A Perpetual Crisis Machine
Samsung's VIP Center is home to a uniquely paranoid culture--and that's the way the boss likes it.

(FORTUNE Magazine) – The guts of a next-generation digital video camcorder are splayed on a worktable near Sun Woo Song's desk, although to a visitor's eye they might as well be the innards of a notebook computer or a digital TV. Right now they are just a few slabs of green circuitboard attached to a life-support system consisting of an oscilloscope and a power supply. Song gestures proudly at the contraption, inviting me to imagine that it eventually can be folded like origami, sutured to a loading mechanism and a camera, infused with clever software, labeled with the Samsung logo, and delivered into the eager hands of consumers in time for ... Sorry, we can't say when project code-name Rainbow will emerge from Samsung Electronics as a real product.

Rainbow is top secret, just like the 30 or 40 other projects that will pass this year through Samsung's VIP Center for some meticulous fine-tuning or, sometimes, a wholesale reimagining.

Even at this early, concept stage, a small crisis has emerged. Management has sent Rainbow back to the drawing board, intensifying the already palpable sense of urgency. "We needed to enhance the product design," explains Song, senior engineer and leader of the 19-strong Team Rainbow. "The prototype needed more new ideas."

The big green sandwich of silicon and circuits has certainly come to the right place. The five-story VIP Center nestles amid the enormous factories and twin office towers that make up Samsung's industrial complex in Suwon, South Korea, a manufacturing town about an hour south of Seoul and not far from the spot where, in 1969, Samsung Electronics was founded in a Quonset hut. The VIP Center is best described as an invitation-only, round-the-clock assembly line for ideas and profits where Samsung's top researchers, engineers, and designers come to solve their grittiest problems. The ground floor houses big training rooms. Floors two through four are workrooms for the various teams. The top floor is reserved for the 42 dormitory rooms, each containing two beds, a shower, and a small desk and chair. There is a simple shared kitchen. In the basement is the fun stuff--billiards, Ping-Pong, gym, and sauna.

I wander past a meeting room where half a dozen casually clad engineers quietly manipulate their own facets of the consumer electronics puzzle. One team member sitting at his desk stares at a small loop of metal about the size of a silver dollar nestled in his hand, as if he were Hamlet contemplating Yorick's skull. In another room, five men sit around a central conference table, two of them pointing animatedly at a wall projection: "What? The power drain is 5.2 kilovolts? Not good enough! The goal is 4.9!" Other members of Team Rainbow toil quietly in their designated workspaces, knowing they will be testing their limits of endurance soon enough. In spite of an order to add more features while making it simpler, the original schedule for a final camcorder design prototype remains fixed and absolute.

The VIP Center is one of the reasons Samsung Electronics, once known as the maker of cheap black-and-white TVs, has become in less than a decade the world's dominant--and most profitable--consumer electronics company, knocking Sony from the top of the heap. At Samsung, speed equals success, and disaster lurks in every overlooked detail or missed deadline. According to the management philosophy laid out by vice chairman and CEO Jong-Yong Yun (everyone calls him vice chairman Yun), profits in the Digital Age are directly linked to being first to market. A delay in delivery takes a product one step closer to being a commodity, and when it comes to commodities, the low-cost Chinese manufacturers will eat your lunch noodles. Failure is not an option, especially in the VIP Center, a concrete-and-glass embodiment of Samsung's uniquely paranoid corporate culture. "Vice chairman Yun stresses that if you relax, if you become complacent, a crisis will find you," adds Kyunghan Jung, a senior manager of the VIP Center. "There is," he says, "a lot of tension here."

The VIP Center--which stands for Value Innovation Program, not Very Important Person--is definitely a guy's kind of hangout. The hospital-drab walls are decorated mainly by flow charts, timelines of technological achievement, and above every urinal in the men's room, a picture of a jet exploding into the side of the World Trade Center in New York City. (The Korean text over the pictures warns of the importance of maintaining top security and reminds the viewer that disaster can strike out of the blue.) A roll of toilet paper on a tray of fruit juices provides a low-cost alternative to napkins.

More than a dozen projects are underway in the VIP Center on the day of my visit, some expected to last a month, some as long as a year. I'm being allowed to tag along with two of them: the Eiger project, which has to reduce material costs on a new flatbed, multifunction printer by 30%; and Rainbow, which must trim the hundreds of steps needed to manufacture a new camcorder by 25%.

Once through the front door and past the security guards, climbing the stairs of the building reveals door after door after closed door marked with code names: Hinan, Mosel, Porsche, Elle. The various teams closeted within could be working on a new liquid-crystal display TV or a problem with semiconductor yields or maybe just a way to eliminate one function from an air-conditioner control panel. While the objects of their attention vary widely, the team members at the VIP Center have one thing in common: Their bosses have vowed in writing--etched in metal on a plaque that hangs on the wall--to keep them in the VIP Center until they have solved their particular problems. If that means spending the night, so be it. Although team members may go home to sleep if they want to, Samsung executives acknowledge--with obvious pride--that the building is occupied 24 hours a day, seven days a week. And even if they don't sleep over, 18- to 20-hour days are not uncommon. "When people are told they have to come here, they know they have to come up with results in a very, very short time," says Song, a veteran team leader. "This is not a prison," one engineer tells me, "but it's not a volunteer job either."

In April the managers invited the wives of Team Rainbow's researchers--of the 39 original members, only one is female--to the VIP Center to explain that their husbands were coming home late or not at all because they were working and sleeping in the dorm.

"Our wives were complaining," recalls Jaehoon Koo, a software specialist and VIP Center veteran who moved his family to Suwon in order to be able to sleep in his own bed, if for only a few hours a night. "We called a meeting to soothe and comfort the family members, to remind them how important this project is and why it is needed for the husbands to work so hard." And why is that? "We're building the foundation for the new generation of camcorders," Koo explains.

Doosik Joo, a father of three and a five-time VIP alumnus, has a different explanation. "People say, 'You've spent all your life there, and what have you done?'" he says. "I can say, 'I drove down costs, created more value for the customer.' Sure, maybe we work more than the normal eight hours, but because we do, the next generation may only have to work eight hours. We do it not only for our company and our families, but also for our country."

Working and living in the VIP Center is not just geek macho. "Seventy percent to 80% of quality, cost, and delivery time is determined in the initial stages of product development," says Jung, the crisis-conscious senior manager whose business card also identifies him as a certified value specialist. He's one of the 50 or so "core members" of the VIP Center staff who work to support the teams assembled from across the company, all determined to engineer value into Samsung's next-generation products. The company's obsession with reducing complexity early in the design cycle is one reason Samsung Electronics has lower manufacturing costs, higher profit margins (an industry-leading 21% last year), quicker time to market, and, more often than not, more innovative products than its competition.

But for Yun (pronounced yoon), nothing breeds failure quite like success. And Samsung Electronics has had a lot of successes lately. It's the world's leading maker of memory chips, flat-panel LCD displays, and color televisions, and it's battling Motorola to be the world's No. 2 maker of mobile phones, behind Nokia. Last year it earned more than $9 billion on $72 billion in sales, good by any standard but remarkable for a manufacturing company. It has twice the market capitalization of Sony, which has long served as a Samsung role model. Hardly a week goes by in which Samsung fails to announce a "world's first" or "world's biggest" or world's something-or-other product. In recent months Samsung has unveiled a seven-megapixel digital camera phone, an 82-inch LCD display, a 102-inch plasma HDTV, a phone that receives satellite television broadcasts--the list goes on and on.

Most telling, a humbled Sony turned to Samsung last year to help it gain a foothold in the flat-panel TV market, and earlier this summer the British market-research firm Interbrand calculated that Samsung's global brand value--defined as the present value of the brand's future earnings--had actually passed Sony's for the first time. The reversal can be attributed in part to a decline in Sony's fortunes, but since Yun restructured the business in 1997, no other global company's brand equity has grown faster.

Marketing and design are critical factors in Samsung's rise, of course, but the bedrock of Samsung's growing global presence, and the reason it is likely to stay No. 1 even if rivals steal a march from time to time, is the sheer depth and scale of its technical research. No other tech company--not Intel, not Microsoft, not Sony--spends a higher percentage of revenue on R&D than Samsung does: 8.3% last year, or $4.6 billion, rising to more than 9% this year. (The company has nearly 27,000 researchers, out of a total workforce of 113,600, including some 2,400 Ph.D.s and 8,600 with master's degrees, working in 17 research centers around the globe.) And while Asian competitors cut capital expenditures and R&D spending to weather the Asian financial crisis of 1997, Samsung boosted its already high investment in new technologies. Those investments put it in position to dominate today's hot markets--LCD TVs, multimedia mobile phones, and memory chips. Even if you don't own a Samsung-branded product, there's probably a bit of Samsung in whatever device you do own: Apple iPods, Dell computers, Microsoft Xboxes, Nokia phones, Sony PlayStation Portables--name your favorite gadget.

For Yun, a scholarly 61-year-old engineer who looks to history and philosophy books for inspiration, this growing list of No. 1's are so many more reasons not to celebrate. In his monthly speeches to employees he invariably warns that Samsung is in a crisis every bit as severe as the one that nearly destroyed the company in 1997. Back then, memory chips provided 50% of the profits of Samsung Electronics and 35% of the total revenue of Samsung Group, the family-owned chaebol, or conglomerate, of which Samsung Electronics is the largest division. But in 1996 the memory-chip business began to implode as supply outstripped demand. Samsung Electronics had taken on prodigious debt to expand in chips, and as prices fell, the company reeled.

Today, says Yun, "we stand at the crossroads to becoming a world leader or a major failure." There are, in fact, unsettling similarities to the late-1990s crisis. Now, as then, a record year for profits presaged a collapse in prices for almost all of Samsung's key products; profits and market growth in mobile phones are shrinking, and the 15% rise of Korea's won against foreign currencies in the past year has withered profit margins for a company that gets 80% of its revenue from exports. First-quarter profits this year were down 52%, followed by a 46% decline in the second quarter. On top of that, the South Korean economy is stagnant, labor unrest is on the rise, and Samsung Group executives are mired in a scandal involving slush-fund payments to politicians. There are even public protests against Samsung's overwhelming dominance of the Korean economy. Looming over all is China, simultaneously Samsung's biggest potential market--and competitive threat. Yun's paranoia is not some managerial affectation.

To understand Samsung's hunger for success, it's necessary to understand South Korea. Brutalized by the Japanese military occupation during the first half of the 20th century and almost completely destroyed in the 1950s war that divided the country, South Korea had one of the world's poorest economies in the 1960s and lacked the industrial infrastructure, particularly the manufacturing and electronics expertise, that Japan and other Asian countries developed after World War II. When the three-year-old Samsung Electronics Co. began selling black-and-white TVs in Korea in 1972, Sony was already a brand globally admired for its high-quality transistor radios, tape players, and Trinitron color TVs.

By 1995, Samsung--the name means "three stars" in Korean--was making memory chips and other components that helped power the high-tech products of brand-name Japanese and American companies. Its own Samsung-branded consumer-electronics business focused on making commodity products cheaply. That year, celebrating the group's growing success, Kun-Hee Lee, the chairman and son of the Samsung Group's founder, gave Samsung mobile phones to friends and key workers. Within days, however, he was receiving complaints that the phones were defective. Embarrassed, he ordered the entire inventory from the Gumi factory that had built the phones--$50 million worth--to be piled in a giant heap in the factory's courtyard. Under banners proclaiming that Samsung would from then on be known as a maker of quality goods, Lee, his top managers, and 2,000 employees watched as workers smashed 150,000 wireless handsets, cordless phones, and fax machines with hammers and threw the pieces into a bonfire. "A defect is a cancer," Lee proclaimed. It marked the beginning of the company's transformation into a respected global brand.

As semiconductor prices plunged in 1996, Lee realized that Samsung Electronics would have to diversify beyond the cyclical memory-chip business. So in December 1996 he tapped Jong-Yong Yun as president and CEO and exhorted him, "Change everything except your spouse and children."

Yun had barely begun to formulate a strategy when the 1997 Asian meltdown hit. Spooked Western investors staged the equivalent of a run on Asian stocks, currencies, and assets, wreaking havoc in markets across Asia and driving Samsung to the brink of bankruptcy. Yun acted quickly and boldly. He dumped dozens of non-core businesses, fired nearly one-third of the workforce--shocking in the Korean chaebol culture of lifetime employment--and bet the company on the emerging world of digital technologies. "Sometimes," says Yun, who's fond of speaking in Confucian-esque aphorisms, "the lizard has to sacrifice its tail to survive."

This period saw him crystallize what he calls his "sincere management" philosophy: Cut costs for short-term competitiveness. Spend on research in core technologies for long-term competitiveness. Don't enter new markets or product lines unless there's a real chance to become No. 1. Ruthlessly cut any business that does not earn the company a growing profit. Be the first to get innovative products to market. Constantly refine supply-chain and decision management. Adapt quickly. Put quality first.

Yun decided that Samsung had to control its own destiny and not just copy others if it was to transform itself into a 21st-century power. Dissecting the iconic products of the emerging Digital Age--computers, cellphones, CD players, and the like--Yun identified core technologies common to them all: semiconductors, large-area LCDs, display drivers and chip sets, and mobile telephony. This focus gave the company a big advantage. Although Sony and other rivals had a huge head start in consumer electronics, that lead was based in the analog world. The digital world required new skills and technologies, Yun realized, and it was suddenly a level playing field. (It wouldn't be for long.)

About the same time, the South Korean government began a concerted effort to propel the nation to the cutting edge of information technologies, building a national broadband Internet network that today is unmatched in the world. The growing digital infrastructure gave Samsung a vast, real-world laboratory for testing new products and services. And into this churning environment, the VIP Center was born.

Inside the VIP Center the day never begins, because it never really ends. And although weekends are officially encouraged, all the team members know that as deadlines approach, Saturdays and Sundays--and time with their families--can evaporate. "The calendar on the wall here at VIP Center says Monday, Tuesday, Wednesday, Thursday, Friday, Friday, Friday," Team Rainbow's Jaehoon Koo jokes.

"Currently for the design team it is a very busy time," Koo says, which is a VIP euphemism for very little sleep. "Next it will be the circuit team. Then the software team." And software time means the 35-year-old Koo may not be going home for a while. Although his rule is to go home at night--even if it's 4 A.M. and he has to be back at dawn--at crunch time the dorm rooms are "necessary for the success of the program. In the VIP Center it's very easy to work, very good for the early stages of a project," he says. There are no distracting phone calls, no messy administrative tasks. All the critical team members are within shouting distance, and with everyone working on the same project in the same room, arranging meetings on short notice is a snap. The VIP Center support team is always available to lend a computer-aided engineering specialist, a modular-design expert, mechanical engineers, and quality specialists.

The critical nature of teamwork becomes evident late one morning as the Rainbow team leader, Sun Woo Song, is focused on the mother of all spreadsheets, the one he maintains with hundreds of color-coded mini-deadlines and links showing how one facet of the project is connected to another. He's found a bottleneck: key coding. The buttons on the camcorder can't be programmed until the software is complete. But technically it's doable; it's mainly a juggling act with clocks and calendars.

As he struggles with the schedule, I pop in on Project Eiger; it's winding down its stint in the VIP Center and has fewer than ten members at the moment. The prototype on the worktable is actually recognizable as an all-in-one flatbed printer, scanner, and copier. I joke through my translator that it must have been zapped with Samsung's ultra-top-secret shrinking ray gun. These guys become visibly nervous at the mention of the phrase "ultra-top-secret shrinking ray gun," as if I've discovered a trade secret. Indeed, secrets at the VIP Center are so guarded that one engineer asks me not to write "new laser printer" or "next-generation camcorder." "It could cause big damage to our competitive nature," he says.

The tightly wound engineer leaves, perhaps to stare at the picture of the plane taking down Tower Two, and I get to talk with Byung Sun Ahn, who has logged more hours in the VIP Center than almost anyone else. "I like to think of the VIP Center as a smaller version of NASA," says Ahn, 45, the principal engineer and project manager for the Eiger team. He worked on one of the first VIP projects back in 1998 and 1999 and has led several teams. "You know, everyone in the same room, looking up at the same big screen. The place is designed for smooth communications and fast decision-making."

"In the U.S., everyone has their own small cubicle, their own space," Ahn continues. "Here we each have our own desks around the walls, but there's a big central table. You can see from people's expressions how they're doing. We're able to communicate efficiently in real time. When we gather around the table, we're like NASA, all specialists working together and looking at the same big screen."

The specialists come not only from Ahn's digital printing division, but also from the core VIP Center staff. The sponsoring group--digital video in the case of Rainbow, digital printing for Eiger--pays all the development cost, while the VIP Center provides the dorm facilities, the food, and the training, a key part of the VIP Center experience. That takes me downstairs to the TRIZ room.

TRIZ is a Russian acronym for Theory of Inventive Problem Solving. It's a curious throwback from the Stalin-era Soviet Union that has proven unexpectedly effective in the hands of Samsung's single-minded capitalists. Some 60 years ago a Russian patent clerk, Genrich Altshuller, who had studied thousands of submissions, decided that there were patterns of innovation common to the evolution of scientific and technical advances, and that inventiveness could be taught just like, say, reading or arithmetic. He developed the TRIZ method, which uses some 200 different exercises to help develop creative problem solving and is based on the concept of resolving contradictions. It is so popular among Samsung product designers that TRIZ team leader, Jun-Young Lee, is developing a multimedia training tool to reach thousands of engineers instead of the couple of hundred or so who can schedule personal training sessions at the VIP Center. His team includes two Russians, Eduard Kurgi and Yury Danilovskiy, who are specialists in the technique.

"When something gets better, it can also get worse," Jung, the VIP Center senior manager, explains. Chairman of the Samsung Electronics Fishing Club, the affable Jung turns to angling for an example. "The fishing line has to be thin enough so the fish doesn't notice it," he starts. "But it also has to be strong enough so it doesn't break when you catch the fish. In that case, you make the fishing line flat, so it appears thin, while the flatness gives it strength."

Recognizing a fellow geek, I try to make a connection. His TRIZ explanation is exactly the premise for the thin ribbon of nanoparticles envisioned for a proposed space elevator that would lift small payloads into orbit, I say.

"Yes, fishing is very scientific," Jung agrees.

In any event, TRIZ is by no means unique to Samsung; hundreds of companies--including competitors like Philips, LG, and Motorola--use it too. At the VIP Center, however, the goal is to train every engineer and researcher in the company in TRIZ think. It's employed to evaluate such things as whether a button can be removed from, say, a new camcorder. Removing the button can save lots of money in manufacturing costs, but only if the loss of function is acceptable to the consumer, and only if it takes the camcorder design one step closer to perfection. TRIZ has been useful in increasing the yield of semiconductor factories, designing new motors for washing machines and vacuum cleaners, and increasing the viewing angle of LCD TVs. Collaborating with TRIZ specialists, engineers who are accustomed to attacking technical problems in the traditional linear fashion often come up with breakthroughs.

"We put ideas on the table, they put ideas on the table, and we go from there," says Lee, the TRIZ specialist. "If it's a good idea, we patent it." And, since the VIP Center was created in the late 1990s, Samsung's growth in good ideas, measured in patents, has risen faster than any of its competitors--1,600 last year.

For all his successes, there's one thing missing from Yun's executive bio: a lovable, iconic product on the level of Apple's iPod or Sony's Trinitron. Despite the company's advanced technology, increasingly innovative designs, and TRIZ, it's hard for Americans to think of a single product that's closely identified with the Samsung brand. And to stay atop the consumer-electronics business, Samsung needs not only flawless execution but also a blockbuster--one that is sexier than an Internet- enabled refrigerator. Maybe it will be an advanced mobile phone, or a portable MP3 music player. Yun says that by the end of next year Samsung will displace Apple's iPod from its leadership position. In the meantime Yun has his current crisis to get through, especially dealing with the beating Samsung is taking in its main businesses of memory chips and LCD panels.

Given how quickly Samsung learns and the sheer force of its R&D, the company looks as if it has built the foundation to lead markets for the indefinite future. Today Samsung Electronics ranks No. 1 in the world in eight product categories, including flash memory chips, computer monitors, big LCD screens, and CDMA mobile phones. Yun's goal is to double the No. 1 rankings in three years and triple them in five years. The company's seventh-generation LCD factory is producing high-definition screens the size of a king-size bed. The Korean won is strengthening against the dollar, Samsung is buying back $2 billion of its own stock, and the lights still burn all night at the VIP Center.

In other words, vice chairman Yun sees potential disaster just around the corner. He acknowledges that he rarely misses a chance to remind even his top executives of the perils that, he says, could sink Samsung Electronics at any turn, even in its finest hour, even though he's rung the crisis bell 1,000 times before. "You love your wife, but you still have to tell her that you love her every day," he says.