Emerging Nokia Case Study

January 3, 2012

Defining the Nature of the Problem

The nature of global markets has been rapidly changing in the last twenty – twenty five years. These changes to a great degree have been determined by the major breakthroughs in the geopolitical makeup of the world. One of the pivotal events that fueled the economic changes around the globe was the collapse of the communist bloc in the beginning of the 1990s and consequently the dismantling of the bi-polar world order that had been previously characterized not only by two antagonistic ideologies, but also by two incompatible and mostly isolated from each other marketplaces.

The description of that old world order was often referred to as “the free and the communist world”, “the West and the East”, which later morphed into” developed and developing” countries. As the pure and acute ideological  division of the world has moved to the fringes of the global agenda, leaving the front stage of the world community focus to the global economic, ecologic and broader humanitarian challenges, the new world paradigm has been more and more often referred to as “developed and emerging economies”.

The playing out of these new global realities is very vividly represented by the nature of the challenges and the business decisions required of the executives of the world-renown engineering and telecommunications giant – Nokia, which is mostly known to the world for its leading role in the mobile phone handsets industry.

From mid- 1990s and to the present time Nokia has attained and maintained its status of the world  leading mobile phone manufacturer. According to ABI Research in 2008 Nokia had close to 40% of the worldwide mobile phone market share, with its closest rival Samsung having only about 16% of the market.[i]  This success was attributed initially to bringing to the market easy-to-use mobile device that struck the chord with the consumers.

However this continuous leadership of the company in the global market was coming from different segments, which was a reflection of the company’s shifting marketing strategies throughout the 2000s.  In early 2000s Nokia was enjoying about one third of the US mobile phone market, but in 2009 the US market penetration was only at about 10%, and the revenue fell from €3.4 million in 2004 to €1.7 million in 2009. At the same time Nokia experienced increasing revenue growth from its strong footprint in the emerging markets. In 2009 the emerging markets accounted for 60% of the company’s revenue. [ii]

Analysis of these financials indicators of Nokia demonstrates the major strengths and weaknesses of the company. They also represent the threats that the company may face in the future if they do not take corrective actions.

Nokia has been priding itself in the ability to adapt and the engineering prowess throughout its history. In particular, they have been extremely successful in streamlining their manufacturing processes and supply chain operations for their mobile phones division.  These two strengths of the company were a crucial factor in their ability to penetrate and dominate the emerging markets in China, India, Latin America and Africa where the consumers had extremely high price sensitivity due to very low levels of disposable income compared to the population in the developed markets. Initially Nokia was able to get into those markets by offering their low end units at the price point affordable to the consumers and profitable for the company. Once they established their presence in the market they were also able to further increase their market penetration by using innovative distribution strategies to reach out to the highly dispersed rural population.

This success however brought about an unwanted side effect: the company was doing the manufacturing and logistics so well that they became too focused on these aspects of their business. These attitudes manifested themselves in the fact that by being very successful in the cost-cutting efforts of the low end phones, the company lost the sight of what was going on in other segments of the mobile phones market. The two main blunders in the non-emerging markets were the missing of the clamshell design pioneered by Motorola with its Razr model in 2004-2005; and the chronic lagging behind in the smartphones segment. The lack of innovation in the mid-level and high-end phones was the main reason of Nokia’s steady demise in the North American and to some degree in European markets.

This focus on manufacturing efficiency while is a distinct strength of the company and source of significant revenue streams up until present, is at the same time the major threat for the company’s successes in the future. The trend that has been going in the mobile phones industry is the increasing commoditization of the market. With the exception of the iPhone that managed to become in iconic symbol and reached the exclusivity status, the manufacturing of the mobile devices has been getting more and more standardized. With this trend continuing it is easy to predict that some new manufacturers from China or India may come up very soon with even cheaper mobile phones than Nokia’s. If the price were to remain the only distinction for the Nokia’s phones, then their market position in the emerging markets would be seriously challenged, just like it happened in the North American market.

Therefore with the development and advancement of the smartphones in the developed markets the main revenue source for the companies has been shifting from the phones to the services and applications. Fortunately for the company they were able to realize this trend and have been allocating significant R&D resources in development of the services and applications, such as the navigation services, OVI mail, Life Tools, etc. According to Alex Lambeek, the Nokia’s Vice President of Mobile Phones Marketing, “Nokia is transforming itself from an engineering-centered company to a costumer-centered company”. This is a positive change in the company’s strategy and the one that needs to be actively pursued, not only declared.

Recommendations:

Nokia therefore has no choice but stay active in the emerging markets where they have achieved great success to date. However with the growing consumer power in these markets Nokia needs to keep a close eye on the emerging middle class and their new and more sophisticated demands, lest Nokia repeat its fiasco in the developed markets. This monitoring of the growing needs of the population in the emerging markets will dictate the new services and applications that Nokia would have to offer in order to stay relevant for their evolving consumer base in those countries.

In order to regain its position in the developed markets, Nokia needs to review their attitude to those markets that has been summed up by one executive from the North American network operators  “The attitude at Nokia was basically: ‘Here is a phone. Do you want it?’ Nokia wouldn’t play by the rules here, and they have paid a price.”[iii] As the physical devices become more of a commodity, they need to shift company’s focus to offering more relevant services in a more attractive packaging bundled with their devices. One of the possible ways to increase attractiveness of Nokia phones in the high end segment in developed markets could be abandoning its proprietary Symbian OS in favor of Google’s Android which have been gaining enormous popularity both among application developers and consumers.

Reference:
http://www.bbc.co.uk/news/business-11725411 – Leading mobile phone makers lose market share
[i] http://www.mobileburn.com/news.jsp?Id=6191 as reported by Mobile Burn, January 30, 2009
[ii] http://www.nokia.com Nokia’s annual reports.
[iii] http://www.nytimes.com/2009/10/19/technology/companies/19nokia.html – Nokia Tries to Undo Blunders in U.S. New York Times. October 18, 2009