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The Corporate Strategy Office has been key to Samsung's success. Now it's shutting down.

South Korean Parliament Holds Hearing Over Corruption Scandal Around Park's Confidante
Lee Jae-Yong, vice chairman and de facto leader of Samsung, is facing bribery charges.
Photo by Jeon Heon-Kyun-Pool/Getty Images

Samsung is facing its biggest crisis in decades. Last month, as it was working to regain customer trust after last year’s problem with exploding smartphone batteries, the company’s de facto leader, Lee Jae-yong, was arrested on bribery charges.

On Tuesday, Samsung announced an organizational change that is likely to have a far-reaching impact: It’s shuttering the Corporate Strategy Office, the company’s nerve center.

This could be the beginning of the end for a bold experiment that was inaugurated by Lee’s father in the early 1990s. Samsung employed an unusual strategy of simultaneous cooperation and competition among its various business units. This strategy depended on strong leadership from the top, and now Samsung doesn’t seem to have the leadership it needs to continue the strategy.

And that’s a problem for Samsung because the company’s profitable smartphone business is facing fierce competition from cut-rate Chinese rivals. The company needs a unified strategy to address this threat. And with a highly distracted leader and no Corporate Strategy Office, executing such a strategy will be difficult.

Why the Corporate Strategy Office was key to Samsung’s success

Big conglomerates often face a choice between using internal and external suppliers. Suppose, for example, that Acme Corp. is building a cell phone and has to decide whether to use a screen created by Acme’s screen division or by an external supplier. There’s an advantage to both approaches: Using an internal supplier can allow for tighter collaboration and more learning on each side of the relationship, but there’s a danger that having a captive customer will make Acme’s screen division lazy.

Since the early 1990s, Samsung has taken an unusual approach: Use both an internal and an external supplier at the same time. When Samsung builds a new cell phone model, it will ship some units with Samsung-made components — screens, memory chips, batteries, and so forth — inside, and others with units supplied by third parties.

“Samsung affiliates do not receive special treatment when making deals with other Samsung affiliates,” wrote scholars Jaeyong Song, Kyungmook Lee, and Tarun Khanna in a deeply researched 2016 paper on Samsung’s culture. “They must be prepared to lose out to external suppliers if they are not competitive in quality, price, or time to delivery.”

Employees at the most successful divisions got bonuses that represented as much as 50 percent of their base salaries. Conversely, Samsung had a policy that “any business that incurred losses for three straight years (excluding new businesses) should be sold or liquidated,” Song and his colleagues wrote.

Healthy internal competition can keep everyone at a company on their toes. But if competition becomes bitter or gets out of control, it can be ruinous. If people feel they’re being unfairly compared to other parts of the company, they may be tempted to sabotage their rivals. They might withhold crucial information from rivals or blame failures on them, making the company as a whole less successful.

This is where the Corporate Strategy Office comes in. Lee Kun-hee, the father of the company’s current leader Lee Jae-yong, cultivated a cadre of Samsung executives who were more loyal to Samsung as a whole — and to him personally — than to any specific business unit. Rising stars within the company spend time in the Corporate Strategy Office, which has authority over promotion and transfers of senior executives.

“Senior managers in the finance and human resource management departments of affiliates check counterproductive behavior of senior executives,” Song and his co-authors write. “Most of those managers have work experience at the Corporate Strategy Office and maintain strong ties to the Office. Those managers directly report the counterproductive competitive behaviors of their senior executive to the Office.”

Of course, this approach only works if there’s a universally respected — or at least feared — figure at the top of the corporate hierarchy. Without it, the Corporate Strategy Office could simply become another battleground for infighting among Samsung’s many divisions.

And that’s the problem. Even before last month’s arrest, Lee Jae-yong had been struggling to build the kind of stature within Samsung that his father had enjoyed (the elder Lee is still alive but was forced into de facto retirement by a 2014 heart attack). But now with a bribery prosecution looming over his head and potential jail time in his future, it was going to be almost impossible for the younger Lee to exert the kind of power his father had.

And without a strong leader at the top, the value of Samsung’s Corporate Strategy Office is greatly diminished, so Samsung has decided to close it. It’s too early to say exactly how this will change Samsung, but most likely the company will turn into a more conventional conglomerate, with affiliates enjoying greater autonomy and less pressure to simultaneously cooperate and compete with their peers.

A leadership vacuum will make it hard to adapt to a changing smartphone market

There isn’t necessarily anything wrong with this — there are lots of conventional conglomerates whose various parts operate independently. The challenge is that a lack of central direction will make it harder for Samsung as a whole to respond forcefully to major competitive threats.

We last saw this around 2010, when Lee Kun-hee returned to the company after a two-year absence to lead Samsung’s response to the iPhone. Because Samsung has affiliates that make so many smartphone components, it was able to assemble a kind of smartphone dream team to make excellent, affordable smartphones and bring them to market more quickly than competitors that were working with a lot of external suppliers. The agility made possible by Samsung’s unusual structure allowed it to quickly shoot to the top of the smartphone market, where it has stayed ever since.

But Android phones are increasingly becoming a commodity, and Samsung is facing growing competition from dirt-cheap smartphone vendors in China. To maintain its healthy smartphone profits, Samsung needs to find a way to differentiate its own product — perhaps by offering unique software and services like you can find on the iPhone and Google’s Pixel phone.

But Samsung’s decentralized structure makes it difficult to create unified software platforms.

“Interviews with former and serving employees paint a picture of confusion and overlap between competing divisions, where the short-term interests of promoting hardware trump long-term efforts to build platforms that would add value for customers and increase their loyalty to the brand,” wrote Jeremy Wagstaff and Se Young Lee in a December 2015 report for Reuters.

“One said he only learned from someone outside the company that the hands-free app his team was updating for the upcoming Galaxy S4 launch had competition — from inside Samsung.” The manager became frustrated the software was seen “as little more than a marketing tool” within Samsung.

Samsung may need a cultural change to adapt to the next phase of the smartphone industry’s evolution. That kind of cultural change can only be initiated from the top. And the closure of Samsung’s Corporate Strategy Office suggests that they aren’t going to get that kind of leadership any time soon.