The challenge of a competing rule changer at Nokia

It’s easy to forget that before Steve Jobs walked onto a stage, pulled an Apple iPhone out of his pocket and changed the world in 2007, Nokia was the disruptor. The Finnish mobile phone company became market leader in a rapidly changing industry by delivering and relentlessly improving relevant customer benefits in line with its brand promise, ‘connecting people.’

For nearly 20 years, Nokia was consistently customer-led, continually innovating to connect people through mobile telephony. In the 1990s it was a bold, innovative company in broader business terms - more than most people realise. It bravely focused on mobile communications and was an early adopter and driver of 2G technology.

Like many other outside-in companies in this book, Nokia looked beyond the existing boundaries of its industry, spotting opportunities and growth by redefining the market. For example, it was the first mobile company to target a global audience without handsets, looking to reach the 4 billion people still unconnected. And as it grew, Nokia remained in touch with its customers by restructuring the organisation and introducing sophisticated global customer segmentation.

Nokia understood the power of building a strong brand trusted by mobile operators and customers alike. It was the first supplier to sell phones that worked on every major cellular standard. It saw the potential of the mobile handset beyond calls, selling the first examples to have an integrated FM radio, a calendar and with games like Snake (that still has a cult following).

Nokia’s iconic designs remained constant. The look and feel of Nokia products were the same everywhere - classic brick phones known by their numbers like the 3310 and 5110, with a swappable coloured fascia. It was among the first to understand that handsets were as much lifestyle as technology products and that consumers highly valued ease of use and beautiful design.

Nokia became a recognised world leader in supply chain management. When booming global sales growth stalled in late 1995, it experienced a rapid inventory build-up. Recognising that the mobile phone industry was as much about logistics as technology, Nokia swiftly reorganised its supply chain and averted a crisis.

In 1999, Nokia supplied more than one out of every four phones in the market.40 By the end of 2007, half of all smartphones sold in the world were made by Nokia, while Apple’s iPhone had a mere 5% share.41

Yet, by the first half of 2013, Nokia’s market share had plummeted from more than 25% to less than 3% in a sobering reminder that even the strongest companies can fall. Nokia’s market capitalisation, which had been close to $250 billion at its peak in 2000, tumbled to around $50 billion in 2010. In the same year, Nokia replaced its CEO. Later, it abandoned software development, and became just a hardware provider, surrendering its position as a leading smartphone competitor. It ultimately exited the industry, selling its mobile business to Microsoft in 2013. So, what went wrong?

Everything changed with the launch of the Apple iPhone. Nokia may have been market leader at this point, but Apple’s innovation rewrote the rules of the mobile industry. Apple approached the sector from the outside-in, anticipating that the communications industry would no longer be centred on making phone calls but about facilitating someone’s digital life and connecting them with music, photos, retail, each other and more. Apple understood the potential of a rectangle with a screen and data connectivity, enabled by easy-to-use, ubiquitous software, powerful fast processing and data stored in the cloud. With its full touchscreen and app-based operating system, the iPhone changed the definition of what a smartphone could be.

On paper, Nokia should have sailed the choppy waters of competition with ease. It had bountiful economic and intellectual resources and had dominated the mobile industry for years. However, three years after the introduction of Apple’s iPhone, Nokia had failed to launch a next-generation smartphone in response. A tech journalist recalls talking to Nokia executives in 2012 and believes that at the root of the company’s failure to react robustly was an inability to take risks that grew in proportion to its success. This was compounded by denial in the face of clear and significant warning signs.

There wasn’t a sense of urgency a former Nokia executive told me. When dealing with a machine that pumped out millions of phones, a single mistake or bad call could cost the company billions of dollars. As a result, management was structured around many layers of approval bodies and meetings. The whole structure was built to prevent mistakes.42

The lack of urgency is understandable; Nokia’s share of both the smartphone and total cellphone markets was in decline, but the drop-off wasn’t dramatic. In countless interviews with Nokia executives, they were quick to point to their market leadership as proof they were still in a strong position.43

Within the company, Nokia executives were faced with an inconvenient truth - their industry was no longer about churning out devices but something much more. Customers and how they thought about the category had evolved in a different direction to Nokia’s executives who were obsessed with managing the machine without screwing up. They’d stopped thinking about their industry from the customer’s point of view.

Our view of our competitors’ products’ usage was completely distorted ... People didn’t know how good Android was, or the iPhone ...

It wasn’t known throughout the company how good the competitors’ products are becoming. The group of people who really knew the pain was way too small.44

Another senior strategy consultancy explained that Nokia’s middle managers lacked external fear about competition from other firms and were confident that feature phones would prevail over touchscreen phones. Apparently blindsided, they weren’t thinking about what the interface was there to do. The iPhone was opening up a whole new world, reshaping the industry while Nokia executives were fighting yesterday’s battle.

Nokians [thought that they] were the best in class. And they didn’t even want to hear how you could think about things differently. They just went into their cocoon and patted themselves on the back.45

Indeed, many managers within Nokia believed the company was invincible given its market leadership and R&D strength. Between 1992 and 2006, it had made 51,836 patent applications,46 was estimated to generate more than $600 million in revenue-related patents each year and had invested more than $50 billion in R&D over two decades.47 Backed by these assets, its growth trajectory seemed secure. In 2005, Nokia sold its billionth phone. Mobile phone subscriptions surpassed 2 billion.48 And it was from this context of sustained success and leadership for Nokia that the iPhone entered stage left on a platform where the value provided to customers was changing and so were their expectations. According to one upper middle manager:

The classic smartphones with old-fashioned keyboards sold in such goddam huge numbers that some people questioned why we even should make touchscreen phones - ‘We’re doing fine as it is.’49

This confidence came from the top. For example, after Apple had introduced the iPhone, the CEO said publicly, T don’t think that what we have seen so far [from Apple] is something that would in any way necessitate us changing our thinking.’50

Nokia’s decline was reflected in the mobile company’s unswerving loyalty to outdated technology. Symbian, the firm’s mobile operating system, was simply not up to the job compared to newer operating systems like iOS and later Android. While Samsung chose to adopt Google’s Android software for its own devices following this mobile software revolution, Nokia, hoping to ensure sustainable profit, decided to continue improving its own proprietary platform which was Symbian. Yes, it was trying to innovate but without sight of the inevitable future.

So much money, time and resources had been invested in Symbian that even doubters within Nokia were reluctant to suggest the operating system wasn’t good enough.

Our organization had to have faith in it - you must believe in the gun you’re holding, because there’s nothing else. It takes years to make a new OS. That’s why we had to keep the faith with Symbian.5

Consumers’ responses to Nokia’s phones became increasingly negative. A stream of new Nokia smartphones from 2007-2010 failed to impress. In 2007, the N95 had full music features, GPS, internet but no touchscreen.

In 2008, the 5800, its first touch screen smartphone, was a commercial success, but it was about 18 months too late to market because of software glitches. In 2009, the N97 was a failure in terms of user experience. Finally, again a year too late, Nokia launched another ‘iPhone killer’ - the N8 - to muted reviews. ‘Usability is where the Nokia N8 ... falls short the most ... if you are coming from webOS, iOS, or Android, things are likely to feel kludgy to you.’52

Nokia’s problems were intensified by its organisational structure. Layers of management were blocking links between the customer and R&D.

The sales organization had been changed such that the link to the customer was rather unclear... There was a layer between the customer and the units developing the software ... This blocked transparency and also motivation.”

Similarly, middle managers who were the most likely to challenge existing technology were not encouraged to question managers above them in the hierarchy. There was a climate of fear within the organisation that prevented middle managers from sharing negative opinions with their superiors and peers stifling a sustainable long-term innovation strategy.

Nokia’s TMs [top managers] believed that MMs’ [middle managers] narrow internal focus would ensure effective implementation, and therefore they discouraged MMs’ external focus ... When MMs asked critical questions, the TMs urged them to keep their attention focused on implementing their tasks ... the answer typically was that ‘this is the direction we have chosen. Don’t challenge me but focus on implementation.’54

After the crisis and the fall of Nokia, one of these middle managers reflected on how the mobile company’s drift into inside-out beliefs had changed his behaviour. He said: [1]

Unfortunately, failure seems inevitable, eventually, for customer-led companies that achieve greatness. While Nokia’s early success was a result of being customer-led, the Finnish mobile company found itself gradually losing the boldness and openness characteristic of outside-in beliefs.

Nokia succumbed to a slow, relentless drift from outside-in to inside-out beliefs that became suddenly visible when a competitor changed the rules, disrupting the industry to create value for customers. The problem wasn’t created when Apple launched; it started, slowly, several years before, when protecting the ‘machine’ became more important to Nokia than questioning the way they created customer value.

Nokia was left defending its old model in a new world where it no longer had relevance or understanding of what its customers really wanted. Apple saw what Nokia could no longer see. That the boundaries of the industry were fundamentally shifting. And to return to the analogy of ready meals and Deliveroo - this was not about creating better microwave meals but about understanding consumer value - nice food fast.

  • [1] should’ve been much, much more courageous. And I should’vemade a lot more noise, should’ve criticized people more directly ... Icould’ve made more of an impact. And it would’ve been breaking theconsensus atmosphere ... Nobody wanted to rock the boat... I shouldhave been braver about rattling people’s cages.55
 
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