Nokia As A Toyota: Branding And Disruptive Innovation
Should Nokia have split itself into an incumbent chasing high end smartphones and a disruptor that seeks to bring smartphones to the masses?
Segmenting the market according to user needs, profitability and product capabilities is not new. The automobile industry, for example, has been there — and has taught us a few lessons on the necessity of focus in the process. The big three auto makers in the US had stretched the branding too thin (primarily through retaining acquisitions as independent brands) and had segmented the market to such unsustainable levels that they had to jettison some brands (for e.g., Ford offloaded Volvo, Jaguar, Land Rover) to focus on profitability.
Toyota has been a beacon in segmenting the market according to demographics. The Lexus brand symbolizes luxury, Toyota symbolizes reliability and economy. Sensing that the average age of Toyota owner was 47, Toyota spanned a new brand Scion to address the youth segment.
The phone business in contrast has been a monolithic branding endeavor. Whereas an Apple phone or a Blackberry phone signifies luxury and sophistcation, a Nokia phone or a Motorola phone could be a cheap device or a high end smartphone. Nokia could have started a trend.
As Horace Dediu summarized in a series of articles analyzing Nokia’s partnership with Microsoft, Nokia had to address issues on several fronts: low ASP, unattractive margins, lack of focus, high development costs. Nokia abandoned Symbian in favor of Windows Phone, effectively rendering itself to be a high end player given the high costs of hardware required for Windows Phone.
Nokia has an installed base of 250 million users. Agreed that the platform stickiness is not a big factor, and the current installed base does not guarantee loyal customers in the future. A majority of Nokia’s installed base is from the poor and developing economies. Every one seems to agree that, in the near future, a majority of phones would be smartphones. Who will bring smartphones to the masses?
ZTE and other low cost handset vedors seem to have the momentum at the moment. In his famous burning platform internal memo to employees, Nokia CEO Stephen Elop indicated pressure from low cost manufacturers producing devices based on chips from the likes of MediaTek.
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.
According to Clayton Christensen‘s theory of Disruptive Innovation, disruptors start off serving customers currently unserved by the incumbents. The poor and the masses are currently unserved by the smartphone vendors.
Should Nokia chase profits at the high end or address low cost handset vendors eating into its installed base? One solution offered for the Innovators Dilemma is to span a separate unit that is independent and is focused on serving the currently unserved. Why did Nokia not take this path?