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RingtoneExploring the Rise and Fall of Nokia in Mobile Phones$

Yves Doz and Keeley Wilson

Print publication date: 2017

Print ISBN-13: 9780198777199

Published to Oxford Scholarship Online: November 2017

DOI: 10.1093/oso/9780198777199.001.0001

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PRINTED FROM OXFORD SCHOLARSHIP ONLINE (oxford.universitypressscholarship.com). (c) Copyright Oxford University Press, 2021. All Rights Reserved. An individual user may print out a PDF of a single chapter of a monograph in OSO for personal use. date: 12 April 2021

A Fading Star

A Fading Star

Chapter:
(p.113) 7 A Fading Star
Source:
Ringtone
Author(s):

Keeley Wilson

Publisher:
Oxford University Press
DOI:10.1093/oso/9780198777199.003.0007

Abstract and Keywords

Covering the period 2006–11, in this chapter we see how the seeds of destruction that were unknowingly sown in the early 2000s come to fruition. Nokia was collapsing from within well before Apple or Google became competitors, leaving Nokia’s new management team in a difficult position in which developing a successful managerial response to the changed external environment had become all but impossible. Successive reorganizations, a lack of technology leadership, and the collapse of the strategy process all contributed to Nokia rapidly losing its leadership position. The chapter also looks at the options Nokia’s management team considered with regard to its smartphone strategy before ultimately choosing an alliance with Microsoft.

Keywords:   leadership changes, reorganizations, internal competition, industry convergence, new competitors, applications, operating systems, smartphones, strategy options

When Ala-Pietilä had turned down the CEO role in 2005, Ollila then looked to his trusted lieutenant and new head of Mobile Phones, Kallasvuo, to replace him. With Nokia facing an internal struggle to adapt to the new matrix structure and ever greater external pressures, many saw the CEO role as a poisoned chalice. But the softly spoken Kallasvuo agreed, and in October 2005 was put in charge of operations in preparation for becoming the next CEO of Nokia in June the following year. Ollila retained not only his role but also a certain degree of control, as chairman of the board.

Kallasvuo, a lawyer by training, had spent most of his career in Nokia in legal affairs and finance. For almost the last decade and a half he had been Ollila’s right-hand man and an exceptional CFO. But these roles hadn’t required him to develop an in-depth strategic or technological understanding of the industry, and there was doubt in some quarters within Nokia as to whether he had the right background and skills to guide the firm through the changes the industry was facing. He was, however, widely seen as a good operational manager, not just a finance expert, who understood shareholders and analysts and was extremely sensitive to what was needed to please them—and when Kallasvuo took over as CEO, they had every reason to be happy as Nokia’s growing internal problems had yet to have an impact on its performance.

Nokia could still rely on a loyal customer base and had the best retention rates in the industry—53 percent of Nokia customers replaced their phones with new Nokia products in 2006, compared with rates of 32 percent for Sony Ericsson, 30 percent for Samsung, and 29 percent for both Motorola and LG. And while most manufacturers were suffering from a double whammy of slowing mainstream markets and falling handset prices (which dropped from an average of US$120 in 2004 to US$40 by 2008), Nokia continued to grow due to its dominant position and strong demand in emerging markets. Against this backdrop, a strategy of “more of the same” looked liked the least risky route for Kallasvuo and his senior management team.

(p.114) Despite the combined phone businesses posting strong results in both 2006 and 2007 (with revenues up 12 percent to 37,691 million euros in 2007, and operating profit at 5,161 million euros in 2006 and 7,931 million euros the following year) all was not well within Nokia. The problems brought about by the new matrix structure remained, and as time passed had become entrenched as barriers to innovation and decision making. Anonymous feedback from an internal survey I was asked to conduct in 2006, investigating obstacles and weaknesses, revealed a general consensus that the matrix wasn’t working. One respondent commented that “The matrix structure encourages silos.” Another noted, “The matrix demands that we are more internally focused. We now prefer not to make decisions but to share responsibility and we hide behind processes.” And in a rather bleak analysis, someone said, “In the matrix nobody owns anything and nobody is responsible for anything.”

Ollila had brought in the matrix structure to try and reinvigorate innovation, but by 2006 it was clearly dysfunctional. When we met in the summer of 2016, he explained how this had happened, recalling, “Matti Alahuhta had been aware of the challenge of differentiation and integration and had planned a series of actions, training, new incentives and working groups to make the matrix work. But he left and his plans weren’t pursued. There was no one to arbitrate between the product lines, and middle managers lacked collaboration and negotiation skills. We were just too slow to learn.” Faced with challenging environments both internally and externally, Kallasvuo began thinking about how to overcome the matrix problems.

A Reorganization for Better Integration

In 2007, Kallasvuo brought his top team together in New York for a two-day meeting to try and find solutions to the deepening fragmentation between Mobile Phones, Multimedia, and Enterprise Solutions and the product lines within them. He explained, “We came to the conclusion that we needed to run as an integrated company where phones, operating systems, and services would be developed in an integrated fashion.” To achieve this, Kallasvuo announced that from January 1, 2008 Nokia would adopt a new organizational structure designed to bring about harmonized roadmaps across the various product lines and eliminate overlaps in R&D, sales, and marketing.

In the new structure, NET’s network activities, which had merged with Siemens in June 2006 to create Nokia Siemens Networks, would remain a separate business. The existing vertical phone-based businesses were all merged, along with the horizontal software functions, to create a single business group named Devices and Services. This new business group comprised three business units: Devices, covering all hardware products (regrouped into (p.115) five business units) and headed by Kai Öistämö, who since 2006 had taken over from Kallasvuo as head of the Mobile Phones group; Services and Software, responsible for the technology platform under Niklas Savander, who had run platforms in R&D; and finally Markets, under Anssi Vanjoki. Other moves saw Mary McDowell, previously head of Enterprise Solutions, becoming the chief development officer, and Tero Ojanperä, head of strategy and CTO, taking charge of services in Savander’s group.

The appointment of Vanjoki, who was regarded as one of Nokia’s few remaining technology visionaries, in a new markets organization was the only surprise in the reorganization. The relationship between the mild-mannered Kallasvuo and confrontational Vanjoki had never been good, and Kallasvuo explained, there were several motives in appointing Vanjoki to oversee sales and marketing, “I didn’t want to lose him but neither could I let him dominate the product side—he had a very strong vision and priorities for where he thought Nokia should be,” and so this new role both utilized his skills but reduced his (often domineering) influence.

Unfortunately, the reorganization did little to alleviate the fragmentation, internal conflicts, and inefficiencies within Nokia, and in his own words Kallasvuo admitted that, “By reversing the logic of 2004 we created huge additional complexity with many more interface and articulation points.” The heads of the new business units were too focused on reaching their own performance targets to put any priority on collaboration, and with very different approaches and visions they weren’t well suited to working as an integrated whole as the “dream team” had done so successfully in the past.

Neither had the reorganization changed anything at the product line level, and so even though these groups were now under the same Devices umbrella, they continued to compete for resources from the Services and Software units. This put Services and Software under unrealistic pressure trying to respond to multiple demands and priorities—which inevitably couldn’t all be met. So, just as in previous years, whenever software and service development delays looked likely, product line managers regularly dropped features from their phones in order to meet product release schedules. Not only did this result in much wasted effort internally, but in this new ecosystem environment in which multiple partners were critical to success, Nokia lost credibility with content and application providers.

While the world was changing around Nokia, continuing with a strategy that had middle-market mobile phones at its core reflected a lack of technology leadership in the firm. Ironically for a company whose success had been dependent upon technology breakthroughs, Nokia had a poor record when it came to appointing visionary CTOs after Neuvo left, relying instead upon its individual businesses and research centers to drive the technology agenda. In fact, between 2005 and 2008, when the industry was in the grips of a massive (p.116) technology shift, Nokia didn’t even have a dedicated CTO—Tero Ojanperä had taken on the role in 2006 but this was in addition to being head of strategy (which is where both his heart and head had been focused). What’s more, Nokia’s board proved ineffective in providing much-needed guidance.

With his reorganization, Kallasvuo also tried to improve Nokia’s technology vision with an infusion of fresh blood in the CTO role. In 2008, Bob Ianucci from HP was appointed head of the NRC and as the unofficial CTO. However, his desire to create an independent corporate research center modeled on HP Labs did not go down well in Nokia, nor did the fact that he remained based in Palo Alto. After eight months, he left. He was followed by Charles Davies from Psion and the Symbian alliance, and then Richard Green from Sun Microsystems, but neither stayed long as CTO in Nokia.

The Changing Nature of the Industry

Without a thorough grasp of platform software, ecosystems, and applications, Nokia’s senior management team lacked a strategic understanding of where the industry was heading. It was a case of trying to deal with “unknown unknowns,” and the default response to this became delay and procrastination. When in doubt, decision making was delegated to committees, but this tended to lead to stalemates and further delays. Exacerbating the lack of technology competence in the top team was a widespread superficial veneer of understanding elsewhere in the management ranks. When reflecting on this, on more than one occasion Kallasvuo has expressed his frustration that too often Nokians “Used all of the right words—they learned to ‘speak Internet’ and gave the impression they knew what they were talking about. They had quasi knowledge and it was easy to be misled by articulate people using the right language masking a lack of the right skills.”

When Apple had launched its first iPhone in 2007, viewing it from a product perspective, its poor voice quality and reliance on 2.5 GPRS connectivity made it easy for Nokia to dismiss. Just over a year later, Google released its Linux-based mobile OS, Android. Both platforms offered customers a good range of applications and both supported user-friendly touchscreen interfaces. In comparison, Nokia’s range of smartphones based on the Symbian OS had what now felt like old-fashioned keypads and drop-down menus. By this time Nokia was using fifty-seven different versions of its Symbian OS, which made it not only time-consuming for developers to create apps but meant the portability of apps across different phone models was extremely difficult. Consequently Nokia’s own app store, called Ovi, offered a fraction of the apps available from its competitors (around 8 percent of the number available from Apple’s App Store and 19 percent of the total apps on the Android Market).

(p.117) The game was clearly changing, and for Kallasvuo this realization only hit home in late 2008 in a meeting he had with Steve Jobs. Summarizing the conversation, Kallasvuo recalled, “Steve Jobs told me he didn’t regard Nokia as a competitor as we weren’t a platform company. When I argued that we were investing in platforms he looked at me and said he’d been investing in a platform and OS for forty years and so he wasn’t worried by our recent effort.” Nokia’s CEO came away from that encounter realizing that the change wasn’t just about technology, it was a complete shift from one business to another.

In June 2009, almost two years after Apple launched the first iPhone (and the day of the introduction of Apple’s third-generation iPhone), Nokia released the N97, its first smartphone with a touchscreen interface. However, hardware limitations due to the use of cheap components, combined with software limitations from the Symbian OS, did little to win over consumers. By 2010, sales of the iPhone, RIM’s BlackBerry, and Android-based smartphones were chipping away at Nokia’s dominant market share, and shareholders and analysts were beginning to question Nokia’s ability to compete in the smartphone market.

An Alternative OS to Symbian

It was becoming ever-more clear that in the world of smartphones, having a good, accessible OS platform was key, and with its multiple versions and complexity, questions about Symbian’s suitability could not be avoided. Although it had invested heavily in Symbian, both financially and in terms of commitment, Nokia had developed an alternative OS. In 2002, frustrated with the limitations imposed by Symbian, and aware that any alternative would be met with stiff resistance from the thousands of Nokian’s working on it, Vanjoki had begun a “skunk works” project based in Tampere (and codenamed OSSO—Open Source Software Operations) to create an alternative open source Linux-based OS.

The entire effort was funded under the radar by Vanjoki, and even though the small OSSO team, headed by Ari Jaaksi, had limited resources they worked quickly and development was fast. The new Linux-based OS was renamed Maemo in 2007. Jaaksi’s team had been focusing on developing a touchscreen smartphone, but as Maemo became a more visible threat to Symbian they were forced to scale back their plans. And so in 2007, what had been planned as the first Maemo smartphone was actually launched as the N800 Internet tablet—in other words, a smartphone without voice capabilities!

Internal resistance to Maemo was strong. There was a large camp within Nokia that was loathe to accept any project initiated by Vanjoki because of personal feelings, regardless of how good the outcome may be. On a more (p.118) practical level, migrating to a new OS would be difficult and disruptive for customers and app developers, not to mention the thousands of software developers working on Symbian within Nokia.

Failing to see any real sense of urgency in moving to a new OS, Nokia’s senior managers allowed Symbian development to continue and dominate while encouraging the two platforms to find common ground. In January 2008, Nokia acquired Norwegian firm Trolltech, hoping it had found a solution to bringing Maemo and Symbian closer together. Trolltech’s main product, Qt was a cross-platform application layer that allowed developers to write applications in just one source code that could then be used on different OS platforms. Rivalries between the Symbian and Maemo teams led to each developing their own (and incompatible) Qt user interface tools, and so the hoped-for collaboration didn’t happen.

Prior to Kallasvuo’s 2008 reorganization, the small Maemo team had managed to maintain a degree of autonomy from the main phone development activities. However, under the new structure Maemo joined Symbian as part of the Devices group. This caused much disquiet with a number of senior managers, who felt that by putting Maemo with Symbian it would no longer be able to grow independently and risked being penetrated by the culture of a large company. Their concerns were realized as the Maemo team rapidly grew to over 1,000 engineers and in doing so lost its agility and flexibility.

Partnership with Intel

No matter how compelling an alternative it provided, Maemo continued to struggle to gain traction within Nokia. Then, in 2010, a possible tie-up with Intel offered an opportunity to expand Maemo. Since abandoning its successful Xscale range of processors in 2006 (which had been popular in early smartphones and PDAs), Intel had been unable to compete against ARM which dominated GSM standards, and Qualcomm with CDMA architectures. By combining its own Linux-based Moblin OS with Nokia’s Maemo, Intel saw an opportunity to expand its presence in mobile and Nokia recognized a route to legitimize Maemo.

The two firms announced a partnership at the Mobile World Congress in Barcelona in early 2010, renaming the new joint OS MeeGo. Unlike the fifty-plus annual Symbian product launches, MeeGo announced it would focus on releasing one flagship phone each year.

However, the MeeGo alliance immediately encountered problems. Combining the two development teams was difficult, and Moblin and Maemo had very different modular architectures which proved arduous to merge and impossible to test until the entire OS was completed. This resulted in frustrating delays at a time when the sense of urgency for a new platform was increasing. (p.119) The Wimax access technology Intel had developed not only proved slow and unreliable, but only a few months into the alliance it became apparent that most operators were adopting the alternative LTE (long-term evolution) technology. Further delays were encountered while integrated LTE support was developed.

Smartphone Strategy Options

The onslaught from Apple, RIM, and Google in the smartphone arena, stiffer competition from new producers in emerging markets, and continuing internal wrangling over operating systems had really begun to take their toll by 2010. Nokia still had one of the strongest patent portfolios in the industry, a valuable global brand, and an installed base that was second to none. But this was no longer enough, and so the management team outlined the different strategy options open to them.

One obvious route was to join Android. However, mobile carriers including AT&T and Verizon in the US, and Orange, T-Mobile, and Telefonica in Europe, were wary of an Apple iOS–Google Android duopoly taking over the industry, as this would reduce their own power and ability to innovate. They let it be known that they would support the emergence of a third platform ecosystem and Nokia’s further two options catered to that: it could strengthen its own Symbian and MeeGo platforms, or join forces with Microsoft.

Join the Android Platform

When Apple released its first iPhone, Google was already working on Android, a Linux-based OS. Initially only T-Mobile and HTC used Android, but in 2010 the ecosystem expanded as it was adopted by Verizon and Motorola in the US, and by Samsung for its Galaxy range of phones. Joining the Android platform was a relatively attractive proposition for Nokia: integrating the Android OS would be a fast and easy option and the Qualcomm chipset used by Nokia was already designed for Android. Nokia would also gain access to a vast range of apps and app developers, instantly countering one of the biggest criticisms it currently faced. There was also the possibility that the combined might of Google and Nokia could create a real competitive threat to Apple and the emerging Asian players.

Yet the flipside of the low-risk choice was an equally low reward. Moving to Android would remove some differentiation in Nokia’s offerings, and for a firm that had always controlled its OS platforms this was a genuine concern. Customers that had long been loyal to Nokia would easily be able to switch to any other manufacturer in the Android ecosystem, and a large number of (p.120) Nokians felt Samsung had already established itself as the dominant device player in the grouping, which would leave Nokia on the back foot from the outset. Nokia’s CFO at the time, Timo Ihamuotila, highlighted another potential problem of joining Android, “There was a conflict between our Navteq mapping business and Google Maps.” The highly successful Navteq provided the mapping services to Google’s competitors Microsoft and Yahoo, and it was difficult to see how the two competing map providers could coexist on the Android platform.

A Combination of MeeGo and Symbian

Although Symbian was unwieldy and unloved by apps developers, Nokia had made progress on rationalizing its OS. As Kallasvuo explained, “Lots of work had been done to merge and standardize the various versions. We were ‘pruning’ the incredible Symbian tree.” With such a huge investment in terms of skills, knowledge, and resources in Symbian (by 2010 there were around 6,200 engineers working on it), dropping the OS entirely did not seem feasible. As an alternative it was envisaged that mid- and low-end phones could retain the Symbian OS, while high-end smartphones could migrate to MeeGo. According to Alberto Torres, head of MeeGo by this time, “Symbian needed to be discontinued but Qt would have prolonged its life a bit and made the transition to MeeGo easier” by providing a path to developers from Symbian to MeeGo.

MeeGo seemed to offer Nokia the opportunity to compete head-on with Apple and Android and create a third ecosystem, which being Linux-based would offer developers and consumers easy portability. It also offered the opportunity to extend beyond smartphones to support a wider range of devices including tablets, netbooks, Internet-enabled televisions, and in-car entertainment systems. On the downside, Nokia continued to experience problems working with Intel, and overtures to Sony Ericsson, Samsung, and LG in 2010 to join a MeeGo ecosystem had all been rejected.

Ally with Microsoft

Microsoft had been slow to recognize that mobility would be the future driving force of the industry, and seriously lagged behind the competition with only a 1 percent market share. Access to a global hardware brand would instantly boost its presence in the mobile communications sector, and so Microsoft was eager to join forces with Nokia.

From Nokia’s perspective, Microsoft wasn’t an entirely unknown quantity, as the previous year the two firms had formed an alliance to enable Nokia to offer Microsoft Office Mobile on its enterprise-targeted phones. Building (p.121) further on this partnership to work with Microsoft on a Windows Mobile OS would enable Nokia to make serious inroads into RIM’s 75 million BlackBerry business subscribers by offering full, seamless mobile access to Microsoft Office via the Windows Phone OS, as well as offering a distinct alternative to Apple and Android. Microsoft was also very bullish about how quickly it could deliver the new platform.

The benefits of moving to a Microsoft OS were not clear-cut though. As Erkki Ormala, Nokia’s head of technology policy, explained: “By moving to the Windows Mobile OS we would have to lose some of the most advanced features on Symbian. Of course this had to be balanced with the connectivity to the Office suite and business systems that Microsoft offered.” Neither Nokia nor Microsoft had a strong record in content and applications and so would need to attract content providers to the alliance, and this might not be straightforward as both firms had poor reputations as partners: a combination of Finnish cultural traits and years of dominance in the industry meant that Nokia could seem aloof and arrogant, while Microsoft was well known for being a ruthless partner (Nokia’s own board investigated whether Microsoft would benefit disproportionately from a potential alliance).

Another Reorganization

In just over two years since the 2008 reorganization, the much hoped for closer integration had not been achieved. Nokia’s share price had dropped around 60 percent and delays to new phone launches had become a more regular feature. While grappling with decisions about which smartphone strategy to pursue, in May 2010 Kallasvuo undertook another reorganization designed to simplify Nokia’s structure and at the same time strengthen the group’s smartphone operations.

A new Mobile Solutions group, including smartphone devices and all related software and services, was created. Anssi Vanjoki was moved from his markets role to head this critical new group. All of Nokia’s traditional middle- to low-end phones were put into the Mobile Phones group led by Mary McDowell, while Niklas Savander moved from services to run the Markets group.

Without a bold vision for the future or any concrete announcement about how Nokia was going to compete in Internet services, shareholders and analysts were unimpressed by the latest reorganization, and at the AGM later that month became very vocal in pushing for a new CEO. However, these calls were quashed by Ollila and the board, which gave Kallasvuo a vote of confidence.

(p.122) A New Leader for a New Strategy

Less than two months later, Ollila and the board were forced to acquiesce to shareholder demands. In a statement announcing that the search for a new CEO was underway, Ollila said, “The time is right to accelerate the company’s renewal; to bring in new executive leadership with different skills and strengths in order to drive company success.” More and more criticisms had been leveled at Nokia for being overrun with managers who lacked vision and made too many financial-based decisions. Many outside observers suggested that to stand a chance of fighting back against the iPhone and Android, Nokia should hire a tech-savvy visionary with strong consumer electronics experience.

The board instructed search agents that potential candidates should have a background in Internet and software development in large, complex, multinational firms. But the relatively low remuneration package on offer, combined with the geographic remoteness of Finland and the prevailing Finnish culture within Nokia, resulted in only two names being put forward to replace Kallasvuo—one from inside Nokia and one external candidate.

The internal candidate was Anssi Vanjoki. Widely admired in the industry as the visionary who turned the mobile phone into a consumer product, he had supported the development of the Communicator in the 1990s and more recently been responsible for the Maemo OS. He had long been tipped to be Nokia’s next CEO. He knew Nokia inside-out and had not been shy to voice his disagreement with Nokia’s leadership and their strategic decisions. Of course, his passion, outspokenness, and lack of diplomacy during his nineteen years at Nokia hadn’t endeared Vanjoki to everyone.

When approached by Ollila to see if he would be interested in the CEO position, Vanjoki explained, “I knew Nokia was in trouble and so spent the summer of 2010 developing a rescue plan. I visited all our R&D centers to understand what each was doing, what skills they had and how they could be used to turn around the company.” Vanjoki’s grueling schedule paid dividends, and by the end of the summer he had developed a new strategy to accelerate the development of MeeGo for high-end smartphones that would be ready for introduction in October that year.

The external candidate was Canadian national Stephen Elop. As president of Microsoft’s Business division, he had been working with Nokia for almost a year on the alliance to provide Microsoft’s Office suite on Nokia’s enterprise smartphones. Prior to Microsoft, Elop, an engineer by training, had worked for a number of firms including Macromedia and Juniper Networks.

Elop certainly wasn’t the high-profile tech visionary investors hoped for, but he represented what many believed was an urgent infusion of new blood into Nokia’s leadership. A quiet and thoughtful manager, Elop didn’t display the more demonstrative traits often associated with North American leaders. (p.123) He was considered a good cultural fit, and the importance of this in a firm that had always been headed by Finns, and which despite being a global company maintained a strong Finnish culture, cannot be underestimated. There were internal detractors to Elop who questioned whether, if chosen as CEO, he would retain his allegiance to Microsoft and simply position Nokia as the Seattle firm’s largest licensee.

Nokia’s board met on September 21, 2010 and reached the decision to appoint Stephen Elop as Nokia’s new CEO. They believed that Elop could lead the transformation of Nokia from a hardware to software company needed to compete against the iPhone and Android. They also felt he was better placed than a Finnish national to steer the firm to a stronger position in the US, where it was now languishing with around an 8 percent market share. Prior to the meeting, Ollila had warned Vanjoki which way the board was likely to vote—in response to which Vanjoki recalled saying, “If you appoint Elop, I will leave that day.” True to his word, just after the announcement Vanjoki resigned.

Commentary

By 2006, when Ollila relinquished the CEO role, Kallasvuo was the last of the original “dream team” remaining at Nokia. His appointment was not a great surprise, as since he had been appointed to head the Mobile Phones group in 2004, it had been assumed he was being groomed for the top job. The company was still financially successful, and he was trusted by Ollila and many others at the firm, but not everyone viewed his appointment with great confidence: he lacked the charisma and decisiveness of previous leaders. Years later, Kallasvuo himself would tell me that he, too, realized that he was not the perfect candidate, but that he accepted his appointment out of a sense of duty to both Nokia and to Finland, suggesting that he saw that times ahead would be difficult, but wanted to protect the company and its employees. Laudable as this attitude was, it did not put him on the right path for facing a difficult future.

By 2008, Nokia was first and foremost confronting the full intensity of rapid convergence between industries, and becoming a victim of that convergence (it is important to note that disruption was not, as some observers mistakenly argue, affecting Nokia at this point, but would only come into play later when much cheaper and better quality Korean and then Chinese phones began to dominate in the mid-range market). Convergence is not a balanced or symmetrical process, where pre-existing industries simply fuse and become one in a “merger of equals.” When industries converge, one may dissolve into the other much as an acquired company is absorbed and dissolved into its acquirer.

(p.124) It turns out that in the late 2000s mobiles phone dissolved into computers. What had been the lifestyle-changing telecommunications innovation of voice calls and MMS on the move became just one function, or feature, of a new breed of pocket computers which were somewhat inaccurately called “smartphones,” as if to imply the phone was still central. In the same way that telecom services dissolved into Internet communication with Voice over Internet Protocol (VoIP), Wi-Fi, and “over the top” (OTT) service providers, the telephone handset industry dissolved into the personal computer industry. The imbalance in convergence leads to the migration path of the “converged” industry being much steeper and shorter than that of the “converging” side. This was captured by the dismissive comment made by Steve Jobs to Kallasvuo, “You are not a competitor of ours, you are a device company now having to develop platforms.”

Nokia was a victim of convergence largely because its new competitors saw themselves as platform businesses. For them, mobile phones were indeed just a type of screen, not dissimilar from TV monitors or personal computers, through which consumers could access their core products: applications and content downloads via iTunes for Apple and advertising messages triggered by information search for Google. The platform approach of these competitors was being deployed across a whole range of access channels, and mobile phones just happened to be winning the race as one of the most prominent channels. What had for many years been a distinct and simple telecoms platform was now being enveloped and dissolved into much larger platforms (Eisenmann et al., 2011).

In terms of Cognition, this was new and uncomfortable territory for Nokia and its senior managers struggled to respond. Becoming an Internet platform company would be very hard. The migration from software to include hardware does seem easier than migrating from hardware to software. Beyond the obvious skill gaps and the difficulty of filling these from Finland, combined with a social capital deficit with the media and content industries, even deeper issues blocked Nokia’s path. Researchers familiar with the industry and the plight of incumbents trying to “reinvent” themselves, or to use a popular phrasing, “re-engineer their DNA,” suggest the deeper challenges are identity related (e.g. Altman and Tripsas, 2015). Trying to change corporate identity is akin to an individual changing their personality—an unlikely mutation.

The possibilities open to Nokia to transform itself were limited, and by 2010 none of Nokia’s options was particularly attractive. The collaboration with Intel for MeeGo proved to be more difficult than expected. Technical differences, such as the structure of software modules in the architecture of Maemo and Moblin, made their combination difficult and meant that individual modules could not be tested separately—somewhat reminiscent to problems with Symbian. As both Nokia and Intel were incumbent leaders in their respective fields, development was slow and arduous as the process of collaboration between the two large incumbents proved difficult. And with its (p.125) broader gauged focus on tablets and laptops, Intel had failed to find a successful approach to mobile communications.

Yet Nokia was now facing considerable urgency. It had done its best to make Symbian an industry-wide platform and open it fully (in particular after Psion cashed in and Symbian was transformed into an open source platform). However, beyond its product development inefficiency, Symbian was also proving unattractive to independent application developers—as a development environment, it took much longer for developers to master and had fewer software development kits to help them than either iOS or Android offered (Figure 7.1). As a result, Nokia suffered both in hardware, with inferior products, and software, with fewer applications sold in smaller volumes (Figure 7.2).

A Fading Star

Figure 7.1. Average time required to master each platform

A Fading Star

Figure 7.2. Mobile application stores 2010

Post-2008, some ex-Nokians have argued that there was a lack of support for MeeGo’s development. This is open to debate. MeeGo’s development team had been substantially increased, and with around 1,000 people was large by any standards. Software development specialists tend to argue that large teams (for which they put the threshold as low as sixty to a hundred professionals) are grossly inefficient and ineffective, unless the development project is very clearly divided into modular sub-projects and these are very well specified and integrated. This would suggest that the issue facing MeeGo was not one of quantity but quality. Nokia suffered from a dearth of software system architects and project managers—talented software system architects are a scarce resource and project management in software development requires complex knowledge that is acquired through practice. Exactly how limited Nokia’s software architecture definition and management capabilities were remains debatable.

Yet the alternatives to MeeGo were not particularly attractive. Joining the Android club had obvious advantages: Android was an open platform and (p.126) poised for potential leadership across a broad range of phones, from basic ones to smartphones. On the downside, joining Android would relegate Nokia to the role of hardware supplier, just like Samsung and LG at a time when they were facing an onslaught from a host of lower cost emerging Chinese competitors. In a world where its traditional sources of advantage were fast eroding, Nokia would also lose the key future source of competitive advantage: mastery of its own OS. Its supply chain excellence was no longer a unique advantage, particularly against the Apple-FoxConn duo, and in light of Apple’s policy of only having one phone model—the iPhone—which made its logistics and supply system much simpler than Nokia’s.

What had been an advantage for hardware feature-based differentiation turned into a disadvantage for software application-based mass customization. Despite all its efforts at cutting costs, it was difficult to envision Nokia winning a cost-reduction race against China and Korea. In Korea, Samsung gained a growing advantage in hardware optimization as it improved the quality of collaboration between its various businesses, in particular semiconductors and mobile phones (Song et al., 2016). The supplier partnerships that Jean-François Baril (as head of purchasing) and others had built for Nokia were losing their unique value as the industry matured, not just against integrated companies like Samsung but against phone assemblers who could rely on a wide network of suppliers. And Nokia had missed the opportunity to become a strategic partner of Google years earlier when Google informally sounded out senior executives at Nokia and was rebuffed. By 2010, Google was only willing to offer Nokia regular membership in Android, with no special advantages. Key (p.127) executives at Nokia, committed to Symbian or dazzled with the potential they saw in MeeGo, had failed to take sufficient notice of Google’s ambitions.

The option of allying with Microsoft was, given what Nokia’s executives knew at the time, not an unreasonable option. Although the Gartner Group (a well-respected source of industry forecasts) did not expect Windows Mobile to succeed, other industry analysts predicted Microsoft would gain market share leadership in mobile operating systems by 2016, and some even contemplated Samsung dropping Android in favor of Microsoft. Yet, as with MeeGo, pushing Windows Mobile would be an uphill battle to develop a new, credible ecosystem from a late start—not an enviable undertaking. Within Microsoft itself, there was disagreement about the role of hardware in its future development, with some arguing for Microsoft’s exit from all hardware businesses while others pushed for an acquisition of Nokia. Although Microsoft had been remarkably successful, from a market development and market share point of view it had had little success in creating a profitable business from game consoles, its one major hardware product. In 2010, the features offered by Microsoft Windows Mobile lagged behind those of Symbian, but Microsoft engineers were confident they would quickly catch up and create a superior platform. Microsoft proved willing to subsidize Nokia’s development of Windows phones (the exact amount was not officially announced, but was rumored to be US$250 million per quarter), providing a welcome cash injection into Nokia’s ailing business.

When discussing the options of MeeGo, Android, and Microsoft with a small group of the most senior executives at Nokia just prior to 2010, one of them jumped to a flipchart in the room and drew the diagram in Figure 7.3, intimating that, although no option was perfect, Microsoft was the worst with high risks and low returns.

A Fading Star

Figure 7.3. Comparative alliance options

When I teach the Nokia alliance case (Doz and Wilson, 2016) in executive seminars on alliances I run at INSEAD, the participating managers from a range of companies and industries are usually quick to point out that although no single option was perfect for Nokia, a mix perhaps could have been. They suggest that joining Android could have been a “stopgap” measure, to prevent Nokia from being dependent on an increasingly obsolete Symbian platform. Accelerating the development of MeeGo (as far as the alliance with Intel allowed) and making it compatible with Android—enabling end users to migrate to MeeGo as a “better Android” in the future—would have allowed Nokia to piggyback on the application developers and installed base of Android, while regaining strong differentiation once MeeGo was introduced.

The Organizational dimension was also problematic for Nokia. Day to day, the reorganization of 2007 had not resolved any conflicts. The three business groups that had been set up in 2004 were abandoned, but within the new integrated Devices and Services group, apart from the removal of a layer of senior management, nothing much had changed: Devices (products) still had (p.128) to interact and negotiate with Services and Software (including technology platforms) and Markets. Multimedia and Enterprise Solutions phones were folded back into a common entity with Mobile Phones. This was almost a return to pre-2004 NMP. Now, the pull of core mobile phones toward the middle range became even stronger.

To many, the reorganization acknowledged the failure of the product differentiation and market segmentation strategies pursued since 2001. It was not necessarily that these strategies had been unfounded or unwise from a market standpoint, but they were poorly implemented and so did not have a real chance of success. Traditional mobile phones, bolstered by Nokia’s huge success in emerging markets, still accounted for nearly all mobile phone sales. Smartphone sales were increasing, but not all that fast, and multimedia products beyond camera phones (a feature which was now adopted in mass-market phones as well) had not met with real success. Nokia’s foray into mobile gaming consoles, again a victim of hardware capacity compromises and questionable design, had failed to capture users’ imagination. And Enterprise Solutions had not really taken off, partly because Nokia lacked expertise in corporate networks and communication architectures, and had not developed the encryption software that secure communication would have required.

The Services group would, to an extent, replace Multimedia, making multimedia features, software, and content more widely available through the whole product range. However, the challenge would remain for Nokia to establish itself as a distributor of media content, without again entering into conflicts with the network operators (themselves seen by new media entrepreneurs as mere providers of the “pipes,” a commodity), a significant challenge for a firm (p.129) which was now seen as a legacy hardware manufacturer by leading new media types. One media group executive commented, “The problem with Nokia was they didn’t even have the credibility any longer to meet the right people.”

Once again, it would seem that the approach taken toward the workings of the organization under the new structure was schematic, and to an extent simplistic: organization charts and reporting relationships were redrawn without addressing increasingly problematic behavior issues. Conflicts were now eroding the basic substance of Nokia’s culture. In essence, the challenges Nokia now faced could not be solved by changing the firm’s structure. As Kallasvuo himself later noted, there were simply too many interdependencies and these were not amenable to an organizational design approach. In very simple terms, the creation of three business groups whose tasks and performance remained interdependent—via the horizontal platforms—created a strong imperative for coordination and collaboration across these units (Zhou, 2013). But that imperative was not met.

Relationships deteriorated further. As one former Nokia leader put it, allegiances had shifted from loyalty toward Nokia and its success, to personal loyalty toward particular individuals or “brotherhoods.” This change in loyalties was most visible in the ongoing conflict between Kallasvuo and Vanjoki. Their interpersonal differences were starting to gain precedence over sound, substantive decision making and were leading to consequences of some magnitude: the strategic need to develop a new OS was for many conflated with taking sides in an interpersonal conflict. For example, rivalry between the core phone and smartphone developers reached fever pitch, and resulted in the wings of the smartphone team being clipped to the extent that they were confined to developing tablets (just when the smartphone market was beginning to take off).

The conflict between Kallasvuo and Vanjoki became increasingly acrimonious, partly because they embodied very different views—prudent evolution on Kallasvuo’s part and radical change on Vanjoki’s—and partly because their personalities and management styles were very different. The fact that Vanjoki was now the last senior leader with a strong view of the industry, and the technologies and strategies its evolution required, was disquieting to Kallasvuo, who was often placed in the position of having to agree or disagree with a forcefully argued position, the basis for which he did not fully grasp. That made him uncomfortable and resulted in a tendency to procrastinate. In retrospect, one can see that having Kallasvuo and Vanjoki coexist in the two most senior roles from 2008 to 2010 became a major source of difficulties. Some people close to Nokia have argued that these tensions could have possibly been diffused to an extent by Ollila, who as chairman of Nokia was still influential, even though by then he devoted most of his time and attention to his role as chairman of the board at Royal Dutch Shell.

(p.130) Beyond the toll of interpersonal rivalries, there were serious Emotional consequences post-2006 resulting from the underdevelopment of Nokia’s structural context and the seeming lack of attention to this on the part of Nokia’s CEO. A function of a strong structural context in a company is to connect the external performance demands from financial markets with internal measurement and reward systems, so choices can be guided to meet external needs, but not in a simple mechanistic transmission mode. What a well-developed structural context provides is not alignment but buffering. It should protect and shield middle managers from the full force of external pressures, with corporate management absorbing some of those pressures. Yet Kallasvuo did not shield the operating management or middle managers from stock market pressures. Years later, when reflecting on how hard it had been for him to lead Nokia, and asked what his main mistake had been, Kallasvuo responded that rather than do everything to meet market expectations, he should have decreased shareholder returns for two years, and accepted a stock price decline to allow resources to be directed toward sustainable performance rather than current results. This fits with a more general observation researchers have made about shareholders and boards generally contributing to the renewal difficulties incumbent firms face (Benner, 2010).

Over many years the Nokia assessment and reward system, based on trust and transparency, had put considerable emphasis on informal and subjective evaluation by line managers. It’s worth noting that within this system Nokians had a high degree of job security, as a poor performance assessment led to a “personal development plan” to improve skills, never termination. In keeping with Nokia Values and a strong team spirit, considerable emphasis in the assessments had been put on how results were achieved (for a detailed analysis see Kolehmainen, 2010). Yet, at the same time, the system became vulnerable to a shift in emphasis to merely “meeting the numbers,” and also to a loss of interpersonal trust and a decline in communication. In turn, the integrity of the management control process was compromised, and interactions—including at the top—took a theatrical rather than authentic character. Success in past years having bred “natural optimists,” a true, sober assessment of situations was replaced by exceedingly optimistic reports and a denial of rising difficulties.

Success had also led to an ethos of “doing a lot with limited means.” Nokia’s leaders had inherited a conviction from the firm’s heyday that more could actually be done with less, as in the 1990s when targets had been routinely exceeded. During the 2000s, this resulted in a culture in which resourcing was no longer commensurate with expected results. Doing more (and more) with less (and less) was being attempted. In the late 2000s, Nokia’s top management found it difficult selectively to connect external demands with internal commitments to enable internal efforts to bear fruit. As the extent of the challenge posed by the iPhone and then Android had not been fully grasped, (p.131) management’s internal demands for ever-greater performance were essentially around “more of the same,” only faster and with fewer resources.

A consequence of this “more performance with fewer resources” approach was that Nokia’s leaders saw themselves, retrospectively, as having been profligate and lenient in the years of munificence. A form of hubristic self-confidence developed. Ironically, even though performance demands were increasing, poor performance was no longer tolerated and managers who failed to meet targets were openly chastised.

The quality of dialog between top managers and the managerial ranks declined. Some of this was the result of decision overload, while some was a consequence of top managers finding it difficult to engage in substantive dialogs about the specifics of projects. This is a common tendency in maturing, self-confident organizations, and is characterized by a shift from dialogs of substance to theatrically scripted style conversations. In that context, “speaking the truth to power” (Wildavsky, 1987) became increasingly difficult. The forceful personality and temperament of Ollila also became a barrier to specific issues and difficulties percolating all the way to the board and being openly discussed. Although being only one factor among many, fear did play a part in making dialogs more difficult, in particular as pressures grew (Vuori and Huy, 2016). Rather than confront and communicate an uncomfortable reality, middle managers would now more often fall into a denial and cover-up mode. The CORE drivers for this period are summarized in Figure 7.4.

A Fading Star

Figure 7.4. 2006–10 CORE profile

(p.132) References

Bibliography references:

Elizabeth Altman and Mary Tripsas, “Product to Platform Transitions: Organizational Identity Implications,” in Oxford Handbook of Creativity, Innovation, and Entrepreneurship: Multilevel Linkages, edited by Christina E. Shalley, Michael A. Hitt, and Jing Zhou (Oxford University Press, Oxford, 2015).

Mary Benner, “Securities Analysts and Incumbent Response to Radical Technological Change: Evidence from Digital Photography and Internet Telephony” (Organization Science, Vol. 21 Issue 1, January/February 2010) pp. 42–62.

Yves Doz and Keeley Wilson, Nokia in 2010: What Are the Alliance Options? (INSEAD Case Study, 2016).

Thomas Eisenmann, Geoffrey Parker, and Marshall Van Alstyne, “Platform Envelopment” (Strategic Management Journal, Vol. 32 Issue 12, 2011) pp. 1270–85.

Katja Kolehmainen, “Dynamic Strategic Performance Measurement Systems: Balancing Empowerment and Alignment” (Long Range Planning, Vol. 43 Issue 1, 2010) pp. 527–54.

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Aaron Wildavsky, Speaking Truth to Power: The Art and Craft of Policy Analysis (Transaction Publishers, New Brunswick, 1987).

Yue Maggie Zhou, “Designing for Complexity: Using Divisions and Hierarchy to Manage Complex Tasks” (Organization Science, Vol. 24 Issue 2, 2013) pp. 339–55.