MASTERS IN TELECOM & DIGITAL BUSINESSFebruary 19th 2010

Corporate Policy and Strategic ManagementStrategic Analysis of Nokia’s Smartphone Market

Professor: Arthur Morin

Deepak AgarwalAnoud Hussein AlotaibiGustavo Andres AlvaradoCarol EidMurali ErraguntalaRafael GomezBing Van Der Lande

Table of ContentsSmartphone – Introduction...................................................................................................................3Nokia - Description of Company.........................................................................................................3Why Nokia and Why Smartphones......................................................................................................3Industry Analysis..................................................................................................................................3Porter’s 5 Forces...................................................................................................................................3

Threat of Entry.................................................................................................................................3Supplier Power.................................................................................................................................4Substitutes.........................................................................................................................................4Buyer power.....................................................................................................................................4Rivalry..............................................................................................................................................5Complements....................................................................................................................................5

PEST analysis.......................................................................................................................................5SWOT Analysis....................................................................................................................................5Strategic Diagnosis of Nokia in Smartphone Industry.........................................................................5

Product analysis................................................................................................................................5Segmentation analysis......................................................................................................................6Product-line breadth analysis...........................................................................................................7Value chain analysis.........................................................................................................................8Brand analysis..................................................................................................................................8

Strategy Formulation............................................................................................................................8Product differentiation......................................................................................................................8Cost differentiation...........................................................................................................................9Functional strategy.........................................................................................................................10Corporate Strategy..........................................................................................................................11

Glossary..............................................................................................................................................12Exhibit 1: Organization details...........................................................................................................13

Nokia organization.........................................................................................................................132008 facts and figures.....................................................................................................................13Nokia strategy.................................................................................................................................14

Exhibit 2: Market growth of smartphones..........................................................................................15Exhibit 3: BCG matrix........................................................................................................................16Figure 5 – BCG Matrix of NokiaExhibit 4: PEST analysis...............................................................16Exhibit 4: PEST analysis....................................................................................................................17

Political...........................................................................................................................................17Economical.....................................................................................................................................17Societal...........................................................................................................................................17

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Technological.................................................................................................................................17Exhibit 5: Product comparison chart..................................................................................................18Exhibit 6: Segmentation chart............................................................................................................19Exhibit 7: List of products in ‘N’ series and ‘E’ series......................................................................20

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Smartphone – Introduction1

A smartphone is a mobile phone offering advanced capabilities, often with PC-like functionality. There is no industry standard definition of a smartphone. For some, a smartphone is a phone that runs complete operating system software providing a standardized interface and platform for application developers. For others, a smartphone is simply a phone with advanced features like e-mail, Internet and e-book reader capabilities, and/or a built-in full keyboard or external USB keyboard and VGA connector.

Nokia - Description of Company2 “Nokia envisions a world where connecting people to what matters empowers them the most

of every moment” Olli-Pekka Kallasvuo, Nokia CEONokia is a manufacturer of mobile devices and a leader in converging Internet and

communications industries. They make a wide range of devices for all major consumer segments and offer Internet services that enable consumers to experience a wide array of services (music, maps, media, messaging and games). They also provide digital map information through NAVTEQ and equipment, solutions and services for communications networks through Nokia Siemens Networks.Refer to Exhibit 1 for more details about “Nokia”.

Why Nokia and Why SmartphonesSmartphone segment is one of the rapidly growing segments in the mobile handset industry.

Smartphones are penetrating into mobile handset market at a very fast rate capturing a larger pie of the overall mobile handset market and hence that segment is more lucrative. Though Nokia is a market leader in the entire mobile industry, its performance in smartphone market is abysmal in comparison with its competitors (Refer to Exhibit 2). If Nokia and its competitors perform at the same rate as outlined in Exhibit 2, it will take no more than couple of years for Nokia to lose its market leadership position. So the situation is alarming for Nokia

The focus of the document is to present a detailed analysis of various attributes that might be responsible for the declining market share of Nokia and later draft a strategy for Nokia to jump to ‘Star’ category in the BCG matrix (Refer to Exhibit 3). However we are sticking ourselves to external attributes and we are not evaluating internal attributes like operational efficiency of Nokia as it was difficult to either ascertain or obtain the internal data.

Industry Analysis

Porter’s 5 Forces Porter’s 5 forces analysis is done to understand the industry attractiveness of the smartphone industry.

Threat of Entry Huge capital requirements (Low): High manufacturing cost, high R & D cost. Constant push

to innovate and launch new products.

1 Source: http://en.wikipedia.org/wiki/Smartphone 2 Source: Nokia in brief, http://www.nokia.com/about-nokia/company

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Economies of scale (Low): Fixed cost is high, so economies of scale has to be achieved to increase profit margins

Product differentiation (Low): Smartphone will become a commodity unless they are differentiated from its competitors. Moreover the bargaining power of the buyer is high, so product differentiation is an ideal way to add value to the buyer.

Distribution channel (Low): In most of the countries, smarphones are sold through mobile operators and hence they exert more bargaining power. Alliance with mobile operators is an essential factor for product success in smartphones segment.

Absolute cost advantage (Low): Recent data by FT3 reveals that the operating margin of Nokia and Apple is above 30%, whereas the operating margin of the remaining smartphone manufacturers is below 15%. Such efficiency in operations is achieved through learning curve experienced by both Nokia and Apple after remaining in the industry for a longer duration.

Governmental and legal barriers (Low): Mobile industry is heavily regulated. Retaliation (Low): All leading players are fighting a fierce battle to gain more market share,

so there will be a heavy retaliation against any new entry. Existing players have sufficient financial clout to block new players.

Brand (Low): Strong brand recognition is required to sell smartphones.

Supplier Power Software provider (Moderate): There are so many open sources mobile operating system

providers, options are plenty and hence the bargaining power of software providers is low. Hardware provider (Moderate): There are so many suppliers for hardware components too

(Qualcomm, TI & Intel) and hence the bargaining power of hardware providers is also low

Substitutes The power of substitutes is moderate and it actually depends on the impact of substitute

products. Smart phones do wide variety of functions, so any product that specializes in one of those

individual functions can also be termed as a substitute. Other formidable substitute products are notebooks (with smaller screens), PDAs, tablet PCs.

Buyer power Buyers bargaining power is high because of the following reasons:

More choice of products and very limited differentiation of those products. Elastic demand –Demand is highly sensitive to economy, buyers can delay buying new

models. Less asymmetric information – Buyers have all the required information. Less switching costs: This depends on the country and type of mobile plans provided by the

service provider.

Rivalry Rivalry is intense among existing players. The differentiation in terms of product features are getting diminished; however players are

continuing to differentiate their products in terms of applications and services offered.

3 Source: Financial Times – Published on 15th February 20105

Exit barriers have to be evaluated in correlation with value chain analysis. Exit barriers are low for manufacturers that occupy only part of the value chain against the manufacturer that occupy most of the value chain.

ComplementsComplements are critical for product differentiation and they have a very moderate bargaining power. The power of complementary products (Applications) will be further subsidized with increasing network externalities. We do not see complements gaining more power until all the mobile platforms converge under some common standards.Some complements include:

Email Maps & GPS Applications

Music & other media related applications Utility applications Internet based etc.

PEST analysisPEST analysis is done to understand the macro-economic factors that might affect Nokia. Since the macro-economic factors are not critical for the scope of the document, we have added the PEST analysis in Exhibit 4.

SWOT AnalysisTable 1 - SWOTStrengths Brand Awareness Technology leader in Manufacturing Mobiles Market leader Presence across 150 countries

Weakness Not good at software Performance of Symbian OS is lackluster Increasing dissatisfaction levels with its

smartphone Very weak market share in US

Opportunities Huge loyal customer base Huge presence in developing countries Can use its infrastructure business (Nokia

Siemens Network) to reduce the bargaining power of mobile operators

Threats Rapidly changing industry Chances of missing Inflection point is high Threat of entry from new players, Microsoft

might enter smartphones market. Google has just entered the market with Nexus One.

Strategic Diagnosis of Nokia in Smartphone Industry

Product analysisTo provide an unbiased review of Nokia’s products, we compared Nokia’s N97 with Apple’s iPhone. Refer to product comparison chart in Exhibit 4.

The comparison chart indicates that Nokia’s N97 is more feature-rich than Apple’s iPhone. Yet Nokia managed to sell only 500,0004 phones in 1st qtr of its launch in comparison with 1,000,000

4 Source: http://nokiaexperts.com/gartner-numbers-show-500000-nokia-n97-units-sold-june/6

iPhones in first week of its launch. So what might have gone wrong for Nokia despite being feature rich might be the user experience? At least the statistics shown below has skewed our answers towards lack of user experience. Nokia is at the bottom of satisfaction index, so there is a clear indication that customers are not satisfied with Nokia’s smartphone. Data in table 2 further emphasizes that the defection rate from Nokia to other smartphone brands in comparison to the defection rate from other smartphone brands to Nokia might be higher.

Table 2 - Smartphone satisfaction index: How happy are you with your smartphones5

iPhone 92%Android 77%Palm Pre 77%Blackberry 73%Palm Treo 70%Symbian OS (Nokia) 66%Windows 66%

Segmentation analysisBroadly, the smartphone segment can be classified into three kinds of users

1. Entertainment users2. Communication users3. Information users

Nokia has well defined products for each of those users. ‘N’ series is targeted for Entertainment users and ‘E’ series is targeted for communication users. However is Nokia successful in reaching the targeted users for their products?The common usage characteristic between entertainment and communication users is access to internet. Entertainment users connect to internet to download music, applications and games and also to connect to social sites. Communication users connect to internet to interact with others through e-mail, chat etc. So internet usage is critical for both the users. However internet usage statistics of Nokia smartphones in comparison with its market share (shown in Exhibit 2) is not convincing, rather the internet usage statistics is very abysmal.

Table 3 - Statistics of global internet traffic through smartphones6

Global Traffic By Platform September 2009 Share October 2009 ShareApple iPhone 43% 50%Symbian (Nokia) 29% 25%Android 10% 11%RIM BlackBerry 8% 7%Windows Mobile 5% 3%Others 5% 4%

5 Source: http://techcrunchies.com 6 Source: http://www.knowyourmobile.com/blog/368798/apple_iphone_way_ahead_in_worldwide_smartphone_data_usage.html

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Indeed the internet usage statistics of Nokia is declining. So it is evident that Nokia smartphones are not brought by the targeted consumers. There is a clear mismatch between the product and its consumers. Nokia products are not reaching intended consumers.

In this section we are refraining ourselves from answering some of the key questions such as1) Are all the segments equally capable of being profitable?2) Which segment is more attractive to smartphone manufacturers?3) Whether companies should focus and choose a particular segment or pursue all three?

However we have tried to analyze whether Nokia is successful in reaching each of its target segment. Based on earlier hypothesis, our analysis is that the majority of Nokia smartphone consumers are not 3G users.

Product-line breadth analysisNokia has broad range of products for this particular segment much more than any other mobile manufacturer. To evaluate our claims, we have listed the list of mobile phones launched in ‘N’ series and ‘E’ series since 2007 in Exhibit 7.

From Exhibit 5, it is easily discernible that Nokia is launching lots of product much more than its competitors and its broad product portfolio is not doing any good to increase its market share. Nokia in a desperate bid to capture the lost market is flooding the market with lots of products. Increased product portfolio will eventually increase its overall cost and decrease its profits margin. Though Nokia is market leader and its sales are larger than its competitors, its wide product portfolio results in customers being thinly scattered across each product line. The critical factor for a technology product to be successful is to ‘Cross the chasm’ shown in the image below

Figure 1 - The Chasm7

To successfully cross the chasm, you have to ensure that your product is embraced by the right consumers and you have sufficient consumers in each segment to act as a reference point to consumers in the consecutive segment.Nokia is not doing either, its products are not embraced by the right consumers and consumers in each segment are thinly scattered across the broad range of products. So Nokia do not have sufficient reference consumers in each category.

7 Adapted from “Crossing the Chasm” By Geoffrey Moore8

Value chain analysis

Figure 2 – Value ChainIn most of the geographic locations, telecom operators exert control in distribution, sales & marketing and they influence the total sales of smartphones, so that part of the value chain is critical for strategic analysis. Telecom operators’ device specific 3G plans for each mobile manufacturer bundle the plans along with the smartphone and sell it through their distribution channel. Voice ARPU is going down and the future belongs Data, so telecom operators are willing to promote products that would increase their Data ARPU. We indicated in earlier part of the document (Refer to Table 3) that internet usage of Nokia smartphones is abysmal and hence telecom operators do not have any additional incentives to sell Nokia smartphones. It is a typical ‘chicken and egg’ story. Since few telecom operators offer Nokia smartphone, Nokia is losing some of its prospective buyers too.

Brand analysisIs “Brand Perception” a spoiler for Nokia? Nokia is an umbrella brand with wide range of products. We have to evaluate whether Nokia requires a sub-branding to target the right consumers. We do not have any statistics to prove our claim. However after talking with few of the probable consumers, we get an impression that Nokia is predominantly seen as a “2G Mobile Manufacturer”. Our sample size limits us to arrive at some concrete conclusion, so we believe that a more detailed study and careful analysis has to be done before any conclusion on the “Brand Perception” of Nokia is reached.

Strategy Formulation

Product differentiationProduct differentiation in smartphones is achieved through lots of applications, services and user experience. Nokia is fast catching-up with its competitors through exclusively launched ‘OVI Store’. There is a projection that application downloads from all application stores by 2014 will be 6.67$ billion. So consumers would value applications a lot and hence Nokia cannot afford to stay behind. The strategy for Nokia is not to be a leading applications provider for smartphones, but to ensure that its competitors do not gain sufficient competitive advantage through applications. Basically Nokia has to nullify the competitive advantage that its competitors have gained out of applications by offering application developers an ideal platform through its ‘OVI store’.Nokia has to focus on increasing the user satisfaction index. There is a general perception that performance of Symbian operating system is lackluster and it is too slow for smartphones. Nokia is a leader in hardware; however its reputation is at stake in software. We understand the strength of Symbian lies in its robustness, but do customers still value robustness or do the preferences of customers has changed? We suggest Nokia to form alliance with leading software providers. But Nokia decided to enter open source operating system through Maemo in 2010. Now focus has to be shifted to increase the community strength of Maemo. The critical success factor for any product development is to have limited platforms. With Maemo, the number of platforms has now increased to 3 (Including Symbian S40 & S60). Unless Nokia can draft a clear strategy for each of the product

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platform, multiple platforms would spell doom for Nokia’s product strategy. Further products from each of the platforms should be clearly differentiated from each other.

Cost differentiationTable 4 - The operating profits of all the leading mobile manufacturers is8

Nokia 30.7Apple 36.4Samsung 13.3RIM 15.4LG 4.2HTC 5.1Motorola -0.1Sony Ericsson -0.1

The above table clearly indicates operational efficiency of Nokia and Nokia has sufficient financial leverage to engage in price wars with all its competitors except Apple. But we do not recommend Nokia to engage in a price war. Instead Nokia can set an industry benchmark for operating profits in smartphone industry and it will bring lots of pressure on all the competitors by investors, shareholders of the respective companies. The competitors in an attempt to increase their operating profits might take wrong steps and finally stumble. They might also leave the industry provided their cost of exit is low. Cost leadership will give Nokia an invincible position against its competitors. Against Apple, Nokia has to become aggressive and fight head-on with it.

Figure 3 - Nokia competitive strategy

8 Source: Financial Times – Published on 15th February 200910

Broad differentiation

strategyLow cost mass market strategy

Cost advantage

Product differentiation

Niche market

Mass market

Focus differentiation

strategyLow cost niche market strategy

FuturePosition

CurrentPosition

Functional strategy Nokia has to reduce its product portfolio. This is an industry where ‘HIT’ matters, so Nokia

has to release lesser products and hit bulls eye through a focused approach. One ‘HIT’ product would suffice to turn the attention of everyone (consumers and telecom operators) towards Nokia. Nokia should focus on releasing a product that would challenges the likes of ‘iPhone’ and ‘Nexus One’.

Market segmentation chart in Exhibit 6 throws an opportunity for Nokia. There are not many manufacturers targeting information users, because many are not considering it as a lucrative market after declining PDA sales. Nokia can consider entering the market through some innovative product and explore blue ocean strategy

There is not a clear target for Nokia in their aim to reach all major consumer segments. They need to connect emotionally, for example, they can begin by changing the names of the devices (N Series, E Series) because there is no emotional connection. We recommend that they develop products and services that solve specific customer problems and fit into specific lifestyles.

Nokia has currently two operating systems (Symbian & Maemo) and both are open source. Nokia has to clear define a roadmap for both the operating systems. Maemo is a new community and efforts should be focused towards increasing the strength of the community.

Brand ‘Nokia’ has a global appeal, creating a sub-brand and communicating to the global audience is costly. However we are not sure whether branding low-end and high-end mobile phones differently would cast any magic on the declining market share. We are thinking of a brand strategy analogous to ‘Toyota & Lexus’ and ‘Honda & Acura’.

Smartphone is a constantly evolving industry, so Nokia has to keep a tight vigil on the inflection points. Disruptive changes in technology occur at inflection points and they will bring a sea-change to the entire industry, missing such inflection points will be suicidal.

Corporate StrategyNokia is currently divesting9 few of its business that does not add value, Nokia has to continue divestments and concentrate its resources and energy on Smartphone business. Because smartphone market has a huge potential for growth and it can add lot of value.

9 http://www.nokia.com/about-nokia/financials/divestments11

Glossary

1. Open source is a development method for software that harnesses the power of distributed peer review and transparency of process. The promise of open source is better quality, higher reliability, more flexibility, lower cost, and an end to predatory vendor lock-in.

2. The OVI Store was launched worldwide in May 2009. Here, customers can download mobile games, applications, videos, images, and ringing tones to their Nokia devices. Some of the items are free of charge; others can be purchased using credit card or through operator billing in selected operators.

3. Symbian is an open source operating system (OS) designed for mobile devices and smartphones, with associated libraries, user interface, frameworks and reference implementations of common tools, originally developed by Symbian Ltd.

4. Maemo is a software platform developed by Nokia for smartphones and internet tablets. It is based on the Debian Linux distribution.

5. A personal digital assistant (PDA), also known as a palmtop computer, is a mobile device which functions as a Personal information manager and connects to the internet. 

6. Average revenue per user (sometimes average revenue per unit) usually abbreviated to ARPU is a measure used primarily by consumer communications and networking companies, it is the total revenue divided by the number of subscribers.

7. Inflection Point is where the old strategic point dissolves and gives way to the new strategy. Inflection Point is defined by Andy Grove (Former CEO of Intel Corporation) in his book “Only Paranoid Can Survive”.

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Exhibit 1: Organization details

Nokia organization

Figure 4 – Nokia Organization Devices: Develops and manages the mobile device portfolio, includes the sources of

components. Services & Software: Develops consumer Internet services in 5 areas (music, maps, media,

messaging and games), and works to deliver the services in an easily, accessible manner to consumers.

Markets: Manages supply chains, sales channel, brand and marketing activities. Corporate Development Office. Gives operational support to the units and explores

corporate strategic and future growth opportunities. Nokia Siemens Network: Provides wireless and fixed network infrastructure,

communications and networks service platforms and professional services to operators and service providers.

NAVTEQ: Provides digital map data for automotive navigation systems, mobile navigation devices, Internet-based mapping applications, and government and business solutions.

2008 facts and figures Head office in Finland (R&D, production, sales, marketing activities around the world) World’s #1 manufacturer of mobile devices, with estimated 39% share of global device

market in 2008 Mobile device volumes 468 million units Net sales EUR 50.7 billion Operating profit EUR 5.0 billion 128,445 employees at year end (including Nokia Siemens Networks) Strong R&D presence in 16 countries R&D investment EUR 6.0 billion 39,350 employees in R&D (approximately 31% of workforce, including Nokia Siemens

Networks) Sales in more than 150 countries

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Nokia strategyNokia is concerned about mobility and the continuous convergence between media. They

are willing to create value by combining smart services and devices to deliver solutions for consumers. They describe their strategic objectives as:

Irresistible solutions and vibrant ecosystems Direct and continuous consumer relationships. Best devices

Broadening their geographic reach Broadening their device base will grow their service business

Smart services Creating relevant and personalized services Target: 300 million people using their smart services by 2012

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Exhibit 2: Market growth of smartphones

Table 5 - YoY growth of all the smartphone manufacturers as on Aug 200910

Manufacturers Market Share YoY Growth RateNokia 44.3% 10.4%RIM 20.9% 77%Apple 13.7% 62.6%

Figure 5 - Smartphone penetration into mobile handset market11

10 Source: http://techcrunchies.com/year-on-year-growth-rate-of-nokia-iphone-and-blackberry-q2-2009/

11 Source: Morgan Stanley research estimates15

Exhibit 3: BCG matrix

Figure 6 – BCG Matrix of Nokia

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Nokia

Exhibit 4: PEST analysisPEST analysis is done to understand the macro-economic factors that might affect Nokia.

PoliticalNokia has shifted its manufacturing units to India. Nokia has to be wary of the labor laws and its political implications. For instance, the factory was shut for 2 weeks because of employee strike. In few of the countries, mobile market is still highly regulated and government intervention does take place.

EconomicalEconomy plays a key role in the profitability of the smart phone industry. The demand for smartphones is elastic and hence any economic downturn might hamper the sales of the smartphones.

SocietalWe do not perceive much of societal impacts to smart phone industry as the society is quite receptive to advances in technology. Moreover the rise of the so-called information society has made telecommunications increasingly more important to consumer, both in terms of work and leisure.

Technological Smart phone industry is marked by drastic technological changes. Innovation and new product launches at faster rate are key attributes for success in this industry.

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Exhibit 5: Product comparison chart

Table 6 - Product comparison chart of Nokia N97 and Apple iPhone12

Nokia N97 Apple iPhone

Operating System Symbian S60 5th edition iPhone OS

Locked? No Yes

SMS forwarding Yes No

MMS Yes No

Colors White and Dark Gray Black and White

Input Slide-out Keyboard On-screen Keyboard

File transfer Yes No

Camera 5MP with flash 2MP without flash

Video Recording Yes, DVD quality No

WiFi and GPS Yes, with electronic compass

Yes

Removable Battery? Yes No

Memory 32GB with microSD 8GB or 16GB only

Price $600 $700 (unlocked)

12 Source: http://www.sizlopedia.com/2008/12/09/nokia-n97-iphone-comparison/ 18

Exhibit 6: Segmentation chart

Brief description about users in each of the three mobile segments are presented below:

The entertainment-focused users are generally younger than average; many are in college or their 20s. They see a mobile device as a lifestyle choice, and they're willing to pay extra for a device that'll help keep them entertained. Entertainment can also include things like social messaging with your friends. It's anything you do for fun rather than a paycheck.

The communication-focused users are extroverts who live to communicate with others. They're often in people-facing jobs like sales. They're willing to pay extra for a mobile device that lets them keep up with others in multiple ways. E-mail, SMS, voice, conferencing, video calling -- basically, anything communication-related is compelling to them, and they will pay extra for a device that does it well.

The information-centric users are more introverted. Rather than focusing on their dialog with others, they tend to do a lot of thinking on their own, and want their mobile device to be a memory supplement and a means to capture new information. They're not by any means recluses, but ideas rather than social interaction are what really get them energized, and so they're willing to pay extra for features that help them capture and remember ideas and information. What they really want is a brain extender. They often work in information-heavy jobs like medicine, law, science, and academia.The chart below provides various players in each of the user segments13

Figure 7 – Segmentation chart

13 Source: www.mikemace.com 19

Exhibit 7: List of products in ‘N’ series and ‘E’ series

Nokia N series (Multimedia Series)Nokia N series is a product family that includes multimedia smartphones. These are mobile devices supporting digital multimedia services such as music playback, video capture, photography, mobile gaming and Internet services. Some N series devices support high-speed wireless technology, such as 3G, or Wireless LAN.

Products launched since 200714

2007: N76, N77, N81, N92, N93i, N952008: N78, N79, N85, N962009: N86, N97, N97 Mini

In the same period Apple just released one smart phone (iPhone). However there were revisions to that mobile, but Apple did not release a new smart phone.

Nokia E Series (Communication Series)The Nokia ‘E’ series consists of business-oriented smartphones, with emphasis on enhanced connectivity and support for corporate e-mail push services. All devices have advanced office features.

Products launched since 200710

2007: E51, E61i, E65, E902008: E63, E66, E712009: E52, E55, E72, E75

In the same period Blackberry has launched far fewer phones than Nokia.

14 http://en.wikipedia.org/wiki/List_of_Nokia_products20