THE RISE AND FALL OF NOKIA

Written report for ILEM6-27 - Organisation theory and behavioural science Prepared by: TEAM 11
Li Ming Sun Wei Wu Hao Ko Hing Tobey Chen Duo 2012955312 2012955647 2012955738 2008118762 2011950080

THE RISE AND FALL OF NOKIA

Written report by TEAM 11 Executive Summary We analyse the rise and fall of Finnish mobile phone giant, Nokia, in this report. Using the Porters Diamond model in discussion 1, we have shown that the rise of Nokia was mainly due to the favourable environment in the Nordic nations. After comparing the current market environment with the past, we concluded that Nokias fall was mainly contributed by the raising popularity of modern smartphones, and the fact that Nokia failed to catch up with the changes in market trend. We looked at Nokias resources in discussion 2, and some recommendations were proposed to the company regarding the decision to retain or outsource its operations. We suggest Nokia to retain its technology R&D, phone design, and software and services division; because these operations are helping Nokia to differentiate itself and make money. We also recommend Nokia to outsource the R&D of Symbian platform, and the manufacturing and assembly operations, as these operations are costly to maintain and not making money. Our discussion of Nokias threats in discussion 3 shown that, Nokia has strong threat from its rivals and the consumers, the company need to continue working on differentiating its products and improving its social networking functions to remain competitive in the market.

TABLE OF CONTENTS
Discussion 1 Porters Diamond Analysis on Nokias Rise and Fall............4
The Rise of Nokia A Porters Diamond Approach ................................................................4 The Fall of Nokia A Comparative Approach ........................................................................6

Discussion 2 Decision to Retain or Outsource the Production.................8

Operations to be Retained...................................................................................................8 Operations to Outsource .....................................................................................................9

Discussion 3 Threats to Nokia, A Porters Five Forces Approach ...........10

Moderate Threat from New Entrants ................................................................................. 10 Weak-to-Moderate Threat from Substitutes....................................................................... 10 Very Strong Threat from Rivalry......................................................................................... 10 Strong Bargaining Power of Buyers (Threat of Losing Market Share) .................................... 11

Discussion 1 Porters Diamond Analysis on Nokias Rise and Fall

The Rise of Nokia A Porters Diamond Approach

Demand Condition Firstly, Nokia originates from the cold and sparsely populated Nordic nations, an environment that demands innovation in wireless communication technology as the wired communication infrastructures are both too expensive and too difficult to implement. Therefore, wireless communication dominates across the nations, and thus the demand for wireless communication device surges. Furthermore, people across the Nordic nations prefer mobile communication devices as the telecommunication service providers are reluctant to provide wired services due to the huge overhead cost (initial investment) saving brought by offering wireless communication service. Last but not least, the Finnish telecommunication market is so competitive that its customers are willing to buy from the lowest-cost supplier irrespective of the manufacturer. Such situation forces Nokia to adapt a cost-leadership strategy to improve productivity and produce at a very low cost. Factor Condition In terms of availability of knowledge, the Nordic nations high wireless phone coverage signals a mature market with abundant supply of knowledgeable professionals in the

5 wireless communications industry. As an international education leader (OECD, 2010), it is also easy to train the well-educated Finnish people into high-skilled professionals. In terms of financial availability, Nokia is not only a listed company with investments funded by its shareholders. The National Innovation Strategy initiated by the Finnish Ministry of Trade and Industry also funds Nokias R&D projects publicly. Therefore, Nokias projects are well-funded and allows the company to grow and develop at a fast pace. As a member if the European Union, Nokia also enjoys a larger market and zero-tariff from other member countries. Thus, Nokia can enjoy a greater economy of scale without encountering additional costs. Structure of Company and Rivalry There are 2 aspects on Nokias company structure and strategy that contributes to its rise. Firstly, Nokia employs a U form functional structure that allows it to take advantage of economies of scale, and eventually drives down cost of production. Moreover, the company focuses on human technology which makes the final product stand out from a line-up of functionally similar products. The fierce horizontal competition within the region also serves as a driving force that pushes Nokia to always strive for better and acquire patents to support its products. Thus, Nokia can always come out with innovations that surprise the customers and beat its competitors. Related and Support Industry Several developments are in favour of Nokia during the time of its rise. Top of the list was the development of digitalization technology that turns information into string of binary-bits, which turns mobile phones into something more than a mobile communication device. Nokia was among the first companies to adopt this technology into its products, and thus enjoyed the first-mover advantage. The cutting-edge technology was coupled with the ever-advancing and matured wireless communication technology, which makes Nokias phones more stable to use and cheaper to produce. On the other hand, the development in supply chain management helped Nokia to ensure an uninterrupted supply of parts and components in production. For example, Nokia was able to parallel source from other supply chain partners when one of its major suppliers factory was destroyed in a catastrophic fire (Mukherjee, 2008).

6 Government The Finnish government existed as a positive force in Nokias rise in early years. Firstly, as one of the freest economies in the world, the Finnish government did not set up any entry barrier in the telecommunication industry, nor did it try to inference the market and the industry; therefore, Nokia won the market share fair and square, and it was able to develop its core competencies through competing in a fair and competitive market. Moreover, the Finnish government displayed its strong support in innovation and R&D in the country. The Finnish Funding Agency for Technology and Innovation (FFATI) and National Fund for R&D (NFRD) was set-up in early 2000s to support the technology development in the country. Has a high-tech company, Nokia benefits tremendously from those government funding. Chance The development in digitalization technology was also served as a major chance for Nokia in its rise. The digitalization technology provides an entire new landscape of possibilities to mobile phone manufacturers; it allows manufacturers to differentiate themselves not only on look and feel, but also on how they implement these new technologies. Nokias decision to implement its own Symbian system was a good choice at that moment.

The Fall of Nokia A Comparative Approach

7 Change in Demand Condition As the wireless communication coverage approaches 100%, more and more people own a mobile phone and the market becomes more and more saturated. The market saturation forces producers to actively change its business strategy from cost-leadership to differentiation; as the customers are no longer pleased by companies offering simple and similar functionalities on their products. Being satisfied with simple mobile communication functionality, the customers shifts their focus on user experience; so whoever offers the best user experience wins in the market. Nokia, in its arrogant winners ego, failed to catch up with the market dynamics. Change in Factor Condition Nokia holds a patent portfolio of 36,000 telecommunication related patents (Envision, 2012), yet it fails to honour those highly-valuable patents into its flagship products, and just let its market share eat by the new entrants. With the new generation of smartphones dominates, Nokia currently lacks expertise in Linux, the base system for smartphone platforms; instead, it insisted on continuing using the incapable Symbian system, and the customers reacts badly to such decision. Change in Company Structures and Rivalry Nokias business is too concentrated on the mobile device market in recent years; therefore, the company becomes too vulnerable when its phones are not doing well in the market. On the other hand, Nokias competitor has changed from traditional mobile phone manufacturer to home electronics manufacturer previously focusing on producing personal computers; those companies are more experienced in making computer-like smartphones, thus giving them an edge over Nokia. Change in Related and Supporting Industries In general, the Finnish government has reduced its funding on R&D in the telecommunications industry; not only does Nokia suffer from this reduction in funding, such effect has a magnified impact to Nokia as its supporting industries (such as R&D on new wireless communication standard) also suffer from this. Change in Government The Finnish government decided not to rescue Nokia when it was on the verge of bankruptcy; it shows the Finnish government has lost confidence on Nokia which further speed up its fall. Nokia has also lost a substantial amount of financial support when the Finnish government decided to discontinue the export subsidy scheme.

8 Change in Chance The rise of social network has a tremendous impact on the fall of Nokia. As the competitors actively try-out functions to incorporate social elements onto their new phones, Nokia was so left-behind in realising the social trend and missed out the opportunity to surprise its customers.

Discussion 2 Decision to Retain or Outsource the Production

Operations to be Retained
We suggest Nokia to retain technology R&D, phone design, and the software and services in-house. Reasons to Retain Technology R&D Although currently a little bit behind its competitors, Nokia is still the worlds largest telecommunication LTE-related patent portfolio holder in the world. Such impressive patent portfolio indicates Nokias enormous ability to innovate, and the level of expertise the company holds against its competitors. More impressively, Nokia has obtained the patents for its state-of-the-art smartphone technology, such as PureView and PureMotion, since Nokia entering the modern smartphone market with its Windows Phone devices. The technology R&D is both capable of help Nokia differentiate itself and vital to Nokias future profitability, Nokia should retain it to allow a better control to the R&D operations. Reasons to Retain Phone Design A good phone design helps the consumers to identify the product. As the Nordic nations are famous in its minimalistic product design, Nokia should take advantage of the talents within the region to design products that stand-out in the market.

9 Reasons to Retain Software and Service The software and service division is among very few divisions in Nokia that is still making money for the company. The Nokia Map mobile application produced by the software and service division is highly regarded in the market as a strong competitor to the market leading Google Map; if Nokia retains the division and continue improving the quality of the mobile application, the Nokia Map could become one of the selling points for the Nokia smartphone in the future.

Operations to Outsource
We recommend Nokia to outsource the R&D of Symbian platform, and its manufacturing and assembly operations. Reasons to Outsource R&D of Symbian Platform The Symbian platform has very limited functionality and it can never be improved to compete with other established smartphone platforms, so Symbian should not be Nokias top priority. On the other hand, Nokia should not drop the platform as the platform works well on Nokias low-end phones. Outsourcing the R&D of Symbian allows Nokia to devote more attention and resources to the development of its highend products, and at the same time keep its low-end products refreshed. Reasons to Outsource Manufacturing and Assembly Operations Setting up manufacturing plant and assembly line in Finland is both infeasible and costineffective. Geographically, Finland is too cold to host the machines required in manufacturing as a lot of machines cannot operate in extreme weathers. Economically, the wage level in Finland is too high for companies to set up efficient assembly line as the assembly-line workers wages will definitely significantly increase the cost of production. Nokia should outsource these operations to developing-countries with low wage rate and suitable weather.

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Discussion 3 Threats to Nokia, A Porters Five Forces Approach

Moderate Threat from New Entrants

Nokia faces moderate threat from low-end smartphone new entrants using the Linuxbased operating-system (e.g. Android, Ubuntu). As those operating-systems can be obtained free-of-charge, theres essentially no entry barrier for entering the Linux-based system smartphone market; besides, those Linux-based systems are functionally superior to the Symbian system used on Nokias low-end phones those new entrants can be a significant threat to Nokia.

Weak-to-Moderate Threat from Substitutes

Technology advancement allows people to enjoy alternative channels of communication. For example, the Voice-Over-IP technology makes it possible for people to make calls using any devices connected to the internet. As a result, tablets, media players, or even handheld game consoles can act as substitutes to a mobile phone. Even though, such threat is weak as each device has its own limitation; yet, the threat cannot be ignored as these devices might further evolve in the future to post a greater threat to Nokia.

Very Strong Threat from Rivalry

Nokias rivals, such as Apple and Samsung, are currently front-runners in the smartphone market, those rivals post the strongest threat to Nokia not only because of their established reputation in the market, their smartphone-related patent portfolio is also a strong threat to Nokia. The infamous patent litigations between Apple and Samsung set a perfect example of how important patents are in the smartphone market whoever comes up with the patent first wins the battle. Nokia, as a late-comer in the

11 market, it implies Nokia has to either invest on getting new patents itself or paying the competitors a large sum of money to obtain the license to use their patents; either way, Nokia has to invest a lot of money in order to compete with the rivals.

Strong Bargaining Power of Buyers (Threat of Losing Market Share)

The buyers are very picky nowadays. Firstly, there exist many alternatives in the market for the buyer to choose from, Nokia need to design products that differentiate themselves in order to attract the eyeballs of the buyers. Secondly, buyers purchasing pattern affects their buying behaviour Nokia suffered in the past for refusing to offer free phones on contract to the customers. Lastly, buyers also display strong social needs while they decide to buy a mobile phone. No matter how functionally superior the phones are, if the phone does not allow users to connect with each other (e.g. through an app they have in common), the buyers may not find the phone attractive as it lacks a serious communication channel.