On August 19, 2016, Samsung introduced the latest version of its popular Galaxy Note series of phones, to great fanfare and widely positive reviews. The Galaxy Note 7 offered an effective stylus, a beautiful design, and cutting-edge software—as well as a tendency to catch fire. Videos of smoking phones and consumer complaints created concerns, leading Samsung to respond.

It recalled the phones on September 2. In announcing the recall, Samsung noted that the battery manufacturer from which it had purchased supplies apparently was not producing the quality that the phone company, known for its technical manufacturing skill, promised its customers. The recall required Samsung to take in and replace approximately 2.5 million devices, at a cost of somewhere between $1–$2 billion. Despite the seriousness of this crisis, Samsung had moved quickly, it promised to switch battery suppliers, and it got new phones into users’ hands within days.

But then the replacements started exploding too. Dozens of unhappy customers came forward with their charred and twisted phones; one of them even forced a passenger airplane to make an emergency landing after it started smoking in a passenger’s carry-on bag. Unable to resolve the manufacturing problem or find a source for the blame in its supply chain, Samsung was forced to recall all phones and completely halt production on the Galaxy Note 7.

The model had been presented as one of the company’s flagship offerings, and its goal was to compete for holiday sales, appealing to consumers with a high-end, expensive phone that would help ensure the company’s profits. Instead, Samsung’s net profits fell nearly 17 percent; for its mobile division, operating profits dropped by 96 percent. In addition to losing all sales, Samsung faced astronomical costs for the continued recall, as well as immeasurable damage to its brand reputation.

Despite recalling all the phones, Samsung still is not sure what caused the product failures. After misattributing the flaw to the battery in the first recall, executives at the company have remained quiet about what they think the problem might be this time. For governmental agencies, this lack of transparency raises a red flag, especially as Samsung moves forward with its plans to introduce the Galaxy S8 in coming months. Further investigations by independent agencies thus appear likely.

To try to stem the losses, Samsung also plans to introduce new low- and mid-range phone models, while reverting more of its emphasis in its marketing communications to touting the Galaxy S7 version. Furthermore, Samsung remains a diverse company, and sales in other divisions, such as semiconductors and display panels, held steady, allowing the company to keep moving forward.

Discussion Question:

1. How well did Samsung handle this product crisis?
2. What did it do well? What could it have done better?
3. What should Samsung’s plan be, going forward?

 Source: Jonathan Cheng and Eun-Young Jeong, “Galaxy Note 7 Recall Sinks Samsung Profit,” The Wall Street Journal, October 27, 2016. See also “Samsung to Kill Off Note 7 After Second Round of Battery Fires,” Advertising Age, October 11, 2016; Joanna Stern, “Samsung Galaxy Not 7 Review: Best New Android Phone,” The Wall Street Journal, August 16, 2016