Disruptive innovation, smartphones and the decline of Nokia

Christian Sandström holds a PhD from Chalmers
University of Technology, Sweden. He writes and speaks
about disruptive innovation and technological change.

Christian Sandström, PhD www . Disruptive Innovation . se

Apple’s IPhone was first revealed in January 2007 and
available for consumers in June the same year in the
United States, then progressively launched globally in
2008.

Out of curiosity I pondered through Nokia’s quarterly
presentation slides in the years 2007-2010 in order to
get a better idea about how they related to the
ongoing shift from feature phones to smartphones.

While such a brief and shallow review will not give
the full picture of Nokia’s response, it might still
reveal something.


Going through these slides it is striking to what
extent Nokia emphasizes the strength of its ever
larger product portfolio.

In the years 2007-2008, virtually every slidestack
contains at least two full slides crammed with all new
product launches.

The images below come from some of these
presentations.


It is also noteworthy how little is said in these years
concerning technological change and the emergence
of smartphones.

Most of the information is related to market growth,
Nokia’s market share, gross margins etc. Towards the
end of each presentation, a 2*2 matrix with threats
and opportunities is presented.

With no exceptions, this slide is very unspecific and
the term ‘Competitive factors in general’ is frequently
used.

Here, there seems to be a symbiotic and destructive
relationship between established firms and the stock
market. Financial analysts care about the big
numbers (revenues, market growth, market share),
these notions fit neatly into their spreadsheets and
number crunching exercises.


But technological change cannot be easily quantified,
nor fully assessed in terms of its organizational
impact. Top management therefore happily focuses
on the aforementioned issues and this inevitably
makes them pay less attention to changes of a more
discontinuous nature.

Associate Professor Mary Benner at Minnesota
University has shown that stock market analysts
virtually ignored Kodak’s and Polaroid’s digital efforts
in the 1990s, while they paid a lot of attention to
(and praised) their product launches based on
photochemical film (read more here).


Also, a slight sense of (Finnish) optimism is
communicated. In the Q1 report from 2008, the
following statement is made:

“Nokia continues to expect industry mobile device
volumes in 2008 to grow approximately 10% from the
approximately 1.14 billion units Nokia estimates for
2007.” (the presentation can be found here).


In Q2 2008 the following is written about the future:

“Nokia mobile device market
share: increase sequentially”


Being present in a growing market can be highly
deceptive because growing demand might obscure
the fact that a technology is about to become
obsolete, thus sending a false message to incumbent
firms that things are actually going well.

This was indeed the case with film sales for Kodak in
the late 1990s and for analog CCTV companies in the
2000s. The market kept growing and an increasing
demand concealed the fact that the technology was
going to die, thus reducing the incumbent firm’s
sense of urgency.

In 2008, slides are still filled with launches of new
feature phones. However, there is an increased focus
on software services and specific phones:


At this point it seems that the company is recognizing
that software is becoming more important and that
phones are used for a wide range of different
purposes.

But the response is to do more of the same, i.e.
launch more feature phones with different
functionalities and hanging on to the by now
outdated operating system Symbian.


By late 2008, special attention is of course given to
the financial crisis. Still no statements about the shift
to smartphones, except for this amazing piece of
denial (Q4 2008):

“Nokia’s longer term strategy
remains valid and intact”


In Q1 2009, the company announced that it will
launch Ovi Store and that its music services have
been launched in Australia and Singapore. Still no
sense of urgency communicated.

Bearing all the above in mind and especially the
quote from Q4 2008, the slide below from Q2 2009
comes as quite a surprise:


All of a sudden, it is stated that the industry is
undergoing some major change, something that has
not been communicated at all previously (at least not
on the slides). In this presentation, even more
attention is given to software and Ovi Store.

For the first time, Nokia now also stated that it will
try to “adjust our services businesses and open up for
greater opportunities for third party partner
services”.

Christian Sandström, PhD Disruptive
Innovation . se

Thus, about two years after the launch of the IPhone
and the shift towards an open model with application
developers, the company finally announces that it is
going to do something at all. In a digital world, two
years is a very long time.

Innovation . se

In Q4 2009, devices (mobile phones) and services
(software) are no longer reported separately but
rather on one slide where numbers and events are
more aggregated:

Innovation . se

As businesses, they still remained unintegrated
mainly since Nokia still refused to do anything about
its underperforming operating system.
The following quote can also be found in the slides
from Q4 2009:

“4Q showed Nokia’s ability to ramp up new, more
compelling offerings, despite a tough competitive
environment”


In Q1 2010 (below), the company states:
“Nokia continued to show solid smartphone
momentum in lower price points”.

While the word ‘momentum’ communicates
something else than actual results, this is still a
choice of words that clearly doesn’t mirror the
seriousness of the situation – especially bearing in
mind the results that were delivered in the coming
years. This is also the first time the word smartphone
is used at all:


In Q2 2010, Nokia is for the first time communicating
that it is doing something about its old software.

Words such as “increased speed” and “innovation”
are used below, but the fact of the matter is that the
company is still doing more of the same, they’re still
trying to compete with cars by developing a faster
horse.


By Q3 2010, the big slides featuring Nokia’s huge (and
obsolete) product portfolio are gone. Sales declined
20 percent in Q2 2011 and went down 25 percent in
Q3 the same year.

In late 2010 and 2011, the presentations become so
meager and dry that it hardly made sense to look at
them.


Having researched similar cases in other industries
and given speeches about how established firms
respond to technological change, I usually argue that
these firms often recognize the threat but that their
responses are not the right ones.

Firms do after all not act in isolation, they attend fairs
where new products are exhibited and usually pay
attention to what competitors are doing. I therefore
frequently and rather easily make a point in busting
the “oversleeping myth”.


Having reviewed the material above, one hardly gets
the impression that this was the case with Nokia. The
company clearly overslept and top management did
not realize the urgency of the situation – the slides
do not communicate any major issues until suddenly
it is stated in Q2 2009 that the mobile industry is
undergoing rapid technological change.


This statement was made two quarters after the
legendary quote “Nokia’s longer term strategy
remains valid and intact”. And once the problems
were recognized, the response was for many years
the faster horse strategy – better feature phones and
eventually an upgrade of Symbian, an operating
system that was never designed to be used on
smartphones.


One can only marvel at the amount of people who
have lost their jobs and how much shareholder value
has been destroyed by the complacency of Nokia’s
top management in these years.

All the above material can be found at Nokia’s
Investor Relations website (here).


Find out more:

www.disruptiveinnovation.se


Disruptive innovation, smartphones and the decline of Nokia

Recommended

Recommended

More Related Content

What's hot

What's hot (20)

Similar to Disruptive innovation, smartphones and the decline of Nokia

Similar to Disruptive innovation, smartphones and the decline of Nokia (20)

More from Chris Sandström

More from Chris Sandström (20)

Recently uploaded

Recently uploaded (20)

Disruptive innovation, smartphones and the decline of Nokia