http://disruptiveinnovation.se/?cat=16
Christian Sandström
FR OM H IS B LO G ( AC C ES S ED 1 3 M AY, 2 0 1 3 )
C ATEGOR Y AR C H IVES : M OB ILE P HO NES
Nokia’s decline in figures
Posted on April 22, 2013 by admin
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I collected som key statistics on the performance of Nokia during the period 2004-2012.
2004 2012. While these figures need to be analyzed
in further detail, a glimpse at them still gives a good idea of what has happened.
The first graph depicts Nokia’s sold volumes, both in emerging
emerging markets (China, Asia Pacific, Middle East, Africa and Latin
America) and their total sold volume. It is worth noticing how large share of their volumes were actually sold in developing
countries.
Interestingly, the decline is much steeper in developed countries
countries (Europe and the United States) where the company lost 47
percent of its volume from 2008 to 2012 as compared to 22 percent in emerging economies.
The following graph shows Nokia’s financial performance in terms of revenues and operating profit:
Needless to say, the company’s market share has declined significantly. It peaked around 40 percent in 2007. In the years up to
the introduction of smartphones, Nokia gained market share on a growing market.
Decreasing volumes have implied collapsing operating margins, as illustrated below:
Another, perhaps more important explanation of Nokia’s problem is related to the decline in Average Selling Price. If each sold
so
phone generated 110 euros of revenue in 2004, then getting only 45 euros per phone in 2012 is of course a tragedy for the
company.
For sure, parts of the decline in Average Selling Price can be explained by increasing volumes in developing countries, but it
i is
nevertheless clear that price competition has been fierce in these years.
Nokia
ia has been squeezed from two ends – in emerging economies, cheaper, local manufacturers have eroded the company’s
margins and in the Western world Nokia has been forced to cut prices due to an outdated product portfolio.
It is truly amazing how a company can appear so solid and competitive and then fall apart within only a couple of years.
Posted in Mobile phones | Tagged collapse,
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Nokia quarterly presentations 2007-2010:
2007 2010: “Nokia’s longer term
strategy remains
ains valid and intact”
Posted on April 8, 2013 by admin
4
Apple’s IPhone was first revealed in January 2007 and available for consumers in June the same year in the United States, then
progressively launched globally in 2008. Out of curiosity I pondered through Nokia’s quarterly presentation slides in the years
yea
2007-2010 in order
der to get a better idea about how they related to the ongoing shift from feature phones to smartphones. While
such a brief and shallow review will not give the full picture of Nokia’s response, it might still reveal something.
Going through these slides itt is striking to what extent Nokia emphasizes the strength of its ever larger product portfolio. In the
years 2007-2008,
2008, virtually every slidestack contains at least two full slides crammed with all new product launches. The images
below come from some of these presentations.
It is also noteworthy how little is said in these years concerning technological change and the emergence of smartphones. Most
Mos
of the information is related to market growth, Nokia’s market share, gross margins etc. Towards the end of each presentation, a
2*2 matrix with threats and opportunities is presented. With no exceptions, this slide is very unspecific and the term ‘Competitive
‘Compe
factors in general’ is frequently used.
Here, there seems to be a symbiotic and destructive relationship
relationship between established firms and the stock market. Financial
analysts care about the big numbers (revenues, market growth, market share), these notions fit neatly into their spreadsheets
and number crunching exercises. Technological change cannot be easily quantified, nor fully assessed in terms of its
organizational impact. Top management therefore happily focuses on the aforementioned issues and this inevitably makes them
pay less attention to changes of a more discontinuous nature. Associate Professor
Professor Mary Benner at Minnesota University has
shown that stock market analysts virtually ignored Kodak’s and Polaroid’s digital efforts in the 1990s, while they paid a lot of
attention to (and praised) their product launches based on photochemical film (read
(rea more here).
Also, a slight sense of (Finnish) optimism is communicated. In the Q1 report from 2008, the following statement is made:
made
“Nokia continues to expect industry mobile device volumes in 2008 to grow approximately 10% from the approximately 1.14
billion units Nokia estimates for 2007.” (the presentation can be found here).
In Q2 2008 the following is written about the future:
“Nokia mobile device market share: increase sequentially”
Being
ing present in a growing market can be highly deceptive because growing demand might obscure the fact that a technology is
about to become obsolete, thus sending a false message to incumbent firms that things are actually going well. This was indeed
indee
the case
se with film sales for Kodak in the late 1990s and for analog CCTV companies in the 2000s. The market kept growing and
an increasing demand concealed the fact that the technology was going to die, thus reducing the incumbent firm’s sense of
urgency.
In 2008,
8, slides are still filled with launches of new feature phones. However, there is an increased focus on software services
and specific phones:
At this point it seems that the company is recognizing that software is becoming more important and that phones are used for a
wide range of different purposes. But the response is to do more of the same, i.e. launch more feature phones with different
functionalities
tionalities and hanging on to the by now outdated operating system Symbian.
By late 2008, special attention is of course given to the financial crisis. Still no statements about the shift to smartphones,
smartphone except
for this amazing piece of denial (Q4 2008):
“Nokia’s longer term strategy remains valid and intact”
In Q1 2009, the company announced that it will launch Ovi Store and that its music services have been launched in Australia
and Singapore. Still no sense of urgency communicated.
Bearing all the above in mind and especially the quote from Q4 2008, the slide below from Q2 2009 comes as quite a surprise:
All of a sudden, it is stated that the industry is undergoing some major change, something that has not been communicated at
all previously (at least not on the slides). In this presentation, even more attention is given to software and Ovi Store. For the
first time, Nokia now also stated that it will try to “adjust our services businesses and open up for greater opportunities for
f third
party partner services”.
rvices”. Thus, about two years after the launch of the IPhone and the shift towards an open model with
application developers, the company finally announces that it is going to do something at all. In a digital world, two years is a
very long time.
In Q4 2009,
009, devices (mobile phones) and services (software) are no longer reported separately but rather on one slide where
numbers and events are more aggregated:
As businesses, they still remained unintegrated mainly since Nokia still refused to do anything about
about its underperforming
operating system.
The following quote can also be found in the slides from Q4 2009:
“4Q showed Nokia’s ability to ramp up new, more compelling offerings, despite a tough competitive environment”
In Q1 2010 (below), the company states:
tes:
“Nokia continued to show solid smartphone momentum in lower price points”.
While the word ‘momentum’ communicates something else than actual results, this is still a choice of words that clearly doesn’t
doesn
mirror the seriousness of the situation – especially
especially bearing in mind the results that were delivered in the coming years. This is
also the first time the word smartphone is used at all:
In Q2 2010, Nokia is for the first time communicating that it is doing something about its old software. Words such
suc as “increased
speed” and “innovation” are used below, but the fact of the matter is that the company is still doing more of the same, they’re
they’ still
trying to compete with cars by developing a faster horse.
By Q3 2010, the big slides featuring Nokia’s huge
huge (and obsolete) product portfolio are gone. Sales declined 20 percent in Q2
2011 and went down 25 percent in Q3 the same year. In late 2010 and 2011, the presentations become so meager and dry that
it hardly made sense to look at them.
Having researched similar cases in other industries and given speeches about how established firms respond to technological
change, I usually argue that these firms often recognize the threat but that their responses are not the right ones. Firms do after
all not act in isolation,
olation, they attend fairs where new products are exhibited and usually pay attention to what competitors are
doing. I therefore frequently and rather easily make a point in busting the “oversleeping myth”.
Having reviewed the material above, one hardly gets
gets the impression that this was the case with Nokia. The company clearly
overslept and top management did not realize the urgency of the situation – the slides do not communicate any major issues
until suddenly it is stated in Q2 2009 that the mobile industry
industry is undergoing rapid technological change. This statement was
made two quarters after the legendary quote “Nokia’s longer term strategy remains valid and intact”. And once the problems
were recognized, the response was for many years the faster horse strategy
st
– better feature phones and eventually an upgrade
of Symbian, an operating system that was never designed to be used on smartphones.
One can only marvel at the amount of people who have lost their jobs and how much shareholder value has been destroyed by
the complacency of Nokia’s top management in these years.
All the above material can be found at Nokia’s Investor Relations website (here).
(
Posted in Mobile phones, Uncategorized | Tagged feature phones, incompetence, Nokia, shift, smartphones | 4 Replies
Explaining the Collapse of Nokia
Posted on April 7, 2013 by admin
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In 2005, Nokia was the fifth most valuable brand
brand in the world. With a turnover of 51,1 billion euros in 2007 and an operating
profit of 8 billion euros, the company’s market share had climbed well above 40 percent.
At this point, most mutual funds had invested significant shares of their funds in Nokia,
Nokia, probably in order to balance the portfolio
vis-à-vis
vis the stock market index. As a consequence, the company’s stock was traded around P/E 15-20,
15 20, a rather high number
considering the size of the firm and its meager growth prospects. When this is the case, and financial institutions keep buying a
stock, it is usually the beginning of a collapse. This holds true for IBM in the late 1980s, Ericsson in the late 1990s and banks
b
in
2006-2007.
In these years, politicians around the world argued that their country needed “a new Nokia” – a company which does so well that
it fuels an entire economy’s growth over many years. Well, today anyone can have a Nokia. The final sign of things to come was
wa
a statement in BusinessWeek 2007: ”Nokia’s dominance in the global cell-phone
cell phone market seems unassailable.”
The firm collapsed in the coming years its new CEO Stephen Elop stated in 2007 that ”the first iPhone shipped in 2007, and we
still don’t have a productt that is close to their experience. Android came on the scene just over 2 years ago, and this week they
took our leadership position in smartphone volumes”.
How can such a sharp decline be explained? And why has Nokia struggled to develop a competitive smartphone?
sm
Technology S-curves
curves provide a good starting point for addressing this issue. The S-curve
S curve theory posits that the advance of a
technology is initially slow. Once a breakthrough occurs, performance increases rapidly until a particular solution has reached
r
its
limits of what is possible within a certain paradigm. At this point, the S-curve
S curve levels off and the technology becomes increasingly
vulnerable and likely to be substituted by another technology S-curve.
S
Nokia essentially surfed on the S-curve related to hardware and feature phones. Over the years, new functions were crammed
into thinner and cheaper phones: radios, cameras, music players, recording capabilities, etc were added. Along this S-curve,
S
Nokia could fend off competitors easily. Being late
late with the introduction of camera phones, the company could still catch up
thanks to its financial resources and engineering capabilities related to hardware.
While the pace of development has been stunning for feature phones in the 2000s, it all happened
happened along an established
technological trajectory. As long as competition centered around offering a broad portfolio of feature phones, Nokia was in
control. In this sense, Business Week was right when stating in 2007 that “Nokia’s dominance in the global cell-phone
ce
market
seems unassailable”.
Approximately at this point in time, the S--curve
curve for feature phones started to level off. It now became increasingly difficult to add
valuable technological features or create additional consumer benefits along this trajectory.
tra
Why then has Nokia been so slow in its shift to the next S-curve
S
related to smartphones?
Nokia’s main problem is probably related to the fact that the competencies it developed in the feature phone era were not only
onl
less useful for developing smartphones – they were probably downright destructive for such attempts:
Nokia had never been a software company. Competencies were more related to hardware. Its operating system, Symbian, was
essentially designed for phones used for calling and sending text messages, the online functionality of Nokia phones remained
poor. A smartphone is much more about software and online compatibility than a feature phone. Hence, Nokia was in fact ill
equipped to develop smartphones as its competencies were more related to hardware.
Having an established set of competencies related to feature phones, it became financially rational to continue along this
trajectory and capitalize on these skills. A large company with a large established market where customer needs are known
usually
sually struggle to allocate resources to breakthrough innovations. Such a firm faces a high opportunity cost and therefore it is
not able to renew itself. Big companies think big, but all novelties, by
definition, start as something small.
Rumors abound that Nokia was considering the development of a touch screen smartphone five years ago. The inability of large
companies to invest in unknown technologies and unknown needs is probably the reason why Nokia never did so.
Looking ahead, Nokia is facing formidable competition and the company is still not prepared for it, considering that its
competencies are still largely stuck in the feature phone paradigm. At first glance, the collaboration with Microsoft makes a lot of
sense as Nokia lacks the required software skills. However, Microsoft has never been a dominant player in mobile operating
systems.
Bearing in mind that Nokia’s smartphone Lumia will have significantly fewer applications available for its customers also means
that the company is in trouble. Small installed base of customers means that fewer companies are willing to develop
applications for Lumia, which in turn means that fewer customers are willing to buy a Lumia, which in turn means… Vicious
circle.
Warren Buffett once said “turnarounds don’t turn”. This is probably the case for Nokia.
Summing up: competencies have become incompetencies. A fish is very well suited for survival in the water. Now put it on land
and see what happens.