How did Nokia lose its pre-eminent position in the market for mobile phones? The received wisdom, correctly, is that it missed the smart phones bus.

Apple has moved into the top end of that market and Samsung is at the middle. The bottom is occupied by various others. Now Nokia is trying play catch-up without much success. But it still has the largest share of the ordinary mobile phone market.

A similar thing had happened to Bata also in the 1990s. It didn't spot the growing market for fancier shoes and lost that segment. Then it tried to catch up and failed. Then it reverted to its stock-in-trade mass middle market and has done well.

Maruti had also committed the same error, of trying to produce a fancy car – Baleno, and that SUV called what?? – and bitten the dust. It went back to its staple and has also done well.

Newspapers that have tried to get into TV have done badly too – except when they have used dirty tactics.

So the moral of the story is that firms should stick to their knitting.

Like flies to the honey

But if everyone stuck to their knitting, how would innovation take place? If Apple had stuck to computers and Samsung to TVs and fridges, would smart phones have come into existence?

We don't know, but economics provides several answers to this question. One is straight from the first year syllabus, namely, that when super-normal profits are being made in an industry, it will attract other firms that will try to knock off the incumbents with innovative products.

This has certainly happened with Nokia on the one hand and Apple and Samsung on the other. Attracted by the profits Nokia was making they got in and the rest has been absolute textbook stuff.

Innovation, though, comes in two basic forms: it can tweak the existing product – cameras, recorders, and the like on the phone – or it can offer a completely new product.

Apple offered a completely new product in the mobile phone market by offering the Internet along with the phone; Samsung merely took that forward on a different platform and aimed at the middle market, which it now dominates.

This is classic Schumpeter. Joseph Schumpeter spelt out how innovation is the agent of economic change. He said innovation creates temporary monopolies, which lead to super-normal profits, which then attracts competition. Rivals and imitators get into the act. Eventually, the abnormal profits come down to normal levels.

Schumpeter also came up with the term “creative destruction” – also called Schumpeter's gale – the force of which could blow away the old economic order. In this case, Apple's innovation has certainly blown away some of Nokia's profits and changed the pecking order.

What next?

The real question before Nokia now is to decide what its brand stands for. If the mobile phone market is giving way to the smartphones – just as the laptop market is to the tablet – what will the name Nokia signify?

It might be best for it to learn from Bata and Maruti, and revert to the old reliables, stodgy and dull thought they might be. Bread and butter provide more stable profits than fancy jams and biscuits.

(T. C. A. Srinivasa-Raghavan is Senior Associate Editor, Business Line.)

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