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Nokia's 'Burning Platforms' memo warns of cheapies threat

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One strong theme of Nokia CEO Stephen Elop's 'Burning Platforms' internal memo and its accompanying video (outed exclusively here yesterday) has been overlooked, and this deserves a bit more attention.

Elop points out that Nokia lacks competitiveness not just in vital high margin smartphone space – a story that's been told several hundred thousand times in the past few years – but in the low-cost emerging markets, too. Here Nokia is under threat from low-cost Chinese manufacturers such as ZTE.

Elop describes three threats Nokia faces: Symbian and Meego platforms are inadequate to compete in the high margin smartphone space, he says, bluntly. Nokia is under threat from Samsung in developed 'home' markets such as Europe. And it's under great pressure from low cost Asian newcomers in India and China.

This isn't news - we pointed out Nokia's reliance on cheapies more than three years ago - and the dangers of depending so much on low margin, high volume products.

India is already the fourth biggest economy in the world, and will overtake Japan in third place this year. It's seeing half a billion people join a new middle class – a market about the size of Europe. In 2007, Nokia boasted over two-thirds of the sub-$50 phone segment. Two years ago Nokia claimed 70 per cent market share in India, and six months ago, this was still over 50 per cent. By September, according to IDC figures that Nokia disputes, it had gone into freefall, and had lost 20 per cent of share to names Micromax, Spice, Karbon and Lava. These figures are catastrophic.

Why is Nokia doing so badly? Firstly, it's not alone. China's ZTE overtook RIM in Q4 2010, so all manufacturers are feeling the squeeze. Nokia just had more to lose, being so far out in front. Along with the Western manufacturers, Nokia's products are considered to be poor value, up to four times as expensive as a good value homegrown phone. In addition, Nokia failed to react to the market quickly enough. India's thirst for dual SIM phones wasn't met by Nokia until June, or Motorola until October last year. With around 40 per cent of the market in the shape of dual SIM handsets, this allowed home grown Indian manufacturers to come from nowhere, from 0.7 per cent in 2008 to 25 per cent last year. The entire market is bombing along, with 60 per cent annual growth. This is a bad time in which to slip up.

So did Nokia foresee this challenge, and ignore it? Or did it see the competitive threats, and market demands, but react too slowly? Elop suggests the latter: that it has to react much quicker. But there is another reason, in which corporate vanity plays a part.

Every manufacturer faces similar problems when a market becomes a commodity game: the low-cost manufacturers ultimately win. So manufacturers must seek to add value. Nokia chose the wrong strategy for this.

For the past few years we've heard plenty about Nokia Life Tools, an information service for rural users first launched in India – which Nokia bundles with phones, and promotes heavily in emerging markets. One bundle is agricultural information, one educational services, and a third, entertainment. It's priced at 30 or 60 rupees a month. Life Tools would validate Nokia's strategic decision to bundle services with hardware, we were told.

Life Tools would "usher in an information revolution impacting the daily lives of people," said Nokia India's CEO. "We believe this is the beginning of a historical journey that will take mobility to grassroots and make a positive difference to the lives of people in the areas that are crucial to them.”

But Nokia is not an NGO. The measure of its success in India is not some United Nations corporate goodness programme, but the market. And the market perceived home-grown phones to be more practical and better value. The focus may even have been counter-productive, as the journey the Indian nation is making is one from rural to urban. Life Tools looks much more like a corporate vanity exercise than a coherent strategy. (Services chief Tero Ojanpero also indulged in a similar vanity exercise – here). Elop is right, a more responsive Nokia wouldn't have been so slow to react.

As for the rest of the memo, it is a shock treatment designed to steer the company from thinking about technologies and platforms, and towards making great products again. I would rather he didn't use the word "ecosystem", as it obfuscates as much as it clarifies. But he surely has it right when putting products first.

"Our success must begin and end with winning products," Elop said last week. For all his "ecosystems" babble, a successful product creates its own communities and markets. An unsuccessful one strengthens other peoples' ... ®

Bootnote

For what it's worth, here's Elop's burning platform parable:

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. 

Yes, he would, wouldn't he? The sentiments are spot-on, but it does remind me of Peter Cook's parody of Roald Dahl.

The smart choice: opportunity from uncertainty

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