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Strategy PMBA 2014 Group 5

Executive Summary This presentation examines the partial acquisition of Nokias mobile phone division by Microsoft. The key topics that will be discussed will include a brief summary of the mobile phone lines of business for each company, why Nokias market share of has dropped over the past few years since its peak in 1998 and Microsofts reasonings for acquiring Nokias mobile phone line of business. These topics will be followed by a discussion of whether this acquisition will be successful given the current market conditions. Nokia Nokia was the first company to introduce phones designed to incorporate games, phones that had offered music downloads, as well as phones to compete with Blackberry by offering a full QWERTY keyboard. Nokia developed smart phones that utilized its own proprietary operating system called Symbian which was extremely popular. Nokias phones that utilized this OS dominated the world-wide market in 2007 with a 67% market share with its closest rivals RIM and Microsoft holding about a 10% market share each. In 2012 the company was the 2nd largest mobile phone maker. It conducted operations in 120 countries with a global share of 18% of the market with revenues of 30 billion Euros. A year and a half later the companys market share of mobile phones has fallen to 3.2%, revenues from mobile phones are down 40%, its stock has fallen from a high of $40 a share in 2007 to a present value of $7.95.

It is the groups opinion that the decline of Nokia was due to poor management decisions regarding its product and delay in recognizing its changing business environment. In 2006-2010 it began to aggressively acquire other corporations in which it believed would add to its product offerings. The problem of these acquisitions is that the technology was untested and no advanced planning of incorporating these features into its mobile phone offerings. Nokias phones were specialized for a particular audience and technologies that were incorporated differed among its product offerings. This caused Nokias innovation portfolio to be improperly balanced.

In 2008 the company shifted its focus from the mobile phone and communications industry to the Internet business as a whole, which in part explains some of the acquisitions mentioned above. The company stated that, although it recognized Apple and Google and Microsoft as major players, they were not seen as its competition.

The major blow to Nokia came when Apple introduced the iPhone G3 in 2009 in which Apple was able to secure a market share of 14.4 with its iOS platform followed in 2010 when Googles operating system, Android, was incorporated by Sony and Samsung who, had previously licensed Nokias Symbian OS. Symbians market share dipped 50% while the Android OS increased 27%. In response, the company in 2011 decided to enter a strategic alliance with Microsoft focusing on and enhancing Windows Phone 7. The immediate response to this shift was a drop of 4% in price of Nokia stock with sales of its smart phones dropping to 4.6 million compared to 30 million in 2010. Microsoft Microsoft entered the smart phone market in 2002 with the release of Pocket PC 2000. The company recognized early on the future of Smartphone technology and proceed to integrate is successful PC Windows OS into the mobile market. This soon led to the development of the Windows Mobile OS in 2003 to Windows 8, a truly cross platform (phone, tablet, and PC) OS in 2012. Initially, in 2004, Microsoft was successful gaining a 23% Smartphone US market share in 2004 and reached a high of 47% by 2007. However, after 2007 Windows Mobile suffered a steady decline in US market share reaching a low of 1.5 with the release of Windows Phone 7. Respectively world-wide market share declined during this period from 12% to 3.5%The primary reason for this downturn mirrors that of Nokias situation with the rise of iOS and Androids popularity among consumers. In order to recapture market share Microsoft made a move in September 2013 to acquire Nokias mobile device business for a purchase pr ice of 3.9 bn Euros. Further it would obtain licensing rights of Nokias patents for 10 years for an additional 1.65 bn Euros. Under this agreement Nokia would sign a non-compete agreement through December 2015 in which it could not produce mobile devices under its own name. Nokia in turn welcomed the acquisition stating that it would allow the company to focus on its NSN networks equipment business and increase its profitability. Acquisition In order to fully understand Microsofts rational in its partial acquisition of Nokia, the following topics of corporate level and acquisition strategies will be discussed

Value Creating Diversification Economies of Scope-Patents: Under the deal Microsoft will secure 8,500 design patents as well as licensing rights to 30,000 utility patents (including HERE, a mapping application that will give consumers an effective alternative to Google Maps). Microsoft will then be in a position to combine Nokias licenses with its own patent agreements allowing the company to expand its coverage to Samsung without additional payments. Nokia currently has 60 patents that are currently licensed to IBM, Motorola Mobility, and Motorola solutions of which Microsoft will realize royalty revenue. Securing patents relieves some uncertainty with mobile phone shipments. By acquiring Nokia, the company will no longer have to make its annual license payment to Nokia. Market Power-Vertical integration: First party devices, by the acquisition of device design and engineering, will put Microsoft in a position of optimizing mobile devices to match its Windows 8 OS. This is expected to accelerate innovation in the areas of imaging, interactive entertainment, information capture, and connectivity insuring Windows Phone presence. Microsoft will gain a globally scaled supply chain specific to the mobile device market including established device distribution and sales networks. Microsoft will inherit tested operational processes and systems required for the production of mobile devices. Increase Speed to Market: Nokia produces 200M mobile phones per year. Existing licensing agreements with Microsoft, with several devices specifically designed to run the Windows 7 and 8. Has a total worldwide mobile phone share of 15% allowing for rapid expansion in key growth markets. Microsofts belief that the key to increasing its tablet sales is to rapidly increase its OS use on smartphones. The acquisition of Nokia would make this possible. Synergy: Microsoft and Nokia are highly complementary in nature. Existing relationship and agreements create value that Microsoft could not acquire on its own or through acquisition of another company. The acquisition was relatively friendly in nature with Microsoft maintaining Nokias operational procedures as well as leaving its sales team intact Microsoft is keeping key Nokia executives to oversee supply chain consolidation, phone device R&D, marketing, and consolidation.

Conclusion The presentation will conclude with an opinion of the future success of the acquisition. Microsofts move seems logical due to the foreseen value creation, speed to market and synergy that will be achieved however, it is the groups opinion that the acquisition will only be moderately successful for the following reasons: 1. The smartphone is currently saturated in established markets with Android holding a 80% market share. It will be difficult for Microsoft to convince consumers in these markets to switch. 2. Windows 8 is disliked with many of its PC users refusing to upgrade from Windows 7. This is a key group that Microsoft must win over if it is to have success in the mobile device market. 3. When Nokia announced it was entering into a strategic alliance with Microsoft the stock price dropped by 4%. This can be viewed as an indicator of stockholder faith in the value of Microsofts OS