South Korean giant Samsung (NASDAQOTH:SSNLF) has been on the mobile ropes of late. The company's all-important mobile division saw operating profit plunge by 74% last quarter, and now Samsung has vowed to trim its product portfolio in an effort to cut costs.
A new article from The Wall Street Journal underscores the severity of Samsung's mobile predicament.
A tale of three CEOs
Samsung is reportedly thinking about shaking up its executive leadership team, which could even include demoting one of its three co-CEOs, J.K. Shin. Co-CEO B.K. Yoon could take over mobile responsibilities in addition to the TV and home appliance segments, The Wall Street Journal reported.
With the Internet of Things starting to take off, consolidating these divisions under one executive makes sense considering potential overlap of technologies and components. Yoon approved Samsung's recent acquisition of SmartThings, a small start-up that specializes in providing an IoT platform for connected appliances -- a platform that will compete with Apple's HomeKit.
Samsung instituted its three-CEOs leadership structure in March 2013. Shin and Yoon were promoted due to the company's strong performance in the smartphone and TV markets, but the past year has been rough on Samsung's smartphone business in the face of dramatically intensifying competition.
The Galaxy S5 was a flop
Specifically, Wall Street Journal sources indicate that Samsung's latest flagship handset, the Galaxy S5, fell well short of internal expectations. The Galaxy S5 sold 40% fewer units than Samsung had initially hoped, after the company aggressively built up inventory based on the assumption that demand would be robust. Samsung had surveyed carrier partners, which predicted greater demand.
The U.S. was the only market in which the Galaxy S5 outperformed the previous Galaxy S4, according to the WSJ report, further underscoring Samsung's troubles in emerging markets where low-cost OEMs are on the rise. Galaxy S5 revenue in China was reportedly down 50% compared to the Galaxy S4. It's no coincidence that Xiaomi just overtook Samsung's smartphone market share in China.
Was this always inevitable?
Samsung's struggles are supposedly even weighing on employee morale, which might be somewhat expected considering that the company has an embedded cultural belief that it is in a perpetual state of crisis. That includes good times and bad, and the purpose is to fend off complacency. You'd think that employees would then be prepared for a real crisis.
The company's overall approach to the smartphone market proved quite successful for a couple of years, but now the strategic weaknesses are coming to a head.
Android devices are inherently commoditized, and OEMs' efforts to differentiate themselves have largely fallen flat. That erodes pricing power very quickly. Samsung's exorbitant spending on marketing helped cement the Galaxy brand firmly in consumers' minds, but maintaining that brand positioning is proving a bit too expensive even for a company as large as Samsung. Samsung's shotgun approach to its product portfolio risked spreading development resources too thin.
For the past few years, Apple and Samsung have gobbled up all of the smartphone industry's operating profits, with Samsung enjoying approximately 30%. But as Samsung's profit margin is squeezed simultaneously from both the low end and high end, the company is suffering the inevitable fate of many commoditized hardware vendors before it.
Evan Niu, CFA owns shares of Apple. The Motley Fool recommends Apple. The Motley Fool owns shares of Apple. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.