Case Study 2: Nokia Global Operations

Over the last 15 years, the Finnish company Nokia has built global leadership of the mobile telephone
market. After dramatic growth in recent years, Nokia has faced problems in making the best strategic
choice for continued growth. This case explores its strategic decision making and the risks that it now
faces.

Background

In the late 1980s, the small Finnish company Nokia was involved in a wide range of businesses. For
example, it made televisions and other consumer electronics in which it claimed to be 􀂶third in
Europe􀂶. It also had a thriving business in industrial cables and machinery and manufactured a wide
range of other goods from forestry logging equipment to tyres. It had been expanding fast since the
1960s and was beginning to struggle under the vast range of goods that it sold. Sadly, group􀂶s chief
executive at that time, Kari Kairamo, was overwhelmed that he committed suicide. It is rare that
strategic pressures are so intense but the impact on managers of strategy evaluation and development
is an important factor in generating stress.

The Early 1990s

In 1991 and 1992, Nokia lost USD120 millions on its major business activities. The company had to find
new strategies to remedy this situation. It had already cut out some of its activities but was still left
with a telephone manufacturing operation, an unprofitable TV and video manufacturing business and
a strong industrial cables business. Nokia began the process by seeking a new group chief executive.
Its choice was Jorma Ollila, who had previously run the small Nokia mobile phone division, which was
loss-making at the time. 􀂶My brief was to decide whether to sell it or keep it. After four months, I
proposed we keep it. We had good people, we had know-how and there was market growth
opportunity, explained Ollila.

In 1992, Nokia chose to develop two existing divisions that had related technologies: mobile telephone
and telecommunications equipment (switches and exchanges). Subsequently, it focused mainly on the
mobile business but did not pull completely out of the telecommunications equipment market. There
were four criteria to justify the strategic choice to focus on mobile telephones:

1. It was judged that the mobile telephone market had great worldwide growth potential and was
growing fast.

2. Nokia already had profitable businesses in this area.

3. Deregulation and privatisation of tele-communications markets around the world were providing
specific opportunities.

4. Rapid technological change 􀂶 especially the new pan-European GSM mobile system provided the
opportunity to alter fundamentally the balance between competitors.

Clearly, all the above judgements carried significant risk. In addition, the company’s strategic choice
was limited by constraints on its resources. The heavy losses of the group overall were a severe
financial constraint. In addition, it was not able to afford the same level of expenditure on research
and development as its two major rivals, Motorola (US) and Ericsson (Sweden). Moreover, although it
had the in-house skills and experience of working with national deregulated telecommunications
operators through competing in world markets in the 1970s and 1980s, it would need many more
employees if it was to develop the market opportunities. However, by selling off its other interests
and concentrating on mobile telephones it was able to overcome some of the difficulties.

Looking back on that time, Ollila commented: In order to be really successful you have to globalise
your organisation and focus your business portfolio. We have been able to grow and be global and
maintain our agility and be fast at the same time. What Ollila did not say was that Finland is a small
country, so to build any sizeable business, it is essential to think beyond the country’s national
boundaries.

1992-2000: Building Global Leadership

One of Ollila’s first tasks was to build a management team. He chose two new, young executives as
part of his team: Sari Baldauf as head of Nokia networks and Matti Alahuhta as head of Nokia mobile
telephones. Alahuhta had recently attended IMD Business School in Switzerland where he had written
a dissertation on how to turn a medium-size technology-based company into a world-class enterprise
against larger rivals with greater resources. 􀂶e clearly had in mind how Nokia could compete with
competitors like its Swedish rivals Ericsson, the Dutch company Philips, the French company Alcatel
and the American company Motorola, all of whom had considerably greater resources in terms of
finance and technical knowledge. Alahuhta identified three important factors to help Nokia: first, it
was important to find a new technology that would change the rules of the game and turn all existing
competitors into beginners􀂶 second, it was essential to move fast internationally and respond flexibly
as international markets developed third, the company had to assess and deliver what customers
really wanted from mobile telephones. Alahuhta did not especially identify one technology
development that proved highly valuable in the early 1990s. This was the agreement within the
European Union to adopt the GSM technical standard for mobile telephones. This allowed company
like Nokia to have access to a large market where the technology was standardised and major
economies of scale were therefore possible. Such a development was important because the GSM
standard was subsequently used worldwide, with around 500 millions of the world’s 700 millions
mobiles using this standard by 2000. This was fortunate for companies like Nokia: “Good luck favours
the prepared mind” was Alahuhta’s cryptic comment some years later.

Benefits and Problems of Strategic Choice

In fact, Nokia was highly successful in its expansion.: moved rapidly to design phones that would
appeal to global customers by designing mobile phones that offered reliability and ease-of-use. This
meant that it had to invest heavily in software development and it formed an alliance with the British
company, Symbian, subsequently taking a majority share in order to ensure that developments
remained on track. Nokia was also singleminded in its investment in factories in order to deliver
economies of scale, reduce costs and raise profit margins. Nokia was particularly good at reading what
customers wanted and then moving quickly into the market place with new telephones: it realised
that the mobile phone during this period was almost a fashion accessory and designed phones to
reflect this. It made the important judgement that the market during the 1990s was moving from
being a high-tech market into a mass-market, where cheaper, entry-level phones were required. This
was in sharp contrast to its Nordic competitor, Ericsson, who had remained with high-tech phones:
“We had the wrong profile in our portfolio,” was the later comment from Kurt

Hellstrom, Ericsson’s chief executive. By 2000, Nokia had developed a range of mobile telephones that
were both attractive to look at and innovative in their use of the new digital technology that had
become available. The result was that by 2000 Nokia was world leader in mobile telephone
manufacture, with 35􀂶 global share.
2000-2005: Coping with New Challenges

Having concentrated its resources into mobile telephones, Nokia then had to cope with a major
downturn in the world market 2000-2002 which occurred for three main reasons. The first reason was
that the market became saturated in some parts of the world for example, 80􀂶 of people in the EU
had mobile telephones. Other markets were also becoming saturated 􀂶 only America lagged behind
because of the profusion of mobile standards in that market. Even in countries like China and India,
around 30% of the population had mobiles and the take-up was much higher in Asian countries like
Singapore and Japan, though the latter country had developed its own technical standards outside the
GSM system.

The second reason for problems was that the technology bubble of the late 1990s came to an end in
2001. This left the leading telecommunications companies over-burdened with debt and wanting to
slash their costs. Sales in Nokia’s telecommunications equipment division - related to mobile phones
but more associated with the surrounding infrastructure of telephone exchanges dropped 50% over
three years. Nokia itself had to make some 7,500 workers redundant in order to recover the situation.

In the mobile phone division of Nokia, there was a third additional problem for Nokia. The telephone
service providers like Vodafone and Orange were delaying the introduction of the next generation of
mobile telephone technology for reasons of technical feasibility and lack of funds through paying too
much for the licenses. The ‘3G’ pure digital technology would introduce a whole new market for
telephone services that would need a totally new series of product designs. In turn, this would require
new manufacturing processes inside companies like Nokia. The result was that all the mobile
telephone manufacturers, including Nokia, were hit by falling profits in 2001-2002.

The early markets for the new 3G technology were in Japan and Korea, where the GSM Notes standard
was not used. In addition, some of the Asian electronics manufacturers like Samsung and Sony realised
that the new technology gave them another chance to enter the global mobile markets, particularly if
they had missed out on the benefits of the GSM standard. Sony combined with Ericsson to launch a
new joint venture and Samsung invested heavily in new 3G technology. The result was that Samsung
had built a global market share of 14% by 2005 and Sony Ericsson had a share of 6%. However,
Motorola still kept its second position with 17% of the market. Competition was therefore increasing
for Nokia.

New Challenges and New Management

At this point, Nokia lost its way slightly. It failed to read customer demand correctly around the year
2003-2004. The new ‘clam shell’ folding designs and mid-price photo imaging screens from its
competitors proved popular in the market place. Nokia did not move to match these but stuck with
its existing ‘stick’ designs. There was some suggestion that this may partly have been because Nokia’s
economies of scale were more associated with its existing designs. Certainly, Nokia had easily the
highest profit margins in the industry and was reluctant to reduce these. Eventually, Nokia decided
that its dominant world market share was highly valuable and it would be preferable to reduce its
prices, take a loss of profit margin and also introduce new ‘clam shell’ designs. At the end of 2004, the
company’s share had begun to rise again and was back around 35%. More generally around 2004,
Nokia realised that it needed to review its position. It had taken a hit from its competitors and it had
failed to read the market changes fully. Importantly, it also faced new challenges that would come as
3G digital technology became the accepted medium of telephony. Essentially, this would open up
opportunities that were unclear but potentially important live transmission of television to mobile
phones,
new games to mobile phones, instant web access, etc. All these were technically feasible but still
remained to be exploited fully. New mobile phones needed to be multimedia and also needed to
consider the extent to which they would converge in terms of performance with other consumer
electronics like the highly successful Apple iPod. There was also another new trend that Nokia needed
to master. The world market for mobile telephone providers was becoming more concentrated.
Companies like Vodafone, Orange, Telekom and others were Nokia’s major customers. The mobile
telephone service customers were buying around 65-70% of all the world’s mobiles, which they were
then selling or offering free to customers. The Japanese electronics company Sharp had been able to
move into mobile telephones from nothing in the early 2000s by doing a deal to supply Vodafone with
some of its models. This was a serious matter for Nokia since such large customers required more than
the standard models: customers like Vodafone wanted customised phones that would deliver
competitive advantages over their rivals and large orders meant real bargaining power. Nokia has
been hit hard by the strategies of Samsung, Motorola and Sony Ericsson. Nokia has responded with a
new product range but has lost some market share. Nokia needed to introduce a whole new area of
customer management for such large customers. ‘It’s a very different era in terms of management
requirements, in terms of skills, know-how, how you build your customer relationship,’ explained

Nokia’s Chief Executive, Ollila. The outcome of all the above was the introduction of new management
at Nokia in December 2004. ‘From a management point of view, it began in spring or summer 2003
when we in the management team started discussing the need to look at the organisation afresh,’ said
Ollila. In a period of change in the industry, Nokia needed to adapt and restructure its management
team. The result was that both Sari Baldauf and Matti Alahuhta left Nokia. Mr Alahuhta went to a
leading position at another Finnish company and Baldauf to do something ‘completely different’.
Hence, as Nokia faced up to the new challenges, it decided that a new organisation structure and a
new management team would be needed. Ollila commented: ‘You don’t make generational changes
easily. . . It’s a big change. But change allows you to reposition, to rethink.’ Nokia’s profitability had
stabilised in the short term but the company needed to think carefully about new technologies, new
trends and new strategic choices. It was announced that Nokia’s widely admired Chief Executive,
Jorma Ollila, would be leaving this position in May 2006 but would remain non-executive Chairman.
The Nokia Management team that guided the company to world leadership in mobile phones would
largely have left the company.

Questions

1. Why did Nokia select only one area for development􀂶 What risk would it involve?

2. What problems did Nokia face in 2004?

3. What was the significance of the introduction of the new GSM system for Nokia’s chosen strategy?

4. How important was the management team to strategic choice? Did it really have to change in 2004?