Demand-supply-analysis (Case company - Nokia)

1. Pankaj Saharan
October 2012

2. 
Consider the following aspects of your target
company
◦ Structure of the demand and the factors affecting the demand
◦ The economic drivers of the production decisions including the scale of
economics
◦ Structure of the supply and the factors affecting the supply

4. ◦ Nokia creates differentiation in devices based on
different price point segments.
◦ Pricing is heavily dependent on the competitor
prices e.g. Smartphones segment is typically have a
price bracket (400-600€).
◦ Demand is different for different device segments
depending on geographical region, local taxes,
distribution chain etc.
◦ Marginal revenue for a smartphone (high segment)
is greater than a low end phone.
◦ There is no ”perfect competition” among different
players in mobile phones market and is not
”oligopoly” either even though there are small
number of big players.

5. 


Nokia shipped 83.7 million handsets worldwide in Q2 2012,
down -5% annually but up +1% sequentially.
Demand for mobile phone handsets is expected to grow even
more in future.
Typical demand curve of Nokia looks like:

6. 


Nokia tries to capture multiple price points on the overall
demand curve of mobile phones.
The different price points are used for differentiation among
mobile phones for targeted set of consumer segments.
Example: 600€ phone is smartphone for developed markets
and 100€ phone is a low-end feature phone for growing
markets.

7. 
Demand for Nokia’s phones depend on following factors:
The price point of each phone
The price of substitute goods (e.g. laptops, PDAs, tablets etc.)
The price of complementary goods (e.g. plastic covers, accessories etc.)
The level of advertising expenditure ( on phone +complementary and substitute
products).
◦ Customer’s disposable income e.g. value of Handset cost as % of GDP/capita
◦
◦
◦
◦
◦ External macroeconomics factors e.g. inflation, IT boom etc.
◦ Consumers’ tastes and preferences
◦ The cost and availability of credit.
◦ Consumers’ expectations
◦ Changes in population
◦ Advertising expenses (e.g. Nokia did ”firework marketing” during Lumia phones
launch for first time in US) + relationship (e.g. With mobile phone operators,
distribution channels etc.)

8. The following are necessary for demand
analysis of mobile phones of Nokia:
 Sales forecasting
 Production planning
 Cost Analysis (per segment) and Financial
planning
 Pricing strategy
 Advertising costs
 Resource and Inventory Management

9. 1200
Price
€
Demand -
1000
Smartphones
800
Supply -
600
Smartphones
400
Demand Featurephones
200
Supply -
0
0
50
100 150 200 250
Featurephones
Devices in millions
Total Revenue of Smartphones (if sold at Eq. Point.) = 600 € (Price) * 100 million (Quantity)
Total Revenue of Featurephones (if sold at Eq. Point )= 300€ (Price) * 150 million (Quantity)

11. 
While analyzing production decisions of Nokia, the first thing
taken into consideration is the structure of the market in which
Nokia is operating which is determined by:
◦
◦
◦
◦


the number and size of the firms competing with Nokia in the market
the ease with which firms may enter and exit the market
the degree to which firms' products are differentiated
the amount of information available to both buyers and sellers regarding
prices, product characteristics, and production techniques.
At Nokia, the physical relation between various inputs and
outputs are analyzed, which in Economics is termed as
”Production Functions”
Like other companies, Nokia’s sample production function takes
into consideration three important factors and tries to optimize
the combination to create most production:
 Q = f (L,C,R, .... )
where L -> Labour, C -> Capital, R -> Raw material

12. 

Diminishing rates of return is avoided by
calculating and analyzing MP and AP.
In Nokia, there is continued” Agile
Transformation” which is focusing on
improving the existing development
processes by removing the slag times,
increasing AP & MP.

13. Automation of production processs e.g. validation & verification
(quality) using new technology aim at reducing long-run average cost of
production
Source: Nellis & Parker, ”Principles of Business Economics” 2nd Edition

14. 
Nokia invests heavily to obtain ”Increasing returns to scale”

Nokia’s main internal economies of scale factors are:
◦
Labour -> Nokia values labour unions and local rules regarding labour wages, safety, development
etc.
◦
R&D -> Nokia has history of investing in R&D, also in production environment. New ways to
automate production is just one way.
◦
Capital -> Even during downward share value and hard economic times, Nokia still maintains good
cash flow for investment.
◦
Diversification -> E.g. Nokia does this by differentiating against prices, customer segments,
regions, operator requirements etc.
◦
Product Promotion -> E.g. Nokia does this by multiple marketing techniques, brand value,
relationships etc.
◦
Distribution optimization -> E.g. Nokia does this by creating good relationships with buyers and
sellers, operators, online stores etc.
◦
Complimentary products -> E.g. Nokia invests heavily in producing world class accessories for the
phones which increase the brand value in addtion to shifting the overall demand curve by their
price regulation).
◦
Procurement -> E.g. Nokia does the partnerships, deals with multiple vendors.

15. From my point of view, main factors are:
 Internal:
- Management: Nokia is criticized by many analysts of
having multiple layers of management in the
organization structure and ”silos-based” working
environment which hinders productivity, accountability,
responsibility, communication etc. to name a few. This
results in increasing long-run average costs.

External:
◦
Nokia has laid off huge number of employees during
recent times e.g. Shutting down of Salo factory. Due to
labour and government pressure, the company has to
pay big packages for the labour force.

16. Lower
prices
Increase
in total
output
Learning
curve
Reduced
costs
Economies
of Scale
Increased
production
efficiency

18. Important factors Nokia’s condition of supply today are:



Cost of production: If the price of an input increases, the cost of the output will
increase, and, other things held constant, profits will decrease. Nokia will then have to
decide if shifting part of its resources and effort to other products will improve its wellbeing.
Technology: Production costs are determined not only by the prices of inputs, but also
by technology. Technology represents the knowledge of how inputs (such as labor, raw
materials, energy, and machinery) can be combined to produce the product. If this
knowledge increases so that people find cheaper ways to make the same output, then,
other things held constant, profit increases and we expect sellers to respond by
producing more.
Prices of other products: Because we have defined cost as what must be given up to get
something, the prices of other goods that Nokia could produce and sell must be part of
the calculation of the cost of production e.g. tablets, e-commerce store etc.

19. 


Changes in consumer expectations: Nokia always try to analyze and predict
changing consumer behaviour to take supply increase/decresase decision.
Competitiveness of market structure: Mobile phone market is red-hot at the
moment with huge competition among top players for market share and it is
one of the most important factors concerning the supply requirements.
Changes in Market size: Supply of mobile phones is directly proportional to
the rate of market size growing in a particular region.
Source: Nellis & Parker, ”Principles of Business Economics” 2nd Edition

20. 



Our supply chain consists of around a hundred direct suppliers
for hardware, components and parts, and ---- hundreds of
software suppliers. We also work with thousands of indirect
suppliers providing services and equipment needed for our
operations.
Our global supply chain begins with raw material extraction and
processing, ending in the manufacturing of components and
final product assembly.
There are typically four to eight supplier layers between Nokia
and any mining activities. Our supply chain is spread around the
world as it needs to deliver to our own production sites as well
as to our offices worldwide.
As we operate our own global manufacturing network, most
manufacturing is done in-house complying with our strict social
and environmental requirements. This also means that our first
tier supplier line starts only after production.
Source: http://www.nokia.com/global/about-nokia/people-and-planet/impact/supply-chain/supply-chain/

21. Source: http://www.springerimages.com/Images/RSS/1-10.1007_s10842-011-0107-4-0