Innovative Ideas and Methods of Managing Nokia Corporation

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Nokia was a top phone company dominating the mobile phone market in the late 90’s/ early 00’s. Little did we know at that time that even a strong established company like Nokia was surprisingly vulnerable and fell from the top to bottom in a period of less than 5 years. In this essay we attempt to explain and critically evaluate Nokia’s inability to respond to the disruptive changes in the mobile phone industry despite being an established market leader. We will start by explaining the disruptive innovation that took place in the mobile phone industry and analyse Nokia’s own journey before and through that disruptive period; how it rose to success in its early years as an innovative organisation but then went on to grow into a firm which became risk averse leading to its ultimate decline. We will break down our analysis into various components of the approach that Nokia took in responding to the disruption/ threats in particular the role played by the strategic leadership, the culture within the organisation and the capabilities within the firm to deliver and innovate. Through our review and analysis, we will conclude that large incumbents like Nokia when faced with disruptive innovation should try and stay ahead of the curve by pursuing radical innovation themselves and also be able to change and implement strategies swiftly to deal with external threats out of their control. In addition, they should be able to operate in a dual mode to do both radical and sustaining innovations. Nokia did not always do mobile phones and telecommunications. It started off in 1865 as a papermill operation, expanding into several different products (e.g. rubber, flexible cables) through the 19th century - an example of a company adapting well to change.

Slow Rise - In the late 20th century, Nokia took advantage of the increasing surge in the popularity of mobile phones and rapidly grew to have one of the most recognisable and valuable brands in the world. In 2007, its net sales figure reached the highest at 51.06 billion Euros (StatInvestor.com, 2019): Sudden Fall - At its height, Nokia commanded a global market share in mobile phones of over 50% (Statista, 2019), however the market share started eroding after 2006 timing in with the innovations introduced by Apple and Google. The market share dropped to under 5% in 2013: In 2016, Microsoft who had bought the entire mobile business from Nokia decided that it will stop manufacturing mobiles inherited from Nokia. “Practically speaking, the company’s mobile phone business crashed from the top position in the world to complete extinction within about eight years” (Peltonen, 2019, p163). How can we explain such a sharp decline?

Nokia’s earlier story is a powerful lesson in innovation and adaptability (Steinbock, 2001). A lot of studies and articles talk about Nokia’s strong leadership to be the main reason behind its success. However Cooper, Steinbock and Lowenstein (2001) in a strategic study identified additional factors in its bold strategic intent, innovation through value chain, flat organisation, competition through co-operation and connecting people slogan strategies being the real force behind its success. Nokia also very early realised the benefits of producing attractive and user-friendly products i.e. mobile phones as consumers products which got smaller in size and price giving it a significant competitive advantage over others (Steinbock, 2003). Based on this track record, no one could have predicted the future that the company was headed towards.

Disruptive innovation in the mobile industry – The market for mobile phones has been one of the most dynamic in recent history. The degree and rate of technology change and product innovation in the industry is staggering ((Turnbull, Leek and Ying, 2000). In 2007, Apple launched its expensive but dazzling iPhone which changed the global mobile industry in line with Schumpeter’s (1950) creative destruction theory – creating something new that simultaneously destroys the old rules and establishes new ones all driven by the search for new sources of profits (Tidd and Bessant, 2018). The iPhone changed the phone market – not just by a radical technological shift (hardware to software focus) but also by the emergence of a new market with very different needs and expectations (e.g. touchscreen features, consumers using phones as mini computers with the use of apps etc.) but Nokia ignored all signs of the disruptive threat from Apple’s new product. Nokia initially surfaced on the Technology S-curve with hardware and feature phones only. Over the years new features like cameras, music players etc. were added using it’s existing tech platform. However, this S-curve started to level off as it started to become more difficult to add more rich functionality features. In parallel the Smartphone S-curve had also surfaced with the iPhone launch. Nokia also tried to be the early adopters by trialling the touchscreen functionality but failed due to the limitations of its existing Symbian platform and tech capabilities.

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Nokia could have succeeded by ‘jumping the s-curve’ by choosing the right strategy at the start of the market disruption. We analyse Nokia’s strategic leadership, internal culture and capabilities in the next section of this essay to understand why this didn’t happen. Strategic Leadership – “Leadership fit is the capability of a company to have the right leader and leadership form to have a constant fit with the environment” (Klabbers, 2019, p21). Klabber’s (2019) research concludes that during the early or disruptive stages of an industry, entrepreneurial, charismatic or autocratic leadership styles are more suitable to stress on radical innovation whereas in a maturing market, transactional leadership styles are more appropriate for incremental innovation. Nokia’s strategic leadership needed to adapt to the external environment in particular with the changes in the industry. In the 1990s, Nokia’s young management saw it being nearly destroyed by Kairamo’s adventurous leadership and therefore this experience played a great part in shaping the strategic approach that the same management generation would adopt in the future. Instead of keeping to the visionary leadership which had led them to the initial international success, they started turning into a risk averse, transactional management style under Ollila’s leadership. Under Kallasvuo’s leadership, Nokia’s strategy was based on the belief that they should focus on managing growth and expansion instead of exploring new markets. The leadership team not only stuck to its transactional management style and focused on short term performance, but they also displayed traits of arrogance and illusions of ‘eternal success’ beliefs formed from its past success (Siilasmaa and Fredman, 2019). Laamanen, Lamberg and Vaara (2016) identified the key wrong decisions made by the leadership which included ignoring innovations and products that could have been successful, deciding on the wrong technology for their main platform, wrong choices of CEOs, not enough innovation and overall mistakes in strategy. To sum up, Nokia’s strategic leadership failed to embrace new ideas and innovation to spur growth when the mobile phone industry started changing.

Organisational culture – “The organisation of innovation is much more than a set of processes, tools and techniques….innovation is promoted or hindered by a number of factors, including trust and openness, challenge and involvement, support and space for ideas, conflict and debate, risk taking and freedom” (Tidd and Bessant, 2018, p 134). Up until 1994-1995 the key values within Nokia were trust, loyalty and commitment, while employees enjoyed freedom and took responsibility (Bouwman et al. 2014). However, in the later years Nokia became an example of bureaucratic culture that made a top performing organisation vulnerable leading to a dramatic fall. Organisational fear which was grounded in a culture of temperamental leaders/ top managers and frightened middle managers was a huge contributory factor towards its decline as studied by Vuori and Huy (2015). Vuori and Huy (2015) concluded that the culture within Nokia consisted of aggression from top managers (mostly the CEO) that resulted in fear that middle managers felt relating to loss of status, reputation and in some cases their jobs. As a result, top management created a psychological unsafe environment, leading to staff not feeling safe to raise critical issues. The information gap and the overly optimistic updates from middle managers to the board resulted in the Board making wrong decisions based on the wrong understanding that they had sufficient time, resources and capabilities (Siilasmaa and Fredman, 2019).

Capabilities – According to Teece (2007), enterprises with strong dynamic capabilities are intensely entrepreneurial as they not only adapt to changing business environments but are also able to influence/ shape them through innovation and collaboration. As an organisation, Nokia had the best product development resources and competent staff at its disposal, as well as access to leading researchers and consultants. As Jorma Ollila (Nokia’s CEO 1999 – 2006) describes in his autobiography, “We knew how phones were designed, manufactured and marketed. Our machinery was supreme. Nokia’s phones worked reliably in all countries, networks and conditions. Nokia’s engineers were the best in the world. We had taken over all markets... ” (Ollila & Saukkomaa, 2013, p 418). Nokia had an established, well-invested R&D function which saw a significant rise in the R&D investment following 2007 iPhone launch (Statista, 2019).

However, despite the significant R&D investment, 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 increasing, but Nokia lacked the skills, and inclination to adopt this new way of working. Nokia’s innovation capabilities, which previously had been praised, were now seen as insufficient. Vouri and Huy (2015) highlighted innovation underperformance within Nokia as a result of top managers not having an accurate understanding of their organization’s capabilities and ended up allocating disproportionate attention and resources to the development of new phone devices for short term market demands at the expense of developing the OS software. We therefore conclude that in Nokia’s case, it wasn’t the lack of R&D investment but more a lack of capabilities required to manage innovation that contributed towards its decline.

Nokia’s decline in mobile phones cannot be explained by a single answer and our analysis of various interlinked factors above can be summed up as - Strategic leadership gaps led to growing bureaucracy and poor management decisions. A toxic culture created fear and lack of trust amongst colleagues at different levels leading to important updates/ information and creativity being suppressed. The capabilities within the organisation were not prioritised to focus on radical innovation instead on sustaining innovation which led to Nokia not being ready in time with products and ideas to respond to the threats from iPhone and Android launches.

In hindsight, Nokia with all the resources available to them should have been well prepared to deal with any threats/ disruptions by either proactively leading radical innovations themselves (staying ahead of the curve) or quickly changing strategies to adapt to any threats from outside. In order to be able to innovate and/ or change strategies swiftly, it needed to be agile as an organisation through a culture of openness, trust and respect throughout. For large firms like Nokia, which end up growing significantly in size, it is important to acknowledge the importance of operating in dual mode i.e. innovating in increments to keep improving products and maintaining performance at the same time adopting the strategy and freeing up resources to do radical innovation. This can be achieved by removing bureaucracy and giving R&D staff more individual freedom so that they can and are allowed to allocate more of their time to their own creative ideas and projects without the need to justify short term measurable outcomes. This can only be possible once management learn to accept and take higher levels of risk.

Stephen Elop, Nokia’s CEO between 2010 and 2013 whilst announcing the sale of Nokia’s phone division to Microsoft famously said, “We didn’t do anything wrong, but somehow, we lost.” In line with Christensen’s Innovator Dilemma theory (1997), Nokia did all the right things in maintaining operational excellence; they were too focussed on not doing anything wrong. This focus distracted them from identifying new opportunities in the market and planning for the long term. Nokia’s strategic leadership had become too slow and risk averse in its thinking that they got outpaced by the dynamic and evolving phone market. Competitors like Apple caught the wave and did it RIGHT; Nokia lost out and failed.

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