Downfall of Nokia
Downfall of Nokia
Downfall of Nokia
2nd year Full‐time Master Studies, International Business
Downfall of nokia
Introduction
Mobile phone industry is one of the most dynamic and competitive market in
the world. During the last decade the mobile industry have experienced many
notable changes such as introduction of Apple’s iPhone and Google’s Android
operating system. Last major change occurred when the Finnish mobile phone
manufacturer Nokia was acquired by Microsoft in 2013. Microsoft switched the
brand name Nokia Lumia to Microsoft Lumia and continued developing Lumia
series smartphones without Nokia. For a decade Finnish mobile phone manufac‐
turer Nokia was a market leader in mobile phone market. Since the early 2000s
smartphones became increasingly popular segment inside the mobile phone in‐
dustry. Mobile phone market leader Nokia underestimated the importance of
smartphones, and although remaining as a market leader for entire mobile phone
industry until the early 2010s, it was underachieving in the smartphone market in
comparison to its main rivals Apple and Samsung. Nokia tried to gain a market
leadership in the smartphone industry through strategic alliance with technology
company Microsoft, which, however, failed to achieve itsgoal.
This article attempts to explain through descriptive research method the main
reasons that caused the downfall of Nokia from being the mobile phone market
leader to becoming a former mobile phone manufacturer in less than 10 years.
This article suggests that industry changes and company’s decision making envi‐
ronment caused an irreversible decline in Nokia that resulted in acquisition of
Nokia’s Devices & Services unit to Microsoft.
1. Smartphone market
In the early and mid‐2000s Finnish company Nokia was a trusted brand and
the undisputed market leader in mobile phone market. Nokia had gained market
leadership from Motorola in 1998. However, Nokia did not understand a critical
change in customer demand on time. Consumers interests changed from feature
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phones1 to the modern smartphones in relatively short period of time. Although
Nokia and many other mobile phone manufacturers had smartphones long be‐
fore the introduction of modern smartphones. The first iPhone in 2007,changed
the direction of the wholemobile phone industry and the modern smartphones
quickly beganto increase their popularity. Nokia on the other hand overestimated
the value of its own brand and reacted slowly to the rapid changes in the
smartphone market. Instead of focusing on the software, Nokia stubbornly held
on to its outdated Symbian operating system and hardware design.
Symbian OS had helped Nokia establishing its market leader position in the
early 2000s. However unlike its rivals Google and Apple, Nokia was not able to
moderniseSymbian OS, which had since the introduction of modern smartphones
become outdated. Early smartphones, such as Nokia communicator series, were
mainly targeted on business users or to satisfy a need of certain other consumer
segment. For example, Nokia N‐Gage, handheld gaming device and a phone, was
marketed for gamers. By modern standards, early smartphones were often com‐
plicated and hard to use and develop apps to since every smartphone operated
differently2.
Mobile ecosystem is somewhat an abstract term that can be understood as
a group of mobile devices, software development tools, device manufacturers,
app stores, application developers, applications, accessories, cloud services,
smartphone users and operating systems that are all symbiotically linked to each
other3. How well all the elements around the ecosystem work, defines the value
of the particular ecosystem. Operating system is a easier to understand. The oper‐
ating system (OS) is a sub‐program that runs other programs in every computer.
Microsoft’s Windows is probably one of the most well‐known operating system
in the world. Since smartphones are basically a handheld computers, they also
require operating system to run and maintain apps (programs) and other func‐
tions. The Symbian was the main operating system for Nokia’s smartphone’s
between 2002–2011.
2. Development of the smartphone market
Nokia enhanced its market share in mobile phone market until 2007. Accord‐
ing to David J. Cord Nokia’s share of the global mobile market had climbed from
33 per cent in 2005 to 35 per cent in 2006. Next year was even better; Nokia was
1
Feature mobile phone is an industry term for low‐end mobile phones.
2
T. Martin, The Evolution of the smartphone, Pocketnow, 28 July 2014, http://pocketnow.com/2014/07/
28/the‐evolution‐of‐the‐smartphone [access: 29 November, 2016].
3
What Is Mobile Ecosystem, LearnDataModelling.com, 31 August 2015, https://learndatamodeling.
com/blog/what‐is‐mobile‐ecosystem/ [access: 29 November 2016].
240
able to sell 436 mobile phones and its market share was around 40 per cent in
20074. Nokia’s nearest rival at the time was Motorola5, who sold around 164 mil‐
lion mobile phones during that year6. Nokia was by far the dominant mobile
phone manufacturer.
Due to rising consumer demand for smartphones, the focus of mobile phone
manufacturers had gradually started to shift from hardware to software. This
meant that things such as the number of applications in app store replaced the
amount of megapixels in mobile phones camera as an active element in the pur‐
chasing decision of average consumer. Consumers wanted to perform increasing‐
ly complex actions with their smartphones, not merely making phone calls, tak‐
ing pictures and sending text messages or emails. Smartphones became smarter
and started to resemble small handheld computers with their complex software
related functions such as browsing the internet, uploading pictures, watching
video clips, accessing digital music stores, maintaining virtual music or movie
libraries and downloading apps7.
The mobile phone industry began to experience a fundamental change during
the end of first decade of the 21st century. Something new and exciting was intro‐
duced in mobile phone industry.The launch of iPhone and, soon after Google’s
open‐source Android operating system transformed smartphones into a hybrid of
computing and communications devices with enormous and ever increasing
amount of software apps. Modern smartphones have since that not only created
new industries around their ecosystem but replaced entire industries. Interesting‐
ly technology blog Gecko&Fly have calculated that smartphones have replaced 50
everyday items such as cameras, laptops, voice recorders etc.8
There are number of factors and strategic errors that caused Nokia’s failure to
adjust to changes in consumer demand and entirely new competitive environ‐
ment. Most notably in 2006 Nokia decided to move its focus from smartphones
back to feature mobile phones. While Nokia’s core competence was in radio tech‐
nology and hardware engineering, smartphones required software, user experi‐
ence design skills and competence in touch screen technologies that Nokia, to
some extent, simply lacked during that time.9 Nokia failed to understand the
4
D. Cord, The Decline and Fall of Nokia, Schildts&Söderströms, Borgå 2014, p. 13.
5
In 2011 Motorola Mobile was acquired by Google and in 2014 sold to Chinese Lenovo.
6
M. Ahmad, Nokia’s smartphone problem: The end of an icon?, CreateSpace Independent Publishing
Platform, North Charleston, South Carolina, May 6 2013, p. 84–85.
7
M. Ahmad, Nokia’s smartphone problem…, p. 92–93.
8
N. Tengyuen, 50 Things Your Smartphone Replaced [Or Will Replace In The Future], Gecko&Fly, No‐
vember 19 2016, https://www.geckoandfly.com/13143/50‐things‐smartphone‐replaced‐will‐replace‐
future/, [accessed 29 November, 2016].
9
T. Vuori, Q. Huy, Distributed Attention and Shared Emotions in the Innovation Process: How Nokia Lost
the Smartphone Battle, “Administrative Science Quarterly” 2015, p. 1–43.
241
importance of building of an mobile ecosystem around the smartphone10. In
a nutshell,Nokia’s demise was fundamentally caused by its inability to adapt and
develop a working operating system, smartphone ecosystem and to attract mo‐
bile app developers and interest of consumers.
During the late 2000s it became increasingly evident that Nokia would need
a partner that would have software expertise. Symbian operating system that
Nokia was using as a platform for its smartphones during that time had become
outdated compared to its rivals Apple’s iOS and Google’s Android. At the time
Nokia was developing a new Linux‐based operating system with Intel to replace
Symbian.Maemo’s development was later abandoned when Nokia and Microsoft
announced their strategic alliance. Nokia had two options; it could start develop‐
ing operating system with Google’s Android or Microsoft’s Windows mobile OS.
Nokia chose to enter cooperation with Microsoft. Microsoft had tried to enter
mobile market first time in 2000 when it introduced Tablet PC, with mobile ver‐
sion of Windows OS11 Nokia’s problems with smartphones presented a new op‐
portunity for Microsoft to enter potentially lucrative market.
3. Strategic alliance
Much like a marriage, strategic alliance is a form of partnership where two
companies take advantage of each other’s core strengths and share their own
strengths with their strategic partner. Partners can be potential competitors.
Global Strategic Alliance is a term used of strategic alliance partnership when
cooperating partner companies originate from different country. The main benefit
of strategic alliance is that it enables complementary skills and assets that a single
company couldn’t easily develop on its own.
In 2011, Nokia and Microsoft established a broad strategic alliance that aimed
to use their complementary strengths to create a new mobile ecosystem under
Microsoft’s Windows Mobile OS. Microsoft had extensive software engineering
skills and Nokia had a strong global brand and skills regarded to mobile phone
manufacturing, electrical engineering, design and marketing. An additional aim
of the strategic alliance was to introduce a competitive operating system to Ap‐
ple’s iOS and Google’s Android. The first smartphone that resulted from strategic
alliance between Microsoft and Nokia reached the market in late 2012, but was
too late to challenge dominance of Samsung and Apple at that time12.
10
M. Ahmad, Nokia’s smartphone problem…, p. 91.
11
A Brief History of Windows Mobile, Notebooks.com, 12 April 2010, http://notebooks.com/2010/04/12/a‐
brief‐history‐of‐windows‐mobile/ [access: 29 November, 2016].
12
C. Hill, M. Schilling, G. Jones, Strategic Management Theory: An Integrated Approach, 12th edition, Cen‐
gage Learning, Boston 2016, p. 269.
242
According to Chris Huxham and SivVangen, organizations typically collabo‐
rate if they are not able to achieve their objectives alone. Collaboration often
means bringing together different resources including technology or expertise.
Such as it was the case during Nokia’s and Microsoft’s collaboration, with inter‐
company collaboration two companies can take a product to market; one compa‐
ny provides the product while other provides the access to the market.Huxham
and Vangen states that seeking collaborative advantage is a resource‐consuming
activity which should only be considered when the goals are really worth pursu‐
ing13.Under Windows Mobile OS Nokia created a smartphone series Nokia Lu‐
mia. It seems obvious that Nokia’s motivation to enter strategic alliance with
Microsoft was to regain the lost market leader position by gaining access and
exploiting Microsoft’s major software resources.
4. Elop buried Symbian alive
In September 2010, Stephen Elop, a former head of Microsoft´s Business Divi‐
sion, was appointed as the CEO of Nokia Corporation. In February 2011, Elop
sent his famous internal memo titled the Burning Platform to all the employees of
Nokia. Soon after this, the memowas accidentally leaked to media. The memo
compared the situation of Nokia in the smartphone market, to a person standing
on a burning oil platform14. Thanks to Burning Platform memo and Elop’s an‐
nouncement to stop the development of the in‐house mobile operating systems,
Symbian OS and Maemo, Nokia’s smartphone sales declined significantly. Nokia
released its only Maemophone N9 in June 2011. Despite the generally favourable
review most reviewers did not recommend to buy the N9 because of Nokia´s
earlier decision to stop the development of Maemo. It would not make any sense
to buy a smartphone that would not have any content or updates in the near fu‐
ture.
Elop’s actions during that time can be compared to the Ratner Effect and Os‐
bourne Effect. Elop managed to do premature announcement of new product and
comment negatively on existing products. Although it was known for some time
that Nokia´s Symbian phones were no longer competitive against iOS and An‐
droid, they still generated significant profits. Elop´s announcement was the last
nail on the coffin that effectively transformed the Symbian market to virtually
non‐existing. At the same time, Nokia´s first Windows Phone would not be ready
for a year, and once they were released their sales were not enough to replace the
13
C. Huxham, S. Vangen, Managing to Collaborate: The theory and practice of collaborative advantage,
Routledge, New York 2005, p. 5, 13.
14
A platform is used as a synonym for an operating system.
243
volume and profit of Symbian devices had generated. Furthemore thefirst Lumia
phones were released in 26 October 201115.
5. Cross‐border acquisition
Cross‐border mergers, strategic alliances and acquisitions have become more
common way to a company to gain growth and expansion, but they must value
the target enterprise on the basis of its performance in the market through enter‐
prise valuation and by combining elements of strategy, management, and fi‐
nance. The potential core competencies and competitive advantages of the target
firm attract the acquisition from strategical point of view16.
In this article we will focus on the concept of cross‐border acquisition from
viewpoint of Nokia case. Cross‐border acquisitions have many notable benefits
and advantages. Through acquiring an existing company, buyer company short‐
ens the time that is required to gain a competitive entry and position in the mar‐
ket. Acquiring existing company through cross‐border acquisition may be a cost‐
effective way of gaining new technology, brand names and logistic or distribution
advantages, while similarly eliminating a local competitor. However, much like
all acquisitions, the cross‐border acquisitions don’t lack its disadvantages. Much
like all acquisitions, there is always a risk of paying too much or suffering other
financial costs. History has shown that integrating different corporate cultures
may be a difficult process. Often after acquisition, considerable downsized are
required due to economies of scale and profitability. In most cases the threat of
downsizes further lowers the company’s productivity when employees attempt
to save their jobs. In cross‐border acquisitions host governments might try to
intervene in acquisition processes for political reasons17.
On 3th of September 2013 Microsoft announced its plans to acquire Nokia’s
Devices & Services unit and all of its businesses for EUR 3,79 billion and in addi‐
tion pay EUR1,65 billion for licensing of Nokia’s patents. EUR 5,44 billion deal
was closed on 25th of April 2014. On the same day Microsoft formally appointed
former Nokia CEO Stephen Elop as the new head of Microsoft’s Devices Group.
Devices Group added Lumia smartphones and tablets, as well as other Nokia
mobile phones, to its existing portfolio. Device Group portfolio already existed of
Microsoft Surface tablets, Xbox video game console, and various hardware acces‐
15
How Stephen Elop killed Nokia: Two key lessons for your business, Startup Smart, September 4, 2013,
http://www.startupsmart.com.au/technology/how‐stephen‐elop‐killed‐nokia‐two‐key‐lesson‐for‐
your‐business/ [access: 29 November, 2016].
16
D. Eiteman, A. Stonehill, M. Moffet, Multinational Business Finance: Eleventh Edition, Pearson Educa‐
tion Inc., Boston 2007, p. 614.
17
Ibidem, p. 617–618.
244
sories. Through acquisition 32 000 employees of Nokia moved to work for Mi‐
crosoft18.
Conclusions
18
Microsoft ostaa Nokian matkapuhelimet, Taloussanomat, 3 September 2013, http://www.iltasanomat.fi/
taloussanomat/porssiuutiset/art‐2000001808135.html, [accessed 29 November 2016].
19
D. Cord, The Decline…, p. 190–192.
20
Ibidem, p. 213.
245
Smartphone market operates in a paradoxical manner; consumers will not
buy a mobile device if it doesn’t offer at least the minimum amount of applica‐
tions, and developers won’t invest development resources unless the platform
offers a significant number of users. In a sense, Microsoft had a considerably
more assets to loose when they engaged in strategic alliance with Nokia. Nokia
was supposed to work as a showcase to Windows Mobile which no major
smartphone manufacturer was using as an operating system in their phones and
number of applications remained very limited compared to Android and iOS.
Why did Nokia choose to have strategic alliance with Microsoft instead of
Android? This comes down to the operating system and ecosystem and Nokia’s
differentiation strategy. Windows Mobile OS (Windows Phone) offered a third
alternative and a way for Nokia to differentiate itself from competitors platforms:
Google’s Android and Apples iOS. Many of the mobile phone manufacturerssuch
as HTC, Samsung, Sony‐Ericsson (Sony), LG and Motorola gradually switched to
using Google’s Android OS. If it had chosen Android, Nokia would have not
been able to differentiate from other mobile phone manufacturers. With Mi‐
crosoft, Nokia was able to bring an alternative on the table.
After the beginning of the smartphone wars, the heavyweight title fight over
the market shifted to be resulted between Apple and Samsung, while Nokia’s role
was to fade away from the entire market with constantly falling market share.
Nokia’s fate resembles now bankrupt home‐video rental chain the Blockbusters.
Blockbusters, much like Nokia, failed to recognize and react to the threat of novel
innovation on time. Technological improvements, such as increased broadband
speed, enabled streaming large video files over the internet. Companies, such as
Netflix, took advantage of new model. While Blockbuster failed to recognize the
threat that online streaming services posed to its chain of brick‐and‐mortar video
stores. Yet another example is Kodak. The company entered bankruptcy in 2012,
after smartphones replaced digital cameras21.
References
21
L. Downes, P. Nunes, Big Bang Disruption: Business Survival in the Age of Constant Innovation, Portfo‐
lio Penguin, UK, 2014, p. 189‐192.
246
Downes L., Nunes P., Big Bang Disruption: Business Survival in the Age of Constant Innova‐
tion, Portfolio Penguin, UK, 2014.
Eiteman D., Stonehill A., Moffet., Multinational Business Finance: Eleventh Edition, Pearson
Education Inc., Boston 2007.
Hill C., Schilling M., Jones G.,Strategic Management Theory: An Integrated Approach, 12th
edition, Cengage Learning, Boston 2016.
How Stephen Elop killed Nokia: Two key lessons for your business, Startup Smart, September 4
2013, http://www.startupsmart.com.au/technology/how‐stephen‐elop‐killed‐nokia‐
two‐key‐lesson‐for‐your‐business/.
Huxham C., Vangen S., Managing to Collaborate: The theory and practice of collaborative
advantage, Routledge, New York 2005.
Martin T., The Evolution of the smartphone, Pocketnow, July 28 2014, http://pocketnow.
com/2014/07/28/the‐evolution‐of‐the‐smartphone.
Microsoft ostaa Nokian matkapuhelimet, Taloussanomat, September 3 2013, http://www.
iltasanomat.fi/taloussanomat/porssiuutiset/art‐2000001808135.html.
Tengyuen N., 50 Things Your Smartphone Replaced [ Or Will Replace In The Future],
Gecko&Fly, November 19 2016.
Vincent J., Four Reasons why Microsoft had to buy Nokia, Independent, September 3
2013, http://www.independent.co.uk/life‐style/gadgets‐and‐tech/features/four‐rea‐
sons‐why‐microsoft‐had‐to‐buy‐nokia‐8796638.html.
Vuori T., Huy Q., Distributed Attention and Shared Emotions in the Innovation Process: How
Nokia Lost the Smartphone Battle, “Administrative Science Quarterly” 2015.
What Is Mobile Ecosystem, LearnDataModelling.com, August 31 2015.
Summary
Mobile phone industry is one of the most dynamic and competitive market in the world.
For a decade Finnish mobile phone manufacturer Nokia was a market leader in mobile
phone market. Since the early 2000s smartphones became increasingly popular segment
inside the mobile phone industry. Mobile phone market leader Nokia underestimated
the importance of smartphones, and although remaining as a market leader for entire
mobile phone industry until the early 2010s, it was underachieving in the smartphone
market in comparison to its main rivals Apple and Samsung. Nokia tried to gain a mar‐
ket leadership in the smartphone industry through strategic alliance with technology
company Microsoft. Strategic alliance, however, failed to achieve this goal. This article
attempts to explain through descriptive research method the main reasons that caused
the downfall of Nokia from being the mobile phone market leader to becoming a former
mobile phone manufacturer in less than 10 years. This article suggests that industry
changes and company’s decision making environment caused an irreversible decline in
Nokia that resulted in acquisition of Nokia’s Devices & Services unit to Microsoft.
Keywords: Nokia, Microsoft, Google, Apple, smartphone, mobile phone, strategic man‐
agement, global strategic alliance, market positioning, market strategy, mergers and
acquisitions
247
UPADEK NOKII
Streszczenie
Jednym z najbardziej dynamicznych i konkurencyjnych rynków na świecie jest branża
telefonii komórkowej. Przez dekadę liderem w branży był fiński producent telefonów
komórkowych – Nokia. Od początku XXI w. Jeden z segmentów rynku w sposób szcze‐
gólnie zauważalny zyskiwał na popularności i powoli monopolizował rynek telefonów
komórkowych – smartphony. Lider branży – Nokia – nie docenił rosnących
w popularność smartphonów, i pomimo iż pozostał w czołówce firm produkujących
telefony komórkowe, do roku 2010 technologicznie pozostawał w tyle w porównaniu do
swoich głównych konkurentów, firm Apple i Samsung. Przy rosnącej sile popytu na
smartphone, Nokia próbowała utrzymać pozycję lidera w branży przez strategiczny
sojusz technologiczny z firmą Microsoft. Celu tego nie udało się osiągnąć i sojusz odniósł
porażkę.
Artykuł ma na celu wyjaśnienie głównych powodów zawarcia tego strategicznego dla
Nokii i Microsoftu sojuszu, oraz przybliżenie procesu przejęcia Nokii przez Microsoft.
Kwestią badań jest to jakie czynniki kierujące branżą telefonii komórkowej zaważyły
o zawiązaniu sojuszu między Nokią a Microsoftem, oraz które z czynników zadecydo‐
wały o jego niepowodzeniu. Literatura źródłowa użyta do napisania tego artykułu to
dzieła poruszające temat fuzji i przejęć firm. Wykorzystana została również literatura
z zakresu marketingu i zarządzania. Narzędziem analizy ostatnich zmian zachodzących
na rynku telefonii komórkowej są analizy biznesowe znanych czasopism branżowych.
248