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Electronics Manufacturing – M528

Nokia’s Relationships, communication is the key.


The aims of the report and necessary relationships

This report is intended to show how Nokia’s relationships with three different partners affects it success in the marketplace and cost of its products. Further than this it should also be shown how the relationship with Nokia affects its business partners and how if at all the four different businesses have had to evolve in order to make their relationships effective and successful. Nokia has relationships with its suppliers and retail outlets who will be selling their product. Some of the most important suppliers to Nokia are the companies which provide storage (mobile phone “memory”), screens, buttons, software and various other hardware components. For the suppliers, Nokia is forced to search through many different competitors selling similar products and make a judgement based on cost of the product, reliability of the business and suitability of the product for their purpose. The companies that Nokia choose to supply them must be capable of meeting Nokia’s demand, and form an important link in the market chain. Nokia must have cost and quality in the forefront of their mind when choosing a new supplier to provide them with their essential products.

Other relationships include that of partners that assemble the product and retail outlets that are supplied by Nokia and sell the products provided by Nokia on to the end user. The assemblers Nokia use must have the correct facilities for manufacturing, along with the capabilities to meet Nokia’s demand. It is also beneficial to Nokia if both the suppliers and manufacturers have the ability to respond to changing demands put upon them. These are some very different types of relationships for Nokia, and are all essential to the continued success of the Nokia business. Nokia does a large amount of the assembly for themselves, but has recently joined Siemens in a partnership which allows a vast improvement in Nokia’s ability to meet demand for assembly of mobile phones. This joining of large companies has proved very effective in the past, forming new companies such a Sony Ericsson, which have a far greater advantage in the marketplace. Nokia’s relationship with Siemens has resulted in some of the assembly areas of the two companies merging together, effectively creating a new business called Nokia Siemens.

For the various retail outlets that Nokia supplies the relationship is quite different. Nokia may have some say on the types of features that should be included with their latest products, along with the requirements of the product (if it has video calling, GPRS or is tri-band). Nokia may also have some input of the deals that can be done with the phones, and may possibly have some input over free minutes with some retailers. The main difference in the retail relationships are that the retailers dictate the demand for the product, and Nokia may have to adjust accordingly. This would have a knock on effect on the other partners to Nokia, especially the suppliers to Nokia.

Nokia’s position in the marketplace, the types of relationships that are involved and how they have contributed to Nokia’s success

Nokia is a company that was started long before mobile phones hit the market, and became leader in this market shortly after mobile phones took off. Nokia has an estimated market share of 36% this year, with net sales increasing from 9.5 billion in the first quarter of 2006 to 9.9 billion in the first quarter of 2007 (Nokia, 2007, Quarterly and annual information). The table below sourced from Nokia (2007, Quarterly and annual information) shows that Nokia sells their mobile phones all across the world, so this begs the question of how a company that has no more than a handful of retail outlets manages to sell billions of dollars worth of mobile phones all around the world.

Worldwide Sales

As stated in the summary for Nokia’s ongoing success it is necessary for Nokia to have business partners that are able to Supply Nokia with essential components for the products. It is essential for them to also have relationships with companies that can assemble their products and retailers that can sell their products to the mass market. The main questions asked are why does Nokia need these relationships and why does Nokia not do these tasks itself?

It is important to know the answer to the later question before looking into the answer to the first question. Nokia could quite easily expand into the component, assembly and retail sectors, so it is not a case of Nokia not being able to provide these services for itself, but its unwillingness to. For some product lines Nokia does indeed produce some of the components, usually assembling part of or all of some of the phones being produced. Nokia has even opened up some Nokia phone shops in some of the large cities around the world, however a majority of these services are provided for Nokia by its business partners. Nokia does not fully enter these markets because it is not profitable or sensible for it to do so. In order for it to be able to correctly retail its products it would have to spend large amounts of money advertising its new products to the general public. As well as this it would individually need to find a service provider for each of the phones it sells, and may need to provide such companies with large amounts of money in order to use their network. All of these problems are dealt with by Nokia’s business partners, meaning that a reduced risk is involved for Nokia in this area. In the area of component supplies Nokia would have to either invent new technologies suitable for their products, or would have to buy licences for existing technologies in order to be able to produce the components for their products. This would not only be a costly venture but also a risky venture too.

As for manufacturing the product, Nokia does do this entirely for itself for some of its lines, but for some of the lines that are more popular it is necessary for them to contract out the work. This is more down to a necessity for meeting the demand, however it would be very costly to have sufficient facilities to meet any demand, but which were idle for large amounts of the time. Nokia’s latest partnership with Siemens is looking to address assembly issues, providing Nokia with the abilities to fully assemble its products. Nokia is hoping that this partnership will reduce costs whilst improving Nokia’s abilities. Added to all of the above reasons are the co-ordination problems and sheer logistics that would be involved in managing a network of such large proportions. This is why Nokia prefers to sub-contract some of the workload, as well as sharing the risk with their business partners. This has meant that when Nokia has faced problems such as in the March 2000 incident in the Philips semiconductor plant in Albuquerque (Economist, 2006, When the chain breaks) where the supply chain has been compromised Nokia was able to adapt accordingly.

What Perlos does for Nokia

This partner provides Nokia with the essential plastics that are necessary for creating the casing, buttons and various other plastic components essential for the construction of the mobile phone. This is a very competitive market, unlike the market for most non-plastic items, where Nokia-agreed pricing is negotiated with the suppliers for these parts (Renstrom, 2000, Nokia's Texas site connects with suppliers). Perlos has supplied telecommunications housings to Nokia in Europe since the early 1980s, and has recently followed Nokia to Texas in order to stay close to Nokia’s manufacturing process. The main reasons for the move were logistics and cost, as it was almost impossible to deliver from Europe due to freight and other costs (Renstrom, 2000, Nokia's Texas site connects with suppliers).

This shows that Perlos has a strong relationship with Nokia, which is necessary for the continued success of Perlos. Nokia streamlines its suppliers as well as monitoring the suppliers closely. It does this by constant communications with the suppliers, as well as by monitoring the output of the suppliers and delivery times. This ‘self awareness’ of Nokia allows them to adapt quickly to changing situations, especially if the suppliers are compromised in any way. In one instance one of Nokia’s suppliers had a problem at their main factory, and due to Nokia’s quick action and constant monitoring of the situation they were able to notice when the problem was escalating and respond accordingly, in this case by finding alternative sources for the components (Economist, 2006, When the chain breaks).

Nokia supplies Perlos with all of its financial income for its Texas factory, so this means that Nokia is very much in control of this relationship, however Nokia benefit from an established, trusted supplier who they can depend on. Perlos is entirely dependant on Nokia in this venture, however this is only one of many factories that Perlos has. Perlos has recently streamlined it plastic mould production business, and is also currently investing in other ventures such as health care (Higgs, 2006, Perlos sells health-care unit to JV), so although they are dependant on Nokia in this field they do have other separate areas. The main benefit for Perlos in this relationship is that they can generate a large amount of revenue by simple moulding of plastic and have been able to strategically position themselves to easily meet Nokia’s demands.

Siemens’s relationship with Nokia reduces assembly costs, benefiting both businesses

Siemens relationship with Nokia was borne out of necessity for a reduction in assembly costs and streamlining of the two separate companies, and has ended up more as a business merger, with the two companies effectively being combined to form a new business. The partnership was started in order to reduce the costs of assembly, as the two companies shared similar assembly plants that were rarely fully utilised. Occasionally it was necessary for the separate businesses to contract out work when demand for a popular product became too great. In the partnership it has allowed the two companies to effectively share their assembly facilities in order to reduce costs. This helps the two companies in two different ways, first they can more fully utilise the facilities that they have, with the more popular lines taking up more production time. The second benefit is that with the shared facilities they can use the larger facilities to cope with larger demands on the more popular lines.

This extremely close relationship has meant that the two companies have become heavily dependant on each other, sharing resources and abilities in order to enhance their individual abilities and achieve results that would not be obtainable individually. The business merger has only involved the sections of network equipment divisions (Morris, 2006, Masking the joins), and the rest of the two companies have remained separate. The merger of this division will take around another year to be fully completed, when the combined market share of Nokia-Siemens will drop from 42% to 30%. This relationship will also affect Siemens relationships with other partners such as NEC and Juniper. Nokia is hoping this these short term losses will be made up for in the long term with the increase in productivity and utilisation of resources. The two companies will be combining and streamlining similar products in order that the two partners do not compete with each other.

What Vodafone requires from Nokia

Vodafone is a major worldwide retailer of mobile phones, shipping to countries such as Japan and China, as well as Europe and America. Vodafone is also a network provider, boasting some of the best network coverage in the world, these very different capabilities contribute to the ongoing success of Vodafone. The service of the network provided is maintained by sub-contracting out the work of sustaining this vast network, whereas new mobile phones are sourced from a variety of suppliers such as Nokia. Vodafone will often require the mobiles to be modified with their own branding and occasionally additional software and features, and this requires close communication with its suppliers. It is also necessary for Nokia to keep Vodafone informed of the state of ordered products and availability of certain mobile phones. Vodafone has recently unveiled a deal with Nokia that will see the new range of Nokia 6680 smart phones shipped to Japan (Worldwide Videotex Update, 2006, NOKIA 6680 SMARTPHONE SHIPS TO VODAPHONE JAPAN). The mobiles will be customised for Vodafone’s K.K range by Nokia.

All of this requires a close relationship between the two companies, as Nokia relies on companies such as Vodafone to advertise and sell their products, whereas Vodafone relies on companies such as Nokia to keep them supplied with new products to sell to their customers. Vodafone will often offer the phone for a reduced price as an incentive to sign up on a contract, and the revenue will be generated for them by the ongoing custom provided by the contract. The main advantage of this relationship to Nokia is the sharing of risk between themselves and the retailer, as Vodafone will commit to sell all of the products it purchases from Nokia. Another advantage is that it is able to reach a larger market than it would be able to on its own, which increases sales and thus profit.

Vodafone also out sources the management of some of its networks around the world, such as the Australian arm of the Vodafone Empire (Williamson, 2007, Inside out: the rise and rise of managed services). Vodafone believes that this out sourcing “delivers cost efficiencies and allows us to control the quality and technical direction of our networks so that we can deliver the best and most advanced technology available to Australian customers” (Williamson, 2007, Inside out: the rise and rise of managed services). Also Vodafone is currently using the Nokia E61 to spearhead their drive to compete against their Blackberry rival in the e-mail market sector (Savvas, 2006, Vodafone hots up e-mail battle with Nokia E61), which will allow for Vodafone to dominate in this sector if successful.

Supplier relations, Nokia controls both ends of the market

Nokia has good communication links with both its suppliers and its customers, this is to ensure that it is fully aware of the changing environment that it is in. These good communication links and relationships with its suppliers mean that Nokia are able to alter their demands on their suppliers at short notice to rapidly change output to meet a varying demand. These close interdependent relationships also mean that Nokia can quickly and efficiently respond to changes at either end of the market, giving it control over both ends of the market.

Most of Nokia’s suppliers have specialised factories for catering with Nokia’s individual needs (Renstrom, 2000, Nokia's Texas site connects with suppliers), and as such can only supply Nokia with their products, as it would be costly to re-organise their manufacturing processes in order to cater for other customer. This means that the suppliers are heavily dependant on Nokia, but it also means that Nokia are dependant on their selected suppliers as for specialised parts it would be difficult to find replacement suppliers. This inter-relationship dependency means that it is in both parties interest for them to react quickly to meet the end customer’s needs, and Nokia’s dependency on its suppliers means that they get sufficient payment to continue running, whilst their dependency on Nokia helps to drive down the costs for Nokia.

For companies like Vodafone which are supplied by Nokia they tend to supply Nokia with the types of phones they will be needing, which specific branding they require, if any, and where the phones need to be shipped to (Worldwide Videotex Update, 2006, NOKIA 6680 SMARTPHONE SHIPS TO VODAPHONE JAPAN). They need to be in close contact with Nokia to inform them in any changes in the marketplace, and can even provide feedback on specifics about popular phone functions. As companies that purchase from Nokia tend to commit to selling the entire product they purchase which shares the risk, which is better for Nokia than the customer. Despite this companies such as Vodafone continue using Nokia as the product is reliable, effective and able to meet their changing demands. This means that there are many different advantages and disadvantages in being a supplier to or being supplied by Nokia. Both suppliers and customers have made strong businesses with their relationship with Nokia, so it would be difficult to say where in the supply chain it would be better to be, as Nokia tries to treat everyone the have a relationship with fairly.

Nokia’s suppliers have a dependant but safe relationship

Suppliers to Nokia have had a stable source of income, as Nokia create a trusted supplier list (Renstrom, 2000, Nokia's Texas site connects with suppliers) and then tend to remain loyal to their trusted suppliers. These contracts allow for a strong, stable income, which companies such as Perlos have used to invest in other businesses (Higgs, 2006, Perlos sells health-care unit to JV). This demand may be increased for popular products, so may occasionally generate extra revenue, but generally this type of relationship is stable and provides a steady source of profit. The main benefits for Nokia in this relationship are that they need to control a smaller network, meaning that the logistics involved are simplified. Also a large amount of investment would be necessary to enter into this market, and Nokia are likely to have an increase risk which would be better shared with their suppliers.

Vodafone has had more control over products with Nokia

Vodafone has enjoyed a strong product which has helped to attract new and keep existing customers. They have been able to change their demand at short notice, and have still had their orders met. They have shared the risk with Nokia in selling the products, but have been able to change their orders at shot notice to meet their needs, as well as having exclusives on certain products, which has helped to improve the abilities of their company, making it more attractive to customers who like the Nokia style of mobile. Added to this Vodaphone feels able to out source management of its Australian network to Nokia (Williamson, 2007, Inside out: the rise and rise of managed services), and is using the Nokia E61 to spearhead their drive to compete against their Blackberry rival in the e-mail market sector (Savvas, 2006, Vodafone hots up e-mail battle with Nokia E61). This means that Nokia’s wide range of products and services has been able to provide Vodafone with more flexibility and can thus provide their customers with a better service.

Changes have needed to take place for Nokia’s relationships to continue

Some of the relationships have required little change from either partner, whereas for some of the relationships it has been necessary to restructure certain areas, and in some cases it has even been necessary to relocate. In the case of the suppliers Nokia stated that although they did not require their suppliers to relocate to Texas with them, it would have been impossible to continue as effectively without them there constantly feeding their supply chain (Renstrom, 2000, Nokia's Texas site connects with suppliers). This means that it is necessary for the suppliers to relocate in order to be in close vicinity to Nokia’s assembly lines. It is often also essential for the suppliers to used specialised moulds or technology to fully meet Nokia’s needs, and although this can make Nokia dependant on them, it also makes them reliant on their contract with Nokia. In addition to this Nokia also likes to monitor their suppliers in order to keep themselves aware of any changes which may affect them, apart from this there are few other changes that need to take place for a successful and prosperous relationship with Nokia.

In the case of Nokia’s relationship with Siemens large amounts of change in the form of restructuring and relocation has taken place and is still ongoing. This merger of the network equipment divisions (Morris, 2006, Masking the joins) should allow for benefits for both the companies, but does however mean that the restructuring must be carefully orchestrated so that the two business partners work together in the partnership, and do not have any competing products between the two businesses.

For Nokia’s relationship with Vodafone generally little change was necessary as Nokia merely had to respond to Vodafone’s demand, as well as to listen to feedback from Vodafone. The area’s where change was necessary was when Vodafone found it beneficial to out source management of their networks, where it was necessary for Nokia to take control from Vodafone.

Nokia’s relationships enhance its abilities whilst simplifying logistics

Nokia uses its relationships to enhance its abilities, improve productivity and reach markets that would otherwise be unavailable. It uses its relationships over expanding its business into these areas as it is more cost effective to contract out work and have these relationships. This means that Nokia is able to effectively position itself in the marketplace without unnecessary expenditure and risk, by carefully forming relationships with different companies. These companies that Nokia has relationships with must share common goals and possess abilities that Nokia does not have in order to form strong, stable relationships which benefit all the companies involved. Although these relationships are not without their risks, the potential advantages are a very strong motive for the formation of these relationships.

Nokia has strategically positioned itself in such a way that it is able to control a large proportion of the market without needing a large, complicated network. This means that the logistics involved in controlling their network can be simplified, giving a greater awareness of the environment that they are in and improving response times to any changing factors. Nokia has recently streamlined its suppliers in order to improve its ability to effectively monitor these relationships to check that none of their partners are experiencing problems. This can only help to improve their responsiveness in the marketplace, which should lead to increase sales due to better supplies. Nokia trust Perlos, but still monitor their output as a safeguard against any problems, the trust is shown in continued use of a supplier. As for Nokia doing the supplying they will sometimes do exclusive deals with certain networks with some of their specific phones, although they do not do this that often as it reduces the potential market for their product. Nokia will make phones to order for Vodafone, and will even brand them according to Vodafone’s needs. Nokia also provides Vodaphone with network management services, which reduces work for Vodaphone, whilst providing additional revenue for Nokia.

One of the most controversial new relationships that Nokia has developed is that with Siemens, this reduces the costs of assembly for both the companies, whilst increasing the company’s abilities to assemble phones for themselves without having to outsource. This combination of large companies has been done before producing new, stronger companies such as Sony Ericsson, and Nokia is hoping that its new Nokia Siemens Company will be able to share similar success to that of Sony Ericsson. Nokia has effectively used its relationships with companies such as Vodaphone to compete against leading competitors such as Blackberry in order to gain advantages in the marketplace. All of these relationships and careful communication between all of the partners, suppliers and retailers allows Nokia to continue growing in the marketplace, and may eventually lead to Nokia taking control of the entire mobile market. Nokia’s new relationship with Siemens provides Nokia with a much greater potential in the area of productivity and cost effectiveness, they must however keep in mind that communication between themselves and their respective partners has been and will continue to play a major role in their success.

Reference list.

All information has been sourced from the sites below. Some of the sites have been used to check information obtained from other sites, and all the information has been read and referenced when used in the text.