Pankaj Saharan October 2012

Consider the following aspects of your target company

Structure of the demand and the factors affecting the demand The economic drivers of the production decisions including the scale of economics Structure of the supply and the factors affecting the supply

 Nokia creates differentiation in devices based on different price point segments. Pricing is heavily dependent on the competitor prices e.g. Smartphones segment is typically have a price bracket (400-600). Demand is different for different device segments depending on geographical region, local taxes, distribution chain etc. Marginal revenue for a smartphone (high segment) is greater than a low end phone. There is no perfect competition among different players in mobile phones market and is not oligopoly either even though there are small number of big players.

Nokia shipped 83.7 million handsets worldwide in Q2 2012, down -5% annually but up +1% sequentially. Demand for mobile phone handsets is expected to grow even more in future. Typical demand curve of Nokia looks like:

Nokia tries to capture multiple price points on the overall demand curve of mobile phones. The different price points are used for differentiation among mobile phones for targeted set of consumer segments. Example: 600 phone is smartphone for developed markets and 100 phone is a low-end feature phone for growing markets.

Demand for Nokias phones depend on following factors:

The price point of each phone The price of substitute goods (e.g. laptops, PDAs, tablets etc.) The price of complementary goods (e.g. plastic covers, accessories etc.) The level of advertising expenditure ( on phone +complementary and substitute products). Customers disposable income e.g. value of Handset cost as % of GDP/capita External macroeconomics factors e.g. inflation, IT boom etc. Consumers tastes and preferences The cost and availability of credit.

Consumers expectations
Changes in population Advertising expenses (e.g. Nokia did firework marketing during Lumia phones launch for first time in US) + relationship (e.g. With mobile phone operators, distribution channels etc.)

The following are necessary for demand analysis of mobile phones of Nokia: Sales forecasting Production planning Cost Analysis (per segment) and Financial planning Pricing strategy Advertising costs Resource and Inventory Management

1200 Price

1000
800 600 400 200 0 0 50 100 150 200 250 Devices in millions

Demand Smartphones Supply Smartphones Demand Featurephones Supply Featurephones

Total Revenue of Smartphones (if sold at Eq. Point.) = 600 (Price) * 100 million (Quantity) Total Revenue of Featurephones (if sold at Eq. Point )= 300 (Price) * 150 million (Quantity)

While analyzing production decisions of Nokia, the first thing taken into consideration is the structure of the market in which Nokia is operating which is determined by:

At Nokia, the physical relation between various inputs and outputs are analyzed, which in Economics is termed as Production Functions Like other companies, Nokias sample production function takes into consideration three important factors and tries to optimize the combination to create most production:
Q = f (L,C,R, .... ) where L -> Labour, C -> Capital, R -> Raw material

the number and size of the firms competing with Nokia in the market the ease with which firms may enter and exit the market the degree to which firms' products are differentiated the amount of information available to both buyers and sellers regarding prices, product characteristics, and production techniques.

Diminishing rates of return is avoided by calculating and analyzing MP and AP. In Nokia, there is continued Agile Transformation which is focusing on improving the existing development processes by removing the slag times, increasing AP & MP.

Automation of production processs e.g. validation & verification (quality) using new technology aim at reducing long-run average cost of production

Source: Nellis & Parker, Principles of Business Economics 2nd Edition

Nokia invests heavily to obtain Increasing returns to scale Nokias main internal economies of scale factors are:
Labour -> Nokia values labour unions and local rules regarding labour wages, safety, development etc. R&D -> Nokia has history of investing in R&D, also in production environment. New ways to automate production is just one way. Capital -> Even during downward share value and hard economic times, Nokia still maintains good cash flow for investment. Diversification -> E.g. Nokia does this by differentiating against prices, customer segments, regions, operator requirements etc. Product Promotion -> E.g. Nokia does this by multiple marketing techniques, brand value, relationships etc. Distribution optimization -> E.g. Nokia does this by creating good relationships with buyers and sellers, operators, online stores etc. Complimentary products -> E.g. Nokia invests heavily in producing world class accessories for the phones which increase the brand value in addtion to shifting the overall demand curve by their price regulation). Procurement -> E.g. Nokia does the partnerships, deals with multiple vendors.

From my point of view, main factors are: Internal:

- Management: Nokia is criticized by many analysts of having multiple layers of management in the organization structure and silos-based working environment which hinders productivity, accountability, responsibility, communication etc. to name a few. This results in increasing long-run average costs.

External:

Nokia has laid off huge number of employees during recent times e.g. Shutting down of Salo factory. Due to labour and government pressure, the company has to pay big packages for the labour force.

Lower prices

Increase in total output Learning curve

Reduced costs Increased production efficiency

Economies of Scale

Important factors Nokias condition of supply today are:

Cost of production: If the price of an input increases, the cost of the output will increase, and, other things held constant, profits will decrease. Nokia will then have to decide if shifting part of its resources and effort to other products will improve its wellbeing. Technology: Production costs are determined not only by the prices of inputs, but also by technology. Technology represents the knowledge of how inputs (such as labor, raw materials, energy, and machinery) can be combined to produce the product. If this knowledge increases so that people find cheaper ways to make the same output, then, other things held constant, profit increases and we expect sellers to respond by producing more.

Prices of other products: Because we have defined cost as what must be given up to get something, the prices of other goods that Nokia could produce and sell must be part of the calculation of the cost of production e.g. tablets, e-commerce store etc.

Changes in consumer expectations: Nokia always try to analyze and predict changing consumer behaviour to take supply increase/decresase decision. Competitiveness of market structure: Mobile phone market is red-hot at the moment with huge competition among top players for market share and it is one of the most important factors concerning the supply requirements. Changes in Market size: Supply of mobile phones is directly proportional to the rate of market size growing in a particular region.

Source: Nellis & Parker, Principles of Business Economics 2nd Edition

Our supply chain consists of around a hundred direct suppliers for hardware, components and parts, and ---- hundreds of software suppliers. We also work with thousands of indirect suppliers providing services and equipment needed for our operations. Our global supply chain begins with raw material extraction and processing, ending in the manufacturing of components and final product assembly. There are typically four to eight supplier layers between Nokia and any mining activities. Our supply chain is spread around the world as it needs to deliver to our own production sites as well as to our offices worldwide. As we operate our own global manufacturing network, most manufacturing is done in-house complying with our strict social and environmental requirements. This also means that our first tier supplier line starts only after production.

Source: http://www.nokia.com/global/about-nokia/people-and-planet/impact/supply-chain/supply-chain/

Source: http://www.springerimages.com/Images/RSS/1-10.1007_s10842-011-0107-4-0