S w W11594 FROM IN-HOUSE TO JOINT R&D: THE WAY FORWARD FOR NOKIA DENMARK PhD student Marcus Mller Larsen and Professor Torben Pedersen wrote this case solely to provide material for class discussion. The authors do not intend to illustrate either effective or ineffective handling of a managerial situation. The authors may have disguised certain names and other identifying information to protect confidentiality. Richard Ivey School of Business Foundation prohibits any form of reproduction, storage or transmission without its written permission. Reproduction of this material is not covered under authorization by any reproduction rights organization. To order copies or request permission to reproduce materials, contact Ivey Publishing, Richard Ivey School of Business Foundation, The University of Western Ontario, London, Ontario, Canada, N6A 3K7; phone (519) 661-3208; fax (519) 661-3882; e-mail cases@ivey.uwo.ca. Copyright 2011, Richard Ivey School of Business Foundation Version: 2011-12-20 INTRODUCTION For the management of Nokia Denmark, the question of defining the future strategic directions for its product development activities was a vital issue that boiled down to some key concerns. Nokia Denmark was a subsidiary of the world's largest telephone manufacturer, the Nokia Corporation, and was one of the largest of Nokia's many product development units dispersed all around the world. The Danish site developed somewhere between six and 10 mobile phones per year, depending on instructions from the Nokia headquarters located outside the Finnish capital of Helsinki. In 2007, Nokia Denmark decided to deepen its relationship with one of its current suppliers, Taiwanesebased Foxconnthe world's largest electronics component manufacturer with most of its facilities in mainland Chinain a joint R&D (JRD) setup in which Foxconn was given the responsibility of developing and testing selected mobile phones. Development of more complex mobile phones with new and sophisticated technologies was still retained in-house in Denmark, but the more standardized and less complex products with known techniques were outsourced to Foxconn. However, while the decision to approach Foxconn was originally motivated by a need to release pressure on in-house product development capacity, by 2010 the in-house/JRD organization had become a central facet of Nokia Denmark's product development organization. Recent developments in the Nokia environment had spurred lively debates as to how the company should move forward. Indeed, as newly appointed CEO Stephen Elop expressed it: \"In the five weeks since joining Nokia, I have found a company with many great strengths and a history of achievements that are second to none in the industry. And yet our company faces a remarkably disruptive time in the industry, with recent results demonstrating that we must reassess our role in and our approach to this industry. Some of our most recent product launches illustrate that we have the talent, the capacity to innovate and the resources necessary to lead through this period of disruption. We will make both the strategic and operational improvements necessary to ensure that we continue to delight our customers and deliver superior financial results to our shareholders.\"1 Changes to the company, its strategy and organization 1 Nokia interim report, 2010, Q3. Page 2 9B11M114 were therefore inevitable, although it was impossible at this point in time to predict what precisely would happen. Still, the Danish management knew that the time would come when they would have to present, justify and defend their strategy for how the product development division of Nokia Denmark should evolve. Accordingly, three different strategic options had been outlined: 1. Nokia Denmark could scale up the JRD with Foxconn to eventually suspend more of the in-house product development. While this seemed to be a highly drastic move, it would allow Nokia Denmark to focus exclusively on more creative and value-adding activities such as the architecture and concept mapping of new mobile phones. 2. Conversely, Nokia Denmark could phase out the JRD with Foxconn and pursue fully in-house product development. This would require Nokia Denmark to employ more resources on simple standardized projects, but it would also save the costs of controlling and coordinating the interfaces and interdependencies between the two companies. 3. The last option would entail a continuation of the parallel organizational structure that had emerged in recent years. This could give Nokia Denmark the best of both worlds. However, experience had shown that the balancing act between in-house and JRD product development was far from straightforward. Obviously, there were no easy answers to how Nokia Denmark should position its product development in the future. Each of the strategic alternatives had its own benefits and disadvantages, and these needed to be carefully identified, assessed and weighed against each other. Moreover, what would be the consequences of pursuing one strategy over another? Cautious prioritization would determine which qualified choice had to be made. However, given the broad array of stakeholders and considerations that had to be included in the final decision, the Danish management knew perfectly well that the task in front of them was indeed not an easy one. NOKIA CORPORATION: FROM RUBBER SHOES TO MOBILE PHONES The vision of Nokia Corporation was called Connecting People in order to \"empower everyone to share and make the most of their life by offering irresistible personal experiences.\"2 The Finnish multinational was the world's largest manufacturer of mobile devices with an estimated 31 per cent of global market share at the end of 2010. The same year, Nokia produced approximately 432 million mobile devices and had a net sales of 42 billion and an operating profit of 2 billion. Its global workforce consisted of 130,000 employees in 120 countries all around the world. Thirty thousand people were employed in R&D in 16 different countries (see Exhibit 1). The company was founded in 1865 by Fredrik Idestam, a mining engineer, as a groundwood pulp mill to manufacture paper in the town of Nokia (thereby the name). In the first century after its establishment, the company became a major industry focusing particularly on rubber. It was not until 1967 when merging with a cable company created what became known as the Nokia Corporation that it began focusing on the electronics industry. This milestone gave Nokia the ideal position for pioneering mobile communications as it begun developing a number of path-breaking products. In 1992, Nokia decided to focus solely on telecommunications. This decision, which coincided with the mobile revolution of the 1990s, made Nokia the world's largest mobile phone manufacturer by the end of the decade. In the past 10 years, Nokia was increasingly focusing its telecommunications business on related products and services such as multimedia devices, smartphones and Internet services. 2 www.nokia.com/about-nokia/company/vision-and-strategy, accessed December 18, 2011. Page 3 9B11M114 Products, Markets and Competition By 2010, Nokia's product portfolio was separated into three categories to represent its target customer segments. First, Mobile Phones covered cost-effective voice and messaging phones. According to Nokia, \"Our Mobile Phones sub-unit addresses markets where there has been, and we believe there continues to be, significant potential for growth in mobile devices, as well as where we believe there is significant potential for growth in services.\"3 Second, Smartphones included the portfolio of mobile devices that provided advanced technologies and services; as Nokia explained, \"Our smartphones are advanced mobile devices optimized for creating, accessing, experiencing and sharing multimedia as well as business use.\"4 Nokia's smartphones were powered by Symbian S60 and MeeGo, both open source operating systems maintained by Nokia, and accounted for approximately 30 per cent of worldwide smartphone sales in 2010. Third, Mobile Computersthe smallest of Nokia's segmentsfocused on the market for high-performance, high-end compact computing devices and services. Nokia had the industry's largest distribution network with more than 650,000 points of sale all over the world. The company was particularly strong in China, India, the Middle East and Africa. In fact, in 2010, 16 and 22 per cent of Nokia's net sales came from Greater China and the Asia-Pacific region, respectively. The Middle East and Africa represented 14 per cent. Europe was still the largest market with 36 per cent of net sales, while 5 per cent came from the United States and 7 per cent came from Latin America. The two largest single markets were China and India, followed by the United Kingdom, Germany and the United States (see Exhibit 2). On the competitive front, Nokia was still the largest mobile phone manufacturer in the world, measured both in market share and revenue. By 2010, Nokia was a global market leader with 31 per cent market share, while the second largest mobile phone manufacturer was Samsung with 20 per cent market share (see Exhibit 3). However, compared to the same period in 2009, Nokia's share had fallen by 11 per cent. Other competitors included both traditional mobile phone suppliers such as LG, Motorola, Palm, Research in Motion and Sony Ericsson as well as more recent smartphone entrants such as Apple, Google and HTC. Market analysts claimed that while Nokia performed well in the mid-end market, it was struggling both in the low-priced and high-end markets.5 The Finnish company was particularly losing market shares in the expanding premium smartphone market where entrants such as Apple's iPhone and Google's Android-based solutions were increasingly dominating the field. Although Nokia's Symbian platform accounted for 28 per cent of the global smartphone market in 2010, making it the second largest behind Google's Android solution, the market share had fallen from 39 per cent in 2009 (see Exhibit 4). However, Nokia's Symbian platforms were mostly used in cheaper mobile phone solutions and did not capture the more lucrative top end of the smartphone market.6 In an attempt to establish a third major player in the smartphone market along with Google and Apple, Nokia announced at the beginning of 2011 an ambitious partnership with Microsoft to operate most future Nokia smartphones by Windows Mobile. A Global Organization Nokia's organization was divided into three business groups (see Exhibit 5). The Devices & Services segmentNokia's core business areacomprised Mobile Solutions (responsible for developing and managing the portfolio of smartphones and mobile computers), Mobile Phones (responsible for 3 Nokia annual report, 2009. Ibid. 5 http://news.xinhuanet.com/english2010/world/2011-01/28/c_13710223.htm, accessed December 18, 2011. 6 www.eetimes.com/electronics-news/4212987/Nokia-s-CEO-likens-company-to-burning-oil-rig, accessed December 18, 2011. 4 Page 4 9B11M114 developing and managing the portfolio of affordable mobile phones), and Markets (responsible for managing the supply chain, sales channels, brand and marketing activities). Besides this, Nokia had also NAVTEQ and Nokia Siemens Network. NAVTEQ was a wholly owned subsidiary that focused on providing comprehensive digital map information and related location-based content and services for automotive navigation systems, mobile navigation devices, Internet-based mapping applications and government and business solutions. Nokia Siemens Networka jointly owned venture with Siemens provided mobile and fixed network infrastructure, communications and network service platforms, as well as professional services to operators and service providers. Nokia's organization was highly globalized. For the production of mobile devices, the company operated 10 manufacturing facilities in nine different countries around the world. Nokia produced its line of luxury mobile devices in the United Kingdom. Production plants in Salo in Finland, Beijing in China, and Masan in South Korea manufactured high-value, low- to medium-volume devices. And the six other production facilitiesKomrom in Hungary, Cluj in Romania, Dongguan in China, Chennai in India, Manaus in Brazil and Reynosa in Mexicoproduced high-volume, cost-focused mobile devices. Nokia's R&D activities could be separated between the short- to medium-term needs and long-term needs. The short- to medium-term R&D employed a market approach to ensure a high visibility of and accountability for the creation process of mobile phones, smart phones and mobile computers from start to finish, as well as ensuring a better time to market and better R&D productivity. Nokia had established strong R&D presence in Beijing, China; Copenhagen, Denmark; Greater Helsinki, Salo, Tampere and Oulu, Finland; Ulm, Germany; Bangalore, India; London and Farnborough, United Kingdom; and San Diego, United States. The long-term R&D emphasized more exploratory technology development whose focus lay beyond the development of current products, services, platforms and technologies. The research was carried out in a global network of research centres and laboratories, often in close collaboration with leading universities and research institutions such as the Massachusetts Institute of Technology (MIT) in the United States, Cambridge University in the United Kingdom and Tsinghua University in China. In contrast to most of its competitors, Nokia had a highly integrated value chain, including R&D, manufacturing, distribution and marketing. By 2010, it delivered more than 432 million units from 10 factories around the worldmore than anyone else in the industry. A huge challenge for Nokia was therefore to diligently control and optimize the high volumes and supply logistics. Analysts had even speculated that a major core competence for Nokia was its integrated high-tech manufacturing and logistics, which allowed for an extremely rapid execution of built-to-order mobile phone customization processes.7 NOKIA DENMARK: DEVELOPING MOBILE PHONES AT THE TECHNOLOGICAL FOREFRONT In 1996, Nokia opened the doors of the newly built Nokia House in Frederikskaj in Copenhagen, Denmark. The buildings were located right next to one of its closest competitors, Samsung, and also close to where another competitor, Ericsson, previously had had its Danish R&D centre. Prior to Nokia, the buildings had belonged to Phillips, the Dutch electronics company, as its R&D site. Nokia acquired the facilities from Phillips in 1994 and hired a number of Phillips' redundant engineers. \"The inauguration of the new house is the result of strong growth in Nokia's operations in Denmark,\"8 wrote Nokia in a press release in 1996. With roughly 300 employees, the new house would market mobile phones and 7 R. Mudambi, \"Location, control, and innovation in knowledge-intensive industries,\" Journal of Economic Geography, 8:5, 2008, pp. 699-725. 8 Nokia press release, August 30, 1996. Page 5 9B11M114 communications equipment for all the analog and digital systems in Denmark. Additionally, it would host an R&D unit that concentrated on the research and development of future mobile telephone systems. In 2010, 14 years after the facilities were inaugurated, the Danish site had grown to become the largest Nokia development centre outside Finland, with approximately 1,200 employees. About 60 per cent were engineers, equally distributed between software and hardware engineers.9 One in four of the employees came from countries other than Denmark (42 different nationalities were represented), and roughly 6 per cent held a high strategic position in the global Nokia corporation. The primary function of the Danish site was the development of mobile phones, including every aspect from R&D to sourcing and logistics to marketing and market segmentation. Besides the software, a basic mobile phone contained only a few individual hardware parts, including a sophisticated circuit board(s), antennas, an LCD screen, keyboard, microphone, speaker, battery and a number of other smaller components (see Exhibit 6). More specifically, the development of the mobile phone could be divided into the following sub-categories: mechanics, electromechanics, electronics and software; in addition, operations, product validation, quality, display, sourcing and customer care had to be taken into account. All these categories formed the organization of the project development unit, and each team was responsible for optimizing the different technologies and supply chain of the mobile phone. For the management of product development, one of the most critical tasks was to ensure the coordination and fit between the different teams and technology suppliers. Particularly challenging was to ensure that the interfaces between hardware and software were flawless and did not cause any problems. This interface management was therefore highly resource demanding. About six to 10 mobile phones were developed every year in Denmark. The site was quite famous in the global Nokia organization for the many bestselling and path-breaking products and technologies it had developed. For example, the legendary Nokia 3310one of the most successful Nokia mobile phones with almost 200 million units soldhad been developed in Copenhagen. Moreover, the Series 40 software platform and application user interface softwareused on Nokia's broad range of mid-tier mobile phoneswas also developed in Denmark. \"The employees in Copenhagen understand how to combine the fascination of the technological possibilities with commercial success,\" said Peter Rpke, senior vice-president of R&D. \"Without bragging, here in Copenhagen we are the best at combining technological challenges with business opportunities.\"10 Product Creation Process: From Idea to the Market In the Danish unit, the development of mobile phones followed a generic production creation process with the purpose of developing new products and related process capabilities based on orders from the product and portfolio management and by using verified technologies provided by Nokia or external partners. Based on an initial two-page specification of the overall intention of the mobile phone (e.g., overall technological requirements, market segmentation, price estimation, etc.) received from headquarters in Finland, product development encapsulated three broad phases: concept mapping (CM), product development (PD) and product maintenance (PM) (see Exhibit 7). In the first phase, the CM, the focus was to identify the business target and to freeze the business case. \"Here, we have tons of different ideas that we narrow down to one winning concept that we believe in,\"11 explained Tomi Kuparinen, head of program management at Nokia Denmark. This is where new ideas and technologies were integrated conceptually into what would become products according to the overarching customer segments and 9 www.go.dk/virksomheder/index.asp?act=profil/13265, accessed on December 18, 2011. Ingenren, January 12, 2008. 11 Interview Tomi Kuparinen, September 2010. 10 Page 6 9B11M114 instructions received from headquarters, i.e., where the boundaries of the project and the product would be defined. When the product had satisfied the pre-specified criteria of what the concept should achieve, it was then handed over to the next phase. The second phase, PD, concerned the entire process from the conceptualized business case to maintenance of the product. This phase was characterized by five distinct milestonesfrom PD0 to PD4that could only be reached if an assigned steering committee approved the development. PD0 marked the initiation of the product program; PD1 was the product development release (full functionality of the product); PD2 was the manufacturing release (full performance of the product); PD3 the delivery release (product ready for the market); and PD4 was the PD program determination (handover to product maintenance). The intention with this setup was therefore to ensure an optimal process development with transparency for stakeholders. The last phase in PD was related to product maintenance and delivery to the markets. Here, the focus was to ensure the physical integration of the product components and technologies into the finished product. The phase was driven by a number of criteria including whether the factories were able to manufacture the product; if all components were carefully defined and tested; and if all sales channels for the distribution from different countries were defined and open. Moreover, there was a strong emphasis on reducing the overall production costs of the product and its components. The last phase was therefore devoted to ensuring that the mobile phone would be ready to be released on the market. In sum, the whole process could be characterized as a system where good ideas were funneled and converted into a marketable product. As Ulrik Heins, a Nokia Denmark product development manager, clarified, \"concept mapping is creating a lot of different ideas and finding the ones with most promise; product development is basically maturing what we now havea concept; and product maintenance is to keep the product alive and integrate different components. We have divided the process into these three parts as each phase requires different competences and mindsets.\"12 A JOINT R&D MODEL In 2007, Nokia Denmark decided to outsource a few selected product development projects to Taiwanese based Foxconn in a joint R&D (JRD) setup. Foxconna multinational subsidiary of Chinese Hon Hai Precision Industries Co. Ltd.was the world's largest maker of electronics components with $59.3 billion in revenue in 2010 and more than 920,000 employees. According to its annual report, \"Foxconn Technology Group is the most dependable partner for joint-design, joint-development, manufacturing, assembly and after-sales services to global Computer, Communication and Consumer-electronics (\"3C\") leaders.\"13 The company focused on fields of nanotechnology, heat transfer, wireless connectivity, material sciences and green manufacturing processes. It had 12 factories in nine cities in China besides one partially owned Sony factory in Baja California, Mexico, and one factory in Chennai, India. Its largest site, Longhua Science & Technology Park (referred to as Foxconn City), employed alone about 400,000 workers, included 15 factories, worker dormitories and even a downtown shopping area. Despite a number of controversies in the media concerning mistreatment of employees, Foxconn was the manufacturer for a number of large companies including Apple, Dell, Microsoft and Sony-Ericsson. Among other things, Foxconn was the manufacturer of Apple's famous iPhone and iPad. An instruction from the Nokia headquarters in Finland to increase the number of mobile phones developed each year from approximately four to as many as a dozen drew the Danish site to outsource to 12 13 Interview Niels Eilersen and Ulrik Heins, January 2010. www.foxconn.com, accessed on December 18, 2011. Page 7 9B11M114 Foxconn. In an attempt to reach out to a broader group of customers to capture additional market shares with new products and services, the Nokia CEO at the time, Olli-Pekka Kallasvuo, embarked on an aggressive diversification strategy in 2007. However, as in-house engineers and resources in Copenhagen were already scarce, the instructed threefold increase in the number of phones developed each year presented the Danish management with a major capacity problem. Nokia Denmark's product development engineers were already running at a high capacity so the management had to find another way of accommodating the headquarters' request. They therefore decided to approach Foxconn to ease the capacity burden by outsourcing some selected projects. \"It wasn't a top-down, but a bottom-up decision,\" Ulrik Heins recalled. \"The individual development sites were told that they should make X number of products, and then it was up to the local management to find out what the heck we should do. We didn't have the capacity to make all these products, and our guys couldn't deliver it. We then found out that we should make some joint R&D.\"14 Specifically, while the development of lead products (e.g., with breakthrough innovations) was retained in-house in Denmark, selected \"copy product\" projects (products with less complex technologies that have been used in previous models) were outsourced to Foxconn. Foxconn had been chosen for a number of reasons. Besides the obvious cost-saving motivation of relocating product development capacity to China, Foxconnas one of the largest companies in the field of electronic component manufacturinghad much relevant knowledge and expertise that Nokia Denmark saw the potential of tapping into. For instance, it had a long history of developing technological products for major contractors around the world and possessed much experience of optimizing product development processes. In addition, Foxconn had supplied electronics components to Nokia for a number of years prior to the full-scale outsourcing decision. Their already established relationship therefore eased the process of relocating entire product development projects to China. In regards to the generic product development value chain, the actual JRD process was initiated at the end of the concept mapping phase when representatives from Foxconn flew into Copenhagen for two to three weeks of intensive collaboration. This way, the Foxconn representatives were given the opportunity to become fully integrated into how the product should be developed, what the conceptual and technological expectations to the product were, and how the overall product development mindset should be. The control of the project was then handed over to Foxconn who would adjust and mature the project in all manners so that it could be shipped back to Copenhagen for product maintenance after roughly six months. To ensure that the product development process would proceed as smoothly as possible, the Danish management had instructed its Taiwanese partner to replicate the product development organization as it was in Copenhagen (see Exhibit 8. This meant that the organizational structure was similar to the Danish one and also that Foxconn followed the same milestones for the PD process that had been defined in Copenhagen (i.e., PD0 to PD4). However, despite having handed over the project to China, Nokia Denmark was still largely involved in the entire process. In order to supervise the life-cycle of the PD projects, Nokia Denmark and Foxconn arranged weekly video conference meetings to discuss the status of each project as well as specific technological and organizational challenges or alterations that might have occurred. Moreover, the two partners also met either in Denmark or in China every six to eight weeks. The Effects of the JRD The JRD began when Nokia Denmark asked Foxconn, which had the necessary competence, to develop some simple plastics and mechanics for its mobile phones. However, the Danish management soon realized that this was not the most optimal solution as it required too much overhead management from 14 Interview Niels Eilersen, Ulrik Heins and Brian Lodahl, August 2010. Page 8 9B11M114 the Danish unit. \"We ended up reviewing their drawings, controlling the quality and checking whether the test results were good enough,\"15 Niels Eilersen, a product program manager at Nokia Denmark, explained. Particularly, as the interface between electronics and mechanics in the mobile phones is critical in the PD process, it soon became evident that the geographical distance between China and Denmark complicated the management of this interface for the worse. As an experiment, the management decided to ask Foxconn to expand its organization to include test facilities that could match Nokia's test requirements and knowledge about electronics so that they could also take over the development part. \"It was sort of an evolution in which we began with mechanics, but soon found out that it was not quite enough, so we asked the partner to build competences in electronics and tests,\" said Eilersen. \"As a result, we could start the full JRD programs.\"16 Interestingly, when Nokia demanded new competences from Foxconn such as electronics, the Taiwanese company would typically respond by buying a relevant electronics company as a means for gaining the necessary knowledge and match the requirements. \"They're surprisingly fast,\" elaborated Eilersen. \"If we demand a certain competence, they will find and acquire a local company with the necessary competences, which will be included in the next projects. Sometimes it works and other times it doesn't.\"17 Indeed, Foxconn was known by its customers for its agility and fast decision-making. This was one of the key reasons why Nokia turned to Foxconn in the first place. Second, another positive effect was related to the PD life-cycle and the consequent product time-tomarket. Prior to engaging Foxconn in the JRD, Nokia Denmark had an average PD time of 12 to 15 months. However, as the Nokia management realized that Foxconn was able to perform the same tasks with the same quality in only eight months, they began questioning their in-house processes and procedures. \"What's going on? How can they be so fast? Working together with Foxconn has actually been a kind of a wake-up call for us,\" Ulrik Heins explained. \"They have demonstrated that they can make products that are on a level with our products, and they can even make it faster than us with the same quality. This was a surprise for many in Copenhagen.\"18 The engineers in Copenhagen thus became inspired to learn more about how Foxconn worked and how it was able to operate that rapidly. Eventually, with insights and knowledge from Foxconn, a significant learning process made Nokia reduce its PD time by roughly six months. The decision to outsource selected PD projects to Foxconn thus increased Nokia's organizational flexibility considerably. By incorporating Foxconn in the development process, the Danish management to a larger extent could allocate and prioritize more resources on more complex and value-adding projects. At the same time, however, the JRD collaboration with Foxconn had also presented Nokia Denmark with some notable challenges. For instance, there had been a large internal resistance among Nokia engineers towards relocating PD projects to an external supplier and towards teaching an external partner how to make Nokia phones. Ulrik Heins elaborated, \"People in Nokia see it as if we are selling our core competences. On a design level, people have been very nervous and cautious towards the JRD. In the old days, it was rocket science to make good mobile phones. That's not the case today, however. Everybody can easily buy all the necessary phone components on the market. But if you have made these components internally for the last 20 years, you will think that it is still a core competence for the company.\"19 Thus, the act of convincing and changing the mindset of the Nokia employees towards valuing the product development collaboration had beenand still wasa major challenge. 15 Ibid. Ibid. 17 Interview Niels Eilersen and Ulrik Heins, January 2010. 18 Ibid. 19 Ibid. 16 Page 9 9B11M114 The task of successfully aligning Nokia organizationally with the outsourced PD projects had been another unexpectedly challenging process. While the Nokia management had hoped that the outsourced projects would largely be self-manageable, requiring minimum intervention from Nokia's side, they soon realized that safeguarding against misinterpretation and misbehaviour required substantially more resources than initially expected. The Danish management had initially thought that they would be able to merely hand the product over to Foxconn after the concept mapping and receive it back for product maintenance some months later. However, it became evident that frequent meetings and monitoring on the JRD were necessities. For this reason, roughly eight full-time Nokia employees were employed to follow the JRD from Copenhagen while the product was being developed by 30 to 50 engineers in China. Another issue was the fact that Foxconn supplied many of Nokia's most significant competitors such as Apple, Sony-Ericsson and Motorola. A legitimate fear was therefore whether Nokia's technology would be misappropriated by Foxconn employees and leaked to other companies. However, the Danish management was confident that this would not be a problem. As Ulrik Heins clarified, \"It is completely watertight. And that is absolutely necessary, or else we would have had problems working with them. There was actually an episode where Apple lost some technology, so we asked our partner what they then did for Apple. The reply we got was that they didn't know. They are divided to the extent that they cannot even communicate to other employees working with other partners. It is completely hermetically sealed.\"20 On a more cultural note, embedding a Taiwanese company into the PD process had caused some noteworthy avenues of frustration. Although the output of the Chinese engineers was of a very high quality, one particular exasperating issue was the extremely high employee turnover in the Taiwanese company. \"We use a lot of resources in educating Chinese engineers,\" Ulrik Heins said, referring to new engineers who are flown to Copenhagen to learn about Nokia's product development techniques and procedures, \"and then, six months later, these engineers disappear to another company, and we have to use additional resources on educating new employees. In a sense, we have become an educational centre.\" Obviously, this issue would not have been a problem if Foxconn possessed the necessary Nokia PD knowledge internally so that they could train and educate its own employees with minimum interference from Copenhagen. Yet, there were no good answers to whether this would be the most optimal solution to this challenge. THE WAY FORWARD FOR NOKIA DENMARK The Nokia Corporation had a history of being highly decentralized and organized to encourage creativity, entrepreneurship and responsibility. \"It's the way the organization creates a meeting of minds among people. How do you send a very strong signal that this is a meritocracy, and this is a place where you are allowed to have a bit of fun, to think unlike the norm, where you are allowed to make a mistake?,\"21 Jorma Ollila, Chairman of Nokia, asked rhetorically. The decision to outsource the development of a number of mobile phones to Foxconn had indeed been an entrepreneurial act in an otherwise highly integrated corporation. This was something Ulrik Heins could confirm: \"It's really learning-by-doing. Nokia is kind of a cowboy company. We plunge into things, muddle our way through and eventually become wiser. It is not that much design in the things we do. We go out and try, and then we adjust.\"22 However, the time had now arrived for the Danish management to rationalize its entrepreneurial spirit. Based on a thorough assessment of PD activities, a decision and a strong business case of which direction the company should take needed to be made. 20 Ibid. E.M. Olson, S.F. Slater and T. Hult. \"The importance of structure and process to strategy implementation,\" Business Horizons, 48, 2005, pp. 47-54. 22 Interview Niels Eilersen and Ulrik Heins, January 2010. 21 Page 10 9B11M114 Exhibit 1 NOKIA CORPORATION KEY FIGURES HIGHLIGHTS Income statement (EURm) Net sales Gross profit Research and development expenses Selling and marketing expenses Administrative and general expenses Operating profit Profit before tax Profit Ratios (%) Return on capital employed Net debt to equity (gearing) Personnel 2010 2009 2008 2007 2006 42,446 n.a. (5,863) n.a. n.a. 2,070 1,786 1,850 40,984 13,263 (5,909) (3,933) (1,145) 1,197 962 891 50,710 17,373 (5,968) (4,380) (1,284) 4,966 4,970 3,889 51,058 17,277 (5,636) (4,397) (1,165) 7,985 8,268 6,746 41,121 13,379 (3,318) (3,314) (666) 5,488 5,723 4,306 n.a. (43) 6.7 (25) 27.4 (14) 54.3 (61) 45.8 (68) 132,427 123,553 125,829 112,262 68,483 NET SALES BY REPORTABLE SEGMENTS 2010 EURm 2009 EURm Change % Devices & Services Net sales Operating profit Research and development expenses 29,134 3,299 2,954 27,853 3,314 2,984 4 5 1 NAVTEQ Net sales Operating profit Research and development expenses 1,002 (225) 751 670 (334) 653 50 33 15 Nokia Siemens Networks Net sales Operating profit Research and development expenses 12,661 (686) 2,156 12,574 (1,639) 2,271 1 58 (5) Source: Nokia annual report, 2006/2010. Page 11 9B11M114 Exhibit 2 SALES FIGURES AND GEOGRAPHY, 2009 Net sales by market area (%) North America, 5% Latin America, 9% Europe, 34% Middle East & Africa, 13% Greater China, 18% Asia-Pacific, 21% 10 Major market, net sales (EURm) Italy, Brazil, 1252 1333 Spain, 1408 China, 5990 Indonesia, 1458 Russia, 1528 India, 2809 USA, 1731 Germany, UK, 1916 1733 Source: Nokia annual report, 2009. Page 12 9B11M114 Exhibit 3 GLOBAL MARKET SHARES Vendor Nokia Samsung LG Electronics ZTE Apple Others Total 4Q2010 million units shipment 4Q2010 market share 4Q2009 units shipment 4Q2009 market share Year-over-year change 123.7 80.7 30.6 16.8 16.2 133.4 401.4 30.8% 20.1% 7.6% 4.2% 4.0% 33.2% 100% 126.8 68.8 33.9 9.5 8.7 92.8 340.5 37.2% 20.2% 10.0 % 2.8% 2.6% 27.3% 100 % (2.4%) 17.3% (9.7%) 76.8% 86.2% 43.8% 17.9% Source: IDC press release, http://www.idc.com/about/viewpressrelease.jsp?containerId=prUS22679411§ionId=null&elementId=null&pageType=SY NOPSSY. Exhibit 4 SMARTPHONES MARKET SHARE Vendor Nokia Apple Research In Motion Samsung HTC Others Total 4Q2010 million units shipment 4Q2010 market share 4Q2009 units shipment 4Q2009 market share Year-over-year change 28.3 16.2 14.6 28.0% 16.1% 14.5% 20.8 8.7 10.7 38.6% 16.1% 19.9% 36.1% 86.2% 36.4% 9.7 8.6 23.5 100.9 9.6% 8.5% 23.3% 100.0% 1.8 2.4 9.5 53.9 3.3% 4.5% 17.6% 100.0% 438.9% 258.3% 147.4% 17.9% Source: IDC press release, www.idc.com/about/viewpressrelease.jsp?containerId=prUS22689111§ionId=null&elementId=null&pageType=SYNOPS SY, accessed on December 18, 2011. Page 13 9B11M114 Exhibit 5 NOKIA ORGANIZATIONAL STRUCTURE Corporate Executive Board Corporate Functions Mobile Solutions Markets Mobile Phones Nokia Siemens Network NAVTEQ Source: www.nokia.com, accessed on December 18, 2011. Exhibit 6 COMPONENTS OF A NOKIA PHONE Source: http://electronics.howstuffworks.com/cell-phone6.htm, accessed on December 18, 2011. Page 14 9B11M114 Exhibit 7 NOKIA'S PRODUCTION CREATION PROCESS Product Portfolio Planning P 0 Road mapping Product Maintenance Product Development Concept mapping P 1 P 2 P 3 Product management Productisation Delivery capability implementation Marketability Source: Nokia internal presentation. P 4 Product maintenance Ramp down Page 15 9B11M114 Exhibit 8 JRD ORGANIZATIONAL STRUCTURE Nokia Copenhagen Product development manager Software Mechanics Electro mechanics Hardware Foxconn China Product development manager Software Mechanics Source: Nokia internal presentation. Electro mechanics Hardware