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Our storyFew companies have Nokia’s storied capacity for transforming, developing new technologies and adapting to shifts in market conditions. From its beginning in 1865 as a single paper mill operation, Nokia has found and nurtured success in several sectors over the years, including cable, mobile devices, paper products, rubber boots and tires, and telecommunications infrastructure equipment. Nokia’s sector-by-sector success over the years has mirrored its geographical rise: from a Finnish-focused company until the 1980s with a growing Nordic and European presence; to a bona fide European company in the early 1990s; and onto a truly global company from the mid-1990s onward. With the acquisition of Alcatel-Lucent in 2016, we further deepen and widen our global reach. Nokia has been producing telecommunications equipment since the 1880s – almost since telephony began. A storied pastWhen Finnish Engineer Fredrik Idestam set up his initial wood pulp mill in Southern Finland in 1865, he took the first step in laying the foundation of Nokia’s capacity for innovating and finding opportunity. Sensing growing pulp product demand, Idestam opened a second mill a short time later on the Nokianvirta River, inspiring him to name his company Nokia AB. Idestam’s sense of endeavor would continue to prevail in the different phases Nokia would take. In the 1960s, Nokia became a conglomerate, comprised of rubber, cable, forestry, electronics and power generation businesses resulting from a merger of Idestam’s Nokia AB, and Finnish Cable Works Ltd, a phone and power cable producer founded in 1912, and other businesses.
Deregulation of the European telecommunications industries in the 1980s triggered new thinking and fresh business models. In 1982, Nokia introduced both the first fully-digital local telephone exchange in Europe and the world’s first car phone for the Nordic Mobile Telephone analog standard. The breakthrough of GSM (global system for mobile communications) in the 1980s introduced more efficient use of radio frequencies and higher-quality sound. The first GSM call was made with a Nokia phone over the Nokia-built network of a Finnish operator called Radiolinja in 1991. It was around this time that Nokia made the strategic decision to make telecommunications and mobile our core business. Our other businesses, including aluminum, cable, chemicals, paper, rubber, power plant, and television businesses were divested. By 1998, Nokia was the world leader in mobile phones, a position it enjoyed for more than a decade. And still, the business and technology worlds would continue to evolve, as would Nokia. A shifting industryIn 2007, Nokia combined its telecoms infrastructure operations with those of Siemens to create the Nokia Siemens Network joint venture. We later bought Siemens’ stake in NSN in 2013 as the business was emerging from a successful strategy shift and the reality of what Nokia calls a Programmable World of connected devices, sensors and people was starting to take shape. In 2011, we joined forces with Microsoft to strengthen our position in the highly competitive smartphone market. Three years later, we accepted Microsoft’s offer to buy most of Devices & Services, with the deal closing in April 2014. Nokia emerged from the transaction with a firm financial footing and three strong businesses – Nokia Networks, HERE maps and Nokia Technologies – focused on connecting the things and people of the Programmable World. Nokia’s transformation was not done. The HERE digital mapping and location services business, an arena we entered in 2006, was a key pillar of Nokia’s operational performance. But in 2015, the Nokia Board held a strategic review of the business in light of plans to purchase Alcatel-Lucent. The result was a sale of HERE to a car company consortium in a deal that closed in December 2015.
Our reputation as an innovation powerhouse has been bolstered by the addition of Bell Labs. It joins a future-focused business backed by thousands of patent families, a reflection of Nokia’s innovation pedigree which has produced a huge array of benefits for consumers, business and society as a whole. The acquisition helps us shape the connectivity and digitalization revolution before us – the Programmable World – in which many billions of people, devices, and sensors are connected in a way that opens up a world of possibilities. These can make our planet safer, cleaner, healthier, more sustainable, more efficient and more productive. Nokia’s long history is marked by change and reinvention. We’ve always been excited by where technology will lead us as we seek to expand the human possibilities of a connected world. We will continue to innovate, reimagining how technology works for us discreetly while blending into, and enriching, our daily lives. STRENGTHS The biggest strength of the company is their brand name. Many consumers often opt for Nokia more than any other brand because of the reliability, durability, and creativity their phones provide. Most of Nokia’s highly qualified personnel have teamed up with Microsoft’s experts as a part of the acquisition deal. The phones provided by Nokia have a much higher re-sale value compared to other mobile phone brands. Many of Nokia’s products are easy to use and are usually coupled with a variety of handy accessories. Products offered by the company are available in all price ranges. WEAKNESSES The company, though, is often criticized for poor after sales services. Took a long time to enter the highly productive and booming smartphone market. As a result, the company lost a lot of its once huge market share. Some of Nokia’s products are not affordable for middle and lower class consumers, which often affects their searches negatively. The Finnish mobile company has made comparatively lower profits due to drop in sales that result from tough competition. According to statistics, the company’s profits have fallen by 7% in the second quarter of 2014. There are slumps in the company’s development with its Windows Lumia range of smartphones because of constant competition from rivals Android and iOS. STRATEGIES BEING EMLOYED Major elements of the new strategy include: - Plans for a broad strategic partnership with Microsoft to build a new global mobile ecosystem; Windows Phone would serve as Nokia's primary smartphone platform. - A renewed approach to capture volume and value growth to connect "the next billion" to the Internet in developing growth markets - Focused investments in next-generation disruptive technologies - A new leadership team and organizational structure with a clear focus on speed, results and accountability "Nokia is at a critical juncture, where significant change is necessary and inevitable in our journey forward," said Stephen Elop, Nokia President and CEO. "Today, we are accelerating that change through a new path, aimed at regaining our smartphone leadership, reinforcing our mobile device platform and realizing our investments in the future." Nokia plans to form a strategic partnership with Microsoft to build a global mobile ecosystem based on highly complementary assets. The Nokia-Microsoft ecosystem targets to deliver differentiated and innovative products and have unrivalled scale, product breadth, geographical reach, and brand identity. With Windows Phone as its primary smartphone platform, Nokia would help drive the future of the platform by leveraging its expertise on hardware optimization, software customization, language support and scale. Nokia and Microsoft would also combine services assets to drive innovation. Nokia Maps, for example, would be at the heart of key Microsoft assets like Bing and AdCenter, and Nokia's application and content store would be integrated into Microsoft Marketplace. Under the proposed partnership, Microsoft would provide developer tools, making it easier for application developers to leverage Nokia's global scale. With Nokia's planned move to Windows Phone as its primary smartphone platform, Symbian becomes a franchise platform, leveraging previous investments to harvest additional value. This strategy recognizes the opportunity to retain and transition the installed base of 200 million Symbian owners. Nokia expects to sell approximately 150 million more Symbian devices in the years to come. Under the new strategy, MeeGo becomes an open-source, mobile operating system project. MeeGo will place increased emphasis on longer-term market exploration of next-generation devices, platforms and user experiences. Nokia still plans to ship a MeeGo-related product later this year. In feature phones, Nokia unveiled a renewed strategy to leverage its innovation and strength in growth markets to connect the next billion people to their first Internet and application experience. New leadership team, operational structure
The Nokia Leadership Team, previously the Group Executive Board, will consist of the following members: Stephen Elop, Esko Aho, Juha Akras, Jerri DeVard, Colin Giles, Rich Green, Jo Harlow, Timo Ihamuotila, Mary McDowell, Kai Oistamo, Tero Ojanpera, Louise Pentland and Niklas Savander. Alberto Torres has stepped down from the management team, effective February 10 to pursue other interests outside the company. The renewed governance will expedite decision-making and improve time-to-market of products and innovations, placing a heavy focus on results, speed and accountability. The new strategy and operational structure are expected to have significant impact to Nokia operations and personnel. New company structure
Smart Devices will be responsible for building Nokia's leadership in smartphones and will be led by Jo Harlow. The following sub-units now in Mobile Solutions will move under Smart Devices: - Symbian Smartphones - MeeGo Computers - Strategic Business Operations To support the planned new partnership with Microsoft, Smart Devices will be responsible for creating a winning Windows Phone portfolio. Mobile Phones will drive Nokia's "web for the next billion" strategy. Mobile Phones will leverage its innovation and strength in growth markets to connect the next billion people and bring them affordable access to the Internet and applications. The Mobile Phones unit will be led by Mary McDowell. Markets will be responsible for selling products, executing compelling marketing and communications, creating a competitive local ecosystem, sourcing, customer care, manufacturing, IT and logistics across all Nokia products. It will be headed by Niklas Savander. Services and Developer Experience will be responsible for Nokia's global services portfolio, developer offering, developer relations and integration of partner service offerings. Tero Ojanpera will lead the Services and Developer Experience unit in an acting capacity. NAVTEQ, an integral part of Nokia's location and advertising business, will be headed by Larry Kaplan, and continue as a separate reporting entity. The CTO Office will be responsible for Nokia's technology strategy and forward-looking technology activities, including Nokia Research Center. It will be headed by Rich Green. Design, responsible for Nokia product and user experience design, will be led by Marko Ahtisaari. The CFO Office, responsible for all financial activity, will be headed by Timo Ihamuotila. Corporate Development, responsible for driving implementation of Nokia's ecosystem strategy and strategic partnerships, will be headed by Kai Oistamo. Corporate Relations & Responsibility, responsible for Nokia's government and public affairs, sustainable development and social responsibility, will be led by Esko Aho. Human Resources will be led by Juha Akras. Legal and Intellectual Property will be led by Louise Pentland. Nokia Siemens Networks continues in the Nokia Group as a separate reporting entity. PRIMARY REASON FOR BEING THE GLOBAL BRAND SMW13 started today in London and other 7 cities around the world. SMW founder & CEO, Toby Daniels, kicked it off with a great interview with Craig Hepburn, Global Director, Digital & Social Media at Nokia, longtime friend and one of the men that helped drive and inspire Nokia from its toughest moments to the Microsoft acquisition. Between 2008 and 2013, a lot has changed in the IT industry that has affected our society in ways nobody has anticipated. New players, new technology and an incredibly more demanding audience forced everyone to challenge themselves. That deeply affects the mobile industry, too. Nokia lost their longterm #1 position, while still making incredibly good hardware. So they doubled down on mission, partnerships, and more importantly, on building a new relationship with their customers. We asked Craig what challenges they had to face in this period of time, how they reorganized themselves to turn around a potentially dangerous situation, and how Nokia found a new way for the company to adjust to the change of times. The answer is easy but not immediate: they focused on product and rebuilt their image from scratch. From the overarching strategical approach, embracing social and digital in the company as a whole (top management included!), investing in the info structure, redesigning their marketing strategy, changing their entire mindset — to the more tactical things like putting feeds of social networks on screens on the walls of their HQ, connecting with VIPs, creating strong advocacy programs, building the app ecosystem, and yes, partnering with SMW, of course! The shift in thinking, in behavior and in mindset, really moved the needle for Nokia. The Instagram case is one example of how they put these principles into place. The absence of Instagram from the WindowsPhone has been a huge pain point for both consumers and Nokia. So they put themselves out there, approaching the problem in a very public, transparent way. They invested in the ecosystem and brought the app to WindowsPhones (well an unofficial app, but approved by Systrom). There’s still a common misperception that WindowsPhones does not have a strong ecosystem. And that might have been true in the past. But we took a look at what key apps are missing now and we honestly couldn’t find any. As Craig pointed out 90% of the big apps are now on Windows Phones. A new era So where is Nokia heading now? The best manufacturer marries a strong and powerful software house, and the possible outcomes are not hard to see. The Lumia 1020 is an awesome device, and people who tried it loved it. And, have you seen the “imitation is the best for of flattery” campaign? Like the Oreo Tweet it went viral because it was genuine. In Craig’s words “we didn’t anticipate that [..] and we hope that more of this stuff will happen.” And that’s just the start. Nokia’s problem was to getting the device in people’s hands, which any marketer knows costs a great deals of money. Miscrosoft will make that possible. This is a great opportunity and a new start. In the Game of Phones, you win or you die. Or you make alliances. Together, these 2 houses are pretty powerful. MC DONALD’S HISTORY As the Great Depression strangled the mill towns of their native New Hampshire, a pair of young brothers headed west with dreams of making it big as Hollywood producers. The only work that Richard and Maurice McDonald could ever land in the film industry, however, was pushing around movie sets, and the small cinema they opened in suburban Los Angeles fizzled. Thirty-seven-year-old Maurice and 31-year-old Richard had to wonder if their hopes of becoming millionaires by the time they turned 50 were just delusions as they opened a tiny drive-in restaurant in San Bernardino, California, on May 15, 1940. Little did they know that their new restaurant would be the meal ticket to fulfilling their American dreams. The original McDonald’s at the corner of 14th and E Streets, just a few blocks from historic Route 66, bore little resemblance to today’s ubiquitous “golden arches,” beginning with the menu. Hard as it may be to believe, the future fast-food giant started out by serving up barbecue slow-cooked for hours in a pit stocked with hickory chips imported from Arkansas. The feature item at McDonald’s Famous Bar-B-Q was a barbecued beef, ham or pork sandwich with french fries for 35 cents. The eclectic 25-item menu included everything from tamales and chili to peanut butter and jelly sandwiches to ham and beaked beans. The 25-cent “aristocratic hamburger” sounded like an offering better suited for Burger King. The octagon-shaped drive-in barbecue joint lacked inside seating and sported a few stools at its exterior counters, but female carhops in majorette boots and short skirts served most customers who pulled into its parking lot. As the brothers’ business caught on, sales topped $200,000 a year, and as many as 125 cars filled its parking lot on weekend. After World War II, drive-in competition in San Bernardino grew, and the McDonalds discovered something surprising about their barbecue restaurant—80 percent of their sales came from hamburgers. “The more we hammered away at the barbecue business, the more hamburgers we sold,” said Richard McDonald, according to John F. Love’s book “McDonald’s: Behind the Arches.” The brothers closed their doors for three months and overhauled their business as a self-service restaurant where customers placed their orders at the windows. They fired their 20 carhops and ditched their silverware and plates for paper wrappings and cups so that they no longer needed a dishwasher. According to Love, they simplified their menu to just nine items—hamburgers, cheeseburgers, three soft drink flavors in one 12-ounce size, milk, coffee, potato chips and pie. “Our whole concept was based on speed, lower prices and volume,” Richard McDonald said. Taking a cue from Henry Ford’s assembly line production of automobiles, the McDonald brothers developed the “Speedee Service System” and mechanized the kitchen of their roadside burger shack. Each of its 12-person crew specialized in specific tasks, and much of the food was preassembled. This allowed McDonald’s to prepare its food quickly and even ahead of the time when an order was placed. All hamburgers were served with ketchup, mustard, onions and two pickles, and any customers who wanted food prepared their way would have to wait. “You make a point of offering a choice and you’re dead,” Richard McDonald told the Chicago Tribune in 1985, “the speed’s gone.” According to Love, the first customer at the newly reopened McDonald’s was a 9-year-old girl ordering a bag of hamburgers. The retooled restaurant struggled at first, though, and fired carhops heckled the brothers. Once McDonald’s replaced potato chips with french fries and introduced triple-thick milkshakes, however, the business began to take off with families and businessmen drawn by the cheap, 15-cent hamburgers and low-cost menu. With labor costs slashed and revenue growing to $350,000 a year by the early 1950s, the McDonald brothers saw their profits double. They had already established a handful of franchises in California and Arizona by the time a milkshake mixer salesman named Ray Kroc visited San Bernardino in 1954. Kroc couldn’t understand why the McDonalds could possibly need eight of his Multi-Mixers, capable of making 48 milkshakes at once, for just one location until he set eyes on the operation. Seeing the potential in the business, the salesman quickly became the buyer. Kroc bought the rights to franchise the brothers’ restaurants across the country, and in 1955 he opened his first McDonald’s in Des Plaines, Illinois. The relationship between Kroc and the McDonald brothers grew very contentious as the aggressive salesman and the conservative Yankees had different philosophies about how to run their business. Kroc chafed at the requirement that he receive a registered letter from the McDonalds to make any changes to the retail concept—something the brothers were reluctant to do. “It was almost as though they were hoping I would fail,” Kroc wrote in his 1977 autobiography, “Grinding It Out.” In 1961, Kroc purchased the company from the McDonald brothers for $2.7 million. While the name of the chain may have been McDonald’s, the face of the restaurants quickly became Kroc’s. Plaques with his likeness were mounted on the walls of many franchises with a description of how “his vision, persistence and leadership have guided McDonald’s from one location in Des Plaines, Illinois to the world’s community restaurant.” The brothers who lent their name to the business and pioneered the fast-food concept faded to the background. After selling the business, the founders kept their original San Bernardino restaurant, to the annoyance of Kroc, which they renamed “Big M,” with the golden arches on the marquee sharpened to form a giant letter “M.” To gain his revenge, Kroc opened a McDonald’s around the block that eventually drove the brothers out of business. The original McDonald’s was torn down in the 1970s and replaced by a nondescript building that housed the San Bernardino Civic Light Opera before becoming the headquarters of another fast-food chain, Juan Pollo Chicken, which operates a small unofficial museum with McDonald’s artifacts inside. The McDonald brothers may finally get their Hollywood moment next year in the feature film “The Founder,” although Kroc, played by Michael Keaton, is slated to be the lead character in the story of the global growth of McDonald’s. STRENGTHS McDonalds’ (MCD) low-cost menu “Dollar Menu & More,” has been instrumental in driving customer traffic according to Bloomberg News. However, such low cost items cannibalize sales from other higher priced items and compromise profit. Wendy’s (WEN) also offers a similar menu called the “Right Price Right Size Menu.” Burger King (BKW) calls their’s the “King Deals Value Menu.” McDonald’s purchases raw materials required for menu in bulk, which helps achieve economies of scale and eventually benefits the customers through such low cost food options. First mover advantage McDonald’s has pioneered restaurant chain expansion. It enjoys this advantage all across the world in the restaurant industry. It’s represented in the PowerShares Dynamic Leisure and Entertainment ETF (PEJ) and the PowerShares Dynamic Leisure and Entertainment ETF (PBJ). Except in China, McDonald’s dominates the restaurant chain business across the world according to the Financial Times. The first mover advantage has equipped McDonald’s to reap benefits because it holds the largest market share of ~17%, according to IBISWorld. WEAKNESSES McDonalds’ food has continuously been in the limelight for its quality and how it affects health. Documentaries such as “Super Size Me” garnered further negative publicity for McDonald’s. Unfortunately, this has also cast a shadow on McDonald’s trying to move to a healthier menu—a trend towards that consumers have started to embrace. Similar offerings McDonald’s and its competitors, like Burger King (BKW) and Wendy’s (WEN), have very similar offerings. This puts a pressure on pricing and retention efforts. STRATEGIES BEING EMPLOYED McDonald's MCD, +1.18% has had a rough year so far, declining 15% since the ball dropped in Times Square. Same-store sales for the global, quick-casual, restaurant chain have been under pressure. Third-quarter earnings missed analysts' consensus estimates by four cents. For the entire company, the October sales decline of 1.8% marked the first decline in sales for McDonald's in nine years. Total sales in the U.S. declined for the month of October by 1.4% and same-store sales slipped by 2.2%. This lackluster performance may have been the reason that the head of U.S. operations, Jan Fields was replaced with another longtime McDonald's executive, Jeff Stratton, a few days ago. Part of the disappointing earnings I believe can be traced to the strength in the dollar versus currencies in its areas of operation. I would also state that McDonald's was facing some very strong same-store sales from 2011, thus presenting a high bar to jump in 2012. Coming into 2012, I realized that McDonald's would be facing a challenging operating environment beyond the same-store sales issue, such as: a slowdown in its fast growing Chinese market; a certain European recession; and, a lack of new menu changes on the horizon. As a result, I sold about 20% of my holdings in the company's stock at just over $100 in January of this year. This was the second time I have taken a bit of the stock off the table. I have held the stock personally and for clients since the selloff on Christmas Eve day 2003, the day of the “mad cow” scare, and continue to do so. So now that I have discussed what McDonald's has endured in 2012, I want to focus on what McDonald's can do to get back on track. Consider this an open letter to Donald Thompson and his management team. Here are my four suggestions. 1. GET INTERNATIONAL We already know that McDonald's has extensive operations throughout the world with a large presence in China, Japan, Australia, Europe and Latin America. The Latin American operations are all under the control of a regional franchisee, Arcos DoradosARCO, +4.63% So I am not saying that McDonald's needs to expand internationally. Rather it needs to satisfy the yearning for international tastes at home here in the United States. The company made a strategic decision in 2006 to divest itself of its majority holding in Chipotle Mexican Grill CMG, +2.04% In retrospect, I think that McDonald's should have kept that operation. Redesigned menus met the demand for healthier quick service meals in the last decade by introducing salads, more chicken dishes, wraps and other items. Now I believe McDonald's needs to spice up its menu by developing new offerings or differentiating its existing menu items to incorporate Tex-Mex/Latin; Oriental; Indian and Russian flavors in a more aggressive and permanent manner. 2. VERTICAL ACQUISITIONS As I mentioned before, I thought that the company should have held its investment in Chipotle. Similarly, I believe that McDonald's didn't give Boston Market enough attention and patience. McDonald's also provided the seed money for Coinstar's US:CSTR Redbox movie and game rental kiosks. As you can see, the company wasn't afraid of investing in new or interesting concepts in the past. I think that it is time that McDonald's uses its strong balance sheet and cash flow to do so again. Specifically, I think that McDonald's should expand into small concepts with an eye on invading the strategic territory of Starbucks SBUX, +1.61% and Panera BreadPNRA, +1.01% Here are some suggestions for acquisition: Au Bon Pain, Atlanta Bread Company; Einstein Noah’s Bagels US:BAGL ; and, Caribou Coffee US:CBOU All of those companies, whether private or public, could be bought for an insignificant sum in McDonald's terms. These are all small operations with growth potential that McDonald's can fund expansion from its existing resources. However, the company needs to remain patient and focused on these endeavors. 3. SOCIAL NETWORKING McDonald's, for the most part, relies on traditional marketing means to attract its diners. However, I am afraid that it is not using the medium by which the adolescent/tween/teen demographics are in contact with. The company has to develop a social networking strategy and implement it pronto. 4. GAS STATION INTEGRATION McDonald's has been successful at building store-within-a-store locations such as those at Wal-Mart WMT, +0.45% However, the company has been beaten to the punch by Subway and Dunkin' Donuts DNKN, +0.24% who have aggressively added mini-locations at gas stations across the country. It is time for McDonald's to roll out its McCafe concept as stand-alone units in gas stations, train stations, air terminals and other smaller locations. As for investing in McDonald's stock, here is what I have recently suggested to my long time readers of my newsletter, The LakeView Restaurant & Food Chain Reportwww.restaurantstox.com and Wall Street All-Stars www.wallstreetallstars.com. If you own it, hold it. If you sold some stock as I suggested earlier this year when it hit $100, you might want to add some back. If don't own any you can start an investment position right now. The company's 3.6% dividend is not only safe, but, on a cash basis, will be increased by 7% to 10% on an annual basis. Furthermore, the company has a very large stock repurchase program in effect averaging between $2 billion and $3 billion a year.
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