Causes of Nokia’s market failure and

recommendations for it’s revival.

Study Group K6

ARWAL DHAR (61910386)

DALAN MENDONCA (61910380)
RADHIKA SRIRAM (61910306)
RAJAT BHATNAGAR (61910122)
Table of contents

1. Introduction

2. Nokia Mobiles division

3. Industry Attractiveness: Then and Now - Five Forces Model

4. Causes of the downfall

5. Re-entry of Nokia

6. HMD Global’s strategy

7. Recommendations for HMD Global

8. Exhibits

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Nokia is one of the most popular multinational communication corporations in the whole

world that focuses on supplying products and services in wireless telecommunications,

wired and information technology industries. Before the 1990’s, Nokia had a business

model that was cross-industry and diversified. Nokia had 34 subsidiaries in 10 different

industries. Facing heavy losses, in 1992, the firm decided to change their strategy and

change the business structure. It sold 71 enterprises and by the end of 1993 there were

only two groups left, namely mobile phone and network. In the early 1990’s the mobile

phone industry was evolving rapidly. By the beginning of the 21 st century, there was

severe competition in the mobile phones industry. While Nokia dominated the market with

its line of phones for a long time, its Symbian OS could not become popular and with

players like Apple, HTC and Samsung taking stage, consumers began to switch to those

brands [Exhibit 1].

Nokia Mobiles division

The company was charting brand new territory, paving the way in an infant industry that

was to eventually become the world's largest. In 1992, Nokia launched the 1011, this was

the world's first GSM (Global systems of mobile communications) digital phone. The first

GSM networks were replacing the old analog 1G systems. Nokia showed that they could

push the concept of all-encompassing mobile phone that was more than just a simple

transmitter and receiver connected over a network. They knew that the future was all in

the Software. With adequately easy to use software this new phenomenon of a portable

talking device could be so much more. In 1994, Nokia released the 2110 [Exhibit 2]. At

the time mobile phones were huge, with large batteries and yet had very small unreadable

displays. The 2110 had large screen, address books, call and text indicators and was the

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first phone was the to feature the iconic Nokia ringtone. It was the very first phones to be

able to send and receive text messages. Consequently, it was an instant hit and went on

to become one of the bestselling phones of all times. The importance of software was

fully realized in 1996, with the Nokia 9000 communicator. It had a full QWERTY keyboard,

web browser, email, fax, word process and the 90's quintessential spreadsheet. By 1998,

Nokia overtook Motorola as the largest manufacturer of mobile phones in the world. In

their quest to have the best software in their phones, during the same year, Nokia got

onboard with the Symbian software. In the early 2000's Nokia had hit after hit with a range

of mobile phone launches. In 2002 they released the 6650, which was the first ever 3G

phone and the 7650, Nokia's first ever camera phone. By 2005, Nokia phones were the

number one digital camera brand in the world.

Industry Attractiveness: Then and Now - Five Forces Model

Nokia led the mobile phone, and later the smartphone industry for nearly good two

decades before seeing a sharp slump. This could be partly attributed to the fast-changing

nature of the industry and also Nokia's inability to preempt these changes and address

them as required.

Pre-2007 period: Bargaining power of the buyer: Low

In the early days, Nokia was the frontrunner in the mobile industry. With not much

competition, buyer power was low. There weren’t many players who could challenge what

Nokia was offering. In the era of feature phones and early days of the smartphone, Nokia

was a trendsetter, expanding extensively a market that slipped out of its hand rapidly in

the late 2000's.

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Post-2007 period: Bargaining power of the buyer: High

By 2012, 5 years after the launch of the most successful Nokia smartphone N95, Nokia's

market capitalization dropped considerably, from € 110 Billion to € 15 billion. The 2007

release of the first iPhone, with its full touch screen display and its unique operating

system (iOS) followed quickly by the launch of the first Android phone by Google in 2008,

expanded competition in the smartphone market quicker than Nokia could anticipate.

Customers suddenly had more and better options to choose from, eroding existing brand

loyalty, lowering switching costs and shooting up their bargaining power rather rapidly.

Pre – 2007 period: Bargaining power of the supplier: Moderate to High

Two types of suppliers existed in the Mobile phone industry – hardware and software.

Software at the time was primarily Symbian, since Android and iOS were not launched in

the market yet. Nokia was producing mobiles on a large scale and bought hardware

materials in bulk. With not many players in the market suppliers could bargain for higher

prices. Also limited availability of supplier gave little power to Nokia to negotiate.

Post – 2007 period: Bargaining power of the supplier: Low

As the market expanded, the number of suppliers of mobile phone components also grew.

Even though a few players still remain key suppliers of certain components in this industry

such as Samsung for Amoled screens, Qualcomm for processors etc., the sheer number

of suppliers in this market lowers their bargaining power. Also, the scale of globalization

allows companies to make use of suppliers of these small components from across the

globe at very low rates.

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Pre – 2007 period: Barriers to entry: Low to medium

The initial capital investments required was the only major challenge for a new entrant.

Once operating in the industry even one good product was enough to build brand image.

Since the growth prospects of the industry was high, many players were inclined to enter

the market.

Post – 2007 period: Barriers to entry: High

As the market evolved, more number of players entered the market increasing the

competition. Capital investments were still high for any manufacturer. Building brand

loyalty was a difficult process.

Pre – 2007 period: Threat of substitute products: Medium

At the time of the growth of the mobile phone industry, other new technologies such as

tablets were also coming through. Growth of these markets was interfering with the

growth of the mobile phone markets.

Post – 2007 period: Threat of substitute products: Medium to High

As the innovations in the smartphones industry begin to peak and time to market of

revolutionary technology increase, there is an increased threat from other substitutive

products. Tablets, Wearable Tech products, Mini laptops all were intruding into the space

occupied by the traditional smartphones.

Pre-2007 period: Rivalry among the competitors: Low

Limited number of players in the market with strong brand loyalty for Nokia kept the rivalry

in this industry on the lower side up until the late 2000's.

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Post-2007 period: Rivalry among the competitors: High

With multiple big players in the market like Apple, Samsung, Google, Nokia, Motorola etc.

The rivalry in the industry picked up pace quickly.

As the forces in the industry altered, and the competition intensified, Nokia's sales and

market share dwindled. But how did a company that was known to actively innovate lose

their biggest battle to changing industry dynamics?

Causes of the downfall

Imprudent internal restructuring: On the appointment of Olli-Pekka Kallasvuo as CEO,

the new top management dissolved the Future Technologies team, which analyzed future

technology trends and opportunities. At the same time, it merged the smartphones with

the basic phones operations and were more concerned about the bottom line. This

created a cannibalistic internal competition within the business units and development

projects distracting employees and the management away from the market reality.

Undue focus on Hardware: The strategic target setting remained at focusing on the

number of new products, time to market and lowering the cost of production. However,

software development still did not receive enough resources and was not made a

strategic priority. Nokia managed to match the competition in terms of the hardware that

was on offer but was heavily criticized for its poor software implementation.

Ignoring channel and distribution partners: While competitors rushed to grab a single

percent point of market share in the industry, Nokia remained complacent when it came

to strengthening their relationships with and capitalizing on what their channel partners

had to offer. When everyone in the industry was tying up with carriers to create discounted

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offers for their handsets, Nokia chose to rely on the loyalty it had built over the years and

chose not to head in the same direction.

Standardization in the times of versatility: In the process of wanting to cut production

costs, Nokia focused more and more on standardizing their production, reducing their

range of models, while the customers demanded more and more differentiation and had

their demands met by Nokia's competitors. Nokia failed to accurately predict the customer

needs and focused more on basic functionalities while their customer had graduated to

wanting more advance features.

Slow to respond to competition: Underlying all of the above failures, was the biggest

failure of them all, their unresponsiveness to competition. The market developed as

quickly as it did only because their competition accelerated the lifecycle stage the industry

was in by offering what was not previously available to the consumers. Nokia's inability to

predict, or even timely react to the actions of their competitors was potentially the biggest

reason behind their downfall.

In the middle 2000's, Nokia's N-series was the flagship product line. In 2007, Apple

released the i-phone, which was differentiated by its full touch screen display and its

unique operating system (OS) and in 2008, Google released their first Android phone,

ushering the battle of the smartphone operating systems. Suddenly the N-series did not

seem all that lucrative. Nokia did respond by launching the all touch screen 5800 and the

phone was indeed a commercial success. Although Nokia managed to match the

competition in terms of the hardware that was on offer, it was heavily criticized for its poor

software implementation. By 2009, Nokia was already an underdog in the smartphone

market striving for market share.

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In 2010, sales hit new levels of low and Nokia was in desperate need of saving and it was

decided to change the top management. Ex-Microsoft executive Stephen Elop was

appointed the new CEO and sparked further resistance from stockowners. Until now

former CEO's had all been Nokia employees. Elop was convinced that Nokia had to do

away with the old Symbian operating system and stop development projects for emerging

operating systems to reduce the cost of R&D.

Re-entry of Nokia

Faced with a changing mobile market with significant manufacturing cost structures and

rising competition from Apple, Samsung, Google and Chinese handset makers, Nokia

sold its devices unit to Microsoft, with a short three year non-compete clause. Microsoft

not only paid Nokia for this business but subsequently invested significantly more to

restructure the business. It was hoped that with Nokia’s device strengths and Windows

Phone as an OS, Microsoft could compete effectively in the smartphone market.

However, Windows Phone failed break to out of the chicken-egg problem of not enough

apps and failed to attract users. Eventually, Microsoft shut down its phones division.

In May 2016, it was announced that Microsoft would be selling its phones division -

software assets going to HMD Global and hardware assets going to FIH, a subsidiary of

Foxconn. HMD Global was a new outfit started by former Nokia-employees to go after the

phone market. HMD Global had licensed the Nokia brand name and paid Nokia a royalty

for the same. HMD Global kicked off on December 13th 2016 with the launch of two

feature phones, Nokia 150 and Nokia 150 dual sim.

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Current trends in the mobile phone industry

With the foundations of the roll out of 5G, one of the most anticipated mobile technologies,

slotted for this year, 2018 looks promising. 5G will be the connective tissue for wearables,

the internet of Things (ioT), autonomous vehicles, augmented reality and mobile media,

to name a few. And the roll out of 5G will be facilitated through smartphones.

Smartphones have thus emerged as the 'hub' for a more connected life. Smartphones

run complete operating system software with a standardized interface for developers.

Currently, traditional kingpins Apple and Samsung are facing stiff competition from

Chinese manufacturers, who have emerged as true competitors. The collective share of

Chinese vendors for smartphones was 53 % in 2017 as compared to 34% the year before

[Exhibit 4].

Since the advent of the iPhone, smartphones have transformed the way consumers

communicate, educate, and entertain themselves. As more and more such models arrive,

a wave of innovative features and functionality have bolstered the adoption of advanced

devices. Significant advances have been achieved in terms of processing power, screen

display, memory, camera quality and many other features.

Smartphones are expected to impact two key markets which include – home automation

and automotive entertainment. Consumers now want to migrate their user experience

from the home environment to their vehicle with seamless connectivity. While current

accessories such as the Google Mini or Amazon Echo continue to flood the market,

opportunities can be seized through the design of the smartphone itself. Modular

hardware designs for smartphones can create opportunities for simple add-on products

and accessories such as high-end cameras, credit card readers, scanners, keyboards,

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 and other devices. For example, Motorola released the Moto Z in 2016 with a Hasselblad

camera add on.

The Internet of Things has remained a buzzword since the last few years, and it is not

showing signs of slowing down. According to Statista, in 2018, the number of IoT-

connected devices will be more than 23 billion worldwide [Exhibit 3]. By 2025, it will cross

the threshold of 75 billion. A cell phone bridges the gap between intelligent systems and

people, while an application is the main instrument for handling connected devices. IoT

apps allow you to:

• Monitor readings of devices and sensors

• Evaluate data, build charts and reports

• Manage devices (open/close, turn on/turn off, trigger alarms, and more)

App development for wearables is the most concentrated area as of now, with the main

representatives being applications for smartwatches, fit bits, smart columns and home

assistants. In fact, in the Google I/O keynote 2018, CEO Sundar Pichai made

announcements regarding the ability of Google Assistant to be more conversational and

book appointments using AI and voice technology. Also, other features were announced

such as Google Lens Copy feature and AI based Smart Reply Feature for convenience,

thus indicating that the emergence of such features will pivot the brand of smartphones

bought by consumers

Finally, Virtual Reality (VR) and Augmented Reality (AR) offer a vital vantage-point for

smartphone manufacturers through accessories. Integrating an AR device with the

processing power of a smartphone creates an opportunity to transform devices such as

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glasses or heads up displays on vehicles, allowing customers to add on devices that

enhance their customer experience.

HMD Global’s strategy

Operating system and manufacturing choices

HMD Global decided to rectify the much-touted folly of Nokia and adopted Android as its

operating system for its smartphones. This gave HMD Global access to a feature-rich and

mature operating system. It also decided to use “Stock Android” i.e. it used the operating

system without applying any significant customizations on top (as is common with many

Chinese phone sellers), this has allowed Nokia to maintain a close partnership with

Google and also enabled it to receive timely security updates and other OS

improvements. HMD Global decided to stay in line with global trends and decided to

completely outsource manufacturing to Foxconn, the world's largest contract

manufacturer (also an investor in HMD). This gives Nokia access to highly flexible

manufacturing setup.

Thus, by deciding to tap to into the flexibilities of Android and Foxconn, HMD Global

enjoyed much less capital costs in developing its phone.

Segments

While HMD Global initially started off by launching feature-phones, it has steadily built up

it a sizeable smartphone line-up. In the smartphone category, Nokia first entered the mid-

range segment with the launch of the Nokia 3, 5 and 6 priced at ₹9,499, ₹12,899 and

₹14,999 respectively. Nokia CMO Pekka Rantala justified the entry by saying that “Half

of the world's population that has a smartphone buys in this range”.

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Subsequently, HMD Global has expanded price segments in both directions. It launched

the Nokia 1, an entry-level Android phone priced at 5499. It also launched the Nokia 6

(new), Nokia 7 plus and Nokia 8 Sirocco at prices of ₹16,999, ₹25,999 and ₹49,999

respectively [Exhibit 6]. This represents a quick and clear climb towards the premium

segment currently dominated by the Apple iPhone and Samsung Galaxy.

HMD Global has also launched a few featurephones in the sub-₹5000 range. Thus we

see that HMD has positioned Nokia as a wide-player akin to Samsung, thereby aligning

with the former positioning of Nokia. CMO Pekka Rantala makes these intentions clear

by saying “It’s able to maintain credibility by selling 15 dollar phones to India and 1000

euro phones to Finland at the same time. I’m trying to take good care of the brand, so

that the product managers can create a very comprehensive product portfolio”

Product attributes

Nokia phones were popular for their unique design, robustness and reliability. HMD has

been careful to retain the attributes of the former Nokia in its new phone line-up. The new

crop of Nokia smartphones boasts of a clutter free stock Android experience and premium

build quality. The entire line-up Nokia has stayed from any radical designs like its former

Lumia or N-Gage models but manages to deliver very solid, cold and durable feel, which

is what their feature phones possessed.

While Nokia has made waves for hardware for it’s hardware, it is yet differentiate itself in

software. The competition is going strong in terms of camera features like Portait mode,

filters and AR camera effects. Additionally, competing phones come with unique OS

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features like “Peek” to view time and custom touchscreen gestures. Nokia is yet to catch

on to this bandwagon.

Go-to-market

HMD has sold its phone through partnerships with over 500 retailers worldwide, including

online and offline. Nokia has sensibly stayed away from launching its own retail channel

until volumes pick up further.

Performance

HMD Global has played it safe by sticking to building simple phones without too many

bells and whistles. They’ve managed to continue the Nokia heritage of quality, simplicity

and reliability. Nokia has also leveraged nostalgia heavily in promoting their brand

awareness, by launching refreshed versions of classic phones like the “indestructible”

3310 and 8810 “banana-phone”; alongside releasing a version of Snake for Facebook

messenger. All of this has resulted in selling an impressive 77 million phones in its first

year of operations and capturing 1% of the global smartphone market share in Q4 2017.

Recommendations

While HMD has gotten off to a great start leveraging nostalgia and playing it safe at the

lower end of the market. As it moves ahead, Nokia faces an uphill battle in competing

with the likes of Apple, BBK Electronics and Samsung.

Going forward Nokia must innovate on all fronts, driving down the costs of basic

smartphone and while also attacking the lucrative premium end of the market. Nokia will

have to differentiate itself more strongly at the upper end of the market.

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We have four key recommendations for HMD

1. Launch a premium flagship

Nokia will have to establish itself an innovator in the smartphone market by launching a

best-in-class premium smartphone. While this would serve as innovation challenge for

Nokia, it will also serve as opportunity for the Nokia brand to make a strong comeback

while also leveraging higher willingness-to-pay to get high margins.

2. Differentiate and tap into niche segments

Nokia will need to invest more strongly in developing custom OS features, superior

camera capabilities and effects and other software improvements. Alongside, Nokia will

need to bring back some of earlier radical designs to capture different segments of the

market. Currently, phone features and builds are identical for different segments of the

market - tailored accessories for photography and projection, dedicated gaming phones

have just started entering the market. Nokia can tap into these niche segments which are

also premium to gain a foothold.

3. Create an ecosystem

It is not enough to merely keep creating smartphones, consumers today enjoy huge

benefits from the Android, iOS and other ecosystems which offer data backup, photo

syncing, health monitoring and more. Nokia must expand its ecosystem on both software

and hardware and software fronts. In hardware, it can leverage the existing Nokia health

lineup of smartwatches and smart weighing scales. In software, it must provide users with

basic cloud services, data backup and customization options.

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 4. Emphasize Durability and Privacy

The Russian hacking of the US election, Facebook data leaks and other data breaches

have increased consumer concerns about the privacy of user data. Nokia must extend its

reputation for durability into the software offering users advanced security and privacy

services like devices encryption, secure private messaging and more. This will allow

Nokia to position itself differently as a European player cognizant of users' privacy

concerns in opposition to American companies which take great liberties with user data.

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Exhibit 1: Market Share

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Exhibit 2: Range of Nokia Phones

Exhibit 3: ioT connected devices installed worldwide from 2015 to 2025

Source: Statista 2018

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Exhibit 4: Share of phone shipments worldwide from 2009 - 2017

Exhibit 5: Nokia's global segmentation strategy 2007

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Exhibit 6: Recent Nokia phones after being led by HMD (to get Android 9.0)

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