How Nokia Lost its Pace in the Smartphone Race
Nokia was for a long time the world’s largest mobile phone manufacturer and was in fact one of the pioneers of the smartphone. Throughout the 1990s and early 2000s, the Finnish company was regarded as the leading player in the global mobile technology market — with an assortment of mobile phone models powered by cutting edge technology and innovation. However, the tables turned rapidly in succeeding years, and these days Nokia is struggling for relevance, with the likes of Samsung and Apple emerging as the dominant smartphone manufacturers.
The Nokia of today is a very different, much diminished company compared to what the company was early to mid- 2000s. Although it cannot be regarded as a failure yet, it is certainly a diminished force — smaller, less profitable, with fewer assets, and less resources at its command — including dwindling cash reserves. According to reports, Nokia’s net cash fell to EUR€3.6 billion by the end of Nokia’s third quarter in 2012, down from €4.2 billion in its second quarter. Nokia’s decline is evident in several ways; the company recently lost ownership of its own headquarters, with reports indicating that it agreed to sell and lease back the building to raise €170 million in 2012. Since 2010, job cuts have been a regular occurrence at the company. As at January 2013, Nokia had approximately 45,000 employees in its mobile and location division — down from approximately 61,000 a year earlier. The fall of the company culminated in the acquisition of its devices division by Microsoft for US$7.2 billion — a mere fraction of the estimated $250 billion it was worth in the early 2000s.
What Went Wrong?
The subject of how things went wrong at Nokia inspires a wide range of reactions from mobile industry analysts and observers. There is some sort of agreement among many commentators that poor strategy and inability to adapt to change were at the root of the company’s misfortune. Besides, many observers have noted that complacency was at the root of Nokia’s problems. As a market leader for over a decade, Nokia seemed to rest on its laurels and play safe by relying on the approach that helped it achieve its success. Meanwhile, the consumer transition from traditional (feature) mobile phones to smartphones was dramatic and caught Nokia off-guard. Nokia’s failure to act swiftly when the trend towards smartphones was beginning to emerge is an important starting point in the discussion of the company’s subsequent decline.
As Al Ries and Jack Trout point out in their 1981 book Positioning: The Battle for Your Mind, change is inevitable, and leaders must embrace change rather than resist it. In the case of mobile telephony and the technology industry in general, when a new technology opens up the possibility of a new market that may threaten the existing one, it is often necessary for a forward-looking company to look out for opportunities and prepare to embrace the impending change in direction. Based on a number of indications, Nokia’s decline started with its failure to recognize that smartphones were the future of mobile technology — choosing instead to focus resources on feature phones. According to market research firm Strategy Analytics, only 14 percent of Nokia’s 2012 mobile phone shipments were smartphones, in contrast to 34 percent for Samsung.
Looking at both companies’ product mix over the past few years, Samsung’s growth was almost entirely in the smartphone segment, whereas Nokia went the opposite direction. As a percentage of total, Nokia shrunk its smartphone business from a peak of 24 percent in the third quarter of 2010 to around 14 percent by the first quarter of 2013. In the same period, Samsung’s smartphone share of portfolio increased dramatically from 10 percent to nearly 50 percent. These contrasting trends show how Nokia’s failure to evolve and embrace change contributed to its rapid decline. The company’s lukewarm response to the emergent signs of global interest in smartphones meant that it failed to position itself and take full advantage of its market leadership as the smartphone market began to show signs of an impending boom. Even then, Nokia has failed to retain its dominance of the less lucrative feature, low-cost mobile phone market segment, as the company faces intense competition from mobile phone producers in emerging markets who can make fast, cheap handsets at the lower end of the mobile phone market.
The failure of Nokia to adapt to changing circumstances is a big puzzle for technology industry analysts. Occasionally, a genuinely “disruptive” technology, might come along and wipe out an entire industry. However, this was not the case for Nokia, as the sources of decline appear more prosaic and avoidable — a failure to implement technologies that have already been developed, a disregard for changing customer demands and preferences, a complacent attitude towards emerging competitors, and a general failure to keep pace with the changing mobile phone market. One of the key issues that has been raised in this regard is Nokia’s failure to recognize the increasing emphasis on applications and operating systems as opposed to phone designs.
A major source of Nokia’s decline is its smartphone operating system strategy which is connected to problems with software more generally. The company did not seem to understand software, so it did not understand the critical importance of applications and building an ecosystem around applications. Several analysts acknowledge that Nokia has usually produced high quality hardware, but has struggled with issues related to its software. The company underestimated the significance of third-party applications to the smartphone proposition. While Nokia’s strategy seemingly focused on selling phones to as many people as possible, and designing a range of phones to meet every need, the company failed to understand that people did not merely want a phone; they wanted a way to manage their lives, perform various tasks — which depended largely on applications and operating systems.
The operating system-related problem might have been avoided if not for Nokia’s critical misstep. Seeing how outdated its Symbian platform had become in comparison to Google’s Android and Apple’s iOS, Nokia launched what it hoped would be its next-generation operating system, MeeGo, in 2011 alongside its flagship N9 Smartphone. Unfortunately, the launch of this well-received operating system came rather late. By the time Nokia released MeeGo, it was far too late to compete with Android and iOS.
In any case, by that point Nokia had already publically committed to Microsoft and soon after announced a decision to abandon in-house operating system projects such as MeeGo — meaning the positive reviews MeeGo received could not be leveraged and used as an effective platform for Nokia’s revival. “Nokia needed to have MeeGo ready to go into the market two or three years before its introduction in 2011,” says Adam Leach, a principal analyst at Ovum, a technology research services firm. “They needed to be on their new platform probably round about 2008, 2009. If you think 2008 was just when Android entered the market, it was just a year after iPhone was finding its feet. Nokia really needed to be there at that point with its platform for growth — offering some kind of computing experience on the device.”
Nokia’s seeming risk aversion prevented it from innovating and trying out disruptive, revolutionary ideas. While Samsung was frantically converting its mobile phone portfolio to smartphones, Nokia failed to do so and chose to play safe instead. Similarly, while the Android and iOS operating systems were starting to make waves, Nokia preferred to stick to its outdated Symbian operating system, and even when they belatedly introduced an operating system that showed potential (MeeGo), it was soon discontinued in spite of the positive reviews it received.
These missteps suggest an intolerance of failure and an aversion to risk taking that effectively sealed the company’s fate. The bigger and more successful Nokia became, the more risk-averse it become since the executives came to expect that all of the company’s innovative new products and services would succeed. However, this attitude bred caution and rigidity, as it stifled the culture that encouraged trial and error. It has been suggested that one reason for Nokia’s slow response to innovation and change is the unwieldy bureaucratic structure at the organization. Previous employees and knowledgeable analysts estimate that Nokia used to have over 300 Vice Presidents and Senior Vice Presidents around the world. The over-bloated management layers and over-complicated organization structure had caused significant delays in decision making processes. A single product decision could take months if not years to be made, hence significantly affected its responsiveness to the rapid-changing mobile market.
Another dimension of the discourse is the school of thought that blames Nokia’s poor presence in the United States for the company’s decline. According to this school of thought, Nokia did not do enough to penetrate and establish a strong presence in the United States, which is one of the largest and most lucrative smartphone markets in the world.
The company did not compete as ingeniously and energetically in the U.S. as it did in Europe and Asia, thus giving the impression that the country was at best a third-class priority. While it is unclear whether the de-prioritization of America was deliberate, the disruptive emergence of Apple’s iPhone and Google’s Android operating system revealed the magnitude of this strategic blunder. Nokia’s already poor market share in the United States plummeted even further, with the company accounting for barely 7 percent of the U.S smartphone market. On the other hand, each of Nokia’s biggest rivals has roughly 10 times more share of America’s market than Nokia, and this has been used as a springboard for global expansion, thereby undermining Nokia’s overall position.
Backing the Wrong Horse
The appointment of Stephen Elop as Nokia’s CEO in 2010 is considered by many observers as a key factor that arguably precipitated Nokia’s fall. Elop made a number of decisions that eroded what was left of Nokia’s claim to dominance — particularly by announcing that Nokia would abandon its Symbian and MeeGo operating systems for Microsoft’s Window’s phone operating system. At a time when Android had emerged the largest and most popular operating system in the market (with an estimated 80 percent market share) followed by Apple’s iOS (with about 13 percent market share), the decision to adopt Windows Phone operating system clearly indicated a lack of ambition and a poor understanding of consumer preferences and marketplace dynamics.
In any case, Nokia’s first Windows Phone-based smartphones were not sold until nine months after the company’s CEO announced the decision. Consequently, Nokia smartphone sales collapsed from 28.6 million smartphone units per quarter to 16.8 million units by the time its new Lumia series smartphones were starting to sell. Nokia effectively surrendered its dominant market position, further depleting to about 6.3 million units per quarter by the first quarter of 2013. In what is considered one of the fastest collapses in the history of the technology industry, Nokia’s smartphone market shares ultimately fell to an all-time low of about 4 percent.
Nokia’s changing shape is the result of its management’s efforts to realign the business to fit the new strategy of using Microsoft’s operating system, rather than developing smartphone platforms in house — leading to various in-house software efforts to be discontinued. Many technology industry analysts insist that choosing the Windows Phone operating system to fight the dominant players of Android and iOS was a bad decision for Nokia, as it simply dragged Nokia down and constrained its progress. With the success of Android and iOS, Nokia’s Windows Phone-based smartphones are proving a hard sell.
In a sense, the smartphone industry has become a “war of ecosystems” as Nokia CEO Elop rightly acknowledged, and for many phone buyers, the decision to buy smartphones is heavily influenced by the operating system or software that powers a given phone model. This means that with the low popularity and poor acceptance of Windows Phone (with only 4 percent market share), Nokia will find it difficult to compete against its biggest rivals — Samsung and Apple, whose phones are mostly based on Android and iOS respectively. Furthermore, adopting Windows Phone also means Nokia is now reliant on Microsoft’s execution — a company that continues to lag behind the pace of development on the main smartphone platforms.
With the benefit of hindsight, Nokia should have adopted Android instead of Microsoft’s Windows Phone — by not doing so, the company missed the opportunity to be in Samsung’s current position as the dominant force in the mobile industry. Though, it is left to be seen whether Nokia’s alliance with Microsoft will eventually prove successful and facilitate a turnaround in fortunes in spite of current evidence to the contrary.