Gaining Strength As The Volume Leader

Based in Finland, Nokia's single most profit- and revenue-generating region is Europe. But the company's global strategy has been likened to that of Honda decades ago. Honda started by focusing on developing markets with small motorbikes. As the economies of such countries emerged and people could afford cars, they were already loyal to Honda.

Nokia has followed that same model. It sells phones in more than 150 countries. In most of those countries, it is the market leader. Nokia has a real knack for forging regional strategies based on the overall needs of consumers. But Nokia has filled its coffers by understanding the growth dynamics of specific emerging markets. Soren Peterson, Nokia's senior vice president of mobile phones, understands that concept more than anyone. He spends a great deal of his time studying the needs of consumers in emerging markets. And for the most part, these consumers need cheap phones.

Recognizing the need to make less expensive cell phones, Petersen is on a crusade throughout his company. Although it has been a bit of a battle, Petersen has convinced others that Nokia can make as much profit as the competition without charging more than $72 retail per phone. As a result, Nokia has relentlessly pursued the goal of bringing down costs and making phones less expensive.

Petersen cites an example of one cost-cutting tactic that sparked a chain of events at Nokia. While on a visit to Kenya, he stopped by an "excessively rural storefront," where he noticed that all products were displayed in plastic bags. When he asked the merchant where the boxes and manuals had gone, the man replied, "Make good fire."

Petersen quickly realized that packaging for many areas of the world barely needed to "last the journey." Packaging changes resulted in a savings of $147 million a year. "These numbers alone lit up a whole new drive within the business for these kinds of things," Petersen reported. Illustrating the magnitude of the large-scale manufacturer, Petersen explained that one cent in cost represents a million dollars for Nokia.

Among other notable discoveries for emerging markets, Petersen recognized that although many such customers spend a significant portion of their salary on one device, many of them will never know how to read or write. This led to an icon-based address book rather than the usual text-based version. Now, millions of people around the world identify their contacts by simple pictures, such as a soccer ball or a flower. And once it realized that many people in less-developed countries share their phones with up to a half-dozen other people, Nokia also added multiple phone books to its devices.

Because cell phone demand is growing so rapidly in emerging nations, Nokia will do well if it just holds its current market share in such countries. In India, for example, millions of people each month are buying their first cell phone. But Nokia isn't just holding on in such countries. In China alone, Nokia sold more than 70 million phones in 2007, a 38 percent increase over the previous year and a 35 percent share of the Chinese market. China also represented one-sixth of Nokia's unit sales.

Nokia shipped 150 million phones to emerging markets in 2007. For every five phones Nokia sells, one of them is an entry-level device, up from one in ten only two years ago. Most of those entry-level phones end up in developing countries. So whereas Europe accounts for 39 percent of Nokia's net sales, Asia, Latin America, Africa, and the Middle East account for 56 percent. The United States, with its market structure driven by the network carriers, produces only 5 percent of Nokia sales. With cell phone volume growing faster in developing regions, the gap will likely widen even more in coming years.

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