Nokia: The Nordic minnow that took over the sea
By Michael Skapinker and Christopher Brown-Humes
Published: June 19 2001 16:56GMT | Last Updated: June 19 2001 17:12GMT
In 1989, Matti Alahuhta, a young manager from an obscure and sprawling Finnish concern called Nokia, took a year off to contemplate the following question: how can a medium-sized company overtake its big rivals to dominate a high-technology industry?
Mr Alahuhta used his time as executive in residence at IMD, the Swiss business school, to study other companies that had attempted this feat. At the end of his sabbatical he produced a dissertation that said, yes, it was indeed possible for smaller companies to conquer the world.
What they needed was a new technology - something that changed the rules of the game, turning all companies, no matter how big, into beginners. When that occurred, he pointed out in his paper, "all companies start from a market share of zero".
As it happened, just such a technology was starting to make itself felt: the mobile phone. Electronics giants, including Motorola, Ericsson, Siemens, Philips and Alcatel, rushed into the market. They had vast scale, experience, distribution networks and research and development facilities. Nokia - smaller, more focused, nimbler - defeated them all.
Today, Nokia is the world's leading manufacturer of mobile phones. With 35 per cent of the market, it had sales of E30.4bn ($26.1bn) and pre-tax profits of E5.9bn last year. The consultancy Interbrand named it the world's fifth most valuable brand after Coca-Cola, Microsoft, International Business Machines and Intel. Nokia was the only non-US company in the top 10.
It is a story to inspire entrepreneurs and managers everywhere. You do not have to come from Silicon Valley - or even the US - to dominate a high-technology market. If a company from a small country on the fringes of Europe can do it, surely others can too? Over three days, we shall be looking at how Nokia rose from obscurity - and whether it can sustain its performance.
Mr Alahuhta, who spent a year thinking about how to transform the company, is today head of Nokia mobile phones. He is a member of the tightly knit team - led by Jorma Ollila, the chairman, and Pekka Ala-Pietila, the company president - that has turned Nokia into one of the corporate phenomena of the past decade.
Most of the strategy that transformed Nokia into a world-beater was set out in Mr Alahuhta's dissertation: to develop a product with global appeal, move fast to sell it internationally and find a way of keeping a close eye on what the customer wants, not just what the technology makes possible. "What Nokia has done is amazing," says Bengt Nordstrom, president of Northstream, a Nordic mobile internet consultancy. "Despite a small domestic market and restricted access to talent and capital, it has become a world-leading company."
For a time, it appeared Nokia had even found a way of staying on top while markets all around it crumbled. In April, Ericsson took a E1.7bn restructuring charge and announced plans to cut 12,000 jobs, while Motorola announced a 29 per cent fall in sales. Nokia, however, said it expected worldwide mobile phone sales of all companies to rise to between 450m and 500m from 405m last year - and said it aimed to win 40 per cent of those. This would make its sales three times those of Motorola, its nearest rival - an extraordinary feat given that Nokia won the top spot from Motorola only in 1998.
Last Tuesday, however, Nokia presented its shareholders with a nasty shock. It said global mobile phone sales this year would be only "very modestly" higher than last year's. The company said it would miss its second-quarter revenue and earnings estimates. That day, the markets knocked 20 per cent off Nokia's share price.
The company that once revelled in being first up the mountain now faces a different question: when you have reached the top, how do you stay there when the winds begin to howl?
Nokia's outlook is more uncertain than it has been for several years but the company has long experience of weathering storms. The most recent was in 1996, when Nokia issued a profits warning - again, after mobile phone sales slowed. There were problems, too, with suppliers and the late delivery of components. Nokia recovered and learnt important lessons about supplier relations and inventory management.
When Nokia is in difficulties, it falls back on a corporate culture that is hardy, resilient, resourceful - and Finnish. It can also console itself with the thought that, whatever its troubles today, it has seen worse. Although the wider world has become aware of Nokia only in the past few years, it is one of Europe's oldest companies. Since its start in 1865, it has survived far more than profit warnings.
Dan Steinbock, author of The Nokia Revolution, a recent history of the company, points out that being based in Finland means Nokia "has endured Russian oppression, a Bolshevik revolution, a struggle for independence, a civil war, a worldwide depression, two world wars . . . and the premature death of key executives."
For years, many customers of Nokia's nascent consumer electronics business thought it was Japanese - a misapprehension that the company, which needed all the help it could get, did little to dispel.
In fact, Nokia takes its name from a small mill and river near the Finnish city of Tampere. The company began as a paper manufacturer but it has since been many other things too. It has manufactured rubber boots, raincoats and cables. It has made television sets and generated electricity. By the late 1980s, Mr Steinbock recalls, Nokia was Ireland's leading manufacturer of toilet paper, the world's only supplier of studded winter bicycle tyres and the provider of electricity to 350 Egyptian villages.
Nokia went into the telecommunications business in the early 1960s. Finland, while small, was an ideal nursery for a telecommunications company. Most countries had a national telephone operator that purchased equipment from a national supplier. By contrast, Finland has always had many telephone companies and equipment manufacturers from all over the world have competed furiously to supply them. Nokia had constantly to develop and improve its products.
Finland's links with its Nordic neighbours helped, too. With their sparse populations, the Nordic countries were early and enthusiastic adopters of mobile communications. In the early 1980s, they launched the Nordic Mobile Telephone (NMT) standard for analogue mobile phones, the first system anywhere to allow callers to "roam" across national borders.
When Mr Alahuhta wrote his dissertation, Nokia was at a turning-point. The Soviet empire was collapsing, freeing Finland from the fraught relationship with its huge neighbour and allowing it to strengthen trade and political ties with the wealthy countries of western Europe. When Mr Ollila was appointed chief executive in 1992, he began selling large chunks of Nokia's business so that it could focus on one market: mobile phones and the networks that allow them to operate.
Another factor played a huge role in Nokia's success: the adoption of a single standard for Europe's digital mobile phones - the Global System for Mobile Telephony. The GSM standard has been a resounding success. By the beginning of this year, two-thirds of the world's 700m mobile phone subscribers were using GSM.
The arrival of GSM just as Finland was joining the wider European family meant that good fortune played its part in Nokia's 1990s success. But as Mr Alahuhta noted in a recent interview: "Good luck favours the prepared mind." When GSM arrived, Nokia was ready. The first GSM call was made in 1991 on a Nokia phone over a Nokia network.
Nokia did more than ride the GSM wave. It understood, before any of its competitors, that a mobile phone was more than a means of communication. It was also a fashion accessory. How it exploited that revelation, and how it integrated fashion and design into its manufacturing system, are the subjects of tomorrow's article.
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