Nokia Corporation
Business Model Problem

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By mannprod
July 16, 2004

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Nokia has a business model problem.

When the cell phone market was growing, it did very well and was able by cool designs and quicker time to market to beat its competitors. But the market has changed considerably. The cell phone market is now a mature market in most of the world. That means that Nokia must clarify its business model. In my opinion it leaves only two possibilities:

1. Nokia can be the low cost producer. This means cutting on the fat margins and lowering prices to the bone. With its sheer size, Nokia can become the Dell of the cell phone world. For a while it will decimate earnings, but after a few years competitors won't be able to survive. It means giving up some short-term earnings for long-term profitability and future revenue growth.

2. Nokia can keep advancing cell phone technology and gamble on innovation. It means that it must keep coming up with cool new technology. The result would be that it would no longer compete in the low cost arena and give up developing world markets. It also means that sometimes it will miss on a trend. This is a very risky proposition. The model is more similar to Apple or Sony.

It seems to me Nokia hasn't yet made the choice and is trying to do both at the same time. This is a management mistake. They lack focus and are slowly giving up the advantages they accumulated during the growth period.

The best way to play both tracks would be to split the company into two via a spin off. Much like Coke split bottling operations. Either the Dell side (low cost) would be a new brand that would sell for cheap (the old navy of phones), or the spin off would be the innovation part that would become a new brand (the BMW of cell phones). The two companies would be much more profitable and focused than Nokia is now.

I know this is radical, but I believe such a move would enhance shareholders value tremendously and would create two top companies out of one large struggling giant.


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