Samsung has wowed the tech industry the last three years with it’s shotgun approach to revenue growth. In the time that the tech media has been discussing whether or not Apple would even debut a smartwatch, Samsung brought at least two different models to market. There’s nothing inherently wrong with that approach if you don’t mind spending the money. It can be effective. That’s kind of like buying your wife a red, black, and white Mustang for her birthday because you’re not sure which color she’s going to like. If you don’t mind blowing the cash, hey, it’s your money. But Samsung wowed the tech industry last week for all the wrong reasons. With Samsung Mobile’s profit falling 74% year over year, everybody could see that something has gone drastically wrong.
How could something like this happen? Shouldn’t Samsung’s executive leadership have seen this coming? I think the answer lies in the way that most corporations review their monthly, quarterly, or annual results. And it’s a problem that is not unique to Samsung. It’s a system that has gone global over the last twenty years and one of it’s downsides can lead to unexpected surprises.
I’ve worked with two corporations in the last twenty years that have contracted Toyota manufacturing consultants to help implement lean manufacturing systems. I’m a big believer in the Toyota method and I’m in good company since most successful companies in the world have internalized parts of it. But the problem lies not with the manufacturing part as much as the financial review, aka policy deployment review.
The Toyota method stresses that you have limited time and money so you can’t afford to attack everything at once. You must use data analysis to help you focus where your attention is needed the most. In manufacturing slang we used the phrase “Pareto it and kill it”, meaning you attack your top defects as defined by scientific data gathering.
So how does this lead to corporate executives getting blindsided by a huge drop in profitability? Boards, CEO’s, and VP’s are all busy people who request a top down approach to financial reviews in the interest of time. When they look at profitability by category, they see rolled up results from many different products. As long as revenue and margins are strong, they probably won’t delve too deep. And subordinates generally don’t volunteer information that is unflattering to their competence unless they know it’s going to come out eventually anyway. So if you have an environment where a few products are generating enormous revenue and margin gains, all the low volume “dogs” can remain comfortably hidden. Yet all the while, sucking money out the window in the form of tooling costs, high prototype material pricing, engineering time, etc. The CEO may see a pretty graph that shows gross margin was up 30% but never realize that if it wasn’t for all the dogs it would have been up 50%.
And since the Toyota method has ingrained the principle of focusing on the problems area’s, executives will generally jump to the divisions showing the least growth. Those guys will be given excruciating interrogations where they are asked for detailed income statements for each and every product , budget vs actual variance explanations, 30, 60, and 90 day action plans to improve performance, and on and on. While the other divisions listen, grateful that they’re not the ones getting hammered.
So now that Samsung Mobile is going to get the full anal review it is going to be VERY interesting to see what happens. Samsung chairman Lee Kun-hee was already said to be paranoid about financial instability during the best of times. They’ve got to be in full-on panic mode right now. This is where the light of day will start to shine on all those low volume pet projects that were getting subsidized by the high volume runners. The questions will be fast and furious. Who authorized another smartwatch three months later? How much is that curved secondary screen that nobody wants costing us? Why did you authorize a new SOC to go into production when the previous one had only made it to month six?
I’m going to predict a new, back to the basics Samsung will emerge from this. One in which the time trusted cost to benefit analysis is done prior to spending significant money. A Samsung that tries to squeeze value out of parts by going multi-platform. A Samsung that starts looking at product gross margins on a deeper level as opposed to just category. A Samsung that lets models sit on the market a little longer, earning their return. Basic blocking and tackling.
Samsung's wild product days of 2011 to 2014 are coming to an end and I'm glad I got a chance to see it. Because something tells me it's going to be a while before we see something like this happen again.
How could something like this happen? Shouldn’t Samsung’s executive leadership have seen this coming? I think the answer lies in the way that most corporations review their monthly, quarterly, or annual results. And it’s a problem that is not unique to Samsung. It’s a system that has gone global over the last twenty years and one of it’s downsides can lead to unexpected surprises.
I’ve worked with two corporations in the last twenty years that have contracted Toyota manufacturing consultants to help implement lean manufacturing systems. I’m a big believer in the Toyota method and I’m in good company since most successful companies in the world have internalized parts of it. But the problem lies not with the manufacturing part as much as the financial review, aka policy deployment review.
The Toyota method stresses that you have limited time and money so you can’t afford to attack everything at once. You must use data analysis to help you focus where your attention is needed the most. In manufacturing slang we used the phrase “Pareto it and kill it”, meaning you attack your top defects as defined by scientific data gathering.
So how does this lead to corporate executives getting blindsided by a huge drop in profitability? Boards, CEO’s, and VP’s are all busy people who request a top down approach to financial reviews in the interest of time. When they look at profitability by category, they see rolled up results from many different products. As long as revenue and margins are strong, they probably won’t delve too deep. And subordinates generally don’t volunteer information that is unflattering to their competence unless they know it’s going to come out eventually anyway. So if you have an environment where a few products are generating enormous revenue and margin gains, all the low volume “dogs” can remain comfortably hidden. Yet all the while, sucking money out the window in the form of tooling costs, high prototype material pricing, engineering time, etc. The CEO may see a pretty graph that shows gross margin was up 30% but never realize that if it wasn’t for all the dogs it would have been up 50%.
And since the Toyota method has ingrained the principle of focusing on the problems area’s, executives will generally jump to the divisions showing the least growth. Those guys will be given excruciating interrogations where they are asked for detailed income statements for each and every product , budget vs actual variance explanations, 30, 60, and 90 day action plans to improve performance, and on and on. While the other divisions listen, grateful that they’re not the ones getting hammered.
So now that Samsung Mobile is going to get the full anal review it is going to be VERY interesting to see what happens. Samsung chairman Lee Kun-hee was already said to be paranoid about financial instability during the best of times. They’ve got to be in full-on panic mode right now. This is where the light of day will start to shine on all those low volume pet projects that were getting subsidized by the high volume runners. The questions will be fast and furious. Who authorized another smartwatch three months later? How much is that curved secondary screen that nobody wants costing us? Why did you authorize a new SOC to go into production when the previous one had only made it to month six?
I’m going to predict a new, back to the basics Samsung will emerge from this. One in which the time trusted cost to benefit analysis is done prior to spending significant money. A Samsung that tries to squeeze value out of parts by going multi-platform. A Samsung that starts looking at product gross margins on a deeper level as opposed to just category. A Samsung that lets models sit on the market a little longer, earning their return. Basic blocking and tackling.
Samsung's wild product days of 2011 to 2014 are coming to an end and I'm glad I got a chance to see it. Because something tells me it's going to be a while before we see something like this happen again.
RSS Feed