive position
in new product areas other than smartphones?

1. Describe Samsung as a conglomerate. What type of

diversification does Samsung pursue? Identify Endnote
possible factors such as core competencies, econo- 1. A chaebol denotes a South Korean multinational business
conglomerate.
mies of scale, and economies of scope that might
underlie its success as a diversified conglomerate
Sources: This MiniCase is based on Khanna, T., J. Song, and K. Lee (2011),
(chaebol). Which do you consider its key success “The paradox of Samsung’s rise,” Harvard Business Review, July–August;
factors? “Samsung: the next big bet,” The Economist, October 1, 2011; “Samsung and
its attractions: Asia’s new model company,” The Economist, October 1, 2011;
2. How did Mr. Lee turn Samsung Electronics from a “Faster, higher, stronger: the rise and rise of Samsung,” The Sydney Morn-
ing Herald, August 13, 2012; “The rise of Samsung and how it is reshap- ing
sleeping and bureaucratic company into a world ecosystem,” Business Insider, March 14, 2013; “How Samsung got big,”
leader? TechCrunch, June 1, 2013; various Samsung Annual Reports.