Porter's 5 forces analysis (Case company: Nokia)

1. Pankaj Saharan
September 2012

2. 
Over the past 150 years, Nokia has evolved from a small paper mill in south-western
Finland to a global telecommunications leader connecting over 1.3 billion people.

Nokia has disrupted into various industries before becoming a telecommunications giant
from making rubber boots, car tyres, generated electricity, even manufactured TVs etc.

Nokia’s own mobile phones’ platforms included Symbian (60 & 40), MeeGo (open-source
Linux based platform) and Meltemi (low end Linux based platform)

Nokia announced a Broad Strategic Partnership with Microsoft to build a new Global
Mobile Ecosystem (with Windows Phone) in Feb 2011.

Currently, Nokia’s phones strategy focusses on Windows Phone platform (for
Smartphones) and Symbian 40 (for low-end feature phones segment).

Nokia has decided not to continue development of MeeGo and Meltemi along with
divesting from long time cash-cow Symbain 60 devices.

Main competitors (mobile phone manufacturers) are Samsung (took over Nokia as global
mobile phones market share leader in 1Q12), Apple, RIM, HTC.

3. Organization Structure
© 2012 Nokia

4. Net Sales
Operating Profit
Net sales per region
© 2012 Nokia

5. © arstechnica.com

6. Key elements of Nokia’s strategy:
 build a new winning mobile ecosystem in partnership
with Microsoft
 bring the next billion online in developing growth
markets
 invest in next-generation disruptive technologies
 increase our focus on speed, results and
accountability
© 2012 Nokia

7. HIGH
Barriers to
Entry
Rivalry
between
Competitors
Power of
Suppliers
MODERATE
HIGH
LOW
Threat of
Substitutes
Power of
Buyers
HIGH

8. Market entry as a global* mobile phone manufacturer is getting extremely tough because of various reasons.

Proprietary learning curve: Mobile phone manufacturing requires patents and proprietary knowledge. Even leading mobile
phone companies are currently engaged in battles over patent issues.

Brand identity and brand switching costs: Brand value is very important for mobile phones sales. E.g. reports have
suggested that HTC which has produced very good devices with excellent hardware specs on top of Android mobile platfrom
are struggling to even maintain the market share. It has been established that it is because of its diminishing brand value.
Brand switching is not very predominant in the industry as a typical smartphone buyer tends to keep the phone for a
considerable amount of time ranging from 1-3 years depending on many factors including country, age, profession,
educational level etc.

Battle of Ecosystems: As described by Nokia’s CEO and many other industry analysts that today is the age of battle of
ecosystems and not just mobile phones. So companies like Apple, Samsung and Nokia are considering smartphones
business as part of overall mobile ecosystem consisting of software stack, operating system, applications, application store,
3rd party developers offering etc.

High expected retaliation: Global market share is currently captured by few leading players. There is expected high
retaliation if a new device manufacturer tries to enter the market and poses a threat to capture the share.

High capital requirements and Economies of Scale: Differentiation factors among mobile phone devices are getting fewer
which is requiring companies investing heavily in R&D costs, marketing spend, PR costs etc. Also, mobile phone production
require quite much capital in place for factory establishment with quite many raw materials, R&D budget, supply channels
etc.

Complex distribution channels: Most countries have operator specific ”Walled Garden” approach where operators are the
key driver for mobile phone sales are giving mobile phones along with operator connections. Leading existing players are
already competing for their new device placements via operator deals.
* Global phone manufacturer is referenced here as a manufacturer who is willing to produce and distribute the devices
globally under one brand and not a regional player trying to capture a niche market segment (e.g. Some Chinese

9. 
Low Bargaining leverage: As per Nokia’s strategy, the company is focusing on Smartphones and feature phones
segments that span across multiple price tiers. It’s the smartphones category that has most margins (in which
Apple operates only!) but all the segments have now fierce competition mainly due to the fact that the
differentiation in products is getting tighter across brands.

Increasing Buyer volume: Consumers (end buyers) volume is continuously increasing globally despite recession
in recent years in some regions and saturation in some. Asia-Pacific market (developing countries) is expected to
grow at even higher rate in coming years. The continued fall in handset prices in most segments, notably
smartphones, with devices with greater capabilities now available at a lower price point have also lead to increase
in consumer volumes.

Increased price sensitivity: Price differentiation is getting lower and lower as device manufacturers are facing
fast changes in designs, technical and data capabilities leading the buyers to price sensitive in their buying
decision. With lot of Nokia’s competitors offering similar packages, the buyers are seeking out best value for their
money.

Low threat of backward integration: Some mobile operators have started building their own mobile phones
under their brand (e.g. Videocon in India) but still have not been hugely popular. So the threat is still low. Most of
the mobile phone manufacturers have their own stores to directly sell to consumers, Nokia is still behind in this
area too.

Low Product differentiation: In the cut-throat mobile industry, the product differentiation factors are getting lower.
If when player comes up with a new feature or technology improvement, it is taken by competitive player very soon
e.g. dual-core processors, wide-screen, LTE, etc. Nokia is not market leader in smartphones anymore and are
catching up with the competitors with very low product differentiation factors. Nokia has especially very weak
hardware components differentiation (except for camera).

Low-Medium Consumer’s churn ratio: Many of the consumers are tied into long term contracts so switching
from one handset to another will be difficult and expensive for the consumer, as a result they may not want to
change until the contract is finished.

10. 
Supplier concentration: Nokia suppliers for hardware components are not concentrated and there are actually large number of
equipment manufacturers that Nokia could switch to. There is competition among suppliers to cope up with the demand for fast
growing requirements of device manufacturers including Nokia.

High differentiation of inputs: Nokia does not depend on a key equipment manufacturer. It buys different hardware components
from multiple vendors and Nokia possesses its own assembling factories where the devices are assembled.

Moderate impact of inputs on cost or differentiation: There is growing trend of differentiation based on hardware specifications
(dual-core processors, physical memory, NFC support, wide-screen, screen glass etc.) which affects the final selling price and
margins. But overall, mostly margins are dictated by software and application ecosystem.

Moderate switching costs of firms in the industry: Most of Nokia’s competitors are enhancing (not switching) the business
model to Tablet space where they are reusing the software stack, operating system, applications portability, application store, design
etc. among other things to enhance the competitive advantage and binding the users to their brand (and thereby enhancing brand
value). Nokia is pondering over the idea to go into Tablet space but has not make any official announcement yet.

Low bargaining power of suppliers: Even though Nokia is losing it’s market share and brand value seems to be on downward
trend but Nokia is still leading device manufacturer and seller in some countries and among the top with narrow margins in others.
Nokia is still in a very strong position when it comes to bargaining with the suppliers.

Impact of Microsoft as a Strategic Partner and as a supplier: Nokia announced it’s strategic alliance with Microsoft for their
software to build Lumia range of devices for smartphones segment which was considered as a major coup for Nokia than for
Microsoft. Microsoft is providing it’s Windows Phone software for Nokia’s competitors as well as an attempt building up the
ecosystem which Nokia is looking as a positive thing to negate the impact of Android and iOS operationg systems. But if we consider
Microsoft as a software (or ecosystem) supplier and not as a strategic partner, Microsoft’s power over the software is very high
because Nokia’s smartphone strategy is solely based on Microsoft’s platform after Nokia’s decision to discontinue MeeGo and phase
out Symbian and no backup or fallback strategy seems to be in place.

11. 
Low Buyer inclination to substitute: Mobile phones have become necessity
for everyday lives of people and its hard to replace with any substitute products
especially when they are away from home.

High switching costs: There exist multiple substitute products e.g. for
contacting people, usage of social media, emails and VOIP systems are
substitutes, digital cameras for photography, TV/radio/iPod for listening music,
tablets for internet browsing, reading books, emailing etc. But potentially all the
value from substitute products could be derived from a single smartphone,
needless to say each substitute product might cost more than the mobile phone
and need to be carried all the time.

High price-performance ration (value): No other substitute product has the
ability to make phone calls, send messages, surf the web, reading a book,
listening to music, use GPS services, communicating via social media and many
more in one device. The idea of being in constant communication with someone
at anytime and anywhere makes the mobile phone a very important device to
people and the perceived value by user (price-performance) ratio is very high.

12. 
Competitive position: Nokia is losing the cash power it had once. Also the current negative credit reports it faces might result in weakening
Nokia’s innovation engine and affect its competitive ability.

Industry growth: Intense competition is forcing many vendors and operators to drastically change their business models or risk dropping out
of the market as economies of scale, segment leadership, brand power and distribution become key determinants of success.

Low Product differentiation: There is also very little differentiation between the competitors and the loss of market share of Nokia during
recent years means that any new smart phones in the market will find it difficult to tempt existing competitor device consumers to switch.

High margins: The smartphone segment offers the largest returns for many in the mobile value chain, and it has therefore become the most
competitive – attracting all the major vendors competing across various operating systems and price tiers. Huawei has set an ambitious goal
for itself: to ship 60 million smartphones in 2012, an increase of 200% year-on-year.

Brand identity: Brand identity is vital for long term success in mobile phones market. But there is still growing competition e.g. from Chinese
'microbrands' and grey market (mainly in the emerging regions like India).

High diversity of rivals: Over 2011 Nokia’s sales were down 18% in China, 27% in Europe and 61% in North America. Nokia has faced
increased competition from low-cost phone manufacturers such as ZTE and Huawei (mostly in China and Europe).

Low-Medium Consumer’s churn ratio: Many of the consumers are tied into long term contracts so switching from one handset to another
will be difficult and expensive for the consumer, as a result they may not want to change until the contract is finished.