The Nokia OYJ: Financing the WP Strategic Plan case study grants students the opportunity to assess a financial policy amidst a strategic change.
Susan Chaplinsky and Felicia C. Marston
Harvard Business Review (UV5656-PDF-ENG)
July 13, 2011
Case questions answered:
- What are the strengths/weaknesses/opportunities/threats facing Nokia OYJ?
- What are the key features of the plan with Microsoft, and how will it help Nokia? Do you think it will work?
- According to Exhibit 10, Nokia estimates it will need €4.3bn in external funds under the downside scenario. What are the drivers of Nokia’s funding deficit?
- Evaluate the following alternatives to meet its funding needs.
a. Issue €4.3 billion of long-term debt(all at once, at the beginning of 2012).
b. Raises €4.3 billion in equity at a price of US $4/share. Assume the firm can be sure it will be able to raise the equity at this price and that it will occur all at once, at the beginning of 2012 – Note the share price is in US dollars.
c. Reduce or eliminate the dividend(all at once, at the beginning of 2012) d. Decrease the cash balance.
Qualitatively evaluate the benefits and costs of each (for simplicity, assume no combinations or other alternatives are allowed) - Adjust the Pro Forma Balance Sheets for the downside scenario for each alternative in Qs 4, making clear which adjustments you made. To the extent that not all of the funding is needed or that more funding is required in any given year (i.e., the pro forma balance sheet does not balance), assume that cash is increased or decreased accordingly. In making your decision, determine the effect of each of these scenarios on Nokia’s (a) bond rating and (b) Cash balance and cash-to-sales ratio.
- Which alternative should the management team of Nokia OYJ choose?
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Nokia OYJ: Financing the WP Strategic Plan Case Answers
This case solution includes an Excel file with calculations.
SWOT Analysis of Nokia OYJ
The significant strength of Nokia OYJ is its ability to produce reliable products for decades, such as its Lumia 900, which was also awarded as the Best Smartphone in 2012. By investing a large amount in its Research and Development, Nokia’s products and wireless services strengthen its technical ability and its competitive advantage.
The company’s R&D expenditure was 14.5% of its net sales in 2011, and Nokia employed almost 27% of its workforce in its R&D department. Most importantly, their wireless service is credited to be the first company that provides the services in the whole wireless industry; Nokia preserves its intellectual property rights to more than 10,000 patent families as well. Another strength is its global distribution network.
In order for Nokia to reach its consumers efficiently, there are more than 850,000 sales locations around the world. From Nokia’s historical balance sheet, we can see that they have a healthy financial structure with 10,902 million eurodollars in cash, which means that Nokia may finance the 4.3 billion external financing needs without considering other alternative methods. The Nokia-Microsoft merger is also a strength in which Nokia’s devices would be upgraded with new features provided by Microsoft.
The major weakness Nokia is facing is the new entrants. Besides the impact of the financial crisis, 50% of the market share decline is caused by the competitive position. Both Apple’s products and the Google Android system have a great impact on Nokia’s global market share, and the total market share has dropped from 38% in 2007 to 26% in 2011, as indicated in the case.
Aside from Nokia’s downgraded credit rating, it also has a poor market cap, debt ratio, and an EBIT margin of 13,756 million eurodollars, 28%, and -3%, respectively, compared to Apple’s 289,506 million eurodollars market cap, 0% debt ratio, and 31% of EBIT margin. In this case, it is possible that Nokia’s credit rating will be downgraded again if it issues more debt.
Another disadvantage of Nokia’s falling is that it started off as a manufacturing company while both Apple and Google started off as software companies. It will be much harder for Nokia to develop any customizable applications for customers. In other words, Apple and Google have a competitive advantage over Nokia. These weaknesses are the main factors that lead to Nokia’s stock price and EPS decline.
There are also some opportunities that can help Nokia to survive its current situation. Nokia has to decide on the main operating platform for its smartphones. The first option is to keep using Symbian/MeeGo and update its operating system it. Secondly, Nokia could also adopt the Android operating system, which will have volume shares along with it. Partnering with Microsoft will be another option to choose from so that they can use the Windows system.
All three options provide different benefits and drawbacks, and Nokia still needs 4.3 million Eurodollars in external financing, no matter which option it chooses. In addition to this, Nokia should consider four different financing alternatives to obtain the financing needs. The company can either choose between issuing long-term debt or equity financing. It can also decide to eliminate dividends or reduce its cash balance to fund the entire 4.3 million Eurodollars financing needs.
Nokia’s profitability is being threatened by new entrants. Google’s Android and Apple’s IOS systems have a substantial effect on Nokia’s market presence with their customizable smartphones and applications. From the Smartphone Operating System Share, we can see that Symbian was the most used system at 52% in 2008 compared to 8% of Apple’s IOS and 1% of Android systems.
In contrast, Symbian’s usage decreased to 17% in 2011, and the IOS system increased to 15%, together with Android becoming the leading operating system being used in 2011 with a 53% market share.
Even though partnering with Microsoft will provide strategic strength, it will threaten Nokia at the same time because Nokia may help Microsoft with establishing Microsoft’s own Windows smartphone platform, which makes Nokia even more competitive.
Microsoft Plan Key Features
The strategic plan with Microsoft will promote Nokia’s prestigiousness to the next level of the company’s development and sales. As part of the plan, Nokia will contribute to marketing, hardware design, language, and other technical support, as well as deliver the mapping and navigation capabilities.
At the same time, Microsoft will provide software such as the Windows operating system (as a Windows phone), the Bing search engine, applications, advertising, and social media to Nokia smartphone devices. Both companies will then work together to develop new apps after they merge. Overall, this strategic plan will contribute to a big change and replace Nokia’s old system with the Windows platform.
We think the strategy will provide benefits to both companies. Nokia can benefit from Microsoft’s powerful operating system to compete with other companies in the smartphone industry. On the other hand, Microsoft can establish its wireless smartphone market, with Nokia being the main producer of the hardware segment.
Luckily, both companies can focus and specialize on whichever they are good at; Nokia will take care of hardware development, while Microsoft will take care of software and programming. We can count on the power of Microsoft’s intellectual property (including brand reputation, strong software power, etc.) and that it will make the collaborated product to be much more attractive to customers than what Nokia could’ve done alone.
Drivers of External Funds
Based on Exhibit 10 provided by the case, there is a total of €4.3 billion in external funds required under the downside scenario; the balance sheet would not balance without having an extra €4.3 billion on the right side of the balance sheet. There are several aspects of the firm that will require raising external funds, but the most important part requiring most of those external funds will be in their R&D department.
Ever since the appearance of the first iPhone, mobile phone users worldwide have shifted to smartphone users while Nokia still maintains about…
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