The title was “Nokia loses Mobile Lead Amid Bad Call on Phones”, with the sub title “Corporate Culture Lavished Funds on R&D but Squandered Chances to Bring Innovations to Market“.
In the article it is described how Nokia more than seven years before Apple rolled out the iPhone had similar technology ready and further in the late 1990s had a prototype wireless tablet computer with a touch screen.
Consumers never saw either device. As the article argues, the gadgets were casualties of a corporate culture that lavished funds on research but squandered opportunities to bring the innovations it produced to the market.
What happened? To understand this we can make an odyssey back in time, and we will find interesting historical similarities.
Motorola pioneered analog mobile phones in the 1970s. Prior to 1973, mobile telephony was limited to phones installed in cars and other vehicles. Motorola and Bell Labs raced to be the first to produce a handheld mobile phone. That race ended on April 3, 1973 when Martin Cooper, a Motorola researcher and executive, made the first mobile telephone call from handheld subscriber equipment.
The prototype offered a talk time of just 30 minutes and took 10 hours to re-charge, which was highly unpractical, but it placed Motorola in leadership in handset development for two decades to come.
Then disaster struck for Motorola due to leapfrog innovation being brought out to the market by the Nordic suppliers Ericsson and Nokia, with a new generation of digital technology.
Nokia led the wireless revolution around the millennium and set its sight on ushering the world into the era of smartphones. The Nokia Communicator was one of the first mobile phones that combined business optimized functionality with a QWERTY keyboard and an LCD screen. My friend Petri Kajander, then in Helsinki, was one of the first people to have one.
However now in 2012 that the smartphone era truly has arrived, Nokia is racing to roll out competitive products as its stock price collapses and thousands of employees loose their jobs.
In the current year, 2012, Nokia ended a 14-year-run as the world´s largest maker of mobile phones, as rival Samsung Electronics took the top spot and makers of cheaper phones, ate into Nokia´s sales volumes. Nokia share of mobile phone sales fell to 21% in the first quarter from 27% in 2011, according to market data from IDC. Nokia´s share of the market had peaked at 40,4% at the end of 2007.
Nokia is loosing ground despite spending $40 billion on research and development over the past decade, which is nearly four times the amount spent by Apple in the same period.
The decline is even more surprising if one knows Nokia´s corporate history. The company had a long history of successfully adapting to big market shifts, having started out in 1865 as a lumber mill and over the years diversified into electricity production and rubber products.
At the end of the 1980s when the Soviet Union collapsed and recession in Europe caused demand for Nokia´s diverse portfolio of products to dry up, the company started to focus on cell phones.
Nokia executives predicted early on that the business of producing cell phones that do little but make calls would lose its profitability and the company spent billions of dollars to research mobile e-mail, touch screens and faster wireless networks.
Nokia saw where the industry was heading and was the market leader and did research in the right direction, yet it has lost out. How could this happen?
At the same time, Research in Motion from Canada had a dominant position in the corporate market thanks to its Blackberry device, but it has not been able to come up with a solution to the iPhone either and as a result RIM has lost about 90% of its market value in the past five years.
This blog post aims to explain why Nokia has lost the position as market leader, and what companies can learn from this in order to protect themselves from falling into similar decline.
The hurricane that hit Motorola, that hit Nokia, that hit Blackberry is called hyper competition, and there is no escape from it in the modern business world.
When the iPhone was launched, Nokia failed to recognize the threat. Consumers loved the iPhone and by 2008, Nokia executives had realized that the threat was not the hardware but the software and the app store business model, and that matching the iPhones slick operating system IOS was their biggest challenge. By then it was too late.
Hyper competition is a situation brought by modern technology and speed of business, globalisation, rapid transport and manufacturing in which there is global very strong competition between companies, markets are changing very quickly, and it is easy to enter a new market, so that it is not possible for one company to keep a competitive advantage for a long time.
This can be because of a rapid escalation of competitive tactics used among direct business competitors. Techniques used may include rapid innovation in product positioning, pricing adjustments, increased marketing efforts and product improvements.
However for most traditional companies, the full impact of hyper competition has yet to be understood. Then when it is understood, it will be too late.
Hyper competition results from the dynamics of strategic maneuvering amongst competitors in the global economy with perfect price information through the internet.
It is the condition of rapid escalation of competition based on price-quality positioning, competition to protect or invade established product or geographic markets and competition based on deep pockets and the creation of even deeper pocketed alliances.
Often a characteristic of new markets and industries, hyper competition occurs when technologies or offerings, or innovative leapfrog development brings something so new that standards and rules are in flux, resulting in competitive advantages.
However long term profits resulting from such competitive advantages cannot be sustained.
In order to compete irrespective of how short-term the competitive advantage is, companies can implement a strategy based on finding and building temporary advantages through market disruption rather than trying to sustain an unsustainable advantage.
The key to survive hyper competition is to continuously innovate, and as we in Bearing teach our clients, to innovate in dimensions that are possible to defend toward competitors.
It has been explained elsewhere on this blog that values are created on the outer edges, meaning in other dimensions than development of products and services.
This understanding is todays key to successful and sustainable profitability, however it requires a continuous process of innovation, as competitors will not stand still.
One path to success that Nokia failed to take is to to use sweet spot analysis, where the strategic sweet spot of a company is where it meets customers’ needs in a way that rivals can’t, given the context in which it competes.
The creative part of developing strategy is finding the sweet spot that aligns the firm’s capabilities with customer needs in a way that competitors cannot match given the changing external context – factors such as technology, industry demographics, and regulation.
David J. Collis and Michael G. Rukstad presented an approach for how to do this in their Harvard Business Review article “Can You Say What Your Strategy Is?” in April 2008. In the article, they present a graph similar to the one below, which we use in our methodology approach for corporate strategy work in Bearing.
For the interested reader, the article can be downloaded by clicking on the link below.