In 2009, Nokia was the 5th most valuable brand in the world. Their phones were an object of desire everywhere. One year before I bought a used N80, and even with few scratches, it looked so much better than the competing phones. Fast-forward to 2014 and Nokia dropped to 98th place in the ranking. Two other phone makers dominated the market: Apple and Samsung, the first and seventh-most valuable brands of the planet respectively. Why did Nokia fail?
More than half of all profits from the mobile-phone industry went to Nokia in 2007. In 2013, they were in such a critical situation that Microsoft came to the rescue.
Nokia had a hardware-centered business model and underestimated the software revolution caused by the birth of smartphones. Apple came with the iPhone in 2007, to which Samsung quickly responded with their Galaxy series powered by the open-source Android. Meanwhile, Nokia rowed against the tide, betting on the superiority of its hardware to compensate for software deficiencies.
Nokia was a prisoner of its past success, and with the dawn of a new era, they hesitated too long to adapt.
Why Did Nokia Fail? The myth of Innovation and Adaptation as mutually exclusive
The legendary CEO from Intel, Andy Grove, instructed that entrepreneurs should be aware of the knowledge vanguard in their areas. By being aware of the industry innovations, it is possible to resort to them if needed. Few industries may disappear in the coming decades, and both innovation and adaptation can save you from a demise. The demise that comes to mind when we think of why did Nokia fail.
While innovationawareness is desirable, it should not exclude the prospect for adaptation. Business graduates may think that the two terms are mutually exclusive. Others, on the opposite side, might think they mean the same thing. Both are wrong, because while they are different, both can be part of the ethos of the same enterprise.
Innovation is often disruptive, sparked by creativity, and validated by frequent testing with a high failure rate. Adaptation, on the other side, is evidence-based, sparked by experience and knowledge of different scenarios and has a lower failure rate.
With those two definitions in mind, it is easier for an entrepreneur far from home to be innovative instead of adaptive. When I moved to Poland to open my business, I had plenty of ideas I wanted to test, but very limited knowledge of the terrain to design different scenarios. There is a way to overturn this disadvantage.
Commit not with an idea only, but with a profitable business that pays for itself.
Especially in the technology world, the widespread promotion of innovation shadows adaptation. Often people incorrectly attribute the success from previous business models to pure innovation instead of adaptation. Few examples:
- Before becoming a leader in internet streaming, Netflix was a DVD-by-mail rental company. Their idea of delivering entertainment with convenience was always the same, but adapted to the progress of internet bandwidth.
- With the demise of analogic photography, Kodad almost disappeared after more than a century of activity. It re-emerged later serving her core customers (photographers and film-makers) differently: with hardware and digital tools for image licensing.
- During a half-century, UK residents used the Yellow Pages publications to consult local phones and addresses. With the Internet, the publishers went online and turned into Yell.com, the UK’s leading online business directory.
- On its way to global expansion, Starbucks did not bet always in the same successful formula used in the USA. They developed taste profile analyses to adapt their products to each region, to the point that in China they adopted ancient tea house practices intrinsic to the local culture.
Reading the above examples, you may think it is all about innovation instead of adaptation. But see how none of the companies mentioned changed their target customers, or how the reason behind their products. It is not a case of completely changing their business, but adapting to new environments (like Starbucks in China) or technological changes (like Netflix, Yellow Pages, and Kodak).
This same adaptation that brought prosperity for the above examples (and to Samsung), lacked at Nokia. The Finnish company insisted that design and hardware superiority—with all the heavy investments to acquire it – could protect them against the mobile app revolution.
The idea of “we invested too much to change our ways now” translates into one of the most dangerous business traps: the sunk cost fallacy.
Forget Sunk Costs. Be Like Water.
Imagine you moved to a new state on the other side of the country. You just took a loan to refurbish an old building, turning it into state-of-the-art rental apartments to host MBA students from the nearby university. It is a campus city, and you are the only prime-accommodation supplier, so profits are near guaranteed.
One day, you receive the news that the state university will move all the executive programs to the capital, leaving only undergraduate courses in your city. Undergrads have less money, so either you lower your rental prices for unprofitable levels, or give back the building and close your rental venture.
While the second decision may sound the most logical, a fair share of the entrepreneurs would still take the first, using two justifications:
1. It might happen that after some time, the university decision is reversed and the MBA courses return, together with the customers.
2. The money and time invested are too high to just give up.
While the first justification, if based on evidence, is acceptable, the second is not logic. It means to keep losing every month just to not “lose” the initial amount invested. Even this phrase that I just wrote makes little sense, because this thought—called the sunk cost fallacy—does not make sense either.
Still, executives and even governments take decisions based on this fallacy, which we also name it The Concorde Fallacy. The name comes from the insistence of the British and French governments to fund the unprofitable operations of the supersonic airplane for years, just because it was expensive to develop it.
Conclusion – Why did Nokia fail
Nokia, the Concorde, or our fictitious rental-apartment business are examples of fallacies and biases blocking the adaptation to new environmental, economic, and technological realities.
There is a quote useful (and thought-provoking) for entrepreneurs facing changes and seeking adaptation in the daily struggle with competitors.
Be like water making its way through cracks. […] If you put water into a cup, it becomes the cup. You put water into a bottle and it becomes the bottle. You put it in a teapot; it becomes the teapot.
This quote summarizes why did Nokia fail. It could be from Warren Buffett when he changed his 3-decade long rule and invested in Apple Inc. It could be from Apple themselves when the company explored the still uncertain mobile-software business. Or even from Starbucks, when they invested in tea shops to expand to China.
The author, though, was the martial artist Bruce Lee.
Levi Borba is CEO of expatriateconsultancy.com and a best-selling author. You can check his books here. This article is based on a chapter of the book Starting Your Own Business Far From Home: What (Not) to Do When Opening a Company in Another State, Country, or Galaxy.