Winning Across Global Markets: How Nokia Creates Strategic Advantage in a Fast-Changing World

Table of Contents

Title Page

Copyright Page

Introduction

A Brief History of Nokia’s (and Finland’s) Challenges

Betting on the Future

Staying Close to the Productivity Frontier

Underestimating Nokia’s Strengths . . .

. . . And Overestimating Nokia’s Vulnerabilities

Nokia Excels in Quality and Cost and Innovation

How to Succeed Without a (Large) Home Market

What This Book Reveals About Nokia

Chapter 1 - SUCCESS THROUGH LEGACY AND GLOBALIZATION

Origins of Nokia

The Rise of the Industrial Conglomerate

Expansion into a European Technology Concern

Finland’s Economy Plummets

Nokia Struggles for Corporate Control

Can Nokia Be Saved?

Nokia’s New Global Focus

Embrace of Globalization

Chapter 2 - STRATEGY THROUGH THE EXECUTIVE TEAM

Globalization Without a Home Market

Strategy Driven by the Executive Team

Nokia’s Collective Mind

Externally Oriented but Internally Collaborative

Diverse Team Drives Transformation

How the Executive Team Works

How Teams Drive Strategy Throughout Nokia

Chapter 3 - HOW NOKIA ’ S VALUES, CULTURE, AND PEOPLE CONTRIBUTE TO SUCCESS

Perseverance as Driving Force

Increased Diversity from Across the World

A Shared Purpose Through Values

Commitment to Corporate Responsibility

Development of Global Human Resource Management

Recruitment of Diverse Team Players Worldwide

Development of Managers and Leaders

Chapter 4 - BUILDING A GLOBALLY NETWORKED MATRIX ORGANIZATION

Building Organizational Capability for Changing Markets

Balancing Business and Geography

Nokia’s Structure Today: Toward the Pure Matrix

How Nokia’s Headquarters Work with Its Country Units Around the World

How Nokia’s Country Units Localize Global Strategies

A Globally Networked Organization

Chapter 5 - INNOVATING GLOBALLY VIA R & D NETWORKS

The Rise of Nokia’s Innovation

The Nokia Research Center Drives Nokia Innovation

How R&D Is Done in Nokia’s Units

How Nokia’s R&D Units Cooperate with Universities

Today, Open Innovation Is Vital

Developing New Business

Nokia’s Innovation Network Is Global

Chapter 6 - DEVELOPING STRATEGIC CAPABILITIES ACROSS THE WORLD

Nokia’s Demand and Supply Network

Leadership in Global Distribution and Sales

The Power of Nokia’s Global Brand

Strategic Approach to Marketing

Seeking Insights from Customers Around the World

Chapter 7 - HOW NOKIA IS GROWING AND TRANSFORMING ITS BUSINESS AREAS

Nokia’s Winning Business Strategies

Leadership in Mobile Devices

Nokia’s Devices

Nokia Design Philosophy

Growth of Consumer Services

Toward Solutions

Network Infrastructure: Leveraging Scale and Transforming Solutions

Cooperating Across Boundaries

Chapter 8 - COMPETING IN GLOBAL MARKETS

Winning Across Global Markets

Connecting All People

Quest for the U.S. Market

Sustaining Leadership in Western Europe

Reducing Presence in Japan

Sustaining Leadership in China

Sustaining Leadership in India

Expanding Presence in Russia

Winning in Brazil

Winning the Next Big Emerging Economies

Chapter 9 - HOW NOKIA SEEKS TO SUSTAIN LEADERSHIP

Three Scenarios for Future Communications

Competition for the Future

What Are the Sources of Nokia’s Success?

What Could Go Wrong?

NOKIA’S KEY EXECUTIVES

NOTES

Acknowledgements

ABOUT THE AUTHOR

INDEX

Copyright © 2010 by Dan Steinbock. All rights reserved.

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Library of Congress Cataloging-in-Publication Data

Steinbock, Dan.

Includes bibliographical references and index.

eISBN : 978-0-470-60403-8

1. Nokia (Firm)—Management. 2. Cellular telephone equipment industry—Finland—Management. 3. Cellular telephone systems. 4. Telecommunication—Management. I. Title. HD9697.T454N.7’62138456—dc22

2009051933

HB Printing

INTRODUCTION

Our industry is undergoing one of the biggest transformations in its history, which has been accelerated by the economic crisis, reported Nokia’s CEO Olli-Pekka Kallasvuo in early fall 2009. The Internet, PCs, and mobile communications were converging faster than had been anticipated. At the same time, consumers were no longer interested in just mobile devices but also in solutions. There is no turning back, Kallasvuo warned.

Winning Across Global Markets is the first book to tell the story of how Nokia prepared for this great transformation. It is the first book on Nokia’s strategy, organization, and values that is based on interviews with all of Nokia’s leading senior executives in the past two decades. No other independent author has gained such privileged access. The book tells the story of how Nokia creates strategic advantage in a fast-changing world—with the goal of showing how companies operating in technology-intensive or marketing-intensive industries, or both, can compete in order to win in a global marketplace.

A Brief History of Nokia’s (and Finland’s) Challenges

In the 1990s, Nokia’s senior executives found themselves ahead of both the United States and Japan in the mobile communications industry. The Finnish company seemed to emerge from nowhere as an industry leader; Newsweek once called it an overnight success. The reality, however, is more complex. Nokia’s worldwide clout is barely a decade old, but the company itself was created almost 150 years ago, in 1865.

Nokia was founded during the early industrialization of Finland, a small Nordic country that has been ruled for centuries by its neighbors, Sweden and Russia. Over the past century and a half, Nokia has been created, re-created, and restructured again and again. It was born amid Finland’s national awakening and has endured Russian oppression, a struggle for independence, the Bolshevik Revolution in Russia, a devastating civil war, the rise of nationalism and protectionism in Europe, a worldwide depression, two wars against the Soviet Union and one against Germany, devastation and heavy reparations to Moscow, the loss of eastern territories and integration of more than 400,000 refugees, postwar reconstruction, the Cold War and insulation from the West, national industrialization, decades of rapid growth, years of leftist radicalism, cyclical recessions, Moscow’s perestroika (reforms) and glasnost (openness), the suicide of its charismatic executive and the death of his right-hand man, the collapse of the Soviet Union and the Finnish-Soviet trade, Finland’s most severe recession since the 1930s, participation in the European integration and monetary union, rejuvenation of growth and Nokia’s boom years, the stagnation of the technology sector, outsourcing and offshoring, the rise of China and India, and, most recently, the global economic recession.

During these upheavals, Nokia has persevered and often led the country, overcoming one adversity after another and demonstrating remarkable resilience. Its global success, however, is the result of developments during the past two decades or so. Under the leadership of the legendary CEO Kari Kairamo, Nokia grew very fast and ambitiously already in the 1970s and 1980s. It initiated the transformation from the old industries of forestry, rubber, and cable and moved toward electronics. In the process, it began to seek growth in nontraditional areas and grew into a diversified technology conglomerate. It had great aspirations but lacked adequate capabilities.

Betting on the Future

In 1992, Nokia bet its future on a vision of digital mobile communications, under the leadership of its then-new CEO, Jorma Ollila, and the CFO, Olli-Pekka Kallasvuo (who became the company’s CEO after Ollila retired in 2006). Along with the extraordinary group executive team, Nokia’s leaders focused the company on mobile communications and divested all noncore properties. Unlike most of its rivals, Nokia was not content with the notion that the cell phone would remain just an executive tool or a yuppie toy. It believed that mobile devices should belong to everybody—not just those living in advanced economies but also to those in emerging economies and in the least developed countries as well.

Amid this massive transformation, Nokia helped transform the way people live, work, and play in every corner of the world. The numbers tell the story:

• At the beginning of the 1990s, there were only 17 million mobile subscribers in the world; in 2008, this figure exceeded 4 billion users. By 2013, it is projected to hit 5.9 billion, driven by China, India, and Africa.

• In 2001, there were 42 million mobile Internet users worldwide; in 2008, more than 400 million. By 2013, it is projected to exceed 700 million.

• 2009 saw a total of 1.2 billion mobile devices shipped. Shipments of these devices will nearly double in 2014 to a total of 2.25 billion. At the same time, application downloads are expected to reach 5 billion, from 2.3 billion in 2009.

As the world’s largest device maker and with a market share of almost 40 percent, Nokia can take much of the credit for this enormous growth.

Staying Close to the Productivity Frontier

The communications transformation is not over; it is now entering a new stage. Technologically, mobile devices are turning into converged mobile devices. Traditional cell phones are gaining greater intelligence and turning into smartphones; computers are growing smaller and gaining mobile communication capabilities; at the same time, both are converging and colliding. Geographically, communications used to be driven by advanced economies in the West; in the future, communications will be increasingly driven by large emerging economies in the East. More than any other company in the world, Nokia has seized these technological and geographic opportunities.

Unlike many of its rivals, Nokia is not known for complacency. When one source of growth has been exhausted, it has moved to another through competitiveness, innovation, and perseverance. During the past two decades, value has migrated from mobile infrastructure to devices; now it is moving to software and services, especially solutions (shorthand for mobile devices plus services). In each case, Nokia has been close to the frontier in productivity. Through years of hope and glory, doom and gloom, it has stood the test of time and, unlike most of its rivals, has been unafraid to embrace change.

What happened to us was that we were not expected to succeed. That’s our story, says Jorma Ollila, Nokia’s chief executive from 1992 to 2006 and currently chairman of Shell. This is too personal, he adds quietly. "But the most important cultural element that I have helped to develop in this company is that you can come back . . . . It takes a lot of effort, sleepless nights, twenty-four hours a day, seven days a week, but you can come back . . . ."

The question is, how? How has Nokia achieved its success? How does Nokia create strategic advantage in a fast-changing world? How has it been able to win across increasingly global markets? How does it innovate? What are its other strategic capabilities? How does it develop strategic advantage? How does it create and execute strategy? How does its organizational structure support and contribute to that strategy? What kind of values, culture, and people make that organization possible? Is Nokia’s triumph sustainable? And what are its lessons to other companies operating in fast-changing environments across the world, in both advanced and emerging economies?

This book addresses all these questions.

Underestimating Nokia’s Strengths . . .

Nokia is history.

Excuse me?

"It’s a nice story, underdog and all that. But let’s be real, it’s D.O.A.

Dead on arrival."

Why would you think that way?

Microsoft will kill Nokia.

The interviewer was a senior journalist at one of America’s greatest business weeklies, in an interview with the author that took place in June 2001. Like Bill Gates at that time, this interviewer thought that Nokia was in the business of manufacturing boxes, whereas Microsoft dominated software and operating systems. Since the value in the business was moving toward software and services, Microsoft would win and Nokia would lose. At least that’s how the argument went. Like Gates, the journalist thought that Nokia would happily go to its grave making boxes.

True, Microsoft dominates operating systems and software in PCs, but it was a latecomer in mobile communications, which Nokia dominated. Besides, times change. In the past, Nokia and Microsoft were the toughest rivals. Today, they collaborate in a global alliance. More important, the Nokians had been building capabilities in operating systems and software already for half a decade. In the increasingly complex and global technology sector, no single company, not even a single nation (including the United States, which has ruled over the technology sector), can any longer dominate the entire ecosystem.

Coming from a tiny country, Nokia had little arrogance; it took nothing for granted and had a humble view of globalization. Global integration is not a pretext to command and control markets, but a new foundation to sense and respond to markets. Still, this humility has often been misinterpreted as a sign of weakness. For example, consider this conversation, which took place only two years after the previous interview: This analyst represented a leading investment bank (which got into serious trouble during the global financial crisis). The high-end challenge was not Nokia’s only concern. With the burst of the technology bubble and increasing outsourcing and offshoring in the early 2000s, many analysts, observers, and practitioners were absolutely convinced that low-end challengers would condemn Nokia to extinction.

Nokia doesn’t have a chance in hell.

Why would you think that way?

Today it is the underdog, but tomorrow it will be buried by new challengers in Asia.

The argument was not entirely without basis. For example, in the 1990s, Chinese equipment manufacturers had no market share in China’s nascent mobile marketplace; by 2003, their share had soared to 55 percent. But that was not the end of the story. Soon thereafter, foreign multinationals mounted their counterattack. After the dust settled, Nokia emerged as the winner not only in China but also in India, the two most critical marketplaces of the twenty-first century, whereas many of its traditional Western rivals began a slow but sure decline.

So why did the analyst quoted above misjudge Nokia? He took it for granted that because the company had initially built its manufacturing capabilities in high-cost Western Europe, the capacity would remain in Western Europe. In reality, Nokia began to move to China and India already in the mid-1990s. A decade later, Nokia could not be easily written off in the low-end marketplace because it enjoyed the kind of cost-efficiencies that were as great as, if not greater than, those of the most competitive Chinese players.

. . . And Overestimating Nokia’s Vulnerabilities

Still, Nokia’s track record has in no way discouraged the prognosticators. Consider this exchange, which occurred in summer 2009:

As you know, at this point in time most investors consider Nokia a doomed company.

But why would they think that way?

The thinking is that Nokia will not be able to transform its business model and working practices to compete with Apple. iPhone will kill Nokia.

This industry analyst represents still another leading investment bank (one that also got into trouble but is doing better after government subsidies). Here the notion is that Apple is the driver of the future in communications. The assumption is, again, that Nokia will happily go to its grave making boxes while superior rivals like iPhone will deliver the future.

True, even if Nokia developed the first mobile multimedia devices, Apple was the first to come up with a highly attractive smartphone solution in the United States. Yet iPhone is not the only alternative in the marketplace, and, as critical as America remains in the broad technology sector, it no longer dominates the ecosystem of mobile communications.

The numbers may not tell the future, but they do illustrate the present:

• In 2008, the projected global market volume of mobile devices amounted to 1.2 billion units, whereas the sales of Apple’s iPhone units soared to about 12 million. That means that in relative terms iPhone’s growth has been explosive, but in absolute terms iPhone sales were less than 1 percent of the total.

• In stark contrast to iPhone’s sales of 12 million units, Nokia shipped 468 million mobile devices in 2008—including some 61 million converged devices—that is, mobile computers and smartphones. Clearly, Apple’s success in the United States and in some other countries is impressive, but it’s not enough.

• Winning across increasingly global markets requires just that: winning across global markets.

Conversely, Nokia must speed up its transformation to cope with rivals, such as iPhone and BlackBerry, in America and elsewhere or it will risk its success in the future. After all, today one of the central challenges is to attract, grow, and retain developers for the new generation of mobile devices and solutions. It is not enough to have the capabilities to win the future; in order to truly benefit from the network effects, you must be perceived as the winner of the future.

Since the 1990s Nokia has served as a Rorschach test for many observers and analysts. The track record is that many tend to underestimate Nokia’s strengths and overestimate its vulnerabilities. The question is, why?

Nokia Excels in Quality and Cost and Innovation

For an entire generation, American managers have been taught to choose between quality or cost advantage. That is the very basis of the most popular theories of competitive advantage in strategic management. Yet Nokia has demonstrated that you can (and increasingly must) excel in both quality and cost-efficiencies while also excelling in innovation.

A decade ago, Microsoft was seen as the future winner in mobile communications. Currently iPhone carries that mantle. In both cases the assumption is that the story of Nokia is over. Perhaps it could excel in quality; maybe it could thrive in cost-efficiencies. But innovation is seen as Silicon Valley’s birthright and as American as apple pie. In fact, perceptions have fallen behind realities. In an era of global integration, innovation is bound to be increasingly global and dispersed. In the past, what was good for GE may have been good for America; today, what is good for Nokia may be good not just for America but the world at large.

And there is still more to the story. Both innovation and costefficiencies are necessary, but achieving one without the other is insufficient for success in global markets. Today companies must be able to sense and respond in all critical markets—in advanced economies but especially in emerging markets. During the past two decades or so, the rise of the large emerging economies and the accompanying collapse of traditional cost structures across industries have dramatically accelerated the forces for cost-efficiencies, quality, and innovation worldwide.

But even more is needed for sustained global leadership. As Nokia has demonstrated, it is the combination of strategy, organization, and values that is vital in the dynamic, increasingly global, and rapidly changing environment.

Throughout its recent history, Nokia has operated in an industry in which the forces for worldwide innovation are particularly intense. Since the 1990s companies have been forced to seek high volume—that is, economies of scale through worldwide R&D, production, distribution, and marketing and sales—in order to amortize, as quickly as possible, the heavy investments they’ve had to make because of rising R&D expenditures, new technologies, and ever shorter product life cycles.

Concurrently, the convergence of consumer preferences worldwide and the ever-faster diffusion of technology have contributed to the acceleration of change and fragmentation of innovation. In the postwar era, American companies still enjoyed the most sophisticated business environment. In contrast, today new consumer trends or market needs can emerge not only in New York, London, and Tokyo, or even Helsinki, Seoul, and Hong Kong—but also in Shanghai and Mumbai, Rio de Janeiro and Dubai.

In the past, a U.S.-centered strategic mindset was the key to success. Even today it remains necessary because America dominates the technology sector. Still, it is no longer sufficient. Today, a global mindset is a must.

How to Succeed Without a (Large) Home Market

Our situation is so difficult, if not hopeless, said a leading business journalist in Taipei. We have great engineers and electronics companies, but our population is barely 23 million, whereas even South Korea has more than 48 million. That’s no home market.

Nokia comes from Finland, whose population is about 5.3 million and whose capital city Helsinki is located at 60 degrees north latitude, like Anchorage, Alaska, I replied. Size is a great asset, when it is used strategically. But so is smallness, when it comes with speed and flexibility.

The story of Nokia is important across industries and heralds the future to many multinationals across the world. The reason is in its extraordinary positioning, in terms of the competitive environment and the marketplace. Most major multinationals operate in a marketing-intensive or a technology-intensive environment. Unlike these companies, Nokia operates in a technology- and marketing-intensive environment. Like Intel and Microsoft, it seeks to stay at the cutting edge of the latest technologies worldwide; like Coca-Cola and Procter & Gamble, it also monitors closely the latest fashions and trends in the increasingly global markets.

Nokia, however, is different from Intel, Microsoft, Coca-Cola, and Procter & Gamble in a crucial way. It was not born in a huge and prosperous home market. Today, Finland belongs to the prosperous elite of the world nations, but that legacy is fairly recent. Through much of their history, the Finns have struggled for survival, as witnessed by the national hymn: Our land is poor, it has no hold / On those who lust for gain... / Yet this poor land of urs would still / Our hearts with longing fill.

Unlike large and wealthy nations, Finland, long with other Nordic countries, is ramatically dependent on international markets, foreign trade, and investment. As a result—and in contrast to most of its rivals—even Nokia’s geographic distribution is much more even:

• Over a third of its net sales originate from Europe and almost as many from Asia.

• The other sales come from the Americas, the Middle East, and Africa.

• Its home market (Finland) accounts for less than 1 percent of net sales.

That makes Nokia, along with a few other multinationals, unique. When it comes to globalization, Nokia is in a category of its own. Unlike Coca-Cola, Procter & Gamble, Intel, and Microsoft, it is a multinational company that possesses virtually no home market of its own, from a commercial standpoint.

Despite the diversity of large-country multinationals, most come from advanced economies (United States, Western Europe, Japan) or large emerging economies (especially the so-called BRIC economies, that is, Brazil, Russia, India, and China). Because these multinationals originate from a great home base, their large home market is almost an inherited birthright. Due to its distinctive legacy as a small-country multinational with a tiny home market, Nokia must be flexible and very responsive locally. On the one hand, because of its peculiar global strategy, it sees the world as a single global village, emphasizing uniformity in customer needs, distribution channels, offerings, markets, and regulatory requirements. On the other hand, its legacy as a small-country multinational supports local responsiveness, pressuring the company to consider variations in customer needs, distribution, adaptations, market structure, and regulatory demands. This humility is a recipe for winning across global markets.

To large-country multinationals, foreign markets mean ancillary revenue sources. To small-country multinationals, foreign markets are their revenue sources. Large-country multinationals have most of their critical activities—from headquarters to R&D—in their home base. In contrast, small-country multinationals have many of their critical activities dispersed worldwide. To the extent that globalization will continue and the future of the world is multipolar, globalization will be driven by multiple power centers worldwide. Nokia is the bellwether of multinationals in an increasingly multipolar world and hence it is of interest to all of us and worthy of study.

Necessity is the mother of invention, and it is the inherent constraints of Nokia’s landscape—a miniscule home market and a highly technology-intensive, marketing-intensive environment—that have forced this company to develop the distinctive strategy, organization, and values that have led to its success. In turn, they may offer strategic inspiration for success to many other companies in various industries and environments.

What This Book Reveals About Nokia

This book is not the first attempt to decipher the reasons for Nokia’s success. However, it is the first independent effort based on free access to and dozens of interviews with all of Nokia’s leading executives, including the CEO, chairman, board of directors, members of its famous group executive team, chiefs of functions, chiefs of key country markets, and former Nokians who have contributed critically to Nokia’s success since the 1990s. It is also based on interviews with an extensive group of Nokia’s managers, employees, rivals, partners, and suppliers, as well as public policy authorities and academic researchers in the Americas, Europe, Asia, Africa, and the Middle East. The underlying research and interviews have been carried out since 2004 (for more details, see the Acknowledgments section).

Unlike its rivals, Nokia has had to struggle for much that most multinational companies take for granted. Indeed, it is the tremendous perseverance of the Nokians, both individually and in teams, that has motivated the company to win against all odds.

Chapter One describes Nokia’s success through legacy and globalization. Nokia has evolved through several eras and reincarnations, from a forestry company to a diversified conglomerate to a European technology concern to the globally focused mobile communications giant it is today. It is Nokia’s ability to build on its legacy and take advantage of globalization that accounts for its success since the early 1990s.

Chapter Two focuses on Nokia’s strategy and its executive team. Because Nokia is a small-country multinational without a large home market and operates in a technology- and marketing-intensive environment, it is a global company that seeks to be externally oriented and internally collaborative, as Olli-Pekka Kallasvuo, Nokia’s CEO, puts it. It is the executive team that serves as Nokia’s collective mind.

Chapter Three takes a closer look at Nokia’s values, culture, and people. Initially driven by Finnish perseverance, Nokia today is characterized by increasing diversity around the world. It is building a shared purpose through values. Indeed, Nokia’s values are the glue that keeps the whole together while providing