Business Strategies That Led to the Collapse of Nokia - Case Study Example

Business strategies that led to the Collapse of Nokia

The main aim of this study is to examine and analyze the business strategies employed by Nokia that led to its gradual collapse.

This study is centered on two main objectives. The first is to evaluate the strategic errors made by Nokia since 2001 that caused it to collapse. Secondly, by focusing on the business strategies employed, this research aims to evaluate the real causes behind the collapse.

It is hypothesized that Nokia’s failure is as a result of the weak research and development team it employed. Secondly, Nokia failed to react to the changes in the mobile phone market in good time, and this allowed the competitors to exploit this failure.

Introduction

For many years, Nokia remained a leading giant in the electronics industry, especially in the mobile phone sector. However, this is no longer the case. Nokia has lost its dominance in the market and was recently acquired by Microsoft. With a history of more than 150 years old, Nokia’s interesting journey is slowly coming to a tragic end. As noted in the article by Sambit Satpathy (2014), by the end of the 1990s, Nokia was a global leader, with other competitors such as Sony and Siemens only playing catch-up. However, at the turn of the millennium, as competition became stiff, Nokia started to lag behind. Companies such as Apple and Samsung started to come up with superior devices, and Nokia failed to meet the every changing demands of the market. The company has since been witnessing declining growth, and in 2013, as discussed in the article by Netra Singh (2014), Nokia was acquired by Microsoft in a deal estimated to be about $7.2 billion. This paper aims at examining the business strategies used by Nokia that led to its gradual collapse.

Literature Review

BUSINESS STRATEGIES

The choice of business strategies discussed in this paper has been guided by their applicability to the telecommunication or mobile phone industry. First, Porter’s generic strategies apply to the cell phone industry because of the nature of the competition in the industry. The generic strategies can be applied to many business types, and this makes the suitable for the present study. Secondly, regarding the competitive strategies, Porter’s five competitive forces have been chosen for analysis because they offer a complete overview of the factors that shape competition. Businesses can use these five forces to specifically understand the main factors shaping competition. Finally, because price plays an important role in the mobile phone industry, the pricing strategy has also been used in the analysis.

Although the Ansoff Growth Strategies can be used for analysis, they have been omitted in the research because it does not consider the external forces that shape a given market. It is only suitable for businesses that are affected less by external forces and rely on market penetration.

Understanding business strategy Simply, business strategy is defined as the pattern of decisions that are taken by a business in order to realize the set objectives or goals (Andrews, 1980). A business strategy will thoroughly outline the policies and plans that will be adopted in order to realize the set goals, including an outline of the human resources the company needs for this mission. Therefore, a business strategy defines the means through which a business will meet the demands of the customers in a sustainable and profitable manner (Teece, 2010). Different business will adopt different strategies depending on factors such as market competition, industry regulation and size of the business among others. Although different businesses adopt different strategies, these strategies can be grouped into three main categories as proposed by Michael Porter (1985). The next section discusses these three strategies in brief.

Porter’s Generic Strategies

Michael Porter (1985) put forward three strategies that can be used by a business to achieve and maintain a competitive advantage. The first is cost leadership which emphasizes on efficiency (Tanwar, 2013). According to this strategy, a firm may decide to produce high volumes of products, and sell them at a lower price. This strategy is best applicable in a situation where the cost of producing is relatively small. Secondly, Porter proposed the differentiation strategy in which a business may produce a product or service that is unique in the market (Tanwar, 2013). Due to the uniqueness of the product/service, the company may then charge a higher price. The unique attributes of the product/service should be valued by the customers. Finally, there is the focus strategy in which a firm only concentrates on a specific segment of the market (Tanwar, 2013). As a result, the firm will enjoy high customer loyalty, and this makes it difficult for other firms to compete with it.

The pricing strategy and how it applies to the telecommunications industry

In addition to the three strategies discussed above, the pricing strategy is common. The pricing strategy refers to the methods used by companies or businesses to determine the final selling price of a product or service. There are three main pricing strategies used. First, there is the cost-based pricing whereby businesses purely rely on accounting data to set prices (Hinterhuber, A., & Liozu, 2012). In this case, the business aims at getting a specific return on investment or the markup on the costs. Secondly, competition-based pricing is based on the actions of the competitors in the market. A business will set prices after examining how other similar businesses are charging for similar products or services. Finally, there is the customer value-based pricing whereby businesses set prices depending on their perception of the usefulness of the product or service to the customers.

Due to the technological changes that have been witnessed in the past several decades, the use of mobile phones and other hand-held devices is on the increase. For this reason, the telecommunications industry is also affected by the element of price (Andreas, 2008). In the telecommunication industry, there are a wide range of consumers that have been to be taken care of- from the high-end users to the low end users and everything in between. Pricing in this industry is thus done focusing on the different market segments that have to be served. For example, mobile manufacturers such as Nokia, Motorola, and LG have been known to provide products in a variety of price ranges.

There are several pricing strategies that are used in the telecommunications industry. The first is the penetration pricing in which companies aim to maximize on the market share. Companies rely on selling high volumes thereby reducing the overall unit cost (Ferrell & Hartline, 2010). Secondly, the predatory pricing strategy is applied by focusing on the prices offered by the competitors. A company offers lower prices compared to the competitors to get all the customers. There is the perceived value pricing in which prices are set based on the usefulness of the product to the customer. The perception of the consumer of a given product is affected by elements such as quality, availability of warranty and performance (Andreas, 2008). Fourth, there is the value pricing strategy in which mobile phone companies charge a fairly lower price for a good or high-quality product. Fifth, there is the produce form pricing in which different prices apply to the same product (Ferrell & Hartline, 2010). In the mobile phone industry, two similar phones from the same manufacturer with almost comparable features are priced differently. Finally, in the telecommunications industry, promotional pricing is also used where prices are set depending on the occasion.

In order to adopt a given strategy, a business has to understand the existing market and the forces dominating the given industry. In 1980, Michael Porter developed a framework that helps businesses analyze the main factors that shape competition in a market.

Competitive Strategies: Porter’s five forces

Michael Porter (1980) developed the five forces tool as a simple way to help businesses understand the major forces that shape competition in an industry or market. The first of these forces is the bargaining power of suppliers which relates to the ability of suppliers to drive up prices. If a business has fewer supplier choices, then the more bargaining power the suppliers hold. Secondly, there is the bargaining power of customers which determines the overall impact customers have in the industry. If for instance, buyers are few, then the buyer power becomes high because they are in a position to dictate prices (Jaradat, Almomani & Bataineh, 2013). The third force relates to the threat of new entrants. If new entrants can easily get into an industry, then the competition will be much higher. New entrants have the ability to change the shape of the market regarding prices, market share and customer loyalty. Fourth, there is the threat of substitute products whereby a threat exists if customers have alternative products in the market at a lower price. Substitute products can reduce the sales of business. Finally, the competitive rivalry among the players in industry shapes competition. If the competition is high, then there will be pressure on prices, and this reduces the profitability of the players in the industry.

In addition to understanding the factors shaping competition as highlighted in Porter’s framework, businesses have to examine the internal operations and how they affect the business. Specifically, a business has to look at the various business units and how they individually contribute to the business. The BCG framework is usually employed for this type of analysis.

BCG Matrix

In the early 1970s, the Boston Consulting Group (BCG) designed a matrix that has since been used as portfolio analysis model. This matrix is based on the idea that the business units of a given company can be classified into four categories depending on the market growth and market share about the main competitor (Netmba.coml, 2010). The first of these categories is named ‘dogs’. These are units that have a low market share and growth rate and thus do not generate nor consume high volumes of cash (Nutton, 2006, p. 43). Secondly, there are ‘Question marks’ which are those units that grow rapidly and hence use much cash. However, these units have a low market share; they generate very little cash. Third, ‘stars’ are those units that generate huge volumes of cash due to their high market share, and also consume huge volumes of cash (Nutton, 2006, p. 44). In such units, the net cash generated is approximately equal to the cash consumed. Finally, ‘cash flows’ are those that show a high return on assets, and hence generate more cash compared to what they consume. Cash cows provide most of the cash used in the running of the business.

Pricing Strategy as applied in Telecommunication industry

Throughout the world, the telecommunication industry is one of the most competitive industries (Ernst & Young Global Limited, 2015). Pricing has been used as a business strategy in the telecom industry by employing it as a driver of growth. This is achieved through the use of pricing plans that cater for the varied individual needs of the market. Because of the wide range of products that are produced by various manufacturers in this industry, it becomes necessary to set prices that cater for the different market segments or groups. This has led to a number of pricing plans being developed by different manufacturers in this industry. These pricing strategies are used to gain market share and increase the volume of sales.In order to cope with this competition, different businesses have adopted different business strategies (Ernst & Young Global Limited, 2015). One of the most common used strategies in the telecommunications industry is the pricing strategy in which different companies are coming up with a variety of pricing plans to ward off competition. For example, the most common used is the volume-based pricing structure in which customers pay less if they purchase a product or service in bulk (Capgemini, 2012). For mobile manufacturers like Nokia for instance, the customer could get a discount if they purchased two or more products. Also, pricing strategies have also been based on payment mode. In this case, companies are allowing consumers to pay for products and services after using them. Mobile manufacturers have in the past offered their devices on hire purchase terms, thereby allowing consumers to enjoy them and pay in installments. The common practice among many mobile phone manufacturers has been on increasingly the functionality of their devices and reducing the overall cost of purchasing them. Over the years, the cost of acquiring a handset has been on a steady decrease, and this has been the trend across all manufacturers. Taking the case of Nokia for instance, the cost of the early devices that were manufactured in the 1990s was very high compared to the prices of better devices manufactured in the 2000s. With competition from companies such as Apple, LG, Siemens, Samsung and Sony, Nokia and other manufacturers have been forced to reduce the prices.

Business strategy that led to the collapse of Nokia

For many years, Nokia commanded a large percentage of the market share in the mobile phone industry. However, the company is no longer the giant it used to be, and other competitors such as Apple and Samsung have taken over. The main reason for the collapse is the business strategy adopted by Nokia. As noted in the article by Michael Schrage (2011), Nokia’s strategy involved focusing on emerging markets at the expense of major markets such as the United States. Although for many years, as noted in the articles by Dittrich and Duysters (2007); Doz and Kosonen (2008), although Nokia was a global leader in innovation; its business strategy meant that its innovations were only tailored for emerging markets such as Asia. Nokia was more concerned about maintaining its dominance in Europe, and this made it difficult for Nokia to cater for the larger global market.

One of the major shortcomings, as noted in the article by James Surowiecki (2013), is that Nokia failed to understand the importance of Smartphones in the mobile market, and this gave a chance to other companies such as Apple to take advantage. For example, as of 2010, Nokia’s global share in Smartphone declined to about 38% from 47%. With a reducing market share in smartphones, Nokia could only watch as Apple’s iPhone and Google’s Android took over the market. Starting around 2007, the world mobile industry was shifting towards touch-screen smartphones and many companies started to shift their business strategies towards this trend (GSMArena.com, 2015). Unfortunately for Nokia, investments in touch-screen smartphones were limited, and this made it impossible for the company to transition into the new era. Furthermore, given that Nokia had already an established brand image, it over-relied on this brand power. This meant that it was reluctant to adopt new technologies and operating systems to meet the demands of the market but instead relied on its superior hardware designs to win over the market. Unfortunately, these factors led to the downfall of Nokia.