Nokia Connects People; Disconnects its Past
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The first half of 2012 has not been kind to Nokia (NASDAQ: NOK) and its employees. The stock price plunged under $2 per share and has only just recovered on speculative buyout rumors. For Nokia their core business in feature phone has collapsed and their smartphone strategy was shifted mid-stream to Microsoft’s (NASDAQ: MSFT) Windows Phone by new CEO Steven Elop. While Nokia’s $6 billion in net cash at the end of March 2012 makes immediate bankruptcy seem remote, investors greet their situation with skepticism. Their latest earnings report allayed worries of a massive drain of that cash reserve.
The shift in smartphone strategy has put Nokia far behind its nimble competitors, in particular Samsung and Apple (NASDAQ: AAPL). Their lead at this point looks nearly insurmountable. Continuous innovation and superior supply chain management by Apple and Samsung have them gobbling up more than 90% of the profits in the industry. Consequently, Nokia is now reverting to the traditional management measures of keeping the company profitable and excising costs; i.e. layoffs and plant closures. Three of their top management executives stepped down at the end of June and it has announced layoffs of 10,000 workers.
Gone in 60 Seconds
The journey of becoming the market leader in feature phones to an also-ran in smartphones has been breath-taking in its speed. Experts had been predicting an end to Nokia’s dominance with its competitors revolutionizing how we think about phones and ushered in a whole new world of apps, Nokia’s management, lacking in product vision, decided otherwise. They kept on manufacturing cellular phones, even though they were not substantially profitable, and did not foresee the shift of consumers towards the world beyond just the smartphone. The N97 phone, buggy, underpowered and completely inferior in every way to the iPhone was the disaster that began the slide to where we are today.
Considering its widespread operations to virtually every part of the world, the company had maintained a decentralized structure. Every country or region had been empowered enough to exercise its own interests as long as it remained profitable. However, after the failure of N97, a complete restructuring was necessary. Management admitted that it was time that to let go off the older versions of Symbian platform. As the Executive Vice President at Nokia, Anssi Vanjoki quoted, “We got a good lesson, and you will see that we have learned it when Symbian^3 will be released.” Things got worse from there.
Where’s my Visionary Management?
While Stephen Elop has the distinction of being the only non-Finn in Nokia’s management, his hiring as CEO has faced severe criticism. They needed something they didn’t have. They needed Steve Jobs and they had a collection of middle managers and engineers. Elop’s history at Microsoft and immediate announcement of switching the company to Windows Phone has been met with everything from hope to derision. But, it was a bold and brash move for a traditionally conservative company that needed to make a radical course correction.
Elop and his management style from the first day that he took charge of the company showed signs of a democratic leadership style. The CEO had made it clear in his very first correspondence of an open door policy, one where any suggestions would be welcomed. Although, this approach surely would have helped in strengthening the employees’ confidence in the company, the consumers were little interested in the internal management of the company.
Critics have also pointed out a potential visionary failure on part of Elop by letting Android enter and sweep away the market. But, in reality what was he to do. Symbian wasn’t good enough to compete long-term, even though it had market share. Elop, however believed that hitching up with Microsoft would be quicker, easier and in the long-term more successful than if Nokia tried to go it alone with Symbian against Apple and Google. They didn’t have the infrastructure to build a full-blown ecosystem. So the two dysfunctional former industry titans have teamed up to try and assault the iOSdroid castle.
By making the announcement the way he did and without equivocation, Elop invited criticism and immediately changed expectations without stringing consumers along with vague promises of supporting Symbian. Bold, brash, future-oriented and maybe fool-hardy but it was probably the only real choice he had if Nokia would continue to be a going concern.
After a rather dismal July 2012, where the announcement of the final phase of their retrenchment was announced pushed the stock below $2.00 per share, things have stabilized. The CEO and other board members bought one million shares to restore the investors’ confidence, a rare move in today’s markets dominated with insider selling. The company is convinced that Windows Phone 8 (WP8) will be the platform to launch the new Nokia. Frankly, it has to be.
Nokia World is less than 3 weeks away and it was announced recently that Microsoft and Nokia would be making a joint announcement at the start on September 5th. Samsung is expected to unleash its Galaxy note towards the end of this month, as well as having new WP8 devices out. But it’s the 800-pound gorilla in the room of Apple’s imminent release of the iPhone 5 that has the industry wondering.
With a situation regarded by many as havoc for the first time in the company’s history nearly over, Nokia will live or die by Microsoft’s handling of their multi-pronged Windows 8 plan. While Samsung has capitalized in the vacuum left by Nokia’s abandoning Symbian, becoming not only leaner but more well-rounded and is setting their sights on Apple in terms of branding as well as covering its bases by developing for both WP8 and their cash-cow Google’s (NASDAQ: GOOG) Android.
Nokia is a company whose brand still carries a lot of cache as a maker of quality phones, but they and Microsoft have to deliver a superior product at higher margins to protect what’s left of it.
Is the road ahead expected to ‘connect’?
Naturally for a former leader like Nokia, management will have to realign the company’s culture around building beautiful devices that are singular in look, feel build-quality and bring back that feeling that used permeate their phones the same way the latest iGadget does. The Lumias are a good start but the next generation of them will have to be brilliant as they will be the first devices off the line to show off Windows 8.
Perhaps Nokia was a little too late in realizing the importance of differentiation and innovation, but ‘better late than never’ and having a plan beats not having one. Windows Phone 7.5 and the first generation of Lumia phones were beta tests of the Nokia/Microsoft strategy. Management has performed a minor miracle producing them and creating even a small amount of buzz. Windows Phone has fully replaced Symbian’s market share in Finland and the latest market share numbers from Europe are encouraging as well. Nokia is purely a speculative play at this point with a share price close to that of an un-expiring call option.
PeterPham8 has no positions in the stocks mentioned above. The Motley Fool owns shares of Apple, Google, and Microsoft. Motley Fool newsletter services recommend Apple, Google, and Nokia. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.If you have questions about this post or the Fool’s blog network, click here for information.