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How Samsung’s misdiagnosis of the Galaxy Note 7 could damage its brand

A pedestrian walks past a screen displaying an advertisement for Samsung Galaxy Note 7 smartphones outside a store in Hong Kong on Oct. 11, 2016.

Justin Chin/Bloomberg

It is a reverse halo effect: After reports of fires and explosions led to a massive recall of the Galaxy Note 7, consumers could be forgiven for looking at their other Samsung Electronics Co. Ltd. products and wondering if they should be worried.

The phone launched globally in August with positive reviews. But reports emerged last month that the Note 7 could become overheated when charging and even explode. Samsung recalled 2.5-million devices and assured the public it had fixed the problem – but replacement phones also caught fire. The launch was a failure; the recall was a failure; and on Tuesday, Samsung announced it is halting sales of the device.

Just two weeks ago, the U.S. Consumer Product Safety Commission issued a warning about Samsung top-loading washing machines made between March, 2011, and April, 2016. According to a lawsuit filed in the United States, problems have included machines blowing apart.

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For the company to have so badly misdiagnosed the safety threat of the Note 7 could cause major overall damage to the brand, which also makes consumer products including television sets and refrigerators. The spread of mistrust from one product to others has happened before. Last year's Volkswagen emissions scandal damaged that company's overall reputation beyond the models of diesel cars that were affected.

Samsung has built a brand based on quality, and all products used in consumers' homes require a level of trust. The company has taken a hit to its image for both quality and trustworthiness.

"Greed and engineering arrogance stopped them from the smart move, which would have been to kill the Note 7 immediately," said Eric Schiffer, chief executive officer of Los Angeles-based Reputation Management Consultants. "… They've [now] made the right call. They need to look at the long-term consumer relationship."

One thing Samsung needs to do is communicate better.

The textbook case study on crisis management is Tylenol: In 1982, seven people died after bottles of Extra Strength Tylenol in the Chicago area were tampered with and capsules were laced with cyanide. It was a nightmare scenario, and Tylenol's market share plummeted. But its parent company, Johnson & Johnson, reacted swiftly. It advised consumers not to use the product, replaced more than 31 million bottles for free at a cost of about $100-million (U.S.), and established a toll-free hotline for safety questions.

Rather than leave the task to a spokesperson, the CEO of Johnson & Johnson, James Burke, spoke to the media directly. The brand bounced back thanks to his transparent approach, and his decision to stop selling capsules and to introduce tamper-proof packaging that has become the norm.

No consumers have died in Samsung's case, but the principles of good crisis communication remain the same.

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"They need to put a face on this," Mr. Schiffer said. "The CEO should be in front of the public taking personal responsibility, explaining what the realistic risks are in a human way, and talking straight – not hiding behind press releases and spokespeople."

Tuong H. Nguyen, mobile technology analyst with Gartner Research, says that while companies from Apple to Dell have had battery explosion issues, Samsung's is the first he can recall where the replacement part also failed.

"As far as I can remember in the past, it's because you the consumer used a third-party battery or charge, and companies could say, 'This was not on us,'" Mr. Nguyen said. "Either they don't know what's wrong or they are not forthcoming. And the first is probably worse."

Unless Samsung can adequately explain the cause of the problem, and assure people it will not affect other devices, the brand could take a more long-term beating. Smartphone customers could decide the easiest way to avoid complications is to switch brands.

Last week, consultancy Interbrand released its ranking of the world's most valuable brands, and placed Samsung at No. 7, with an estimated brand value of $51.8-billion.

That value need not take a permanent hit.

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"As long as there are safety concerns around Samsung's products, its brand's value will suffer and consumers will flee to Apple," said Steve Burkhart, general manager in North America for public relations firm The Hoffman Agency, which specializes in the tech sector. "But once Samsung can demonstrate conclusively that it has resolved all safety issues, it's brand value will rebound just as Toyota's rebounded after its problems with product safety. I think you will see that Samsung's brand has a lot of resiliency."

With a report from Shane Dingman

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BY THE NUMBERS

$20-billion (U.S.)

Amount chopped off Samsung Electronics Co. Ltd.'s market value on Tuesday

36.7 per cent

Portion of the 4.9 million smartphones sold in Canada for the first half of 2016 that were Samsung brand

4 million

Approximate number of Note 7s sold worldwide

21,953

Number of Note 7s sold in Canada, as of September

16 and 33 C

Temperatures between which some volatile chemicals in lithium-ion batteries can catch fire

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