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Nokia and Schumpeter

Nokia and Schumpeter
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First Published: Tue, Feb 15 2011. 08 10 PM IST
Updated: Tue, Feb 15 2011. 08 10 PM IST
The recent travails of the world’s largest phone maker are a timely reminder that we still live in a Schumpeterian world.
Nokia has been losing market share to makers of smartphones such as Apple at the top of the market and cheap Chinese manufacturers at the low end. The squeeze has shaken the Finnish company to the very core. Chief executive Stephen Elop reportedly wrote in an internal memo that Nokia is “standing on a burning platform”. He later revisited the incendiary metaphor when he added: “We poured gasoline on our own burning platform”. The company denies any such memo exists. Nokia has now been driven into the welcoming arms of Microsoft, which itself has seen its market value overtaken by Apple.
At a time when the world quite reasonably worries about the power of large companies and the growing wealth of a new plutocracy, the Nokia case shows us that corporate power can be transient. Even overwhelming market share of the sort Nokia once had offers little protection to companies that cannot move with the times.
Joseph Schumpeter had warned that the sort of threat Nokia faces is the true face of competition in a capitalist economy, as against the textbook version of competition based only on price. “In capitalist reality as distinguished from its textbook picture, it is not (traditional) competition that counts but competition from the new commodity, the new technology, the new source of supply, the new type of organization,” he wrote in Capitalism, Socialism and Democracy, his classic work. Schumpeter said that this type of competition “strikes not at the margins of profits and the outputs of existing firms but at their very foundation and their very lives”.
These distinctions are often inadequately appreciated in public discussion and public policy. The sort of competition that Nokia faces at the bottom end of the market from Chinese mobile phone makers and those who source from them is the traditional war of attrition based on cost. The huge success of products such as the iPhone and BlackBerry is another matter altogether—a structural shift in a consumer market that blindsided the dominant player.
Large companies always struggle to survive over the very long term, and corporate mortality is quite high over the decades. It’s true even in India, where old industrial groups which dominated in the 1960s and 1970s have become irrelevant, even if they gamely hobble along.
Nokia itself showed that adapting to new circumstances is not always impossible. It was once a diversified conglomerate that had interests in everything from paper to footwear to plastics to consumer electronics. Like much of the Finnish economy, Nokia had to quickly adapt to the stagnation and subsequent collapse of the former Soviet Union, an important market.
Nokia saw early on that telecom liberalization and digitization of networks would open up a huge market. It sold most non-telecommunications businesses by 1995 and focused on the business that made it one of the world’s most recognized brands. Its inability to show the same strategic clarity in recent years shows that even a company that displayed a brilliant ability to adapt may not necessarily show the same agility in a different situation.
In a recent blog post on Nokia, economist Chris Dillow noted: “… for all their talk about flexibility, firms—especially large ones—are quite inflexible.” A big reason for this is described in a paper by Peter Rousseau and Boyan Jovanovic. A firm’s organizational capital, they say, has a particular vintage—it embodies the technologies that existed when it was founded. But there is a big danger that subsequent developments will render such capital obsolescent, and the firm will not be able to adapt. Companies, like societies, can be trapped by their own history.
Ironically, successful firms might be more prone to this than others—as past success breeds complacency, creates large pressure groups which are loath to change, and encourages the “not invented here” syndrome.
Schumpeter drew an important distinction between monopoly and big business. Many people use the two terms interchangeably. Schumpeter tried to correct this misconception. He argued that big firms could rarely protect monopoly profits in the long term. Big companies survive because of innovation and organizational agility rather than monopoly status.
It is interesting that the current global debates of corporate power and the super rich have not morphed into wider attacks on monopoly capital. Most countries do need antitrust regulation to prevent concentration of economic power in any company or cartel. Open markets also help in diffusing such power. But it is easy entry to challengers with new technologies, new business insights and new organizational methods that is often the most potent defence against concentrated economic power.
That’s the basic Schumpeterian truth: the most vibrant threat to corporate power in the long run comes from technical and organizational innovation.
Niranjan Rajadhyaksha is managing editor of Mint. Your comments are welcome at cafeeconomics@livemint.com
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First Published: Tue, Feb 15 2011. 08 10 PM IST