Whatever happened to doing Business the Nokia Way?

Autumn 2010

Back in 1999 Nokia was the undisputed market leader in the rapidly growing business of connecting people on the move. It had the highest market value of any European company and a reputation for being the coolest telecoms company in the world. No wonder Management Gurus at that time were in the business of waxing lyrical about doing "Business the Nokia Way".

Nokia had succeeded in becoming the market leader by following a strategy of incremental innovation. It is constantly thinking about the future and is well known for its high levels of investment in R&D. The flag ship of this ongoing commitment is the Nokia Research Centre a global research group that continues to work closely with some 100 universities around the global on R&D projects.

When it comes to world's best design practice Nokia ticks all the right boxes. Collaboration is at the core of its approach to product design. For example Nokia sends design teams out to work with the locals to discover new ideas for mobile devices that would change the way people interact in the emerging markets. They run online conversations and collaborative workshops so their customers and developer community can contribute designs and ideas that will help to create the ultimate concept device.

The result of all this energy and investment are ground breaking concepts like the Nokia Morph, undisputed market leadership and an extensive product range that has earned Nokia the label of the General Motors of the Mobile Phone World.

What I find interesting about the Nokia story is that ten years after "Doing Business the Nokia Way" was published Nokia's market value has fallen dramatically.

So the question needs to be asked how could this decade long investment in R&D and ongoing commitment to "Incremental Innovation" deliver an 80% loss in shareholder value? The answer of course is the iPhone. In three short years Apple has disrupted Nokia's market and redefined its future.

Ironically, back 1997 when Nokia's star was on its meteoric rise and the Sony PlayStation was rapidly redefining the games market, Apple was arguably on its knees. Its flagship product, the iconic "Mac ", had lost the PC wars to the clones and its revolutionary mobile PDA, the Newton, had proven to be far too ahead of its time. The question wasn't really about what would we see next from Apple's Innovation Engine but would Apple be around to compete in the next round of the information revolution? It took a $150 Million investment from Microsoft and the return of Steve Jobs to nurture the seeds that have subsequently disrupted Nokia's market dominance.

The rest as they say is history. Apple has been the American success story of the noughties.

Fast Company is leading this month's issue with Invincible Apple: 10 Lessons From the Coolest Company Anywhere. Providing us with rich contextual insights like...

Apple's specialty is the remix. It curates the best ideas bubbling up around the tech world and makes them its own. and,
Steve Jobs's primary role at Apple is to turn things down.

They aren't the first, nor will they be the last, media outlet to wax lyrical about Steve Jobs and Apple's achievements over the past few years. Nor is the analysis limited to words. We also have pictures and illustrations like Ben Millen's iPhone Deconstruction Diagram. Each in turn will attempt to offer some insight into how Apple's Innovation Model has once again disrupted an existing market and left the competition for dead by becoming the new profit leader.

Apple spends significantly less as a % of its revenues on R&D than its competitors. But, if we include the "Freemium" R&D investment made by the developers who supply the games and apps that fill the App Store into the mix then the level of R&D investment as % of revenues is equal to that of Nokia.

	Apple	Nokia	Sony
Business Week's Innovation Ranking	1	23	10
R&D Expenditure (Billions)	$1.1	$8.7	$4.8
R&D as % of Revenue	2.3%	11.8%	6%

So has Apple redefined the future of R&D? Has Apple's revolutionary new approach to R&D rendered obsolete the much celebrated Disruptive and Incremental Innovation of Engines of Sony and Nokia?

The trend towards outsourcing R&D to cut costs and get new products to market faster is not new. Business Week has been tracking this growing trend by the world's leading Brands for the past decade (See the reports from 2005 and 2008). There is also the recent report in The Atlantic and Andy Grove's commentary piece this week for Bloomberg on the export of US technology jobs to Asia. The trend reflects the global movement towards Speed and Agility being the new drivers of innovation.

Like most of its competitors, Nokia was already outsourcing some of its R&D capabilities to its suppliers. The problem now is Apple appears to have taken this outsourcing trend to the next level and significantly reduced its R&D costs by engaging its loyal following of developers to enrich and enhance the product's basic capabilities at little or no cost to Apple.

Nokia isn't the only R&D icon that has been disrupted by Apple since 1997.

Sony's ongoing commitment to Innovation Leadership had defined the future of the Electronics Industry for more than 50 Years. From Magnetic Tape to DVDs, Transistor Radios to Walkmans Sony had consistently redefined how we create and consume electronic media by disrupting the established market leaders.

For example, the PlayStation Sony disrupted the game console industry by selling the revolutionary new gaming platform at a low-margin to secure market share. The profits came later from downstream sales on the high-margin games software that was developed by Third Party Developers. The revolutionary new model was so successful that by 2002 the PlayStation generated 60% of Sony's profits. Earlier in the decade Apple's iPod usurped the Sony Walkman as the portable music device. Now it is the turn of the iPhone and the iPad to disrupt Sony's portable gaming device (PSP) by turning the model on its head with a revolutionary new High Margin mobile gaming platform that has secured market share by flooding the market with Low Margin (i.e. Mostly Free) software.

So what does this mean for Nokia? Can it do what Apple has done? Does it have the R&D capability to disrupt the industry it has dominated for over a decade or will it suffer the same fate as Sony and allow Apple to render its platform obsolete?

For the past decade Nokia thought it was in the business of Connecting People. Today Nokia's believes its future lies in selling experiences.

"At Nokia, we're constantly thinking about the future. We spend our days envisioning a world that few can imagine but that we know is just over the horizon. We have developed a vision of how the physical world will fuse with the digital world in the future through mobile technologies."

In reality Nokia is still in the business of providing its customers with the gadgets to allow them to walk into a crowded room and say:

If you think that's cool then take a look at this!

Apple's revolutionary iPod, iPad and iPhone platforms are nothing more than blank electronic canvases that allow the customer to design their own mobile digital life style. The iPhone, just like the original Apple Macintosh, is an empty shell waiting to be populated by its owner. Facebook is pretty much the same - a blank electronic canvas that allows the customer to personalise their little bit of the web with the things that interest them today - be that Apps, Games or Content.

This is why, in the end, I don't believe there is anything innovative about the iPad. It's just Apple doing what Apple has always done well. Designing blank, dare I say plain vanilla "electronic" slates that allow everybody to project their vision into the vacant shell through the Apps, Wall Papers and Media they install onto the device. Think Apple Mac: Graphic Designer or Accountant, Video Editor or Journalist. Chemist or Music Composer. It all depends what software you installed. Fast forward 20 years and Think iPad. The device is the mirror for your personality. You load the Apps, Games and Media that defines who you are.

Nor then does it take a rocket scientist to predict that Apple will continue to bring revolutionary new plain vanilla electronic slates of varying shapes and sizes to disrupt other established markets in the future.