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Nokia in a Leader's Trap

Recently, Nokia announced that its market share was likely to fall off somewhat in the future because it was refusing to enter into a price war with others in its industry who are discounting. Nokia has decided to stand apart from the discounters in the marketplace. (See the Symptom & Implication, “Large competitors are maintaining price levels as smaller competitors discount” on StrategyStreet.com. Unfortunately for Nokia, these discounters include the #2 cell phone maker, Samsung, and the #4, LG Electronics. (See the Symptom & Implication, “Price wars are spreading in the industry” on StrategyStreet.com.) The outlook on this decision is grim.

We have seen this same situation many times before. We call it the Leader’s Trap. (See the Perspective, “The Leader’s Trap” on StrategyStreet.com.) In a Leader’s Trap, an established industry competitor maintains a price umbrella and cedes share to a discounting competitor in the mistaken belief that customers will stay loyal to the established competitor by paying a premium for his product. Over time, the company in the Leader’s Trap not only loses share, but also sees prices fall to a level near the prices established by the discounting competitor.

Nokia has announced its intention to take market share only when the company believes that the share will be sustainably profitable in the long-term. This sounds good, but won’t work. The market share the company surrenders today generates cash and, probably, profits. The major players who are discounting their prices today are, therefore, becoming stronger with the addition of more revenues and cash flows in a difficult market. On the other hand, Nokia can only become weaker. It loses cash flows. It broadcasts to all customers in the marketplace that its prices are high. How does Nokia win in this situation?

The answer: it does not. Nokia is unlikely to succeed where previous leaders, such as GM, IBM, AT&T, and many others, have failed. The Leader’s Trap always weakens the company holding the price umbrella and strengthens all the competitors underneath the umbrella. Nokia is sure to regret this tactic.

Posted 10/6/08

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