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Crisis recovery case study: Samsung 18 months on from the explosive S7 Note

In August 2016 the Samsung faced what was possibly the biggest crisis of its corporate history. In this article Robert McAllister looks at the causes of the incident, how Samsung reacted and the lessons that can be learned.

In August 2016 Samsung released their much anticipated new ‘big phone’ - the S7 Note. The S7 Note had a lot to live up to, namely competition from its rivals and the success of its older sibling the S5 Note (they skipped the S6 Note), which was widely regarded as the best Android phone of its generation.

With the S5 Note, Samsung had pioneered the concept of the ‘phablet’ or big phone. This provided consumers with a device that was packed full of high tech features in a package that was larger than a traditionally sized smart phone, but smaller than a tablet; Samsung was not going to give up its top spot easily.

The S7 Note, like the S5, was packed with the latest generation of tech and features, stealing a march on Apple’s range with an improved camera, better screen definition, processor speed and battery life. The latter would soon prove to be the S7 Note’s Achilles heel.

The crisis

On 2nd August 2016 the launch of the S7 Note was met with very positive reviews by the press in the US and Asian markets, where the phone was initially released. Such was its popularity, Samsung struggled to keep up with the high levels of demand for the phone. However, shortly after its release, numerous reports emerged showing the charred remains of newly purchased S7 Notes, consistently claiming the phones were bursting into flames. Images were widely shared on both social and traditional media creating a PR nightmare, resulting in a complex product recall of 2.5 million S7 Notes and a technical challenge for Samsung’s engineers to identify the root cause of the issue.

To make the situation worse, the phones were banned on many airlines; during every pre-flight safety briefing Samsung was named and shamed, further damaging the brand and eroding consumer confidence.

The impact

The impact of the crisis was felt keenly by Samsung, who estimated the cost to the business was £4.4bn. Its 2016 Q3 profits dropped by 30 percent, driven by the cost of the recall and the resultant drop in sales caused by erosion of confidence in the brand. Samsung also lost its spot as the world’s top mobile phone company to Apple in Q4 of 2016. Such was the damage to the S7 Note’s reputation, Samsung were forced into killing off their flagship phone, with no immediate replacement.

How did Samsung respond?

Samsung acted quickly to implement a large-scale recall of the faulty S7 Notes, before it had carried out extensive testing and identified the cause of the issue. This proved initially to be a sound course of action and demonstrated to Samsung customers that it did care about their safety. 

However, Samsung made the decision to issue customers with replacement handsets, assuring them and the wider public that they were safe to use. When the same issue resurfaced, Samsung had to implement an embarrassing second recall; reversing the impression that they cared about customers’ safety and ultimately led to Samsung withdrawing the S7 Note from sale completely.

The second recall also led to questions being asked about Samsung’s competence in crisis management and product safety testing. Thankfully Samsung had delayed the launch of the handset in the large European market, thus allowing Samsung to focus its recall efforts within specific territories.

After the second recall was announced, Samsung realised it needed to do better and worked swiftly to identify the cause of the issue; initially they released only known facts, which hinted that the battery was causing the fires without speculating further. Only when Samsung’s engineers had identified the cause of the issue did they release a detailed report which was presented at a press conference three months after the recall was announced by DJ Koh, Samsung’s Mobile President.

The report presented a transparent and honest account of the problems with the Samsung S7 Note and identified a number of scenarios that could cause the batteries to self-ignite. Blame was levelled at a battery casing that was too small and an abnormal weld spot, both of which could lead the electrodes in the battery to compress, resulting in a short circuit.

The report also demonstrated Samsung’s commitment to identifying the cause of the issue where 700 engineers subjected 200,000 devices and 30,000 batteries to a range of tests at three separate manufacturing plants. At the press conference, Samsung also used external experts to verify their findings; academics and independent consultants lent credibility to the report’s findings.   

In the report Samsung also announced a new set of multi-layer safety measures, the formation of a new battery safety group, and a new eight-point battery safety test, seeking to reassure consumers that it had indeed learnt from the S7 Note’s failings

Finally, after the second recall was announced, Samsung demonstrated strong crisis leadership through the high level of engagement of its Mobile President DJ Koh, showing that it was committed to resolving the crisis.

What was the result?

Such was the damage to the S7 Note’s reputation, Samsung was forced into completely withdrawing it from sale. The company saw Q3 profits’ drop by 30 percent and the loss of the top spot to Apple. The first half of 2017 was going to be a key time for Samsung, in short, its next handsets the S8 and the S8 Note had to be exceptional and … not catch fire!

Samsung released the S8 Note in late April 2017, packed with market-leading tech that quickly established it as the Android of choice and, by the end of 2017 it won Tech Advisor’s coveted ‘best Android phone’ award.
Samsung also used the marketing release campaign to emphasise that the S8 was the safest and most innovative phone that the company had ever produced, trying to firmly put the S7 Note crisis behind them.

The way Samsung handled the crisis, and the release of an excellent new flagship phone had set favourable conditions for Samsung’s recovery. By April 2017 a ReportLinker survey titled ‘Samsung Galaxy S8: Did Samsung Succeed in Restoring Trust’ showed that 89 percent of existing Samsung consumers would consider buying a Samsung phone again and 66 percent of non-Samsung customers would consider buying a Samsung phone at their next upgrade, up 15 percent from October 2016.

By January 2017 Samsung had also regained the top mobile company spot from Apple and saw strong growth in sales powered by the S8 range in the first half of the year.

Summary

In summary, the crisis was caused by a technical design flaw where the battery compartment was too small to safely house the high capacity battery. This led to the battery being compressed, causing it to short circuit and catch fire. This should have been picked up by Samsung in its safety testing, however lapses in quality control by Samsung stopped the issue being identified before the phone was released to the US and Asian markets.

But what led to this design flaw being missed? The mobile phone market is extremely competitive which has led to a technical ‘arms race’ between the major phone companies. This encouraged Samsung to try and steal a march on the industry by providing the S7 Note with industry leading battery life, achieved by squeezing a large battery into a smaller than ideal battery compartment. This of course led to the problems identified above.    

After a poor start, Samsung managed the short and medium-term impact of the crisis well, swiftly recalling the S7 Note, showing clear leadership and communicating in a transparent and honest manner. This set the conditions for them to mount an impressive recovery in 2017, regaining the trust of their customers, and confidence in the brand by the wider public, retaking the top mobile phone company spot back from Apple.

The crisis also made Samsung change the way it approached the release of new phone models. It has become more safety conscious, and the way it designs phones has become more strategically focused. Samsung, whilst still keenly focused on providing best in class phone hardware now also focuses on ensuring its new generations of phones are at the forefront of the digital software race, placing its handsets at the heart of the wider Samsung digital ecosystem offering.

The S7 Note crisis was a bitter pill to swallow for Samsung. However, by responding promptly to the short and medium-term aspects of the crisis and adjusting its strategy to overcome initial pitfalls, identifying and addressing its failings, Samsung has enhanced its business resilience for the future. 

The author

Robert McAllister is Senior Consultant, Instinctif Partners. Contact: robert.mcallister@instinctif.com

Find out how your crisis management system aligns with international best practice – give CrisisOptic, powered by Instinctif Partners, a go today and get your free business resilience score. Access it at https://optic.instinctif.com



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