In less than a decade, Nokia emerged from Finland to lead the mobile

phone revolution. It rapidly grew to have one of the most recognisable

and valuable brands in the world. At its height Nokia commanded a global
market share in mobile phones of over 40 percent. While its journey to the
top was swift, its decline was equally so, culminating in the sale of its
mobile phone business to Microsoft in 2013.

It is tempting to lay the blame for Nokia’s demise at the doors of Apple,
Google and Samsung. But as I argue in my latest book, “Ringtone:
Exploring the Rise and Fall of Nokia in Mobile Phones”, this ignores
one very important fact: Nokia had begun to collapse from within well
before any of these companies entered the mobile communications
market. In these times of technological advancement, rapid market
change and growing complexity, analysing the story of Nokia provides
salutary lessons for any company wanting to either forge or maintain a
leading position in their industry.

Early success

With a young, united and energetic leadership team at the helm, Nokia’s
early success was primarily the result of visionary and courageous
management choices that leveraged the firm’s innovative technologies as
digitalisation and deregulation of telecom networks quickly spread across
Europe. But in the mid-1990s, the near collapse of its supply chain meant
Nokia was on the precipice of being a victim of its success. In response,
disciplined systems and processes were put in place, which enabled Nokia
to become extremely efficient and further scale up production and sales
much faster than its competitors.

Between 1996 and 2000, the headcount at Nokia Mobile Phones (NMP)
increased 150 percent to 27,353, while revenues over the period were up
503 percent. This rapid growth came at a cost. And that cost was that
managers at Nokia’s main development centres found themselves under
ever increasing short-term performance pressure and were unable to
dedicate time and resources to innovation.

While the core business focused on incremental improvements, Nokia’s

relatively small data group took up the innovation mantle. In 1996, it
launched the world’s first smartphone, the Communicator, and was also
responsible for Nokia’s first camera phone in 2001 and its second-
generation smartphone, the innovative 7650.

The search for an elusive third leg

Nokia’s leaders were aware of the importance of finding what they called
a “third leg” – a new growth area to complement the hugely successful
mobile phone and network businesses. Their efforts began in 1995 with
the New Venture Board but this failed to gain traction as the core
businesses ran their own venturing activities and executives were too
absorbed with managing growth in existing areas to focus on finding new
growth.

A renewed effort to find the third leg was launched with the Nokia
Ventures Organisation (NVO) under the leadership of one of Nokia’s top
management team. This visionary programme absorbed all existing
ventures and sought out new technologies. It was successful in the sense
that it nurtured a number of critical projects which were transferred to the
core businesses. In fact, many opportunities NVO identified were too far
ahead of their time; for instance, NVO correctly identified “the internet of
things” and found opportunities in multimedia health management – a
current growth area. But it ultimately failed due to an inherent
contradiction between the long-term nature of its activities and the short-
term performance requirements imposed on it.

Reorganising for agility

Although Nokia’s results were strong, the share price high and customers
around the world satisfied and loyal, Nokia’s CEO Jorma Ollila was
increasingly concerned that rapid growth had brought about a loss of
agility and entrepreneurialism. Between 2001 and 2005, a number of
decisions were made to attempt to rekindle Nokia’s earlier drive and
energy but, far from reinvigorating Nokia, they actually set up the
beginning of the decline.

Key amongst these decisions was the reallocation of important leadership

roles and the poorly implemented 2004 reorganisation into a matrix
structure. This led to the departure of vital members of the executive
team, which led to the deterioration of strategic thinking.

Tensions within matrix organisations are common as different groups with

different priorities and performance criteria are required to work
collaboratively. At Nokia,which had been acccustomed to decentralised
initiatives, this new way of working proved an anathema. Mid-level
executives had neither the experience nor training in the subtle
integrative negotiations fundamental in a successful matrix.

As I explain in my book, process trumps structure in reorganisations. And

so reorganisations will be ineffective without paying attention to resource
allocation processes, product policy and product management, sales
priorities and providing the right incentives for well-prepared managers to
support these processes. Unfortunately, this did not happen at Nokia.

NMP became locked into an increasingly conflicted product development

matrix between product line executives with P&L responsibility and
common “horizontal resource platforms” whose managers were struggling
to allocate scarce resources. They had to meet the various and growing
demands of increasingly numerous and disparate product development
programmes without sufficient software architecture development and
software project management skills. This conflictual way of working
slowed decision-making and seriously dented morale, while the wear and
tear of extraordinary growth combined with an abrasive CEO personality
also began to take their toll. Many managers left.

Beyond 2004, top management was no longer sufficiently technologically

savvy or strategically integrative to set priorities and resolve conflicts
arising in the new matrix. Increased cost reduction pressures rendered
Nokia’s strategy of product differentiation through market segmentation
ineffective and resulted in a proliferation of poorer quality products.

The swift decline

The following years marked a period of infighting and strategic stasis that
successive reorganisations did nothing to alleviate. By this stage, Nokia
was trapped by a reliance on its unwieldy operating system called
Symbian. While Symbian had given Nokia an early advantage, it was a
device-centric system in what was becoming a platform- and application-
centric world. To make matters worse, Symbian exacerbated delays in
new phone launches as whole new sets of code had to be developed and
tested for each phone model. By 2009, Nokia was using 57 different and
incompatible versions of its operating system.

While Nokia posted some of its best financial results in the late 2000s, 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 becoming apparent, but as
dominant industry leader Nokia lacked the skills, and inclination to engage
with this new way of working.

By 2010, the limitations of Symbian had become painfully obvious and it

was clear Nokia had missed the shift toward apps pioneered by Apple. Not
only did Nokia’s strategic options seem limited, but none were particularly
attractive. In the mobile phone market, Nokia had become a sitting duck
to growing competitive forces and accelerating market changes. The
game was lost, and it was left to a new CEO Stephen Elop and new
Chairman Risto Siilasmaa to draw from the lessons and successfully
disengage Nokia from mobile phones to refocus the company on its other
core business, network infrastructure equipment.

What can we learn from Nokia

Nokia’s decline in mobile phones cannot be explained by a single, simple

answer: Management decisions, dysfunctional organisational structures,
growing bureaucracy and deep internal rivalries all played a part in
preventing Nokia from recognising the shift from product-based
competition to one based on platforms.

Nokia’s mobile phone story exemplifies a common trait we see in mature,

successful companies: Success breeds conservatism and hubris which,
over time, results in a decline of the strategy processes leading to poor
strategic decisions. Where once companies embraced new ideas and
experimentation to spur growth, with success they become risk averse
and less innovative. Such considerations will be crucial for companies that
want to grow and avoid one of the biggest disruptive threats to their
future – their own success.