It’s tough being #1

Jill Alvidrez, MBAPeimin Chi, EECSNipul Chokshi, MBASarang Dalal, BioESteve Sinha, EECSRahul Shah, EECS Nancy Suh, MBA

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It’s Tough Being #1

No, really, it is! Overview of US Handset market

Value Chain & Market Characteristics Outlook & Key Decisions Recommendations

Opportunities/Risks

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Handset Market Value Chain

Consumers don’t buy directly from Nokia

ServiceProviders ConsumersComponent

VendorsHandsetMakers

NokiaMotorolaEricssonSiemensSamsungOthers

MotorolaPhillipsTexas Instr.QualcommCypressRF MicrodevicesOthers

AT&T WirelessSprint PCSCingularVerizon WirelessVoicestreamOthers

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Handset Sales Volume (in mil)

23

34

52

72

87

0

10

20

30

40

50

60

70

80

90

1997 1999 2001E

US

Merrill Lynch Research, April 2001

106

167

280

410

474

050100150200250300350400450500

1997 1999 2001E

World

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Nokia US Market Share

Samsung

Audiovox

Kyocera

Motorola

LGIC

Denso SanyoNokiaOthers

Motorola

Ericsson

Mitsubishi Other

Nokia

Source: Info-tech Trends

64.4% of GSM/TDMA market

Only 2.9% of CDMA market

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Key marketing strategy Respond to consumers’ preferences

Lindholm team: engineers, graphic designers, psychologists, sociologists, and a theater director to study human behavior

Well-designed, high-quality, technologically advanced…all in a user-friendly package

Year 1992: CEO sheds chunks of Nokia business to focus on mobile telecommunications

Pricing Strategy Lower price on most popular models Avoid price wars

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Nokia’s Outlook: Two Extremes

WORST BEST

End of growth phase

Mobile data services difficult intro continues

No emergence of single standard

Commoditization of handset

Voice traffic will cont. to be robust

GPRS “always on” will be key enabler and driver of data-driven services

Maintain cost leadership

Sustain brand equity (e.g., Nike, Intel)

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Key Decisions Facing Nokia

Push and pull marketing First-time and replacement

markets Consumers and businesses (TBD) Voice and data markets CDMA and GSM/TDMA markets

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Resist Commoditization by Push and Pull Marketing

CustomerNokiaRetailer

Service Provider

Employer

PUSH

PULL

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Global: New vs. Replacement Phones

68% 61%61%

59% 48%32%

39%

39%

41%52%

0

50

100

150

200

250

300

350

400

450

500

1997 1998 1999 2000 2001E

Ph

on

es in

Mill

ion

s

Replacement

New

Source: Merrill Lynch April 2001

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Focus on Replacement Market

Replacement market increasingly important Penetration rate grows Replacement cycle is shortening

Replacement determined not only by demand but also by supply Reasons to trade-in: size and battery life People are more savvy, they want more

features and accessories

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Risk Factors

Economic slowdown Slowing subscriber growth

Replacement market weaker than anticipated Still mostly driven by voice; data services

not rich/easy enough to use yet to encourage replacement buys

Average holding time Globally just under 2 years (Merrill Lynch 2001)

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Data-driven Services: Opportunities to partner with Content Providers

Demonstrate value of a “feature-rich” handset

Partner with AOL/Amazon/Yahoo/MSN to deliver their content over NOK handsets

Note that SPs have to agree to the scheme to allow users access to content

Probably the “long-shot” opportunity

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Long-term: Focus on CDMA market in US

CDMA represents another growth opportunity MOT lost market share to NOK b/c they were slow on

converting from analog to digital Establish market share leadership in CDMA

sales Current market leader is Samsung (21.7%) Nokia’s share is 2.9%

Aggressively pursue partnerships with CDMA service providers – Sprint PCS Verizon Wireless

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Conclusion Resist commoditization!

Continue building brand Understanding customer needs Forging industry alliances

Bring new products to market Replacement market Data-driven

Long-term: Shift technology from TDMA CDMA

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Appendix

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US Market Penetration

20

25

31

40

48

05

10152025

30354045

50

1997 1998 1999 2000 2001E

Source: Merrill Lynch, April 2001

Perc

en

t

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Competition

Hurting in general, especially handsetsKey chip supplier to industry

Emphasizing Internet/WAPPartnership w/Sony

Secure phonesPartnership w/ Toshiba

Partnerships attempt to overtake Nokia in 3G race All competitors have weaker TDMA sales than Nokia

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Nokia’s Road to market leadership

Alahuhta begins

branding

Industry benchmar

ks

Ring, covers, elliptical

edge designs

1st GSM on a

Nokia

Segmentation by product

linesNokia becomes market leader

1989

1990

1995

1998

2000

1992

CEO sheds non-mobile

phone/network business

units

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Nokia’s Current Strategy:Technology & Design

Year 1990: Industry Benchmarks Nokia 2110 ~ Large screen, clean design, easy UI

Year 1995: Frank Nuovo, Chief Designer Product Design with a Competitive Edge

Customizable rings and covers Elliptical Designs

Year 2000: Effective Segmentation Nokia 6250 ~ Rugged & durable Nokia 8890 ~ Sophisticated metal case Nokia 3300 ~ Colorful models Watching customers in action, in traffic, at work,

etc.

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Nokia’s Current Strategy: The importance of the brand

“Is the handset industry following in the footsteps of the PC industry?”

Nokia argues no.

“We’re selling branded consumer goods, not a [commodity].”

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Nokia’s Current Strategy: Brand – Connecting People 5th most valuable brand Value Proposition

Cutting edge communications technology designed around individual human needs

Differentiation Positioned as fashion accessory

Personification of the brand “young, sexy, sophisticated, hip and

generally ‘with it’.” Ericsson is an “austere, conservative,

middle-aged Swedish engineer”.

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Nokia’s Current Strategy: Tactics

Aggressive advertising and promotions Cut through clutter with exclusive

sponsorships Brand the ring High profile events

Club Nokia Customer “care and feeding”

Classlink Programs Focus on youth and education

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Nokia Leverages competitors’ failures Motorola

Analog lost to Nokia’s early digital phones Late to leverage partnerships with service

providers Ericsson

Weak branding price wars Widely regarded as unfashionable (…but has

recently partnered with Sony, whose brand is associated with strong design)

Contract manufacturing to Flextronics, Singapore