Nokia’s strategy of doom? [Strategy]

When the largest cell phone manufacturer in the world decides it will drastically reduce its production in the fastest growing cell phone segment, something certainly is not right. Our friends at Gizmodo, tell us that Nokia is going to halve their production in the Smartphone market.
Before I go any further, here’s a few statistics to put things into perspective. One in every three persons who owns a phone has a Smartphone in his hands – and that’s all around the world. In the US, this number can only be higher. Furthermore, the market has been growing like crazy and will continue to do so in the foreseeable future.  All this without even mentioning that Nokia has taken a beating this year w.r.t the Smartphone market share. It lost over 10 percentage points in just one quarter while the Smartphone market grew by close to 4%. Obviously, the Apples and the bluberries Blackberries have been on a roll.
As Giz points out,

In a webcast yesterday, Nokia's Chief of Smartphones Jo Harlow claimed: "We see ... really fierce competition certainly in the high end, but we also see it in the mid to low end of smartphones increasing"

This tactic of releasing dumbed-down handsets which look, feel and act exactly like the last 50 models to be sold was mentioned at Nokia Capital Markets Day earlier in the week by Olli-Pekka Kallasvuo, who wants to bring prices down to increase margins. Cutting smartphone production in half for 2010, Nokia's claiming it launched around 20 high-end devices this year. 20? They obviously have a different opinion on what's considered a premium handset, if that's true. Antti Vasara, the Head of Smartphones R&D at Nokia, stated that: "We have cut down unnecessary differentiation, so that we have a far more focused portfolio for next year"

Is releasing just one Maemo device (the far-superior platform to Symbian) considered "unnecessary differentiation"? We would've called it "offering punters what they want," keeping in mind the N900 has far outsold expectations, forcing Nokia to delay sales in both the US and Europe.

This is serious news. In a previous article, I had pointed to the fact that Nokia was looking at improving its profit margins and not exactly ‘focusing’ on sales figures (they both are obviously intertwined – but a change in focus can affect a lot of managerial decisions). While focusing on profitability is a good thing – and this excerpt from Giz points to the same – it looks like Nokia is looking to streamline its offerings and focus on the mid-to-low end of the market. This has been a strategy that has worked for Nokia in the cell phone market in general. While a streamlining of product portfolio might not be good news for the market (more dumbed down phones never are) but it certainly could be a blessing in disguise for Nokia’s supply chain.
We all know that Nokia has a cutting edge supply chain with amazing response times. Many references to its Supply chain excellence^PDF can be found on the Internet Archives. It would also be worthy to mention the Royal Philips Fire Incident^PDF where Nokia recovered from a severe supply chain disruption to rapidly outdo the competition. This incident in particular made several supply chain gurus sit up and take notice of Nokia’s supply chain so much so that they were acknowledged to have one of the best supply chains among contemporary companies. Keeping this in mind, it wouldn’t be hard to see the benefits of having a large number of low end smartphones in the market. Especially when the margins come from a quicker response time and a shorter time-to-market.
Amidst the software battle among smartphones, what l with Symbian taking a beating this year, Nokia is going to have to look at a lot more things than just supply chain efficiencies in order to come back strong. As always, no one knows for sure what 2010 is going to hold forth – opportunity for a comeback or opportunity for a disaster. Time will tell – we all will wait and watch.

The myth of the disappearing supply chain

 

Recently, blogger Christopher Sciacca from the Supply Chains Rock blog, wrote a brilliant blog post titled “Are Supply Chains Disappearing?” I am an avid reader of Chris’ blog myself and follow his posts closely. This post of his in particular, got me thinking.

Firstly, ARE SUPPLY CHAINS DISAPPEARING? I certainly think (hope, pray and all of that too) that they aren’t. Chris is someone with a lot of experience in Supply Chain Management which clearly reflects in his blog posts. He refers to a Wall Street Journal article in his blog post. This article really makes for some interesting reading for those of us who make a living of analyzing supply chains. It primarily revolves around a decision by Larry Ellison, the chief executive of Oracle. The following is an excerpt from the original article.

Mr. Ellison plans to buy Sun Microsystems Inc. and transform Oracle into a maker of software, computers, and computer components -- a company more like the U.S. conglomerates of the 1960s than the fragmented technology industry of recent years.

"It is back to the future," he told financial analysts in October.

Mr. Ellison is among the executives reviving "vertical integration," a 100-year-old strategy in which a company controls materials, manufacturing and distribution. Others moving recently in this direction include ArcelorMittal, PepsiCo Inc., General Motors Co. and Boeing Co.

One important aspect we need to look into is the reason for this supposed ‘vertical integration’ by the companies. While ArcelorMittal seems to be doing it to keep control over the raw materials side of its business, Pepsico wants to keep control of its distribution piece. And however flat Boeing’s supply chain might have been, there is always a large amount of vertical integration involved in making up a supply chain as complex as Boeing’s. Less vertical integration generally means more delays from your “trouble” suppliers. These delays can be offset by diversifying the supplier base but this might not be a viable option for Boeing, simply because of the industry it is in. At any rate, a common theme among these newfound ‘vertical integrators’ is control over parts of the supply chain.

While I agree with Chris in saying that this is a shift that is noting, this phenomenon of a company owning a stake in its suppliers is certainly not new. In fact, a number of companies use this principle in their day-to-day operations. Companies like Toyota with its Toyota Production System, have made it a binding principle to take ownership(by monitoring and guiding their suppliers – not actually owning them) of their suppliers and tie the suppliers’ success to their own.

The 14 Principles of The Toyota Way

Principle 11

 

Respect your extended network of partners and suppliers by challenging them and helping them improve.

 

Toyota treats suppliers much like they treat their employees, challenging them to do better and helping them to achieve it. Toyota provides cross functional teams to help suppliers discover and fix problems so that they can become a stronger, better supplier.

Source: Wikipedia Article

This management system ensures a closely knit supplier network which is willing to adapt to cater to the company’s demand. Toyota also keeps its suppliers close together which enables it use JIT manufacturing techniques. This notion of keeping the suppliers close has also been used by Dell albeit for speeding up their manufacturing lead time.

Something to note here is the industry shift that is taking place in the case of Oracle. Oracle is moving from being a software company to becoming a full-fledged manufacturing company. This move certainly entails the requirement of better supply chain controls. I have never believed in the concept that a completely FLAT organization can be a market leader. As a company grows in size, needs of driving innovation and maintaining quality while reducing the time-to-market in its supply chains will necessitate having a certain degree of control on their supply chain. This decision of Oracle, however, seems to be a rushed decision to say the least.

Larry’s change of philosophy seems sudden. As recently as March, Oracle tried to buy only Sun's software products, according to a filing with the Securities and Exchange Commission. But when IBM neared a deal to buy Sun, Mr. Ellison decided he, too, wanted the whole company. Oracle won by offering $9.50 a share for Sun, or 10 cents a share more than IBM's bid.

However, the shift from a software company to an integrated hardware-software provider means a shift in supply chain policy is imminent. I would love to see them use SAP software while they’re at it though.