Coining Term: "Elop Effect" when you combine Osborne Effect and Ratner Effect

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.

CORRECTION..

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.

CORRECTION 2..

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)

Comments

[cycnus]

Soon there would be Elop Gate.

:)

BTW,
rim announcing that they would release QNX based phone next year.
I really wondering if the newly released phone of their would suffer the osbourne effect as well.

[Sam]

Agree totally the Elop Effect has destroyed employee morale and more importantly loyalty to Nokia. Only a moron would do what he has done. Did he seriously think customers would not take on what he said in his "Burning Platforms" speech.

Why couldn't he have announced that Meego and Symbian are going to continue but also maybe a few phones a year with Android and WP7 OS. I think everyone would have been happy with that.

The market share was going down because more and more people are buying Smart Phones and the number of competitors is increasing. It was a fools dream to believe it would remain the same.

[n900lover]

It is almost entertaining to see Elop, after deliberately fast-killing symbian, trying his best to do the same with n9. He probably already has samples of wp7 phones nearing the final look and can see how much of crap wp7 is. If customers were left to choose between n9 and wp7, it would be disaster for him and ms. So better not to even allow sale of n9 in countries cursed with wp7 launch, Nokia and profits be damned.

[cycnus]

@n900lover

he's a trojan.... therefore, I'm expecting elop gate too :)

btw, it's really funny how elop blackmailing the nokia user by saying that usa and uk won't got any n9, and if wp7 fail, then nokia is also done... no plan b. it seems to me that he were trying to say to nokia user, "buy this wp7 devices, before nokia wen't bankrupt, because nokia won't make symbian or meego devices for you. if you like nokia. you must buy this to save nokia, otherwise, we're gone".

what an a** h***
sorry for the strong usage of words.

[Tango Finn]

Our unit settled on using the term "elopcalypse" internally a while ago.

[Eurofan]

Tomi, I hope the Nokia Board will listen to you. We are watching the elopcalypse of a one great company otherwise.

[Eurofan]

I meant to say the elopcalypse of a once great company.

[HCE]

Mostly agree with this. While I think Nokia might have had to switch to another platform (the only candidates being Android and Windows Phone), there was no reason to announce the switch and rubbish their own products when the new platform was a year away. That is asking for trouble and I am not sure what Elop, the Nokia board and Microsoft were thinking when they decided to announce this to the world.

I'm not convinced that Nokia's position was as wonderful as you claim it was. My view of the situation is pretty close to what was in the "Burning Platform" memo - so from my point of view, Elop was telling the truth. However, certain truths are best left unsaid or at least, left unsaid until the transition to the new platform is well underway.

- HCE

[peter]

tomi, while I like many others agree your points 100%, more words do not make any sense.
Time to sue Stephen Elop and Jorma Ollila in Finnish Court.

[ejvictor]

Much worse for Nokia fans in the USA the only option in the biggest consumer society in the world will be a black market Nokia device ; Chris Weber, President of Nokia North America was quoted “No unlocked channels and no open distribution. It’s a big change for us. We’re going to be the most operator-friendly company around.” With an OS that carriers hate???? Nokia's demise won't be a case study, it will be an entire semester course!

[n900lover]

HCE:

IMHO it is quite clear why he did this. With symbian/n8 finally starting to look like it can stop the decline and with upcoming meego/n9 that has the potential to truly fight back against iphone and android, should he wait whole year he could end up with 40 % share in smartphones and n9 selling in millions.

Try to ditch all this for your beloved (and non existent) wp7 with some burning memo.

[Kirill Zelenski]

exactly. and third part of Elop effect is destroying of morale inside Nokia. how you can believe in CEO/Company after this kind of memo???
even if that would be true. nobody will continue work as before... it is basic for any manager. absolutely no way saying that! he is stupid or want to destroy.

in "burning platform" was only "everything what you have done is bad, stupid etc... lets jump out from here". effective manager, what to say! )))

[peter]

you see what mototrol ceo Sanjay Jha said about potential wp7 deal with ms. mmi surged 7%.
He needn't to ditch any of his droid line, just possible add new line of wp7.

why nokia can not ?

Time to arrest criminal CEO Steven Elop and his clan, finnish police. They are financial terrorists who committed a crime in 2/11 which is similar to 9/11/event.

[atombum]

Having worked in the inside, the burning platform memo was the truth. Symbian was a disaster five years ago already, and consumers started slowly realizing that as well. Publishing sub-par crap like N8 didn't really help. Elop was blatantly honest, but I guess that was needed to wake up the people inside.

From what I've heard, the spirits are a lot better inside now than they were a year ago. Of course, if you were dumb enough to believe Symbian had a chance in post-iPhone world, you'd better be on your way out anyway. The company will be smaller but at least there's going to be less fat (read: ignorant, passive middle managers) around.

Looking forward how Tomi will react when the Windows mobile turns out to be a good move after all. There's nothing wrong with the platform. Just a shame to see N9 go— that little thing would have been an actual iPhone killer… two years ago. It still is a solid device, very different and better than, say, Android.

And Android as an optional OS for Nokia? Please. *That* would have made Nokia an ODM in an instant. But guess its hard to see from the outside.

[peter]

@atombum , what smoke are you trying to spread. my kid loves the unlocked nokia n8 over iphone 4 from at&t. my wife loves nokia's feature phone over sony erricsson from at&t. based on tomi's data, n8 had been selling very well till terrorist head elop sabotaged it. as a consumer I'd like to take a class action against eflop, not to mention investors of nokia.

[Asko]

@atombum "And Android as an optional OS for Nokia? Please. *That* would have made Nokia an ODM in an instant. But guess its hard to see from the outside."

And what will WP7 make Nokia in an instant? A small marketing shop in Siperia? Sorry, but Nokia is toasted with its current strategy.

[peter]

@atombum , "Looking forward how Tomi will react when the Windows mobile turns out to be a good move after all."

It can never be good for nokia IF it goes with WP7 line alone. With current "strategy" going, nokia is going to belly up before year end.

Look at the new head of nokia in North America, I would say he is the terrorist head the second.
he thinks he is making iphone, making exclusive-only deal with carriers. even apple is selling unlocked phone NOW. not to mention samsung, lg,htc, rimm, mmi.

nokia wp7 will be the least wanted phone among all wp7 phones IF selling by carriers.

Nokia's strength is free GPS maps navigation for life which all carriers will block.

[peter]

Finnish Court needs to summon Steven Elop over his criminal action on 2/11 and measures after that to destroy nokia.

Finnish Congress needs to hold public hearing over Elop's criminal plan and its impacting results on consumers, distributros, carriers and investors.

[MIP]

As I wrote just this morning after reading that Nokia officially announced that they won't launch the N9 in the UK, I think we now have a new word for 'stupid':

http://www.mobileinfoplanet.com/2011/08/11/stupid-has-a-new-name-now-and-a-face/

[Eurofan]

@atombum: WP7 and WP8 will flop in the market place everywhere, particularly in the US subsidized market. No one who is not satisfied with iOS or Android is going to go running to WP. They will look to RIM or HP. Microsoft is one of the most disliked companies in America. It's reputation among consumers is like radioactivity. They make OS's that people don't enjoy using, OS's that constantly barrage the user with unwanted pop-up questions and are not intuitive. By the end of 2012 this will be clear again, although to any objective observer this was clear already.

You say morale in Nokia is better now. Maybe in the marketing department or in the carpool which ferries around those frequent flying, glad handing American executives. Not in the engineering department, I don't think. A Nokia which makes Windows Phone devices will be driven out of business in five years by the Chinese if it doesn't drive itself out of business first from lack of sales.

Your faith in the salability of WP phones is absurd. Consumers have voted down Microsoft phones already and are prepared to do so again and again. It is one of the last freedoms consumers have in the cellular space, the freedom to dislike Microsoft and avoid Microsoft products. If you have just signed a two year commitment to pay $100/month for voice/data/messaging and have to choose between $200 subsidized cell phones, why would you want something with a Microsoft OS? No amount of advertising budget can purchase more than a gullible blip in WP users.