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.