The Strategic Decisions That Caused Nokia’s
Failure
The moves that led to
Nokia’s decline paint a cautionary tale for successful firms.
In
less than a decade, Nokia emerged from Finland to lead the mobile phone
revolution. It rapidly grew to have one of the most recognisable and valuable
brands in the world. At its height Nokia commanded a global market share in
mobile phones of over 40 percent. While its journey to the top was swift, its
decline was equally so, culminating in the sale of its mobile phone business to
Microsoft in 2013.
It
is tempting to lay the blame for Nokia’s demise at the doors of Apple, Google
and Samsung. But as I argue in my latest book, “Ringtone: Exploring the Rise and Fall of Nokia in Mobile Phones”,
this ignores one very important fact: Nokia had begun to collapse from within
well before any of these companies entered the mobile communications market. In
these times of technological advancement, rapid market change and growing
complexity, analysing the story of Nokia provides salutary lessons for any
company wanting to either forge or maintain a leading position in their
industry.
Early
success
With
a young, united and energetic leadership team at the helm, Nokia’s early
success was primarily the result of visionary and courageous management choices
that leveraged the firm’s innovative technologies as digitalisation and
deregulation of telecom networks quickly spread across Europe. But in the
mid-1990s, the near collapse of its supply chain meant Nokia was on the
precipice of being a victim of its success. In response, disciplined systems
and processes were put in place, which enabled Nokia to become extremely
efficient and further scale up production and sales much faster than its
competitors.
Between
1996 and 2000, the headcount at Nokia Mobile Phones (NMP) increased 150 percent
to 27,353, while revenues over the period were up 503 percent. This rapid
growth came at a cost. And that cost was that managers at Nokia’s main
development centres found themselves under ever increasing short-term
performance pressure and were unable to dedicate time and resources to
innovation.
While
the core business focused on incremental improvements, Nokia’s relatively small
data group took up the innovation mantle. In 1996, it launched the world’s
first smartphone, the Communicator, and was also responsible for Nokia’s first
camera phone in 2001 and its second-generation smartphone, the innovative 7650.
The
search for an elusive third leg
Nokia’s
leaders were aware of the importance of finding what they called a “third leg”
– a new growth area to complement the hugely successful mobile phone and
network businesses. Their efforts began in 1995 with the New Venture Board but
this failed to gain traction as the core businesses ran their own venturing
activities and executives were too absorbed with managing growth in existing
areas to focus on finding new growth.
A
renewed effort to find the third leg was launched with the Nokia Ventures
Organisation (NVO) under the leadership of one of Nokia’s top management team.
This visionary programme absorbed all existing ventures and sought out new
technologies. It was successful in the sense that it nurtured a number of
critical projects which were transferred to the core businesses. In fact, many
opportunities NVO identified were too far ahead of their time; for instance,
NVO correctly identified “the internet of things” and found opportunities in
multimedia health management – a current growth area. But it ultimately failed
due to an inherent contradiction between the long-term nature of its activities
and the short-term performance requirements imposed on it.
Reorganising
for agility
Although
Nokia’s results were strong, the share price high and customers around the
world satisfied and loyal, Nokia’s CEO Jorma Ollila was increasingly concerned
that rapid growth had brought about a loss of agility and entrepreneurialism.
Between 2001 and 2005, a number of decisions were made to attempt to rekindle
Nokia’s earlier drive and energy but, far from reinvigorating Nokia, they
actually set up the beginning of the decline.
Key
amongst these decisions was the reallocation of important leadership roles and
the poorly implemented 2004 reorganisation into a matrix structure. This led to
the departure of vital members of the executive team, which led to the
deterioration of strategic thinking.
Tensions
within matrix organisations are common as different groups with different
priorities and performance criteria are required to work collaboratively. At Nokia,which
had been acccustomed to decentralised initiatives, this new way of working
proved an anathema. Mid-level executives had neither the experience nor
training in the subtle integrative negotiations fundamental in a successful
matrix.
As
I explain in my book, process trumps structure in reorganisations. And so
reorganisations will be ineffective without paying attention to resource
allocation processes, product policy and product management, sales priorities
and providing the right incentives for well-prepared managers to support these
processes. Unfortunately, this did not happen at Nokia.
NMP
became locked into an increasingly conflicted product development matrix
between product line executives with P&L responsibility and common
“horizontal resource platforms” whose managers were struggling to allocate
scarce resources. They had to meet the various and growing demands of
increasingly numerous and disparate product development programmes without
sufficient software architecture development and software project management
skills. This conflictual way of working slowed decision-making and seriously
dented morale, while the wear and tear of extraordinary growth combined with an
abrasive CEO personality also began to take their toll. Many managers left.
Beyond
2004, top management was no longer sufficiently technologically savvy or
strategically integrative to set priorities and resolve conflicts arising in
the new matrix. Increased cost reduction pressures rendered Nokia’s strategy of
product differentiation through market segmentation ineffective and resulted in
a proliferation of poorer quality products.
The
swift decline
The
following years marked a period of infighting and strategic stasis that
successive reorganisations did nothing to alleviate. By this stage, Nokia was
trapped by a reliance on its unwieldy operating system called Symbian. While
Symbian had given Nokia an early advantage, it was a device-centric system in
what was becoming a platform- and application-centric world. To make matters worse,
Symbian exacerbated delays in new phone launches as whole new sets of code had
to be developed and tested for each phone model. By 2009, Nokia was using
57 different and incompatible versions of its operating system.
While
Nokia posted some of its best financial results in the late 2000s, the
management team was struggling to find a response to a changing environment:
Software was taking precedence over hardware as the critical competitive
feature in the industry. At the same time, the importance of application
ecosystems was becoming apparent, but as dominant industry leader Nokia lacked
the skills, and inclination to engage with this new way of working.
By
2010, the limitations of Symbian had become painfully obvious and it was clear
Nokia had missed the shift toward apps pioneered by Apple. Not only did Nokia’s
strategic options seem limited, but none were particularly attractive. In the
mobile phone market, Nokia had become a sitting duck to growing competitive
forces and accelerating market changes. The game was lost, and it was left to a
new CEO Stephen Elop and new Chairman Risto Siilasmaa to draw from the lessons
and successfully disengage Nokia from mobile phones to refocus the company on
its other core business, network infrastructure equipment.
What
can we learn from Nokia
Nokia’s
decline in mobile phones cannot be explained by a single, simple answer:
Management decisions, dysfunctional organisational structures, growing
bureaucracy and deep internal rivalries all played a part in preventing Nokia
from recognising the shift from product-based competition to one based on
platforms.
Nokia’s mobile
phone story exemplifies a common trait we see in mature, successful
companies: Success breeds conservatism and hubris which, over time,
results in a decline of the strategy processes leading to poor strategic
decisions. Where once companies embraced new ideas and experimentation to spur
growth, with success they become risk averse and less innovative. Such
considerations will be crucial for companies that want to grow and avoid one of
the biggest disruptive threats to their future – their own success.
Yves Doz,
INSEAD Emeritus Professor of Strategic Management | November 23, 2017
Read more at https://knowledge.insead.edu/strategy/the-strategic-decisions-that-caused-nokias-failure-7766?utm_source=INSEAD+Knowledge&utm_campaign=6bb2a74dab-EMAIL_CAMPAIGN_2017_11_30&utm_medium=email&utm_term=0_e079141ebb-6bb2a74dab-249840429#jWI71JtE9W6HVP4Q.99
No comments:
Post a Comment