Nokia’s Blind Spot

WSJ writes how Nokia chased the top-end of the market and got hit in the middle:

The Finland-based company has spent hundreds of millions of dollars launching a string of “smart phones.” It now pours almost 80% of its research-and-development budget — about $3.6 billion (2.9 billion) a year — into software, much of it designed to give phones computer-like capabilities. Adding urgency to the effort: Microsoft Corp. has been developing software for smart phones for years, threatening to dominate the burgeoning market.

Now it appears that Mr. Ollila and his trusted lieutenant, Anssi Vanjoki, focused on the wrong battle — at a big cost to Nokia. Smart phones have proved too bulky and expensive for many consumers, and remain a tiny presence in the market. Moreover, in concentrating on smart phones, Nokia has neglected one of the hottest growth sectors in cellphones, midrange models with sharp color screens and cameras, giving competitors a rare opportunity to steal market share.

Last year, Nokia sold 5.5 million smart phones, according to estimates from International Data Corp., far short of Nokia’s target of 10 million. Analysts expect the company to post its third year of little or no sales growth. In the first quarter, its sales fell 2% — in a global cellphone market that grew 40% from the year before, as measured by units sold. Nokia’s share price is down 17% in Helsinki and 19% on the New York Stock Exchange this year.

Meanwhile, Nokia’s global market share, which a year ago stood at 35%, has plunged to 29%, as Samsung Electronics Co. and archrival Motorola Inc. pushed the cheaper midrange models.

This amounts to the biggest stumble for Nokia since it became the world’s leading handset maker in 1998. Behind Mr. Ollila’s miscalculation is a dilemma that many executives face: how to choose which battle to fight? Often, corporate chiefs are criticized for focusing too much on short-term goals and quarterly performance. Yet Nokia’s experience shows that fighting long-term wars at the expense of today’s battles also can be damaging.

The issue that Nokia faces is that they have made Microsoft the “evil empire,” says Don Listwin, chief executive of Openwave Systems Inc., a Redwood City, Calif., cellphone-software supplier that competes with Nokia. “How do dominant companies lose their position? Two-thirds of the time, they pick the wrong competitor to worry about.”

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Rajesh Jain

An Entrepreneur based in Mumbai, India.