On the MIX website, Henry Chesbrough has offered an insightful analysis of Nokia’s corporate woes and Steven Elop’s ‘burning platform’ memo. He writes that Nokia’s problem is far more fundemental than simply needing to improve execution or develop some new handset models. Nokia has fallen into a 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.
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.
The Meaning of Words
As much as I love the analysis, I don’t like the words.
For me, creating a commodity where none previously existed is a source of compeitive advantage, not a negative to be avoided. The term commodity trap sounds like Nokia is the only active agent in the market but the reality is that other players changed the terms of engagement on them.
Regardless, Nokia has, indeed, missed a trick. Two tricks actually.
While it was asleep, contract manufacturers made the fabrication of complex and high-quality products a commodity business. As Chesbrough correctly notes this trend has eroded Nokia’s competitive advantage and their position in the market. Any move they make, the ‘fast followers’ in the market can emulate quicker than Nokia can innovate again. They are building a commodity and they need more than just another great design to escape the commodity end of the market.
Ironically, at the other end of the market, Apple and Android have also commoditized the market, just a different market.
Yes, they are selling premium hardware but the handset market has always been heavily subsidized by telecom providers in exchange for long-term contracts. The real money in handsets has always been in services. For a longtime, this has essentially been voice calls but, with the rise of the smart phone, data services are increasing important. First, Apple and then Android essentially commoditized application development in a way Nokia never managed. Apple and Android have made the mobile data services market explode.
By including a usable browser and making app installation plug-and-play, suddenly anyone could build a data service. There really isn’t that much the iPhone does that you couldn’t achieve on the Nokia N95 but the amount of effort and development pain involved simply made it pointless. The pain outweighed the utility until Apple made it easier.
So, has Apple really thought of their business like a service, not a commodity?
I don’t think so. Apple is an incredibly secretive business and is generally dismissive of its customer’s opinions. They aren’t famous for consulting their customers about product direction or having an open approach to the developers and music publishers in their marketplace. They are a product company. They just make great products and even though the products are expensive. These products completely commoditized the data services market. Mobile applications became accessible to a mass market. They were no longer the perserve of large corporations.
So, sometimes creating a commodity isn’t a a trap but a disruptive innovation. Nokia just got the wrong end of the stick.