SMASH

Suvi Nenonen, Kaj Storbacka, Kaj Erik Storbacka, Suvi Nenonen

• Publisher: Emerald Publishing Limited
• Year: 2018
• ISBN:
  9781787438392
• Topic: Business
• Subtopic: Business Strategy
• Index: Business

Stunningly, strategy has never adequately defined one of its central institutions, the market. Old playbooks got away with a hodgepodge of assertions, assumptions and approximations.
But the undeniable complexity of modern markets confronts us with the truth. Markets are elaborate, evolving ecosystems – think biology, not machinery. Today, strategy must embrace complexity or die.Recognizing markets as complex adaptive systems spells strategic implications. Notably, as markets are partly socially constructed, they can be reconstructed. And while they cannot be predicted or controlled, they can be influenced.
Rooted in the richness of market systems, SMASH traces the three main resulting shifts in strategic thinking: (1) from firm focus to context focus, where the relevant context is our definition of the market; (2) from competing and winning to value creation and cooperation; and (3) from analysis, prediction and planning to non-predictive strategizing and experimentation.
Nenonen and Storbacka weave these three strands together into a cohesive strategic framework – Strategies for Market Shaping. Market shaping strategies acknowledge that much of firm performance is explained by the markets where a firm operates. Crucially, strategic choices go beyond market selection, entry and exit; firms should actively seek to adapt the market to the firm instead of the firm to the market, and open up untapped value in the process.
Market shaping is not new. What is new is systematizing an actionable framework for understanding and shaping markets. And the good news: It does not take market power and resources, or intuitive genius, to shape markets to your own benefit. SMASH offers tangible strategies that savvy market shapers of any size can implement, making it a must-read.

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YOUR STRATEGY PLAYBOOK HAS EXPIRED

What is market shaping? And what, exactly, is “the market” anyway?

Stunningly, strategy has never adequately defined one of its central institution, the market. Old playbooks got away with a hodgepodge of assertions, assumptions and approximations. But the undeniable complexity of modern markets confronts us with the truth. Markets are elaborate, evolving ecosystems – think biology, not machinery. Today, strategy must embrace complexity or die.

Market shaping is the first strategy to embrace and exploit the truth about markets. It elegantly distils their complexity. And it shows how any firm can then turn strategy on its head – by adapting the market to the firm instead of the firm to the market, opening up untapped value in the process. The value market shaping unlocks defines strategy’s new “main chance.”

NOKIA: FROM HERO TO ZERO BY DOING EVERYTHING BY THE BOOK

In 2007, Finnish multinational Nokia was the darling of the global mobile phone market. CEO Olli-Pekka Kallasvuo smiled from the cover of Forbes magazine, and felt secure enough to dismiss Apple’s new offering, the iPhone, as a “niche product” which wouldn’t “in any way necessitate us changing our thinking”.¹ Few would have questioned him.²

Nokia kept notching up successes for several years, but remarks such as this came back to haunt it when everything seemed to go wrong at once and the company nosedived. In September 2013, the once-mighty brand sold its mobile phone business to Microsoft for 5.4 billion euros. A paltry sum, when only six years earlier Nokia’s annual operating income from the same business was over 5 billion euros. What reduced the uncontested market leader to a fire sale of its main business line?

The demise of Nokia, or more precisely Nokia Mobile Phone, is an epic saga, with many twists and turns over two decades before the final reversal. To grasp it properly, we need to analyze both its rise and its fall – both the “hero” and the “zero” chapters.³

Hero – Best Products and Most Efficient Supply Chain

Let us begin at the beginning. Nokia stepped onto the world stage as a key player in influencing the development of the Global System for Mobile Communications Standard. You’ll know it by its more household abbreviation: GSM. GSM paved the way to the second generation of digital mobile telephony – called 2G.

The first GSM phone call was made in 1991 on a network built by Telenokia and Siemens with a phone built by – you guessed it – Nokia. In 1993, Nokia became the only mobile phone manufacturer whose entire GSM phone range supported Short Message Service, or SMS. (SMS refers of course to “txts,” the add-on that became a killer app of mobile telephony and rewrote our language like a bad, vowel-less Scrabble hand in the process.) This, just a year after the first SMS message was sent. And as early as 1996, Nokia provided a smart phone with Internet connectivity: the Nokia 9000 Communicator.

The late 1990s and early 2000s were the golden years for the mobile phone manufacturers. Double-digit growth was spurred by the rivalry between the main players: Nokia, Sweden’s Ericsson, and Motorola from Illinois. By the mid-2000s, Nokia was on top. Success stemmed largely from its super-efficient supply chain, affordable and reliable phones, the fastest ramp-up process for the new mobiles (hugely important in a business with 18-month product lifecycles), and the widest range from which operators worldwide could select models for their local consumers.

In 2000, the market entered a transition stage. Over the next few years, 2G would gradually be phased out and 3G phased in. Put simply, whereas 2G brought mobile telephony from analog to digital, 3G deserves credit for bringing voice and data fully under the same standard. The growth rates of mobile phone users and Internet users, and a convergence of digital technologies, sent telco operators into a bidding frenzy, especially the Europeans. Operators spent over 125 billion USD on 3G licenses.

Nokia understood that 3G was the next big thing in mobile telephony and threw itself into this third generation hoping history would repeat. Certainly, the early days showed promise. In 2002, Nokia became the first mobile phone manufacturer to launch a 3G handset. The same year saw the first Nokia smart phone to sport a built-in camera: the 7650. The company followed this up in 2003 with its mobile game deck N-Gage, which combined a portable game console with a mobile phone. And Nokia’s first music phone hit the market in 2005.

Anecdotally, it also seems that Nokia’s engineers had showcased a touch-screen phone in-house as early as 2000,⁴ but the company halted development because its market research predicted consumers would prefer keyboards to touch screens. And you would trust your company’s consumer insight when it had researchers on the ground in every continent not inhabited primarily by penguins.

Yet, the 3G market was proving an unpredictable beast. In 2000, Nokia erred wildly with a forecast of over 300 million mobile phones connecting to the mobile Internet within two years. The true figure came in at just 1% of that. Sure, the 3G handsets were more expensive than their 2G predecessors, but this hardly explained the slow adoption. Something else was at play, and it was weighing down Nokia’s ascendancy.

What hid the downturn in Nokia’s fortunes due to 3G was that, during the transition, 2G of course continued to run alongside it. Luckily, Nokia’s 2G handsets were still selling like hot cakes. That was perhaps why Kallasvuo could make his airy dismissal of the iPhone in January 2007, for that year was the zenith of Nokia’s fortunes thanks to the continuing, albeit waning, success in its 2G market. Consolidated turnover of 51 billion euros, operating profit of almost 8 billion euros, cash reserve of nearly 7 billion euros, market share of 37.8%⁵ of the global mobile phone market, hefty investments in R&D (11% of turnover) and the most efficient supply chain in the industry.

Zero – Expiry of Nokia’s Strategy Playbook

How, then, to explain the nosedive and that humiliating sale to Microsoft six short years later? You’ve probably heard some of the conventional accounts. It was Icarus syndrome: Management grew arrogant, flew too high, crashed, and burned.⁶ It was consumer preferences: underestimating the importance of aesthetics and a smooth user experience à la Apple. It was sluggishness in updating the operating system: hanging on to the old-fashioned Symbian for too long, and failing to develop MeeGo fast enough. It was hesitation introducing the touch screen. And so on.⁷

None of these explanations withstands scrutiny. For starters, Nokia’s management stayed substantially unchanged, and always took cutting-edge advice from top-drawer recruits and world-class management consultants. More’s the pity, but Nokia itself didn’t much change.

Consumer preferences weren’t to blame either. Until 2011 Nokia was still the clear market leader in mobile phones, with 23.8% market share.⁸ And the rival who eventually overtook it was Samsung, not Apple. Finally, if you disaggregate, the company’s decline started well before the iPhone débuted.

We believe conventional explanations for the demise of Nokia Mobile Phones miss the forest for the trees. They look for answers at the firm level: in failures of Nokia’s leadership, or failures in product-related competitive advantage against industry rivals, causing loss of product market share.

If you stand back, a bigger picture emerges – one defined by what we’ll expound as complex markets. Recast thus as a tale of two markets, Case Nokia Mobile Phones reveals a firm with essentially constant strategy tracking a rise during the 2G market boom, then a slowdown after 3G arrived, and eventually a fall as 2G phased out and 3G took over. Could there have been something radically different about the 3G operating environment that stopped Nokia from successfully replaying its winning strategies from the 2G environment? Was there something about the 3G market for which the company and its strategy were fundamentally unprepared?

Stephen Elop was recruited from Microsoft to succeed Kallasvuo as CEO. In the notorious “burning platform” memo of 2011,⁹ Elop confided what he thought had gone wrong. The memo was never meant for public consumption, but leaked to the press. To our mind, the core of the memo is a completely new definition of the market – both Nokia’s own market and markets in general: “The battle of devices has now become a war of ecosystems, where ecosystems include not only the hardware and software of the device, but developers, applications, ecommerce, advertising, search, social applications, location-based services, unified communications and many other things. Our competitors aren’t taking our market share with devices; they are taking our market share with an entire ecosystem. This means we’re going to have to decide how we either build, catalyze or join an ecosystem.”

Elop saw past product markets and viewed markets as ecosystems of interdependent actors. He saw that these systems go beyond mere products or “devices”; that their dynamics dwarf uncoordinated, unilateral company strategies such as Nokia was following; and that such systems can be deliberately shaped – or in Elop’s words “built” or “catalyzed” – as well as just joined in a me-too fashion.

Nokia had contributed to the emergence of the 2G market by actively engaging – together with competitors – in the creation of the GSM standard. However, the 2G market was less complex than 3G. It required relatively few actors to create value to the end users: the handset manufacturers, the producers of the telecommunication networks and the companies operating those networks. The GSM standard used for 2G meshed these neatly together: The consumer could rely on getting her calls and SMS messages regardless of the brand of her mobile phone, her and her friends’ telco operators, and the manufacturers of their networks.

But the 3G standard introduced data into the picture and made the market ecosystem inherently more complex. What kind of content and data-based services should be made available to 3G phones? Who would create that content? How would the IP rights to this content be enforced? How could existing content, such as television shows, be rendered compatible with mobile phones and their small screens? How should operators charge their customers for data? How would operators even measure data usage?

Nokia tried to apply the old, 2G market rules (such as first mover advantage and focus on the quality and numbers of devices) to the new 3G market game. However, the more complex, volatile new market had taken the old market playbook past the point where it could function at all, even as an approximation; it revealed the limits of the old book and its old view of markets.

What really stands out in all this is that Nokia did far more right by the traditional¹⁰ strategy playbook than it ever did wrong. The failure of Nokia was nothing less than the failure of the playbook itself. Nokia went from hero to zero precisely because it did everything by the book – a book that had passed its use-by date.

Nokia’s Expired Playbook May Be Your Book!

Why should that concern you? Because we’re talking here about essentially the same playbook that is still, today, repeated as variations on a theme between the covers of the myriad strategy, management and marketing titles on your bookcase and ours. Roughly, that book says: Position your firm to the best market, hopefully a growing one, then plan and execute a long-term strategy to adapt the firm to that market by cultivating a competitive advantage, and so compete for the holy grail of market share.

Now, the traditional playbook is a useful volume as far as it goes, with some genuine insights, but it is flawed and becoming less workable by the month. In particular, it is increasingly compromised by its inherited picture of markets. For the traditional book is based on a theory about markets that is fatalistic, incomplete, often circular, and at times plain contradictory. That theory was always flawed at a deep level in the ways just listed, just as the systemic theory that we’re going to replace it with was always more correct. We’ve said that in the mobile telephony context, 3G took the old playbook past the limits where it could function. But exactly how did the old view continue to pass as viable for so long, and how does it continue to do so today?

We see several explanations for the persistence. First, particularly in simple and stable contexts, it contained just enough truths to be of some use. Second, its weaknesses were not stress-tested often or severely enough to throw the whole theory into question – market-shaping exceptions like Apple under Steve Jobs could be put down to freaks of nature. This situation lasted while the majority of markets remained fairly static and their workings approximated mechanistic laws of cause and effect. By contrast, 3G and other 21st-century markets with their exponential network effects have assumed a positively ecological level of complexity and global connectedness: Think biology or sociology, not machinery. Third, no really well-developed and validated alternative theory was circulating in the mainstream. Fourth, the now-emerging theory of markets as complex systems is just that: more complex. It should be no surprise, then, that managerial applications wishfully cleaved to the simpler status quo. We all secretly wish for easy solutions to wicked problems, don’t we? Nowadays, as the markets of the 21st century increasingly resemble 3G more than 2G in complexity, unpredictability, and malleability, the old theory and the playbook based on it will serve you less and less well and leave you more and more exposed to the increasing number of companies that have intuited ecosystems thinking, the way Nokia was exposed to Apple. And in the book you’re holding, of course, we seek to supply the missing alternative theory and step-by-step advice on how to put it into practice. We’re aiming to make the intuition systematic and learnable. Like so often in life, the first step in learning the right way to do things is to unlearn the wrong way – the old playbook. But before we weed out and unlearn the bad theories and practice one by one, let’s sneak a peek inside that – so far exclusive, intuitive – club of the market shapers and makers. These are the outlier firms. The exceptions that prove the rule. The few which have somehow managed to build their strategies on rock, not sand. Unsurprisingly, most club members are either helmed by the founding entrepreneurs or at least deeply entrepreneurial in their culture. They’re also more likely to be found in disrupted industries. Often they are the disruptors themselves. More specifically, market shapers and market makers draw on a cohesive set of characteristics and strategic plays of 14 designable market “elements” which we’re going to hang our academic and consulting hats on and which you in the field can apply. At the heart of that set, of course, is market-level thinking. It’s the level of strategizing beyond company, competition and product which Nokia CEO Stephen Elop glimpsed too late: “building, joining, or catalyzing” entire “ecosystems”; adapting the market, not to the market.

Now, you’ll already have spotted an obvious candidate for such a positive case story: that “freak of nature,” Apple. We’ll take Apple’s story as read. But to mix things up a bit let’s sample another sector. This sector lies beyond pure digital wizardry, where the rubber literally hits the road: urban transport and the brilliant, brazen bad boy on the block, Uber.

UBER: TRANSFORMING TRANSPORT BY INTUITIVE MARKET SHAPING

If Nokia was the model student following all the rules of the doomed old school, Uber Technologies Inc. doesn’t just represent the new school; it’s unschool. The online ride-sharing company, with its game-changing app that lets riders hail, track, and pay for a cab online, and its alleged nonworkforce of mere “partner” drivers, is shaking up market institutions and flouting the rules of the old taxi-scape. The very word Uber, slang drawn from the German for super, breathes unbridled ambition. It’s a born market shaper – and one of the most radical.

Co-founding entrepreneurs Travis Kalanick from California and Canadian Garrett Camp dreamt up the concept one snowy winter’s night in Paris in 2008. The pair were frustrated trying to hail a cab during some down time from a LeWeb conference, but their minds were on the taxi problem back in their city of residence, tech hub San Francisco. They kicked around ideas like splitting the costs of a Mercedes S-class and a driver between themselves before cottoning on that they could tap existing private car owners. UberCab (as originally christened) was founded in 2009. It went into beta launch in 2010, road tested in New York and later that year débuted in San Francisco. Swatting down fines and cease and desist notices for operating like an unlicensed taxi company, Uber (with newly streamlined name) and its budget option UberX soon spread through the United States, Europe, and Asia. The funding snowballed with the popularity. It now operates in over 60 countries.

Characteristically for market shapers, Uber’s founding entrepreneurs are still at or close to the helm, with Kalanick and Camp as CEO and chair, respectively. And it’s hard to imagine a more entrepreneurial motto than Kalanick’s “Always be hustling.” Uber’s disruptive, too, from tip to toe. But the company made it to the magic 50-billion-dollar valuation faster than Apple or even Facebook. How did they pull it off?

Back in Paris, Camp had muttered that you ought to be able to hail a ride at the tap of a button. Now, the button-tapping was clearly going to involve an a...