Looking to reduce costs, Samsung will remove between twenty-five percent and thirty percent of its smartphone portfolio during 2015. The South Korean company is also looking to increase operating profits back above ten percent through the rationalisation of the product line, and the accompanying drop in the bill of materials due to the increased economy of sale of shared parts.
News on the cutbacks came from Robert Yi, head of Investor Relations, at a presentation in New York (reports The Wall Street Journal).
It's a smart move, and one which will addresses the increasing logistical cost that Samsung's smartphone strategy is racking up. That said, I don't feel that it gets to the heart of Samsung's underlying issue that is impacting on the financial performance of the company. Unless Samsung can once more make its handsets attractive to the consumers so they sell, it doesn't matter how many or few models there are on the shelf.
At its heart, Samsung can be seen as a fast follower company. When ideas come to market from a competitor, Samsung can react quickly to build and ship its own version of the technology, be it hardware or software. Because of the company's size, it has the ability put significant resources into marketing and advertising, while leveraging its own extensive supply chain and distribution network.
The rapid explosion of smartphones over the last five years has played well with this methodology. It is one of Samsung's key strengths, and the company has clearly reaped the benefits in market share, income, and profits. The issue is that there is now no technological leap to be made in hardware. Every mature mobile platform and manufacturer displays roughly the same level of hardware specification, software functionality, and basic user interface elements.
The smartphones that will have an impact in 2015 will occupy two specific areas. The first is at the high-end, with luxurious design cues, styling, and an almost absurd attention to detail. The second is in the volume game, where profit is derived from a mix of aggressive sales of low-cost and low-margin devices.
The launch of the Samsung Galaxy Alpha earlier this year could be seen as a move to focus on style and design. The handset certainly looks the part of a high-end smartphone, although there are many echoes of both the iPhone 5's, and the Galaxy S2's, design in the metallic chassis. This message of luxurious materials was firstly dampened by a hardware specification that was less powerful than the Galaxy S5, and then weakened by the announcement of the mid-range and low-range Galaxy A5 and A3 handsets which brought the high-end design into the lower reaches of the portfolio.
Yi's statement indicates that Samsung believes its future will be driven by the second area. A reduced portfolio focusing on shared parts should reduce the bill of materials all round, and allow the marketing team to produce a more focused message across the reduced portfolio.
If this is the case, Samsung is going to reach a decision point in the very near future. Does it want to prioritize market share, or does it want to prioritize profit? It's going to be very difficult to maintain both of these as goals. In trying to do so during 2014, Samsung has failed on both. Profits in Q3 2014 were down 59.65% year on year. While shipments are only marginally up, official sales figures have yet to be reported. Looking at historical trends of Samsung's shipments vs sales, it's very likely that sales are down as well.
Reducing the number of devices in the portfolio and relying on the economy of scale to reduce the operation costs is a short-term financial manoeuvre that cannot be repeated each year. Samsung needs to do something many believe is not present in the Galaxy range of smartphones, phablets, and tablets. It needs to show true innovation. It needs to find something unique and appealing that will allow the company to be seen as a leader, rather than a follower.
Samsung needs to step up to the plate and show that it can think on its feet and deliver a vision of a smartphone that is uniquely Samsung, and it needs to be a vision that others can agree with and wish to be involved with.
Samsung needs to show some innovation, to disrupt itself, and to bring something new and exciting to the table. This strategy makes a lot of sense if Samsung has something spectacular for 2015, perhaps with a view to an unveiling around the time of the Mobile World Congress in the middle of February.
I hope it does. At the moment this new strategy feels like 'cheaper for us to make, with less choice for customers'. There needs to be more, and it needs to be soon, or Samsung will slide away from the number one post in the same way as Nokia, Blackberry, Sony Ericsson, Palm, and countless others have done before.
