Nokia’s ‘Burning Platform’ Highlights Perils of Creative Destruction

Published on February 9, 2011

When the Nokia 6160 cellular phone was released in the late 1990s, it was one of the hot technology gadgets of the era.  With its “candy bar” styling, good looks, and positive user experience, the phone was very popular and was once considered something of a minor status symbol.

Fast forward one decade and many of the same observations could have been made about early versions of Apple’s iPhone which first appeared in 2007.  The iPhone has only increased in popularity with each new release over the past four years but may have lost some of its allure as a status symbol now that it seems like almost everyone has a smart phone.  Google’s Android operating system has made great strides and poses formidable competition for Apple.  Nokia, on the other hand, has a “burning platform” that is in decline.

Cling to Burning Platform or Jump into Icy Waters?

In a memo intended for Nokia employees, CEO Stephen Elop has characterized Nokia’s current plight in stark terms.  Mr. Elop recounts the events of the past four years since the introduction of the iPhone and notes that Nokia has steadily fallen behind competitors despite what he characterizes as “brilliant innovation” within the company.  At the core of Nokia’s problems is the dated Symbian operating system which fails to deliver the user experience of modern smart phones and is now losing ground in lower end devices as Google’s Android operating system begins to penetrate the market for sub-$100 phones:

At the midrange, we have Symbian. It has proven to be non-competitive in leading markets like North America. Additionally, Symbian is proving to be an increasingly difficult environment in which to develop to meet the continuously expanding consumer requirements, leading to slowness in product development and also creating a disadvantage when we seek to take advantage of new hardware platforms. As a result, if we continue like before, we will get further and further behind, while our competitors advance further and further ahead.

Nokia appears to be “stuck in the middle” to use Michael Porter’s characterization of firms that have failed to distinguish themselves as cost leaders or as differentiators of premium products.  Such firms typically achieve mediocre business results but in the case of a technology company in a rapidly changing field, the result is more likely to be eventual extinction without taking steps to radically change:

We poured gasoline on our own burning platform. I believe we have lacked accountability and leadership to align and direct the company through these disruptive times. We had a series of misses. We haven’t been delivering innovation fast enough. We’re not collaborating internally.

Nokia, our platform is burning.

Sometimes a company needs a pep rally from its leadership and sometimes a stern dose of reality is required.  Mr. Elop has chosen to deliver the required message.  On February 11, Mr. Elop is scheduled to make a major presentation regarding Nokia’s future direction and all signs point to the company’s adoption of an alternate operating system such as Android or Windows Phone 7.

Creative Destruction and Apple

Apple has become a favorite investment for growth and value investors alike and today’s valuation does not appear demanding particularly when the market capitalization is adjusted for excess cash on the balance sheet.  We have been critical of Apple’s poor level of disclosure regarding the health of CEO Steve Jobs but no one can deny that the company has delivered stellar financial results for shareholders and this has been reflected in stock price performance.

The bullish case for Apple recognizes the company’s proven innovation and implicitly assumes that such performance can be sustained in the future.  This may be a dangerous assumption given the unfortunate reality that Mr. Jobs may not remain at the helm for the long term.  Although Apple has solid operational and technological talent, few doubt that Mr. Jobs has provided much of the vision behind groundbreaking products like the iPhone and iPad.

Which Phone Will You Use in 2020?

Even with continued technological excellence, Apple is subject to the forces of creative destruction just like any consumer electronics company.  In 1998, users of Nokia’s 6160 cell phone held in their hands the best that money could buy in terms of mobile communication and the same may be true for today’s iPhone 4 user.  Few, however, would hazard a guess regarding what type of cell phone (or, in reality, pocket computer), people are likely to favor in 2020.  The same is true of tablet devices and other consumer electronics devices.

We do not pretend to be able to forecast the future for Apple but at some point, the company could face the “burning platform” issue that no one thought Nokia would face when the company’s technology was “state of the art” not so long ago.  In more mundane fields, Schumpeter’s notion of creative destruction can work at a slower (and sometimes glacial) pace but in consumer technology a decade is an eternity.  This is something that Apple shareholders must seriously consider.

Disclosure:  No positions.

Nokia’s ‘Burning Platform’ Highlights Perils of Creative Destruction
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