Business model transformation at Nokia
Incumbent firms often face situations in which their historically evolved business model loses its relative advantage in the pressure of market dynamics. After recognizing the threats in competitive erosion, firms typically engage in transformation processes that aim to revitalize or turn around the firm's business model.
Then, the difference between success and failure of transformative activities boils down to the firm's ability to change its business model effectively and in rhythm with the dynamics of the external business environment.
Nokia Corporation is an example of a corporation whose business model has dramatically transformed in the face of changing environmental dynamics. The most notable changes occurred in the period of 1985-1995, when the corporation's market focus expanded from the original focus on paper, rubber, and cable industries to the field of consumer electronics – which was eventually replaced by a focus on mobile telecommunications: mobile telephones and mobile telecommunication networks.
Moreover, the changes in the corporate action patterns were just as dramatic. For instance, periods of organic growth alternated with spells of frantic M&A activity. Also, the corporate culture changed from a slow-moving conglomerate to a strategically agile and focused telecommunications market leader.
The origins of Nokia lie in three old companies: Nokia Forest and Power, the Finnish Rubber Works and the Finnish Cable Works, which merged in 1966 to form Nokia Corporation. Despite the fact that the traditional lines of business remained dominant for almost two decades after the amalgamation, it was in the 1960s that the seeds of Nokia's later dramatic changes were planted, in the form of early corporate ventures in various fields of electronics. These endeavours, albeit insignificant in size and largely overshadowed by the other divisions, later evolved into a knowledge base in radiotelephony and switching technologies. Gradually, Nokia's strategies also became more technologically oriented and the electronics division, which had been started in a remote corner of the cable factory, became the focus of investment and growth for the entire corporation in the 1980s.
In the 1980s, Nokia internationalized its operations while acquiring competences in the fields of electronics through the acquisition of various companies. Some of these purchases proved to be essential, as Nokia's later focus on telecommunication networks was contingent on its early acquisition of a Finnish company, Televa, with expertise in switching and base stations. The focus on mobile phones, in turn, was contingent in Nokia's early involvement in radiotelephones through the founding of a joint venture company – Mobira – with another Finnish company, Salora in 1979 and the subsequent acquisition of the whole of Salora by Nokia in 1984.
Conversely, Nokia also made clear miscalculations by getting involved in the consumer electronics business by purchasing large European television and computer manufacturers in the 1980s. The deals proved nearly fatal for the company. Moreover, the corporate situation was further aggravated by the collapse of the Soviet Union, which suddenly took away a large part of corporate sales to Soviet markets, as well as a severe macro-economic recession in Finland at the beginning of the 1990s. In effect, Nokia ended up in a survival crisis.
Nevertheless, extensive divestments of businesses and a new focus on the mobile telecommunications saved the company from demise by the mid-1990s. The mid-1990s then saw Nokia thriving with its new focus. The establishment of the pan-European GSM standard proved to be a lifting force for the company, as it was able to find new customers in nascent mobile telecommunications markets.
Business model transformation at Nokia
The three business models at Nokia are:
- NokiaCorp87 – the corporate business model of the entire Nokia corporation in 1987;
- NokiaMobile87 – the business model of Nokia's mobile phone business unit in 1987; and
- NokiaCorp95 – the corporate business model of the renewed Nokia corporation in 1995.
Strategies and structures
In 1987, NokiaMobile87 was a highly focused business unit that relied on organic growth, engineering know-how, and pan-European collaboration in technology standard development. On the contrary, NokiaCorp87 was engaged in highly active M&A as a part of its aggressive internationalization strategy. Moreover, NokiaMobile87 had a coherent structure and rather few subunits: the two product-based units, i.e. phones for the use of business and phones for the use of governmental authorities, and country- or continent-specific sales organizations. In contrast, NokiaCorp87 had a highly diversified and complex structure with various product-specific business units operating in matrix with various international regional units.
By 1995, however, the corporate business model had transformed radically. NokiaCorp95 manifested a strategy that relied almost exclusively on organic growth, evident in the corporation's almost non-existent M&A activities during 1993-1997. It had also got rid of much of its diversified structure. The traditional business units and the newer consumer electronics unit, as well as the complex international structure, were expressly replaced with a focused structure of two business units in the telecommunications product area (Nokia Mobile Phones and Nokia Networks) and regional sales offices abroad. Thus, NokiaCorp95 actually inherited both its focused structure and strategy relying on organic growth from NokiaMobile87 (and the related mobile telecom networks unit).
Operations and resources
Processes of ensuring product quality and supply chain efficiency were concerns to managers in NokiaMobile87, due to problems manifesting as component failures, product deficiencies, and inefficient production, and the resulting customer complaints and cost overflows. Investments were made to develop and improve these processes. Also, the processes of managing intellectual property rights were under development, especially after the business unit ended up in court with Motorola, concerning patent issues in the US at the end of the 1980s. For the executives of NokiaCorp87, these processes were not yet of high concern – with respect to any of the corporations units – but by NokiaCorp95 the product design and quality as well as supply chain efficacy had become central areas of development and competitive advantage. Thus, NokiaCorp95 inherited also the emphasis put on these processes from NokiaMobile87, and further reinforced this emphasis.
"Business unit level managers perceived important changes in markets and the business environment in general, offering concrete strategic alternatives for corporate headquarters."
In effect, product and operations development became a central function of the whole corporation, much as it had been in NokiaMobile87. Along with improving product quality and operations performance, this manifested in shortening product development project lead times and increased corporate R&D spending and university cooperation, in Finland as well as abroad.
Lessons from Nokia
External triggers for change acted as strong signals for change both at the level of the corporation and at the level of the business units. This, in turn, created the legitimacy for radical and rapid changes in the respective business models.
- Lesson 1: A radical business model transformation is triggered by market process signals cognized as radical by both unit and corporate level managers.
The internal ranking of business units, according to growth prospects and financial performance, allowed the change of the corporate business model. In Nokia's case, the corporate recipe quickly transformed from a diversified conglomerate to a strong telecom-focused firm, through the inheritance of many elements of the earlier business model of the mobile telecom subunit to the new corporate business model. What is more, the internal ranking of business units was necessitated by a sophisticated management accounting system, allowing swift reactions to declining business performance after 1988.
- Lesson 2a: Explicit and continuous ranking of business units allows an emergent rise of business model transformation at the corporate level, through inheritance of elements from the best-ranked unit-level business model(s).
- Lesson 2b: Swift transformation of corporate-level business models is facilitated by a sophisticated management accounting system that allows the identification of business units with viable alternative business models vis-à-vis the established corporate-level business model.
Nokia's telecom units (especially Mobira/NokiaMobile) demonstrated very strong technological competence in the early 1980s, which raised the probability of business model innovations. What is more, the technological capability of the middle-level managers allowed divergent actions from official corporate strategy. Business unit level managers perceived important changes in markets and the business environment in general, offering concrete strategic alternatives for corporate headquarters. Later, the internal ranking of business units and the credibility of business unit managers strongly influenced which alternatives were preferred at CHQ.
- Lesson 3: An existing group of routines and capabilities (at business unit level) of a corporation, available for inheritance, is a necessary requirement for the swift refocus of the (corporate-level) business model to successfully fit to the evolving business environment.
At the level of the top management team (TMT) and at the level of individual managers, the HR system, corporate culture, and the personal values, beliefs and backgrounds (cognitions) of the TMT strongly influenced the choice of strategic alternatives and, eventually, business model transformation.
At Nokia, the decisive factor behind telecom focus was the fact that the TMT at CHQ in the beginning of the 1990s consisted almost solely of executives with a telecom background. Their product ontologies strongly favoured rapidly growing handset and network businesses, in which Nokia also had significant early-mover advantages in technological development. However, it seems evident that the promotion of the former telecom managers to CHQ was as much a consequence as a cause of the rapid selection of the telecom business as the only realistic alternative in the worsening economic situation.
- Lesson 4: A necessary mechanism for corporate-level business model transformation is the promotion of the business unit managers and their cognitions to the CHQ.
This is a shortened version of “Strategic management of business model transformation: lessons from Nokia”, which originally appeared in Management Decision, Volume 49 Number 4, 2011.
The authors are Jaakko Aspara, Juha-Antti Lamberg, Arjo Laukia and Henrikki Tikkanen.