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How Nokia Fell from Grace


By failing to understand changes in its market and remaining geographically removed, the mobile-phone maker ceded control to Apple and others

What was the most successful European company of the 1990s? Easy: Nokia (NOK). The Finnish mobile-phone manufacturer captured the emerging market for mobile phones and built the industry's most powerful brand. Its handsets virtually defined the industry from the time it launched its first GSM phone, the 1011, in 1992. From 1996 to 2001 its revenues increased almost fivefold, and by 1998 it was the world's biggest mobile manufacturer. In 2005 it sold its billionth handset, an 1100 to a customer in Nigeria.

Politicians lined up to praise Nokia as an example of how Europe could prosper in the 21stcentury. Romano Prodi, president of the European Commission, drew attention to the success of Nokia and its rival, Sweden's Ericsson (ERIC), in a speech in 2002. "Their achievement in mobile telephones helped to create two vibrant clusters, around Oulu in Finland and Stockholm in Sweden, which have attracted a large number of startups as well as investment from foreign companies," Prodi said. "These examples demonstrate that European regions are capable of developing new, high-tech clusters."

Now, what's the most disappointing company of the 2000s? Easy again: Nokia. The company has been in steep decline—a point underscored by its Sept.10 announcement that it was hiring its first non-Finn as chief executive officer.

Lessons of the Fall

Just as Nokia's rise held lessons about how Europe could succeed, its downfall tells us much about why European enterprises—and large companies worldwide—so often stumble. In the past three years, the news out of Nokia has only been bad. Since Apple (AAPL) introduced its iPhone in January2007, Nokia shares have fallen 49percent. In a ranking of global brands by Millward Brown Optimor this year, Nokia was No.43, having dropped 30 places in 12months. Its profit margins have been shrinking, along with its market share and the average price of its phones.

True, it still has more than one-third of global mobile-phone sales. But it's stranded in the middle of the market. Korean manufacturers such as Samsung Electronics are leading the main consumer market. Apple's iPhone and Research In Motion's (RIMM) BlackBerry dominate the upscale smartphone industry. Recognizing the scale of its challenges, Nokia hired Stephen Elop, the Canadian head of Microsoft's (MSFT) business unit, to turn the company around. Everyone will wish him well. (It takes a hard heart to root against the Finns.) But if the guy knows so much about phones, he's kept it a secret. Microsoft has never made any progress in that industry.

The cruel truth is that for all its residual market share, Nokia looks like a has-been. The company misread the way the mobile-phone industry was merging with computing and social networking. And it's probably too late to turn that around.

There are uncomfortable lessons here. First, success is not a sinecure. Nokia got to the top of its industry quickly. Once there, it became complacent. Under CEO Olli-Pekka Kallasvuo, Nokia worried about hanging onto market share rather than creating innovative products that excite customers. Second, Nokia was unwilling to challenge itself. The company clung to the idea that handsets were mainly about calling people. It failed to notice that they were just as much about checking your e-mail, finding a good restaurant, and updating your Twitter page.

Isolation Is Bad

Finally, Nokia wasn't located near a cluster of similar companies. Building a technology giant in Finland was a great achievement. But Nokia wasn't surrounded by Web companies or consumer-electronics manufacturers. That meant it wasn't in the mix of innovative ideas, which would have forced it to question its assumptions—and watch its back—every day. The harsh reality is that Finland isn't in the mainstream of Europe, never mind that of the global economy. Most of Europe's most successful industries are located in fairly tight geographic centers. Its pharmaceuticals industry is mostly in Basel and the southeast of England. Its luxury automobile industry is in Munich and Stuttgart. Its banking industry is based in London. There are exceptions—think of Airbus in Toulouse. More often than not, though, companies benefit from proximity to their competitors, poaching staff and swapping ideas. Isolation is bad for people, and bad for companies.

That's especially true for industries undergoing rapid change. Nokia needed to be right in the middle of the computing industry—and probably the film, music, and Internet businesses as well. We still don't know what kind of device the mobile will become. But it's far-fetched to imagine a business can keep up from the periphery of Europe. Nokia should have relocated to California a decade ago. It would have caused an outcry in Finland, and probably in Brussels as well. And it would have been worth it. Nokia needed to pitch itself into the cauldron of technological change. Maybe that way it could have held onto its brand leadership, rather than surrender it to a computer manufacturer that looked dead on its feet a decade ago.

Europe still has companies that dominate industries such as oil, aerospace, pharmaceuticals, automobiles, and financial services. All are prone to similar missteps. Are the auto manufacturers doing enough to prepare for the arrival of electric cars? Are the drug companies ready for the merging of computing and biotechnology? Are banks positioned for a decade when debt is steadily reduced, not increased? Probably not.

Politicians and business experts spent a lot of time praising Nokia and trying to learn from its rise. They should devote as much time to studying the lessons of its downfall. If they don't, much of the rest of European industry may be doomed to repeat its mistakes. And Europe can't afford to lose many more world leaders.


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