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Executive Summary

During the year 2007, Nokia’s mobile phones division was at its peak and the company stock

was trading as high as $ 40 (NYSE), along with a market capitalization of $ 116.8 billion. The

immediate events that followed included the launch of the Apple iPhone in 2007 and Google’s

Android in 2008. What came next was a downward landslide for Nokia which eventually

ended with the acquisition of its Devices and services division by Microsoft in 2013-14.

There have been multiple opinions on why, despite being the market leader, Nokia failed to

sustain its business. This case attempts to methodically follow the chain of events since early

1990s all the way to 2014, study the strategic decisions which were taken, decisions which

should have been taken, and analyze their impact on its business.

The case categorically addresses these approximately 25 years as three distinct phases,

critical in themselves as they were milestones in Nokia gaining and, consequently, losing

competitive advantage. It concludes by stressing upon the absolute importance of sustaining

competitive advantage, once acquired, through internally generated value.

*For the purposes of the study, the scope of the exercise has been limited to developments

within the smartphone market (and associated software developments)

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1. General Introduction

While it’s a relatively less known fact, Nokia has been a company that’s even made paper,

tires and rubber boots. However, what made Nokia a household name across the world has

been its mobile phones.

During the year 2007, Nokia’s mobile phones division was at its peak and the company stock

was trading as high as $ 40 (NYSE), along with a market capitalization of $ 116.8 billion. Apple

launched the first iPhone in mid-2007 (Exhibit 1). The first Android device was launched in

mid-2008. By early 2009, the stock price had dipped close to $ 9. In 2011, the company

announced its plans to collaborate with Microsoft on the software front and switch to

Windows Phone as its primary OS. By 2012, the stock price had touched a record low of $1.71.

The same year itself, Nokia announced to lay off 24,500 employees. On September 3, 2013,

Nokia announced a deal with Microsoft under which Microsoft would acquire Nokia’s Devices

and Services Division, along with a transfer of approximately 32,000 employees, for a mere

sum of approximately $ 5 billion (the total transaction amount was $ 7.12 billion for

acquisition of Devices and Services Unit and licensing of patent portfolio). The acquisition was

completed on April 25, 2014.

There have been multiple opinions on why, despite being the market leader, Nokia failed to

sustain its business. Some say it was because of Apple and its iPhone, others believe that it

was because of Android, yet another group of people believe that it was a result of Nokia’s

own inaction to the changing industry landscape. Hence, the study group aims, not to

conclude whether Nokia was right or wrong (which, in perspective, is conclusive enough) but

to analyze its course of action in the last 10 years and interpret the impact on its business. For

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the purposes of the study, the scope of the exercise has been limited to developments within

the smartphone market (and associated software developments).

What makes the study interesting is the fact that, while many companies have sold off parts

of their business in order to streamline, Nokia is one of the few examples of a company that

has sold its primary business in order to survive. Not only this, it is a classic case of derailment

at a company level.

2. Evolution of the Mobile Phone Market

The first call through a handheld mobile phone was made in 1973 through a Motorola phone

that weighed 1.1 kg, had a talk time of only 35 minutes and took 10 hours to recharge!1 The

first commercially available phone was the Motorola DynaTAC 8000x, in 1983. Nokia launched

its first commercial handheld phone in 1987, called the Mobira Cityman 900. Currently, any

typical smartphone, on average weighs 175-200 grams, can provide a talk time of upto 12

hours and recharges in about 3 – 3.5 hours.

The evolution of the mobile market can broadly be looked at in terms of hardware and

software changes that have come up on the last few decades2.

2.1. Hardware development

From the earliest of mobile phones till the late 90s, mobile phones were operated through

keypads that comprised of a numeric pad and arrow keys (Exhibit 2). This was followed by

mobile phones with full QWERTY keyboards and trackballs. One of the most popular examples

of such devices are the Blackberry range. In the first decade of the 21st century, the focus

shifted to a more natural form of interaction that involved using a mobile device through

1 Source: http://www.cellular.co.za/cellphone_inventor.htm 2 For the study, hardware changes are limited aspect that involve direct user interaction and not cellular communication technology.

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touch input. Touch screen devices have, till date, been based upon two technologies –

Resistive and Capacitive. Resistive devices operate based upon input detected as pressure

applied on the screen, while capacitive screens operate through electrical charge

conductance3 and are generally agreed upon to be the better experience of the two for

commercial mobile phones. The early Nokia touchscreen devices were based upon resistive

technology while the iPhone was among the first to use the capacitive touch screens. In the

recent years, capacitive screens have become the industry standard.

2.2. Software Development

On the software front, mobile phones have broadly be categorized under three heads:

Dumb Phones – Phones that can perform only basic tasks like make and receive calls,

send messages, etc. No internet connection. Eg. Nokia 1100

Feature Phones – In addition to the dumb phone features, these phones provide basic

internet and multimedia capabilities. Eg. Nokia Asha series

Smartphones – These devices provide advanced computing capabilities in addition to

the above discussed features. Eg. Nokia Communicator Series, Nokia Lumia Series,

iPhones, etc.

While dumb phones are essentially extremely low end hardware, feature phones and

smartphones often offer comparable hardware specifications. The key difference however is

in the device’s operating system. For the purposes of the study, the group has focused on

smartphone devices and their respective operating systems.

3 http://techexplainer.wordpress.com/2012/04/02/resistive-vs-capacitive-touchscreen/

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2.3. Smartphones and the changing industry

Till the mid-2007, Nokia and Microsoft were the only two companies that offered operating

systems for smartphone devices. Symbian (owned by Nokia) was the OS of choice on all Nokia

Smartphones, while Windows Mobile OS (by Microsoft) was used by HTC in its smartphones.

In mid-2007 Apple launched its own version of smartphone OS called iOS. This was followed

by Google launching the Android mobile OS in 2008. Other OS entrants to the market also

included Bada by Samsung, etc. A flurry of OS options gave rise to intense competition in a

market which had earlier been primarily dominated by Symbian.

Simultaneously, on the hardware front, cellular technology had attained critical mass

resulting in commoditization of a major part of the industry, lowering of entry barriers to the

market, and creating immense scope for price wars. An analysis of the smartphone market

using the principles of Porter’s Five Forces4 is presented in the figure below.

4 http://hbr.org/2008/01/the-five-competitive-forces-that-shape-strategy/ar/1

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Figure 1: Industry Analysis using Porter's Five Forces

As can be seen from the figure above, the smartphone market has evolved from one with high

entry barriers and monopolistic characteristics to being highly competitive, with low entry

barriers and almost inconsequential bargaining power of the supply side. The key

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transformation of the industry has been through entry of multiple players. However, the

industry has witnessed remarkable growth in the past two decades, with the trend expected

to continue in the coming future. The number of unique mobile phone subscribers has

increased from 12.4 million in 1990 to 4.5 billion5 in 2013. As per a study done by Gartner, in

2013 out of the total mobile phone sales, smartphones accounted for almost 58% of the sales

volume6. Hence, while the profitability potential of the market has increased significantly, the

market itself has become relatively less attractive for the traditional players, viz. Nokia and

HTC.

3. Nokia Oyj

Historically, Nokia began in 1865 as a wood pulp mill in southern Finland and started

manufacturing paper. Subsequently, the company diversified into multiple businesses

including rubber tires, boots and eventually into telecommunications.

Nokia’s history for the last few decades (that relevant to the current case) can broadly be

categorized based upon its then leadership and its OS of choice. The subsequent sections

adopt a similar approach in studying Nokia’s history, identifying, for each period, the decisions

undertaken and the corresponding potential competitive gains or loss.

3.1. Pre-2007: Symbian S60 and Nokia as market leaders

In 1992, the then CEO, Jorma Ollila took a crucial strategic decision of focusing entirely on the

telecommunications industry. As a result, all other businesses were gradually divested. For

the rest of the decade the company focused aggressively on expansion in the

telecommunications industry, both through in-house development and acquisitions.

5 http://mobithinking.com/mobile-marketing-tools/latest-mobile-stats/a#uniquesubscribers 6 http://www.gartner.com/newsroom/id/2665715

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During the last decade of the 20th century, smartphones were still a nascent market with

customers in the enterprise sector. In 2002, Nokia launched its first Symbian based

smartphone, Nokia 7650, for the mass market. The OS was called S60 and was a derivative of

Symbian. Being the first mover in the segment, the OS gained immense popularity. It was

among the first mass market phones that allowed users to install third party programs.

Keeping S60 as its software foundation and utilizing the expertise that it has gained in the

hardware segment over the years through R&D, Nokia subsequently introduced a wide array

of phones with multiple design languages and configurations. The worldwide popularity of

mobile phones, surpassing even Nokia’s most optimistic predictions, made the company the

world’s largest mobile phone manufacturer, a position it held until 2012. For the period from

1996 to 2001, based upon its mobile phone sales, the company increased its turnover from

6.5 billion euros to 31 billion euros7. By the end of 2007, in the smartphone segment, Nokia

had gained a market share of 49.4% with retail sales of approximately 60.5 million (for 2007).

Its closest competitor, at the time, was Research in Motion (RIM) with a market share of 9.6%

and unit sales of 11.8 million (Exhibit 3). While Nokia’s focus has been primarily on retail

consumers, RIM’s market share (through Blackberry) was based off its success with enterprise

users.

Hence, in the pre-2007 period Nokia had developed and gained a competitive advantage in

the smartphone market by,

Becoming a first mover in the smartphone OS market

Utilizing its hardware based R&D expertise to provide an integrated product

Other contributing factors detailed in the figure below:

Figure 2: Porter's Value Chain analysis for Nokia (pre-2007)

7 http://www.nokia.com/about-nokia/company/story-of-nokia/mobile-revolution/leading-the-world

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Source: Author’s Research

3.2. 2007-2011: The Burning Platform

While the company had been making record sales, not all was good. By the end of 2003-04,

touchscreen devices had become the latest fad and the company had hit the realization that

the existing OS, while highly versatile, was inept for use on a touchscreen device. At the time,

Nokia had been simultaneously working on a linux based OS, called Maemo (later renamed

to Meego)8, which offered immense potential but could never gain traction due to the

company’s leadership insisting to stay with Symbian. David J. Cord, in his book titled ‘The

Decline and Fall of Nokia’ mentions that, “…major reasons for Nokia's decline include a

pervasive bureaucracy leading to an inability to act, destructive internal competition and the

failure to realize the importance of lifestyle products like the iPhone…”9. As a result, while the

company was making gradual progress in attempting to modernize a ‘grandfather’ OS, in mid-

8 http://taskumuro.com/artikkelit/the-story-of-nokia-meego 9 Cord, David J., The Decline and Fall of Nokia, 2014

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2007 Apple caused a major disruption in the smartphone market by announcing the first

iPhone based upon its proprietary OS, called iOS. In the coming years, iPhone would prove to

be the first nail in the coffin of Nokia. In an interview with tech blog ZDNET, the then CEO

Ollila mentions, “…we knew what was happening, but our mistake was in not being able to

turn that into action.”

In the next year, i.e. 2008, Google launched its own smartphone OS, titled Android. Being

open source in nature, Android adoption spread like wildfire. From being the only smartphone

OS for the mass market, Symbian had now been pushed to the number three spot in terms of

popularity and consumer satisfaction. By the end of 2009, Nokia’s stock price had dipped from

a high of $40, in 2007, to almost $9. By 2010, its market share (in terms of annual sales) had

been reduced to only 29%. Samsung, buoyed by the success of Android had captured 17.6%

market share (Exhibit 4).

In September 2010, when Stephen Elop became the CEO of Nokia, one of the most important

decisions he had to take was to decide on the future OS for Nokia smartphones. It was well

accepted had Symbian was past its prime. The other option the company had was to focus on

the development of Meego which would leave them with only one device in the near future.

While one device in itself was not insufficient, according to Elop an ecosystem to match and

compete with those built around Android and iOS would have to be built, which was not

possible at the time. In early 2011, Elop sent the famous ‘burning platform’10 memo to Nokia’s

employees, comparing the company’s current situation to that of a man standing on an oil

rig, with ‘jumping into water’ being his only options. By February 2011, the company

announced its plans to collaborate with Microsoft on the software front and switch to

10 http://blogs.wsj.com/tech-europe/2011/02/09/full-text-nokia-ceo-stephen-elops-burning-platform-memo/

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Windows Phone as its primary OS. At its end, he said, the company would continue to focus

on hardware innovations. Another decision of importance was the focus that would be laid

on the US market.

Still, in 2011, Nokia launched its first and last Meego device, named Nokia N9 (Exhibit 5).

Despite the fact that the device won multiple awards for its design, and praise for user

interface interface and OS versatility, it was made clear that the device was ‘Dead on Arrival’

with limited market release and limited support. Subsequently, the design language from the

N9, called the ‘fabula’ design, was passed on to the Lumia line of phones.

The first windows phone devices by Nokia were launched in late 2011. However, considering

that Microsoft itself was struggling with its OS at the time, the phone failed to gain much

traction, worsening Nokia financial woes. During Elop's tenure, Nokia annual revenues fell

40% from 41.7 Billion Euros per year to 25.3 Billion Euros per year. Nokia profits fell 92% from

2.4 Billion Euros per year to 188 Million Euros per year11.

Hence, in a matter of 4 years, Nokia had lost the competitive advantage that it had built in

the last 15 years.

While it was still innovating at the hardware front, its own OS had become obsolete

Even after 2 years of its launch, Windows Phone had failed to gain significant traction

in the US, resulting in limited sales for Nokia devices.

It is important to note here that while the actual impact of a lack of viable OS option became

visible during Stephen Elop’s term, it was actually a result of lack of long term vision and

planning on the part of the previous leadership and their insistence on sticking with an

obsolete OS despite a viable alternative in the form of Meego. Hence, Nokia ended up losing

11 Nokia Annual Reports 2010, 2011

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its competitive advantage due to its failure to capitalize on internal resources, misaligned

leadership, and its inability to adapt to a changing market scenario.

3.3. 2011-2014: The Microsoft years

For Nokia, the downward slide did not stop with windows phone. Despite being the leader

among windows phone manufacturers (76% market share in windows phone for 2012)12, by

2012 the stock price had touched a record low of $1.71. The same year itself, Nokia

announced to lay off 24,500 employees. On September 3, 2013, Nokia announced a deal with

Microsoft under which Microsoft would acquire Nokia’s Devices and Services Division, along

with a transfer of approximately 32,000 employees, for a mere sum of approximately $ 5

billion (the total transaction amount was $ 7.12 billion for acquisition of Devices and Services

Unit and licensing of patent portfolio)13. The acquisition was completed on April 25, 201414.

4. Closing Thoughts

In perspective, it is clear that Nokia’s competitive advantage during the 1992-2007 period was

built upon its first mover advantage, in conjunction with appropriate utilization of its internal

resources. Under a strong leadership, the company had generated value, in the form of

proprietary OS and supporting hardware, which was unique and difficult to imitate. One of its

key differentiating points was innovation on the hardware front that allowed it to fully exploit

value from its OS, even in the later stages.

However, along the same lines, reaping the benefits of being a first mover it became short

sighted and failed to plan for the long term, for a market that was evolving from a hardware

centric to a software (ecosystem) centric theme. As soon as the market opened up to new

entrants, in the form of Apple and Google, despite its hardware prowess Nokia failed

12 http://blog.adduplex.com/2012/12/adduplex-windows-phone-november-2012.html 13 http://www.microsoft.com/en-us/news/press/2013/sep13/09-02announcementpr.aspx 14 http://www.microsoft.com/en-us/news/press/2014/apr14/04-25nokiapr.aspx

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miserably on the software front. Despite internal availability of valuable software resources,

due to lack of appropriate leadership, the company lost its first mover advantage.

While Nokia’s decision to go with Windows Phone has been widely criticized, under the

prevalent circumstances, with Samsung already the leader in the Android market, the study

group feels that it was the most logical path to follow. Unfortunately, it did not turn out well

for them.

Therefore, the key learning from the case is the realization that while gaining competitive

advantage is critical, even more important should be the focus on and the efforts for

sustaining it. In the case of Nokia, internal value was the way to sustaining their leadership.

They had it all and still lost it.

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Exhibits

Exhibit 1 - Nokia: Timescale

Exhibit 2 – Mobile Phones: Hardware Evolution

Nokia 1100 (left) – Numeric Pad and Arrow Keys, Blackberry Curve (Centre) – QWERTY and

trackball, iPhone 5S (Right) – Touchscreen

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Exhibit 3 – Smartphone Market Share – 2007 (‘000 Units)

Company 2007 Sales Market Share 2007 (%)

Nokia 60,465.00 49.4

Research In Motion 11,767.70 9.6

Apple 3,302.60 2.7

HTC 3,718.50 3

Sharp 6,885.30 5.6

Others 36,176.60 29.6

Total 122,315.6 100

Source: http://www.gartner.com/newsroom/id/910112

Exhibit 4 – Smartphone Market Share – 2010 (‘000 Units)

Company 2010 Units 2010 Market Share (%)

Nokia 461,318.20 28.9

Samsung 281,065.80 17.6

LG Electronics 114,154.60 7.1

Research In Motion 47,451.60 3

Apple 46,598.30 2.9

Sony Ericsson 41,819.20 2.6

Motorola 38,553.70 2.4

ZTE 28,768.70 1.8

HTC 24,688.40 1.5

Huawei 23,814.70 1.5

Others 488,569.30 30.6

Total 1,596,802.40 100

Source: http://www.gartner.com/newsroom/id/1543014

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Exhibit 5 – Nokia N9 (‘fabula’ design)

Source: http://everythingn9.com/n9-still-wins/

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Annexure: Research Question

Research Question & Why is it interesting/relevant:

Ever since Microsoft acquired Nokia’s mobile phones division there have been multiple opinions

on why, despite being the market leader in 2007, Nokia’s consequent strategy failed to sustain

its business. Hence, the study group aims, not to conclude whether Nokia’s strategy was right or

wrong (which, in perspective, is conclusive enough) but to analyze its course of action in the last

10 years and interpret the impact on its business.

The research focus, therefore, can be summarized as, ‘The story of Nokia – Things it did and did

not do’.

What makes the study interesting is the fact that, while many companies have sold off parts of

their business in order to streamline, Nokia is one of the few examples of a company that has

sold its primary business in order to survive. Not only this, it is a classic case of derailment at a

company level.

Research Methodology: The research methodology will focus on identifying the company’s

strategy in relation to key decisions and developments (internal/external) in the last decade and

the impact this had on its mobile phones business. The data required for this analysis will include

the company’s financial performance, its performance with respect to competitors (market

share, etc.) and the company’s approach to the mobile phone market in the last decade. Majority

of this data can be obtained from Nokia’s Annual Reports, along with other secondary sources

like financial databases, company website, technology blogs/websites, interviews and

statements of company officials, etc.