Hyper Competition and the Speed of Change

by Jörgen Eriksson on July 23, 2012

wsjYesterday, in the weekend issue Friday – Sunday July 22-22, 2012, Wall Street Journal published a two page article about the decline and fall of Nokia.

The title was “Nokia loses Mobile Lead Amid Bad Call on Phones”, with the sub title “Corporate Culture Lavished Funds on R&D but Squandered Chances to Bring Innovations to Market“.

Nokia tabletIn the article it is described how Nokia more than seven years before Apple rolled out the iPhone had similar technology ready and further in the late 1990s had a prototype wireless tablet computer with a touch screen.

Consumers never saw either device. As the article argues, the gadgets were casualties of a corporate culture that lavished funds on research but squandered opportunities to bring the innovations it produced to the market.

What happened? To understand this we can make an odyssey back in time, and we will find interesting historical similarities.

Motorola pioneered analog mobile phones in the 1970s. Prior to 1973, mobile telephony was limited to phones installed in cars and other vehicles. Motorola and Bell Labs raced to be the first to produce a handheld mobile phone. That race ended on April 3, 1973 when Martin Cooper, a Motorola researcher and executive, made the first mobile telephone call from handheld subscriber equipment.

The prototype offered a talk time of just 30 minutes and took 10 hours to re-charge, which was highly unpractical, but it placed Motorola in leadership in handset development for two decades to come.

Then disaster struck for Motorola due to leapfrog innovation being brought out to the market by the Nordic suppliers Ericsson and Nokia, with a new generation of digital technology.

Motorola

Nokia communicatorNokia led the wireless revolution around the millennium and set its sight on ushering the world into the era of smartphones. The Nokia Communicator was one of the first mobile phones that combined business optimized functionality with a QWERTY keyboard and an LCD screen. My friend Petri Kajander, then in Helsinki, was one of the first people to have one.

Nokia

However now in 2012 that the smartphone era truly has arrived, Nokia is racing to roll out competitive products as its stock price collapses and thousands of employees loose their jobs.


In the current year, 2012, Nokia ended a 14-year-run as the world´s largest maker of mobile phones, as rival Samsung Electronics took the top spot and makers of cheaper phones, ate into Nokia´s sales volumes. Nokia share of mobile phone sales fell to 21% in the first quarter from 27% in 2011, according to market data from IDC. Nokia´s share of the market had peaked at 40,4% at the end of 2007.

iphone imageThe iPhone had been launched by Apple on January 9th 2007, and it had changed everything.

Nokia is loosing ground despite spending $40 billion on research and development over the past decade, which is nearly four times the amount spent by Apple in the same period.

The decline is even more surprising if one knows Nokia´s corporate history. The company had a long history of successfully adapting to big market shifts, having started out in 1865 as a lumber mill and over the years diversified into electricity production and rubber products.

At the end of the 1980s when the Soviet Union collapsed and recession in Europe caused demand for Nokia´s diverse portfolio of products to dry up, the company started to focus on cell phones.

Nokia executives predicted early on that the business of producing cell phones that do little but make calls would lose its profitability and the company spent billions of dollars to research mobile e-mail, touch screens and faster wireless networks.

Nokia saw where the industry was heading and was the market leader and did research in the right direction, yet it has lost out. How could this happen?

BlackberrryAt the same time, Research in Motion from Canada had a dominant position in the corporate market thanks to its Blackberry device, but it has not been able to come up with a solution to the iPhone either and as a result RIM has lost about 90% of its market value in the past five years.

This blog post aims to explain why Nokia has lost the position as market leader, and what companies can learn from this in order to protect themselves from falling into similar decline.

 

The hurricane that hit Motorola, that hit Nokia, that hit Blackberry is called hyper competition, and there is no escape from it in the modern business world.

When the iPhone was launched, Nokia failed to recognize the threat. Consumers loved the iPhone and by 2008, Nokia executives had realized that the threat was not the hardware but the software and the app store business model, and that matching the iPhones slick operating system IOS was their biggest challenge. By then it was too late.

Hyper competition is a situation brought by modern technology and speed of business, globalisation, rapid transport and manufacturing in which there is global very strong competition between companies, markets are changing very quickly, and it is easy to enter a new market, so that it is not possible for one company to keep a competitive advantage for a long time.

This can be because of a rapid escalation of competitive tactics used among direct business competitors. Techniques used may include rapid innovation in product positioning, pricing adjustments, increased marketing efforts and product improvements.

However for most traditional companies, the full impact of hyper competition has yet to be understood. Then when it is understood, it will be too late.

Palmisano

Hyper competition results from the dynamics of strategic maneuvering amongst competitors in the global economy with perfect price information through the internet.

It is the condition of rapid escalation of competition based on price-quality positioning, competition to protect or invade established product or geographic markets and competition based on deep pockets and the creation of even deeper pocketed alliances.

Often a characteristic of new markets and industries, hyper competition occurs when technologies or offerings, or innovative leapfrog development brings something so new that standards and rules are in flux, resulting in competitive advantages.

Utskrift

However long term profits resulting from such competitive advantages cannot be sustained.

In order to compete irrespective of how short-term the competitive advantage is, companies can implement a strategy based on finding and building temporary advantages through market disruption rather than trying to sustain an unsustainable advantage.

The key to survive hyper competition is to continuously innovate, and as we in Bearing teach our clients, to innovate in dimensions that are possible to defend toward competitors.

It has been explained elsewhere on this blog that values are created on the outer edges, meaning  in other dimensions than development of products and services.

This understanding is todays key to successful and sustainable profitability, however it requires a continuous process of innovation, as competitors will not stand still.

Schumpeter statement

One path to success that Nokia failed to take is to to use sweet spot analysis, where the strategic sweet spot of a company is where it meets customers’ needs in a way that rivals can’t, given the context in which it competes.

The creative part of developing strategy is finding the sweet spot that aligns the firm’s capabilities with customer needs in a way that competitors cannot match given the changing external context – factors such as technology, industry demographics, and regulation.

David J. Collis and Michael G. Rukstad presented an approach for how to do this in their Harvard Business Review article “Can You Say What Your Strategy Is?” in April 2008. In the article, they present a graph similar to the one below, which we use in our methodology approach for corporate strategy work in Bearing.

Sweetspot

For the interested reader, the article can be downloaded by clicking on the link below.

About Jörgen Eriksson :

Jörgen Eriksson is the founder of Bearing and is the Chairman of the firm since it was created. He has successfully expanded Bearing into covering projects on four continents. He is also Adjunct Professor of Innovation Management at the International University of Monaco and at Universitat Politècnica de Catalunya in Barcelona and he is an active member of the Founders Alliance organisation.

Working with consulting engagements across Bearings practices, he has over the past fifteen years participated in and supervised a large number of client projects, from innovation system development and place development and branding, to merger and acquisition assignments and leading edge research and business development activities for key clients.

His new book, Branding for Hooligans, will be published in 2015. It is about how innovation and branding are key survival factors in our modern times of hyper competitive markets.

Prior to Bearing, he was Director of Europe, Middle East, and Africa for Trema Treasury Management, a technology and consulting services provider, supplying financial software solutions for the global financial industry, Clients included The European Central Bank, Citibank, SEB, South African reserve Bank, Deutsche Bank, Abu Dhabi Investment Authority (ADIA), as well as many other large financial institutions and Fortune 500 companies.

Early in his career Eriksson was educated at the Stockholm School of Economics, where he studied economics, financial economics and philosophy. He then worked in Scandinavian investment banks and also for the Swedish Institute of National Defense Research.

You can contact Jörgen on e-mail jorgen.eriksson@bearing-consulting.com, connect on LinkedIn on http://fr.linkedin.com/pub/jörgen-eriksson/0/38/8a0/ and follow him on twitter on joreri508.

{ 2 comments… read them below or add one }

black hat July 24, 2012 at 16:30

I have been surfing online greater than three hours these days, but I never discovered any fascinating article like yours. Itˇs beautiful value enough for me. In my view, if all website owners and bloggers made just right content material as you probably did, the internet will likely be a lot more useful than ever before.

Jean-Louis Swiners May 18, 2014 at 19:26

Fine !
Thanks

Leave a Comment

{ 1 trackback }

Previous post:

Next post: