The Galaxy Note 7 Disaster: Samsung's Strategic Weakness


Samsung was really the only company in recent years to truly threaten Apple successfully; granted, they did so largely with Google’s help.  But Apple had successfully taken on Microsoft, HP, Dell, Palm, Nokia, Motorola, and Research in Motion, among others, and tossed them aside almost casually even though the massed resources of those firms easily overwhelmed the then still recovering Apple.  Only Samsung hit them where it hurt, but the recent Galaxy Note 7 Disaster showcases that Samsung has an Achilles’ heel and this unprecedented weakness could not only prevent the firm from prevailing against an ever weaker Apple, but it could eventually end it. 

Let’s talk about Samsung’s strategic weakness this week.

Recurring Asian Company Problem

I first ran into this when I was studying Sony’s battle with PCs against Dell.  Sony had by far the better looking, higher quality, and more technologically rich solutions.  Dell’s PCs, and this was in the 1990s, by comparison weren’t very attractive, had a tendency to break, and weren’t as advanced.  What made the difference was that Sony’s customer support sucked while Dell’s was world class.  While Sony invested in building a better box, Dell invested in building a better relationship with its customers.  The end result was that Dell touched their customers more often, treated them well, and the customers came back and bought again from Dell.  Sony touched its customers less often, the experience was horrid, and customers tended to then avoid the brand like the plague, and not just for PCs; they started avoiding the brand for pretty much everything from TVs to Stereos.  

Apple vs. Samsung

Thanks to the Apple stores and more control over its platform, Apple has had a stronger relationship with its customers than Dell has over time.  Given Windows was the industry standard, this allowed them to tread water until they could find a market they could redefine and dominate.  They found that market first with the iPod, then, using that dominance, they moved to dominate smartphones and tablets.  Their Achilles’ heel is their need for large margins and Samsung moved to aggressively take advantage of that with very high quality, lower cost phones like the Galaxy Note.  

Apple out spent Samsung in marketing in the early years and thus was able to hold Samsung off from taking over market leadership until Samsung doubled down on marketing and went after Apple’s image of technical leadership.   As a result, for once, Apple looked weak. But Samsung couldn’t sustain massive advertising budgets on a slimmer margin and Apple was able to take back much of what Samsung gained until the firms reached somewhat of a steady state.  

Now smartphones are relatively solid state so vendor caused breakage is rare. Yet, when it happens, Apple tends to move aggressively first to fix the perception of the problem and then to eliminate the problem itself.  While this has been somewhat uneven depending on the issue, in general, and largely thanks to some flexibility with the store managers, Apple customers have remained loyal.  

But the battery fire issue with Samsung was handled so badly that the phone was largely banned on planes and there was a full recall forced by the U.S. Government.  Samsung’s attempt to minimize costs backfired and people who bought the Galaxy Note 7 were left with a phone that could burn, maim, or even kill them, not to mention the remote possibility that one of these phones could cause a car accident or down a commercial or private plane.

Like Sony vs. Dell, Samsung now has a massive brand problem because buyers will likely not trust the brand—not just for phones, but for a broad range of products.  Samsung’s appliances already had a really bad reputation for poor support, and this one event could not only shift business back to Apple for phones but to companies like GE and LG for appliances.   Much like Sony dropped into decline due to a mix of brand damage and some really bad decisions with regard to digital rights management and their screwing up of the PlayStation, Samsung in one fell swoop may have taken themselves out at the knees.  

Wrapping Up:  Vendor Loyalty

We all have choices to make when it comes to picking a vendor, and most of us choose vendors who we believe have our backs.  While Apple has weakened from the Jobs’ years in this regard, they still lead their segment with respect to customer care.  They just do a better job of it.  Samsung has proven that they don’t have their customers’ best interests at heart even when it relates to physical safety and, I expect, that means a whole lot of you will likely be avoiding Samsung for a few years.   Generally, it takes about five years for a company to recover from a mistake like this, and that is with heavy investment in image recovery –something Samsung apparently hasn’t even started yet.  

We may be witnessing the beginning of the end for what was once the most powerful South Korean brand.  I expect we are also witnessing why Tim Cook, Apple’s CEO, seems to be smiling a lot more at the moment.  

Edited by Alicia Young
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President and Principal Analyst, Enderle Group

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