One of the more compelling stories of late is the recent recall of Samsung Galaxy Note 7’s. A few months ago there were anecdotal stories of Samsung 7’s blowing up. Not blowing up in the colloquial explosion of interest and sales— blowing up in the literal explosion of batteries.

The plural of anecdote became data and the data became evidence and the evidence suggested a nice equation: Samsung Galaxy Note 7 + Charger = Boom. Samsung eventually had to concede that the initial explosions were a symptom of a larger product failure rather than defective outliers.

Unlike many defective parts in the cell phone competitive space, this particular defect brought with it more than intrigue and inconvenience. Indeed, consumers can handle insufficient charges due to weak conduction of electricity between the charger and the battery or a faulty battery that needs to be replaced. But this event is heating up consumers everywhere. Such a dangerous defect has even caused airliners to ban the Galaxy Note 7.

So the question is: Will Samsung Survive the Galaxy Note 7 Crisis?

Reputation and Switching Costs: When we think of sources of competitive advantage we consider the resources, capabilities, and core competencies of an organization that are valuable, rare, inimitable, non-substitutable and able to be leveraged by the organization. One of the most important sources of competitive advantage is reputation. Specifically, reputation is socially complex and has path dependency which makes it difficult for other firms to capture their economic rents. Consider the cell phone competitive space. The resistance to the disruptive vision of what Apple believed a cell phone should be came, in part, because Apple was not known as a cell phone company. Moreover, one could argue that Apple hadn’t achieved their reputation as visionaries and innovators in the electronic space. Fast forward to the present where we see Apple put forward an idea, like getting rid of the head phone jack, and many consumers and journalists find themselves in a position of criticizing the move while also assuming an asymmetrical knowledge gap between conventional wisdom and Apple wisdom. Thus, this competitive advantage has accumulated over the years allowing Apple to make a series of what appears to be less than optimal strategic decisions not hurt their adoption rates and market share.  After all, remember the time Steve Jobs told us we really wanted a portable computer in our pockets that has the bonus feature of making calls?

Samsung’s reputation is slightly different but equally socially complex and path dependent. Samsung is a conglomerate with over 70 years’ worth of evidence that they create reliable products.  Samsung’s reputation across a spectrum of electronics is that you will get a high quality product with top of the line specs. In the cell phone competitive space this has been demonstrated by their emergence as the preferred Android phone. The Samsung Instinct was seen as the comparable competitor to the first iPhone and subsequently the galaxy and note became the alternative to the iPhone. In this way, Samsung’s reputation became intertwined with Apple in the cell phone space rather than Nokia, RIM (Blackberry), or Motorola whom were in the cell phone space but in the vanishing flip and brick phone segment.

Another isolating mechanism for Apple and Samsung is the iOS and Android platforms perceived switching costs. Apple has done a masterful job integrating their platform such that all of their products communicate well with each other but not so well with other platforms such as Android and Windows. As consumers we now have perceived switching costs associated with our decision to switch platforms. These are not just financial costs but other economic costs such as time, stress, sunken costs (i.e., I just bought a new iPad!), etc. These are the classic debates with family and friends about how clunky one interface is or whether a back button is a right afforded to us by the constitution.

But more than that, switching costs in the cell phone space includes a certain level of comfort with one platform over another. These two components, reputation and switching costs in the competitive space, are why I believe Samsung is in a unique position to overcome a short term loss of market POWer (explosion puns are more difficult than you think). But there is a particular attribute of Samsung that provides the necessary context for their ability to withstand the blowback- product offerings.

Product Offerings: So now that we have a decent sense of the importance of reputation and perceived switching costs as a source of competitive advantage we should explore market dependence and product offerings. First, it might be helpful to imagine a scenario where the iPhone 7 was exploding. How would things be different?

In line with our previous discussion, Apple’s reputation is often associated with innovation and pushing the limits of technology. As such, faulty electronic equipment might be seen as a flaw in the design of the product tied to engineers exceeding their capacities. Implications of the event in regard to overall reputation might lead consumers to believe Apple bit off more than they could chew.

In contrast, Samsung’s reputation is that of excellence in quality. Samsung has developed a surplus of technological social capital such that a defect this serious can be seen as an exception rather than a rule. After all, their televisions haven’t blown up trying to keep up with the Kardashians. It is the existence of concurrent electronic success that will, in my opinion, enable Samsung to bounce back.

A second component worth considering, then, is the overall product offering. But more importantly the market dependence of the cell phone industry and the product lines in the industry. So back to our counterfactual; if the iPhone had to be recalled what happens to Apple? Apple’s portfolio is heavily reliant on the cell phone market and the iPhone (and the s version) are the only products in the competitive space. Therefore, Apple does not have many options to mitigate the risks associated with the overwhelming reliance on this one product. Thus, the impact of an event like this to Apple might be catastrophic (insert meteor, explosion, extinction, impact crater joke here) as a recall of the iPhone leaves consumers with little to no options in the iOS market. *It should be noted that a narrow product offering is a strategic choice and has worked thus far for Apple.

So what about Samsung? Unlike Apple, Samsung has multiple product offerings in the cell phone space which means they have the ability to respond to this crisis in a way that mitigates further damage. So if you made it this far through the blog, this is where we tie it up.

Samsung’s reputation for creating quality products has created a surplus of social capital such that we are more willing to see this as an isolated and abnormal event. Samsung has multiple product offerings in the cell phone competitive space so a total recall of the Galaxy Note does not eliminate their ability to compete in the space and meet demand. Moreover, because there are high switching costs associated with switching platforms  Samsung only needs to convince consumers hesitant to leave android that it is easier to switch from a Galaxy Note 7 to a Galaxy S7 (or J7, etc.) than it is to go to iPhone. As long as Samsung is viewed more favorably than HTC and LG, the refund or exchange recall will probably see many consumers simply switch from the Galaxy Note 7 to the Galaxy S7 rather than take on the switching cost to a new manufacturer (e.g., HTC or LG) or a new operating system (i.e., Apple iOS).

So I tend to believe Samsung will only take a short term hit. However an important caveat is how they manage the crisis. If Samsung can ensure they are taking the proper steps to identify and correct the issue then they can rely on their past reputation to mitigate the scrutiny. Moreover, because Samsung is the premier maker of Android phones they can still capture consumers deterred by high perceived switching costs. Thus, as note(d) previously, it’s Samsung’s Galaxy and we’re just living in it. Unless this issue is more pervasive than we suspect… then we’ll see which star emerges to fill the void left by the collapsing  star once known as Samsung (one time for the out of this world space puns).

*this was written on my SAMSUNG PHONE without Internet connection during my flight from Dallas to Charlotte for SMA. Please let me know if there are any inaccuracies, typos, or any clarifications needed.  I plan on posting this when I land in the rough form as more of a diary entry. Also, the flight attendant said, “At this time we need all small portable devices on airplane mode. Hopefully that device isn’t a Samsung Note 7”*

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