Market Share and Comparative Advantages of Microsoft and Nokia - Term Paper Example

Microsoft and Nokia Table of Contents Introduction 3 Discussion 3 Overview of Microsoft 3 Overview of Nokia 4 Background of the Deal 4 Rationale for the Deal 6 Conclusion 7 References 9 Introduction Strategic alliances have emerged as a common competitive tool in the current business environment, wherein two organisations are often observed to merge their operations to gain higher market share and comparative advantages over their common rivals. Collaborations or such kind of strategic partnership agreements help organisations to produce better quality goods and/or services. On 2011, Microsoft Corporation and Nokia Incorporation went into a strategic alliance with a similar intention to gain competitive advantages by producing better quality goods and services for their common network of customers around the world (Cellan-Jones, 2011). However, the deal has been a controversial one and has attracted massive debates from various parts of the global business environment. In this discussion, the main objective is to briefly describe about the background of the strategic deal formed between Microsoft and Nokia, along with their individual company overview. Henceforth, the discussion will emphasise the rationale behind establishing the deal between these two companies, concluding with a brief summary of the entire strategic alliance. Discussion Overview of Microsoft Microsoft is a globally renowned multinational organisation, which was established on 1975. The company is often regarded as a giant in the global Information Technology (IT) industry. Over the years, Microsoft has developed Personal Computer (PC) operating systems along with a superior brand image within its customer segments ranging from educational to large corporate sectors (Microsoft, 2014). Unfortunately, since last two years, Microsoft has been losing its competitive power in the global IT industry. Competitors like Apple, Oracle, Sony and many others have been eventually coming up with exciting features to attract the global customers and persuade them to select the substitutes of computer products, which have been resulting in a steep decline for Microsoft products (Hoovers Inc., 2014). Accordingly, it can be asserted that in order to rejuvenate its market share, competitive positioning and preserve customer loyalty, Microsoft decided to penetrate the Smartphone industry context through a strategic alliance with Nokia. Overview of Nokia In comparison to Microsoft, Nokia was established decades ago and was incorporated on 1871. Nokia is often regarded as one of the pioneers in the telecommunication industry. Over the years, it has spread its product and services in more than 150 countries all over the globe (Nokia, 2014). Nokia has dominated the mobile phone market more than ten years in early 21st century. In its market functioning, Nokia has launched various exciting features in its product to attract customer’s attention. However, the launch of the Android, the company started losing its market share eventually in every quarter leading to competitive disadvantages. According to strategy analysts, Nokia had to witness a drop in its share value by 4.4% during the early 21st century (Olson, 2011). These lacunas witnessed in the company’s performance can further be asserted as few noteworthy reasons or motives that encouraged the company to enter into deal with Microsoft. Background of the Deal Since February 2011, the management of Microsoft and Nokia decided to build up a partnership relation to accelerate their growth rate in the global market. On September 2013, the Board of Directors of the organisations finally declared that they have planned to work together. Eventually, through the deal, Microsoft took over Nokia for a total transaction value of EUR 5.44 billion (Microsoft, 2014). Microsoft actually acquired Nokia’s mapping services along with other devices and those services. As per the agreement and the contractual conditions, Microsoft paid exactly EUR 3.79 billion for the all kinds of devices along with EUR 1.65 billion to obtain the licence to Nokia’s patents. From Nokia’s perspective, this settlement is expected to significantly fortify their financial situation and deliver a solid basis for future investment in its on-going process (Nokia, 2014). The agreement between Microsoft and Nokia bonded upon few understandings, which considered their mutual interests on further business functioning and competitive positioning. Correspondingly, Nokia accepted Microsoft’s Windows phone as its strategy to obtain competitive advantages in the Smartphone industry (Thurrott, 2011). In subsequence, Microsoft’s windows phone needed the assistance of Nokia’s hardware design and language support, which further initialised the deal between these two conglomerates. This deal was further expected to assist Nokia and Microsoft in refurbishing their marketing strategies and make competitive decisions for the future progression of mobile designing within the industry. The agreement terms of the deal between Microsoft and Nokia further dictated that Nokia’s mapping services were to be re-designed as an essential part of Microsoft’s mapping services (Nokia, 2014). Additionally, the agreement also stated that only Microsoft’s development tools should be used to create an application to run on Nokia’s windows phone (Microsoft, 2014). This was further criticised to deliver greater benefits to Microsoft through the deal while hampering many negotiation interests of Nokia (Tellis, 2013). Through the deal, more than 32,000 employees of Nokia were shifted to Microsoft (Clarke, 2013). As per the opinion of the management of Microsoft, it was really a lucrative deal for both of these organisations, as it was supposed to bring a huge impact on their recent future in terms of information and telecom industry (Microsoft, 2014). The deal was also expected to help the global consumers to gain a higher bargaining power being able to choose from a wider variety of options. Furthermore, the deal was expected to increase market share of the companies and likewise benefit the shareholders by assuring them greater returns on their investments. Nokia’s management was also of the view that this strategic alliance would be useful to regain their strength financially and further assist them in future to invest in on-going projects (Nokia, 2014). As a result, Nokia dropped down their Meego mobile operating systems with main objective to create a platform where Microsoft’s Windows phone operating system performs with their hardware and services. Additionally, they were also trying to develop different languages to be supported in Nokia and Microsoft products. On the other hand, Microsoft was focusing on their windows phone operating system to make it a better telecommunication platform to increase the competitive potentials of Nokia products (Thurrott, 2011). Rationale for the Deal Undoubtedly, the strategic alliance between Nokia and Microsoft has been very crucial for both the organisations. As observed from the study of Microsoft’s performance immediately prior to the deal, even after capturing the PC operating systems market globally, it had failed to capture the Smartphone market, which was leading to a continuous decline in its competitive stance and customer loyalty within the international market (Thurrott, 2011). On the other hand, Nokia was also observed to lose their grip on the market during last couple of years, principally owing to lack of innovation and rapid technology advancements in comparison to its market rivals. It was on the same grounds that Microsoft also had to struggle to an extent to preserve its leadership position (Badenhausen, 2014). Microsoft has been struggling to raise its sales volume in the Smartphone industry and cope with the changing preferences of its international customers gradually inclining towards the telecommunication industry products as substitutes to the PC industry. To be precise, people currently showed greater preference towards the use of smart phone rather than PCs or laptops, which in turn was inhibiting the competitive positioning of Microsoft to a substantial extent. The consequence of such changes was evident on the quarterly budget constraints of Microsoft, which motivated this conglomerate to enter into the deal with Nokia (Hartung, 2014). Accordingly, after studied the talent of Nokia in hardware designing and engineering, Microsoft initiated the strategic alliance with them. Eventually, Microsoft was able to obtain the benefits of Nokia’s expertise supply chain, manufacturing unit, marketing and sales team along with a distribution channel making it a cost effective and strategically beneficial deal for Microsoft (Clarke, 2013). In the similar context, when assessing the motives of Nokia to agree in the merger or the strategic deal with Microsoft, it becomes apparent that Nokia was also losing its competitive market share owing to lack of innovation, which motivated it to take the advantages of Microsoft’s Research &Development (R&D) facilities. Gradually, the changes observed in the Smartphone industry were becoming quite disappointing for Nokia owing to customers’ greater preference for Android mobiles (Nokia, 2014). The company was also facing continuous pressure from its global counterparts in terms of rapid innovation. As a result, on a continuous basis, the sales volume of Nokia was observed to decline for consecutive three quarters on an average of 24%, causing financial as well as market risks for the company (Badenhausen, 2014). It was owing to these primary reasons that Nokia agreed to enter into the deal with Microsoft. Conclusion As can be observed from the above conducted discussion, the common motives of Microsoft and Nokia can be identified in terms of their shrinking leadership positioning and increasing need for competitive advantages in the growing Smartphone industry structure. This supported the mutual interests of the companies largely. From a critical perspective, the motive of these two organisations was to gain the benefits of each other’s industrial competencies. For instance, where Microsoft lacked in adequate supply chain, manufacturing unit competencies and sufficient understanding of the industry elements in the Smartphone industry, Nokia lacked in its R&D capabilities to facilitate rapid innovation. Accordingly, it can be identified that the strategic and competency related limitations of Microsoft were the strengths of Nokia and vice-versa, which further rationalises the deal as an effective one. In addition, the deal was also treated to increase customer bargaining power stimulating competition within the industry, which can again be grounded as a major potential for the stated deal between Microsoft and Nokia. References Badenhausen, K., 2014. Apple Dominates List Of The Worlds Most Valuable Brands. Forbes. [Online] Available at: http://www.forbes.com/sites/kurtbadenhausen/2013/11/06/apple-dominates-list-of-the-worlds-most-valuable-brands/ [Accessed March 22, 2014]. Cellan-Jones, R., 2011. Nokia and Microsoft form partnership. BBC News Technology. [Online] Available at: http://www.bbc.co.uk/news/business-12427680 [Accessed March 22, 2014] Clarke, G., 2013. Microsofts $7.1 bn Nokia Gobble: Why You Should Expect the Unexpected. The Register. [Online] Available at: http://www.theregister.co.uk/2013/09/03/microsoft_nokia_rise_of_elop/ [Accessed March 22, 2014]. Hartung, A., 2014. Will Game Console Sales Decline Like PC Sales? Microsoft Should Consider Getting Out of Gaming. [Online] Available at: http://www.forbes.com/sites/adamhartung/2014/02/18/microsoft-should-give-xbox-one-to-nintendo/ [Accessed March 22, 2014] Hoovers Inc., 2014. Top Competitors for Microsoft Corporation. Company Information. [Online] Available at: http://www.hoovers.com/company-information/cs/competition.Microsoft_Corporation.c86cc6059119a54b.html [Accessed March 22, 2014]. Microsoft, 2014. Nokia and Microsoft Announce Plans for a Broad Strategic Partnership to Build a New Global Mobile Ecosystem. News Centre. [Online] Available at: https://www.microsoft.com/en-us/news/press/2011/feb11/02-11partnership.aspx [Accessed March 22, 2014]. Microsoft, 2014. Microsoft to Acquire Nokia’s Devices & Services Business, License Nokia’s Patents and Mapping Services. News Centre. [Online] Available at: http://www.microsoft.com/en-us/news/press/2013/sep13/09-02announcementpr.aspx [Accessed March 22, 2014]. Nokia, 2014. The Story of Nokia. About Us. [Online] Available at: http://www.nokia.com/global/about-nokia/about-us/the-nokia-story/ [Accessed March 22, 2014]. Olson, P., 2011. Nokia Let Down By Consumers. Forbes. [Online] Available at: http://www.forbes.com/2009/01/22/nokia-volumes-china-markets-equities-cx_po_0122markets10.html [Accessed March 22, 2014]. Thurrott, P., 2011. Nokia + Microsoft: An Analysis of the Strategic Alliance. Paul Thurrotts Supersite for Windows. [Online] Available at: http://winsupersite.com/article/windows-phone-7/nokia-microsoft-an-analysis-of-the-strategic-alliance [Accessed March 22, 2014]. Tellis, G. J., 2013. Microsoft and Nokia: A Marriage Made In Hell? Forbes Leadership Forum. [Online] Available at: http://www.forbes.com/sites/forbesleadershipforum/2013/09/04/microsoft-and-nokia-a-marriage-made-in-hell/ [Accessed March 22, 2014]. Read More