Managing Change Semester: Case Study for Assignment 1: Nokia: A Slimmer Management Model
In February 2011, Nokia's Chief Executive Stephen Elop warned employees "Nokia was standing on a burning platform". A few days later, he announced the leap: a controversial alliance with Microsoft in smartphones to build a ‘third ecosystem' to rival Apple and Google's Android, and an accelerated pursuit of the "next billion" consumers in the emerging markets. At that time, there were still a few inside Nokia who doubted the situation was that dire. The company was, after all, the biggest handset manufacturer in the world. It was still infected with what one senior executive called "the arrogance of Nokia". However, those who could not smell the smoke, quickly felt the flames as Nokia implemented a deep restructuring. Since then, Mr Elop has sort to tackle a trio of internal challenges: to become more open, more accountable and more agile. The most important question Mr Elop had to answer was ‘will consumers buy Nokia's phones in sufficient quantities to guarantee its future'?
Mr Elop is often asked if he has a "Plan B" if the Windows plan falters, but there were, and are, few other options short of a break-up of the whole company. The choice of Android as a smartphone platform would have led Nokia into a fragmented, commoditised, overcrowded market. The Microsoft deal was the only strategy that was available to Nokia. Nokia had adapted its structure and cost base to this reality. The company, which employed about 65,000 in 2011, now has 45,000 staff. It has closed or consolidated 200 out of 500 sites worldwide. Nokia used to launch 50 products a year. It now introduces less than 25. Some analysts interpreted it as a sign of the depth of Nokia's plight, but corporate controller Kristian Pullola says the decision signalled "nothing is sacred when it comes to driving the focus on cash". Later that year, Mr Elop announced a further 10,000 job cuts. The share prices fell 83 percent, and Samsung snatched the mantle of the world's biggest handset makers. In January 2013, Nokia cancelled its dividend for the first time in its 148-year history.
Executives say what looked from outside like a deepening crisis reinforced Nokia's determination to reform its overcomplicated management systems. Mr Elop claims to have increased the "intensity of execution" of the strategy. ‘Focus' is the word the Nokia executives kept repeating. For instance, Jo Harlow, who leads the smart devices division, has mapped Nokia's management structure against that of its US partner, to improve efficiency. Nokia created the roles of Programme Manager, Head of Quality and Head of Engineering to match similar roles at Microsoft. Under the old Nokia system, the company would have to choose between an innovative product, brought to market late, or a punctual product with less innovation. One reason was that decisions that should have been taken locally got stuck at a committee level at headquarters. But in the "controlled mania" of producing a first Windows phone by 2011, Ms Harlow says Nokia learnt to ‘give the teams the authority to run faster'. At the same time, the company, guilty in the past of overcomplicating new products, has made choices not to do something just because they could, in refining the Windows platform.
Juha Akras, Nokia's head of human resources, says one side effect of becoming smaller is greater cooperation. To his surprise, internal measures of staff satisfaction have continued to improve, even during the gloomy first half of 2012. But Nokia has also faced setbacks, notably in its attempt to strengthen the second pillar of its strategy: to sell more mobile phones in fast-growing markets such as China and India. The company admits it was slow to bring its more innovative full-touch feature phones into these markets in the first half of 2012, allowing Samsung and HTC to steal market share.
In June, Mr Elop put Juha Putkiranta, in charge of factories, supplies and logistics, and Chris Weber, new Head of Sales and Marketing, into the senior leadership team. Board would now report directly to the Chief Executive. "We really ratcheted up the degree to which the senior leadership and layers below were involved in what was going on, " Mr Elop says. A "change task force", put in place in 2011 became a turnaround leadership group last year as it became clear. Mr Pullola says, that Nokia needed to become even more disciplined and focused on cash control. Outsiders still worry that supply chain shortages - such as the group's inability to get enough Lumia phones into shops in China for the New Year holiday - indicate deeper problems. Nokia replies that demand exceeds expectations. Technology companies also have a long history of crimping Supply as a marketing ploy, but analyst Mr Windsor says it is clear that at the very high end, they aren't the customer of choice for suppliers. Will customers buy it? More worrying is that new Nokia Smart phones are not yet the device of choice for customers. Marketing remains their weakest link in terms of being able to read again that 'wow' factor, says Gartner's Carolina Milanesi.
While Nokia's share of the market for more affordable mobile phones slipped just over four percentage points between 2011 and 2012 to 19.1%, its smart phone share dropped from 17.9% to 5.8%. Better fourth-quarter results than expected, published last month, did show the first positive underlying profit margin in the core mobile phone business for a year - as well as an improvement in its net cash position. Following last year's collection of course in full touch feature phones, these more affordable devices - sold under the sub-brand Asha (meaning hope) - are selling better, and a revived Nokia Siemens networks provided unexpectedly strong support to the group. The sales of Windows phones were in line with expectations. Given the amount Microsoft is spending to market its wider operating system, Ms Harlow believes the customer is just starting to appreciate the advantages of Windows 8 when used on computer, phone and tablet. "The amount of effort going into Windows 8, the amount of advertising - that is going to help," adds Mr Elop, who on Monday announced new affordable Windows models and also said that Nokia was winning more corporate business. But, Pekka Yla-Anttila, research director at ETLA, a Helsinki economic think-tank, says the ‘alliance with Microsoft isn't yet flying... No one can say whether it will succeed or not - even six years ago we didn't know anything about iPhones."
In an effort to differentiate Nokia's products, Mr Elop has pushed the company to emphasise how the new phones will improve customers' lives. He suggests to sales staff, for instance, that, rather than detailing the technical attributes of the Lumia phone's cameras, they should say "it takes better pictures at night": " If you go into these store and look at these devices, it's hard to tell most of them apart. You can look at a piece of paper next to them and see its got a Snapdragon quad-core blah blah blah...[Instead], we asked ‘What are the improved customer experiences that really make a difference?'
Pankaj Ghemawat, global strategy professor at IESE business School, compares Nokia's broader challenge with that which faced Nintendo in the early 2000s when it was trying to get ahead in the videogame market. Incremental changes was not sufficient to outstrip feuding rivals Microsoft Xbox and Sony PlayStation, so the Japanese company came up with the revolutionary Wii. Nokia "has to build a city and the bridge to get to it at the same time", he says.
Is it enough? Nokia executives seem confident the company has turned a corner. The share price has doubled since last July. The immigration officers at London's Heathrow airport - whom US-born Ms Harlow uses as a barometer of public perception - have started asking her about Nokia's new devices rather than sympathising with her about her employer's problems. Gartner's Ms Milanesi believes Nokia has now finally brought together the elements of a viable software ecosystem and attractive hardware. But nobody else has stood still.
Apple and Samsung are still riding high, and the Apple iOS and android platforms dominate the smartphone market. Even BlackBerry, which looked to be falling faster than Nokia, has bounced back with a well-reviewed new product and operating system, while "white-label' manufacturers chip away at Nokia in emerging markets. Mr Elop made a personal commitment to his senior team in Istanbul that he would "make Nokia sing again". But he still needs to make himself heard above an extraordinary cacophony of other powerful voices.
Adopted from: Burnes. Managing Organizational Change: Sixth Edition. Pearson Education Limited, p. 533-536.
CASE QUESTIONS
1. What is your analysis of what went wrong at Nokia? Critically discuss what Nokia should have done to avoid this situation?
2. Discuss the strategic importance of Mr Elop's alliance with Microsoft. Argue your points from the Prescriptive and Analytical approaches to strategy.
3. Analyse Mr Elop's leadership style. Was it appropriate for Nokia's situation? If yes, why? If not, why not?