Samsung: A Case of Regaining Consumer Confidence

The last two years saw the tarnishing of Samsung Electronics’ (“Samsung”) reputation that began almost 80 years ago, when its primary focus began with trade exports of dried fish, fruits, and vegetables[i]. Crippled with the exploding Galaxy Note 7 smartphone and bribery and corruption on an executive level, Samsung faced a mountainous challenge to regain consumer confidence, bringing to light greater implications of the chaebol system in South Korea and key takeaways on regaining consumer confidence the industry can learn from through Samsung’s recent happenings.

Bribery and Corruption

In August of 2017, the third-generation de facto leader of Samsung Group, Lee Jae-yong, was sentenced to five years in prison, following a conviction of five charges including bribery and perjury. Historically, his father was also convicted of similar crimes but was pardoned by the South Korean President. Following the election of new President Moon Jae-in (after ex-President Park Geun-hye was impeached earlier in 2017 in connection with this case), the administration has vowed to crack down on corruption within the government and businesses. Although more pressure could be placed on the managerial executives at Samsung, it is noted that previous South Korean chaebols were able to run their empires behind bars. Lee would likely be able to access Samsung executives and make ultimate decisions even in prison[ii].

Lee Jae-yong was sentenced（Photo by CHUNG SUNG-JUN）

With the historical precedence of clemency on adhering to laws and returning favours, this sentence brings into light the inherent implications of the chaebol (loosely described as large, family-dominated conglomerates) system in Korea and the economy’s reliance on these organizations. With a diverse portfolio in dozens of industries, Samsung is South Korea’s largest chaebol that accounts for approximately 15% of South Korea’s annual GDP[iii]. However, this sentence exemplifies that collusion between governments and businesses may not result in the best interest for its people. As a nation, the public is scrutinizing the abuse of political power and the lack of accountability by powerful individuals driven to forward personal agendas. While these business-government relationships have a long history in South Korea, this criminal offense brings into question whether cleaner administration will come at the trade-off of economic stability.

Galaxy Note 7 Explosions

With worldwide sales of the Galaxy Note 7 beginning in August 2016, technology enthusiasts were ecstatic for a smartphone that excelled in all areas. Just afew days later, however, the first reported explosion of the smartphone appeared in South Korea. In response, Samsung conducted additional quality control assurance while delaying production of any new Note 7 devices. By September 2016, Samsung announced a global recall of approximately 1 million Note 7 devices, quoting faulty batteries. The smartphone was soon banned on aircraft as a safety precaution and an exchange program was set up by Samsung, with replacement batteries for the smartphone being made by a new, Chinese supplier[iv]. Upon resuming sale of the new Note 7’s in October, more instances of overheating and explosions were observed, prompting the stopping of production and sales of all Note 7 devices. Samsung recalled all old and replacement Note 7 devices and eventually discontinued the product as of October 19, 2016[v].

Samsung Note 7 explosion（Picture from news.china.com)

With the strong “can-do” spirit instilled in Korean culture, the strict authoritarian decision making and rigid hierarchy evident at Samsung Electronics contributed to the sub-par management of its device, the Note 7. With a strong managerial push to outdo its competitors, a lack of transparency, and limited departmental communication, Samsung found itself at a global scandal. While the technical issues with the Note 7 are attributed to design flaws and manufacturing defects, Samsung’s management pushed for faster response and innovation times with the rise of its competitors, contributing to the failure of the Note 7[vi].

Both recalls are estimated to cost Samsung $5.3billion USD (although some reports state it could cost up to $17billion USD), not limited to revenue loss but supplier contract cuts as well. Within three months, the company was able to reach a 96% recall[vii] [viii]. Urging consumers to return the phones as soon as possible in anti-flammable containers, Samsung worked with authorities, such as the Federal Aviation Administration to recall the smartphones. Working directly with telecommunications carriers, it pushed out a variety of software updates that would limit the usability of the phone and directed consumer attention to its successful Samsung Galaxy product line[ix] [x].

Regaining Consumer Confidence

With the strong leadership of DJ Koh, the President of Samsung’s IM Division, he personally intervened to determine the issues with the Galaxy Note 7 and its resolution. Samsung worked towards transparency through the identifying the root cause of the explosion, sharing its findings, and adapting these changes to new products going forward. To begin, Samsung created a new test lab that was “staffed…with 700 researchers, 200,000 devices, and 30,000 batteries” to replicate situational factors and testing to better understand the Note 7’s battery issues. Samsung also employed three third party testers to identify the issues associated with software, hardware, and manufacturing. The internal and external test labs yielded that battery manufacturer flaws and tight design specifications lead to the overheating of the phones[xi].

Mr. DJ Koh at Press Conference (Picture from techawarness.com)

In order to restore consumer confidence, Samsung created a battery advisory group comprised of specialized consultants and university experts and a new eight-point battery check to ensure utmost quality[xii] [xiii]. Samples are taken from supplier lots and include extreme physical tests, such as high temperature, immersion in water, and hydraulic physical pressure presses. If one battery were to fail the tests, the lot would be returned to the supplier[xiv]. These learnings and processes will be provided to various global standardization organizations to be shared with the industry as a gesture of goodwill by the company[xv].

With a stronger focus on the battery in the long term, Samsung turned to the promotion of its next major flagships in the Samsung Galaxy product line. Utilizing a smaller capacity battery and strenuous testing, Samsung aims to prove that it has built the safest, most innovative phone. According to a survey by ReportLinker, “89 percent of Samsung customers are willing to consider another Samsung phone as their next purchase” [xvi]. With strengths in a loyal consumer base, strong brand reputation, and the limitation of issues pertaining to just one product, Samsung is in a good position to regain its lost consumer confidence.

Launch of Galaxy Note 8 (Picture from voanews.com)

While Samsung seems to have overcome this fiasco with the successful launch of the Galaxy Note 8 in 2017, its response to the crisis may have implications regarding its poor corporate governance. Dr. Willy C. Shih, a professor at Harvard Business School, explains that “the rather poor way they handled the first recall suggests they have trouble accepting problems until they become quite big and they have no choice but to face them. This time, it will really call into question how they communicate problems, whether management is open to hearing things from the front line,” referring to the strict top-down hierarchy that may have to lead to the failure to begin with[xvii]. Samsung Electronics was quick to blame external supplier manufacturing defects as the cause of the fires, rather than review the root cause internally instead. While Samsung has taken appropriate steps to regain consumer confidence and evidently turned its crisis into an opportunity, its underlying bureaucratic management style brings into question whether a similar situation regarding a different component of its products may surface in the future.