Introduction
Many organizations have set out policies and procedures to protect and safeguard themselves against risks. How a business adopts and handles threats is influential to business success. The way a company handles risk-related issues is essential to other stakeholders such as customers, shareholders, employees, and the government. In order to understand the problem better, it would be good to use a case study and discuss how the company manages risk at a particular time. The case to be evaluated in this study is the failed Samsung launch of the Galaxy Note 7. This paper discusses various hazard components such as risk attitude, risk appetite, risk identification, risk consequences, and risk impact, as demonstrated in this case.
In August of 2016, Samsung released a much-hyped Samsung Galaxy Note 7, and by the end of that month, the product had achieved a record sale. However, the company discontinued the product in the following month of September and initiated a global recall. This move was forced by reports that its batteries were faulty and often started overheating and exploding. The first accounts came from South Korea and China a week after the product launch. Although Samsung initially tried to refute the claims arguing that the outbursts occurred when a customer used a non-original charger, it had to give in after more bursts were reported. All customers who had purchased the Note 7 were advised to return it and exchange it for another phone, such as the Galaxy S7 or S7 Edge (Heathman, 2016). Studies later established that the two types of batteries had flaws, with the first battery having negative electrodes while the second suffered from atypical supersonic welding burns (Lopez, 2017). The incident not only affected Samsung’s reputation but also caused huge revenue loss, although the company continued to make profits.
Samsung’s Risk Attitudes
After studying the case study of Samsung’s manufacturing of the Samsung Galaxy Note 7, a person can deduct various company attitudes towards uncertainty at that time. According to Dikmen et al. (2018, p. 1), “risk has been defined as an unpredictable event or set of circumstances that should it occur will bring certain negative effects to the projects objectives.” Risk attitudes are the behaviors people or organizations gravitate toward the threats and are categorized into three broad groups. The risk seekers are the ones who put the potential benefits or gains over the possible repercussions that could be faced. Risk-averse people and organizations do not prefer taking uncertainties as they fear indecision. Risk-neutral people weigh all the pros and cons and do all calculations before making any decision.
Samsung adopted a risk seeker attitude in manufacturing the Note 7s, where it put the potential benefits over the possible risks. The two hazards that Samsung took were related to its batteries. First, Samsung wanted small batteries to make the phone as slim as possible, causing negative electrodes to bend, increasing the likelihood of short-circuiting (Heathman, 2016). Second, the company took a gamble of outsourcing batteries from third-party providers such as Amperex Technology Ltd. The batteries bought from this manufacturer were incorrectly welded; therefore, points left on the battery could penetrate the protective insulation (Heathman, 2016). The company took the risk of not leaving enough physical room for error in the batteries, a significant contributor to the explosions.
The risk seeker attitude helped Samsung gain a global market share as its creativity in making the brand led to massive sales. It achieved its goal of making the desired finished product by trying to ensure that its internal phone components were altered. The group always recognized the exogenous change in social and economic influences on people purchasing choices. Samsung, therefore, designed a product that was able to be accepted by the young, affluent consumers who would go for the classiest and most efficient brand. With continuous investment in R & D, the company enjoyed product differentiation from the other phone manufacturers in quality, outlook, and performance. Studies also show that the company had differentiated itself from the competitors during this time by having advanced technologies. Some notable ones included the edge-screen, which improved the screen-to-body ratio but also brought a risk of the phone breaking quickly. Another was the iris cognition that allowed the phone to unlock by looking at it. During this time, Samsung also developed the Bixby AI, which acted assistant for users of Samsung phones.
Risk Appetite
Samsung had the right threat attitude of being a risk taker, but it was over-ambitious regarding its stand. Risk appetite in an organization is the number of perils the organization is ready to take to pursue its goals and objectives (Rehacek and Bazsova, 2018). The company’s risk appetite was improper, as its aggressiveness in beating the competition made it overlook the battery design. The company knew that batteries need to be given a space for errors, yet it went ahead to create small batteries without any room for errors. Similarly, when the company was informed that its batteries were faulty, it showed some reluctance to recall the Note 7s. Only after it had been clearly established that the disadvantages of faulty batteries far outweighed the advantages did the company discontinue the product. Even after Samsung came under sharp criticism for manufacturing batteries that endangered the users, the company did not stop its goal of being innovative. It demonstrated a risk appetite by going ahead to produce other brands, such as the S7 and the S7 edge, which were not significantly different in design from the Note 7s.
The fact that the Note 7s were allowed to be put into the market raises questions about Samsung’s quality assurance processes. Either the organization’s quality assurance team was faulty, or the company’s management did not hear its recommendations. Whichever the case, it shows that the company had an unrealistic risk appetite for putting the product into the market and hoping that no problem would occur. For the company to remain ahead of the competition, the management or the quality assurance team might have set low standards to qualify the Note 7s. This was pushing the risk appetite of the organization further than the acceptable level (Rehacek and Bazsova, 2018). Samsung focused on maintaining its market leadership in its innovation to produce slim phones, it ignored all other essential factors and, therefore, exposed itself to disastrous outcomes.
Risk Identification
Risk identification is essential to organizations as it determines if the organization will achieve its objectives. When launching the Note 7s, Samsung needed to have identified all the potential risks, but it did not. The company should have set measures of what could go wrong, how often, and how bad the problem would be, and finally decide if there was a need for action (Bagley, 2019, p.78). Determining the degree and the likelihood of a problem would help an organization determine if a risk is worth taking or not (Hadzisalihovic, Pruckner, and Kern, 2019). The company did not put a sound risk identification system or chose to ignore the risks.
If the company knowingly misses the uncertainty, management should reconsider its level of risk tolerance. However, the company should consider changing its risk identification system if the threat is not recognized. Nonetheless, the firm responded well when it determined that there was a problem with its phones (Hadzisalihovic, Pruckner, and Kern, 2019). It set out a suitable policy where all customers who had purchased the Note 7s had them exchanged. It also showed a good response by ensuring that the customers who were hesitant to return the phones would be locked out of service.
After the company had recalled its products, a manufacturing engineering company was asked to investigate the errors that contributed to the failure of Note 7. It identified two issues that the quality assurance team had ignored. The batteries lacked the extra space for electrodes when charging hence causing the overheating and busting. This risk identification contributed to the management having to accept the compensation of products. This was a proactive move as by doing so, the company prevented possible disasters such as fires and injuries. Recognizing the possibility that the phone was exploding prevented an already bad problem from getting worse. Therefore, risk identification also involves preventing uncertainties from causing worse impacts.
Risk Consequences
Before Samsung adopted its vertical integration manufacturing method, it knew that there would be particular consequences. The company, however, prioritized innovation over the possible consequences for fear of being outcompeted by new manufacturers. When it was discovered that Note 7 had problems, the first consequence that the company faced was a loss of revenue as it had to stop the distribution of the product (Zhou and Lianqian, 2020). The firm further experienced huge costs in compensating all the customers who had purchased the Galaxy Note 7. However, the biggest consequence that the South Korean manufacturer faced was a loss of its reputation as a producer of safe products (Yang et al., 2018). Nonetheless, the entity continued to make a profit that year and in the years that followed.
It is clear that Samsung had analyzed all the consequences that the failure of Note 7 could bring before it launched the product. This is demonstrated by the fact that the company had adequate insurance cover. The compensation process was also done quickly because other brands could easily be substituted for the Note 7s. The organization, by announcing that it had stopped the manufacturing of the phone, ensured that any consequences such as injuries caused by the phone were mitigated. This decision was made late when Note 7 had already received humiliation on social media and on YouTube. Therefore, it would have been better if the company had identified the severity of the battery failure before. However, the mitigation measure prevented the humiliation from being subjected to the whole company.
Risk Impact
An analysis of the financial statements of Samsung in 2015 as compared to those of 2016 reveals that the event played a role in the company’s income. Studies have shown that the company’s Shares dropped by 9%, and therefore its market value dropped by $17 billion (Yun et al., 2018). After the recall process started, the company revised its operating profits from $7.8 billion to $5.2, and analysts have estimated that around $1.5 billion were used in replacing the phones (Heathman, 2016). During the launch of Note 7, Samsung was a global leader in phones sold but lost that position in the last quarter of 2016. Thus, the firm that overtook Samsung in sales was Apple.
The main reason why it gained market leadership was the release of a new iPhone brand with no defects. Lacking a new model to compete with Apple’s new phone contributed the Samsung losing its top position. It also gave the market an impression that Samsung’s products were defective therefore reducing sales. On a positive note, the manner in which Samsung handled the issue was good and brought positive impacts. By showing a willingness to compensate consumers, the telephone manufacturer showed that it cared for its customers. This brought a positive impact because the customers would maintain their loyalty to the brand.
Conclusion
The Samsung Galaxy Note 7 case shows that the company understood the risks involved with it manufacturing the brand. Still, the competitive nature of the smartphone market made it go ahead with manufacturing. The company later identified the dangers posed by the phones, took swift measures, and mitigated the issue. The risk had already impacted the company’s reputation and finances by then. It also brought adverse consequences to its external environment. This shows that the company had an unbeneficial and destructive risk appetite. Although Samsung is in a competitive environment, it should reconsider its risk attitudes and the pros against the cons before making decisions.
Reference List
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Heathman, A. (2016) We finally know why Samsung’s Galaxy Note 7s ‘exploded, [online] Wired.co.uk. Web.
Hadzisalihovic, A., Pruckner, J. and Kern, A. (2019) ‘Concentration Risk Indicator,’ Journal of Financial Risk Management, 8(02), p.92.
Lopez, M. (2017) Samsung explains Note 7 Battery explosions and turns crisis into opportunity. [online] Forbes. Web.
Rehacek, P. and Bazsova, B. (2018) ‘Risk management methods in projects,’ Journal of Eastern Europe Research in Business and Economics, pp.1–11.
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