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Nokia's Real Problem: The Commodity Trap

by Henry Chesbrough on February 22, 2011


henry-chesbrough's picture

Nokia's Real Problem: The Commodity Trap

Last week, Nokia's new CEO Steven Elop wrote a scathing memo to his team at Nokia, describing the company's declining market position in mobile phones as a "burning platform". Such direct and blunt language is unusual in most corporate settings, and shows how seriously Elop views Nokia's troubles.

But Nokia will not arrest its deterioration until it properly diagnoses the cause of its position in the market. I believe that Nokia has fallen into a "commodity trap" in mobile phones. In this trap, it is not enough to accelerate innovation or increase the number of new products one offers. Instead, Nokia needs to rethink the nature of its business. For Nokia is no longer in a product business, it is now in a service business. And it will need to innovate differently in order to get out of the commodity trap.

A commodity trap is a subtle trap. Companies that differentiate their products by building them to be smaller, faster, more powerful and cheaper begin to find that others quickly imitate every new feature that they introduce. The length of time that any given product is attractive in the market begins to decline, as even newer products quickly take over. And with the globalization of manufacturing and even R&D now, skills like total quality management, six sigma, supply chain management and enterprise resource management are now widespread, and known to most everybody.

Nokia is not the first cell phone maker to fall into this trap. Only 7 years ago, Motorola stunned the world with its elegant, sexy Razr phone. This phone was slim, sleek, and definitely cool. Motorola sold more than 50 million of them, and was the world's #1 handset manufacturer. But Motorola kept trying to come up with even better products, and its next products weren't any cooler than the Razr, while other makers (including Nokia) soon caught up with cool designs of their own. Today, Motorola is the #7 manufacturer of handsets in the world.

For Motorola and for Nokia, coming up with ever better cell phone products is no longer enough. These handset manufacturers face mounting pressures from new entrants like Apple, Google, Palm (now part of HP), and Microsoft, all of them working hard to continue to innovate new mobile phones, either by themselves or with partners. But each is doing far more than that: they are building platforms that attract thousands of other companies to design applications and services that run on their handsets. Even if Nokia can develop a superior handset and then continue to lead in producing superior handsets, that is no longer sufficient to provide a superior customer experience. Nokia must focus its innovation efforts on the applications and services (which support its platform) that will enrich its customers' experience with its phones. If it fails to do so, it will soon be supplanted as the market leader in cell phones as Motorola has been.

Nokia's approach to innovation will require radical changes. This company that achieved so much with its product design skills in the previous decade must develop an entirely new set of innovation skills in order to create, develop, and manage a platform--an ecosystem of other companies that build their offerings on top of Nokia's. This requires Nokia to open up much more of its architecture for others to build upon. Since others have already created powerful ecosystems in mobile phones, Nokia also must compete for independent developers to lure them to invest in developing for Nokia's architecture. To do that, Nokia must provide a unique and differentiated experience for its users. It will not be enough to offer the same applications and services that Apple and Google already provide. Fortunately for Nokia, it enjoys a very powerful position in many of the fastest growing cell phone markets in the world, and applications like mobile payment systems are already well underway with its products in these markets. If Nokia can consolidate these efforts to create a new suite of banking services delivered through its systems, it will enjoy a bright future in the largest, fastest growing markets in the world. But it must think of itself as a systems architect, in order to design and execute the various services needed to bring this vision into reality. Product thinking won't work anymore.

There is a lesson here for all companies. Whether you make a product or a service, you need to think of your business as a service business. With a service mindset, you will encourage your people to create valuable experiences for your customers. With an open mindset, you will invite many others to add to and build upon your products and services - your platform. If you set out to innovate your services to create new and differentiated customer experiences, you can escape the tyranny of the commodity trap. This is the path to win and sustain leadership in your market.

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anders-magnusson's picture
Interesting hypothesis, but I am not sure this is Nokia's real problem. With Nokia's economies of scale, a commodity can be perfectly OK as long as the market doesn't change - and it certainly did, and Nokia wasn't prepared for it. I know this from first hand.

Some 10 years ago, I met with Nokia's Marketing Management Team at Nokia's Espoo Head Office in Finland to discuss Customer Satisfaction. They were not particularly interested. They felt that Customer Satisfaction was irrelevant because Nokia had the future in their labs, and the Customers couldn't know anything about this. Instead they claimed that Nokia's real challenge was to organize the company properly to reap the benefits of this future.

This attitude shocked me because I recognized the reasoning far too well from my years at Digital Equipment (DEC), the computer star in the 80's with some 125,000 employees that totally lost momentum and was absorbed with great difficulties first by Compaq and then by HP. At DEC, were convinced that we had the very best computing solutions and felt that Microsoft and Intel were selling toys...

Customer Satisfaction would certainly not have helped Nokia - after all, it is retrospective and not linked to profitability if you closely examine survey responses versus actual profit margins - but I am positive that both Nokia and Digital Equipment would have been much better off had they/we not been so conceited! Trying to capture what your customers want the next time they open their wallets is not a bad idea.

But of course: Who could have imagined that Steve Jobs could revolutionize not only personal computing but also mobile telephony plus whatever becomes of the iPad? Amazing!

andrew-armour's picture
Superb piece. I would also add that as well that this 'innovation trap' is often so very sticky and keeps them locked into and inside the organisation too. Marketers are increasingl too insular and thinking all solutions must be the result of the organisations own internal brilliance and inventivenes. The greatest innovation from Apple was not the iPod and iPhone themselves but the fact that they had to form new alliances with apps and rights owners. In fact, history and some of the latest research (see my link below) shows that innovation actually extends from collaboration and partnerships with people, ideas and thoughts from outside the organisation.