fast follower

I received a few questions from Shirley Siluk of NewsFactor as a follow-up to my post on the trajectory of successful companies.

1. Do you foresee any hope for a turnaround for Samsung? If so, where do its best opportunities lie?

The smartphone business was a huge opportunity for Samsung and they took full advantage of it. Unfortunately, it’s a difficult business to stay on top of. The list of victims in that industry is quite long and there have been no long-term winners. Samsung’s operating model seems to be to invest as a ‘fast follower’ filling in the market after it’s established while leveraging capital intensive components synergies. That has also worked for them in consumer electronics (at the expense of Sony and other Japanese vendors). If the modus operandi does not change then their turnaround will depend on the creation of new opportunities/categories. Wearables may be such an opportunity but it may not be as big as the phone business. ((The graph shows estimates of smartphone shipments for a select number of vendors.))

2. What has contributed most to Samsung's decline? Which competitors are posing the greatest threat?

The fast follower strategy belies its own limitations: it implies a transience or impermanence in strategy. In a fast follower strategy it’s only a matter of time before late followers eat into the business, similar to the way that the fast follower ate into the innovator. Chinese vendors are poised to take more share. The way I said it in 2011 was that I saw in Huawei ((I did not anticipate the Xiaomi and Lenovo entrants which are also doing very well.)) what Samsung was five years earlier. It’s easier for the low-end providers to move up-market and not at all easy (in terms of loss of margin) for the higher end to move down.

3. You mentioned the pattern of commoditization in all of Samsung's markets -- what would be the best way around this?

Commoditization is largely unavoidable. The way to survive as a business is to ensure you create new businesses or solve new problems. One hope that springs eternal is that through a “brand” a maker can ensure long-term margin survival. That did not help Nokia, Sony, or Microsoft. Brand is only valuable if it carries meaning and often that meaning becomes a fading product. So the short answer is that Samsung needs to create new categories or businesses. The challenge for them is that they need to control the platform and service infrastructure. These are currently out of their control and I’m not quite sure how they can regain that control.

I was wondering if you had any followup comments you could offer about Samsung in light of the announcement today that it's developed a faster 60 GHz wifi technology -- do you think this kind of technology, if it's everything Samsung says it is, could provide the kind of corporate turnaround momentum Samsung needs?

Certainly not. This is a sustaining improvement in a technology. What Samsung needs is a disruptive improvement. A disruptive improvement implies a new business model. Put another way, it means that Samsung needs to invent a new way of making money.

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Postscript: One problem with this prescription is that it's considered impossible to execute and those who try to operate as repeatable innovation companies are punished with deep discounts and condemned as being "hits driven" rather than annuities. Woe befalls the manager who seeks this route.

Kenney Ho, a staff reporter from Korean newspaper The Chosunilbo (The Chosun Daily) sent me a set of delightful questions.

According to Kenney, The Chosunilbo "has a history of 90 years, has been the most dominant, and influential paper of all time in Korea. It is the No.1 newspaper company in Korea with more than 1.8 million circulation, firmly holding the largest market possession. The paper is recognized Asianwide, where there are many readers in Japan and China."

-You said "All mobile device vendors experiencing losses are not likely to really recover". Even though, it wouldn't mean that the employees, executives of Nokia has completely nothing in hands for recovery. If you are the CEO of Nokia right now, What are your steps to make Nokia recover its deficits?

My statement was based on the historic data which shows that 14 phone vendors have either exited the business or lost their independence during the last decade. No vendor that has reached a period of prolonged loss making has recovered. These are just observations and it's possible that Nokia may be the first to recover. However, going by the patterns of the past, it would be very unlikely. When I thought about the reasons why companies have not been able to recover I came to the second observation about the way phones are sold. Once a brand reaches a point where it's considered "risky" for distributors and operators to range they tend to defer purchases which leads to a spiral of continuing losses and more damage to the brand. The market amplifies "distress" and recovery becomes impossible.

If I were the CEO of Nokia I would set course for turning the company into a new business. I would approach the market asymmetrically and not try to compete directly with the other vendors. I would look toward services, platforms and software solutions and de-emphasize hardware.

-Many experts say that because Nokia dominated phone making industry in the 2000s, they maintained a corporate culture of complacency, which led them to decline. Do you agree with this? If you agree, Can you point out the examples of Nokia's complacency?

Complacency would mean that Nokia would not invest or try new things. This is not quite right. The company invested in software, services and platforms. It tried many new things and had a large R&D budget. It was the leader in mobile software for many years. There was, however, a culture of arrogance about their position. This meant that they did not think the basis of competition would change. They thought they were too big to fail. They did not challenge the core business model of hardware-first and try to find an internal disruptive business.

-Experts note that Nokia should have reacted directly to Apple's iPhone appearance at 2007. What should have Nokia have done at that time?

The iPhone showed that software and experiences matter more than operator relationships. Nokia did a lot of research on user experiences and software but when the decision came to implement the ideas, the constraints of hardware and logistics and operator preferences took precedence and the software was compromised. What Nokia needed to do is build product around software not software around the hardware and the market.

-Since Apple's iPhone appeared in 2007, Samsung took a Fast-follower tactics which made them successful, which Nokia could not. Do you think Fast-follower have advantage over first-mover?

I don't consider first-mover or fast-follower to be accurate descriptions of strategy. Success follows from innovation and only from innovation. There are various forms of innovation: there is new market creation, new business models, low cost or distribution innovation. Nokia tended to create low cost innovations which opened new, low-end markets. Apple created a new market for browser-based devices and for app-based experiences. These were enabled by an ecosystem that benefited from integration.

Samsung implemented a portfolio strategy with a large number of devices and price points which allowed them to find market niches that could be exploited. This was a distribution innovation. Each strategy has advantages and disadvantages and each strategy is usually linked to company core priorities and processes. There are times during a technology cycle when one strategy is better and another is worse. This is why companies find themselves successful and then fail. Their processes don't match the technology adoption cycle.

For example, in the PC market there is little potential for new experiences tied to an integrated device (except for tablets) and hence there is little growth opportunity for an Apple-like approach. The innovation that matters in the PC market is mostly cost reduction. Nokia was doing cost reduction at a time when voice products were commoditizing. Cost reduction does not work when the basis of competition is new experiences and new business models. As smartphone hardware commoditizes, it's unlikely that Samsung will have an advantage unless is goes to a low-cost approach and enters into direct competition with low-end devices.

-Can you predict the 'Big 5' in handset industry 10years from now? Many people think the list will include Apple, Samsung. Who else might be on the lists?

There is no guarantee that Apple or Samsung will be the top vendors 10 years from now. I expect Chinese brands to become dominant in market volumes. I expect online service companies like Amazon, Baidu, Facebook to create new platforms which and have their own devices, perhaps in large volumes. I expect new input methods (like voice) to create new opportunities and perhaps new platforms and ecosystems. I expect Google may make a lot of money. One thing is for sure, being a hardware-oriented company without software and services and platforms and ecosystems is a sure path to becoming disrupted.

-Nokia was the leading company in Finland. What are the reactions of Finland towards Nokia's downfall?

People tend to blame each other for failures and this is the main discussion topic in Finland: who's to blame. The failure of a company is rooted in complex decision processes which usually take years to run their course. It's quite futile to lay blame on persons, especially since the same persons were celebrated for their wisdom at another point of time. At the same time as Nokia is failing however, another Finnish startup is celebrated world-wide and about to go public: Rovio, the maker of Angry Birds. It will be bigger than Nokia. Finland should make sure there are more Rovios to come.