#Nokia VS Motorola

                     VS                       

#Case- Nokia is the world’s largest mobile phone producer, with approximately 35% market share. The Finnish company’s market share is almost double that of its nearest rival, Motorola. Sales of Nokia handsets have soared recently mainly due to rising demand in India, China and Eastern European markets.

Q.1 Calculate the approximately two-firm concentration ratio in the mobile phone industry.

The concentration ratio is a ratio that indicates the size of firms in relation to their industry as a whole. It is calculated as the sum of the market share percentage held by the largest specified number of firms in an industry.

The concentration ratio ranges from 0% to 100% and an industry’s concentration ratio indicates the degree of competition in the industry.

·        A concentration ranges from 0% to 50% may indicate that the industry is perfectly competitive and is considered low concentration.

·         Medium concentration occurs when an industry’s ratio ranges from 50% to 80%. This indicates industry is an oligopoly.

·         High concentration ratio of one company is equal to 100%, this indicates that the industry is a monopoly.

Here in the case Nokia has 35% market share and Motorola has 17.5% market share (as per hint given). And only these two firms can be two largest companies in the mobile industry. Adding their market shares, concentration ratio is 52.5%. Consequently, the mobile industry is an oligopoly at relatively low degree of competition between Nokia and Motorola. ( see market share information can be used to measure the level of concentration in a particular market)

Q2 Outline what is meant by market share and how it might be calculated?

Market share refers to an organization’s share of the total value of sales of all products within a specific market. It is measure by expressing the firm’s sales as a percentage of the total market     value: -

                Market share = (sales revenue of firm / total sales revenue in market)*100

For example, if sales revenue for Nokia is $35 million in mobile industry that is worth a total of $100 million, then the Nokia’s market share is 35%.

But the question arises why a business is interested in market share? Evidence has shown that there is a positive relationship between market share and profits, although the firm with the largest market share is not necessarily the most profitable. In general, a firm with high market share has better pricing power and is less threatened by competition, they enjoy benefits such as the status enjoyed from being a dominant market player and the ability to gain further economies of scale.

Q3 Explain two advantages that Nokia might enjoy by having a larger market share than its rivals such as Motorola.

The possible advantages that Nokia might enjoy are :

1.      Economies of scale: the most obvious rationale for the high rate of return enjoyed by large-share businesses is that they have achieved economics of scale in procurement, manufacturing, marketing, and other cost of components. Nokia’s business with 35% share of a mobile industry is simply twice as big as Motorola with 17.5% of the same industry, and it will attain, to a much greater degree, more efficient methods of operation within a particular type of technology.

               According to BCG’s “experience curve”, total units costs of producing and distributing a product tend to decline by a more or less constant percentage with each doubling of a company’s cumulative output. Since, in a given time period, Nokia with large market shares generally have larger cumulative sales than their smaller competitors, they would be expected to have lower costs and correspondingly higher profits.

2.      Market power: many economists, especially among those involved in antitrust work, believe that economies of scales are of relatively little importance in most industries. These economies argue that if large scale businesses earn higher profits than their smaller competitors, it is a result of their greater market power: their size permits them to bargain more effectively, “administer” prices, and in the end, realize significantly higher prices for a particular product.

Thus with this two competitive advantage Nokia is able to meet the rising demand in India, China and Eastern European markets which is itself a big market segment and reaping the profitability which Motorola is not capable with small market share.