Will Nokia Innovate or Die?

"Once we rid ourselves of traditional thinking, we can get on with creating the future."
-- James Bertrand

Running a business is all about innovation. Whether you're a biotechnology upstart, a cutting-edge technology company, or a large-scale retailer, innovation is paramount to a business' success. Without innovation, companies run the risk of complacency and getting passed by competitors -- or even worse, folding up shop altogether like Circuit City did nearly three years ago.

No company gets a "free pass" when it comes to adapting its business plan, so when push comes to shove we need to ask ourselves, will this company innovate or die?

Today, I propose we take a closer look at Nokia (NYSE: NOK  ) to determine whether the company can adapt to rapidly changing consumer demands or whether it will be pushed into the background?

What's wrong with Nokia?
It'd probably be much easier to list what's going right with Nokia these days than what's wrong with the flailing cellphone provider. Nokia still holds the largest market share in cellphone sales at 25%, but Nokia's designs are rapidly falling out of favor with consumers who are turning toward touch-screen devices. To shed light on how rapidly Nokia has fallen off the horse, the company's worldwide market share stood at 40% in late 2008 and in less than three years has shrunk by 15 percentage points.

At the heart of the company's problems lies its lack of technological innovation. Think about this: When was the last time Nokia put out a phone anyone was excited about? Perhaps in 2002 when the company brought color screen phones to the masses? Since then the company has been a disaster. It made matters even worse earlier this year by flip-flopping from its proprietary Symbian operating system to running with Microsoft's (Nasdaq: MSFT  ) Windows Phone operating platform.

Getting Nokia back on track
I'm not the CEO of Nokia, but for a moment let's pretend I am. The way I see it, Nokia needs to focus on three things to get its business back on track:

  • Focus on price -- Let's face it, Nokia isn't going to reach into its bag of tricks and magically pull a successful smartphone out of its hip pocket. It's reasonably years away from offering a smartphone that can compete with the likes of Apple (Nasdaq: AAPL  ) or Research In Motion (Nasdaq: RIMM  ) , so it instead needs to focus on its natural price advantage. This segment of the business isn't as sexy as smartphones, but post-recession consumers are still very price-conscious and there's money yet to be made here.
  • Stick to one operating system -- Get out your highlighters, thumbtacks, pencils, and pens out and circle "one" operating system! Nokia's downfall is that its product line is all over the place and it has lost track of what consumers want. The company's partnership to use the Windows Phone operating system may work out just fine -- but will the company stick with it this time?
  • Consider all strategic options -- This includes potentially putting the company up for sale. It's highly unlikely Apple or RIM would have any interest in Nokia, but with Microsoft's operating system already embedded in Nokia's newest smartphones, and Google (Nasdaq: GOOG  ) , with its Android operating system, always out on the prowl, the possibility of unlocking shareholder value by selling itself remains a plausible idea.

What's the verdict?
Nokia is on the verge of disappearing into a cloud of dust behind its peers. It has been late to the innovation game for the past decade, and has simply become complacent being the low-cost, basic phone provider. Unfortunately, that's only going to get the company so far and it may be too late to change the company's fate now. I'm willing to revisit this at a later date, but I'm giving Nokia two thumbs down.

Does Nokia have any chance of a turnaround? Share your thoughts in the comments section below and consider tracking Nokia, and its peers Apple, Research In Motion, Microsoft, and Google with our free service, My Watchlist, in order to keep up on the latest news in this fast-paced sector.

Fool contributor Sean Williams has no material interest in any companies mentioned in this article. You can follow him on CAPS under the screen name TMFUltraLong. The Motley Fool owns shares of Apple, Google, and Microsoft. Motley Fool newsletter services have recommended buying shares of Microsoft, Apple, and Google, creating a diagonal call position in Microsoft, and creating a bull call spread position in Apple. 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 that's black and white yet still cutting edge.


Read/Post Comments (4) | Recommend This Article (5)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On June 02, 2011, at 4:37 PM, deemery wrote:

    I'd bet on "die", because the place to innovate these days is in Software, and they sold that part of their soul to Microsoft. That leaves Nokia with attempts to innovate solely on hardware, which is both lower margin and more competitive.

    Here's a prediction: Nokia price dives and Microsoft buys it. Then there'll be a major shareholder lawsuit on whether that was Microsoft's secret strategy by placing a former Microsoft employee as Nokia CEO.

  • Report this Comment On June 02, 2011, at 5:14 PM, warders79 wrote:

    "It's reasonably years away from offering a smartphone that can compete with the likes of Apple (Nasdaq: AAPL ) or Research In Motion (Nasdaq: RIMM ) , so it instead needs to focus on its natural price advantage."

    From a pure technology perspective Nokia hardware was and continues to be leaps and bounds ahead of the competition, where they have failed is in the software dept. Because of the challenges in software they failed to develop a dynamic ecosystem (ovi, though not very successful it is significant http://www.forum.nokia.com/Distribute/Ovi_Store_statistics.x... Their current line up of devices X7, N8 etc are quite appealing... though not available in the us on contract. This may infact be their largest failure. Had nokia been successfull in dealing with US carriers over the last 10 years we may be living in a very different world. That said...

    The big question is will consumers find WP to be compelling. As though they pay license fee on the OS they also get a cut of ecosystem revenue

    An alternative approach will be to allow their device to be agnostic to the software and let the user choose Android / WP / WebOS etc. This could be an interesting change

  • Report this Comment On June 03, 2011, at 5:15 AM, kariku wrote:

    Die. They had their chance, they could make touch screen phones as early as 2003, but they didn't want to. They can't write decent software. So they should disappear forever along with their annoying tune.

  • Report this Comment On June 03, 2011, at 2:07 PM, TMFUltraLong wrote:

    warders79,

    Those are decent ideas...I'm just not convinced Nokia can focus on one aspect of its business... they are a tech company with ADD and that may be its downfall.

    TMFUltraLong

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