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Why Nokia Lost Its Position, And Samsung Was a Winner

How’s this for a reversal of fortune: Nokia was once the world’s biggest cellphone manufacturer, having introduced the first mass-market mobile handset. Last week, it sold its devices division to Microsoft for $7.2 billion — a fraction of the $250 billion it was worth at the turn of the century. What went wrong?

Disruption happens, of course. Incredibly innovative companies score smash hits, and then sink to nothing when they fail to see the next big thing coming. See Kodak, Research in Motion, Friendster, Netscape, Motorola, Newsweek ... the list goes on.

That didn’t need to happen with Nokia. It could have brought its design sensibility and precise engineering to a wide range of products, just like another company that’s closely intertwined with its home country: South Korea’s Samsung. Instead, like so many first movers before it, the Finnish phenom clung to the source of its greatest success and couldn’t adapt when the competition moved beyond it. For Nokia, becoming laser-focused on making great cellphones blinded the company to consumers’ desire for a mobile device that could do much more than let them talk to friends.

Here’s the confusing thing about Nokia’s fall: It had already executed one of the nimblest pivots in corporate history. As recounted in a corporate history, Nokia started as a paper mill in 1865. Over the next 100 years, it expanded into rubber production, cable and electronics, personal computers and televisions.

In the early 1990s, Finland went into an economic slump. Nokia’s forestry and rubber divisions were losing money, so the company made a strategic decision to throw itself into the fast-growing mobile phone business.

Over the next decade, Nokia became Finland’s single most important business, contributing a quarter of national economic growth between 1998 and 2007.

Unlike some businesses that ride a cash cow until it collapses, Nokia seemed determined not to get out-innovated. It spent billions of dollars a year on research and development. It was aided by Finland’s national technology agency, Tekes, and worked closely with the country’s universities, in a benevolent technology ecosystem that spun off other ideas and skilled workers. Many smaller companies relied on Nokia as a buyer for their products and a route to the global market.

At the peak of its profitability, around 2000, Nokia was a case study of a dynamic, market-leading corporation with both a sophisticated manufacturing process and an endless pipeline of valuable intellectual property. James Utterback, a professor of strategic management at MIT, took a class of 150 business school students there and to Sweden’s Ericsson in the late 1990s. Nokia not only had dozens of phones at different price points on the same operating system-it was also working on futuristic ideas like videoconferencing and mobile location-sharing that the market wouldn’t see for years.

“We went to Nokia and they were clearly superb at platform strategy,” Utterback said, remembering his students’ reactions: “They were predicting that Nokia would be a big success and Ericsson would fail.”

They were wrong. Ericsson ended up pushing from mobile phones into wireless networking, and survived the telecom crash of the early 2000s. Nokia, by contrast, seemed unwilling to harvest the fruits of all its research, developing a stash of patents that were never used. It even came up with a tablet in the late 1990s, the Wall Street Journal reported last year, but decided to stick with its core mobile phone business.

Ironically, it may also have been too focused on low-end competition from Microsoft to see other competitors coming in the fertile mid-market for phones with more features. Only after the iPhone proved that being a pocket computer is more important than simply a voice communication device did Nokia team up with Microsoft to produce the kind of rich experience that consumers now expect.

But there was another path available to Nokia: Leveraging its talent and its importance to the Finnish economy to move into parallel industries, so that falling behind in one of them wouldn’t doom it to be sold for scrap.

In that counterfactual future, the example of Samsung is instructive. The company operates everything from hotels and amusement parks to road builders and oil rigs at home in South Korea, while selling a diverse range of electronics abroad. Companies that large can also get siloed and complacent, but Samsung has stayed ahead of its global competition on several fronts. Its chief executive tells its employees to operate in a state of perpetual crisis. “The positions we currently hold will be obsolete and untenable 10 years from now,” reads its 2011 corporate profile. “Across global business, attachment to laurels is folly. Staying comfortable and motionless is not an affordable luxury.”

Sure, it’s true that Samsung arose under the chaebol system, under which giant companies were given favored treatment by the state. There are plenty of criticisms of such mega-corporations, which tend to have insidious power over governments, and also discourage entrepreneurs from starting their own competitors. But if you’re going to anchor your economy with one big company, it might as well be one that’s diversified, and therefore less vulnerable to a bad strategic call or two.

It’s tempting to imagine what Nokia would have looked like had it taken a similar route. Now, Finland is reeling from lost tax revenue, and unsure where to look for the kind of economic anchor that Nokia provided. Though Rovio’s Angry Birds might be a global phenomenon, it’s harder to structure an economy around a video game company than the global electronics powerhouse Nokia once was, and could have remained.