Nokia Cell Phones Case Study

Executive Summary

In early 2001, Nokia faced a defining moment in its history. Chairman Jorma Ollila and his team of executives sidestepped bankruptcy in the early 1990s and charted the company's path into the emerging cell phone industry. By 2001, this savvy executive team made Nokia the leading cell phone maker. They built a venerable brand name; forged important relationships with suppliers, customers and business partners; and fine-tuned design and manufacturing processes that produced superior operating margins. Moreover, Nokia was debt-free with $2.5 billion in cash, and it operated the biggest research and development budget in the industry. Management was prepared to embark on a strategy to stimulate future growth and solidify its dominance in the mobile telecommunications industry.

The company fixed its eyes on a new prize, the high-speed mobile internet. "If the strategy pans out, the Finns could well sit atop the next stage of the Web, kings not just of Web-surfing machines, but also a power in software and networks" (Baker, Shinal, & Kunii, 2001, 6). However, the road ahead would be fraught with obstacles, including volatile financial markets, business partners suffering under massive debt, mastering new technologies different from existing competencies, and competition from some world's leading technology companies.

In executing its strategy, Nokia should leverage its strengths to profit from the opportunity presented by the mobile internet, keeping a watchful eye on its own weaknesses and dodge the threats that jeopardize its success. Specifically, the company should re-evaluate its aggressive pursuit of a vertical industrial model within the mobile telecommunications industry. Instead, Nokia should proactively pursue strategic partners that complement its core competencies of market-driven product research, design and engineering; brand management; and innovation leadership. In addition, despite its superior manufacturing processes, the company should explore outsourcing more manufacturing to remain cost competitive with its rivals.

Case Analysis

Nokia's executives recognized that the market for cell phones, while still robust, showed signs of maturing. Analysts forecasted industry sales growth rates to decline from 45% in 2000 to 30% or less in 2001. Meanwhile, Nokia expected its blistering 64% sales growth in 2000 to slip to 25% to 35% through 2003. Consequently, executives prepared Nokia to transform itself from a mere cell phone manufacturer into a mobile telecommunications provider, avoiding what Levitt (2004) labels "marketing myopia." A brief analysis of some of the company's key strategic strengths, weaknesses, opportunities, and threats follow.

Strengths

The company's strengths are impressive. First, Nokia has a strong, close-knit executive team that has guided the company through many crises, leading it to the top of its industry. The company's Chairman Jorma Ollila also has strengthened the team through cross-training. For example, the chief financial officer ran the U.S. division, where he learned about manufacturing and U.S. capital markets. Likewise, Ollila sent the network chief to Asia, where she was immersed in the first the market likely to adopt the next generation of the mobile internet.

Next, Nokia has built the fifth-most valuable brand name in the world, eclipsing the likes of Sony, Nike, and Mercedes-Benz. In the 1990s, the executive team restructured the company around a global, market-driven strategy that focuses on customers. In addition, they cultivated distinctive capabilities in research, design, and manufacturing that enabled them to introduce two dozen new phones each year, a key ingredient in the company's ability to provide superior customer value and create its valuable brand.

Finally, the company has achieved enviable financial performance along with a strong balance sheet. In 2001, Nokia led the 405-million unit global cell phone business with more than 30% market share. Moreover, "its handset operating margins are 20%, compared with 5% for Motorola and -30% for Ericcson" (Baker, Shinal, & Kunii, 2001, "Nokia's New Firmament"). Meanwhile, Nokia is debt-free, and it has accumulated $2.5 billion in cash, providing exceptional liquidity. Its financial strength enables the company to maintain the largest research and development budget in the industry among other key advantages.

Weaknesses

Nevertheless, like all companies, Nokia also bears some weaknesses. The company's ambitious strategy to penetrate the high-speed mobile internet is risky. According to a manager within Microsoft's mobility division, "Nokia is clinging to a vertical industrial model" in an industry where companies concentrate on specialties (Baker, Shinal, & Kunii, 2001, 20). Consequently, the company is engaged an array of internet technologies, from tiny web browsers and firewalls to middleware and e-commerce security systems, that stray from its historical technical competence. Moreover, the complexity of high-speed mobile internet systems are colossal, yet Nokia has resisted forging any meaningful partnerships to collaborate on systems design or outsource manufacturing since a disappointing experience with Symbian, a joint-venture between Nokia, Ericsson and later Motorola. The company's "go-it-alone" approach only enhances the risk associated with its strategy.

Also, the company is a victim of its own success. Its stellar performance in recent years has raised the expectations of the financial markets, so much that any underperformance, even the mere perception thereof, has the potential to punish the stock price. When Nokia previewed favorable results in January 2001 for the previous year, the financial markets focused on disappointing industry unit sales and Nokia's stock plunged 9%, or $17 billion. A fickle stock price can produce troublesome issues, such as deteriorating employee morale and diverting management's attention from strategic initiatives.

Opportunities

Management has identified Nokia's primary strategic opportunity as the emergence of the high-speed mobile internet, also known as digital convergence, where computers and an array of consumer electronic devices will communicate with one another over the internet wirelessly. Nokia believes that consumers will choose to access this mobile internet with multi-featured phone-like devices that integrate cameras, game consoles, and electronic organizers and that their vertical industry model will facilitate determining and satisfying consumer demands.

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