It is still mind-boggling how fast Nokia fell from the top rank of the dominant phone company to being sold to Microsoft within five years. How did this happen? And more importantly, can this happen to other companies as well? Those are the questions that researcher tried to figure out in an extensive study for which they conducted 76 interviews with former Nokia top and middle managers.

The researchers identified several key factors, including fear, suppression of information, over-confidence, low technological competence among management, and competing product lines.

Factor #1: Fear

Top management (TM) realized as early as 2005 that Apple is working on a smartphone that is running on iOS. Further intelligence that TM could assemble made them realize that they need to come up with a competitive solution. TM’s fears were externally focused and pressure put on middle management (MM) to react.

Middle managers did not have this amount of external information, but had an internal focus, including internal fears of losing status. Nokia’s tendency to change its organizational structures frequently led to uncertainty with employees, as they need to apply internally and interview for new jobs, which created high levels of uncertainty.

The Nokia culture accounted for aggression from TM (most notably the CEO) that resulted in fear that MM showed losing status, reputation or the job. MMs who would raise objections were subsequently sidelined or demoted.

Factor #2: Suppression of information

MM tended to give overly optimistic reports and suppress information that indicated the opposite, because TM was punishing MMs with deviating opinions or information. This led TM to be blinded by wrong information, information that confirmed their beliefs. MM directly lied to TM, as was reported by multiple middle managers, because also the Nokia culture was to “please upper management.”

TM on the other hand discouraged MMs’ external focus to ensure effective implementation. MMs were not encouraged to gather more outside information.

With those two factors top management created a psychological unsafe environment, which led to suppression of information, not allowing to raise critical issues, punishment of failure, and preventing the creation of trusting relationships.

Factor #3: Over-confidence

Because of the suppression of information, the fact that most middle managers were in Finland and had not been directly exposed to many other technology companies, and the reinforced notion of Nokia employees being the best-of-the-best, Nokia employees tended to see their solutions as the best and ignored advice that contradicted that image.

The manner in which MMs assessed competitors’ products was a) biased by what was perceived as relevant for Nokia, and b) often compared Nokia’s future developments to competitors’ past products. This way Nokia’s products always seemed better than the competition and there was nothing to learn from them.

The new entrants Apple and Google were seen as low threat because of their inexperience in the phone business.

Factor #4: Low technological competence

Top management – including the CEO – had only low technological competence and could thus not judge the real status of development. They did not understand the real status when MM showed them demos of the current development.

Additionally, Nokia’s was ill prepared for the dramatic change in required hardware and software competence. The Nokia core competence was in radio technology hardware, while smartphones needed computer and software competence, competence in touch screen interfaces – and user experience design skills.

Factor #5: Competing product lines

Given that Nokia had several dozen product launches every year, those groups competed for resources and forced them to update and patch the outdated Symbian operation system to an extent where it became unusable for smartphones.

Comparison

Nokia’s situation in the 2005-2010 period shows a lot of similarities with the car industry. While top management realizes that a dramatic shift is coming, middle management is mostly not aware of that. Latter are isolated in their main manufacturing hubs (Sindelfingen, Stuttgart, Wolfsburg, Detroit…) and are over-confident that their set of skills and experiences makes it hard for new entrants to overtake them. What they don’t see is that there is a dramatic change of focus from hardware to software. Software in autonomous vehicles, battery management, and experiences define the quality of a car, like the OS of the smartphone did.

As this article describes in detail, many of the current hard core skills owned by powerful and influential divisions inside traditional car companies will become superfluous. Engine, fuel storage, traction control system and so on are all going to change or disappear in electric vehicles and completely revamp the frame. Instead companies need battery development knowledge and skills. Autonomous vehicles don’t need steering wheels, require other stuff such as LIDAR and big data crunching, and of course a complete new interior and entertainment design.

This type of knowledge and skill set is only sparsely represented in traditional car manufacturers, and especially not in top management who were raised on those old skills. Additionally, existing product lines compete for resources.

While the life-cycles for cars is longer (5-10 years), companies that build up these skills and resources now such as Tesla, Google, and Apple will make today’s car manufacturers extremely vulnerable.

Conclusion

Nokia’s demise is a prime example of what other industries can learn from and react to innovation coming from outside the industry. Even a company that was on top and dominating its market was surprisingly vulnerable and fell from the top to bottom in a period of less than 5 years. Analyzing those factors, comparing it to one’s own company and industry, and then reacting to make the necessary improvements are the first steps for making your own organization more resilient.

Sources

1. Timo O. Vuori, Quy N. Huy; Distributed Attention and Shared Emotions in the Innovation Process: How Nokia Lost the Smartphone Battle; Administrative Science Quarterly, 1–43, 2015
2. Have Tesla and Apple disrupted the auto industry past the point of no return?