I just stumbled across an exam paper i did many years ago. The exam was based on Nokia as a case, and was meant to create a foundation for discussing budgeting.
Question 1
In the article there is a focus on financial measurements, which to a large extend gives a rendition of Nokia’s market position and ability to make money. By defining the number of cell phones sold (780 millions), the market volume based on units sold is expressed. This measure seems quite relevant because it indicates the kind of potential capital being fought over in the cell phone business. In other words, it sets the stage for the potential market share. However, since this is measured in units sold the number may not be as accurate as might be desired since the actual monetary value is not calculated. It would have been relevant to look at the accumulated consumer spending on cell phones in order to create forecasts, strategic initiatives and sales modeling.
Looking at Nokia’s profit is a good indicator of the health of the company, but by no means the only one. However, when coupled with the 25% rise in revenues it illustrates a potential problem for the company, because it is unable to convert increased revenue rates into increased profit rates of the same magnitude. That being said, the difference in the two rates might be related to operations that in the end may have a positive outcome for the company such as R&D investments and increased number of employees.
When looking at share price, the measure does not say anything about the health and status of the company as a whole. Rather it illustrates investor faith in the company, which of course can, and most likely will, influence Nokia internally in terms of strategic decision-making. However, the dividend is still good but if the market is expecting increased investment in R&D, and therefore lower dividends, this may have a negative effect on the share prices. In general, these measures are in my opinion not indicative of Nokia’s situation because they are all based on what other people think the company will do in the future. Measurements should ideally be linked to strategic goals and objectives, thus indicating whether Nokia is doing what it intends to do, and how well it does it.
Referring to the P/L statement gives a clear picture of which of its products in the portfolio are profitable. This is valuable information for strategists in the sense that they can make informed decisions on resource allocation, thereby optimizing investments.
I believe that the article only paints half a picture when it comes to assessing Nokia’s performance in the cell phone business. Firstly, Nokia makes more than just cell phones and as the P/L statement indicates, the company makes money in other segments as well. However, given that Nokia is a tech company, I believe that innovation is a key success factor, and this can be measured. Relevant questions would be how many new products Nokia releases each year, what is the adoption rate, etc. Furthermore, R&D investments will illustrate what the company’s intentions are in terms of innovation as well as the commitment to long-term goals and objectives.
I agree with the author to some extent. Nokia does face increased competition from Motorola, and the figures show this. However, I think it is important to recognize that Nokia is an analyzer in Peter Neergaards terms, which means that their operations are two tiers meaning that they focus on efficiency and price while developing new markets and products. This dual focus means that we need more than financial measures to assess the company, whether they are internal or external. Especially in the cell phone business brand equity measures are relevant to determine the performance of Nokia. Ambler suggests various consumer metrics that help establish the brand equity of the Nokia brand. I believe these metrics might not be the most important ones to investors but measuring familiarity, penetration, what consumers think and feel about the brand as well as loyalty and availability will create a much clearer picture of Nokia and where the company is headed in the future.
Question 2
When designing the Balanced Score Card Ambler argues that, there are certain metrics that are generic and other need to be adapted to the individual company. Given Schumpeterian competition, I could not agree more with him, because generalizations become very difficult because of the diversity in the business world. Nokia for instance might need different measures than Google for example. However, it is possible to discuss certain general traits related to the Balanced Score Card. The essential aspect of the Balanced Score Card is the notion of balance. There should be a balance between the short-term perspective and the long-term perspective. In the Nokia case, there is a desire to increase sales rapidly, which is a short-term goal, but doing this through price discounts might hurt the company in the long term. Therefore, there is a trade off between sales and building brand equity indicating that the Balanced Score Card should contain measures, objectives, goals and targets for both.
Secondly, there should be a fit between internal and external measurements. Especially for Nokia, who I believe is in an analyzer position, it is important to analyze the internal mechanics of the company, in terms of financial aspects and non-financial aspects. The internal indicators can illustrate learning, innovation and growth. It is also important to define goals, objectives etc. for the external environment. These external measures would allow Nokia to determine where the brand is positioned in the minds of the consumers vis-à-vis the competition. It would also give a picture of investor sentiments toward the company, a measure that seems more and more important these days.
Thirdly, the Balanced Score Card should balance between desired outcomes as well as performance drivers. Assuming that the ability to innovate is a key success factor in the cell phone industry, these measures would be concerned with the employees as well as rate of new products.
Finally, there should be a balance between the soft measures such as employee satisfaction and harder measures such as profit. Especially when dealing with brand equity, I find it imperative to balance these two things because marketing according to Shaw and Merric quickly can become a discipline, which focuses on creativity and flashy campaigns as opposed to determining marketing’s contribution to the bottom-line.
Picking dimensions for the Balanced Score Card:
Adopting Kaplan & Norton’s notion that some metrics are generic I have decided to base my version of the Balanced Score Card on Financial, customer, internal and learning measures. These four are broad enough to include all business operations and they can be divided into sub goals in order to narrow the focus substantially.
Financial Measures:
I believe net profit is necessary when picking financial measures. We need to know if we are making money or not. Secondly, turnover is relevant since that figure will illustrate the company’s ability to sell the products. Turning to the external measures, I believe that certain market metrics are relevant. Market growth will indicate the general trends within the market allowing Nokia to determine if the market is growing or shrinking, which will have an impact on strategy formulation and resource allocation. For instance, if the market reclines it might be beneficial to produce cheaper phones at lower price, and spend less resources on brand building activities such as sponsorships. Measuring market share allows Nokia to set strategic goals that are easily measured and understood. It will enable Nokia to position itself relative to the competition. Applying Neergaards terminology is Nokia moving away from being an analyzer to becoming a defender, and what does that mean for the brand equity building actions of the strategy? Lastly, I would recommend future demand as a measurement, because it will help when calculating forecasts as well as sales modeling.
Customer Measures:
I assume that brand names are important aspects of the competition in the cell phone industry. Since Ambler, Keller and Aaker agree that brand equity is consumer based; I would chose measures that reveal how the consumers think and feel about the product. Therefore, perceived quality and customer satisfaction would be two good candidates for softer measures. These measures will tell us where we are position in the minds of the consumers, for instance, are we associated with quality, are we top-of-mind, etc. For harder measures, segment profitability is very relevant because it relates to the aforementioned positioning. If Nokia only sells to 75 years old senior citizens, but have top-of-mind awareness and is associated with quality, it might be necessary to focus on a different segment, which switches cell phones more frequently. Another metric, which relates to innovations, is new product purchase rate. This will indicate the rate of diffusion of new technology and design. Information derived from this measure is usable in the design and innovation process, because it allows the company to plan new product and minimizing the risk of the phone being rejected by the consumers. Lastly, I would follow Ambler’s suggestion to measure penetration since it is a simple way or the company to track how many customers it has and whether that number is shrinking or growing. Furthermore, the company should know whether increasing volume and value sales are due to a larger customer base or to demand by the same customers.
Internal Measures:
According to Kaplan & Norton, the internal business processes are defined by the executive as being critical to the performance of the organization. These processes enable the company to deliver value propositions that will attract and retain customers in the target market while satisfying shareholder expectations. In the Nokia case I would focus on the first and last element of the internal value chain the innovation cycle and the service cycle. Assuming that there is a high level of phone turnover in the market it becomes a critical success factor for Nokia to be able to offer a steady stream of new and improved products. Thus, time to production or innovation time will provide the company with valuable information, which can be incorporated into the marketing plan. Coupled with customer satisfaction, Nokia can assess whether or not it is able to meet market demands for design and functionality. These measures are aligned with the aforementioned metrics because they allow Nokia to meet specific customer needs based valid information about market size and customer preferences. Secondly, I believe the post sales service cycle is important, because this is the second place where there is a direct contact with the consumer. Measuring how quickly a broken phone is fixed, and how many actually break, supplements the brand equity measure. Provided Nokia wants to be associated with quality, service becomes an important part in building brand equity based on attitudes towards the product.
Learning and growth Measures:
Learning and growth identifies the infrastructure that the organization must create to obtain long-term growth and improvement. Kaplan & Norton see learning as coming from three principal sources: people, systems and organizational procedures. They believe there is a gap between existing capabilities and what may be required in the future. The problem for Nokia is to anticipate and develop new technologies while being able to capitalize on these developments. There are certain objectives concerned, which will help solve this problem such as re-skilling employees, enhancing information technology and systems, and aligning organizational routines and procedures. The measurements to control this process are generic and include employee satisfaction, employee retention, and employee training and employee skills. Whether or not these measures establish any sort of causality is questionable. Retaining employees does not necessarily guarantee that these people become more prepared for the future, although it would be likely since they over time become more experienced. The point is that, I think these measures might need to be substantiated by more qualitative measures, that aim at understanding the employees and how the thrive in the company and how they rate their own capabilities in relation to the development of Nokia.
A critical view:
I have presented some measures that I believe are relevant for Nokia. However, a discussion of these is in order, considering the magnitude of the Balanced Score Card and the potential impact it can have on the strategy of Nokia.
I feel there is one thing that stands in the way of implementing a balanced score card and that is culture. The way I see Ambler’s and Kaplan & Norton’s rendition of the scorecard it becomes a control tool that not only control processes, key financial figures etc. but it also controls people. Autonomy is a cultural issue raised by people like Hofstede and I suspect that certain companies would experience serious problems if they implemented the scorecard in the manner of Fritz Hansen, by tying it to bonuses. Furthermore, in a company like Nokia where they are implementing the scorecard for the first time, provided they do, I think it should be tied heavily to the strategic decisions already in place. This will generate a clear picture of where the company is today, which in turn will allow the company to decide where it wants to go next year. The point being, that the balanced score card should be the basis of any decisions the first year upon its implementation, but rather be used from the second ear an onward so as to create a starting point for the strategy formulation. This, less than eloquently formulated opinion, is tied in with Amblers five stages of marketing performance assessment. The way I understand Ambler, implementing the balanced score card is in itself a process which can cause change to the company both in terms of processes and in terms of culture. This notion indicates a trial and error element, which should be taken into account when deciding on the right metrics as well as the number hereof.
Question 3.1
The problem with a budget from a CMO’s perspective is that it is a tool for short term planning and control. Since budgets are normally within a one-year timeframe, and since mental response curves show that it takes time before the consumers react to our brand building activities, return on investments made in marketing will most likely not show up until much later. Aaker and Keller both argue that there is a lagging effect when it comes to marketing initiatives, which is supplemented by Wallanders statement that a year is an insufficient timeframe. In the Nokia case, this is a problem because the sales department is looking for short term effects through price discounts so there are some budgetary concerns that will need to be addressed. Personally, I do not think Nokia can afford to take the short-term perspective because they are the big player in the market and because they have an analyzing position. This means that they are focused on quality and customer retention over sales ratios. Furthermore, providing price discounts might damage the brand equity by destroying the quality aspect of Nokia within the minds of the consumers.
An issue raised in relation to budgeting is the organizational ramifications of the process. Where authors like Merrick & Shaw are firm believers in budgeting, Wallander is a lot more skeptical arguing that budgeting did absolutely nothing for the profit of his company. Safe to say is that since human behavior is involved, the budgeting process is not necessarily a rational endeavor. Questions concerning how the budget should be determined and ho should be involved in the process can cause problems for the company. Ambler argues that most marketing people do not have a sufficient grasp of the finance lingo, effectively leaving them out of the decision making process.
However, budgeting in the mobile phone market can also have a positive effect on the marketing department of Nokia. The budget is in many ways a control tool for implementing the strategic plan of the company because it creates a framework for resource allocation. Furthermore, it can be a motivating factor during the implementation process, given that the employees do not feel that the budget is unfair. Additionally, the budget assigns responsibility and controls the performance, which is a key element when attempting to measure the effects of branding.
In my opinion, discussing budgeting in relation to marketing is a key issue when related to brand equity. The whole foundation of the Keller and Aakers arguments is that marketing is accountable for its expenditures, and is supposed to contribute to the bottom line. Budgets define a framework within which marketing can act. The strength of using a budget in my opinion is that it relates the marketing expenditure to the strategy formulation, management control and task control. By doing this, marketing becomes legitimate just like other departments in the company. Ambler argues that marketing departments are usually viewed rather negatively and budgets are a way of forcing marketing people to communicate with the financial people using financial terms. Furthermore, it links performance to its sources, which is relevant when predicting future progress. From this standpoint, applying budgets in marketing helps internal communication; and should help increase inter-departmental cooperation.