Alarm bell: why Nokia didn’t fit into the era of smartphones
By: Viktor Galckin
Tags: Management, Management And Leadership, Case, Business

The Finnish Nokia, which started with paper production and later became famous for its “unkillable” 3310 phones, always managed to say goodbye to an unprofitable business in time and emerge victorious from the situation. But she lost in the war for the mobile market

Photo: Frank Augstein / AP

The company, which was remembered by a whole generation for its famous “brick phones”, on which one could play “Snake” for hours, is difficult to accuse of being sluggish. Throughout its history, Nokia has not been afraid to change: pulp and paper mills, tire manufacturing, televisions and the world’s most successful mobile devices. The company seemed to have no problem turning 180 degrees, going in a completely different direction and ultimately succeeding in a new market. Yet the company’s most successful mobile unit, which brought the legendary Nokia 3310 to the world, has lost the battle for leadership. Such a failure is often explained by external circumstances, unsuccessful cooperation with Microsoft and even the fact that the latter intentionally sent a “spy” to ruin the Finnish legend.

Through the woods to the TVs

Nokia’s history began in 1865, when a Finnish engineer Fredrik Idestam opened a paper mill near Tampere. And six years later, he, together with Leopold Michelin, formed a joint venture on the basis of this factory called Nokia Ab. In 1896, Idestam retired, and Michelin took over the company, which soon also took up power generators.

In 1922, Nokia began partnering with Suomen Gummitehdas, or Finnish Rubber Products, and the Kaapelitehdas cable factory. And in 1967, the three enterprises merged into one under the common name Nokia Corporation. The combined company is focused on four areas: forestry, rubber, cable and electronics. During the same period, Nokia entered the USSR, and in just a few years the “Soviet neighbor” became the main market for the company.

In the late 1970s, Finland gained the glory of “Nordic Japan”. Then the post of CEO was held by Kari Kairamo. Under his leadership, the company bought out a number of firms, including TV manufacturers Salora and Oceanic, as well as the Swedish company Luxor, which specialized in electronics and computers. These acquisitions made Nokia the third largest TV manufacturer in Europe. And the share of electronics in the company’s revenue from 1980 to 1988 increased from 10 to 60%.

Nokia also took control of Ericsson’s information systems division and acquired handset maker Mobira.

“H ello, is this a plan?”

By the early 1990s, the situation had changed dramatically. Electronics sales began to decline, Finland was going through a severe recession, and with the collapse of the Soviet Union, Nokia lost its main buyer. The post of CEO at that time was held by Simo Vuorilehto. Under his leadership, the company has already gotten rid of such divisions as Nokian Tires, Nokia Data and Finnish Rubber Products. Investors viewed these losses as a financial setback — the company’s stock was plummeting.

A new plan was needed. Then Jorma Ollila, the head of the division of the company responsible for mobile phones, suggested making the direction entrusted to him the key one. The idea was bold and even bordering on insanity, but it still had a grain of common sense. The fact is that sales of a relatively small division that sold car phones and mobile devices grew by 30–50% per year. In addition, Nokia already ranked second in the world in mobile device sales.

The consultants hired by the company argued that it was a bad idea to keep investing in mobile. The market prospects seemed vague to them, moreover, experts considered that Nokia simply did not have the resources that would allow them to seriously engage in this business. “If you believe these guys, just get away, because everything said is fundamentally wrong,” Ollila flared up then, defending his point of view before the board of directors. His emotional arguments were ignored. It was decided to sell the mobile business to Ericsson. However, when the deal fell through, Ollila was allowed to carry out his ambitious plan and was even promoted to CEO in 1992.

Visionary and Worst Director in the World

Under Ollila’s leadership, Nokia has indeed achieved incredible success. In October 1998, phones under the brand of this company became the best-selling phones in the world. The capitalization of the enterprise reached $ 250 billion, and Ollila was considered a real visionary.

A year earlier, the company first released the “Snake” on the 6110, which marked a new era in the development of mobile games and later became a real legend. The operating profit of the company from 1995 to 1999 quadrupled, to $ 4 billion. In September 2000, the Finnish company released the famous “brick” — the Nokia 3310 phone, which later gained worldwide fame thanks to its “indestructibility”, as well as a modified version of “ Snakes “. By 2003, Nokia’s contribution to Finland’s GDP was 3.7%, and the company was responsible for 25% of all exports in the country. That same year, she released a new hit, the Nokia 1100, the best-selling phone of all time. Since the release of the model, about 250 million of these phones have been sold.

Under Ollila’s leadership, Nokia actively bought up IT firms. So, in the 2000s, the company acquired Ramp Network, which specialized in online security systems, the online music service Loudeye, as well as the developer of mobile applications and systems for sending Wi-Fi messages Intellisync.

In 2004, the Finnish telecom giant released its first clamshell smartphone, the Nokia 6260, and a year later introduced a series of new multimedia devices, including the N90 smartphone, which was promoted as “the best camera phone on the market.”

In 2006, Ollila left the post of CEO, but remained on the company’s board of directors. A year later, Steve Jobs introduced the first iPhone. For an outside observer, the situation hardly looked at all alarming: by the end of 2007, half of all smartphones sold in the world were manufactured by Nokia, while the iPhone barely got 5% of the market.

However, as Nokia employees later admit, a rather tense atmosphere reigned in the company at that time: top managers were aware of the appearance of a new model and were worried about this. In 2008, Google released an Android smartphone, and Jobs introduced the new iOS (known as the iPhone OS at the time). Both operating systems outpaced Symbian, which ran Nokia devices. At the same time, Nokia presented its first smartphone with a touch screen, but it was inferior to competitors.

By 2009, Nokia began to suffer losses. Things got worse for the Finnish company, and in 2010 it hired Stephen Elop, a former Microsoft executive in charge of business product development, as CEO. Meanwhile, in 2011, the 24/7 Wall St. put Ollila, then chairman of the board of directors, on the list of the worst leaders. In the same year, Nokia introduced its first Windows phones — the devices came out under the Nokia Lumia brand. However, the new product did not impress users too much — they had enough already entrenched in the market Android and iОs.

During the “reign” of Elop, Nokia shares fell by 60%. In 2013, he stepped down as CEO. And in the same year, Microsoft bought Nokia’s mobile division for $ 7 billion. Later, the IT giant got rid of this business, which passed into the hands of the Finnish HMD Global, which also received the right to use the Nokia brand. In 2017, the new owner of the Finnish brand released an updated version of the Nokia 3310, but this model did not manage to repeat the success of its progenitor.

Everyone is very scared

Since the sale of Nokia’s mobile business, many versions have been expressed as to why the company failed to retain its leadership. Someone believed that the company had been successful for so long that its management simply could not believe that something was going wrong. Others have voiced the assumption that Elop has become a kind of “Trojan horse” and was specially sent to the Finnish company to worsen its situation and bring down the price before the sale. The developers insisted that Nokia underestimated the potential of Android and iOs, and also ignored the fact that Microsoft’s reputation was not perfect at that time.

In 2015, Timo Vuori, Associate Professor of Strategic Management at the Finnish Aalto University, and Qui Hoi, Professor of Strategies at the Singapore office of INSEAD business school, released the results of the study “Distribution of Attention and Social Sharing of Emotions in Innovation Processes: How Nokia Lost the Battle for Smartphones”. They concluded that the problems for the Finnish giant began long before the Trojan horse from Microsoft came to the company.

As part of their scientific work, specialists interviewed company employees, including middle managers and top managers. Wuori and Hoi concluded that one of the key reasons for the company’s failure was the atmosphere of fear that reigned at Nokia. At the same time, according to the study, the company’s management knew in advance about the upcoming release of the iPhone and put pressure on employees to rush those with the development of a more successful analogue.

The CEO and top managers feared they would lose their investment. And employees and line managers, in turn, worried about the reaction of managers to bad news.

“[The chairman of the board of directors] was very cold, and I got the impression that most of the employees at Nokia were afraid of him,” said a person familiar with the company’s work. And one of the Nokia employees claimed that the chairman of the board of directors did not like very much when he was told about the existence of a problem, and preferred to hear that everything is always good.

“The general mood and manner of communication was reminiscent of North Korea,” said a Nokia mid-level executive in a survey.

In his article on the reasons for the failure of Nokia, Hoy argued that top management made the company’s employees weaker, as a result, and the company itself became extremely vulnerable to external competitors. Top managers could not properly motivate employees, and they did not understand well what was happening in the company.

“If a moderate feeling of fear can contribute to healthy motivation, then too frequent intimidation is comparable to an overdose of drugs — you risk getting many side effects,” concluded Qiu Hui.

Author: Margarita Kudryavtseva