Nokia’s decline in figures

I collected som key statistics on the performance of Nokia during the period 2004-2012. While these figures need to be analyzed in further detail, a glimpse at them still gives a good idea of what has happened.

The first graph depicts Nokia’s sold volumes, both in emerging markets (China, Asia Pacific, Middle East, Africa and Latin America) and their total sold volume. It is worth noticing how large share of their volumes were actually sold in developing countries.

Interestingly, the decline is much steeper in developed countries (Europe and the United States) where the company lost 47 percent of its volume from 2008 to 2012 as compared to 22 percent in emerging economies.

Nokiastats1

The following graph shows Nokia’s financial performance in terms of revenues and operating profit:

Nokiastats3

Needless to say, the company’s market share has declined significantly. It peaked around 40 percent in 2007. In the years up to the introduction of smartphones, Nokia gained market share on a growing market.

Nokiastats2

Decreasing volumes have implied collapsing operating margins, as illustrated below:
Nokiastats4

Another, perhaps more important explanation of Nokia’s problem is related to the decline in Average Selling Price. If each sold phone generated 110 euros of revenue in 2004, then getting only 45 euros per phone in 2012 is of course a tragedy for the company.

Nokiastats5

For sure, parts of the decline in Average Selling Price can be explained by increasing volumes in developing countries, but it is nevertheless clear that price competition has been fierce in these years.

Nokia has been squeezed from two ends – in emerging economies, cheaper, local manufacturers have eroded the company’s margins and in the Western world Nokia has been forced to cut prices due to an outdated product portfolio.

It is truly amazing how a company can appear so solid and competitive and then fall apart within only a couple of years.

Paper accepted: Facit and the Displacement of mechanical calculators

I was just recently informed that my article Facit and the Displacement of mechanical calculators has been accepted for publication in the journal Annals of the History of Computing. The paper seeks to explain why Facit – a Swedish manufacturer of calculators, typewriters and office furniture declined in the shift to electronics in the early 1970s. Getting an article published is usually a reason to celebrate, at least in the sense that it merits a small blog post.

Drawing on interviews and archival data, the article argues that a combination of factors put Facit in a very awkward position when the transition to electronic calculators came into motion by 1970-72:

- The shift to electronics rendered Facit’s technological competencies obsolete.

- In the mechanical era, the industry was well consolidated. Firms like Facit were vertically integrated, having their own manufacturing equipment and an extensive service network. The advent of electronics changed the industry structure in several regards. Integration backwards made no longer sense as manufacturers of semiconductors now offered integrated circuits to anyone who wished to put a plastic cover over them and sell a calculator. As prices declined, new sales channels (bookstores, discount retailers etc) also emerged, removing the value of Facit’s big sales organization. All in all, the industry therefore became much more competitive since entry barriers were reduced.

- Electronics was an insignificant part of the market in 1967, only a few years later the technology was better than mechanics in all regards. It is hard for any company to deal with such a pace of development and especially for Facit, a firm that had essentially thrived upon the same technology for four decades.

- To top it off, Sweden as an economy had little experience of electronics. While countries like Japan and the United States had either pioneered integrated circuits or used them from an early point, Sweden did not have the institutions or competencies required to successfully develop electronic calculators. There was a lack of skilled labor and a general lack of understanding and thus, Facit’s attempts to develop electronic calculators remained futile. This element of technological change and the response of established firms has been largely overlooked by previous literature and putting this argument forward is a key contribution of the paper.

Since virtually all manufacturers of mechanical calculators around the world collapsed in the shift to electronics, one cannot be too harsh when assessing Facit’s management. After 50 years of continued expansion and growth, the company collapsed, a long life by most standards.

först

Explaining the Collapse of Nokia

In 2005, Nokia was the fifth most valuable brand in the world. With a turnover of 51,1 billion euros in 2007 and an operating profit of 8 billion euros, the company’s market share had climbed well above 40 percent.

At this point, most mutual funds had invested significant shares of their funds in Nokia, probably in order to balance the portfolio vis-à-vis the stock market index. As a consequence, the company’s stock was traded around P/E 15-20, a rather high number considering the size of the firm and its meager growth prospects. When this is the case, and financial institutions keep buying a stock, it is usually the beginning of a collapse. This holds true for IBM in the late 1980s, Ericsson in the late 1990s and banks in 2006-2007.

Nokia stock

In these years, politicians around the world argued that their country needed “a new Nokia” – a company which does so well that it fuels an entire economy’s growth over many years. Well, today anyone can have a Nokia. The final sign of things to come was a statement in BusinessWeek 2007: ”Nokia’s dominance in the global cell-phone market seems unassailable.”

The firm collapsed in the coming years its new CEO Stephen Elop stated in 2007 that ”the first iPhone shipped in 2007, and we still don’t have a product that is close to their experience. Android came on the scene just over 2 years ago, and this week they took our leadership position in smartphone volumes”.

How can such a sharp decline be explained? And why has Nokia struggled to develop a competitive smartphone?

Technology S-curves provide a good starting point for addressing this issue. The S-curve theory posits that the advance of a technology is initially slow. Once a breakthrough occurs, performance increases rapidly until a particular solution has reached its limits of what is possible within a certain paradigm. At this point, the S-curve levels off and the technology becomes increasingly vulnerable and likely to be substituted by another technology S-curve.

Scurve

Nokia essentially surfed on the S-curve related to hardware and feature phones. Over the years, new functions were crammed into thinner and cheaper phones: radios, cameras, music players, recording capabilities, etc were added. Along this S-curve, Nokia could fend off competitors easily. Being late with the introduction of camera phones, the company could still catch up thanks to its financial resources and engineering capabilities related to hardware.

While the pace of development has been stunning for feature phones in the 2000s, it all happened along an established technological trajectory. As long as competition centered around offering a broad portfolio of feature phones, Nokia was in control. In this sense, Business Week was right when stating in 2007 that “Nokia’s dominance in the global cell-phone market seems unassailable”.

Approximately at this point in time, the S-curve for feature phones started to level off. It now became increasingly difficult to add valuable technological features or create additional consumer benefits along this trajectory.
Why then has Nokia been so slow in its shift to the next S-curve related to smartphones?

Nokia’s main problem is probably related to the fact that the competencies it developed in the feature phone era were not only less useful for developing smartphones – they were probably downright destructive for such attempts:

Nokia had never been a software company. Competencies were more related to hardware. Its operating system, Symbian, was essentially designed for phones used for calling and sending text messages, the online functionality of Nokia phones remained poor. A smartphone is much more about software and online compatibility than a feature phone. Hence, Nokia was in fact ill equipped to develop smartphones as its competencies were more related to hardware.

Having an established set of competencies related to feature phones, it became financially rational to continue along this trajectory and capitalize on these skills. A large company with a large established market where customer needs are known usually struggle to allocate resources to breakthrough innovations. Such a firm faces a high opportunity cost and therefore it is not able to renew itself. Big companies think big, but all novelties, by
definition, start as something small.

Rumors abound that Nokia was considering the development of a touch screen smartphone five years ago. The inability of large companies to invest in unknown technologies and unknown needs is probably the reason why Nokia never did so.

Looking ahead, Nokia is facing formidable competition and the company is still not prepared for it, considering that its competencies are still largely stuck in the feature phone paradigm. At first glance, the collaboration with Microsoft makes a lot of sense as Nokia lacks the required software skills. However, Microsoft has never been a dominant player in mobile operating systems.

Bearing in mind that Nokia’s smartphone Lumia will have significantly fewer applications available for its customers also means that the company is in trouble. Small installed base of customers means that fewer companies are willing to develop applications for Lumia, which in turn means that fewer customers are willing to buy a Lumia, which in turn means… Vicious circle.

Warren Buffett once said “turnarounds don’t turn”. This is probably the case for Nokia.

Summing up: competencies have become incompetencies. A fish is very well suited for survival in the water. Now put it on land and see what happens.