Stephen Elop
Microsoft has agreed to cover 70 per cent of Stephen Elop's pay-off with Nokia paying the remainder © Reuters

When Nokia chief executive Stephen Elop booked the Grand Tarabya hotel in Istanbul for the group’s annual leadership meeting at the end of January, he planned a spectacular finale. As the meeting of 200 senior executives drew to a close, musicians introduced themselves into the room, playing Ravel’s Bolero, until the whole orchestra was present for the climactic bars.

“My message was that the way we would succeed in the end was if each of us played our role, and each instrument came together to build this beautiful symphony,” Mr Elop says.

The Nokia boss likes a metaphor. It is two years since he stunned the Finnish mobile telecoms company and the sector with a memo – quickly leaked – that warned Nokia was standing on a “burning platform”. The company would perish unless it was prepared to jump into the icy water. Days later, on February 11, 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 emerging markets.

At the 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 has called “the arrogance of Nokia”. But if some could not yet smell smoke, they quickly felt the flames as Nokia implemented a deep restructuring.

Since then, Mr Elop has sought to tackle a trio of internal challenges identified in a two-part FT analysis in April 2011: to become more open, more accountable and more agile. But the company, which launched four new devices on Monday at the Mobile World Congress in Barcelona, has yet to answer adequately the most important question: will consumers buy Nokia’s phones in sufficient quantities to guarantee its future?

Mr Elop is often asked whether he has a “Plan B” if the Windows phone 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 really available to them,” says Richard Windsor, an independent analyst and founder of the blog Radio Free Mobile.

Nokia has adapted its structure and cost base to this reality. The company, which employed 65,000 (excluding the Nokia Siemens Networks joint venture) in early 2011, now has 45,000 staff. It has closed or consolidated 200 out of 500 sites worldwide. Nokia used to launch about 50 new products a year; it now introduces 25.

Last year, Nokia sold and leased back its Espoo headquarters, just outside Helsinki. 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”. Nokia went through all cash flow sources to identify the “owner” of every cash-generating item.

Nevertheless, between February 2011 and mid-July last year – just after Mr Elop was forced to announce a further 10,000 job losses – the share price fell 83 per cent. Samsung snatched the mantle of world’s biggest handset maker. In January, Nokia cancelled its dividend for the first time in its 148-year history.

Focus, focus, focus

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 Nokia executives interviewed for this article 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 “so that engineers can talk to engineers, quality managers to quality managers, and so on.

“We have taken a lot of the fluff out of the product programme development cycle so that [product developers] have mature innovations that they can implement . . . in a timely fashion,” she says.

Examples include “optical image stabilisation” – which produces steady video even when the camera is moving – on the flagship Lumia 920, and the entry-level Lumia 620’s “dual shot”, two-tone moulded cover. Under the old Nokia system, she suggests, the company would have had 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 committee level at headquarters. But in the “controlled mania” of producing a first Windows phone by the end of 2011, Ms Harlow says Nokia learnt to “give the teams the authority to run faster”. At the same time, she says the company, guilty in the past of overcomplicating new products, has “made hard choices not to do something just because we could”, in refining the Windows platform.

Juha Äkräs, Nokia’s head of human resources, says one side-effect of becoming smaller is greater co-operation. To his surprise, internal measures of staff satisfaction have continued to improve, even during the gloomy first half of 2012.

Bumps in the road

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 most innovative full-touch featurephones into these markets in the first half of 2012, allowing Samsung and HTC to steal share.

Mr Elop tightened control. In June, he brought Juha Putkiranta, in charge of factories, supplies and logistics, and Chris Weber, new head of sales and marketing, into the senior leadership team. Both 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 “turnround 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 exceeded 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 smartphones are not yet the device of choice for customers. “Marketing remains their weakest link in terms of being able to regain 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 per cent, its smartphone share dropped from 17.9 per cent to 5.8 per cent.

Better fourth-quarter figures than expected, published last month, did show the first positive underlying profit margin in the core mobile business for a year – as well as an improvement in its net cash position. Following last year’s correction of course in full-touch featurephones, 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, tablet and phone. “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 Nokia was winning more corporate business.

But Pekka Ylä-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 great pictures at night”: “If you go into these stores 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 it’s got a Snapdragon quad-core blah blah blah . . . [Instead], we asked ‘What are the improved consumer 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 video game market. Incremental change 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.

Read Andrew Hill’s two-part series from 2011.

Copyright The Financial Times Limited 2023. All rights reserved.
Reuse this content (opens in new window) CommentsJump to comments section

Follow the topics in this article