On the trajectory of successful companies

Samsung Electronics warned Tuesday that its third-quarter earnings would fall below market expectations. It did not cite a decrease in shipments but an increase in marketing expenses coupled with an unfavorable mix (i.e. more low-end units and fewer high-end units).

The headlines reporting the news emphasized the 60% forecast drop in operating income but the company also provided sales figures. Adjusting for exchange rates, the forecast revenues are shown in the following diagram:

Note that I also included Apple’s revenue history and forecast. Samsung’s revenues are shown on the right and Apple’s on the left using the same scale (each horizontal gridline represents $10 billion/quarter.

The explicit cause for the drop is a decline in prices and “increased competition”.1 However a few more questions need to be answered regarding long-term success in the markets Samsung competes in.

Namely:

• The absence of a software platform fully within its control
• The absence of control over an ecosystem of content and apps
• The absence of services
• The lack of integration of software, services and hardware
• The absence of differentiation vis-a-vis other vendors
• The indefensibility of its low end offerings from low end disruptors
• The pattern of commoditization in all its markets

Samsung is a very big company but many very big companies came to become small companies. They all followed similar roads.

1. Though one can’t be sure when there was ever decreased competition in its markets. [↩]