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BUS 307: STRATEGIC MANAGEMENT

Nokia and The Global Phone Industry

Name Riva Afros Rezwana Ferdous Khan Khalika Aktar Mahmuda Rahman Riyasat Rahim Rahim

Id 082011076 082011058 082011041 082011089 082011119

Date: 06-Jan-12

Executive Summary
Nokia is a brand name in mobile phone industry since the early twentieth century. It is a Finnish multinational communications corporation that is headquartered in Keilaniemi, Espoo, a city neighboring Finland's capital Helsinki. The first generations of modern mobile phones were purely devices for conversation and text messages. The money lay in designing desirable handsets, manufacturing them cheaply and distributing them widely. The necessary skills overlapped most of all in Finland, which explains why Nokia, a company that grew up producing rubber boots and paper, could become the world leader in handsets. As microprocessors become more powerful, mobile phones are changing into hand-held computers. As a result, most of their value is now in software and data services. This is where America, in particular Silicon Valley, is hard to beat. Companies like Apple and Google know how to build overarching technology platforms. Nokia, along with the rest of Europe s mobile industry, is being squeezed in both simple handsets and networking equipment. Cheap mobile phones based on chips from MediaTek, a company based in Taiwan, are increasingly popular in developing countries. By some accounts this system and its users now account for more than one-third of the phones sold globally, Mr. Stephen Elop the present CEO of Nokia wrote in his memo. And at $28 billion in 2010, the revenues of China s Huawei almost equal those of Sweden s Ericsson, the world s leading maker of gear for wireless networks. There were found the problem of Nokia in the global phone market; But just like Sony, Nokia has not found a way to shift from hardware to software, says Stphane Tral of Infonetics Research. To allow Nokia finally to shed its hardware skin, Mr. Elop, formerly in charge of Microsoft's Office software products, was brought in. The firm also got a new operational structure and leadership team, more of whom came from outside Finland. And Nokia will henceforth have just two distinct businesses: smartphones and mass-market mobiles. The strategy management and the ultimate makers with different leading perspectives are the main focus of our report on the case of Nokia and the global phone market . This is a report based on secondary information which includes news, researches and articles written by experts and specialists. With any circumstances we do not have the right to change or modify any information, statistics and quotes.

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Topics
y y y y y y y y y Introduction Current Position Symptoms Identification of the Problem Alternative Solutions Analysis of the Alternative Solution Recommendation Implementation Conclusion

Introduction
Prior to February 11th, Nokia's strategy in smartphones was to use the Symbian and MeeGo platforms, linked by a common developer environment (Qt) and service layer (Ovi). MeeGo would be used in the highest end devices, with Symbian in everything else. Underlying this was an assumption that MeeGo would, in the longer term, gradually erode Symbian. Crucially, Nokia would control all areas - in both software and hardware. In the run up to the announcement, speculation centered around Nokia introducing an additional platform, with Windows Phone emerging as the most likely option. When the new strategy was announced, there was a palpable sense of surprise - very few in the industry, even amongst Nokia's harshest critics, anticipated the speed or depth of this unprecedented change in Nokia's smartphone strategy. The impact is made all the greater because Nokia's new partner, Microsoft, is the very company it sought to avoid a decade ago for fear that mobile device manufacturing would become a commodity business. This really underlines how much things have changed in the last 15 years. Commoditization is still a long term danger, but the short term danger from smartphone competitors is a far bigger threat. So, we are talking about strategies for managing changes!

Current Position
Nokia is engaged in the manufacturing of mobile devices and in converging Internet and communications industries, with over 132,000 employees in 120 countries, sales in more than 150 countries and global annual revenue of over 42 billion and operating profit of 2 billion as of 2010. It is the world's largest manufacturer of mobile phones: its global device market share was 23% in the second quarter 2011. Nokia's estimated share of the converged mobile device market was 31% in the fourth quarter, compared with 38% in the third quarter 2010. Page 3 of 10

Global Mobile Device Market Share

Nokia 24%

Nokia produces mobile devices for every major market segment and protocol, including GSM, CDMA, and W-CDMA (UMTS). Nokia offers Internet services such as applications, games, music, maps, media and messaging through its Ovi platform. Nokia's joint venture with Siemens, Nokia Siemens Networks produces telecommunications network equipment, solutions and services. Nokia is also engaged in providing free digital map information and navigation services through its wholly owned subsidiary Navteq.

Others 54% LG 5%

Samsung 18%

Figure 1 Global Mobile Device Market Share

Nokia has sites for research and development, manufacture and sales in several countries; as of December 2010, Nokia had R&D presence in 16 countries and employed 35,870 people in research and development, representing approximately 27% of the group's total workforce. The Nokia Research Center, founded in 1986, is Nokia's industrial research unit consisting of about 500 researchers, engineers and scientists; it has sites in seven countries: Finland, China, India, Kenya, Switzerland, the United Kingdom and the United States. Nokia operates a total of 9 manufacturing facilities located at Salo, Finland; Manaus, Brazil; Beijing and Dongguan, China; Komrom, Hungary; Chennai, India; Reynosa, Mexico; and Masan, South Korea. The Nokia brand, valued at $25 billion, is listed as the 14th most valuable global brand in the Interbrand/BusinessWeek Best Global Brands list of 2011. It is the 8th most admirable Network and Other Communications Equipment Company worldwide in Fortune's World's Most Admired Companies list of 2011, and the world's 143th largest company as measured by revenue in Fortune Global 500 list of 2011. In the global smartphone rivalry, Nokia held the 3rd place in 2Q2011, trailing behind Samsung and Apple. According to new data from Gartner, more than fifty percent of all smartphones bought worldwide during the third quarter were running some flavor of the Android operating system. Worldwide sales of mobile devices totaled 440.5 million units in the third Page 4 of 10

Global Smartphone OS Market Share Others 16% iOS 15% Android 53% Symbian 17%

Figure 2 Global Smartphone OS Market Share

quarter of 2011, up 5.6 percent from the same period last year, according to Gartner. Of that total, 115 million of those were smartphones, with smartphone growth slowing slightly from last quarter, but still up 42% from last year. Nokia (23.9%), Samsung (17.8%) and LG (4.8%) took the top three spots in global mobile device market share. Android (52.5%), Symbian (16.9%) and iOS (15%) took the top three spots in terms of global smartphone OS market share.

Symptoms
In July 2010, Nokia reported a drop in profits by 60%, which turned into an operating loss of EUR 487 million in Q2 2011.Technology analyst Michael Walkley pointed out that in 2007, Nokia had 67% of operating profits while Apple had just 4%. Today, while Apple has 52% of industry profits, Nokia has been relegated its rival s former position with just 4% of operating profits. The mobile phone industry has undergone remarkable change over the past few years. Nokia and Motorola have lost considerable market share to RIM, Apple, and Android-based phones, while Microsoft is nearly out of the picture. On Friday, September 10, Nokia announced that Stephen Elop will take over the position of CEO from Olli-Pekka Kallasvuo. Elop, a Canadian and Nokia s first non-Finnish CEO, was previously the head of the business unit at Microsoft that produces the popular Office software suite. Since the launch of Apple s iPhone in 2007, Nokia has seen a more than 50 percent decrease in its share price. Now, Elop acknowledges that "Nokia requires an approach that recognizes that today s customers are expecting a combination of great handset, an operating environment that is great to use and all within the context of the Internet." Nokia is now changing its focus from hardware to software in order to better compete with the features offered by BlackBerry and the apps offered by iPhone and Android. Following the announcement of the new CEO, Nokia shares increased 6 percent in Helsinki. Market share in smartphones has been rapidly declining. Now, the number one threat to the market is Android, the Google smartphone operating system. In Q2 2009, Android had a tiny market share of just 1.8 per cent. However, by Q2 2010, Android smartphones held a global market share of 17.2 percent, eclipsing the growth in sales of any other competitor. And now, a new report from Gartner says that by 2014, Android phones will represent nearly 30 percent of the entire global market. Nokia is not immediately doomed, since its foothold with loyal customers has Symbian predicted to retain 30.2 percent market share in 2014. Nonetheless, this represents a declining business and is therefore a huge threat to Nokia. Microsoft is hardly a player at all in the smartphone market, meaning it stands on the sidelines of a very lucrative industry. As Nokia struggles to get back into the game, an ex-Microsoft manager as CEO may not be the best thing for the company. After all, why was he not in charge of smartphones at Microsoft if that is his strength? Of course, there is still the significant potential for Elop s take-charge approach to uplift Nokia, and possible future cooperation with Microsoft may be beneficial to both companies. Page 5 of 10

Online stores in France, Spain and the Netherlands were already shut down, and the company is moving forth with closing even more of them. Apparently, the sales were not great

as well, and, instead of proving profitable for the company, these stores were actually eating money. Nokia decided to shut down the various online stores it operates so as to cut down on costs, since it is getting through a rough period at the moment. Nokia is expected to lose a lot of market share in the process of moving to Windows Phone, and already started losing ground in various markets around the world. Some of the latest analyst reports suggested that the company might fall to the third position on the smartphone market this quarter (final quarter of 2011), and that Symbian will lose its leading position on the market as well in the near future.

Identification of the Problem


The peril of dallying: Nokia had some additional problems to deal with. The firm realized its world was changing and was working on a touch-screen phone much like the iPhone as early as 2004. Realizing the importance of mobile services, it launched Ovi, an online storefront for such things in 2007, a year before Apple opened its highly successful App Store. Nokia is the best for hardware from all mobile manufacturers. All iPhone's have problems with hardware. Nokia's weakness is in software. But turning a Finnish hardware-maker into a provider of software and services is no easy undertaking. Nokia dallied and lost the initiative. Historically, Nokia has been a highly efficient manufacturing and logistics machine capable of churning out a dozen handsets a second and selling them all over the world. Planning was long-term and new devices were developed by separate teams, sometimes competing with each other the opposite of what is needed in software, where there is a premium on collaborating and doing things quickly. Olli-Pekka Kallasvuo, Nokia s boss from 2006 until last September, was keenly aware of the difficulty. To get an infusion of fresh blood Nokia bought several start-ups and was reorganized to strengthen its software and services. And it tried to turn Symbian, its own operating system for smartphones, into a platform in the mould of the iPhone and Android. But just like Sony, Nokia has not found a way to shift from hardware to software, says Stphane Tral of Infonetics Research. To allow Nokia finally to shed its hardware skin, Mr. Elop, formerly in charge of Microsoft's Office software products, was brought in and apparently given what Mr. Kallasvuo never had: carte blanche. This is why most observers expected the thorough changes that have now been announced, especially as concerns the operating system on which Nokia intends to bet its future. The firm has to move fast if it wants to have a chance to create a third platform for mobile software and services next to Android and the iPhone hence the decision to ally with Microsoft rather than going it alone with MeeGo, a technically sophisticated but still incomplete operating system it has been developing jointly with Intel. MeeGo, having hitherto been seen as the firm's platform of the future, is being downgraded to a mere

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"research project", while Symbian, Nokia's current operating platform, and is being relegated: it will henceforth only be used on low-end smartphones. To be specific the main problems are` Nokia's weakness is in software  ` Symbian user experience

Transition delay   MeeGo isn't yet ready for the role it was envisioned for MeeGo gave additional credibility, scale and engineering resources, but also added further delays.

Symbian to windows phone  Accompanied by a series of other structural changes in the company

Failure in the Ovi strategy   Underestimated the importance of third party applications Failure to deliver a comparable user experience (DRM, catalogue scope, ease of use), limited by an inadequate software catalogue

Summarizing Nokia s Strategic Choices (Alternative Solutions)


There are many factors and variables that make this situation look complex but they roll up into a choice for Nokia between three strategies: 1. Aggressively invest in their own software platform so that it becomes competitive with alternatives that are available to their customers (focusing on cost leadership). 2. Adopt one of the competitive software platforms, and focus on differentiating their hardware (focusing on differentiation). 3. Pursue Android and to place a significant Cost bet on the Android ecosystem (focus). Differentiation

Leadership

The above choices can be fit in Porters three generic strategies:

Choice 1

Choice 2

Focus
Choice 3

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Analysis of the Alternative Solution


The first strategy has the largest possible downside, and the largest possible upside. If the first strategy fails, Nokia becomes irrelevant in the smart phone market. The definition of success for this strategy leads to massive relevance (and profits). The second strategy has a downside that keeps Nokia in the smart phone business, but as just another one of many manufacturers. Not great, but not as bad as exiting the market. The upside of the second strategy is also not as appealing as winning with the first strategy. The best Nokia can do is be the hardware winner but without control over the software environment. Even if there were as much profit opportunity, the risk that comes with lack of control would discount the value of winning with this strategy in Nokia s eyes. The third strategy comes up with a different issue. Mr. Elop would not choose only Android because of the fallout it would cause in injuring Microsoft (as a perceived gesture of lack of faith in Windows Phone 7 ) and choosing Android really would have been raising the white flag of surrender. The Maximin Strategy Game Theory When you focus on the two choices one with large up and downsides, and one with moderate up and downsides, you see that Nokia is facing a choice, in game theory, of adopting either the minimax or maximin strategy. Nokia can either pick the strategy that has the highest possible best case, or pick the strategy that has the highest possible worst case outcome. A maximin strategy maximizes the minimum guaranteed payout in game-theory-jargon. Translated, it is the conservative approach minimize the downside of failing in the execution of the strategy. Nokia should definitely take the conservative strategy, using maximin to attempt to ensure that the worst is not that bad. And that means embracing [at least*] one of the other already successful smart phone software platforms for their future devices.

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Recommendation
Perhaps we can make a fluent argument as follows:
y y

y y

Nokia can t survive with business as usual. An invest in Symbian strategy is actually a red herring Nokia is already doing that but failing so it would lead to assured destruction, and Nokia therefore must embrace another platform. Mr. Elop, as a former Microsoft person, would lose credibility if Nokia were to choose Windows Phone 7 as their platform. Mr. Elop, as a former Microsoft person, would not choose only Android because of the fallout it would cause in injuring Microsoft (as a perceived gesture of lack of faith in Windows Phone 7 ). Mr. Elop, therefore, will choose to introduce Nokia smart phones based on both Android and Windows Phone 7.

Even if Nokia does have a viable strategic choice of investing in Symbian, they shouldn t. The risk of failing to overcome a culture of mediocrity is too great. Nokia s best choice is to adopt either (or both) Windows Phone 7 or Android as their official platform moving forward. The two platforms were built with different person in mind, and Nokia should offer phones for each group of people, based on the platforms designed for each group.

Implementation
Firstly, during the strategy announcement, it was made clear that additional chassis specifications (classes of devices) will be introduced, catering for different and lower priced devices. Indeed, Nokia is likely to be instrumental in helping author these specifications. Thus the limitations of the chassis specifications are likely not a major concern. Secondly, it is likely that Nokia will come to dominate the Windows Phone device line up. It's not hard to imagine Nokia devices making up 80% or more of Windows Phone shipments. That level of dominance will also give Nokia the greatest voice in shaping the future of the platform and it clearly becomes Microsoft's favored hardware partner. It's going to be interesting to see how Microsoft's other hardware partners react - there's a real possibility that one or more of them will stop making Windows Phone devices, on the basis that it is going to be hard to compete with a Nokia which has (now) fully committed to the platform. It is not too much of a stretch to suggest that it may get to the point where Nokia smartphones and Windows Phone become almost synonymous with each other.

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Conclusion
Quoting Nokia CEO Stephen Elop s honest 'burning platform' memo: There is a pertinent story about a man who was working on an oil platform in the North Sea. He woke up one night from a loud explosion, which suddenly set his entire oil platform on fire. In mere moments, he was surrounded by flames. Through the smoke and heat, he barely made his way out of the chaos to the platform's edge. When he looked down over the edge, all he could see were the dark, cold, foreboding Atlantic waters. As the fire approached him, the man had mere seconds to react. He could stand on the platform, and inevitably be consumed by the burning flames. Or, he could plunge 30 meters in to the freezing waters. The man was standing upon a "burning platform," and he needed to make a choice. He decided to jump. It was unexpected. In ordinary circumstances, the man would never consider plunging into icy waters. But these were not ordinary times - his platform was on fire. The man survived the fall and the waters. After he was rescued, he noted that a "burning platform" caused a radical change in his behavior. We too, are standing on a "burning platform," and we must decide how we are going to change our behavior. At least some of the problems have been due to the attitude inside Nokia. Nokia has lacked accountability and leadership to align and direct the company through these disruptive times having a series of misses. It has not been delivering innovation fast enough.

For us, the discussion around Nokia's strategy decision comes down to this simple question: Could Nokia be successful in the smart devices space by following one of those strategy? There are two answers to this question, each of which leads to a different strategy. If yes, continue the SymbianMeeGo-Qt strategy. If no, a strategic partnership with Microsoft and a switch to Windows Phone offers the best way forward. In both cases, Nokia will need to improve upon its execution. The trouble is that there are so many factors and uncertainties involved that it is just not possible to give an absolute answer to the question above. To an extent, it means the decision then comes down to assessing relative risk and potential return.

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