Samsung lessons in business management

Picture of a Samsung phone shop
By Lecturers Graham Foster and Ally Millar

27 April 2017

Samsung’s decision to cease all production and distribution of its flagship Galaxy Note 7 took the the tech giant out of the business pages and onto the front pages. This is a great example of commercial, accounting and business related issues, covered during the TPE course, mirrored in real life by Samsung.

Graham Foster, Lecturer in Business Management:

The mobile phone market is not a good place to stumble; once the crest of the market share wave is lost it may never be regained. Just ask Nokia or Blackberry. 

This might seem surprising in light of the product life cycle model introduced in TC Business Management. This separates a product life cycle into volatile start-up and growth phases, followed by a period of relative market maturity and eventual decline.

It could be argued that the smartphone market achieved maturity and even saturation several years ago. But, particularly at the premium end of the market, technical advances have created a relentless competition between each successive generation of comparable smartphones, trapping this market in a seemingly continuous, high cadence, growth phase. 

It is striking that we are considering the fate of the Note 7 when the original Note was launched a mere five years ago. Differentiation, or standing out from the competition, in this market is typically driven by innovative design and the desire for novelty among customers who expect to replace their phones regularly. 

This, in turn, creates an imperative for companies to reduce the time to market – the speed with which they can get new ideas onto the shelves and generating sales before their innovations are matched or exceeded by competitors. 

One of the many challenges this creates is to manage the complexity of manufacturing, promoting, distributing and launching cutting-edge products to a very exacting timetable, without compromising core expectations of reliability and safety.

In comparison with Nokia, Samsung’s saving grace may well be that their business portfolio is far more diversified, with a strong global presence in other, more mature markets such as televisions and domestic appliances, which helps to mitigate the risks of losing ground in one of their more volatile markets.

Ally Millar, lecturer in Financial Reporting:

So, what will be the financial impact on Samsung? From a financial reporting point of view, if we were to look into the financial statements at this present moment, we would expect to see trillions (of Korean Won, which is roughly millions of Pounds) in provisions for warranties, as the production of Note 7 has ceased and all units are recalled. This, in turn, will significantly reduce profits.

But can Samsung, with such high levels of diversification, write 2016 off as a bad year and soldier on?

The share price for Samsung fell 7.5% on the announcement that production would cease and it is conceivable that future sales will suffer – users are being forced to switch phones, and potentially brands to stay connected.

Perhaps they will take that ‘bad’ year as an opportunity to be overly conservative in their estimates for a number of other potential expenses and corresponding liabilities. Will we see some ‘big bath’ accounting? It would certainly make future financial year performance look much better.


Update 

At the end of March 2017, Samsung announced their return to the market with the Galaxy S8, seeking to recoup the $5.3bn losses endured by the Note 7, but not only that, their role in producing memory chips has seen profits go some way towards recovering for the first quarter of 2017.

This is one business case to keep on watching!

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