The Nokia Revolution

Selected Acronyms and Definitions	p. xiii
Acknowledgments	p. xix
Introduction	p. xxiii
The Legend and the History	p. xxiv
A Mobile Test Laboratory	p. xxvi
Building Strategic Advantages from Capabilities	p. xxviii
Three Stages of Competitive Development: Toward the Mobile Information Society	p. xxx
The Diversification Strategy	p. 1
The Origins of Nokia	p. 3
From Forestry to Rubber and Cable	p. 4
Idestam and German Innovation	p. 4
Bold Dreams, Ceaseless Innovation	p. 6
Start-Up Struggles	p. 7
Mastering the Full Value Chain	p. 8
The Second Incarnation of Nokia: The Rise of an Industrial Conglomerate	p. 9
The Demise of Idestam's Era: Diversification into Electrical Power	p. 10
Cartelization of the Finnish Forestry Business	p. 13
The Finnish Rubber Works	p. 13
"Wear Only Finnish Galoshes in Finland!"?	p. 14
Branding and Product Proliferation	p. 15
The Finnish Cable Works	p. 16
The Creation of the Cable Company	p. 16
The Rise and Fall of Combination Talks: Toward the War Period	p. 18
Nokia's Role as a Subsidiary	p. 19
From Combination Talks to Three Wars	p. 20
The New Realpolitik and Soviet Trade	p. 21
War Reparations and Nokia's Growth	p. 22
The Expansion of the Finnish Cable Works	p. 22
The Three-Company Merger: The Birth of the Industrial Conglomerate	p. 24
The Emergence of Nokia's Electronics	p. 26
Kairamo's Vision	p. 29
The Cold War Era: The Rise of the Investment Economy	p. 30
Patience to Prosper	p. 30
Kairamo's Rebellion: From Treest o People	p. 31
In and Out of Europe	p. 36
Postwar Technology Catch-Up	p. 37
The Third Incarnation of Nokia	p. 39
From Comparative to Competitive Advantage	p. 39
The Quest for First-Mover Advantages in Electronics	p. 40
Political Visions, Market Realities: The Valco Debacle	p. 41
The Birth of the Electronics Concern	p. 44
Growth-Share Matrix	p. 45
Portfolio Analysis	p. 46
The Acquisition Spree	p. 48
The Push into Consumer Electronics: Mass Production or Focus Strategy?	p. 48
A European Technology Concern	p. 51
The Crash of the Investment Economy and the Struggle for Corporate Control	p. 55
Ownership and Competitive Strategy	p. 55
Problems of Corporate Governance	p. 56
An Ownership Vision	p. 59
The Demise of the Old Capital Investment System	p. 61
The End of the Kairamo Era	p. 64
A Death and a Suicide	p. 68
Barbarians at the Gate: From Banks to Kouri's "Northeast Plan"	p. 69
Nokia's Roller-Coaster Ride	p. 72
The Vuorilehto Interlude: From Diversification to Restructuring	p. 73
From the Eclipse of the Cold War to the Collapse of the Soviet Trade	p. 79
The Global Focus Strategy	p. 83
Restructuring Nokia: the Focus Strategy	p. 85
Nokia, Electronics, and Telecommunications	p. 85
The Post-World War II Consolidation	p. 86
Nordic Cooperation	p. 91
Progressive Public Policies	p. 92
Nokia-Mobira and the Booming 1980s	p. 92
The Evolution of Cellular Networks	p. 93
First-Generation Mobile	p. 93
Nordic Mobile Telephone	p. 96
Nokia and NMT	p. 97
The First Steps	p. 97
From Business Markets to Consumer and Foreign Markets	p. 99
Nokia-Mobira Oy	p. 101
The Spin-Off of Benefon and the Future of Telenokia	p. 106
Second-Generation Mobile	p. 106
The Emergence of the Innovation Stage	p. 107
Global System for Mobile Communications	p. 109
Nokia and the GSM	p. 110
Strategic Intent	p. 116
Jorma Ollila's Nokia	p. 116
The Early Years: Student Politics and Citibank	p. 117
Industry Experience: From Corporate Finance to the Cellular Business	p. 121
Nokia's Strategic Intent	p. 125
Customer Transition and Process Organization	p. 125
Ambitions Versus Resources	p. 130
Competing for the Future	p. 132
Global Focus	p. 136
Global Growth Strategy for a High-Technology Challenger	p. 137
From Low-End Niches to High-End Segments	p. 138
Industry Shift, Early Entry, and Market Leadership	p. 140
Global Focus and "Horizontal Tigers"	p. 143
The Fall of Vertical Dragons and the Rise of Horizontal Tigers	p. 145
Mobile Equipment Vendors: Industry Rivalry	p. 146
Mobile Terminals	p. 146
Infrastructure	p. 147
Finnish and Overseas Segments	p. 148
China's Volume Potential	p. 149
Explosive Growth and Anomic Crises	p. 149
Competition for the Chinese Market	p. 153
Strategic Market Making	p. 156
Business Segments	p. 157
Nokia Mobile Phones	p. 157
Nokia Networks	p. 157
Nokia Communications Products	p. 162
Nokia Ventures Organization	p. 163
Nokia's Strategic Leadership	p. 163
The Group Executive Board	p. 164
The Board of Directors	p. 171
Toward a New Management Paradigm	p. 174
The Quest for the Third Way	p. 174
Strategic Inflection Points and Dominant Designs	p. 179
Human Resource Management	p. 182
The Nokia Way	p. 182
The New Nokians	p. 184
Strategic Flexibility and Cross-Functional Teams	p. 185
Intellectual Property Resources	p. 187
Attracting and Retaining the Best and the Brightest	p. 189
Toward the Mobile Information Society	p. 193
Nokia's RandD: Focusing and Globalizing	p. 195
From Finnish Innovation to Nokia's RandD	p. 195
Finland's National Innovation System	p. 196
Nokia Research Center	p. 198
Globalization of RandD	p. 199
The Expansion of Nokia's RandD	p. 199
Standardization and Downstream Innovation	p. 202
The Global RandD Network	p. 203
The Functions of the RandD Sites	p. 204
RandD and Business Units: Technology Integration	p. 207
Small, Flexible RandD Teams: Concurrent Engineering	p. 208
The Genesis of the Single Flexible Standard	p. 210
Nokia's Initial 3G Efforts	p. 211
The Nordic-Japanese Alignment	p. 212
The Crumbling of the European Front?	p. 216
Trade Threats	p. 219
Upstream Innovation	p. 225
Building New Capabilities	p. 226
Managing Development Capabilities	p. 226
From Capabilities to Product Development	p. 228
Corporate Venturing	p. 231
Early Acquisitions	p. 232
Standards Coalitions	p. 234
The Functions of Nokia's Strategic Coalitions	p. 235
Wireless Application Protocol	p. 238
Symbian	p. 240
Bluetooth	p. 243
Synchronization	p. 244
The Discontents of Strategic Coalitions	p. 244
Supplier and Partner Management	p. 247
Components and Contract Manufacturing	p. 248
Operators and Services	p. 256
ICT Equipment, Networks, and Related Services	p. 258
Downstream Innovation	p. 261
Market Segmentation	p. 262
Lifestyle Segmentation	p. 267
Design	p. 270
Cell Phones as Fashion Statements	p. 272
Designing in Teams	p. 275
Technology-Adoption Life Cycles	p. 278
Branding	p. 279
Mastering the Art of Branding	p. 280
Branding in Mobile Cellular	p. 281
Global Branding	p. 283
Processes and Performance	p. 285
Control Systems	p. 285
Nokia's Secret Code	p. 292
Incumbent Challenger	p. 292
Historical Success	p. 292
Three Possible Explanations	p. 295
The Drivers of Nokia's Strategic Success	p. 297
Disruption and Success	p. 301
The Drivers of Nokia's Strategic Failure	p. 302
Which Customers to Listen To?	p. 304
Appendices
Chronology of the European Integration of the Nordic Countries and Finland	p. 307
Nokia's Process Configuration	p. 311
A Note on the Finnish Sources	p. 317
Notes	p. 323
Index	p. 363
Table of Contents provided by Syndetics. All Rights Reserved.

Chapter One

The Origins of Nokia

FORESTRY drove the Finnish economy from the late nineteenth to the late twentieth century, and even today, Finland remains the world's most forested country. In factor-driven nations, the most successful industries draw advantage mainly from the basic factors of production. In this stage, most Finnish companies in forestry-related industries, requiring little product or process technology, competed primarily on the basis of price. Typically, technology was obtained from other nations rather than created indigenously. Few Finnish companies had direct contact with end users; foreign companies provided most of the country's access to world markets due to modest domestic demand. The Finnish economy remained sensitive to world economic cycles and exchange rates, which drove demand and relative prices.

During this stage, the political economy of the era provided the context for the strategies, rivalries, and industry structures that existed within Finland's business community. Nokia was born amid Finland's struggle against Russification and for independence. The company's founding fathers, in particular Leo Mechelin, the first parliamentarian of the young independent state, led the struggle for national sovereignty. Finland's declaration of independence in 1917 sparked decade-long wars that began with a devastating civil war and resulted in the loss of Nokia's corporate autonomy. The company became part of a three-company coalition in the 1920s. As a subsidiary of a young industrial conglomerate, it had to cope with a barrage of social, political, and economic events, including the Roaring Twenties, the Great Depression, the invasion of the Soviet Union and ensuing wars, and war reparations to Moscow.

After these tumultuous decades, Nokia emerged triumphant in the late 1950s. With a new foreign policy driven by aspirations of neutrality, Finland finally achieved political stability. However, its abundant natural resources no longer supported a high per capita income. The factor-driven economy offered a poor foundation for sustained growth, and as Finland opted for a new stage of economic development, so did Nokia.

From Forestry to Rubber and Cable

Until the 1990s, Nokia's economy and industry reflected those of the Finnish fortunes, albeit with two critical differences. Among Finnish companies, Nokia has always been a pioneer, embracing innovation and risk-taking. It has been driven by bold and grand aspirations.

The creation of Nokia as a small forestry company in 1865 coincided with a tremendous boom in the lumber industry, putting Finland on the road to industrialization. Between 1865 and 1914, the lumber industry spawned a number of associated industries that produced wood pulp, paper, matches, cellulose, and plywood. These industries led to the creation of enterprises that produced textiles, cement, and metal products. Finnish companies at this time were aggressively pursuing export initiatives to supplement the small domestic market, and by 1910 Finland's leading trade partner was Germany, followed by Russia and Britain. Fredrik Idestam, one of Nokia's founders, came of age in this era of entrepreneurial thinking, economic optimism, and new technological opportunities.

Idestam and German Innovation

Born in 1838 to an educated family, Knut Fredrik Idestam attended Helsinki University, graduating in 1863. During his studies at the university, the young engineer had a fortuitious meeting with Leo Mechelin, a chance event that would have a great impact on the history of Nokia (see Exhibit 1-1). Four decades after this encounter, Mechelin, as the country's leading parliamentarian, would play a crucial role in Finland's struggle for political independence, which accelerated in the Great Strike of 1905. Mechelin's constitutional senate, appointed during the strike, was the country's first real parliamentary government. The makeup of the contemporary Nokia would be inconceivable had it not been for Mechelin's active role in government relations, board activities, and capital allocation. From the 1860s to the 1910s, Idestam and Mechelin, Nokia's two founding fathers, supported and complemented each other and were among the "Young Turks" of a new generation of businessmen in Finland.

The political conditions of Finland present an important backdrop to the evolution of Nokia. Following the Crimean War (1853-1856), Finland was joined to Russia by Tsar Alexander I and made an autonomous state. Although its traditions, laws, and constitution remained intact, the tsar replaced the Swedish king as sovereign of Finland.

By the 1860s, technological and political progress seemed to go hand in hand. The first Finnish railway traveling between Helsinki and Hämeenlinna was launched in 1862. A language decree issued in 1863 by Alexander II marked the first step toward making Finnish an official administrative language. As Idestam dreamed of his future in 1863, the Diet of the Four Estates convened for the first time in more than half a century and met regularly to begin legislative work in Finland. The country obtained its own currency, economic development accelerated, and business became less controlled. When the Conscription Act of 1878 gave Finland its own army, the country resembled an independent nation even though it was not one yet.

Unlike Mechelin, Idestam had no political aspirations and, like his father, was more interested in engineering and the metal industry. In late spring 1863, Idestam finished his studies and traveled to Germany. Because of the difficult political circumstances and rumors of impending war, Idestam nearly passed on the opportunity to make the trip that ultimately led to the founding of Nokia. In April 1863, while touring the sights and factories of Germany, Idestam traveled to Mägdesprung, where he had heard that Wilhelm Ludwig Lüders had created a new process to manufacture pulp based on the work of Friedrich G. Keller and Heinrich Völter.

On May 3, 1863, Idestam visited Lüders's factory and persuaded his colleagues to demonstrate the operations of the mill. As they were displaying the new manufacturing equipment, Lüders heard of the presentation and rushed to the scene. He had spent years designing the new process, had invested significant capital in the new machinery, and had no desire to be a gracious host. Lüders ejected Idestam for trying to gather information on a proprietary technology—what he deemed to be industrial espionage. Despite the precipitous end to Idestam's visit, he had seen and heard enough to believe that he could create in Finland what he had seen in Germany.

Bold Dreams, Ceaseless Innovation

Finland's unique maritime landscape in the nineteenth century was both beautiful and potentially useful to industry. Coupled with modern manufacturing technologies, the lakes, rapids, rivers, and seemingly endless forests provided ideal resources for manufacturing pulp to make paper and related products. On May 12, 1865, Idestam realized his vision when he received authorization to build a mill, laying the foundation for the future Nokia Corporation. Over time, the Nokia factory attracted a large workforce, and a town of the same name grew around it (see Exhibit 1-2).

For more than a century, Nokia has been driven by a shared organizational vision of ceaseless innovation and bold dreams, as well as the determination and commitment to vigorously pursue it in domestic and overseas markets. In that regard, Nokia has been an exception among Finnish companies. Through the decades, Nokia's corporate vision, which transcends its founders, has exhibited three characteristics: a context for strategic and tactical decisions; extraordinary effort creating cohesion, teamwork, and community; and self-reliance. The initial conditions were far from easy.

Start-Up Struggles

In the late 1860s, the demand for paper products in Finland far exceeded the domestic supply, even augmented by imports from Russia and Sweden. The domestic paper factories were suspicious of Nokia's products because the company was small and Finnish and lacked the clout of a foreign company. To find success in domestic markets, Idestam would first have to excel internationally, and so he sought customers in continental Europe, particularly Denmark and Germany. This strategy had merit; in 1867 Idestam received a bronze medal in the Paris World's Fair for his groundwood pulp, and sales then took off in England, Russia, and Finland.

To keep the company going, Idestam struggled for financing, and like many other Finnish enterpreneurs of his era, he was dependent on bank loans. "Damn it, the times are so bad!" he wrote to Mechelin in 1865, prior to the purchase of the mill site. "Everybody wants loans, nobody can afford to give them!" Idestam ultimately convinced a group of private investors in Helsinki to finance his operation for a joint note of debt. He also benefited from Mechelin's marriage to the daughter of commercial lawyer J. H. Lindroos, one of the wealthiest men in Helsinki. Mechelin's position as a member of the board of the Union Bank of Finland further added to the financial support of the fledgling company.

The company now under way, Idestam issued forty-one shares in 1867. Mechelin acquired ten, gaining an interest in the company of more than 25 percent. But currency reform, the recession of 1866, and the "Great Hunger" years of the time discouraged expansion. Idestam had met Gebruder Wargunin, a St. Petersburg factory owner, at the Paris World's Fair, who provided the financing that allowed Idestam to build a larger mill near the Nokia River in 1868. But Mechelin remained one of Nokia's most important financiers, sustaining the company over the course of the next two years.

Still, Idestam found little financial relief in Finland and went to St. Petersburg for assistance. Ultimately, it was the commercial trading house of Lindroos that ensured the financial future of Nokia. Mechelin and Torsten Costiander opened doors for Idestam at the trading house. Of the 175 shares, Idestam obtained 100 and Mechelin 30. Together, they controlled almost 75 percent of Nokia. On July 1, 1869, Idestam, Carl Gustaf Mannerheim, Carl Enrooth, and Alfred Kihlman created a limited partnership, rather than a corporation, that enabled Idestam to explore expansion opportunities for Nokia. In February 1871, after months of work with the corporate bylaws, Nokia Corporation (Nokia Aktiebolag) was founded at the home of Leo Mechelin.

Now able to expand his operation, Idestam sought to access the thriving markets of St. Petersburg, Warsaw, Riga, and London. Initially, he concentrated on Russia, Great Britain, and France and built a network of sales agents in each. Having sold the Tampere mill in 1877, he moved all activities to the Nokia region and began to expand; by 1886, he had three paper facilities there. Through his innovative methods, Idestam inadvertently gave rise to something of a pioneering school. Aware that his methods of production entailed strategic advantages, Idestam was very protective of them. Unlike Lüders, he would not allow outsiders to learn his secrets of process manufacturing. In 1872 he wrote, "I would like them to be told that, without my permission and under no terms, must visitors be allowed in the Nokia mill."

Mastering the Full Value Chain

By the 1890s, Nokia had grown and diversified. While it was no different in its basic activities from other "paternalistic" Finnish companies of the era, Nokia was unique in its efforts to grow, upgrade, and innovate. A tiny mill had given way to a much larger one, a pulp factory, a large paper factory, and other industrial facilities and was diversifying into electrical power.

In the course of expansion, Idestam exhibited an interest and talent for marketing and advertising, and given the company's reliance on overseas revenues, he engaged heavily in differentiation activities that would set Nokia apart from other Finnish mills. Historically, Nokia's emphasis on differentiation may have originated from a series of ad brochures that appeared in the 1880s (see Exhibit 1-3). Over time, that emphasis would lead to the use of the umbrella brand (Nokia) for the paper, rubber, and cable products sold between the 1890s and 1930s and to the cellular branding investments of the mid-1990s.

While Nokia is well known for its emphasis on innovation, its long-standing focus on differentiation has been less known. What has made Nokia distinctive among its contemporaries is the fact that it has consistently focused on mastering the full value chain, from operations and new product development to marketing, sales, and service.

Branding, for instance, has never been considered an exclusively departmental function at Nokia, and the company's current brand umbrella strategy has not been merely an effort to imitate the approaches of its competitors. Innovation in branding, or any other point of differentiation, flows through the entire value chain and requires the active participation of corporate leadership. This philosophy has been a critical element in Nokia's strategic maneuvering that dates back to the company's first efforts to brand itself in overseas markets.

The Second Incarnation of Nokia:
The Rise of an Industrial Conglomerate

While Nokia's early years took place in a competitive environment characterized by technological progress and political optimism, conditions were quite different at the turn of the century, when expansion coincided with increasing political turmoil. During the reign of Alexander III (1881-1894) and Nicholas II (1894-1917), nationalist circles in Russia gained increased influence. As part of the Russian Empire, the Grand Duchy of Finland had enjoyed extensive privileges, which had long been a sore point for Russian extremists. The late nineteenth century marked the rise of Russian nationalism and Slavophilic thought, which reflected efforts to integrate the Russian Empire and translated into hard times for Finnish autonomy.

Although leading Finnish politicians supported passive resistance, Governor General Bobrikov, himself a strong advocate of Russification, was assassinated in 1904 by the son of a Finnish senator, and the first period of oppression (1899-1905) ensued, resulting in the demise of the Finnish army. A brief peaceful period preceded the second era of oppression (1908-1917), during which Finland began to develop a democracy. Idestam died in 1916 just as Finland was about to enter an era of independence. He had envisioned Nokia as the most innovative company in Finland. This strategic objective remains strong even today, although little tangible evidence of Idestam's Nokia remains.

The Demise of Idestam's Era: Diversification into Electrical Power

The ability to speak English is a precondition of recruitment at Nokia today; during Idestam's time, much of the correspondence was conducted in German. Speaking the international language of business was important for Nokia given Idestam's overseas market strategy. Nokia's products were first exported to Russia, then to Great Britain and France, and to China, which became an important trading partner in the 1930s. As Nokia became more global, revenues tripled from FIM 1.2 million to more than FIM 3.6 million, while net income doubled from FIM 173,000 to FIM 364,000 between 1895 and 1913 (see Exhibit 1-4). The company benefited from the solid growth that followed the Great Strike of 1905. Through this era, Nokia focused on paper products, in particular groundwood, pulp, paper, and paperboard. The production of groundwood doubled from 2.9 tons to 5.9 tons, and paper production tripled from 2.5 tons to 7.3 tons.

In the operational leadership Idestam was succeeded in the mid-1880s by his son-in-law, Gustaf Fogelholm, the son of a family of liberal reformers. The aging Idestam, then chairman of Nokia, did not support all of Fogelholm's initiatives, especially his persistent efforts to diversify into electrical power. These disagreements led to Idestam's resignation in 1897, when Mechelin, who supported the bold initiative, became chairman. A water-driven power station was built close to the mill, which brought Nokia a new customer, the Finnish Rubber Works (FRW). Between 1914 and the late 1920s, Nokia's production of electrical power quadrupled; during World War II, demand decreased to the level of the early 1930s, but after the war it soared to more than 300 kWh (see Exhibit 1-5).

As Nokia was moving into new business segments, it was also changing from a family business to a public company. This process has seldom been easy for European family-owned companies. As the saying goes, the first generation creates, the second inherits, and the third destroys. That was not the case at Nokia, where the strategic objective (ceaseless innovation) had transcended the specific industries of the company's operations (i.e., forestry, rubber, and cable).

In the decades following World War I, Finland's economy was closed to foreign competition, encouraging local companies to expand into other domestic businesses. Consequently, Finnish forestry giants went through a period of diversification, but Nokia opted for diversification into electrical power before World War I and was already thriving in international markets. At the same time, Idestam was extricating himself from the company, selling most of his stock to his grandson, who sold some to Fogelholm and most to Carl Gustaf Mannerheim, a legendary Finnish soldier whose name was intertwined with Finland's struggle for independence.

Finland was not directly involved in World War I, although Russian troops were garrisoned in the country. In 1917, Russia plunged into the chaos of revolution, and Finland seized the opportunity to become independent. In January 1918, Finland drifted into a civil war between the "Reds," who wanted to create a socialist Finland, possibly in union with the emerging Soviet Union, and the "White" government troops led by Nokia's former board member, General Mannerheim. The devastating civil war ended in victory for the Whites, i.e., the Finnish government troops, in May 1918. In the course of the civil war, Fogelholm served as the chief of the White troops in the Nokia region. While atrocities were avoided, he resigned in the aftermath of the war and was succeeded by Gunnar Bonsdorff, an engineer and technical director of Nokia.

Unlike most Finnish forestry companies, Nokia was not quite as vulnerable to the consequences of World War I. In the early years of the Soviet revolution, the demand soared for newspaper products, which in the course of the war years had become Nokia's most important segment. With the climax of the Bolshevik Revolution, however, increasing uncertainty and problems associated with the ruble reduced the value of the Soviet demand for paper. Also, with its diversification into electrical power, Nokia was not as dependent on the evolution of international capital markets as were most Finnish forestry companies.

Nokia's diversification should be understood within the context of the company's overall original strategy. Diversification was not solely dictated by the company's efforts to protect existing revenue sources; it stemmed from the company's attempts to find new revenue sources that reflected its commitment to ceaseless innovation.

Cartelization of the Finnish Forestry Business

In the 1920s, Finland's economy still relied on forestry, which accounted for approximately 90 percent of its total exports and one-third of the gross national product. After the Soviet Revolution and Finland's independence, the Finnish paper industry lost its Russian markets. However, it was able to penetrate Western markets rapidly due to the centralized marketing efforts of Finnish paper and pulp producers. To compete with Western big businesses, Finnish companies relied on cooperative networks and cartelization. At the time, Finnish governments protected economic prosperity by instituting conservative fiscal policies and by avoiding large domestic deficits or foreign debt.

Concurrently, Finnish society moved toward greater social integration and progress, mirroring developments in the Nordic region as a whole. However, unlike other Nordic countries, Finnish industry faced obstacles created by the civil war. The Finns had been left behind by Sweden and Norway, who had been able to innovate in marketing and technology because of their wartime neutrality. Furthermore, Nokia's ownership structure was changing again. As the company moved from a family-owned business into a truly public company, the Finnish Rubber Works sought majority control of Nokia.

(Continues...)