Nokia’s consultants confirmed what investors long suspected: the Finnish company’s mobile phone business has a "dubious" future and the whole corporation is in a "hopeless" position. The report, commissioned by a board struggling with collapsing market capital, elusive profit, and no clear course for the future, recommended the company close down its mobile business. Given Nokia’s spectacular stock decline—it’s lost 90% of its value in 5 years—that seems sound advice.
Except it wasn’t. Or at the very least, it came two decades too soon: the 1991 memo, discussed in Higher Ambition: How Great Leaders Create Economic and Social Value, is now more than 20 years old and was provided to Nokia’s board, when the company was facing a crisis. Had the board followed this advice and sold the unit, Nokia would never have undergone one of the world’s most dramatic pivots, away from television electronics, rubber, and paper, to become, for a time, the top mobile phone seller in the world.
Then again, it also would never have suffered the remarkable decline that has left some observers wondering if an equally radical change in course is needed to turn the company around, or if, instead, Nokia’s best bet is to heed the advice given more than 20 years ago and sell the business.
Nokia Corporation, as we know it today, was born in 1967, when paper company Nokia Ab, Finnish Rubber Works and Finnish Paper Works merged. But its rubber and paper subsidiaries, founded in the 1800s, are much older. Through the early 1980s, sales at the company came chiefly from rubber and paper products. That changed when competition from cheap Asian imports, as well as decreased demand from a struggling Soviet Union, a major importer of Scandinavian goods, forced the company to adjust course.
So Nokia pivoted, modernizing its industrial operations (its machinery division moved into robotics, for instance) and buying a bevy of electronics companies, including Salora, Scandinavia’s largest color TV manufacturer, and the Swedish state-owned electronics firm Luxor in 1984, according to the International Directory of Company Histories. Those purchases became an increasingly important part of the business: electronics revenue, largely televisions, grew to 60% of sales from just 10% in the eight years ending in 1988, the directory said. And Nokia’s revenues grew, sometimes by double digits annually.
Then that, too, went sour. The Soviet Union collapsed, effectively shutting down a major market for electronics. Finland, along with much of the rest of the world, entered a recession. The result was that pre-tax profits plummeted 40%.
With electronic sales increasingly unprofitable, Nokia again had no clear direction. So the head of its mobile phone division, Jorma Ollila, backed a move away from other electronics and into the fledgling mobile communications market, in which it had been a player since 1979, when it developed radiophones with Salora. The idea to do a kind of modified "zoom-in" pivot, which would make a non-core product central to the company’s growth strategy, was extreme, but not completely outlandish: sales in the relatively small division, which had been offering car phones since 1982 and portable phones since 1986, were growing 30% to 50% a year, according to Nokia—The Inside Story, and the company was already the world’s second biggest manufacturer of mobile phones.
The consultants hired by Nokia’s board thought continuing to invest in mobile phones was a terrible idea. Not only did the market have an uncertain future, they said, but Nokia didn’t have the resources of a major telecom. Ollila fought back, later telling Higher Ambition that he admonished board members: "If you believe these guys, go away, because that’s wrong."
The board initially ignored his advice and attempted to sell the company to Ericsson. But when the deal fell through, they let Ollila have his way, refocusing on the division and promoting him to CEO.
So Ollila jettisoned Nokia’s consumer-electronics, rubber and cable businesses. The move proved to be a phenomenal success. By 1998, Nokia became the world’s largest mobile phone maker, over the next two years, the companies stock price increased 20-fold, pushing its market value to almost $250 billion and its sales to about $27 billion. Ollila was hailed as a visionary.
Until Nokia faltered—again. Ollila, who had been so far-sighted when predicting the possibilities of mobile technology, led a company that by the late 2000s, was failing to innovate. In 2008, Google released the Android operating system and Apple unveiled its iOS system, both providing far more user-friendly experiences than the Symbian system Nokia offered on its smart phones. By 2009 it had posted a quarterly loss. By 2011, Ollila, then chairman, had made 24/7 Wall St. America’s Worst Directors List. This year, Samsung overtook Nokia it as the world’s largest mobile phone maker, the ailing company announced more than 10,000 job cuts, and Ollila stepped down.
Nokia managers acknowledged they needed another change. "For us two companies helped us a lot: Apple and Google. They helped identify the problem for us," Jorgen Hesselberg, Senior Manager, Agile Enterprise Adoption told an innovation forum last spring. "That was speed and innovation."
Now, some of that innovation is coming from Microsoft. In 2011, Nokia agreed to put aside Symbian in favor of a Window’s operating system, a strategy that analysts say has become critical to the company’s ability to continue to be a viable mobile phone maker. "Nokia is placing a huge bet on Microsoft," Strategic Analytics’ Neil Mawston told the Associated Press in October. "If the gamble doesn't pay off, the losses can be high."
The most recent version of the phone, which was unveiled ahead of the holiday season has seen very early signs of success. The Lumia 920 reportedly sold out in U.S. locations on Black Friday and the company experienced similar runs on the phone in Germany.
The company has also been "dipping [its] toe" into lean start-up methods, testing early versions of products, keeping the elements that consumers want, scrapping the ones that they don’t, Hesselberg told the spring forum. He declined in an email to specify which products they were developing using lean start-up best practices, saying that though it did not sound "very start-upy," he’d need Nokia’s permission to speak publicly about product developments and would need more lead time to do that.
But one place Nokia may be using lean start-up methods is with its newly released HERE Maps for iOS and Android. Useful but "ugly," according to Gizmodo, the maps shortcomings are no surprise to Nokia, who said they were well aware that the iOS maps didn’t take advantage of the display offered by Apple, but it plans to update the app "on a regular basis." That may be an indication that, rather than waiting until they had the perfect product, they used lean start-up practices, releasing an early version, with plans to adjust based on user feedback.
If Nokia’s not tipping its hand as to where its next pivot lies, people outside the company have all sorts of ideas. The suggestions on a short-lived Twitter feed and (now defunct) website called NokiaPivots include using its old paper processing expertise to print the next European Union currency and making rubber cases for iPhones using their former galosh-making experience.
More serious observers have also suggested a move. JP Morgan analysts said Nokia, which would need to increase its Windows smartphone volumes by 448% to break even, should scrap its mobile business and instead focus on its Nokia Siemens Networks (NSN) wireless infrastructure unit.
"We believe management needs to focus on how Nokia can re-align its business rather than going head to head with Apple and Samsung," the analysts said in an October 24 note to investors. "In our view, making a profitable NSN the centerpiece of a new Nokia would be a more sustainable strategy."
The move isn’t without precedent. Nokia’s one-time competitor Ericsson more or less did the same thing a decade ago. That didn’t prevent the company from undergoing the same type of steep market declines as Nokia, but, today, the company is valued at more than $28 billion, more than double that of its former rival.
And if that doesn’t work? Nokia can always take the advice of its 1991 consultants and sell out. To wit:
"The big question is: when’s Microsoft going to buy them?" says Randy Giusto, an industry analyst. "When do we get to the pivot point where Microsoft buys Nokia, just like Google bought Motorola?"
[Image: Flickr user Nokia_fan]