This is a year of cataclysmic shake-ups at Samsung Group, South Korea's No. 1 chaebol, or family-controlled conglomerate. Its chairman of two decades, Lee Kun-hee, and other senior executives, including Lee's son and heir apparent, resigned amid a scandal that seized nationwide atttention. But more quietly behind the scenes, business strategy and culture at Samsung Electronics, the crown jewel of corporate Korea, is shifting, too.
Take Samsung's cell phone business. The brand was known for pouring in loads of money and overworking engineers to crank out a plethora of high-end models. Since taking over the telecoms division last January, Choi Gee-sung, 57, has pushed the company to pump out low-end phones, investing in marketing and grabbing market share in emerging markets. This may prove a savvy, well-timed strategy, given the challenges of a global economic downturn.
Under predecessor Lee Ki-tae, Samsung Electronics (other-otc: SSNLF - news - people ) focused on pricey phones and crammed features onto them. Samsung was "focusing too much on cutting-edge technology, putting a lot of functions on the phone," said Peter Yu, a Seoul-based analyst for BNP Paribas. "Samsung phones were getting fatter and uglier," while competitors released sleeker, smaller phones.
But Choi, who previously ran Samsung's digital media business, was interested in something cheaper. "He has been trying to expand Samsung's handset business from high-end to low-end," said Seoul-based analyst Lee Min-hee at Dongbu Securities. Low-end phones, those retailing for less than $100, have become the biggest segment of Samsung's handset shipments, accounting for 40% of 46.4 million units sold in the second quarter, according to Yu.
The new focus has meant revamping three business strategies. First, low-end phones require lower-cost production. The company needs to produce more cheaply, which entails shifting production to China or Vietnam--despite South Korea's global reputation for economic nationalism. "Samsung is trying to increase its outsourcing of supply from local to overseas," Lee Min-hee said. Samsung does not disclose percentages of cell phone parts sourced to domestic versus overseas suppliers. "It's inevitable to relocate to China. It's the floor, the worldwide floor," Lee said, adding that other cell phone makers like Nokia (nyse: NOK - news - people ) and Motorola (nyse: MOT - news - people ) have done the same.
Second, it must sell much more of each model, to make up for the lower profit margins. Samsung "previously had too many models," said Yu. Now "they're selling far more volume per model." This entails investing heavily in marketing rather than competing on phone features. "Previously, the mentality was 'we make a good product,'" so Samsung let the phone speak for itself, Yu remarked. But Choi is "more of a marketing-driven kind of guy. Now they're really pushing out a product."
Finally, the company is trying to focus on emerging markets, where many people still do not have phones and can only afford low-end models. "Take China, for example, where an estimated 500 million people still do not own a phone. It's a similar story in India. Samsung has been taking share in both countries," noted Robert Lea, a Seoul-based semiconductor analyst for UBS.
The reorientation is a sound bet, given the likelihood of a global economic slowdown. "High-end phones are tougher these days," Yu said, adding that competitors like Motorola are moving aggressively into low-end phones for emerging markets as well.
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