51-Nokia in a Leader’s Trap

 

Would you like to compete in a Fast-Growing Market? Many would say yes because it seems so much less competitive. As Lee Corso used to say, “not so fast, my friend. Here is a story of a Fast-Growing Market. Over the years, the market has had several different leaders. Most of them are gone now. The market should get easier now, right? Still not so fast. Today’s market offers still more competition And a difficult future.

Posted 10/6/08

Recently, Nokia announced that its market share was likely to fall off somewhat in the future because it was refusing to enter into a price war with others in its industry who are discounting. Nokia has decided to stand apart from the discounters in the marketplace. (See the Symptom & Implication, “Large competitors are maintaining price levels as smaller competitors discount” on StrategyStreet.com.) Unfortunately for Nokia, these discounters include the #2 cell phone maker, Samsung, and the #4, LG Electronics. (See the Symptom & Implication, “Price wars are spreading in the industry” on StrategyStreet.com.) The outlook on this decision is grim.

We have seen this same situation many times before. We call it the Leader’s Trap. (See the Perspective, “The Leader’s Trap” on StrategyStreet.com.) In a Leader’s Trap, an established industry competitor maintains a price umbrella and cedes share to a discounting competitor in the mistaken belief that customers will stay loyal to the established competitor by paying a premium for his product. Over time, the company in the Leader’s Trap not only loses share, but also sees prices fall to a level near the prices established by the discounting competitor.

Nokia has announced its intention to take market share only when the company believes that the share will be sustainably profitable in the long-term. This sounds good but won’t work. The market share the company surrenders today generates cash and, probably, profits. The major players who are discounting their prices today are, therefore, becoming stronger with the addition of more revenues and cash flows in a difficult market. On the other hand, Nokia can only become weaker. It loses cash flows. It broadcasts to all customers in the marketplace that its prices are high. How does Nokia win in this situation?

The answer: it does not. Nokia is unlikely to succeed where previous leaders, such as GM, IBM, AT&T, and many others, have failed. The Leader’s Trap always weakens the company holding the price umbrella and strengthens all the competitors underneath the umbrella. Nokia is sure to regret this tactic.

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Update 2022:

Nokia’s pricing was certainly a problem. But, its product decisions were far worse.

After introducing the first mobile telephone in 1987, Nokia went on to become the world’s largest manufacturer in 1998 and by 2007 had amassed a 51% share of the global market. The company was popular and profitable but it missed out on the smart phone market. Rather than create a smart phone to compete with Apple and Android, the company continued to produce only cell phone handsets. The company focused on handset first and software a distant 2nd. The emerging smart phone market focused on software first and hardware second. By 2009, the company was using many different incompatible versions of its outdated operating system. The company bled market share and sold itself to Microsoft in 2013. It then produced the Microsoft phone, using Microsoft software in competition with Apple and Android. The merger with Microsoft and the decision to use Microsoft software was a disaster. In 2022, neither the Microsoft phone nor Nokia handsets continue to exist.

Nokia failed while others took their market share because failure often is the cause of more market share change than is success. See HERE for an explanation

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Update 12/25

Samsung and Apple are the 2025 market leaders. Apple maintains share with its product leadership. Samsung leads the overall market. The market is a long way from consolidating.

Samsung and Apple have combined to lead the mobile telephone handset market for several years. But their combined market share is only 36%, which is very low for the average industry. Samsung’s share in 2025 was about 20%. Samsung has led as a true Standard Leader, covering multiple Price Points in virtually all geographic regions. Apple has shown itself to be a uniquely capable Performance Leader with a global market share around 16%. Apple holds the industry Function and Reliability leadership positions. Apple has reached its share position based on its sales in developed markets in the US, Europe and the upper tier of the Chinese market. Several smaller Chinese companies are gaining share in the market by offering combinations of local Standard Leader products at relatively low prices (Price Shavers) and Price Leader products. More recently, a few of these Chinese competitors have introduced Performance Leader products to their portfolios. The Chinese producers have gained most of their shares in developing markets in South Asia, Africa and the Middle East. They represent a future challenge, especially to Samsung.

Samsung is at a profit disadvantage against Apple. Samsung produces only Android handsets. Virtually all other competitors in the market, save for Apple, are also Android handset producers. The result is that the Android market is more price competitive and far less profitable than the Apple iOS market, which is tightly controlled by Apple. Apple’s profits are far greater than Samsung’s. It has far more resources to maintain its Function and Reliability leadership. If it falters in either, it would lose share quickly.

The emerging smaller Chinese handset producers pose major strategic threats to Samsung, but not to Apple. The pressure on Samsung’s profits and Chinese threats to its current market share reduce its ability to maintain its Price Points leadership and geographic reach. Samsung must exploit its superior economies of scale to reduce its costs and prices in order to fend off further incursions by the Chinese Android producers. This will be a challenging assignment.

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