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111 Seiten, Note: 1.3
List of figures
1.1. The unexpected end of the Nokia decade
1.2. Thesis aim and hypotheses
1.3. Research framework and methodology
1.4. Thesis structure
2. Weakening of Nokia’s leadership in the mobile phone market
2.1. Historical course of Nokia
2.2. The rising potential of smartphones
2.2.1. From voice oriented handsets to super phones
2.2.2. Attractiveness of smartphones segment
2.3. Nokia’s ‘missed’ transition
2.3.1. Competitive position in smartphones
2.3.2. Consequences on Nokia’s current situation
3. Causes of Nokia’s strategic drift
3.1. Concept of strategic drift
3.2. Inability to maintain a competitive smartphone platform
3.2.1. Gradual integration of Symbian
3.2.2. Hypercompetition in the mobile phone industry
3.2.3. Apple’s iOS and Android platforms momentum
3.3. Fading of innovation as core competency
3.3.1. Prolonged market dominance
3.3.2. Entanglement in Symbian’s operating system
3.3.3. Successive innovation failures
4. Potential solutions to prevent strategic wear-out
4.1. Building a strategic early warning system
4.2. Developing strategic resilience
4.3. Implementing organizational flexibility
5. Future of Nokia - Chances of recovery and alternatives
5.1. Evaluation of Nokia’s current strategies
5.1.1. Platform(s) choice
5.1.2. Marketing strategy
5.2. Probable scenarios for Nokia’s future
5.2.1. Scenario A: Come-back as services-oriented challenger
5.2.2. Scenario B: Acquisition by multiple predators
5.2.3. Wild cards
5.3. Recommendations for a Nokia’s upcoming challenges
5.3.1. Develop an open mobile wallet platform
5.3.2. Maintain Nokia’s applications and content store
5.3.3. Foster a second OS as beachhead to new industries
5.3.4. Refocus on services as Nokia’s core business
List of references
The focus of this thesis is to study the impact, causes and solutions for Nokia’s strategy worn-out in the hypercompetitive smartphone segment. Based on industry experts interviews, internal documentation and market reports and analyses, the reasons for Nokia’s strategic drift are regrouped around two concepts: industry platform and dynamic capabilities. Three potential solutions, benchmarked from different industries, are suggested to avoid drift situations in similar market environments. Finally, the scenario analysis of Nokia’s current strategic answers to its drift shows the non-sustainability of Windows Phone’s choice as unique smartphone platform. Corrective suggestions include essentially the leverage of Nokia’s services store, the creation of a cross-platform payment and banking solution and the coring towards vehicle and home entertainment industries.
Keywords: Strategic drift, hypercompetition, mobile phone market, industry platform.
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Figure 1. Main theories in the foreground
Figure 2. Mapping major mobile handset vendors’ competitive position
Figure 3. Evolution of Nokia’s operating profitability
Figure 4. Development of a strategic drift
Figure 5. Value appropriation within an industry platform
Figure 6. Framework for strategic recommendations
In the business world, it is quite common to see companies struggling after bad strategic decisions or brilliant competitive maneuvers. In the context of increasingly complex and dynamic environments, such events seem to have a stronger and more abrupt impact on the concerned firms (D’Aveni, 1995: 46). The example of Nokia, market leader of the mobile phone industry, appears to particularly corroborate this observation.
A decade after becoming the world’s biggest phone maker in 1998, the most popular and widely spread technology brand ever1, started falling behind its competitors in the most profitable and fastest growing segment of mobile phones. Although Nokia remained, until recently, the market leader in smartphones, achieving a continuous and positive growth, the decline of its worldwide market share, in the last 4 years, revealed an increased vulnerability. What was considered internally as a performance bump, due to a temporary lack of responsiveness, grew gradually into a chronic inadequacy of strategy. This strategic drift, eventually acknowledged by Nokia’s new senior management (TechEurope, 2011) was answered by a radical transformation project, officially launched in February 2011.
The particular interest for Nokia’s drift and its choice as a thesis topic was motivated by the multiple interrogations raised by the Finnish company’s past course and future fate in the smartphone segment. First, what were the main factors that caused Nokia’s strategy, the same that carried it to the mobile industry leadership, to part away from the overall market evolution? Second, could other companies, in similar markets and circumstances as Nokia, avoid the same drift? Finally, how effective are the strategies currently implemented by Nokia to restore its position in the market?
To answer these interrogations, a particular attention was paid to two potential shortcomings that have been recurrent in other analyses of Nokia’s case: first, the neglect of the impact of the external environment and the focus on, solely, the internal causes of Nokia’s strategy worn-out; second, the explanation of Nokia’s strategic deficiency by subsequent factors, such the impact of Apple’s iPhone on smartphones’ competitive landscape or the inability of the Finnish company to come up with an innovative and competitive mobile operating system. While these aspects certainly contributed to the degradation of Nokia’s situation, they are only posterior effects of an inadequate strategy.
The academic goal of this thesis is to provide a theoretical framework to analyze the main endogenous and exogenous risks that successful companies might face in highly dynamic and competitive industries and how they can prevent or overcome them. In order to achieve this goal, the research will focus on Nokia and the smartphone market. Several hypotheses, formulated concerning this case, will be used to guide this research:
Nokia is confronting serious issues in smartphone market due to a gradual drift in the company’s strategy.
Winning strategies in smartphone market require a stronger focus on building competitive industry platforms.
In hypercompetitive markets context, dynamic capabilities paradigm is more appropriate than resource-based theory to explain organizations’ success and superior performance.
Even in complex and dynamic environments, organizations can sustain their leadership if they develop and implement certain instruments and measures.
The main theories and concepts, used in this thesis, as well as their inter-connections are summarized in figure 1 (with the mention of corresponding section or sub-section). The major causes of Nokia’s drift, as identified in the initial hypotheses and the subsequent research, are grouped around two main concepts: industry platform and dynamic capabilities.
Figure 1. Main theories in the foreground
illustration not visible in this excerpt
This research adopts a qualitative approach based on experts’ interview, in addition to collected secondary data, including industry and analysts reports, Nokia’s financial statements, public announcements and strategy communications.
The expert interview technique was chosen in order to, first, validate the pre-assumed factors that led Nokia to a strategic drift (from secondary data analysis); second, assess Nokia’s current strategic choices, and third, explore its future strategic paths. Although it limits any findings’ generalization regarding the considered topics (Flick, 2009:166), the choice of the expert interview technique allowed, in the Nokia case, a considerable gain of factual knowledge and specialized insight (Kolb, 2008:142).
The interviewees were selected using the stratified purposeful method, which, instead of aiming a homogenous average opinion among involved experts, highlights the respective views of the subgroups of interest they represent (Patton, 2002: 244). The interviews output (occasionally audio recorded with the interviewee’s authorization) was analyzed and coded as cognitive maps in order to provide a simplified, yet accurate, image of the discussed topics.
Six interviews were carried out with experts from different backgrounds and industries, with the required common characteristic of having a deep knowledge and expertise about smartphone ecosystems (text and visual summaries of the interviews are available in appendix 1).
In addition to the following introductory chapter, where the research context and its methodology are reviewed, the main part of the dissertation will be divided into four chapters. Chapter 2 will overview Nokia’s current situation and the difficulties it is facing on different levels. Chapter 3 will address the factors that caused or aggravated Nokia’s strategic drift in the smartphone segment. In chapter 4, three alternative solutions are suggested to help organizations avoid similar strategic worn-out situations. Starting from the cases of three different companies who successfully implemented these solutions, shortlists of key lessons are provided to drift situations candidates. Lastly, in chapter 5, the strategies currently adopted by Nokia to respond to the smartphone market evolution will be assessed; then, four additional suggestions, to restore Nokia’s market position, are formulated along with the resources and capabilities they require.
Nokia has been leading the blooming mobile phone industry not only in terms of sales and market share but also in terms of technical and marketing innovation. The speed, with which it lost its dominance in the fastest growing and most profitable segment of smartphone, less than 4 years, triggers the interest to understand its causes. But before diving into this analysis, it is important to get an outline of, first, Nokia’s strategic path in mobile phones (section 2.1), then, how this latter diverged from smartphone market evolution (section 2.2); and finally, an overview of how Nokia’s unsuitable smartphone strategies affected the company’s weight in the market (section 2.3).
With the fast technical evolution in the industry, the terminology used to distinguish smartphones from the rest of the market is constantly challenged. Hardware features such as advanced computing ability, connectivity, screen size or input method are increasingly added to ‘simple’ phones as well. Consequently, in order to avoid confusion between categories in the next chapters, a smartphone will be defined as a “mobile communications device that uses an identifiable open operating system, supported by third-party applications written by a notable developer community” (Gartner, 2011b); mobile devices (or phones or handsets) will refer to the overall industry and feature phones (or voice- oriented phones or basic phones) to any mobile phone not satisfying the above smartphone requirements.
Nokia is undoubtedly the high tech company with the longest and richest history in the world. Created in Finland in 1860s, the “true” birth of the current Nokia corporation occurred a century later, in 1967, with the merger of Nokia with two jointly owned industrial groups: Suomen Kaapelitehdas (Finnish Cable) and Suomen Gummitehdas (Finnish Rubber Works) (Rouvinenet al., 2004: 94)).
Affected by costly acquisitions in consumer electronics and the collapse of the important soviet market, Nokia’s conglomerate started, between 1989 and 1992, a radical divesting of all of its non-telecommunications businesses, focusing solely on digital mobile communications.
In the beginning of 1990s, Nokia took the opportunity of favorable environment conditions and in particular the liberalization of network operators’ market and the full digitalization of mobile networks to fuel its growth with end-to-end solutions targeting small operators (Doz &Kosonen, 2008a: 99). Balancing the simultaneous development of two main businesses groups: network infrastructure, traditional and highly lucrative business, and mobile handsets, a business with a huge growth potential, Nokia managed to become a global multinational.
Nokia rose rapidly to become the world leader in the manufacturing and sales of mobile phones, driven by engineering design, supply chain management and high quality manufacturing (McCray & Gonzalez, 2010: 243). During this quick ascension, the company also faced -and overcame successfully- two major crises. First, in 1995-1996, a ‘logistics crisis’ was caused by the incapacity of Nokia to forecast and adjust offer and demand; it led to a complete rationalization of the company’s global supply chain and a remanent reputation of “world's best player in terms of demand-supply balancing and overall sourcing, logistics, manufacturing” (Steinbock, 2010: 145). A second ‘Marketing’ crisis occurred between 2002 and 2004, during which Nokia’s worldwide market share decreased from 35.8% to 29% (Schwartz, 2005). This decline was mainly caused by an aggressive competition from Asian (LG, Samsung, Sharp) and North American (Motorola) contenders on both prices and product styles and features (Schwartz, 2005). Nokia’s answer consisted in exploiting the firm’s design and manufacturing capabilities to offer a larger and more differentiated range of phone models; once again Nokia was able to recover lost market share (33% in 2005) and reinforce its leadership (McCray & Gonzalez, 2010: 243).
Nokia is currently the world's leader in cell phones with the same world market share as Samsung and LG, respectively second and third, combined (Appendix 2). In an overall growing market (+18.5% shipped units between 2009 and 2010 and +16% year-over-year growth for the second quarter 2011 (Appendix 3)), its commercial performance is, however, on a downward slope. Oscillating between 34 and 39% between 2006 and the first half of 2010, Nokia’s market share has decreased, according to Gartner (2010d), up to 23% in the second quarter 20112. This performance is imputable to two major industry trends: the commoditization of feature phones, exploited by Asian low-cost manufacturers to reinforce their presence in their domestic markets and the quick increase of smartphone segment sales, with higher margins and supplementary revenue sources, and where Nokia is losing even more rapidly its position (from 46.7% in the first quarter 2007 to 22% in the second quarter 2011 (Gartner, 2008, 2011c)).
Since Ericsson released the first smartphone model in the market in 2000 (R380 model), the category has been continuously redefined. Developing towards the convergence of traditional telephony, Internet services and personal computing (Kenney & Pon, 2011), the smartphone segment remained a high-end niche until the end of 2006 (3% of the total handset market in 2004 (Subramanian, 2005)), hampered by both complexity of use and a higher price than feature phones.
From 2007, smartphone segment sales started increasing at a faster pace than the overall mobile phone industry achieving, in the period between 2007 and 2011, a compound annual growth rate (CAGR) of 40%, compared to 7% for feature phones segment (Garnter, 2007, 2011)3. The share of smartphone shipments in total handsets increased from 11% in the first quarter of 2007 to 26% in the same quarter of 2011 (Appendix 2 and 4).
The growth in smartphone segment has been stronger in developed markets, in particular the United States (40% of mobile users (Kellogg, 2011)) and Western Europe, but following the deployment of high-speed mobile Internet networks and the decrease of smartphone average selling prices, sales are also rapidly increasing in emergent markets. Pyramid Research (2011) is predicting a 30% compound annual growth in Brazil, India, Nigeria and Turkey over the next five years. As a result, most industry analysts predict that smartphones will outnumber feature phones in the next 3 to 5 years in Western Europe (Analysys Mason, 2011) and worldwide (Gartner, 2011c).
Mobile applications market
As a complement to smartphones and a key to user satisfaction (Bernstein Research, 2011: 63), the global mobile applications market increased rapidly, following smartphones growth trend. Given the specificity of smartphone business model, most major vendors receive a share of mobile applications revenues, which adds to the segment attractiveness. Although estimations vary from an analyst firm to another, they all agree on the fact that the total value of mobile applications market is growing both in absolute value and in terms of relative weight in the mobile phone industry.
MarketsandMarkets (2011) estimated this value at 18.0 billion EUR in 2015, compared to 4.9 billion EUR in 2010 (which corresponds to respectively 10% and 8% of the overall smartphone market volume). Adding advertising and value-added services to applications downloads, Booz & Company estimations for the total mobile applications market reach 29 billion EUR in 2014 (Appling and Pappalardo, 2010: 7).
With the increased commoditization trend in feature phones leading to a continuous decrease in their average selling prices, most vendors found in smartphones and the related market of mobile applications and value-added services (such as media content distribution) an opportunity to improve their margins.
Currently, the level of profits of the mobile industry’s incumbents depends directly on the strength of their respective smartphone portfolio. For instance, during the second quarter 2011, only one global manufacturer selling voice-oriented phones (Samsung) is still profitable. Also, the three companies that captured 11% of the top industry vendors’ profits during the second quarter 2007, before “the modern smartphone era”, shared in the same quarter of 2011, 84% of the profits. (Dediu, 2011a). (Appendix 5)
Smartphones manufacturing and distribution activities are part of a hypercompetitive market, which according to D'Aveni & Canger (1995: 46)4 is characterized by “a condition of constant disequilibrium and change”, where the structures of the industry and competition are continuously evolving5. Nevertheless it is important to portray the current competitive forces that are defining to a large extent the different players’ actual positions - including Nokia’s- and the overall segment attractiveness.
It seemed important to include the suppliers of complements to this analysis because of the crucial role they play within the industry providing an additional value to incumbents either directly, as revenues share from applications sale, or indirectly as network externalities (by making it more attractive to final users).
The implementation of the extended five forces framework, adding complements to Porter’s traditional forces (Grant, 2010: 98), shows that, overall, competitive threats are rather moderate or low, explaining the higher levels of profits in mobile phone industry compared to PC manufacturing for example6, and that the main threat comes essentially from internal rivalry (Appendix 6).
Smartphones segment is highly concentrated, more than the overall mobile phone industry (CR4 equal to 73% in 2010)7. Three of the four major mobile operating systems, the most important part in the smartphone and the least affected by commoditization, are either proprietary (iOS, Blackberry OS) or adopted by a single manufacturer (Symbian), thus favoring the increase of the size of their respective sponsors. Unsurprisingly, the availability of Android, by Google, for free is currently pushing the market towards an opposite trend and an increased fragmentation (illustrated by the increase of ‘Others’ total market share in appendix 2).
Besides, mobile operating systems are a source of strong network externalities. In fact, the popularization of mobile applications as an additional value to handsets pushes users to the few platforms that are able to attract developers (in terms of quality and number) Finally, the existing manufacturers have different degrees of integration with the main operating system they use for their phones. A higher integration, synonym of a stronger control over the used platform and a higher share of mobile apps revenues, is rather associated with a superior profitability (Apple is the best illustration of this integration).
Entering smartphone business used to be difficult; the software technology and the attraction of developers require time and high investments. As mentioned earlier, by offering for free its powerful operating system, Google lowered the entry barriers causing a reverse in the market concentration trend and affecting sales and profits levels.
Among the recently attracted players, several feature phone vendors (ZTE, Huawei) and PC manufacturers (Acer, Lenovo) jumped on the opportunity to exploit their existing high promotion and branding investments with an extension in smartphones.
Most of hardware component sub-markets are oligopolies with few specialized suppliers in direct competition with each other. For instance, chips manufacturers are investing increasing marketing budgets in order to promote their platforms (e.g. Qualcomm Snapdragon, NVidia Tegra) and thus differentiate themselves in consumers’ perception.
In order to have a stronger control over certain components’ innovation, performance quality or quantity supply, some smartphone vendors are integrating vertically. Apple designs in-house its iPhone A4 and A5 chips and Samsung, builds OLED screens, in priority, for its high-end smartphones.
With the multiplication of new smartphone brands with different price positioning8 but similar functionalities, consumers have more alternatives. However, their choice of a specific operating system bears potential high switching costs to competitor’s systems for two main reasons. On one side, the absence of inter-operability between mobile platforms, are very likely to lock-in users who invest in the purchase of applications (72 EUR in average per Apple mobile device user (Deutsche Bank, 2011)) within that particular platform (Shapiro & Varian, 1999: 104); on the other side, each system has a different interface and interaction paradigm, which implies that switching to a smartphone running a different operating system requires adaptation time.
Finally, network carriers, in particular in Europe and US, subsidize the price paid by the final user in counterpart of a commitment for 12 or 24-month contracts. Before the expiration of this arrangement consumers are less likely to replace their vendor or platform.
The most important complements to smartphones are network service, content (e.g. videos, music, eBooks) and applications. Since the device manufacturer and/or the operating system leader provide the marketplace for content owners and applications, they hold a high negotiation power (this is less true for more ‘open’ platforms such as Android). Furthermore, the multiplication of application developers, on each platform, keeps the average selling price at a relatively low level (in 2010, the average price for an Android paid app was 2.3 EUR, 2.6 EUR for an iOS app and 5.9 EUR for a Blackberry app (Hoogsteder, 2010)).
Smartphones have few potential substitutes: feature phones can only be used for voice calls; notebooks, netbooks and tablets have a high processing power but are not pocketable devices; eBook readers are not polyvalent and usually don’t allow applications’ installation; finally, Portable Media Players have most of the previous features but their usage is limited by their lack of internet connectivity.
It is almost ironic to consider that Nokia have missed the transition to smartphone segment since it was one of the early vendors to enter it9. Believing in smartphones potential in terms of content and features convergence, and ultimately commercial and financial attractiveness, Nokia was able to dominate the market based on Symbian operating system and high performance components. However Nokia started losing this leadership with the release of iPhone in June and the announcement of Android by Google in August of the same year 2007, which “was a year that would shake the mobile phone market to its core” (Ricknäs, 2010b).
While Apple brought an innovative device based on a user-friendly touch interface and a new business model relying on applications and content distribution, the pricing of its flagship phone affected only the sales of Nokia’s high-end models.
When later, an increasing number of manufacturers who didn’t have, so far, the capability to build a modern mobile operating system, started adopting Android, the market became more and more fragmented (the concentration ratio CR4 down to 62.6% in the second quarter 2011, see Appendix 7). The new entrants who were able to attract customers with a strongly backed Android Marketplace, differentiated form factors and more importantly, different price levels, affected sales levels of existing vendors, in particular Nokia’s (Bernstein Research, 2011: 37). Additionally, the increasing penetration rate of mobile phones worldwide (both for smartphones and feature phones) allowed manufacturers and components suppliers to benefit from higher economies of scale. With cheaper and more powerful hardware available to most manufacturers, Nokia has lost one of its main competitive advantages.
Figure 2 illustrates the changes occurred on both average selling price and performance of Nokia phones and its main competitors, between the second quarter 2007 (after the release of the first iPhone iteration) and the first quarter 2011 (after Android’s wide adoption by manufacturers). It appears clearly that while Apple, and RIM to a lesser extent, were targeting high-end segments, offering superior features at a higher average price, most Android manufacturers were able to increase the quality of their offer while controlling the level of their handsets prices.
In reaction, Nokia with a similar positioning to this second group of vendors, decreased its prices without any major update to its operating system Symbian, leaving its customers with a comparatively lower user experience (not very friendly touch interface, less attractive application store, less advanced notification system and desktop/cloud syncing, etc.).
Figure 2. Mapping major mobile handset vendors’ competitive position10
illustration not visible in this excerpt
Source: Adapted from D’Aveni (2007), Dediu (2011c)
Market share decline
Despite a continuous growth of shipped phones, in units and value, Nokia showed a lower ability to adjust to the new competitive landscape. In the smartphone segment, the slow- down manifested though increasingly lower sales’ growth rates, compared to the other major manufacturers. From 2008 to the first half of 2011, Symbian, Nokia’s smartphones operating system, realized a compound average annual growth of +21%, compared to 55% for the overall market, 100% for iOS and 587% for Android OS (Appendix 8).
Nokia’s issues progressively propagated from smartphones to include all mobile phones, and from western to emergent markets. Sales were initially affected in Europe (third of Nokia’s beginning of 2008, to respectively 34% and 33% in 2010 (Bernstein Research, 2011: 103). Signs of weaknesses appeared, later, in Central and South America and Central and Eastern Europe. More recently, Nokia’s started losing its dominant position in Greater China region that represents fourth of its total sales (second quarter 2011 sales dropped by 24% compared to the same quarter of 2010).
In terms of mobile applications sales, even with a continuously increasing number of daily downloads, Nokia’s distribution platform for Symbian developers (OVI Store) didn’t reach Apple and Android’s popularity levels -both have in addition a smaller installed base of users (Appendix 9).
Deterioration of financial performance
By buying lower than expected volumes of hardware components -common to both smartphones and feature phones such as cameras-, while being pressured by prices’ decrease in the industry, Nokia had to support more expensive purchases and, thus, sacrifice its margins. Expectedly, starting from 2007, its operating profits initiated a decrease trend (figure 3) and in July 2011, Nokia announced its second quarterly net loss since 199811.
Figure 3. Evolution of Nokia’s operating profitability
illustration not visible in this excerpt
Source: Nokia (2011c)
In Frankfurt, New York and the Nordic exchange markets where it is traded, Nokia’s share price reached a historic peek in October 2008, five months after the unexpected iPhone commercial success. Noting the decreasing profitability of Nokia and its inability to produce a successful and competitive smartphone, investors lost their confidence in the Finnish manufacturer resulting in a quick drop of the share value (Appendix 10). During the first six months of 2008, Nokia lost 40% of its market capitalization. Since October 2008, its price share dropped from 28.6 EUR to 3.9 EUR, equivalent to a value loss of 86% in less than 3 years.
Erosion of brand equity
As a combined effect of the decrease of its users base satisfaction12, its poor financial performances and pessimistic future growth potential, Nokia’s brand value was also affected. Considered both internally and by market analysts as one of its main assets, Nokia’s brand lost its position among the top 10 most valuable brands according to most reputed rankings. For Interbrand, Nokia’s brand lost, between 2008 and 2011, 30% of its value; during the same period, Millward Brown, calculated a loss of 76% (Appendix 11).
This chapter will cover, first, the concepts of strategic drift and strategic wear-out from the literature point of view (section 3.1). In sections (3.2) and (3.3) will be listed the main factors of Nokia’s drift, systematically starting by the corresponding theoretical framework and then demonstrating how it particularly contributed to the deterioration of Nokia’s situation.
When first introduced by Gerry Johnson (1988), the concept of strategic drift was defined as the misfit between the changes in the organization’s strategy and its environment changes. Starting from ‘Logical incrementalism’ concept, Johnson argues that managers build their apprehension of external stimuli and their understanding of the environment based on a homogeneous and rather stable view (1988: 88). Thus, they tend to adjust only gradually the company’s strategy following unconsciously their preconceived view. This strategic evolution path might eventually deviate from the environment development course, leading the organization to a strategic drift situation (Figure 4).
In this initial definition, Johnson don’t explain neither the consequences that drifted companies might face, nor describe the factors that could lead to a similar situation; besides, he tends to perceive the explanation of a strategic drift as rather internal (the choice of an incremental evolution of the strategy), than external (unexpected environment change).
Both oversights were revised few years later by the same author (Johnson & al., 2005). Re- defining strategic drift as the progressive failure of existing strategies to address the competitive position of the company, Johnson grants a more crucial role to environmental changes (2005: 28). Besides, he admits that the inability of organizations to acknowledge and address these “strong forces at work” causes inevitably a performance decrease. Henceforth, two main factors explain strategic drift situations: first, an increasingly complex and dynamic external environment and second, a leadership myopia to recognize that the adjustments made on the business strategies are not able anymore to follow the environmental changes.
Figure 4. Development of a strategic drift
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Starting from this duality of factors, external and internal, Gilligan (2009) provides more details about potential strategic drift factors. From the environment side, he gives the examples of changes in market structure and competitive landscape, the evolution of consumers’ expectations as well as legislative and technological changes (2009: 507). As internal factors, Gilligan mentions poor investment and cost control management, and weary managerial philosophy.
Complementing Johnson & al.’s dynamic view of strategic drift (incremental strategies drifting from the environment transformational changes), Gilligan introduces the concept of strategic wear-out. He explains that if the company fails to anticipate early enough the external changes -by modifying consequently its course-, even the most successful strategies would inevitably wear-out and lead to failure (2009: 506). He suggests the ‘gravity law of marketing’ concept, where past strategic choices don’t guarantee future success, as “regardless of how big or powerful an organization or brand becomes, sooner or later its performance will almost inevitably decline” (2009: 508).
Less fatalistic, Dwyer & Edwards (2009) and Danciu (2010) support that the ‘gravity law of marketing’ is not universal as it applies only to complacent companies who are averse to change their current winning strategies. The three authors consider that facing dramatic environmental changes, companies can react proactively and implement strategic shifts.
Concerning the explanation of strategic drift, Danciu proposes four sets of causes: Change in consumers’ expectations and needs, change in market structure and competition, change in macro-environment and internal strategies (2010: 11). The same framework is used in order to list the main factors that led Nokia to a strategic drift in the smartphone market (Appendix 12). The next two sections will particularly focus on the change of the market structure and competition, and the change of the internal strategy of innovation13. The impact, on Nokia, of both change factors will be analyzed based on two concepts: industry platform (section 3.2) and dynamic capabilities (section 3.3).
An important aspect that changed dramatically the competitive mobile landscape, and by extension left Nokia with an inadequate strategy, is the market’s paradigm shift from a competition between smartphones to a rivalry between smartphone industry platforms.
While Nokia acknowledged early on the importance of building a compelling platform, its past strategic choices show that it failed to embrace one important aspect that differentiates industry platforms from product platforms. For instance, if Symbian represented a technological base of components that allowed third party complementors to build upon their services (Gawer & Cusumano, 2008: 28), Nokia failed to accept that its smartphone platform would have much lower value without these partners’ complementary apps by trying to increase its own value share (section 3.2.1).
Moreover, Apple and Google, new entrants with much less mobile industry knowledge and experience succeeded to align their ambition in the smartphone segment with complementors’ interests (Yoffie & Kwak, 2006: 90). Both attracted developers’ resources and innovation to bring additional value to their platforms’ users by creating technological motivations (e.g. new hardware features, accessibility to more development APIs14 ) and business incentives (e.g. Promotion in featured selections of applications stores and TV ads15 )(section 3.2.2).
Offering more accessible application marketplaces than their main competitors (Windows Mobile and Symbian) as well as a simple and financially attractive revenue sharing programs, the two companies succeeded in a very short time to generate a positive feedback, increasing geometrically their respective platforms’ adoption rates (section 3.2.3).
In the mobile industry, ‘platform’ and ‘ecosystem’ terms are usually used interchangeably, but strategic literature authors tend to separate them. According to Cusumano (2010: 33), the main distinguishing feature resides in ‘networks effects’ creation. Similar to the autofeeding multiplication of application developers around winning operating system, the choice of an operating system by ‘independent’ manufacturers generates powerful network effects. A platform that attracts more vendors is more likely to increase its users’ installed base, thus attracting more complementors and so on.
Eleven years before the Open Handset Alliance, host of Android OS development since 2007, Symbian Ltd. was built from the merger of several mobile players’ software assets (Nokia, Psion and Ericsson) to develop a core technical platform where competitive companies can share, as licensee, a more attractive common operating system.
Launch of Symbian
Since its creation, Symbian Ltd. pursued an open strategy towards its licensees, leading to the maximization of the total platform value (Shapiro & Varian, 1999: 198). Preventing its proprietary control by a single firm, Symbian’s capital was equally owned by handset makers. The entry of new manufacturer licensees or their exit from the alliance required series of shares transactions to rebalance the ownership structure (West, 2011: 8).
But starting from 2003, Nokia was more and more tempted to increase its control over Symbian venture for two -seemingly justified- reasons: the first was to monopolize a bigger share in the value generated by Symbian’s innovative platform and therefore increase its own profitability (Grant, 2010: 299). Nokia’s second motivation was to insure itself an important competitive advantage, through the closer integration of the operating system core (maintained by Symbian) with the interface layer (managed separately by manufacturers). By becoming Symbian’s major sponsor, Nokia was aiming to be a central actor that controls the OS technological evolution.
Symbian platform control
The first move to increase Nokia’s influence occurred in 2004, when Psion, one of Symbian founding members, wanted to sell its stake (Wray, 2004a). At that time, by bidding for Psion shares, Nokia’s intention was to increase its stake from 32% up to 63%. But despite public announcements from Nokia reassuring its co-allies that Symbian would remain independent, the latter (Sony Ericsson, Panasonic and Siemens) took part in the shares purchase operation and blocked Nokia’s holding at 47.9% (Wray, 2004b).
With the failure of its bid for financial dominance, Nokia used its commercial weight to gain the targeted control. In 2006, accounting for over three fourth of sold Symbian devices, Nokia negotiated, to its advantage, a reduction of the license royalties by half (West, 2011: 23). By asphyxiating financially the alliance host and depriving it from the required resources to move the platform forward, Nokia prepared the acquisition of the remaining capital of Symbian in 2008 (Appendix 13). Meanwhile, the other Symbian partners, such as Motorola, were constantly exploring -less competitive- alternatives such Linux/Java solutions and Windows Mobile (PC World, 2006).
Outcomes for Nokia
By gradually controlling Symbian’s course, Nokia succeeded in fueling its quick growth and grab a higher share from the premises of smartphone potential; however, its move drove progressively past allies away and eventually deprived Symbian’s operating system from, first, additional users, which by network effects, could have increased the platform attractiveness to complementors (application developers and manufacturers from emergent economies) and second, from additional innovation and technical contributions. In brief, Nokia was able to increase its share from the industry’s total value, but by doing so, it reduced the total value of the industry (moving from optimum A to a lower optimum B in Facing an increasing competition from Android that massively attracted its ex-allies, Nokia back-pedaled over its controlling strategy in April 2009 by transforming Symbian into an open foundation. But the absence of attraction of Symbian mobile operating system to new manufacturers, added to the complexity to manage the new structure, convinced Nokia to take its stewardship once again in November 2010 (Ricknäs, 2010a)16.
illustration not visible in this excerpt
Source: Adapted from Shapiro & Varian, 1999: 198.
From the overview of Nokia’s history in the mobile phone industry (section 2.1), it appears that the Finnish manufacturer built his leadership in the smartphone segment on unique strengths such as broad distribution networks and global branding. Until 2007, existing competitors were unable to match Nokia’s innovation level and reproduce these sustainable advantages.
1 With 2.7 Billion mobile phones shipped in a decade, from January 1, 2000, to December 31, 2009 (Ahonen, 2011a: 98).
2 24% according to IDC, and 25% to Strategy Analytics (Appendix 2).
3 The sales numbers for 2011 were calculated by extrapolation from the first two trimesters’ sales taking into account average quarterly sales seasonality over the last 4 years.
4 This sub-section focuses mainly on smartphone segment, its specific market and competition patterns, rather than the entire mobile phone.
5 The hypercomp]etition that characterizes the mobile phone industry and its impact on Nokia’s strategic drift in smartphones are analyzed more in detail in the next chapter, section 3.2.2.
6 30-35% gross margin and 13% operating margin for mobile phones; 10% and 4%, respectively, for PCs and Laptops (Bernstein Research, 2011:19).
7 CR4 refers to the Four-Firm Concentration Ratio which measures the total market share of the four largest firms in an industry
8 From 57 EUR for a Huawei IDEOS (Huawei, 2010) to 849 EUR for an iPhone 4S (Apple, 2011a).
9 Previously, the smartphone category appeared in Nokia’s public documents under other terms: for example ‘Converged devices’ in 2002 and ‘Multimedia Computers’ in 2007 (Nokia, 2011c).
10 The primary benefit of different manufacturers’ handsets was synthesized from a summary of qualitative reviews from high tech blogs (Techcrunch and Engadget); in that regard it should be considered as a subjective illustration of the actual and average performance of major mobile phones.
revenues), falling from 38% market share in basic phones and 60% in smartphones, in the
11 During the last months, the company’s profitability was also partly affected by internal restructuration projects.
12 According to a customer survey conducted in June 2010 within the US, only 22% are very satisfied with their Nokia phones against 73% for Apple iPhone users (ChangeWave Research, 2010).
13 The macro-environment change was mentioned along the industry analysis (chapter 2) while the change in consumer’s expectations and needs requires a different research approach involving smartphone users rather than the combination experts’ interviews and industry secondary resources adopted in this work.
14 An API (Application Programming Interface) is the software ‘toolbox’ that gives developers access, for their applications, to some of the phone main software and hardware features (PC MAG, 2011).
15 Apple broadcasted, since 2008, a series of TV advertisements highlighting free and paid iOS applications and showing their potential user value (Ars Technica, 2009a,b,c).
16 In April 2011, two months after the announcement that Windows Phone 7 will be its future and main platform, Nokia communicated that Symbian development and support will be outsourced to Accenture starting from 2012.
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