Company CaseNokia: Finding Strength by Abandoning its Core Business

Today, when they think smartphones, most people think of Apple or Samsung. Most would find it hard to believe that little more than a decade ago, Finnish electronics company Nokia was the hands-down market leader in mobile phones. At its peak, one in three of the world's active mobile phones bore the Nokia name and logo, and Nokia was selling a half-billion new phones each year throughout the world. Nokia sold more phones than its then three closest rivalsSamsung, Motorola, and Sony-Ericssoncombined. With more than 50 percent of the mobile phone market, Nokia was the world's fifth-most-valuable brand, valued at $34 billiondouble the value of number 21 Samsung and triple that of number 33 Apple.

Today, however, hardly anyone even recognizes Nokia as a phone maker. Given its current absence from the hot mobile phone category, you might think that Nokia has gone the way of other once-mighty brands such as Kodak or Sears. But, in fact, Nokia is thrivingnot as a phone manufacturer but as a market-leading supplier of network infrastructure for industrial telecommunications service providers. How did Nokia escape extinction and rise to market leadership in a differentindustry? The answer lies in a long and difficult transformation and reinvention.

A History of Transformation

Given its current high-tech positioning, most people are surprised to learn of Nokia's beginnings. Established in 1865, Nokia began life as a wood-pulp paper mill. A few mergers and a hundred years or so later, the Nokia Corporation was making not only paper products but also bicycle and car tires, footwear, computers, televisions, and communications cables and equipment. Starting in the 1960s, one Nokia division made commercial and military mobile radios, a business unit that ultimately morphed into a mobile phone giant.

Nokia rose to mobile phone dominance not by continually introducing new cutting-edge gadgets but by focusing on a simple, age-old strategy: selling basic products at low prices. With competitive advantages in logistics and scale, Nokia was well suited to this basic strategy. And the strategy was a perfect fit with the huge global need for cheap phones in second- and third-world markets. Thus, Nokia became best known for its trademarked easy-to-use block handset. By mass producing basic reliable phones cheaply and shipping them in huge volumes to all parts of the world, Nokia made as much profit on its $72 phones as competitors made on phones selling for much more.

Although Nokia's phone strategy worked well, it was a strategy best suited for twentieth-century markets that were characterized by long product life cycles. Even as Apple stunned the world with the iPhone, Nokia's plan was simply to hold its market share constant in the fast-growing mobile phone market. Given projections that mobile phone adoption would double from 2.5 billion users worldwide to 5 billion in just a few years, that plan would have raised Nokia's revenues and sales volume by 67 percent. In normal markets, that plan might have seemed reasonable.

But the mobile phone market was anything but normal, and what happened next to Nokia can only be described as a slaughter. After years of stellar performance, the mobile phone industry experienced a "perfect storm" of threats, including market saturation in developed countries combined with the effects of the Great Recession on the supply and cost of raw materials. Making matters worse for Nokia, in the midst of these shifting market conditions, Apple introduced the dramatically new iPhone smartphone.

Nokia's sales and profits plunged as it ignored smartphones and continued to focus on developing better solutions for an old mobile phone market that would soon no longer exist. Only eight years after Apple's innovative smartphone changed the world, Apple rose to become the world's most valuable brand. During that same period, Nokia's revenues met with a jaw-dropping decline, plummeting from a high of $75 billion to a low of $6 billion. And its brand value sunk from $34 billion to less than $4 billion.

By the time Nokia awoke to the grim realities, it was too late. The company doubled down by putting more efforts into the same old tactics, but to no avail. Finally, with a global market share of less than 5 percent of new phone handsets, nearly two-thirds of its work force laid off, and losses piling up, Nokia sold its mobile phone business to Microsoft. Although this move saved Nokia from near-certain bankruptcy, it created an entirely new problem. If Nokia wasn't in the phone business anymore, what business was it in?

Taking a Gamble on Reinvention

At the same time that Nokia was selling its phone business to Microsoft, it was already answering that question. To reinvent the company, it turned to one of its smaller business units that offered a glimmer of hope. Back when Nokia was still shipping 500,000 mobile phones a year, it had spun its telecommunications equipment business into a joint venture with Siemens. When its phone sales began to flounder, it attempted to get out of the network equipment business altogether. But with its handset business gone and after careful reevaluation, Nokia decided that the network equipment business presented the best opportunity to restore growth.

Placing all its bets for the future on the industrial telecommunications infrastructure equipment market, Nokia began by buying out Siemens's share of the Nokia Siemens Networks joint venture. With the world going mobile, providers were increasingly packaging mobile services with broadband internet access and TV services. To bolster its infrastructure services capabilities, Nokia acquired Alcatel-Lucent, a French company with strengths in broadband service equipment. The acquisition not only provided much needed technologies and capabilities, it also put Nokia on better revenue footings with market leaders Ericsson and Chinese tech giant Huawei.

To achieve success in the network equipment market, Nokia set specific strategic priorities. For starters, it set out to lead the industry in high-performance end-to-end solutions, serving as a single-source quality provider for corporate customers. Nokia also set out to expand network sales to new markets, including energy, transportation, and web players such as Google and Amazon.

With these new strategic initiatives, Nokia's bet is paying off. Last year, Nokia's sales soared to $26.6 billion, quadruple those of just four years earlier. Unlike its earlier phone business, Nokia is building its network equipment business more on reliably providing cutting-edge technology rather than on being the lowest-priced option. This strategy gives Nokia an edge over rivals Huawei and Ericsson. It doesn't hurt that there has been recent growing concern surrounding Huawei amid alleged attempts of data theft. Thus, despite Huawei's low-price advantage, more customers are choosing Nokia.

As the world transitions from 4G to 5G technology, the timing couldn't be better for Nokia. Nokia has leapfrogged into the lead in the race to provide equipment to commercial network service providers. And with 5G just kicking in, industry analysts expect Nokia's business to keep growing dramatically in coming years.

Questions:

1. Based on the list below, how would you classify Nokia's competitive position just prior to the introduction of the iPhone? When it sold its mobile phone business to Microsoft? Today?

Market leader - The firm in an industry with the largest market share.

Market challenger - A runner-up firm that is fighting hard to increase its market share in an industry.

Market follower - A runner-up firm that wants to hold its share in an industry without rocking the boat.

Market nicher - A firm that serves small segments that the other firms in an industry overlook or ignore.