Nokia sold four in ten of the world's phones and still lost the smartphone

In January 2008 Nokia reported that it had shipped 133.5 million phones in the last quarter of 2007 and estimated its share of the global market at 40%. It had been the world’s largest handset maker since 1998, its phones were known for batteries that lasted, cases that survived being dropped and a distribution network that reached almost every country, and its Symbian software ran on more smartphones than any rival. Apple had announced the iPhone a year earlier. Google’s Android reached its first phone in the autumn of 2008.

The decline came fast. In February 2011 the new chief executive, Stephen Elop, sent staff a memo, soon leaked to the press, describing the company as standing on a “burning platform”, and Nokia announced it would replace its own smartphone software with Microsoft’s Windows Phone. In the first quarter of 2012 Samsung overtook Nokia as the largest phone maker, according to Strategy Analytics. In September 2013 Microsoft agreed to buy Nokia’s devices business and license its patents for 5.44 billion euros. Nokia today is a network equipment company, and phones carrying its name are made by HMD under licence.

Defences that turned into walls

Nokia was the best in the world at the job the market had given phones for a decade. Our books read its fall through the biases that had built the lead: an industry anchored on the idea of a “phone”, operators who bought and sold handsets on the same assumptions, and a market that rewarded conformity to them. As long as the category held, those habits looked like discipline. When the iPhone and then Android turned the phone into a pocket computer, the same habits slowed every response.

That is the uncomfortable part of being a category king. Every bias that makes a leader confident also makes the leader slow, and the two arrive in the same meetings. Volume, margins and market share all said Nokia was winning in 2008, and they were right about the category they measured.

The unit of competition changed

Elop’s memo put the shift in one line: “The battle of devices has now become a war of ecosystems.” Developers, app stores, services and advertising now travelled with the handset, and a customer choosing a phone was choosing all of it. Nokia’s moat had been built for the old unit: factories, logistics, retail reach and engineering for hardware. Those assets still worked. They no longer decided the purchase.

The 2011 decision to adopt Windows Phone was a bet on joining an ecosystem instead of building one, and it meant that the platform layer, the part of the offer customers were now judging, belonged to someone else. In our method a moat is only as useful as the field it protects, and a company that moves field has to ask which of its assets it can carry over and which it must build again. Nokia carried over its hardware and design, gave up its own software, and entered a field where two ecosystems already had the developers.

The news that never reached the top

A study published in 2016 in the Administrative Science Quarterly by Timo Vuori and Quy Huy, based on interviews with Nokia managers, found that shared fear among top and middle managers between 2005 and 2010 shaped what information travelled upward and how candidly the software problems were discussed. We have no inside view beyond that research. What it describes is a common mechanism: in a company that has always won, warnings about the category tend to arrive softened, late, or as requests for more resources inside the old plan.

This is why we set the triggers for changing course in advance, while the numbers are still good. A trigger written down in calm conditions (for example, the share of buyers who choose a phone for its apps) gets acted on without first having to win a debate against a record year.

The first question for a market leader is which of its strengths would become weights if the category moved, and how it would find out early. If you want that question answered before your own numbers start to turn, it is part of what we do.