CI report

2011

Nokia

Nokia’s share price decreased by more than 50% after the CEO Stephen Elop announced in February 2011 that Nokia will enter into partnership with Microsoft, adopting the Windows Phone as its primary smartphone platform.

-What is the current and future competitive environment of Nokia? This will take into account factors such as: customers and competitors, markets and suppliers, production and product technologies, politics and the environment, and the industry’s structure (including changes and trends).-What plans and actions must Nokia and Microsoft take to maintain their competitiveness vis-à-vis key competitors?

I | P a g e S y l v a i n R E V U Z

Sylvain REVUZ Sylvain.revuz@free.frCompetitive Intelligence

Table of Contents1. Executive summary...................................................................................................................................... III

2. Introduction..................................................................................................................................................1

2.1. The problem and KIQs..........................................................................................................................1

2.2. The process..........................................................................................................................................1

2.3. Case background..................................................................................................................................2

3. External analysis...........................................................................................................................................3

3.1. PEST analysis........................................................................................................................................3

3.2. Porter’s 5 Forces..................................................................................................................................5

3.3. Competitors.........................................................................................................................................7

3.3.1. Hardware:....................................................................................................................................7

3.3.2. Software: The OS.........................................................................................................................9

3.3.3. Mobile applications:..................................................................................................................10

3.4. Industry drivers..................................................................................................................................11

3.5. Key competitive issues highlighted by the external analysis..............................................................12

4. Internal analysis..........................................................................................................................................13

4.1. Internal capabilities............................................................................................................................13

4.1.1. Financial capabilities......................................................................................................................13

4.1.2. Human capabilities........................................................................................................................14

4.1.3. Technological capabilities (RORC ratio)..........................................................................................14

4.1.4. Management capabilities...............................................................................................................15

4.1.5. Organisational capabilities.............................................................................................................16

4.1.6. Brand capabilities..........................................................................................................................17

4.2. Core Competency...............................................................................................................................17

4.3. Key competitive issues highlighted by the internal analysis...............................................................18

5. Microsoft an d Nokia analysis.....................................................................................................................19

6. Recommendations......................................................................................................................................20

References........................................................................................................................................................ - 1 -

Appendix........................................................................................................................................................... - 2 -

Appendix 1.................................................................................................................................................... - 2 -

Appendix 2.................................................................................................................................................... - 3 -

Appendix 3.................................................................................................................................................... - 4 -

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1. Executive summary

The general objective of this report is to give comprehensive responses to the following key intelligent questions:

What is the current and future competitive environment of Nokia? This will take into account factors such as: customers and competitors, markets and suppliers, production and product technologies, politics and the environment, and the industry’s structure (including changes and trends).

What plans and actions must Nokia and Microsoft take to maintain their competitiveness vis-à-vis key competitors?

In order to reply to those questions, this report will follow a traditional structure by firstly analysing the external environment (PEST and a Porter’s 5 forces) as well as identifying the main industry drivers and competitors. The external environment analysis will be concluded by summarising the key competitive issues highlighted by the external analysis in an opportunities and threats presentation framework. Secondly, this report will evaluate the external environment by assessing Nokia's internal capabilities (G.Hamel) and core competencies (VIRO) and all key competitive findings will be regrouped into a strengths and weaknesses list. Thirdly, based on the interview with the Head of Finance & Control Nokia France, an analysis of the partnership between Nokia and Microsoft will be presented. This report has been prepared by following a clear competitive intelligence process as described in the first section of the report.

Finally, the following options have been recommended based on Nokia’s current internal and external environments:

1) Retain dominance in the developing markets by reshaping the Nokia brand

Competitive intelligence (CI) actions:

Create a specific CI team in charge of constantly analysing the BRIC market and low-cost mobile phones segment.

Evaluate the impact on the current market if Nokia stops to use the Nokia brand for higher-priced products and introduces a new brand (for example MicroKia).

2) Utilise Nokia Siemens Networks division to exploit the growth of 4G

Competitive intelligence (CI) actions:

CI team to evaluate the main countries that extend their 4G infrastructure and create several war game sessions with Nokia executives in order to anticipate competitors’ reactions.

CI team to evaluate the impact of a potential sale of Nokia Siemens Networks division.

3) Leverage the Nokia/Microsoft (MicroKia) partnership and offer a strong alternative to the RIM Blackberry before the end of 2012.

Competitive intelligence (CI) actions:

CI team to evaluate the impact and risk of failure of the Nokia/Microsoft partnership. CI team to evaluate the possible retaliation by RIM if Nokia/Microsoft enters the corporate world.

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2. Introduction

2.1. The problem and KIQs

Nokia’s share price decreased by more than 50% after the CEO Stephen Elop announced in February 2011 that Nokia will enter into partnership with Microsoft, adopting the Windows Phone as its primary smartphone platform. In addition, in July 2011, Nokia reported an overall operating loss of EUR 487 million with unit sales down 20% year-on-year; this represents the worse financial result in the history of the Finnish multinational. This report will focus on the two following key intelligent questions:

-What is the current and future competitive environment of Nokia? This will take into account factors such as: customers and competitors, markets and suppliers, production and product technologies, politics and the environment, and the industry’s structure (including changes and trends).

-What plans and actions must Nokia and Microsoft take to maintain their competitiveness vis-à-vis key competitors?

By addressing these two questions, this report will be able to provide a set of recommendations that will help Nokia to return to a sustainable financial position.

2.2. The process

A competitive intelligence analysis of Nokia has been conducted following the rigorous competitive intelligence process1 that can be found below. This report represents the dissemination step by reporting the findings as well as a set of recommendations.

1 J P. Herring (1999) “Key Intelligence Topics: A Process to Identify and Define Intelligence Needs" Competitive Intelligence Review, Vol. 10(2) 4–14 John Wiley & Sons, Inc.1 | P a g e S y l v a i n R E V U Z

It is also important to note that only publicly available information has been used and always in a legal and ethical manner. In addition, in order to evaluate the impact of the relatively new partnership between Microsoft and Nokia, an interview with the Head of Finance & Control Nokia France (P Blondeau), was conducted using Skype.

2.3. Case background

Nokia Group before 2011 was the world’s largest mobile phone manufacturer and was the market leader worldwide, except in North America.

In 2010, Nokia reported net sales of EUR 42.4 billion and an operating profit EUR 2.1 billion. However, in the beginning of 2011, Apple and Samsung overtook Nokia in smartphone sales and

Nokia now holds 3rd place. Nokia remains the leader in Asia Pacific countries as well as in developing countries e.g. it holds a 54%

volume share in India, 30% in China. The Nokia Group is composed of 132,427 employees, divided into three major divisions (Appendix1):

- The Devices and Services division is the most important activity division of Nokia and represents around 60% of the total revenue from the 1.3 billion Nokia phones in use. This division has been divided into two different units: the Smart Devices units in charge of all Nokia smartphone products, and the Mobile Phones unit in charge of developing and managing all of the company’s basic mobile phones. Both units are responsible for the development, manufacture, marketing and distribution of all Nokia mobile devices. In 2010, R&D services were present in 16 countries and the production facilities were divided between nine countries (Appendix 2).. In Q1 2011, the division posted a 3% year-on-year increase in revenue; however, the Devices and Services operating profit fell by 19%. This is largely due to intense competition that constantly erodes the margin in the basic mobile phones market, as well as the fact that the Nokia Group struggles in the high-margin smartphone market. - The Nokia Siemens Networks division is responsible for manufacturing cellular communication infrastructure hardware as well as networking and telecommunications equipment (competing with Ericsson and Huawei). Every day, a quarter of the world’s population connect using Nokia Siemens Networks infrastructure and solutions.

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- Navteq provides maps and location-based services for mobile devices.

The following table clearly highlights the importance of each division in terms of their contribution to Nokia sales.

Net sales by reportable segment Q2 20112

EURm % of total net sales

Devices & Services 5467 59

Smart Devices 2368 26

Mobile Phones 2551 27

D&S Other 548 6

NAVTEQ 245 2

Nokia Siemens Networks

3642 39

Nokia Group 9275 100

Nokia sells in over 160 countries, and based on the latest BMI estimation3 Nokia is selling 50 million units of high-range smartphones (N9, N8) and 150 million mid-range smartphones every year with an average selling price of EUR 156. In addition, Nokia is also selling 280 million low-range mobiles with an average selling price of EUR 69. BMI has also estimated that Nokia has the largest number of installed based smartphones with 600+ million units. By analysing the major market in terms of net sale4s, we can use the table below to confirm that Nokia remains relatively strong in developing countries.

2 http://www.nokia.com/about-nokia/financials3 BMI (2010) Special Report BMI Global Handset Market Key Trends and Opportunities4 http://www.nokia.com/about-nokia/financials/quarterly-and-annual-information3 | P a g e S y l v a i n R E V U Z

3. External analysis

The previous section gave a quick snapshot of Nokia’s current situation. This report will now focus on the analysis of the main external factors that are influencing the mobile and smartphone industries.

3.1. PEST analysis

In order to conduct the external analysis we will first utilise the PEST framework in order to understand the macro-economic factors that might affect Nokia.

Political

By doing business in 150 countries, Nokia is constantly subjected to a large number of different political influences. Each country has its own political systems as well as different regulations and terms of trade and the mobile market is still highly regulated. However, as a pioneer in the mobile industry with extensive experience, Nokia entered the highly political Chinese market more than 10 years ago. It is also important to note that Nokia has shifted its main manufacturing units to China and India and therefore any government intervention in those countries (particularly in terms of labour laws) can directly affect Nokia. As an illustration, Nokia’s Indian factory experienced strike action at the end of 2010 that forced the factory to shut down for two weeks.

Economical

The demand for smartphones is varied, thus the economy plays a crucial role in terms of profitability for the smartphone and mobile industry. The recent economic downturn has clearly affected all players in the industry and several have been forced to exit. For example, Motorola sold its mobile phone activity to Google in 2011 and LG is considering stopping their mobile activity5 in the next few years. In addition, because in all developed regions the penetration rate of mobile phones is very high, customers will replace their phone only if value for money is optimum; this will therefore increase the competition between main players.

Societal

Societal impacts have a direct influence on the mobile phone and smartphone industries. Firstly, the rise of the so-called information society has made telecommunications increasingly more important to consumers, both in terms of leisure and work. Secondly, the chart below6 clearly demonstrates that Asia, the Middle East and Africa offer the greatest potential for expansion. Those areas contain an important number of people that do not own a mobile phone because it is currently beyond their means. However, cost leader manufacturers such as Nokia are always able to reduce their price in order to make their products more affordable. It is also important to note that incomes from those regions are predicted to grow rapidly. As an illustration, the latest data on China’s telecommunications7 confirms that Nokia has a current market share of 30%, a far greater share than any other competitors have. It is also important to highlight that in 2010, the disposable income per capita in China was US$ 2025 but it is expected to reach US$ 3355 in 2014. Furthermore, the current mobile subscription penetration in China is estimated to be 57% but is also predicted to grow to 68% in 2014. Similarly, Nokia has 54% of the market share in India and the mobile data subscription penetration is currently 46% but forecasted to reach 66% in 2014. It is also expected that the current disposable income per capita that is currently US$ 823 should exceed US$ 1423 in 2014.

5 http://www.asymco.com/2011/08/26/is-lg-about-to-exit-the-phone-market/ 6 BMI (2010) Special Report BMI Global Handset Market Key Trends and Opportunities 2007-20147 BMI (2011) China Telecommunications Report Q3 20114 | P a g e S y l v a i n R E V U Z

Asia Pacific, the Middle East and Africa are the key opportunity markets for Nokia as they represent the largest markets with the biggest growth.

Technological the mobile phone industry has always relied on drastic technological changes. In addition, during the last decade, the increase in technological innovations has pushed the main players to renew and launch their new products at a much faster rate than they did previously. In addition, the evolution of

networks (3G, 4G and WiMax) has an impact on the mobile phones market. As shown in the graph below8, the fourth generation (4G) of wireless technology is now beginning to be deployed around the world. Most mobile network operators have committed themselves to building networks that will support 4G; therefore, companies like Nokia (Nokia Siemens Networks division) can provide these networks and should be able to increase their sales significantly.

8 BMI (2011) Global Telecommunications Report Q3 20115 | P a g e S y l v a i n R E V U Z

Opportunity Zone

3.2. Porter’s 5 Forces This report will now continue the external analysis by applying Porte’s 5 forces analysis; this will help us to understand the industry attractiveness of the mobile phone and smartphone industry.

Threat of Entry (Medium and increasing)

The threat of entry has been rated as medium and increasing because the mobile phone industry required a large investment as well as a powerful brand; there is also heavy retaliation because of the fierce competition and the maturity of this industry. However, it is possible for an external company to enter through mergers and acquisitions (M&A), as Google recently did with Motorola9.

The mobile industry clearly requires huge capital requirements, mainly because of its high manufacturing R&D costs. Product innovation is driving sales and therefore the main companies are constantly pushing innovation boundaries by investing in R&D to launch new products. All those important investments are also continuously increasing the cost of leaving the market.

In addition, because the fixed cost is high, it is important for leaders in the smartphone industry to benefit from their economies of scale in order to increase profit margins.

With the recent standard imposed by Apple in terms of product design, smartphones are becoming more uniform in terms of functionalities, as well as design, and thus the product differentiation is reducing and smartphones are becoming a commodity.

All major brands use the same distribution channels in order to sell their products. In most countries, smartphones are sold through mobile operators and these are therefore exerting more bargaining power due to their important role in the distribution process.

9 Bloomberg (2011) "Google Buys Motorola for ‘Superpower’ Status" By Susan Decker and Ian King - Aug 16, 20116 | P a g e S y l v a i n R E V U Z

In 2010, the operating margins of Nokia and Apple were both above 30% when all other direct competitors were below 15%10. Nokia and Apple have an absolute cost advantage, mainly because they are able to achieve efficiency in operations through a learning curve, as well as economy of scale. However, Nokia lost this advantage in 2011 within the smartphone segment, mainly because of the incredible growth in sales experienced by Apple and Samsung.

The mobile industry is heavily regulated and governmental and legal barriers are usually low. In addition, all the leading players are now fighting a fierce battle to gain more of a market share, so there will be heavy retaliation against any new entry. A new entrant will also be required to have strong brand recognition, as branding is a crucial element for selling smartphones.

Supplier Power (Medium and increasing)

In this industry, the supplier power is clearly different depending on the item being supplied. Firstly, hardware providers have moderate power because their components are commodities and therefore several sources are available. However, due to recent breakthroughs by leading smartphone players in terms of technology, some components like LCD screens or microprocessors are becoming more and more mono-sourced due to their complexity. Secondly, operating system (OS) providers are starting to consolidate. Nokia has relied on Symbian as its main OS for a long time, but Android (a recent open source solution) has completely redefined industry standards, forcing Nokia to look for other software providers like Microsoft.

Substitutes (Low stable)

Smartphones have a wide variety of functions and therefore many specialized products can be classed as substitutes for one of several functions. For example, products like notebooks or tablet PCs can cover almost all smartphone functionalities, except the most important call and text functions. In addition, even if the speed of 4G will enable customers to use more and more video calls instead of voice calls, users will always rely on small devices like mobiles and smartphones that can be transported easily in a pocket or a bag.

Buyer power (High and stable)

The end user bargaining power is high, mainly due to the increasing choice and very limited differentiation between products. It is also important to note that because mobile trends follow an elastic demand, any economic slowdown will affect sales. In addition, buyers have increasingly more information that helps them to compare phones in order to find the best quality and best priced products. Mobile operators, by representing 60% of mobile sales11, have an important power in terms of price negation and can easily switch from one brand to another, especially for low cost and entry range phones.

Rivalry is intense among existing players (High).

Competition in the global handset market is intense and is rapidly becoming even greater as consumer electronics companies see the potential of transferring their well-known brands into the mobile space. During the last couple of years, we have seen major computing brands move into the smartphone market, either by designing their own phones from scratch (Apple, Lenovo) or by acquiring an existing brand and/or intellectual property (Google and Motorola). We also saw several players exiting this industry due to the difficulty in attracting customers (e.g. Dell, HP and Acer). The variation between product features is becoming diminished and therefore existing players are investing heavily in applications and services in order to differentiate their products.

10 comScore (2010) Mobile Year in Review11 BMI (2011) Global Telecommunications Report Q3 20117 | P a g e S y l v a i n R E V U Z

Complements

As we saw in the previous paragraph, complements are critical for product differentiation and are also very useful to lock in consumers (therefore reducing their bargaining power). The power of complementary products is essentially created through applications. During the last five years, all the main players have launched their application stores; these enable customers to improve the functionality of their mobile phones by automatically upgrading them with new email, maps, GPS, music and other media-related applications.

3.3. CompetitorsThe next important step in this process of assessing the external environment will be to show the current picture of Nokia’s competitors12.

3.3.1.Hardware:

For more than a decade, Nokia has been the iconic leader in the industry. However, the iPhone revolution (as well as the growth of a fully vertically integrated and highly diverse group like Samsung) has disturbed the industry. The latest data clearly highlighted several crucial points:

Firstly, Nokia reported smartphone sales of about US$ 3.4 billion for Q2 2011, while Apple’s iPhone revenue totalled US$ 13.3 billion; this makes Apple the leader of the industry as it shipped 20 million iPhones. It is also important to understand that the average sale price (ASP) of an iPhone is more than US$ 600, while Nokia reports a smartphone ASP of around US$ 20013.

Secondly, Nokia was previously the market share leader, having more than one-third of the worldwide smartphone market in Q2 2010. However, one year later, this figure has decreased to only 15.7% and Nokia is the only brand that has lost market share, reporting a negative growth of 30%.

12 http://www.comscoredatamine.com/page/2/?s=mobile 13 Euromonitor (2011) International Consumer Electronics report 8 | P a g e S y l v a i n R E V U Z

The chart above14 shows the operating profits from the sale of mobile phones among the main vendors. During the second quarter of 2011, Nokia, Motorola, Sony-Ericsson and LG saw losses and did not manage to generate a profit by selling phones. During the same period, RIM and Samsung saw their shares slightly decrease but Apple grew substantially and this company now represents two-thirds of the industry with operating profit of 66.3%. From the same graph, we can also confirm that Motorola and LG are frequently making losses; this may explain why Google bought Motorola last month and why LG is considering exiting the industry before the end of 2011.

14 http://www.asymco.com/9 | P a g e S y l v a i n R E V U Z

The chart above clearly15 confirms that Nokia’s problems are not recent; it shows the change in profit share over a four-year period and we can see that Nokia has slowly lost profits and market shares to Apple. As of September 2011, Apple is currently taking 84% of the profits generated by modern smartphones; this means that Nokia’s main source of revenue is the low-end classic mobile phone.

3.3.2.Software: The OS

The previous section highlighted the fact that Nokia saw its market share and profits decrease over the last four years, and during the same period, Apple and the iPhone took 84% of the overall profits. By studying the operating system (OS), as well as the applications that are developed by the industry, we will be able to understand how its new competitor, Apple, surpassed the previously successful Nokia.

Symbian

Symbian v9 was launched in 2005 and in December 2008, Nokia bought Symbian Ltd., the company behind Symbian OS and made it an open source system. Nokia’s Symbian platform market share increased to 47% but in 2010 it started to plateau and is now declining sharply, currently representing less than 16% of new mobile phone operating systems16. Symbian was mostly used by the Nokia Group and other manufacturers like LG, Motorola, Samsung and Sony Ericsson. Symbian remains the most used OS due to its very large installed based (more than 500 million mobile phones). However, Google’s Android has emerged as a significant challenger to the superiority of Symbian by providing a developer-friendly OS combined with better innovative functionalities, a better user interface and coming from a consumer-friendly brand (Android by Google).

Android

Google’s Android was launched as a free and open source operating system in 2008 and within two years, it grew from having 0% to 21% of the market share. As of 2011, Google’s Android operating system is installed on 130 million17 devices and it is used extensively by leading smartphone manufactures like Samsung, Motorola and HTC.

Windows Phone 7

15 http://www.asymco.com/16 BMI (2010) Special Report BMI Global Handset Market Key Trends and Opportunities 2007-201417 BMI (2010) Special Report BMI Global Handset Market Key Trends and Opportunities 2007-201410 | P a g e S y l v a i n R E V U Z

The Windows Phone 7 was showcased at the beginning of 2010 and represented a significant upgrade to the struggling Windows Mobile 6 OS. Early signs were mixed but the OS was generally well received and Microsoft also created important new features like Zune, Bing, Xbox Live and Windows Marketplace. However, the Windows Phone arrived late on the market in comparison to the Apple iOS or Android and the OS was not free and fully open source. In August 2011, during his keynote speech at the 2011 Microsoft Worldwide Partner Conference, Microsoft CEO Steve Ballmer admitted that Microsoft simply hasn't gained any traction and that Microsoft has failed. Based on the latest figures18 from Nielsen, Windows Phone 7 sales only represent 9% of the market, compared to 38% for Android and 27% for the iPhone.

In order to picture this incredible landscape modification in terms of the OS, both graphs below show how the top smartphone platform has moved from Symbian to Android in fewer than 4 years.

Source: http://www.asymco.com/?s=nokia&submit=Go

3.3.3.Mobile applications:

The previous sections described how the Nokia ecosystem Symbian failed to compete with Apple or Google. In this section, we will see how this issue also affected the developer community and therefore the applications available on Nokia’s mobile phones and smartphones. Firstly, by analysing the number of applications available in the Nokia application store (called OVI) we can see from the graph below that OVI has only 46,000 applications when Android or Apple have over 300,000 applications. However, we can also see from the same graph19 that the trend is slowly growing, confirming the idea that some developers remain interested in developing applications on Nokia’s Symbian platform, even though this platform is less competitive than Android or Windows Phone 7.

18 http://blog.nielsen.com/nielsenwire/?p=2823719 Distimo (2011) Publication-June-2011 http://www.distimo.com/11 | P a g e S y l v a i n R E V U Z

Nokia tried to retain developers by developing the number of services available on Symbian’s ecosystem by acquiring 10+ companies during 2007-201020. Examples of this are the acquisitions of Trolltech, a development frameworks company that enables developers to improve their productivity; and Novarra Inc., a Java based web browser; and Motally a web app tracking software; and Navteq, a company that provides maps for geolocation. In addition, from the results of a recent survey of 5000 application developers conducted by Appcelerator in September 201021, we can clearly see the possible strengths and weaknesses of the Nokia ecosystem when compared with the competition.

Top reasons why developers FAVOUR these platforms

Top reasons why developers DO NOT FAVOUR these platforms

Apple IOS: Apple continues to make the most popular phone (92%)

Apple IOS: Apple has become too controlling (86%)

Google/Android: OS shows tremendous adaptability, from Smartphone to tablets to cars... (69%)

Google/Android: Fragmentation is a developer’s nightmare; testing and developing across the various Android platforms and devices is costly and time prohibitive (61%)

Microsoft Windows Phone 7: Microsoft has a significant market share within the business/ enterprise market (59%)

Microsoft Windows Phone 7: I do not see it successfully climbing its way back in the fast moving smartphone market (72%)

Nokia: I like the global market opportunity that Nokia uniquely offers developers (75%)

Nokia: Nokia’s triple-platform (Symbian, Meego and Meamo) seems too muddled and risky now (52%)

Based on the survey results, we can see the importance of a partnership between Nokia and Microsoft in order to leverage both their strengths. Nokia will bring its global market and Microsoft will share a powerful operating system and ecosystem that are already used in the business and enterprise market.

20 http://www.nokia.com/about-nokia/21 http://www.appcelerator.com/assets/appcelerator-mobile-developer-survey-june-2010.pdf 12 | P a g e S y l v a i n R E V U Z

3.4. Industry drivers

In order to conclude the external analysis section, it is important to identify and understand the four main drivers that will generate the growth of the mobile industry during the next five years.

Growing Affordability of Mobile Handsets

As highlighted by the PEST analysis, living standards in emerging markets continue to improve and the costs of mobile handsets and wireless network connectivity are decreasing through the development of technology and intensification of the competition. Mobile ownership is becoming increasingly affordable and a mobile phone has changed from a luxury to a mass-market consumer product.

Replacement Demand

In developed countries, the smartphone market has reached maturity and therefore additional demand is mainly driven by the need for replacements. In order to boost the demand in smartphones, both brands and operators are using short-term pricing promotions to increase the affordability of smartphones. In addition, smartphones manufacturers are also constantly improving smartphone functionalities and technological innovations in order to maintain a strong demand. During economic slowdown, operators are willing to subsidise the cost of the devices because they know that smartphones are consuming a lot of data and this will be translated into subscriptions that are more profitable.

Handsets with More Functions and Personalised Features

The recent improvements in wireless communications, in particular 3G, have enabled mobile phones to evolve into more sophisticated devices, commonly called ‘smartphones’. Today, smartphones are directly connected to value-added services, such as TV, radio, newspapers and books and new media such as the Internet. The result is that smartphones are now more than just communication devices and are increasingly being used for a variety of personal, work and entertainment purposes. This convergence has made mobile phones more useful for consumers and youngsters are especially seeing those handsets as indispensable social tools, preferring customisable and distinctive products with multimedia functionalities (music/video players, cameras, social networking capabilities etc.). The future success of the smartphone industry depends on the ability of main players to offer distinctive products, services and contents that stand out from those offered by their competitors. Successful products are typically those with distinctive features; this is shown through the success of Apple’s high-tech products. In comparison, Nokia relies more on traditional-functionality low-cost mobiles.

Continual Evolution of Wireless Network Technologies

Wireless network technologies have been continually evolving at a rapid pace in order to cope with the incredible amount of data that users are consuming through their handsets. Today, all mobile handsets are at least compatible with a 2G or 2.5G (GSM/GPRS) wireless technology. In almost all countries, the 2.5G technology allows data transmission speeds of up to 384 kbps. However, in order to improve data speed, several countries are deploying new wireless infrastructures as 3G networks allow a data transmission speed of 2.5 Mbps. However, relatively few countries have yet implemented fourth generation (4G) wireless technology, which enables users to access more features and applications via their smartphones (such as online mobile gaming, streaming videos and multimedia content downloads). Nokia is the only main player that has a division in charge of developing and installing networks and wireless technologies for operators; thus, they can be the first to exploit this opportunity in conjunction with developing smartphones that will be able to fully use the 50 Mbps speeds that these new networks provide.

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3.5. Key competitive issues highlighted by the external analysis

Opportunities

Emerging Markets (BRIC + the Middle East and Africa) with a large, untapped and expanding user base.

Nokia has a strong brand and also dominates all the markets that are expected to be the fastest-growing markets over the next five years (India, China, the Middle East and Africa). By consolidating and protecting its position, Nokia should be able to benefit from this growth, particularly the unit in charge of the company’s basic mobile phone.

Nokia and Windows 7 Mobile partnership + Apple has become too controlling

By studying the current OS landscape, we saw that a partnership between Nokia and Microsoft will be able to combine Nokia’s global market with Microsoft’s powerful operating system and ecosystem that are already used in the business and enterprise. In addition, it was also indicated that a majority of developers are starting to see Apple as too controlling; by providing smartphones that are dedicated to enterprise as well as a well-graphed platform, Nokia will be able to attract a large number of developers.

Expected launch of 4G and 5G networks.

The Nokia Siemens Networks division should be able to sell more infrastructures around the globe supporting 4G due to the increasing need for speed and better networks; this will result in stronger financial results for Nokia.

Threats

New entrant to smartphone market – Google Motorola

Google’s $12.5 billion purchase of Motorola Mobility has clearly confirmed that the market has started to consolidate. This new competitor has a very strong brand and financial position and will quickly be able to compete with Nokia and Apple.

Growing loyalty for a competing OS

Android, the leading mobile operating system, has clearly penetrated the market and developers are becoming more loyal to this ecosystem; this makes the market ever harder for systems that have fallen behind (like Symbian and Web OS).

Price erosion

An inability to compete in the high-end device market makes Nokia dependent on its low- and mid-priced ranges, where strong price erosion is expected to continue driving down profitability.

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Internal capabilities of Nokia

Tangible ResourcesFinancial capabilitiesHuman capabilitiesTechnological capabilities capabilities

Intangible ResourcesManagement capabilitiesOrganisational capabilitiesBrand capabilities

4. Internal analysis

4.1. Internal capabilities

Nokia’s internal capabilities will be analysed through the framework presented below, which is based on the work of Gary Hamel and C.K. Prahalad in their book entitled “Competing for the Future”.22

4.1.1. Financial capabilities

Historically, Nokia has been a profitable company, but it has explained its recent decline in market share as well the impact of its loss of competitively in the smartphone segment on its financial performance. As we saw, Nokia announced the financial results for Q2 2011 with a whopping $693 million operating loss and a massive decline of 20% in net sales. In addition, several analysts (Goldman Sachs & Co., Credit Suisse, and Barclays Capital) have forecasted that Nokia will be substantially below its annual target for 2011. It is expected that Nokia will experience major financial difficulties and this is why analysts have upgraded the Nokia share from a buy recommendation to a neutral recommendation and investors in 2011 are losing confidence, which is resulting in Nokia's share decline.

4.1.2.Human capabilities

Today, the Nokia group has 138,634 employees and the split between business units can be found in the table below23. By studying the repartition of those employees per country, we can see from the table that China, India, and Finland are the most important units in term of employees. This information confirms that Nokia is investing in more human capital in India and China (R&D, manufacturing plants and sales offices) than in its Headquarters and manufacturing plants in Finland. Nokia has also started to significantly cut jobs as it transitions to a new strategy involving a partnership with the software giant Microsoft. In 2011, the company had announced 7,000 job cuts (12 per cent of its phone unit workforce) and Nokia will also outsource its Symbian software development unit to Accenture. This move of laying off 4,000 staff and transferring another 3,000 to the services firm Accenture is expected to save one billion euros. However, this staffs are engineers who are extremely highly-trained, which makes them highly-desirable recruits for Nokia’s competitors. As an illustration, the day after Nokia announced the job cuts, Google posted a message on twitter stating, "Any Nokia software engineers need a job? We're hiring: www.google.com/jobs," recruiter Aidan Biggins EMEA (Europe, the Middle East and Africa)”.

Personnel by reportable segment June 30, 2011

22 Hamel, G., & Prahalad, C. K. (1994) ”Competing for the future” Harvard Business Review, 72(4), 12223 http://investors.nokia.com/phoenix.zhtml?c=107224&p=irol-irhome15 | P a g e S y l v a i n R E V U Z

Devices & Services 57 722

Nokia Siemens Networks 74 887

NAVTEQ 5 710

Group Common Functions 315

Nokia Group 138 634

4.1.3.Technological capabilities (RORC ratio)

We have seen that Nokia has lost is competitive edge in the smartphone industry. However, even if Nokia remains one of the most innovative companies in the world by filing between 1,300 and 1,500 patents applications a year, this innovation seems not to be transformed into gross profit. By comparing Apple and Nokia’s RORC ratio, we can conclude that Nokia’s innovation is not efficient compared to that of Apple. As an illustration, in 2010, Apple’s gross margin was $13.14 billion and Apple spent 1.109 billion on R&D in 2009 24. Thus by applying the RORC ratio, we can conclude that for every dollar that Apple spent on R&D in 2009, it generated $11.84 in 2010 gross profit. By applying the same methodology to Nokia, the numbers show that Nokia produced $3 in gross profit for every dollar that it spent on R&D25. In addition, According to the J.D. Power and Associates 2011 U.S. Wireless Smartphone Customer Satisfaction Study26, Apple ranks highest among the manufacturers of smartphones for customer satisfaction with a score of 795 whereas Nokia ranked under the industry average with 734.

24 http://investor.apple.com/results.cfm25 http://investors.nokia.com/26 http://www.jdpower.com/news/pressRelease.aspx?ID=201114616 | P a g e S y l v a i n R E V U Z

4.1.4. Management capabilities

Before starting at Nokia, Stephen Elop worked for Microsoft from 2008 to 2010 as the head of the Business Division responsible for the Microsoft Office line of products. Stephen Elop was named CEO of Nokia in September 21, 2010 when he replaced Olli-Pekka Kallasvuo. At the beginning of 2011, Elop announced Nokia’s new strategy for 2011, which is based on three Pillars27: Smartphones, The next billion and Future disruptions .

Smartphones

Beginning in 2011, Nokia will use Microsoft’s Windows Phone as its main smartphone operating system. The reason for this is that the smartphone battle is now a war of ecosystems rather than just devices.

The next billion

Around 3.2 billion people do not currently own a mobile phone. Nokia’s reach, extensive product portfolio, and market presence worldwide make it the best-placed manufacturer to supply the next billion mobile phone.

Future disruptions

Innovation in the field of mobile devices is far from over and Nokia will continue its support for revolutionary research and development work through Nokia’s worldwide research laboratories.

By analysing Stephen Elop‘s new strategy, two main problems can be highlighted: Firstly, by applying this strategy, Nokia will continue to focus its corporate activity in two different sectors that are diametrically opposed. By developing a high-end smartphone (differentiation strategy) and low-end mobile phone (cost focus) under the same Nokia’s brand, the company will continue to confuse customers. By

27 http://conversations.nokia.com/nokia-strategy-2011/17 | P a g e S y l v a i n R E V U Z

referring to Porter's Generic Strategies28 as presented below, we can state that Nokia will have a high risk of being "stuck in the middle" and will be not be able to achieve any competitive advantage by following more than one single generic strategy and by using the same brand name as well as the same culture and organisation.

Secondly, Stephen Elop has recently made two important mistakes in term of communication that have clearly impacted Nokia sales. Firstly, he wrote an email called the “Burning Platforms memo” 29 that was reported by the media worldwide. In this memo, Elop made the same mistake as Gerald Ratner by publicly denigrating Nokia's products and organisation. Secondly, during the presentation of Nokia’s and Microsoft partnership, Elop made another mistake called the Osborne effect by announcing a future product (Windows Nokia phone) ahead of its availability and this has impacted the sales of the current product.

4.1.5.Organisational capabilities

Nokia’s organisation has already been introduced in the first section of this document. However, it is important to notice that based on the new strategy, Nokia should match its new company’s ideology by modifying its structure (Structure follows Strategy). Moreover, if Nokia would like to regain a competitive edge in the high-end market, it is important to implement a flexible and more entrepreneurial structure that will be able to cope with rapid changes rather than the heavy bureaucracy and complicate structure that characterise the Nokia group of today.

4.1.6.Brand capabilities

According to Interbrand, in 201030, the Nokia brand was worth 29,495 ($m) (Appendix 3). It is the 8th largest brand in the world, and the first in the sector of consumer electronics. However, Nokia’s brand value is decreasing by 15% year on year due to Apple and Samsung that have clearly outperformed Nokia’s smartphone sales. The second ranking mobile phone manufacturer is Apple, which is 17th, with an estimated

28 Porter, M. (2006 Nov). “Strategy and Society: The link between competitive advantage and corporate social responsibility”. Harvard Business Review , 78-92.29 http://www.guardian.co.uk/technology/blog/2011/feb/09/nokia-burning-platform-memo-elop30 http://www.interbrand.com/en/best-global-brands/Best-Global-Brands-2010.aspx18 | P a g e S y l v a i n R E V U Z

brand value of $21,143 billion, and a growth y-o-y of 37%. This is followed by Samsung, which ranked 19th with a growth of 11%.

4.2. Core Competency

Applying G. Hamel’s view that success results from leveraging an organisation’s capabilities in a manner that delivers value to customers31, this section will assess Nokia’s current core competencies and competitive advantages:

Expertise in network and broadband technologies: In size, the Nokia Siemens Networks unit is the third biggest telecoms infrastructure provider after Sweden's Ericsson and China's Huawei. Nokia's has a huge global telecoms networks customer base, an extensive patents portfolio in this area, a very deep engineering competence, and factories producing very complex and expensive telecoms networking gear.

Production capability: Nokia is vertically integrated and has its own production facilities divided between nine countries. As an illustration, the Beijing facility is the world's biggest handset factory. In addition, its premium manufacturing ability remains in Finland, where for example Nokia produces its N9.

Economy of Scale and Cost leadership on low cost mobiles: Nokia remains the brand that produces the highest quantity low cost mobiles in the world.

Brand value: As we saw before, Nokia remained the number one brand in the sector of consumer electronics (ranking 8th in the world) in 2010.

Worldwide distribution network: In 2011, Nokia has 650,00032 retail touch points worldwide; far more than any of its competitors.

World-leading carrier relationships: Over the last decade, Nokia has developed important relationships with all the world-leading carriers. Nokia is one of the few brands that is known in every country on the planet and thus can access all sales channels due to these long relationships with the worldwide carriers.

Patents portfolio: One of the biggest values of Nokia is its important patents portfolio. Nokia has continually protected its innovations in the mobile space by systematically protecting its intellectual property. A rumour has suggested that Apple pays 11.50 $US per iPhone to Nokia33.

Nokia dominates the biggest markets: By being the leading brand in market share in China and India as well as Africa, Nokia can protect those markets from competitors and benefit from the rapid growth of those countries.

The VRIO framework will help us to assess to what extend Nokia’s competitive advantages are sustainable:

31 Prahalad, C. K., & Hamel, G. (1990). “The core competence of corporation” Harvard Business Review , 68 (3), 79-91.32 http://www.nokia.com/about-nokia/corporate-governance33 http://www.zdnet.com/blog/hardware/were-in-the-money-nokia-rumoured-to-be-getting-1150-per-iphone-sold/1329819 | P a g e S y l v a i n R E V U Z

Resource Valuable (Adds value as perceived by

customers)

Rare Hard to imitate

Supported by

Organization

Implications

Expertise in network and broadband technologies

Yes Yes Yes Yes Sustained competitive Advantage

Production capability No(No direct value for

customers but it has an important impact on Nokia’s

cost performances)

Yes Yes Yes Temporary Competitive advantage

Economy of Scale and Cost leadership on low

cost mobile

Yes Yes Yes Yes Sustained competitive Advantage

Brand value Yes Yes Yes Yes Sustained competitive Advantage

Worldwide distribution network

Yes Yes Yes Yes Sustained competitive Advantage

World-leading carrier relationships

No (No direct value for

customers)

Yes Yes Yes Temporary Competitive advantage

Patents portfolio No(No direct value for

customers because Nokia is licensing its technology to

competitors)

Yes Yes Yes Temporary Competitive advantage

Nokia dominates the biggest markets

No(No direct value for

customers)

Yes Yes Yes Temporary Competitive advantage

Based on the VIRO analysis below, we can conclude that even if Nokia is no longer the leader in the industry, it still has several interesting competitive advantages as well as at least four sustainable competitive advantages.

4.3. Key competitive issues highlighted by the internal analysis

All of the important findings that the internal analysis has stressed will be now summarised and classified into weaknesses and strengths.

Strengths

Well established brand with a long history of quality and innovation in the industry. Global Presence Wide Distribution Network – sales in 150 countries and good relationships with all

leading world carriers. The NokiaSiemens Networks Unit is the third biggest telecoms infrastructure provider, thus this unit

could be an autonomous company like Ericsson or Huawei. Strong presence in developing markets: The brand is dominant in markets such as India, China, the

Middle East, and Africa, which are expected to be the fastest-growing markets over the next five years.

Cost leadership on low cost mobiles: Much of Nokia’s dominance is due to a wide array of devices in the low- to mid-priced ranges, where the company’s reputation for quality has helped to stave off competition from other low-cost brands.

Weaknesses

The management team is trying to pursue two competitive advantages with the same brand and the same corporate culture: differentiation with high-end products (smartphone) and cost focus with

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cheap, low-end, no frills mobiles. This may confuse the end user and Nokia will be “stuck in the middle” without any competitive advantage.

Perceived loss of innovative edge: Nokia was once the innovator but is now perceived to be a follower.

Falling profits and market share. Perceived as a failing company with low technology and an obsolete operating system. Google have

developed an OS that is preferred by high-end users as well as developers. Low competitiveness in smartphones: Nokia’s high-end -series N7 or N9 are largely outperformed by

Apple.

5. Microsoft an d Nokia analysis

On 11 February 2011, Nokia's CEO unveiled a new strategic alliance with Microsoft, and announced it would replace Symbian and MeeGo with the Windows Phone 7. In addition, Nokia also explained that it will retain Symbian as its main operating system on its mid-to-low-end devices. In order to evaluate the potential impact of this alliance, an interview was conducted with the Head of Finance & Control, Nokia France through Skype. Based on the information collected during the interview, four strategic advantages will results from this alliance.

Strong alternative to RIM Blackberry

Nokia has never been very successful at capturing the enterprise market. However, the RIM Blackberry is currently the leading platform for mobile enterprise solutions. Microsoft with Windows for PC is the leading platform for the enterprise market. In addition, Microsoft is a leading provider of unified communications platforms, for example, the Office Communications Server 2007 and also has a monopoly with the Microsoft Office suite.

By natively integrating all Microsoft solutions with Nokia smartphones (Office Communications Server, Microsoft Office applications, Microsoft SharePoint and other Microsoft backend servers and applications), the Microsoft /Nokia solution will offer a powerful alternative to the RIM Blackberry.

Financial support and synergy in R&D

Microsoft has also pledged to invest billions of dollars in engineering in order to help Nokia reduce its R&D spending and therefore improve its financial position without compromising the development of new innovative Nokia/Microsoft devices that will be launched in Q2 2012.

More services for end users

Nokia's NAVTEQ unit will bring to Microsoft expertise in imaging, mapping, and location services. This should result in a competitive edge because currently RIM Blackberry, Apple, and Samsung do not have any mapping solutions, and only Google does. In addition, Microsoft offers several services that can attract the younger generation, for example, the famous MSN/Hotmail real time messenger as well as the Bing search engine or the Xbox Live system and several Xbox games licences that can be decline into mobile phone games.

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Only one platform for the developer and only one application store

Microsoft and Nokia will also merge their application stores (Ovi, Store, and Windows Marketplace), thus the number of applications available will increase significantly. In addition, Microsoft and Nokia will introduce a platform for developers that will enable any application that is already compatible with Windows to be ported to the new Nokia/Microsoft smartphone in a very simple and efficient way. This global platform should attract more developers, and in particular, developers that will be a priority focus for corporate applications. It is important to notice that Apple and Android currently have around 300,000 applications but less than 5% are dedicated to enterprises.34

6. Recommendations

After a scan of the internal and external environment we can clearly understand the current and future competitive environment of Nokia. in addition, the following recommendations may help Nokia and Microsoft to maintain their competitiveness vis-à-vis key competitors.

1) Retain dominance in developing markets by reshaping the Nokia Brand

As previously mentioned, Asia Pacific, the Middle East, and Africa are the key opportunity markets for Nokia as they represent the largest markets for low-cost mobile phones. Nokia is currently the leader in terms of market shares in those countries, thus it can utilise its wide distribution network to further expand into developing markets, particularly the BRIC countries. Nokia should optimise its organizational structure by transferring the entire Mobile Phones Unit in charge of this segment into Asia. This would help ensure that Nokia can conserve its economy of scale as well as cost leadership even if local players are trying to enter this segment. In addition, to lower costs, all internal processes must be optimised by deploying Lean manufacturing on all activities (Sales, Marketing, Finance...). As the image of the umbrella brand became associated with low-cost models, Nokia launched its N-series and E-series sub-brands in 2005 as its higher-priced models and today the N9 is Nokia’s flagship. However, Nokia is trying to reinvent its business model with the strategic alliance between them and Microsoft may therefore be a good opportunity to reshape the company’s brand image in the highest price range by creating a dedicated new brand (for example MicroKia).

Competitive intelligence (CI) actions:

Create a specific CI team in charge of constantly analysing the BRIC market and low-cost mobile phones segment.

Evaluate the impact on the current market if Nokia stops to use the Nokia brand for higher-priced products and introduces a new brand (for example MicroKia).

2) Nokia Siemens Networks division to exploit the growth of 4G

With the acquisition of Motorola Solutions, the Nokia Siemens Networks division is in a much better position to exploit the growth of 4G and sell more communication infrastructure hardware as well as telecommunications equipment to mobile network operators. In addition, the Nokia Siemens Networks division represents roughly one third of total Nokia revenues, about half of Nokia's total number of employees,

34 http://www.distimo.com/publications/22 | P a g e S y l v a i n R E V U Z

and has made revenues of about 12 Billion Euros, but a very little profit. It may be important to list this division separately as an independent company because it is big enough to be a Global Fortune 500 corporation and it is a non-core business for Nokia. In addition, the Nokia Siemens Networks has a deep patents portfolio and factories that produce very complex and expensive telecoms networking gear that could be sold in the future to Cisco, Huawei or Alcatel-Lucent in order to reinvest heavily in Nokia’s core business.

Competitive intelligence (CI) actions:

CI team to evaluate the main countries that extend their 4G infrastructure and create several war game sessions with Nokia executives in order to anticipate their competitors’ reactions.

CI team to evaluate the impact of a potential sale of the Nokia Siemens Networks division.

3) Leverage Nokia/Microsoft (MicroKia) partnership and offer a strong alternative to RIM Blackberry before the end of 2012.

Create the perfect mobile solution for the corporate world by leveraging Microsoft Enterprise solutions as well as solid finance. Research in Motion is a simple target for the two giants, Microsoft and Nokia, and this segment is highly profitable. Apple and Samsung have no specific interest or strength to react to this “niche” attack. By entering the corporate world, Nokia/Microsoft will be able to attract developers that are interested in selling high value applications to organisations.

Competitive intelligence (CI) actions:

CI team to evaluate the impact and risk of failure of the Nokia/Microsoft partnership. CI team to evaluate the possible retaliation by RIM if Nokia/Microsoft enters the corporate world.

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ReferencesBooks

Hamel, G., & Prahalad, C. K. (1994). ”Competing for the future” Harvard Business Review, 72(4), 122

J P. Herring (1999) “Key Intelligence Topics: A Process to Identify and Define Intelligence Needs" Competitive Intelligence Review, Vol. 10(2) 4–14 John Wiley & Sons, Inc.

Porter, M. (2006 Nov). “Strategy and Society: The link between competitive advantage and corporate social responsibility”. Harvard Business Review , 78-92.

Prahalad, C. K., & Hamel, G. (1990). “The core competence of corporation” Harvard Business Review , 68 (3), 79-91.

Reports

BMI (2010) Special Report BMI Global Handset Market Key Trends and Opportunities 2007-2014

BMI (2011) China Telecommunications Report Q3 2011

ComScore (2010) Mobile Year in Review

Euromonitor (2011) International Consumer Electronics report

Websites

http://www.asymco.com/ , accessed on: 21/08/2011 http://blog.nielsen.com/nielsenwire/?p=28237, accessed on: 21/08/2011 http://www.comscoredatamine.com/page/2/?s=mobile, accessed on: 21/08/2011 http://www.distimo.com/ , accessed on: 21/08/2011 http://www.nokia.com/about-nokia/, accessed on: 21/08/2011 http://www.appcelerator.com/assets/appcelerator-mobile-developer-survey-june-2010.pdf, accessed on: 21/08/2011 http://investor.apple.com/results.cfm, accessed on: 21/08/2011 http://investors.nokia.com/ , accessed on: 21/08/2011 http://www.jdpower.com/news/pressRelease.aspx?ID=2011146, accessed on: 21/08/2011 http://conversations.nokia.com/nokia-strategy-2011/ , accessed on: 21/08/2011 http://www.guardian.co.uk/technology/blog/2011/feb/09/nokia-burning-platform-memo-elop , accessed on: 21/08/2011 http://www.interbrand.com/en/best-global-brands/Best-Global-Brands-2010.aspx , accessed on: 21/08/2011 http://www.zdnet.com/blog/hardware/were-in-the-money-nokia-rumoured-to-be-getting-1150-per-iphone-sold/13298 , accessed on: 21/08/2011

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Appendix

Appendix 1

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Nokia Group

Mobile Solutions

Development and

management of the company’s

smartphone portfolio

Mobile Phones

Development and

management of the company’s basic mobile phone range

Markets

Marketing, distribution and

logistics

Navteq

Maps and location-based

services for mobile devices

Nokia Siemens Networks

Appendix 2

Source: http://www.nokia.com/about-nokia/

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Appendix 3

Source: http://www.interbrand.com/en/best-global-brands/Best-Global-Brands-2010.aspx

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