Inside Nokia: Part 1 trying to revive a giant

Perspiring slightly under the arc-lights of an in-house television crew, Stephen Elop, Nokia’s chief executive, is about to deliver for the 10th time his “town hall” address to staff. He must sell to them the most radical strategy change since the historic tyres-to-timber Finnish conglomerate turned itself into the world’s leading mobile phone company in the 1990s.

It is March 18. About 150 staff have crammed into the top-floor canteen of Nokia’s central London office to listen to their crop-haired Canadian boss. The “town hall” speech is tailored each time for a different audience. But the style is the same everywhere: direct, open, interactive. “Can everyone hear me?” Mr Elop begins.

They would have to be deaf not to. In early February, Mr Elop issued his instantly famous “burning platform” memo explaining bluntly the gravity of Nokia’s predicament and why staff had to take a terrifying jump into the unknown. Soon after, he administered a further shock to Nokia’s heart, when he announced the choice of Microsoft as software partner for its smartphones, superseding its homegrown Symbian and Meego platforms, and launched a push to reach “the next billion” customers for low-end handsets in emerging markets.

Critics say he is too late and his attempted rescue is doomed. Nokia, a case study in corporate turnrounds under Jorma Ollila in the 1990s, cannot be turned round this time, they claim. Poor leadership and complacency bred of success, compounded by an over-consensual culture, caused Nokia to miss the smartphone revolution. Since then it has haemorrhaged share to Apple’s iPhone and fallen behind phones based on Google’s Android operating system, while taking heavy punishment from emerging market competitors making fast, cheap handsets at the lower end of the market.

A director of one smartphone rival sniffs that in assessing the competition, “Nokia’s name wasn’t even mentioned”. UBS pointed out in a recent research note that the market was “littered with examples of companies failing to deal with shortening technology lifecyles” and warned the “risks to Nokia remain stark”.

Pekka Ylä-Anttila, a research director at ETLA, a Helsinki-based economic think-tank, puts Mr Elop’s chance of success at only “a little better than 50 per cent”.

Scale of the challenge

As the first non-Finn to run the company in its 145 years, Mr Elop is under particular pressure. Shortly after he took over last September, he visited Stockmann, the department store that dominates Helsinki’s shopping district, to buy underwear. “I go over to the counter,” he recalls with a smile, “and this very young lady was, beep-beep, scanning these in, and she said: ‘Can I give you some advice about Nokia?’ So there she is, scanning in my briefs, and offering me advice on the future of Nokia.”

It was a close-quarters reminder that if Mr Elop fails in his quest, he will be exposed to a blast of criticism as icy as the wind that whips off Helsinki’s frozen harbour in midwinter. His protection includes a deep knowledge of the dynamics of the software industry – acquired at Microsoft, his old employer – and, in the words of Mr Ollila, the chairman who hired him, “his tremendous energy and drive”. So far this drive has been evident in the big decisions Mr Elop has taken, based on a creed of openness, accountability and speed.

“The very first day I began,” he says, “I sent out an e-mail to all of the employees and I asked them three questions: what do you think I need to change? What do you think I need not or should not change? What are you afraid I’m going to miss?”

They e-mailed back in their thousands with a tale of management indecision and staff frustration. “When you have a large organisation where accountability is unclear, many people make decisions and some of them cancel each other out,” says Mr Elop, adding that he made a point of “playing back to employees what it was I was hearing”, both through blogs, responses to individual e-mails and direct meetings.

“This dialogue was broken in our company,” admits Juha Äkräs, Nokia’s head of human resources. “When you have a high-tech company, you think that technology solves all your problems and you forget that good face-to-face communication is important.”

One former Nokia software developer and manager – who, like many Finnish ex-Nokians, retains too many close links with the company to want to be identified – says those four months were a mixture of confusion and self-preservation, with business leaders unsure they would survive and teams scrambling to impress the new boss.

Why Microsoft?

Simultaneously, Mr Elop asked top managers to address questions about Nokia’s competitiveness in the smartphone market. Could Symbian, the platform for Nokia’s smartphones, and Meego, the group’s next generation operating system, pose a challenge to Apple and Google’s Android by the second half of 2011?

In late autumn, senior Nokia executives say, the organic route was still preferred. But at a critical meeting of the leadership team in January, Jo Harlow – in charge of Symbian and now head of the newly formed smart devices division – told Mr Elop that Meego “wasn’t mature enough” and Symbian could not fill the gap. It was, she says, “very difficult personally” but the decision focused the top team on whether to link Nokia’s future to Android or Microsoft.

Details of the Microsoft alliance will only emerge later this month, when the deal is expected to be completed, but Mr Elop describes it as the logical strategic move. Operators – such as Vodafone or Orange – would welcome a strong third ecosystem to offset Apple and Google. Nokia-branded Android phones would be hard to differentiate from the mass of competitors. And Nokia had more bargaining power with Microsoft than with Google. With Nokia, Microsoft’s Windows Phone “had a significant opportunity to move forward and become a real alternative in the industry. That had huge value for Microsoft. What also had huge value for Microsoft is us not going [with] Google.” Bluntly, the company would “pay” more for a deal with Nokia than Google.

Lingering questions

On February 3, Mr Elop aired the “burning platform” metaphor for the first time at a staff meeting at Nokia’s headquarters in Espoo, outside Helsinki. He says the resulting memo, which leaked days later, was “the point of consolidation” of the “steady pattern of communications and the [staff’s] highlighting of issues” that had preceded it.

When Mr Elop’s strategic review was broadcast on February 11, front-line staff say its directness struck home. “There was a clear statement of what would happen. It wasn’t blah-blah-blah, there were clear targets,” says Igor Vinogradoff, a product manager who watched Mr Elop’s address with colleagues in Espoo.

In the short term, though, the CEO cannot yet adequately address two critical questions about his strategy: how precisely the Microsoft collaboration will work and how many people will lose their jobs. The former depends on the completion of the deal. The latter is subject to European rules on worker consultation. Addressing London staff in March, Mr Elop said: “I know this is the most difficult time in this journey. The shareholders don’t like ambiguity, humans don’t like ambiguity either.”

The ambiguity is awkward because re-establishing clarity is an Elop priority. “We’re shifting to a model where accountability really matters,” he says. “It should be clear who gets to make a decision. It should be clear that that person is celebrated when good things happen. It should be clear that, if someone’s not living up to their role, then we need to help them.”

Ambiguity also fosters fear and could drive key staff to rivals. Mr Ylä-Anttila from the ETLA, says: “Getting the creative people to be part of the strategy is about motivation and keeping people enthusiastic. If [Mr Elop] can’t win them over to his side, that will be a major obstacle.”

The choice of Microsoft – famously protective of its operating system – pains those at the company who evangelised for open-source software. Says one, who left Nokia shortly after the announcement: “It was a huge shock, followed by lots of denial, and some people are full of anger.”

In smartphones, the two-year transition from Symbian-based handsets to ones produced by the new Microsoft alliance represents the point of maximum peril and uncertainty for Mr Elop. The company must manage the disappointment of its developers, encourage enough of them to stay in place to fuel the sale of an estimated 150m Symbian phones in the next two years, and produce a winning Windows-based device as fast as it can – before the end of this year if possible.

“The easier task is to start Windows Phone from a fresh perspective, but the more difficult task is to continue to operate Symbian,” says Ms Harlow.

Rivals are not pausing to let Nokia catch up. Last week, the stock market value of Taiwan’s HTC, which makes touchscreen Android-based smartphones, surpassed Nokia’s. Android is gobbling up smartphone share. And in emerging markets such as India, where Nokia is still the most trusted brand, low-end local handset makers are attracting customers.

This all highlights Nokia’s recent inability to adapt as fast as its competitors. Mr Elop and his lieutenants must achieve a rapid transformation that refocuses Nokia on sustainable profit and market share, without squandering its culture and creativity. 

Another ex-Nokian recalls how the company used to “want ownership of the soul of what it builds”, adding: “When the soul comes from [Microsoft], things will be different”.

Mr Elop rejects the premise. “Some people write that Nokia is just going to be a hardware company and Microsoft will do the software: nothing could be further from the truth,” he says in town-hall addresses. But the contention that his bold gamble will change Nokia for ever is undeniable.

- Financial Times, 11 April 2011