Emerging Nokia free essay sample

INTRODUCTION Nokia, one of the leading handset manufacturers, is losing market share in developing and developed markets whereas total handset market is expected to grow by $222 bn. by 2013 (appendix 4). Appearance of smartphone market and rapid adoption of the latest technology by the competitors such as Apple, Samsung etc. has lit Nokia’s platform on fire in the developed market and threatened its dominance in the developing markets. Nokia has been great at turnaround strategy. Will Nokia be able to turn tables this time? KEY ISSUES Nokia faces different key issues in the developed markets and the developing markets: Issues in Developed Market  · Should Nokia quit the developed market?  · If they stay in the developed market, what products and services should be offered? Issues in Developing Market  · What should Nokia do to gain back its market leader position in the developing markets?  · What can Nokia do to improve products and services offered in the developing markets? PROBLEM STATEMENT Nokia’s CEO, Mr. Olli-Pekka Kallasvuo, is facing an issue whether Nokia should implement different strategy in the developed and the developing markets or a single global strategy and what products and services should be offered in the markets where Nokia decides to stay? EXTERNAL ANALYSIS As the industry operates in a different way in both the markets, different Porter’s five forces has been conducted for the developed and the developing markets. PORTERS FIVE FORCES (SEE APPENDIX 1) 2 INDUSTRY STRUCTURE, ECONOMICS AND TRENDS Below mentioned industry structure and trends can be observed in developing and developed markets: Commonality between Both the Markets  · A number of computer manufacturer such as Dell, Acer, Apple and Google have entered the market, thereby, threatening mainstream handset manufacturers dominance.  · In the software for handsets, ecosystems developed by specialist firms (and not handset manufacturer), such as Google, with support for third partly application is increasingly becoming more popular. Smartphones and third party applications are becoming more popular as consumers are spending more on smartphones and third party applications. Developed Markets:  · The trend in the developed market is changing from basic phones enhanced phones to smartphones. Projections for 2010 *â‚ ¬Ã¢â‚¬Å" 13 (case exhibit 11) assert this fact.  · Based on projections 2010 *â‚ ¬Ã¢â‚¬Å" 13, Smartphones will be the key revenue driver in the developed markets (See appendix 4). Basic and enhanced phones will contribute very little to the growth.  · Cell phone carriers are responsible for marketing, sales and distribution of handsets. So, strong relationships with cell phone carrier are vital for success of the product. Developing Markets:  · Marketing, sales and distribution of the handsets is handled by the manufacturer. Vast distribution network and penetration in the market is vital for success.  · Handset market in developing countries is volume driven market (low end handsets; low ASP) as well as price driven (high end handsets; high ASP) market. So, the revenue will be driven by both low end and high end handsets (see appendix 4).  · Products that are launched first in the developed markets are adopted in the developing markets in future. A lot of new products are manufactured and launched only in the developing markets to tap low end phones market. Penetration in the developing market is through first time sale. The crux of the situation is that industry in developed and developing markets is changing in different way. 3 COMPETITOR ANALYSIS The external environment for cell phone manufacturers is shifting from basic and enhanced phones to smartphones in the developed market and spread across the product lines in the developing markets. This shift is rapid in the developed markets whereas gradual in the developing markets. The competitors such as Samsung, Motorola, Apple and Google have quickly reacted to the change and adapted well. Apple, Google and Samsung have together threatened Nokia’s position as a leader in the developed markets. Samsung and LG are following the suite in the developing markets by introducing large number of low to high end products. Nokia’s current strategy has proven futile against competitors. One of the reasons of Nokia’s strategy failure is that it did not keep abreast of what competitors were doing. The industry changed completely in a couple of years and Nokia is unable to meet the market expectations. As a result, Nokia lost its position as a leader in India. Nokia’s future seems to be in dark in the developed countries. Also, Nokia is losing ground to competitors in the developing market. KEY SUCCESS FACTORS Key success factors for developed and developing markets are outlined below: As key success factors for both the markets are different, Nokia will have to adjust according to the customers’ need in both the markets. INTERNAL ANALYSIS Let’s look at Nokia’s current strategy to give insight into how Nokia should react to the rapidly changing industry. COMPANY’S STRATEGY Business Strategy: Integrated (dual advantage) in both developing and developed markets as it launches similar products in both the markets. More low cost products are launched in the developing markets to penetrate deep as these are price sensitive and volume based markets for Nokia. Core Competency: Nokia’s core competency is to manufacture wireless handsets and its ability to adapt to changing market conditions. The company has a long history of turning around the businesses at numerous occasions from paper manufacturer to rubber manufacturer to the electronics company and finally to a leading handset manufacturer. Geographies: Developed markets (Western Europe and North America) and developing markets (Eastern Europe, Asia, Middle East, Africa and Latin America). FINANCIAL ANALYSIS  · Nokia has been increasing its RD spending but its return on sales has been declining (case exhibit 2). More RD spending is not giving Nokia a competitive advantage as it has been launching many low cost products is developing markets, resulting in high RD cost on low margin products. The company does not have a great product to compete against Apple or Samsung in the smartphone market.  · Revenue and operating profits from device service segment has declined significantly since 2007 (case exhibit 3) i. e. Nokia has been losing against its competitors in major markets in its core competent segment *â‚ ¬Ã¢â‚¬Å" devices and services.  · The developed markets (mainly Europe) are the most lucrative markets for Nokia as they are the primary revenue driver and most profitable as well as ASP and gross margins for smartphones are much higher as compared to basic phones.  · Low P/E ratio (case exhibit 8) as compared to competitors such as Samsung and Apple reflects that market is casting doubts on Nokia’s future as a dominant player as Nokia is trading at lower multiple as compared to the competitors. To summarize the financial analysis, Nokia has been losing market share in both developed and developing markets, its profitability has been declining and the market is casting doubts on its future growth. OPERATIONS ANALYSIS (SEE TABLE IN APPENDIX 3) At Nokia, the organizational structure is changing from product based to functional organization. The change has been slow as they are late to react to changing needs of the market from device only market to device and solutions based market. The vision of producing customer centered products is aligning Nokia against the needs of the customer. Nokia has 9 factories and complex distribution network across the globe. As discussed in supply chain analysis (appendix 2), managing and controlling such huge operations can be a cost disadvantage. Moreover, revenue allocation of 10% to RD, for a company whose success rests on innovation, is too low. Also, more products launched in developing markets means less RD spending per product. More RD cost should be allocated to designing few innovative and technologically advanced products with latest ecosystem that can compete strongly against emerging players in the developed markets. MARKETING AND COMPETITIVE POSITION In the developed markets, the cell phone carriers market and distribute products for handset manufacturers. Strong relationship with cell phone carrier can put manufacturer at the forefront. Nokia does not have very strong relationship with the cellphone carriers as they do not have the ability to exert pressure on the buyer whereas Apple does. However, in the developing markets, the manufacturers market their own product. Extensive sales and distribution network play vital role. Nokia has strong presence in India with extensive distribution network whereas competitors do not have as strong network. So, Nokia is better placed in terms of marketing and distribution in the developing markets as opposed to the developed markets. EVALUATION OF ALTERNATIVES Clearly, Nokia is at crossroads in the developed markets and is fast losing its place as a dominant player in the developing markets. Below mentioned are the alternatives that Nokia should consider to compete globally: A1: STATUS QUO (SINGLE GLOBAL STRATEGY) The first alternative Nokia has is to maintain status quo i. e. do nothing. Although easy to implement, the strategy is the least profitable and has high risk of Nokia continuing to lose market share in both the developing and the developed market. A2: EXIT DEVELOPED MARKET Nokia can exit developed market and focus only on the developing markets. Nokia can allocate more resources in the developing markets and fight to gain its dominant position in the developing markets. However, exiting the most profitable markets (i. e. developed markets) will not only strengthen competitors’ positions but also obstruct Nokia’s ability to continuously innovate as latest technology and advanced services are first launched in the developed countries. These devices and technology is transferred in the future to the developing markets. Quitting developed market will thus impact Nokia’s competitive position not only in the developed market but also in the developing market. Moreover, developed and developing markets are expected to grow by same size ($115 bn. and $107 bn. respectively *â‚ ¬Ã¢â‚¬Å" see appendix 4), so, if Nokia quits developed markets it will lose half of the future handset market. A3: DIFFERENT BUSINESS STRATEGY IN DEVELOPED AND DEVELOPING MARKETS Nokia can adopt different strategy in the developed markets and the developing markets. It should adopt differentiation strategy in the developed markets and integrated (dual advantage) strategy in developing markets. Nokia should offer high end products with advanced technology in the developed markets as product features, quality and coolness are vital for success in developed markets. On the other hand, Nokia should continue to operate with dual advantage strategy in the developing markets as a range of products (low end to high end) are successful in developing countries. RECOMMENDATION AND IMLEMENTATION Based on the decision criteria discussed in appendix 5, the alternative A3 *â‚ ¬Ã¢â‚¬Å" different strategy for both markets – scores the maximum points. As both the markets are expected to grow by approximately same size by 2013 and developed markets are high margin markets, Mr. Olli-Pekka Kallasvuo should implement different strategies for each market. To effectively compete against the emerging players in the developed markets, Nokia should partner with a leading software company that will develop latest mobile ecosystem for high end phones i. e. smartphones while leveraging its own core competency of producing reliable handsets. Microsoft is an ideal match as they are struggling with cell phone hardware as they have been unable to capture noticeable market share. Nokia should continue to use existing software in medium and low end phones. Nokia should improve operations by forward vertically integrating supply chain (discussed more in supply chain), reducing the number of factories (max 3 or 4) to manufacture handsets to achieve economies of scope and scale and thus reduce cost. Forward vertical integration by building better relationships with carriers in developed markets and efficiently managing distribution centres in developing countries will empower Nokia to exert more control on supply chain, and thus reduce cost. As Nokia has lost ground in the developed markets, it needs to improve relationship with cell phone carriers to be effectively able to market, distribute and sell its products. Also, in the developing markets they should reduce the number of products launched every year so as to spend more on RD per product and launch better high end products to leverage from high profitability in the developed market. RD spending should be higher than 10% of revenue (ideally between 15% – 20%) as success of products rests on innovation. It should invest considerable amount of resources to understand the competition focus and hot trends in the rapidly changing industry in both the markets. Below is the list of products and services that Nokia should provide in the developed and the developing markets: Developed Markets Developing Markets apple market or android market (application store). Wide array of products (high to low end) Advanced technology in high end products and better usability in low end products. Latest ecosystem in high end products and easy to use software for medium to low end products as those are likely used by rural population. Innovative services such as life tools that have better usability according to the country. Premium (high end) to low (low end). Penetration in the market is price sensitive. Launch some high end products against Android phones as well as continue to launch medium and low end phones against Samsung and LG. PORTER’S FIVE FORCES Competitors: Samsung, Motorola, LG Device only based model with basic services such as text service or life tools. Smartphone market very small but expanding. Frequent new products introductions e. g.. Samsung added 120 new products in 2008 against 50 added by Nokia Price war among competitors to launch phones at all price points. Competitors: Apple, Google, RIM, Samsung, Motorola, Sony Ericson, Microsoft Device and service based model with third party applications. Intense marketing to compete against the products. Sales and promotions through cell phone carriers. Better the relationship with carrier, higher the chances of success. Price war among competing firms as the prices of smartphones are declining. Threat of Substitute Products Low High Substitute Products: Fixed line, Pagers, PDA’s, Smartphones Substitute Products: Fixed line phones, Pagers, PDA’s, Smartphones 1 Substitute products are out-dated. Low cost wireless handsets offer cost effective 1 Nokia does not have a latest smartphone with competent products for a family with a limited disposable income software such as iOS in iPhone or Android in Nexua to compete so smartphone is a substitute to Nokia’s product. Developing markets have transitioned without going through the true phases of adopting substitutes Fixed line phones are not real substitutes to wireless handsets. (Fixed lines hamper mobility) yet difficult to switch due to high switching cost(fixed term contract for smartphones etc) Smartphones are quite expensive, normal customers cannot afford it. Smartphones are eating Nokia’s market share in the developed markets. Customers are early adopters of latest technology. APPENDIX 2: SUPPLY CHAIN ANALYSIS Sourcing Logistics Nokia’s supply chain is very vast and complex. They have 9 factories around the world that manufacture and supply phones around the world. They can move their manufacturing to a few locations and manufacture handsets and components in a few low cost countries to achieve economies of scope and economies of scale.  · Economies of scope can be achieved by manufacturing more handsets from few location by producing large quantities i. e. by reducing fixed cost per unit as fixed cost gets allocated by manufacturing more units.  · Economies of scope can be achieved by procuring more raw materials for the same location and transporting it in bulk, thus saving on transportation. Also, different type of handsets can be transported from same production facility to different country thus saving on transportation of final product.  · Cost can be reduced by moving manufacturing to low cost countries to improve net margins.  · Forward vertically integrate supply chain by building better relationships with cell phone carriers in developed countries and by efficiently managing distribution and service centres in developing markets to keep costs under control and improve margins. APPENDIX 3: NOKIA OPERATIONS ANALYSIS APPENDX 4: FINANCIAL PROJECTION ANALYSIS Based on data provided in the case exhibit 11, below are the revenue and increase in handset market projections by handset segment and markets (developed and developing). ASSUMPTION Middle East / Africa, Latin America, AP ex. Japan and Eastern Europe are assumed to be part of developing markets and rest of them developed markets. ANALYSIS  · Increase in total handset market is estimated to be about $222 bn.  · Approx. 93% and 72% revenue from basic and enhanced phones segment will come from developing countries.  · Approx. 54% and 72% revenue from smartphones – entry level and smartphones *â‚ ¬Ã¢â‚¬Å" features will come from developed countries.  · Smartphones will be the main drivers of revenue in the developed countries.  · Customers in developing markets will buy all type of products – basic, enhanced, smartphones *â‚ ¬Ã¢â‚¬Å" entry level, smartphones *â‚ ¬Ã¢â‚¬Å" feature. APPENDIX 5: DECISION GRID REASON: 1. Competitive Position: One of the major issue that Nokia is facing in the developed and developing markets is facing is losing competitive positions to other companies. The best alternative (A3) should improve Nokia’s competitive position. 2. Innovation: The success in handset industry rests of launching innovative products from time to time. The best alternative should enhance the company’s ability to launch innovative products in both the markets. So, A3 scores highest point for this factor. 3. Profitability: Overall, company’s financial health should improve by implementing the alternative. According to this criterion, A3 gets the highest score. 4. Ease of implementation: The alternative should be easy to implement and financially feasible for the company. So, A1 (status quo) scores highest point and A2 (exiting developed markets) scores lowest point as it is least feasible and costliest option. A3 is in the middle. 5. Risk: Risk has a negative factor. So, the riskiest option scores least point. A1 is the riskiest option for the reason that no action will likely wipe Nokia out of the developed markets and company will continue to lose market share. So, A1 scores lowest. A2 scores highest as exiting developed market reduces the risk. A3 is also risky as a failure of successful implementation will expose Nokia to high risk.