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The changing face of strategy

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In an ever-changing market scenario, corporations, that refuse to see the writing on the wall stand the risk of falling by the wayside

Of late a number of companies have been in the news; albeit for the wrong reasons. collapsed under some $79 billion in debt; Maybach, the luxury car maker is biting dust; Kodak, one of the most recognisable brand names in the world went bust; and is burning. These companies spanned diversified industries, had market presence across continents and more importantly, were market leaders in their product-market segment. What is even more disturbing is the fact that companies across the world are going bankrupt with increasing frequency. According to some recent research findings, the number of companies going bankrupt has gained momentum in the 80s, and especially with the onset of the 21st century the number has increased exponentially. Strategy experts cite reasons, which include corporate crime, market failure and simple insolvency, and are notable for their financial impact on the economy. However, given the magnanimity of the problem, a deeper introspection is the need of the hour. In this regard, Nokia holds some important lessons for us. What went wrong?

In July 2011, Nokia reported a drop in profits by 40 per cent, which turned into an operating loss of ^487 million in Q2 2011. In the global smartphone rivalry Nokia slipped to third place in Q2 2011, trailing behind and Samsung. Its CEO was fired and was roped in as CEO designate; the well-respected president of Microsoft’s business division. On February 11, 2011 Stephen Elop addressed a voice of concern to all Nokia employees, “It is an honest, brutal and a courageous call for change in a company which is still the market leader in mobile telephones, but has missed out on innovations”.

AN EXCERPT OF THE INTERNAL MEMO1 from STEPHEN ELOP
to employees

Hello there,
There is a pertinent story about a man who was working on an oil platform in the North Sea. He woke up one night from a loud explosion, which suddenly set his entire oil platform on fire. In mere moments, he was surrounded by flames. Through the smoke and heat, he barely made his way out of the chaos to the platform’s edge. When he looked down over the edge, all he could see were the dark, cold, foreboding Atlantic waters. As the fire approached him, the man had mere seconds to react. He could stand on the platform, and inevitably be consumed by the burning flames. Or, he could plunge 30 meters in to the freezing waters. The man was standing upon a “burning platform,” and he needed to make a choice.

He decided to jump. It was unexpected. In ordinary circumstances, the man would never consider plunging into icy waters. But these were not ordinary times — his platform was on fire. The man survived the fall and the waters. After he was rescued, he noted that a “burning platform” caused a radical change in his behaviour. We too, are standing on a “burning platform,” and we must decide how we are going to change our behaviour. Over the past few months, I’ve shared with you what I’ve heard from our shareholders, operators, developers, suppliers and from you. Today, I’m going to share what I’ve learned and what I have come to believe. I have learned that we are standing on a burning platform. And, we have more than one explosion — we have multiple points of scorching heat that are fuelling a blazing fire around us.

For example, there is intense heat coming from our competitors, more rapidly than we ever expected. Apple disrupted the market by redefining the Smartphone and attracting developers to a closed, but very powerful ecosystem. In 2008, Apple’s market share in the $300+ price range was 25 per cent; by 2010 it escalated to 61 per cent. They are enjoying a tremendous growth trajectory with a 78 per cent earnings growth year over year in Q4 2010. Apple demonstrated that if designed well, consumers would buy a high-priced phone with a great experience and developers would build applications. They changed the game, and today, Apple owns the high-end range. And then, there is Android. In about two years, Android created a platform that attracts application developers, service providers and hardware manufacturers. Android came in at the high-end, they are now winning the mid-range, and quickly they are going downstream to phones under ^100. Google has become a gravitational force, drawing much of the industry’s innovation to its core.

Let’s not forget about the low-end price range. In 2008, MediaTek supplied complete reference designs for phone chipsets, which enabled manufacturers in the Shenzhen region of China to produce phones at an unbelievable pace. By some accounts, this ecosystem now produces more than one-third of the phones sold globally — taking share from us in emerging markets. While competitors poured flames on our market share, what happened at Nokia? We fell behind, we missed big trends, and we lost time. At that time, we thought we were making the right decisions; but, with the benefit of hindsight, we now find ourselves years behind. The first iPhone was shipped in 2007, and we still don’t have a product that is close to their experience. Android came on the scene just over two years ago, and this week they took our leadership position in smartphone volumes. Unbelievable!

We have some brilliant sources of innovation inside Nokia, but we are not bringing it to market fast enough. We thought MeeGo would be a platform for winning high-end smartphone’s. However, at this rate, by the end of 2011, we might have only one MeeGo product in the market. At the midrange, we have Symbian. It has proven to be non-competitive in leading markets like North America. Additionally, Symbian is proving to be an increasingly difficult environment in which to develop to meet the continuously expanding consumer requirements, leading to slowness in product development and also creating a disadvantage when we seek to take advantage of new hardware platforms. As a result, if we continue like before, we will get further and further behind, while our competitors advance further and further ahead.

At the lower-end price range, Chinese OEMs are cranking out a device much faster than, as one Nokia employee said only partially in jest, “the time that it takes us to polish a PowerPoint presentation.” They are fast, they are cheap, and they are challenging us. And the truly perplexing aspect is that we’re not even fighting with the right weapons. We are still too often trying to approach each price range on a device-to-device basis. The battle of devices has now become a war of ecosystems, where ecosystems include not only the hardware and software of the device, but developers, applications, ecommerce, advertising, search, social applications, location-based services, unified communications and many other things. Our competitors aren’t taking our market share with devices; they are taking our market share with an entire ecosystem. This means we’re going to have to decide how we build, catalyse or join an ecosystem. This is one of the decisions we need to make. In the meantime, we’ve lost market share, we’ve lost mind share and we’ve lost time.

On Tuesday, Standard & Poor’s informed that they will put our A long term and A-1 short term ratings on negative credit watch. This is a similar rating action to the one that Moody’s took last week. Basically it means that during the next few weeks they will make an analysis of Nokia, and decide on a possible credit rating downgrade. Why are these credit agencies contemplating these changes? Because they are concerned about our competitiveness! Consumer preference for Nokia declined worldwide. In the UK, our brand preference has slipped to 20 per cent, which is 8 per cent lower than last year. That means only one out of five people in the UK prefer Nokia to other brands. It’s also down in the other markets, which are traditionally our strongholds: Russia, Germany, Indonesia, UAE, and on and on and on. How did we get to this point? Why did we fall behind when the world around us evolved?

This is what I have been trying to understand. I believe at least some of it has been due to our attitude inside Nokia. We poured gasoline on our own burning platform. I believe we have lacked accountability and leadership to align and direct the company through these disruptive times. We had a series of misses. We haven’t been delivering innovation fast enough. We’re not collaborating internally. Nokia, our platform is burning. We are working on a path forward — a path to rebuild our market leadership. When we share the new strategy, it will be a huge effort to transform our company. But, I believe that together, we can face the challenges ahead of us. Together, we can choose to define our future. The burning platform, upon which the man found himself, caused the man to shift his behaviour, and take a bold and brave step into an uncertain future. He was able to tell his story. Now, we have a great opportunity to do the same.

Stephen.

Strategy
One of the fundamental tenets of market leadership is competitive advantage and its sustainability. Companies across the globe: IBM, Microsoft, Intel or Sony, all have leveraged upon a strong competitive advantage to enable them to reach the pinnacle of success. It enabled Nokia too to become the market leader in the mobile telephony segment. Any competitive advantage is usually the outcome of a successful ‘innovation’. Though the credit for the early patents in mobile telephony goes to Motorola; its VHF technology restricted users to one-way communication only. In 1987, Nokia introduced one of the world’s first handheld mobile phone that weighed about 800gm and had a price tag of about ^4,560. Despite the high price tag, the first phones were almost snatched from the sales assistants’ hands. This is classified as a ‘disruptive innovation’, and is quite different from a simple innovation.

A disruptive innovation helps create a new value network, that eventually goes on to disrupt an existing value network (over a few years or decades), displacing an earlier technology. The term is used in strategy to describe innovations that improves a product or service in ways that the market does not expect; typically first by designing for a different set of consumers in the new market and later by lowering prices in the existing market. Nokia did not rest on its laurels. Subsequent, versions of Nokia’s mobile phones witnessed substantial reduction in sizes. The earlier versions of Nokia mobile handsets were too unwieldy to operate; in contrast the Nokia 1100 launched in 2003 weighed only 86gm. Nokia was also one of the pioneers of GSM, the second-generation mobile technology which could carry data as well as voice traffic. It also enabled high-quality voice calls, easy international roaming and support for new services like text messaging (SMS). This laid the foundations for a worldwide boom in mobile phone usage. GSM came to dominate the world of mobile telephony in the 90s, and by 2008 accounted for about three billion mobile telephone subscribers across the world, with more than 700 mobile operators across 218 countries. New connections were added at the rate of 15 per second, or 1.3 million per day. Disruptive innovations enabled Nokia to blow up a hitherto nascent market segment and emerge as the market leader.

The emerging understanding of disruptive innovation is at dichotomy from what might be expected by default, an idea that is referred to as ‘technology mudslide’. This is a simplistic proposition that an established firm fails because it doesn’t keep ahead technologically with other firms. In this notion, firms are like climbers, scrambling upward on crumbling footing. It takes constant upward-climbing effort just to stay still, and any break from the effort (such as complacency born of success) causes a rapid downhill slide. This is exactly what happened to Nokia. Though it had entered the smartphone segment as early as 1996 with its Communicator, it failed to capitalise on it when Apple launched iPhone. Established firms are usually aware of the innovations, but its firm environment does not allow it to pursue when they first arise. The reason is that they are not profitable enough at first and because their development can take away scarce resources from that of sustaining existing innovations (which are needed to compete against current competition). Therefore, a firm’s existing value networks place insufficient value on the disruptive innovation to allow its pursuit. Meanwhile, new entrants inhabit different value networks, at least until the day that their disruptive innovation is able to invade the older value network. At that time, the established firm in that network can at best only fend off the market share attack with a me-too entry, for which survival (not thriving) is the only reward. Existing firms should watch for these innovations, invest in small firms that might adopt these innovations, and continue to push technological demands in its core market so that performance stays ahead of what disruptive technologies can achieve.

On February 11, 2011, Stephen Elop, unveiled a new strategic alliance with Microsoft, and announced it would replace Symbian and MeeGo with Microsoft’s Windows OS. This news was not well received by customers, and has contributed to the decline in the stock price by 11 per cent. In June 2011 Nokia was overtaken by Apple as the world’s largest smartphone maker by volume. Subsequently, Nokia launched Lumia 800 on the Windows platform and its response has been quite lukewarm. It was and is Nokia’s last hope to catch up in the smartphone segment. Outsourcing can provide a shortcut to a competitive product and it typically contributes little to organisational building. When it comes to innovations, it is easy to get off the train, walk to the next station, but difficult to re-board it when the need arises. Disruptive technologies rarely wipe older technologies off the face of the earth, or out of the business world altogether. But they do often wipe out particular firms.

Emerging paradigm
What then is the mantra for success in the new competitive scenario? The future of strategy will not rest on mere innovations or even disruptive innovations. Market leaders of the future will not be able to sustain alone; they need to create a ‘lock in’. Lock in is a systematic approach where in two or more industry majors, who by default has achieved a proprietary position, co-opt to create a lock in. A lock in implies that, other players have to conform or relate to that standard in order to prosper. It is therefore self-reinforcing and escalating. Once created it becomes very difficult for a competitor to penetrate, and thus becomes a distinct entry barrier. This is referred often referred to as the ‘war of ecosystems’. Bill Gates is the richest man in the world not necessarily because he has developed the world’s best software’s or excels at customer satisfaction; but he has got an army of people working for him who are not on his payroll — all the application software providers who are writing programs based on Windows compatible operating platform. Once you create a lock in it is sustainable because of its ‘network effects’, which is based on the proverbial ‘virtuous cycle’. Customers want to buy an IBM computer with largest set of applications and software developers want to write programs for IBM with the largest installed base.

Lock in
Lock in is an emerging strategy framework that places the customer at the centre of strategy. The concept was proposed by Hax and Wilde in an attempt to integrate the ‘competitive positioning’ framework proposed by Michael Porter and the ‘resource based view’ (RBV) proposed by CK Prahalad. Although these frameworks have often been presented as conflicting views, it is felt they can contribute greatly to the development of a strong strategy. Since they emphasise different dimensions of strategy, they can richly complement each other. They two perspectives can be linked by adding a missing dimension; the ‘customer’. Surprisingly the customer does not emerge as a key stakeholder in either of these two frameworks.

The emerging world of technology surrounding the internet provides unique ways to the extended enterprise to link to its customer and open up new sources of strategic positioning. The customer is the epicentre of all firm activities and owes its existence to it; it is also the heart of strategy. The intimacy and connectivity of a networked economy offer immense opportunities to create competitive positions based upon the structure of the customer relationship. A firm can establish an unbreakable link, deep knowledge, and close relationship that is referred to as ‘customer bonding’. These bonds can be directly formed with the customer, or indirectly through the complementors that the customer wishes to access. Both are powerful sources of margin and sustainability. These bonds represent investments made by firms and complementors in and around the product. Competition based on the product alone misses entirely a primary force driving profitability. Bonding emerges as a central force in shaping future strategy.

There are three dimensions to a successful lock in: best product, total customer solutions, complementor share; all enabled through effective use of technology. Best product positioning represents a way to attract, satisfy, and retain a customer which is an inherent outcome of the product itself. The position is predominantly inward and narrow, based upon the prevailing product economics. Total customer solutions represent a 180 degree departure from the best product positioning. Rather than selling standardised and isolated products to depersonalised customers, firms are seen as providers of solutions based on a portfolio of customised products and services that represent a unique value proposition to individualised customers. Instead of acting alone, they engage with a relevant set of complementors that constitute the extended enterprise. The relevant scope, the gaining of complementors’ share is the ultimate objective, and the system economics as the driving force.

Conclusion
The implementation of this lock in model revolves around what is called ‘delta’; being the Greek letter that stands for transformation and change. It has been long ‘competitive positioning’ and ‘resource based view’ frameworks have been viewed as conflicting by strategic experts. There is an urgent need to integrate the two frameworks to have a unified and holistic strategy. New technology horizons surrounding the internet provide novel and effective ways to link to the customer and to the extended enterprise, and are opening up new avenues for strategic positioning. The transformation toward a delta lock in position requires a very different way to capture the customer. Overcoming managerial frames is the single biggest challenge top managers’ face today in the evolving competitive scenario. Nokia lost its position as it held onto a business model that no longer worked, like an ostrich with its head stuck in the ground. They refused to see the writing on the wall; instead, they chose to pretend that the old profit model was all that there would ever be. When fundamental shifts take place in the market, the business model itself needs to undergo the surgeon’s knife.

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