I got a great tweet from Matthew Bassett @hewbass on Twitter who pointed me to the Ratner Effect when discussing the Osborne Effect and Nokia's CEO Stephen Elop and the market share massacre he has engineered at Nokia this year (Nokia towered over its rivals only six months ago with 29% market share in smartphones, today it has fallen to 15% and third place and is headed to single digits by year-end).
I am about to coin a new term, called the Elop Effect, the most damaging CEO statement conceivable and proof of ultimate management incompetence in the CEO. But lets understand Osborne Effect and Ratner Effect first.
Osborne Effect, as defined by Wikipedia is "a term referring to the unintended consequence of the announcement of a future product ahead of its availability and its impact upon the sales of the current product."
So the Osborne Effect does not really take issue on whether the current product is good or bad, it is only the announcement of the next version, which will make the current edition instantly obsolete. That means the current prodcuts will not sell, the sales collapse means prices have to be slashed which destroys otherwise healthy profitablity and plunges the company into massive losses instantly.
Now, lets take Ratner Effect (this was new to me, but it happened in 1991 which was years after I had gotten my MBA so obviously we didn't study the Ratner Effect in my MBA studies in New York City haha)
Gerald Ratner from Wikipedia was CEO of British jewelry group Ratners (since renamed Signet Group). He made a famous speech in London to the Institute of Directors in 1991 in which he said his company products were sold for such low prices "because its total crap." This remark was then published and caused his company to collapse and was only saved by his departure - and the rebranding of the company to Signet.
So the Ratner Effect is not related to 'generations' or 'platforms' - it is simply that if the CEO of a company calls his own products crap, he will be believed. That will instantly devalue all their products and cause collapse of prices, sales, profits.
Now lets take the Elop Effect. It combines the Osborne Effect with the Ratner Effect. Stephen Elop did not just announce that his company Nokia switches from the existing Symbian and MeeGo platform strategy to one bought in from Microsoft (thus causing instantly an Osborne Effect) - he further added to this damage, by calling the Nokia platform crap, with his Burning Platforms memo, which with hindsight is seen as full of factual errors and many statements that Elop himself has made since seem to retract some of the most damaging statements in the memo. Nonetheless, with the Burning Platforms memo, Elop also called the Nokia platforms, Symbian, Ovi, MeeGo and Qt - as uncompetitive, ie he called his own products crap. That instantly destroyed their long-standing trust and credibility in the market. As part of Elop's damage-control he is already now trying to rebrand parts of it - killing the Ovi branding of the Nokia app store for example and changing the naming regimen for Nokia handsets etc.
The Elop Effect is therefore when a CEO announces both that his current platform is not competitive AND he announces a new system to be replacing the current one, without any new products to sell (in Nokia's case, for at least 9 months).
The Osborne Effect alone bankrupted Osborne Computer company. The Ratner effect alone almost destroyed Ratner which only survived by firing its CEO and rebranding the damaged company. The Elop Effect is far greater than either the Osborne Effect or the Ratner Effect alone. The Elop Effect in only 6 months from February 11, 2011, has so far caused Nokia to go from 29% market share in smartphones to 15% market share (lost half of its customers in less than two quarters). This while the smartphone industry is experiencing hypergrowth globally. Nokia also lost 23% of its lower-prices featurephone sales in the past six months, while the overall non-smartphone 'dumbphone' side of the phone industry is stil growing.
How damaging is the Elop Effect. Well, before the Elop Effect, for the last 3 month period before it, ie Quarter-on-Quarter performance, Nokia was growing smartphone unit sales by 7%, growing average sales prices by 14%, growing total smartphone unit sales revenues by 22% and growing profits by 68%. The smartphone unit profits were of the size of 740 million dollars in Q4 of 2010.
Since the Elop Effect, Nokia smartphone unit sales have declined by 41%, average sales prices fell by 9%, total revenues crashed by 47%, and the smartphone unit which had been Nokia's profit engine, in a handset unit that had never generated a loss, became a giant loss-maker. Smartphone units in Q2 now have produced a loss of 230 million dollars! The turnaround (from profit to loss) has had a value lost of 970 million dollars, 3% shy of a Billion dollars of pure profit out of Nokia's biggest profit engine division, destroyed by the Elop Effect.
Note the total turnaround in Nokia's overall performance as a corporation. In the first five months since Elop took office up to February 10, the Nokia share price had grown 11%. Since the Elop Effect on February 11, the share price has fallen to a 14-year low, and has lost 57% of their value in a six-month period, with further declines. The ratings agencies have downgraded Nokia to barely above junk status.
I had a few minutes to think about it and it hit me that the above is still not quite right. With Osborne, he announced his NEXT device making the current Osborne PC obsolete. Elop did something worse. He announced that the current line is obsolete, he would switch to Microsoft - and yet Nokia would be releasing two dozen MORE new phones on the now-instantly-obsolete system. So its like Osborne Effect but two dozen products into the future, far far far worse. He said in effect, all products on this platform are now obsolete, but we will make two dozen new products on this obsolete platform please buy them even as they are obsolete.
And the same with the Burning Platforms Memo. Ratner told the truth saying his cheap products were crap. If Elop had really been sincere and truthful, with his Burning Platforms memo, then it would be a fair analogy to Ratner. But again, that is not the case. What is worse in Elop's case, is that he made several statements about Nokia's 'faults' which were not true. He was calling his own product worse than it really was. I have chronicled here what all faults were there and how Elop has been walking back some of those statements. But the sad fact is that with Ratner Effect, the CEO talked about honest real faults in his products (as they really were crap) but in Elop's case, he exaggerated the faults of his prodcuts (or blatantly lied - saying that Nokia had fallen behind US based smartphone makers like Apple's iPhone - while at the same time Nokia attorneys were finalizing the patents dispute negotiations - by which Apple pays Nokia and Nokia does not pay Apple for Nokia's patents - is clear evidence that Elop knew when he wrote that, that the reality wasn't so. The public perception was yes, that Nokia had fallen behind Apple by several years but in reality, Nokia's innovative designs and patents had far exceeded that of Apple and it was Apple who had been stealing Nokia property - admitting this by paying back-royalties in the settlement - and agreeing to pay into perpetuity to Nokia a fee for every iPhone ever sold from now on. That Elop says Nokia fell behind Apple is totally wrong and he knew it. There are many other such errors in the Burning Platforms memo but the point is - Elop took perhaps valid issues of Nokia problems - but made them much worse by exaggerating or even blatantly lying about the issues, making Nokia's devices seem worse than they were!
So the corrected Elop Effect - A CEO's statements that annouce that your products are obsolete now, and commit to producing several new products on the obsolete basis before replacements are to be made; all while calling your own products crap, even adding claims of imagined faults that your products do not have. That is the Elop Effect and it will destroy your company in less than a year, guaranteed.
So there you have it. It would take an incompetent CEO to make such a big error as an Osborne Effect. IT would take a colossal idiot CEO to call his own products crap. But now we have a new standard for the ultimate in corporate management incompetence and self-inflicted damage: The Elop Effect is where the CEO both calls his own products uncompetitive and simultaneously announces a shift to a new platform that is not available to sell currently. This is the fastest way to destroy a company. The Elop Effect will be studied in MBA classes for decades to come as the most damaging CEO statement ever made by any major company CEO. (And yes, Nokia's Board has to fire Elop now! If Nokia's Board is not firing Elop, they are guilty of complacency in the face of obviously incompetent CEO running their company)