Some Fortune 500 companies gain notoriety through their unparalleled success and complete domination in their industry. Others become infamous for missteps and wrong calls that lead to a very public downward spiral. And then, in those very rare occasions, you have a company like Nokia, which managed to do both.
The Finnish mobile technology company was at one point in the late 1990’s and early 2000’s, the undisputed giant of the mobile phone space. Their dominance was recently described by Rajiv Makhni from HindustanTimes this way:
“Nokia was the number one in the mobile phone business. Barring none! By a long shot. Absolutely nothing and no one came close! Nokia dominated the market to the point that it was a hopeless pursuit to even try and compete. There was Nokia on one side and then there was everyone else combined on the other side.”
Up until 2007, it appeared Nokia was untouchable. But with the 2007 release of the iPhone and Android lines of smartphones, everything started to unravel. From 2007 to 2012 Nokia lost 90% of its market value. Its domination over Samsung went (in terms of market share) from a 76% to 6% advantage to a 23% to 42% deficit from 2010 to 2012.
It could be easily explained that Nokia was simply one of the early victims of industry disruptions that are commonplace today. But a closer look will reveal some interesting behind-the-scenes machinations that precipitated the downfall. The Nokia story can be an excellent learning opportunity for today’s family-owned business.
Nokia: A Long and Storied History
One of the great ironies of Nokia getting caught flat-footed is the fact that they have more than a century’s experience of reinventing themselves. Nokia was founded as a pulp mill in 1865 on the banks of the Tammerkoski rapids in southwestern Finland. In the early 1900’s the company made galoshes. It was only after 1922 when the company would enter what is today known as the “tech space”. They were acquired by the Finnish Cable Company and were charged with manufacturing materials for the telephone and telegraph industry.
It was near the end of the 20th century when Nokia would take the form we know it as today. When mobile phones began going mainstream in the 1990’s, Nokia decided to cut loose all other business ventures and focus solely on mobile telecommunications. It would not take long for the Finnish company to dominate the space.
Nokia’s decline was so significant and confounding, there has been much speculation as to the precise reason why. If you asked 10 different experts, you would likely get 10 different root causes. Rather than trying to decipher which is the correct one, it would be instructive to look at some of the more commonly accepted mistakes and extrapolate lessons to be learned from them. For most family-owned businesses, the underlying business principles will still apply.
Lesson #1 – Do Not Ignore Key Markets
In a 2011 op-ed piece for the Harvard Business review, Michael Schrange argues that Nokia’s decline (which at that point was still happening) is best explained by the fact that they ignored the North American market. At that time, North America accounted for only 7% of Nokia’s business.
Nokia had been so dominant in Europe and Asia, they believed they could continue to thrive without a strong Western presence. Schrange highlights the folly in this thinking.
“If an American global market leader treated India, China, or Brazil so dismissively, its top management would (rightly) be excoriated as insular and arrogant. But Nokia’s strategic choices have left it with a comparable outcome: an inability to learn, grow or profit in a market demonstrably hungry for mobile innovation. Behaving as if America doesn’t matter takes a peculiar ignorance or arrogance,’ he wrote.
By 2011, both iPhone and Android phones had more than 10 times the market share as Nokia.
So, what’s the lesson here? This example seems to prove the business truism, ‘If you’re standing still, you’re dead.” Always look to get a foothold in untapped markets. Growth and expansion are key to survival. Leaving them ignored creates an opportunity for your competitor to move in and build strength.
Lesson #2 – You must stay ahead of the trend or perish
When it was just about the phones, Nokia was king of the hill. They had been at the cutting edge of cell phone designs since they first appeared on the market. Nokia was leading innovation in terms of the look and design of the product. They were the ones who introduced a wide variety of colours and styles. Beyond that, they pioneered 3G and LTE technology.
But with the emergence of the smartphone, a fundamental change was about to sweep the industry, a change for which Nokia was completely unprepared.
With smartphones, the game changed where it was no longer about the phone but rather what could you do on the phone. Before smartphones, basic functionality was calling or texting. But when the iPhone introduced the App Store platform, it suddenly became about what cool things could you do on your phone. The iPhone design was very plain, but it offered a much larger screen surface. Apple understood that mobile phones were about to transition into mini hand-held computers. Nokia still saw them as phones.
In his New Yorker piece, Where Nokia Went Wrong, James Suroweicki highlights the major contrasting factor between Nokia and the other smartphone companies.
“It’s more accurate to say that Nokia was, at its heart, a hardware company rather than a software company — that is, its engineers were expert at building physical devices, but not the programs that make those devices work. In the end, the company profoundly underestimated the importance of software, including the apps that run on smartphones, to the experience of using a phone. Nokia’s development process was long dominated by hardware engineers; software experts were marginalized.
The lesson here is that if you operate believing what made you successful yesterday will keep you on top tomorrow, you are in for a rude awakening. Nokia was offered to come on board as part of the Android group of phones. They passed, believing the move was beneath them. Had they not passed it’s very likely that they, and not Samsung, would have merged as the leader of the Android group.
Lesson #3 – If You Shoot The Messenger, Your Company Will Perish
After the stunning decline of Nokia, more than 70 upper and middle managers were interviewed in the hopes of shedding some light on what was happening behind closed doors. What they found was a collective company culture that was paralyzed with fear. This then resulted in very hostile exchanges between managers and subordinates. The higher-ups didn’t want to hear that something wasn’t possible under the proposed timeframe or that progress was lagging behind.
In his 2015 piece, Who Killed Nokia? Nokia Did, Quy Huy highlighted the disastrous effects this company culture had.
“This (company culture) led middle managers to over promise and under deliver. One middle manager told us that ‘you can get resources by promising something earlier, or promising a lot. It’s sales work.’ This was made worse by the lack of technical competence among top managers, which influenced how they could assess technological limitations during goal setting. As one middle manager pointed out to us, at Apple the top managers are engineers. ‘We make everything into a business case and use figures to prove what’s good, whereas Apple is engineer-driven.’ Top managers acknowledged to us that ‘there was no real software competence in the top management team’”.
The lesson here is that if you create a company culture where people are berated if they tell you something you don’t want to hear, you will never have the critical information you need at any given time. Without the core facts, warts and all, how can you make the necessary adjustments to stay ahead of the game?
In the end, Nokia has found a way to survive. They made a comeback in 2017 with a new line of smartphones and they will likely be around for years to come. But we can all heed the important lessons from their mistakes and be sure to avoid replicating them in our own business operations.