Please read the case and answer the following questions :

1. What firm-specific advantages did Nokia initially have?

2. What advantages enabled Apple to gain market share over Nokia?

3. Identify the collective thinking, and behaviours of the top management team with regard to external and internal factors. What prompted these to emerge?

4. How did the interaction between top and middle management influence the innovation process and outcomes of Nokia?

5. How relevant is the new trade theory (increasing returns to scale/economies of scale) to analyse the case?

Nokia:

The Inside Story of the Rise and Fall of a Technology Giant

From humble beginnings in 1865 as a timber company, the Nokia conglomerate had by the 1980s become Scandinavia's leading maker of consumer electronics. Focused on the nascent telecoms industry, by 1988 it was the dominant mobile handset producer, with a 13.4% market share of the global market (Motorola in second place held 12.8%, Japan's NEC had 11.2%).Leveraging off its expertise in radio and wireless technology, Nokia was instrumental in developing the 2G digital technology that enabled text messages and voicemail which would become standard throughout Europe. By 2007, Nokia had 38% of the global mobile phone market and 49% of the global smartphone market. Samsung and Motorola were in second and third place in mobile, with 14% and 13% respectively. In smartphones, second-place BlackBerry held a 10% market share. Apple's newly introduced iPhone had just 3%.

Three years later, Nokia was on a fast track to oblivion.

In 2010, the company issued two profit warnings. The CEO was dismissed, having failed to deliver promised market share gains - Nokia's market share in the US had fallen from 20% to 7% during his tenure.Nokia's market capitalization, which had been close to $250 billion at its peak in 2000, tumbled to around $50 billion in 2010 (see Exhibit 1). Its brand image was severely dented, falling from 13 (in 2009) to 43 in a ranking of global brands.

The decline of a company so recently hailed as a model of strategic agility was stunning. What made Nokia nosedive so quickly? Observers offered various plausible theories, ranging from obsolete technology, internal complacency, aggressive competition from Asia, and marketplace disruption with the entry of Apple and Google. But was there something deeper, poisoning the company from inside, that had consigned it to a footnote of telecoms history?

Top Management: Perspectives and Actions

For two decades, Nokia's top management teams had moulded a high-performing innovation machine, steering it to global dominance of mobile handsets. From the late 1980s to the mid- 2000s, Nokia was the leading manufacturer of mobile phones and a pioneer of handset technology and functionality. The brand epitomised innovative end-to-end production of the most advanced handsets with impressive functionality and design.

As early as 1992, top managers (TMs) had recognized the potential of mobile technology. Predicting that handset penetration in industrialized countries would exceed 40 million subscribers, the CEO drove the company to invest in each element of the handset ecosystem - manufacturing, distribution and design R&D. In 1996, Nokia introduced the 'Communicator', the world's first smartphone, offering far greater capabilities than just making calls. By 1998, it was the leading global mobile phone manufacturer, with a 23% market share and 163 million units sold.

The company entered into a joint venture with Ericsson, Motorola and the UK's Psion to create Symbian, hoping it would become the de facto operating system standard for smartphones. The Nokia 9210 Communicator was the first smartphone built on the Symbian OS and was launched in 2001. By 2002, 2.1 million Symbian phones had been shipped.4Among the awards for technical innovation and handset functionality, Nokia won Manufacturer of the Year (2005), Most Innovative Product (2005), and Most Technologically Advanced Product (2005) in the UK. Top management's success in growing Nokia brought recognition for the new CEO (appointed in 2006), who was crowned Business Leader of the Year at the 2008 European Business Awards, and credited with pushing into new markets, driving innovation, adding 10 billion to revenues, and increasing net profits by 67%.

The Global Nokia Innovation Machine

For top management, the key focus was on external trends in mobile communications. Their ability to scan, read and predict the market was a driving force in Nokia's success. Since the early 2000s, with their external sensors attuned, TMs had pushed for worldwide expansion, selling handsets in more than 130 countries across the three main wireless network technologies: GSM (Europe and parts of Asia, 60% of the world), CDMA (North America, 21%), and PDC (Japan).

By 2004, Nokia was restructured into three main business groups: Phones, Multimedia and Enterprise Solutions. A complex matrix of interdependencies - horizontal groups for sales and marketing, operations, sourcing, logistics and technology platforms - supported the three businesses. Business groups and horizontal resource heads together took decisions on strategy and resources. Board directors could lead on a Nokia-wide activity as well as head a business.6The structure underpinned a well-oiled machine in which processes enabled the company to constantly develop its technological assets to match ever-changing market needs. Indeed Nokia was able to launch new handsets nearly every month, customised to different national markets and customer needs.

Developing a High-Performance Culture and Structure

This level of production required relentless effort, yet employees responded positively to pressure from top management, such was the global success of Nokia and its high- performance culture. By 2005 the company had over 58,000 employees, over 20,000 of them working in R&D across 26 countries. Nokia sold 200 million of the 650 million mobile phones sold worldwide7and generated almost 30 billion in revenues. Its 10 major markets spanned Asia, Europe, the Middle East and North America, with handsets customized to each one (see Exhibits 2 and 3). In 2005 alone, it introduced 41 new handsets (32 mid-range or high-end, nine at entry level).

Top managers (TMs) were never technological experts. They had no deep understanding of the engineering or the software development required to power functionality, relying instead on the expertise of middle managers and their teams.

There are different kinds of leaders. There are the kinds like Steve Jobs, who have a vision and who have their say on every possible detail. And then there are professional managers who lead in a different way. [...] It would be impossible for a leader to address all detail. They rather should set the main direction; something like on the level whether we will make touch-based user interface or not. This was what [both Nokia's CEOs during 1992-2010] were like.(Upper middle manager)

TMs main concerns were securing finance for their divisions and developing the strategic response to the marketplace, as well as setting targets for different market segments. Their focus, as indicated, was on the external environment. Middle management (MMs) had a narrower internal focus, concentrating their energies on implementation - designing the handsets and the software.

Essentially, those at the top made the decisions and pressured the middle layer to comply. Management directives were carried out through product units (PUs) which focused on the range of handsets, and the software organisation which developed the operating systems and modified them for the different models (as requested by the Pus). Each PU focused on delivering phones as directed, with an emphasis on product segmentation, cost and schedule. Within each PU there were around 10 product programmes, such that Nokia had about 40 to 50 programmes per year. Top managers relied on the ranks below to deliver on their requests, a pattern that had worked since the early 1990s. This high-performance culture was reinforced through social and economic sanctions - financial rewards, promotions and increasing responsibilities.

In this hothouse environment, some of those at the top were described as "extremely temperamental". One had a reputation for shouting "at the top of his lungs". As a consultant noted, "It was difficult to tell [them] things [they] didn't want to hear."Avoiding the legendary rants of senior managers became tactical, as a software manager explained: "[Some TMs] had a distinctive style so that everyone had to tell them that things are going very well."

"[A TM] would take a small group, walk into a unit and really tell people off, ranting and raving and threatening to fire them ... [There is] a legendary story regarding some Symbian mistakes ... Nobody was actually fired, but groups or individuals might be demoted. Usually [his rage related to] schedules slipping, because Nokia was known for always being on time. People worked weekends and nights to meet the deadlines, and that was definitely something [he] was keen on."(Middle manager, software)

The Game Changer - the iPhone

Despite the perceived aggression, Nokia continued to grow. In 2006, profits were up 16% over 2005, thanks to 39 new handsets at all levels of the market.12The decision was taken to shift production to GSM and 3G handsets (3G had been rolled out from 2005) rather than CDMA, which were considered expensive to produce. In so doing, it effectively turned away from the US market (which used CDMA). Top management thus embarked on a strategy to refocus on software and mobile web services.13In the emerging markets of China, Southeast Asia and India, Nokia remained market leader into 2007, with a portfolio of 50 models designed to meet different lifestyle needs.

But the game was about to change. In January 2007, at its Macworld convention, Apple unveiled the iPhone. It had limited functionality and ran on the 2G network, but it had a distinctive appearance and a 'revolutionary' touchscreen. What it lacked in capability, it made up for in styling and above all brand loyalty. Days before it went on sale in June, in the US, eager consumers began camping outside Apple stores in order to secure an iPhone.

Nokia's N95 handset, launched in March 2007, was superior in every way except it did not have a touchscreen. That, as one Nokia top manager observed, made all the difference:

"The iPhone 2G was not even a proper 'smartphone' - it didn't offer users the ability to install apps ... and didn't support industry standards like MMS [Mutimedia Messaging Service that sends multimedia content rather than just short text messages]... GPS and stereo Bluetooth. But that didn't matter. If your smartphone didn't have the one cool thing the iPhone did - a touchscreen - it seemed that your phone was old-fashioned."

Despite the secrecy for which Apple was famous, top managers at Nokia were aware that it was developing a phone well before it was launched.

"[Nokia's market intelligence] knew [the iPhone] was coming out about a year in advance. [They] had pretty good specifications for it. ... The first thing [that was] flagged up [in a market review] was that [Nokia] didn't have touchscreens or touchscreen development. ...That message went right up to the top of the organization, and was well received too. [The CEO] forwarded [the report] email to his subordinates. Our market analysis showed that our biggest competitive weakness was the lack of touchscreen products. He agreed, and wrote 'Please take action on this'."

TMs reacted by putting greater pressure on the organization below to develop a similar model, working faster to counter the threat while playing down its importance on the public front so as not to undermine confidence among Nokia's investors, distributors or customers. Middle managers were directed to create a touchscreen to see off the upstart.

"One of the first things [the CEO] brought up was the touchscreen. ... He felt it was the next big thing ... He brought it up with the executive group every way he could. And he spoke directly with technical middle management ... In every single executive group meeting, they went over our outlook with the touchscreen. And this was right after he was made CEO [a year before iPhone launch [2006] ... I recall many such cases vividly, where he brought up the right concern [what Nokia should do], he discussed it directly with the technical middle and upper management, he went straight to the topic, put pressure on people, put it up in all possible goals [for middle managers], followed up on it in every single meeting."(Upper middle manager)

Middle managers reported that touchscreen handsets were in development and making good progress, including a touch-specific Symbian operating system. While concerned about the iPhone, TMs held the view that optimism and faith-building was the best way to keep employees motivated in the face of the new threat, thus avoiding panic. This was also the message conveyed to customers and investors:

"I don't think that what we have seen so far (from Apple) is something that would any way necessitate us changing our thinking when it comes to openness, our software and business approach. But the fact that Apple is entering the market, in general, I think will stimulate this market, it's very clear."(Top manager)

However, this strategy of promoting confidence both externally and internally disguised a real concern among TMs, as one admitted:

"The iPhone reaction was more critical and concerned in internal TM meetings. But of course, you show confidence externally."

Although initially only available in the US, and in six European countries a few months later, iPhone sales exploded world-wide. They were further boosted by the launch of later models, including the iPhone 3G in 2008 and 3GS in 2009. Yet with Nokia seemingly doing so well - to judge by its stock market performance - top management continued to downplay the competition:

"We have the widest portfolio in the industry and the deepest understanding of it, as opposed to having one or two hit products at a time."

Apple wasn't the only potential new mobile entrant. Google, which had purchased Android in 2005, entered the mobile market at the end of 2007 with the announcement of the Android operating system (OS), which had open standards and a tie-up with 33 handset companies including HTC, Samsung and Motorola. Android would allow the entry of smaller competitors from India and China, including Xiaomi (founded in 2010), which through its

similar-looking products but lower-than-Apple prices became the leading smartphone developer in China.

In operating system terms, the battle lines were drawn, with Nokia and Apple and their proprietary OS on one side, and on the other Google/Android open standards and every other handset manufacturer. It was this division between different ecosystems of several companies and thousands of external application developers which accelerated development. Henceforth the smartphone became more like a computer in that it was used for running various types of software rather than being a non-modifiable device.

As trends and market shares began to shift (see Exhibit 4), Nokia's TMs saw that the software and the operating system would be the drivers of success and began to fear for the company's competitive position. Apple's use of iOS was a shock, as Apple had been building the OS and applications for decades - the iPhone was essentially a Mac computer with a radio added. Meanwhile Nokia had invested so much in Symbian, and any doubts about its longevity could not be publicly acknowledged for fear it might damage sales and belief in Nokia's excellence.

In fact, Nokia's top management had already taken steps towards building a new operating system. Since the mid-2000s, plans had been in place to eventually replace Symbian with a Linux-based OS, MeeGo. This, they believed, would provide the necessary elements for making good software and would be adequate to maintain its position as the world's leading smartphone provider. Meanwhile, the pressure from the top seemed to be producing results: three major new phone models were in the pipeline: the 5800 (launched in 2008), N97 (for 2009), and N8 (for 2010). Middle managers' reports suggested that they would be delivered on time and meet the highest quality standards.

Middle Management: Perspectives and Actions

For middle managers (MMs), working for Nokia was a source of pride and prestige - there was simply no better place to work. The company's reputation and image provided a multitude of benefits, as one confirmed:

"[Nokia's status was so high that] if you had a Nokia business card, you could get a meeting with any CEO. Any CEO. ... Everyone had good jobs; no one wanted to leave Nokia."

For MMs working at headquarters in Finland and key R&D sites, nowhere else offered better career development without moving continents.

"[Many people change jobs to advance in their career, but] if you've been with Nokia, especially at the level of SVP, VP, or even a director, where the hell are you going, really? You're going nowhere, so you circle around within the company. Unless you're willing to move to the US or Asia, you have no [better] job opportunities."(Consultant)

Many MMs believed Nokia was invincible given its market leadership and R&D strength. Between 1992 and 2006, it had made 51,836 patent applications,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,prompting one analyst to declare: "The quality of the patents is one of the best in the industry."Backed by these assets, its growth trajectory seemed unlikely to waiver. In 2005, Nokia sold its billionth phone. Phone subscriptions surpassed 2 billion.

"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.'"Upper middle manager

Despite the stresses of sustaining a high-performance culture, the organizational climate was very positive. Fears about job security or potential lay-offs were unheard of. Sometimes MMs focused on short-term results to meet the demands of top management, particularly in terms of software development, yet since they invariably delivered they were confident that they could always meet whatever "stretch goals" were set. Nokia had, after all, designed the first phone with a built-in camera (the Nokia 7650), and the first video capture phone (the Nokia 3650).

The MM View of the iPhone

When the iPhone was launched in 2007, Nokia's middle managers gave it mixed reviews. It was an interesting concept but essentially "a bad phone; it didn't even have 3G", and appeared to lack what was by then standard functionality. Some felt the hype was undeserved and even wondered whether Apple had "paid" magazine editors to sex up the iPhone.Few of them bothered to use it - it wouldn't take Nokia long to produce something better.

"[Competitors' products] were always compared to what we knew that we were doing next. There was not much to learn from [them]. In comparison to our [future products] they were no better." (Middle manager)

This lack of concern was consistent with the message from the top, which downplayed the severity of the threat. Likewise in 2008 a top manager downplayed Google's Android open standards strategy, publicly declaring: "We have had that for 10 years. Definitely, we are ahead."The general view was that the iPhone was no big deal - it was business as usual.

Pervasive Fear

But the iPhone's subsequent success could not be ignored. TMs reacted by upping the pressure on the middle, demanding they produce touchscreen handsets rapidly. Over time, their demands became increasingly frantic - one middle managerdescribed how a TM "hammered on the table [with his fist] so hard that the fruit flew in the air" and "[having] nothing but poison running through his veins."Yet top managers could not be challenged by their direct reports without risking loss of status or being side-lined. It seemed to many that TMs favoured those who agreed to deliver whatever the demands:

"Someone else always said yes [to unfeasible top management demands]. All I got was the information - that's how it was. And then my responsibilities were cut because there was always some lunatic who promised they'd do all these ten fine and wonderful things within the timeframe given by TMs ... even though it wasn't true at all ... TMs trusted these people when they said 'It's going to work out.' They had blind faith. The management team... knew a lot of people - but they picked some young, fast-talking guy who said, 'I have this little trick. I'll fix this thing."(Upper middle manager, software)

To satisfy the demands from the top, and fearing for their own futures, middle managers started to feed only positive messages about the new smartphones and associated software developments - to the point of misleading the top about estimated development time and issues. The pressure to comply was huge and the schedules daunting, but it was difficult for individuals to voice their concerns because"The people who told the truth [about the feasibility of schedule] put their reputations on the line. They ran that risk."

In the past, communications had been candid, but heightened fears made middle managers promise things they doubted they could deliver:

"The message about each product area had to be kept positive so [the units] would be allowed to continue [to operate]. If the message was that this hasn't progressed with these resources, [MMs] would be afraid that [their project] would be discontinued... One source of fear was that many good projects had been discontinued ... that could have been successful - for one reason or another."(Middle manager)

Both the Symbian and MeeGo organisations were experiencing difficulties with the software. Over the years, the Symbian software had been stretched to accommodate new handset models which required incremental innovation rather than complete recoding. Now, in an intensely competitive marketplace, no time could be allowed to recode. Within Nokia, decision-making about software followed phone launches with a certain deadline, rather than vice versa.

"[Symbian] had a very antiquated architecture in many ways, which [software developers] could never modernize and they weren't given the time to modernize. They tried to make very different kinds of products based on that architecture, which meant that they had to bolt on all sorts of things to make an individual product happen. And a terrible technical complexity emerged through that process. All sorts of product-specific things piled up in there that they could no longer maintain. [For example] the way the user interface was done, it was really old; a totally antique system. So doing anything with [it resulted in] very slow [performance]. Then instead of saying early on that we have to get rid of this ... it's not worth fixing it, they had just been patching it up. It might help in getting the next product out, but it doesn't solve the [core] problem."(Upper middle manager)

Lacking a technology background, TMs did not grasp the complexity of their demands, nor did they question the status reports:

"The information flowed downwards, but the information did not flow upwards. Top management was directly lied to. They were misled. ... There were situations where everybody [on our level] knew things were going wrong but we were thinking, 'Why tell TMs about this? It won't make things any better.' We discussed this kind of choice openly. And it was possible to give them embellished reports because they did not understand the software."(Middle manager, software)

It was clear to many in the middle that their colleagues at the same level feared top management but no one wanted to admit it. Now, with increasing pressure on the PUs and software organisations, they were also afraid of criticising colleagues in other units at the same level. No one wanted to be seen as 'snitching' on a colleague - being critical was not part of the corporate culture - and there was an added fear of retaliation.

"In those forums, there was no way you would accuse someone of not telling the truth. [Culturally, it was not acceptable] that you would criticize someone else's story in any way... No one wanted to fight their battles in front of [the CEO] and others, because you knew that if you put someone down, they'd put you down the first chance they got."(Upper middle manager, software)

This further distorted communications to top management about the real situation in the PUs and software organisations. Middle managers continued to report that they were making progress on the new handsets, and that the software would ensure high functionality and usability and be delivered by the deadline. All Change: An Outsider Appointed to Sort Out the Mess

When Apple launched its App Store for iPhones in July 2008, it attracted hundreds of external developers who created thousands of apps. In 2009, Nokia launched Ovi, its equivalent based on Symbian code. Ovi did not encourage external developers, nor did it make developing apps easy. Whereas Google and Apple provided software tools to help developers and a single app could be used on different models, Nokia apps could not easily be migrated to all its different models without recoding. A top manager commented, "Developing for Symbian could make you want to slice your wrists."

In November 2008, Nokia's launched its first touchscreen phone, the 5800, at a lower price point than the iPhone. It was a commercial success but 18 months late because of difficulties with the software. The Symbian code had been stretched by incremental innovation to power the phone, both for the 5800 and further 5000 series. Yet to truly challenge the iPhone, Nokia needed radical OS innovation. TMs therefore put further pressure on the Symbian organisation:

"The pressure we put on the [Symbian] software organisation was insane because the commercial realities were also pressing: you must have something to sell. And when the pressure is on the R&D teams, really intensely, of course they feel that they don't have enough time."(Top manager)

The problems accumulating with Symbian were brought into sharp focus with the N97, Nokia's intended 'iPhone killer'. Released in June 2009, it was designed to "change how people think about mobile phones for good" according to one TM.But the timing of the launch was terrible: Apple had revealed its third generation iPhone 3GS just the day before, which was faster and had a better touchscreen than the N97.

With its QWERTY keyboard and resistive touchscreen, the N97 was intended to offer the best of both worlds, but early reviews criticized its disappointing customer experience, with its freezing firmware, navigation issues and problematic web access. It was, in the words of one top manager, a "total fiasco in terms of the quality of the product. Not just [in terms of user experience], but anyone who used the product could see that it simply did not work."

The later N8 was the first to feature the Symbian 3 operating system. Scheduled for release during the second quarter of 2010, it was postponed to September 30th2010. Although it got the highest number of customer orders in Nokia's history, the handset suffered from technical problems (turning itself off and on sporadically) as well as software issues.

By the second quarter of 2010 it was rumoured that the CEO would be replaced. Shareholders were losing patience with a company seemingly failing to be innovative or agile. In September, an outsider, Stephen Elop, was appointed. He had been president of Microsoft's Business Division, with whom Nokia had been in collaboration since 2009 for Microsoft Office on its E-Series smartphones. A Nokia press release announced, "The time is right to accelerate the company's renewal; to bring in new executive leadership with different skills and strengths in order to drive company success."

In addition to considering the options for the OS of the future (MeeGo, Android or Windows), the new CEO had the onerous task of overhauling the company culture as Nokia reached a strategic crossroads.