Why the mighty fail – lessons from Nokia

For many years the name Nokia was synonymous with mobile communications. Yet it took only two decades for the Finnish firm to help create and dominate the industry – with a 40 per cent global market share at its height – before crashing out in a spectacular fashion with the fire sale of its mobile phones business to Microsoft.

Some observers have equated Nokia’s demise with the rise of Apple, Google and Samsung, but the truth is not that simple. Nokia was in the throes of a strategic crisis before any of these companies entered the market and its own financial woes became apparent. In fact, the seeds of Nokia’s destruction in mobile phones were planted at the height of its success.

In the early 1990s, Nokia’s young and energetic management team ran its mobile phones business more like an entrepreneurial start-up than as part of a century-old conglomerate. Opportunistic and visionary choices rather than a grand strategy drove Nokia’s early growth as telecoms markets deregulated in Europe and the US. 

Much as Huawei is harnessing synergies from its adjacent businesses – infrastructure and systems on a chip – to grow its smartphone unit today, Nokia’s early innovation and success relied on the symbiotic relationship between its network and phone businesses. So successful was this combination that in the mid 1990s, Nokia could no longer keep up with demand and its supply chain teetered on the brink of collapse.

Managers acted quickly and commissioned an enterprise resource planning system which gave them the flexibility to scale up production faster than any of their competitors, and within a few years take market leadership away from Motorola – in the four years to 2000, revenues in the mobile phone business increased 503 per cent. But it also marked the tide turning towards an internal, operational focus in the firm.

During this period of extraordinary growth, Nokia’s senior management team had become increasingly concerned with both sustaining growth in the mobile phone business and finding new opportunities. The latter proved unsuccessful, as tough short-term metrics judged new ventures in light of the core phone business and so they were doomed to fail. 

The availability of new technical features, such as cameras, combined with the idea of targeting specific phone models to different user groups – such as business users, basic and high-end personal users – provided the opportunity to sell multiple phones to individuals and led to a strategy of lifestyle market segmentation to drive growth in the core business. Initially successful, over time the pursuit of micro segmentation resulted in a proliferation of products with little differentiation.

As managers at Nokia’s main development centres found themselves under ever increasing short-term performance pressures, they were unable to dedicate energy and resources to anything beyond incremental improvement. And so Nokia’s relatively small data group took up the innovation mantle. 

In 1996, it had launched the world’s first smartphone, the Communicator and was also responsible for Nokia’s first camera phone in 2001. However their software-focused activities were not embraced by the core phone business which saw itself (and therefore Nokia as a whole), as in the business of producing hardware. 

Frustrated that the entrepreneurial drive which had enabled Nokia to shape the industry just 10 years earlier was now lacking, in 2004 Nokia’s CEO undertook a major reorganisation into a matrix structure with “vertical” product lines and common “horizontal” platforms providing key shared resources for research, software development, manufacturing, and marketing and sales.

Although Nokia’s problems wouldn’t become apparent to the outside world for another eight years, the matrix reorganisation marked a critical turning point in its demise: it led to the departure of key members of the executive team and with it, the deterioration of strategic thinking and loss of an informal integration mechanism across business units. 

Combined with cost-cutting pressures, this resulted in a deterioration in quality.

While infighting characterised the rank and file, Nokia’s executive team was focused on rearranging the proverbial deckchairs as the Titanic was sinking – undertaking unnecessary and disruptive reorganisations in the belief that new structures, rather than a new strategy and better processes, would solve the company’s problems. Between 2004 and its near bankruptcy in 2013, Nokia underwent four restructurings.

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Towards the end of the decade, it was becoming clear that a major technology disruption brought about by Apple and Google was redefining the industry around platforms, applications and ecosystems. But as the incumbent industry leader with a simple product-based design, engineer and manufacture business model, Nokia lacked a response to the new competitive threat.

In terms of software, it was committed to its out-of-date and device-centric operating system, Symbian, which required entire new sets of code to be developed for each new phone model and was loathed by application developers everywhere. Although Nokia’s small data unit had developed an alternative operating system, it was met with stiff resistance from the core phone business and abandoned in favour of a fruitless collaboration with Microsoft. 

Nokia had become a sitting duck to growing competitive forces and market changes. The game was lost and in September 2013 it agreed to sell its mobile phone business to Microsoft for €5.44 billion (US$6.77 billion at current rate).

Understanding why and how this happened to Nokia really matters. Nokia’s decline in mobile phones cannot be explained by a single, simple answer: instead, a perfect storm of poor management decisions, dysfunctional organisational structures, operational focus and deep internal rivalries sealed its fate.

In these times of relentless technology advancement, rapid market change and growing complexity, Nokia’s journey in mobile phones provides salutary lessons for any company wanting to forge or maintain a leading position in their industry.