Exploring Corporate Strategy


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Exploring Corporate Strategy

  1. 1. Exploring Corporate Strategy CLASSIC CASE STUDIES Nokia: The Consumer Electronics Business Martin Lindell and Leif Melin The case describes the entry of the Finnish company, Nokia, into the consumer electronics market – resulting in a significant reorientation of the company. It describes the internationalisation of the Nokia Group from a Finnish company, to a Nordic company, to a European company and finally to a global player in world markets. The case raises three main questions. Why and how did Nokia acquire con- sumer electronics businesses? Why was the integration process of acquisitions so difficult? And why, after a decade of investment, did Nokia divest its consumer electronics businesses in 1996? The case can be used to explore the difficulties of integration in terms of management, culture and strategy. l l l INTRODUCTION Nokia, the large Finnish industrial group, was founded in 1966 through a merger of three companies. The main business units at that time were pulp and paper, tyres and cables, with paper manufacturing as the oldest business, established 130 years ago. During the 1970s Nokia started to diversify through expansion in different electronic product areas. In 1995, after twenty years of acquisitions, divestments, internationalisation and rapid growth, 99 per cent of the turnover (FIM36,810 million)1 was repres- ented by three business units in electronics: mobile phones, telecommunications and consumer elec- tronics. The three original businesses had been divested and 91 per cent of the turnover was derived from exports. Nokia had become one of the leading global producers of mobile phones and tele- communication systems, and the third biggest in Europe in consumer electronics, with 34,000 employees, 14,000 of them working outside Finland in 45 different countries. The Nokia case is a remarkable corporate transformation, achieved through focusing the company’s strategic activities in the consumer electronics industry, where Nokia attained its position after a series of rapid acquisitions of five different European companies between 1983 and 1992 (Exhibit 1). Colour 1 The exchange rates in June 1996: 1 British pound (£) = 7.27 FIM 1 Swedish krona (SEK) = 0.70 FIM 1 German mark (DM) = 3.07 FIM 1 US dollar ($) = 4.70 FIM This case study was prepared by M. Lindell of the Swedish School of Economics and Business Administration and L. Melin of Jønkøping University in Sweden. It is intended as a basis for class discussion and not as an illustration of good or bad management practice. © M. Lindell and L. Melin, 1996. Exploring Corporate Strategy by Johnson, Scholes & Whittington 1
  2. 2. Nokia: The Consumer Electronics Business Exhibit 1 The acquisitions made by Nokia in consumer electronics 1983 Salora (Finland), Luxor (Sweden) 1987 Oceanic (France) 1988 Standard Electric Lorenz (Germany) Main plants: Bochum (Germany) and Ibervisao (Portugal), with six other plants supporting the manufacturing of TV sets 1992 Finlux (Finland) Exhibit 2 Nokia’s turnover by business groups (%) 1972 1983 1988 1995 Paper industry 19.9 22.7 10.0 0 Tyres fabric 24.5 11.1 6.0 0 Electronics 8.0 19.1 60.0 99.0 Telecommunications 27.0 Mobile phones 43.0 Consumer electronics 29.0 Cable fabric 47.6 22.0 9.0 – Others – 25.1 15.0 1.0 TV was the dominant product group in the consumer electronics business, with audio systems and satel- lite receivers as other product groups. The radical changes in Nokia can be seen from the division of the turnover into various business areas for four fiscal years (Exhibit 2). The main products in these different business areas have been as follows: l Paper industry – soft tissues, consumer products, power. l Tyres fabric – tyres, industrial rubber, footwear. l Telecommunications – telecommunication systems used in mobile and fixed networks. l Mobile phones – products for all major digital and analogue systems. l Consumer electronics – colour TV sets, satellite receivers, VCRs and audio equipment. l Cable – cables, accessories and systems for use in the construction industry, and the telecommunications and power-transmission sectors. Furthermore, for more than a decade from the mid-1970s, computers/information systems also formed a business area within electronics. FORMULATION OF A NEW LONG-TERM VISION FOR NOKIA During the mid-1970s, after the oil crisis in 1973, Nokia experienced strategic problems. The original core businesses, representing the main part of the corporation, were expected to have limited growth in the future. Top management felt that the company could get into serious trouble if no strategic changes were initiated. The change process began with the formulation of a growth vision, which implied new strategic directions for Nokia. The ambition was to enter industrial sectors with growth potential, so as to increase the share of products with growth potential in Nokia’s product portfolio. The top manage- ment set out the following strategic goals for future development: Exploring Corporate Strategy by Johnson, Scholes & Whittington 2
  3. 3. Nokia: The Consumer Electronics Business l Internationalisation. l Increased share of high-tech produts. l Maintain the competitiveness of the original businesses (paper, tyres and cables). The chief executive officer of Nokia at that time, Kari Kairamo, was the strategist behind the vision. His belief was that growth could not be achieved by remaining in Finland. Nokia had been too depend- ent on its domestic market. He also made a strong point of the need for strategic flexibility and a readiness to take opportunities. In order to increase the share of high-tech products, Nokia soon started to diversify. Entering the consumer electronics market was one of the main moves towards the vision of diversification and inter- nationalisation. All in all, five major acquisitions created the bridge into consumer electronics. The manufacture of televisions was to prove an important element in this. At the beginning of the 1980s, the total annual sales of TV sets in Europe were almost 20 million, about the same as in both the USA and Japan. However, the European market was much more frag- mented, with several technical standards and local protectionism. The consequence was more local pro- ducers in Europe, each with a rather small production volume. The two biggest European competitors were Philips and Thompson (France), but even these firms had fairly local strategies. Large production volume was at this time not regarded as a major critical factor for success. Instead, the flexibility to change production rapidly from one type of TV set to another brand, model or size was a critical factor for competitiveness. Eventually, the non-European competition from the Japanese and other Far East companies led to an increased focus on price competition in Europe. With more focus on price, the small-scale orientation created vulnerability for several European companies. NOKIA ENTERS THE CONSUMER ELECTRONICS INDUSTRY: THE ACQUISITIONS OF SALORA AND LUXOR In the mid-1970s Nokia moved into computers, with the importation and distribution of Honeywell Bull computers, following which the then small electronic business area was divided into professional elec- tronics and computers. At the same time, another opportunity to expand in electronics appeared when the Finnish army wanted a new type of portable radio telephone. It invited most domestic firms in the electronics industry to develop them, and nearly all Finnish electronics firms started to construct mobile radio telephones. The military order was eventually placed with three different companies, Salora, Televa and Nokia. The top management in Nokia thought that three domestic companies in this area were too many. As Salora was regarded as slightly ahead in its R&D activities, Nokia made an initial contact with that company. A co-operation agreement was soon signed between Nokia and Salora regarding their radio telephone businesses, and in 1980 the co-operation was extended. A joint venture on a fifty-fifty basis was formed – Mobira, a mobile telephone business unit. Exhibit 3 Turnover and profit of Luxor, 1975–82 (in millions of SEK) Year 1975/6 1976/7 1977/8 1978/9 1979/80 1980/1 1982 (16 Months) Turnover 484 523 611 700 745 1,010 730 Profit/loss 12 15 –104 –69 –50 –117 –45 Source: Affärsuärlden, 1983, no. 48, p. 33. Salora was also the biggest manufacturer of TV sets in Finland, but in the late 1970s it had problems with its TV business because of a decline in the Scandinavian market. At the same time, the company’s owners were accused of selling on the black market and were forced to relinquish their ownership. The Exploring Corporate Strategy by Johnson, Scholes & Whittington 3
  4. 4. Nokia: The Consumer Electronics Business Union bank looked for new owners and Nokia was invited to acquire Salora. But the head of Nokia’s electronics division, Kurt Wikstedt, was only interested in Salora’s mobile telephone business and not at all in consumer electronics, which were not seen as high-tech products. He saw no competitive advantages for Nokia in the consumer electronics sector: In Finland we cannot produce on such a scale in this product area that we could be successful. The production scale of Salora is too small. We should concentrate on products where the production costs are high, as in professional electronics. Nokia’s group chief executive officer and his corporate planner were in favour of an acquisition, as they regarded consumer electronics as a growth industry. But Wikstedt’s arguments were stronger, and instead Salora was taken over by the shipbuilding company Hollming. The difficulties in Salora continued and the company made huge losses: FIM18 million in 1980 and FIM25 million in 1981. The president of Salora was forced to resign after only a few years in office and Salora was put up for sale again. But Nokia did not show any interest in the consumer electronics part of Salora. It just wanted Mobira. In this situation the owners of Salora, the Hollming Group, linked the possible sale of their share of Mobira to the sale of the rest of Salora. The result was a compromise – Nokia acquired 18 per cent of the shares in Salora in order to be allowed to acquire the remaining 50 per cent of Mobira from Salora. In 1982 Mobira became a subsidiary of Nokia, and Nokia became represented in the Salora board. Nokia later acquired Televa as well and eventually became a global leader in mobile phones. The new president of Salora, Antti Lagerroos, succeeded in improving the company’s performance in consumer electronics: 1982 was a good year and 1983 was expected to be even more successful. Markets were growing rapidly. Salora obtained two big orders for colour TV sets which gave rise to capacity problems. Lagerroos looked for more production capacity and became interested in Luxor, a Swedish competitor, which itself had survival problems in the late 1970s (Exhibit 3). In 1979 the Swedish state saved Luxor from bankruptcy, acquiring it from the family owners for the symbolic sum of one Swedish krona, and put fresh capital into the company in an attempt to improve its fortunes. In 1983 the Swedish Minister of Industry wanted a new solution for Luxor, after having subsidised a finan- cial reconstruction of the company. The minister looked for a large corporation as a partner, but held the opinion that Salora was not large or strong enough. Other firms showed an interest in acquiring Luxor, but none found favour with the Swedish governmental officials. In this situation, Antti Lagerroos introduced a new idea to Nokia’s top managers. Although Nokia’s previous interest in Salora was lukewarm, a Salora–Luxor combination put the matter in a quite differ- ent light; after all, internationalisation was an important ingredient in the Nokia corporate vision and Finnish firms had traditionally made their initial foreign expansion in the Swedish market. Nokia had also become more interested in know-how in mass production and marketing. The production know- ledge in consumer electronics was quite different from that in the production of computers, for instance. At the beginning of the 1980s, computers were still mostly tailor-made. Marketing too was different. Brands and distribution channels were important success factors in consumer electronics, where a good product was not enough in order to obtain a large market share. An acquisition of both Salora and Luxor could give Nokia the possibility of supplementing the competences in R&D and small-scale production with mass production and market orientation. Relations between the group chief executive officer of Nokia, Kari Kairamo, and ministers in the Swedish government were good, and Sweden was motivated to accept the successful Nokia Group as the acquiring company. The production capacity of a combined Salora and Luxor was expected to make it a strong unit. The acquisition took place in January 1984 and Kari Kairamo stated: Nokia’s acquisition of Salora and Luxor means that the company’s position in Sweden is now much stronger. The Luxor, Salora and Nokia venture means that Scandinavian co-operation in this important area has improved. Exploring Corporate Strategy by Johnson, Scholes & Whittington 4
  5. 5. Nokia: The Consumer Electronics Business Kairamo saw Luxor as a first step in further international co-operation, and expected that the clear boundary between consumer electronics and professional electronics would disappear in the future. Kurt Wikstedt strongly stressed the international side of the acquisition: Now we enter Europe. We begin with Scandinavia. We try with Luxor to see if we can be successful in this business, and then continue with Europe. That is the strategy. After many twists and turns, Nokia had entered the consumer electronics business and taken a serious step into the international market. The initial result of the acquisitions was that Nokia got 58 per cent of the shares in Salora and 51 per cent of the shares in Luxor. Later in 1984, Nokia increased its share to 70 per cent of the capital stock in Luxor. In 1983 the turnover for Luxor was FIM590 million and for Salora FIM737 million. The staff of Luxor was 1,500 and of Salora 1,700. All in all, Nokia now had 8,000 employees in its electronics businesses. Nokia’s acquired market share in the TV sector was 36 per cent in the Finnish market and over 20 per cent in the Swedish market. THE INTEGRATION OF SALORA AND LUXOR The new consumer electronics business was organised as a separate division in Nokia, partly because of the doubt over consumer electronics expressed by the head of the electronics division, Kurt Wikstedt. The president of Salora, Antti Lagerroos, was selected as the new president for consumer electronics (Salora–Luxor), and Kurt Wikstedt stayed as president for the remaining businesses in electronics, relabelled ‘industrial electronics’. The integration of Luxor and Salora was arduous, and made no real progress until the Swedish president of Luxor was forced to leave the company in May 1985. Besides the declining consumer electronics business, Luxor also had a successful personal computer division. Nokia closed this computer division, which of course aroused a lot of criticism. Several managers in Nokia were of the opinion that the co-ordination of activities in Salora and Luxor was not sufficient and that the potential synergy advantages had not been fully realised. In 1985 Salora–Luxor got a new president, Heikki Koskinen, when Antti Lagerroos was appointed director in charge of consumer electronics in the top management team of the Nokia Group. Koskinen was a spokesman for decentralisation and local autonomy. Salora and Luxor kept their own sales subsidiaries; only logistics and R&D were integrated. Still, the development of Salora–Luxor was very favourable and quite profitable in the mid-1980s. The production of TV sets in Luxor increased rapidly, although small (14-inch) TV sets represented almost 50 per cent of all production (see Exhibit 4). In 1987, the Salora–Luxor TV brands had a market share of 35 per cent in the Nordic markets. In Finland the market share was about 45 per cent. According to Heikki Koskinen, Salora–Luxor was the only profitable significant consumer electronics producer in Europe in 1987. Gradually, Nokia increased its ownership share in both Luxor and Salora to 100 per cent. The aim of the continued integration was to arrange production in a more optimal way, and to utilise more effectively all the possibilities of synergy, including integrating production plants in a total product planning and produc- tion system, in order to decide more efficiently which products should be produced where and in what quantities. Exhibit 4 Production of TV sets in Luxor 1983 120,000 1984 184,000 1985 240,000 1987 380,000 Exploring Corporate Strategy by Johnson, Scholes & Whittington 5
  6. 6. Nokia: The Consumer Electronics Business NOKIA ENTERS MAJOR EUROPEAN MARKETS In 1986, when the Luxor–Salora integration was considered to be under control, Nokia began to think of the future. Market share was already about 40 per cent in the Nordic markets, which implied that fur- ther expansion for Salora–Luxor in Scandinavia was not possible. An alternative growth and product brand strategy, to turn to western Europe, was decided during the strategic planning process in spring 1986. Heikki Koskinen explained the plans: We had plans to acquire two major brands in Europe, of which we intended to build a local net of brands. One of the brands was going to be more extensive to be sold in all European countries where Nokia was active in consumer electronics. There were several reasons for entering the western European markets. It was thought to be important to be in the home markets of major competitors, in order to prevent them from dumping their products on Nokia’s domestic markets. European co-operation might also prevent the Japanese and American firms taking over the European TV markets. The major European competitors Philips and Thompson started to co-operate within the Eureka framework (European Research Co-ordinating Agency)2 in order to develop the European HDTV (high-definition TV) concept. This joint development was a threat to smaller European producers, which were afraid of not getting the key technology when needed. In order to become a partner in the development process of the HDTV concept, the opinion was that Nokia had to grow bigger. At this time the situation in consumer electronics in Europe had also changed. Competition had become more intensive. Philips, the biggest TV manufacturer in Europe, with a market share of 25 per cent, acquired an American firm and began to think more globally. Thompson, the second biggest TV manufacturer in Europe, with a market share of 20 per cent, acquired two main competitors in the USA and England. Economies of scale through mass production were now considered as very important. The Salora and Luxor factories had a capacity of only 400,000 TV sets each. Nokia was number three in Europe, but still had only 5 per cent market share. The opinion within Nokia was that a volume of 2 million TV sets per year was needed to be competitive with both Philips and Thompson, and the Japanese and Korean competitors. In the late 1980s, the price competition became tougher in the European consumer electronics markets because of a more aggressive penetration from Far Eastern competitors. It was also expected that the fixed R&D costs would rise, which implied that there was going to be a volume advantage regarding R&D too. THE ACQUISITION OF OCEANIC Nokia’s profitability in consumer electronics was good, especially in 1987, and it had passed Philips in market shares in all Nordic markets. In April 1987 the Nokia board of directors approved the strategic plan to acquire European TV brands. The plan was to acquire a French and a German brand, and a fac- tory in either of these two countries. There were negotiations with different sellers, including the French company Oceanic which was for sale. Personal relationships between Nokia top management and the owner of Oceanic, the Swedish Electrolux Group, resulted in a rapid acquisition of Oceanic. Electrolux wanted to divest this business, which had no synergy with its core know-how. Through the acquisition of Oceanic, Nokia got inside the EC with the production of TV sets. Furthermore, Nokia acquired a significant market share in the French market, which was rather closed and difficult for an outsider to penetrate. 2 Originally, the Eureka programme was launched to serve as a European complement to the Strategic Defense Initiative launched by the Reagan administration in the United States. Another reason was that previously launched European tech- nology development programmes were considered too bureaucratic, too slow or too narrowly defined. Exploring Corporate Strategy by Johnson, Scholes & Whittington 6
  7. 7. Nokia: The Consumer Electronics Business The pre-acquisition phase took less than three months and only four meetings were needed. Immedi- ately after the acquisition, the integration process between Salora, Luxor and Oceanic was started. Oceanic had a turnover of 600 million FIM, mainly in colour TVs, and 800 employees. Oceanic’s mar- ket share of consumer electronics in France was just below 10 per cent, with the Oceanic and Sonolor brands. The strategy was to keep the French production unit apart from the other factories because of differences in standards, while accounting systems, logistics and marketing should be integrated. The French local managers were trusted by the Finnish management and retained. The next step in the conquest of European markets was to look for other brands. Nokia was inter- ested in Thompson’s German brands Saba, Nordwede and Telefunken. According to Heikki Koskinen, who headed the negotiations, an agreement was close for one of the brands, when the Standard Electric Lorenz possibility emerged. NOKIA DOUBLES ITS TV PRODUCTION: THE ACQUISITION OF STANDARD ELECTRIC LORENZ At this time, an internal struggle for power was going on between future candidates for the top position in the Nokia corporation. Top managers were traditionally recruited internally, and in 1985 a new manager for industrial electronics was appointed, Timo Koski, after close internal competition. He was seen as the probable next chief executive officer of Nokia. However, the earlier successful president of Salora, Antti Lagerroos, now heading the consumer electronics businesses in Nokia, had strong personal ambitions to advance to the very top of Nokia. This thirst for power became a driving force behind the next acquisition. Parallel to Heikki Koskinen’s negotiations with Thompson, Antti Lagerroos made the initial analysis that resulted in his suggestion to acquire a very big competitor, Standard Electric Lorenz (SEL) in the former West Germany. Lagerroos then used the freedom of action given to him by Kari Kairamo, and started to negotiate with SEL and its owners on his own, partly assisted by the director of technology in Nokia. Almost at the same time, Timo Koski acquired the whole personal computer and information systems business of the Ericsson Group in Sweden – an acquisition of the same size as SEL. Nokia became the largest information technology company in Scandinavia. Ericsson’s large-scale production of terminal systems and established position in systems for commercial, industrial and banking sectors, together with Nokia’s intelligent workstations and retail systems, were expected to enhance the Nokia Group’s competitiveness in the information technology sector. The significantly enlarged division led by Timo Koski was named Nokia Data. Both Antti Lagerroos and Timo Koski had now extended their internal domains significantly in the struggle for further power in Nokia. However, in 1987 Timo Koski suddenly died of a heart attack. The acquisition of SEL from the US conglomerate ITT was made early in 1988, just a couple of months after the Oceanic acquisition. The product on capacity increased from 1 million TV sets annually to almost 2.5 million. The chief executive officer, Kari Kairamo, attached great importance to this acquisition. The opinion was that SEL completed Nokia’s consumer electronics business both tech- nically and regionally. SEL was ahead of Nokia in digital TV technology. And regionally Nokia now became strong not only in France, but also in German-speaking Europe (15 per cent market share) and even in southern Europe as SEL exported to Italy, France, Spain and Portugal. The net sales of SEL were FIM4.9 billion in 1988, with an annual production of 1.2 million colour TVs, 1.7 million picture tubes and 350,000 video recorders. The main production facilities for SEL’s colour TV sets and video recorders were located near Bochum in the Ruhr region. The picture tube factory was located near Stuttgart, and the loudspeaker factory was in Bavaria. SEL also had four other smaller production facil- ities in West Germany. The SEL acquisition included assembly plants in Spain and Portugal as well, and shares in joint ventures in Hungary, Malaysia and Italy. With the incorporation of SEL, Nokia’s position as Europe’s third largest colour TV manufacturer was strengthened. Nokia was now the ninth largest colour TV manufacturer in the world, and the Exploring Corporate Strategy by Johnson, Scholes & Whittington 7
  8. 8. Nokia: The Consumer Electronics Business market share in Europe was estimated to be about 15 per cent, with the new brand names ITT, Schaub–Lorenz and Graetz. In 1992 Nokia acquired the only remaining Finnish competitor, Finlux, which was in good shape and profitable. The production capacity of Finlux was just over 200,000 TV sets. The turnover was about FIM600 million and the personnel 770. POST-ACQUISITION INTEGRATION BECOMES PROBLEMATIC In January 1988, Simo Vuorilehto, the chief operations officer of Nokia, was of the opinion that all Nokia’s consumer electronics units should be consolidated within a wholly new division with its head- quarters in Continental Europe. Significant investments in upgrading and modernisation of production technology and logistics were needed in the new division that was formed, which was named Nokia Consumer Electronics. The integration and co-ordination of Salora–Luxor, Oceanic and SEL started in February 1988 with the appointment of an integration group led by Antti Lagerroos. The group was working hard during spring 1988 with the aim of integrating administration and production in all four acquired consumer electronic units, a total of ten factories, within six months. The purpose was to be able to present an integrated structure for the new division in the summer of 1988. But the timetable could not be met entirely. The chief executive officer, Kari Kairamo, was worried that Nokia did not have enough inter- nationally experienced personnel, and believed that many new managers were needed, especially in the consumer electronics business. This opinion was further strengthened by some analysis carried out by external consultants in early 1988. Furthermore, Antti Lagerroos could not implement the necessary changes fast enough and lost Kari Kairamo’s confidence to lead Nokia Consumer Electronics into Europe. Instead, he was appointed president of Nokia’s Mobile Phones (previously Mobira). He soon wanted to merge Nokia Consumer Electronics and Nokia Mobile Phones, but did not get any support for that. Antti Lagerroos eventually left the Nokia Group in February 1990. In June 1988 a new president, Jacques Noels, was appointed for Nokia Consumer Electronics. Head hunters found him in France at Thompson – one of Nokia’s large competitors in consumer electronics. Before that he had been working for many years in European units of large US companies in the elec- tronics industry. Jacques Noels had to start to organise the consumer electronics division from scratch, and at least half a year of integration was totally lost. Furthermore, ten senior managers in SEL had left the company. Initially, Noels rented an office in Paris for three months and brought his secretary with him from Thompson. The first task was to build a new management team with the right mixture of compet- ence. A new head office for Nokia Consumer Electronics was established in Geneva (regarded as ‘neutral ground’) in order to facilitate further recruitment and the establishment of a truly international division. In 1989, Jacques Noels presented a new organisation structure for Nokia Consumer Electronics, more than one year after the latest acquisition. During that time Nokia’s market share of TV sets had declined from 14 to 11 per cent in the European markets. Not only the consumer electronics business but the whole group showed weak results. The relations between the chairman of the Nokia board and the chief executive officer, Kari Kairamo, became more and more strained. The external directors were expected to suggest some changes in the top management structure of Nokia. In this situation, Kari Kairamo suddenly died (suicide, according to the media) in December 1989. After Kari Kairamo’s tragic death, Simo Vuorilehto became the new chief executive officer. According to him, the key factors in the consumer electronics strategy were marketing, design and production: We are not at all the kind of company that could develop semiconductors or picture tubes in the future. But we can be competitive and ahead of other competitors in marketing, design and production. In production we perhaps cannot be superior to our competitors, but we can at least be at the same level. We cannot develop everything ourselves, which was a mistake in the first integration plans. Exploring Corporate Strategy by Johnson, Scholes & Whittington 8
  9. 9. Nokia: The Consumer Electronics Business Heikki Koskinen, responsible for strategic planning in Jacques Noels’ new management team, emphas- ised similar competitive advantages of Nokia Consumer Electronics: Our strength is in rapid application of new technology. When technologies shift you have to forecast the trends and minimise the investment costs. Our competitive advantage is in the brain of the engineers. That is especially true in application issues. He had never fully understood the volume thinking behind the acquisition of SEL: The only advantage you reach by large-scale production is that you can control the material costs. On the other hand, you have less flexibility and you have to be global. In 1987 we manufactured 900,000 TV sets in Salora–Luxor, and we were very profitable. In Europe there are other profitable but small companies. It is a question of the overall strategy. A small company making half a million TV sets can be profitable. That firm has to co-operate with manufacturers of components and in that way reduce the cost for necessary R&D activities. With small R&D costs, a clear market focus and a strong product range there are good possibilities to be successful. The manager in charge of export sales also held the opinion that too much emphasis had been put on production costs: I cannot understand that acquisitions are made based on production advantages. In our acquisitions there were no synergies between the brands. When you combine factories and brands you take away a large part of the turnover. I am astonished that Nokia had not made clear the future brand policy before the acquisitions. That was the greatest problem. Jacques Noels’ strategy was to become big in some niches, not in the whole market. Nokia should concentrate in high-quality and high-technology TV sets, with good profit margins. According to him, the market share of the total market was therefore not as important. Still, the most profitable markets were the Nordic ones, with a total demand of 1.5 million TV sets, and in these markets Nokia was strong. Jacques Noels saw Nokia’s portfolio of different electronics businesses as a future strength. The group had telecommunication, mobile phones, information systems, computers and consumer electronics, and more and more synergies were expected to emerge between these different business areas. The border between professional and consumer electronics was expected to disappear. According to Jacques Noels, Nokia already had a strong technological capacity and good management resources. But he saw some disadvantages compared with the main competitors: I think they have a different position, because they have very strong brands. Telefunken is a much stronger brand than, for example, Graetz [an SEL brand]. They have also much stronger corporate brands, e.g. Philips compared to Nokia. Their strategy can be very different; they can let almost every brand have its own life. Grundig can have its own strategy, nobody has to know that it is owned by Philips. But at the same time Philips is not putting the same efforts in Grundig as in the Philips brand. Their positioning is very different from ours. The magnitude of the integration task is illustrated by Exhibit 5, which shows the turnover of the acquired Nokia Consumer Electronics units in five European countries. A FIM6,000 million division had to be integrated. In order to integrate the acquisitions, Jacques Noels had two possibilities. The first was to continue as before and integrate the different units over a long period. The second was to try to merge the different units into one organisation more rapidly. The latter alternative was chosen despite the fact that the president thought that, in the short run, this approach would lead to bigger difficulties because the units were used to working on their own. In the long term, after a few hard years of integra- tion, the profits were expected to be considerable. Exploring Corporate Strategy by Johnson, Scholes & Whittington 9
  10. 10. Nokia: The Consumer Electronics Business Exhibit 5 Turnover in the production units of Nokia Consumer Electronics, 1988 Production Unit Turnover (in Millions of FIM) Germany 3,000 Finland, Salora 1,500 Sweden, Luxor 900 France, Oceanic 500 Portugal, Ibervisao 100 A NEW ORGANISATION STRUCTURE AND CULTURE Jacques Noels wanted strong functional centralisation and stressed the importance of a competent and powerful management team. This was the first priority because the management team was seen as the motor of the organisation. But it took time to put together the new team. Both old and new managers were tested by external consultants. Eventually, about 35 people were working at the head office in Geneva. All decisions concerning production, R&D and marketing were made there. Finance and stra- tegic planning were centralised as well. All acquired companies became pure production plants, separated from the sales and marketing activities, but with some R&D activities decentralised to these plants. Jacques Noels especially emphasised the connection and co-operation between R&D and marketing: We have regrouped the marketing and R&D centres so that the head of marketing and the head of R&D work side by side in Geneva, because we believe that they have to work closely together on new models. Production is only how to manufacture as cheap as possible, when the products have been developed. He highlighted the cultural difficulties in integrating the different units and nationalities. A new integ- rated culture for Nokia Consumer Electronics needed to be built on new management principles, but it had to emerge over several years. The tools for cultural integration were an international management group, circulation of leaders between countries, and a ‘Euro-manager’ programme. Young and recently employed graduates from all countries involved were taken into this Euro-manager programme, devel- oped in 1989–90. The creation of this new pan-European culture was planned to continue after 1990 for another three to five years. But Jacques Noels did not have an easy task in seeking to create a ‘Europeanised’ business unit out of Nokia Consumer Electronics: If you make two major acquisitions in three months, you get many problems regarding product strategy; sales channels; general management, etc. There is nothing that works by itself. You have to struggle and that is what we did. First we worked out a product strategy in order to concentrate our R&D efforts. Then, from the middle of 1989, we put a lot of efforts in new brand, sales and marketing policies. MARKETING AND PRODUCTION STRATEGIES WITHIN NOKIA CONSUMER ELECTRONICS In 1989 Nokia Consumer Electronics launched a universal brand, ITT–Nokia, that would be positioned as a middle-range product. The ITT–Nokia brand would then be combined with one or two other and more local Nokia brands in each local market, including a ‘high-end’ brand representing higher quality and/or more exclusive design. For the integration of product development and manufacturing, a ‘Euro- line-concept’ was launched. Nokia Consumer Electronics reduced the number of chassis from 25 to 10, and the goal was to come down to three or four product chassis. All R&D centres were supporting this product concept, but it was modified in accordance with the country and the brand characteristics. The Exploring Corporate Strategy by Johnson, Scholes & Whittington 10
  11. 11. Nokia: The Consumer Electronics Business different centres were concentrated on different levels in the product range, from low-end to high-end chassis. The marketing strategy was to be achieved through an integrated sales, product and distribution strat- egy. Marketing of the brands was the most important part. All acquired brands were local brands, and Nokia as a brand was unknown within the distribution channels. The problem after the acquisition of SEL was to convince the distribution channels that the brand ITT–Nokia had a future. The solution was to combine the innovation image of ITT and resource image of Nokia3 in this new brand ITT–Nokia, with the intention of later dropping ITT. There were many discussions and different opinions about the wisdom of using the Nokia name. Many managers were sceptical about the possibilities of transferring the ITT image to the Nokia name. However, ITT–Nokia was introduced as the pan-European brand in the medium range; a modern brand with modern technology, which was going to compete with Philips. Salora was marketed as high-range brand, while the other brands were used as local brands. Jacques Noels stated: Our strategy is to have three brands per country. The major brand, in the beginning, has to be the established local brand. But this is short term. Gradually we are introducing Nokia as the major European brand. But we want to do that gradually, not brutally. In all countries we are also supporting the original brand. That is why we support Luxor in Sweden, Salora in Finland, ITT–Nokia in Germany and Oceanic in France, and then gradually introduce Nokia as a complementary brand. A brand strategy with three brands means three different channels. The specialised independent retailers are very important. They want to have their local brands. Then we have the large specialised channels that are only selling electronics. Finally we have the supermarkets, big stores, they want to have one brand, one styling, easy to recognise. Some managers were critical of using acquisition as a means of growth and also sceptical of the possib- ility of transferring the image of one brand to another. The brand Salora had a quite good image. Investigations by Nokia showed that Salora had some recognition in England, Italy, France, Netherlands, Belgium, Austria and Switzerland, and much more recognition than the new brand Nokia. Finally, Jacques Noels distinguished between three different production strategies: Today we have two or three complementary strategies. One is volume; it is clear that the volume in TV assembling is important. We are working with that in Germany, where our Bochum plant is one of the largest in Europe; one million TV sets. The second strategy is to specialise, when a plant only produces one product and we can extend that product line. We are doing that in Salo where we are producing our high-end chassis. In Luxor we are producing all our decoders and satellites, and there we also have the technical expertise for these products. In those products the technical expertise is what makes the cost, not so much the production volume, but also how well and quickly we can introduce our products. We have a factory in Portugal, where labour cost is an important factor. We are trying to rationalise our production by stage of the product life, labour cost, volume and engineering. Those are the four criteria and they give different answers for different products. THE DIVESTMENT OF CONSUMER ELECTRONICS However, the integration of the units in Nokia Consumer Electronics proved to be much more difficult than expected and the profitability much lower than predicted. The development of Nokia Consumer Electronics was problematic after the acquisition of SEL. In 1990, the director of corporate finance, 3 The Nokia Group had a very strong financial position in 1987. The use of Nokia as a brand name indicated that the top management of the group was serious about the business and also acted as a signal to the distribution channels. Exploring Corporate Strategy by Johnson, Scholes & Whittington 11
  12. 12. Nokia: The Consumer Electronics Business Jorma Ollila, described the German acquisition as a big disappointment. The chief executive officer, Simo Vuorilehto, stressed the importance of a new strategy so that the company could take control of the situation. The first step in this turnround of Nokia Consumer Electronics was to close down both the Oceanic plant in France and the plant in Portugal. A NEW CHIEF EXECUTIVE OFFICER MAKES RADICAL CHANGES Simo Vuorilehto (chief executive officer) and Kalle Isokallio (chief operations officer) did not agree on many issues and did not work well together. Competing proposals were often brought to the board. Early in 1992 the board of the Nokia Group made the radical decision to replace both men. Simo Vuorilehto retired earlier than originally planned and Kalle Isokallio was asked to look for a new job externally. Jorma Ollila became the new chief executive officer for Nokia in 1992, after two very successful years as the president of Nokia Mobile Phones. He started to reconstruct the group immediately. Only two weeks after Ollila’s arrival, Jacques Noels had to leave Nokia Consumer Electronics. The group controller of Nokia, Hannu Bergholm, was appointed the new president for Consumer Electronics and Heikki Koskinen re-entered the top management team of Consumer Electronics after having left the Noels team in 1990. Later in 1992, production of TV sets in Sweden at the Luxor plant was ceased. All production of TV sets was concentrated on Bochum in Germany and Turku in Finland (at the recently acquired Finlux plant). The aim was to decrease the costs of logistics and to make production more efficient in the remaining two plants. The basic goals for the Nokia Group in 1992 were still the same as two decades previously: that is, growth through products with growth potential and internationalisation. But there were additions. Central values were formulated in a slogan, ‘the Nokia way’. The values common to all businesses were customer satisfaction, respect for the individual, achievement and continuous learning. New key words were telecommunications, global, focus and value added. It was decided that telecommunications (including mobile phones) should be the future core business area. Jorma Ollila stated in the annual report of 1992 that the fastest growth, the most productive investments and the best results were in Nokia’s telecommunication sector. Europe remained Nokia’s largest market, but growth was concen- trated outside Europe: in North America and the Far East. The strategic focus on telecommunications was confirmed in a statement by the board of directors: Nokia’s strategy is to invest in telecommunications and closely associated business operations. It focuses on industry segments and geographic regions that have good opportunities for growth and profitability. But what was to be done with the still unprofitable Nokia Consumer Electronics? One internally dis- cussed possibility was to develop an alliance with another company in the industry. A corporate analyst at Morgan Stanley in London was of the same opinion: ‘Nokia has to co-operate with another European or a Japanese firm in order to be competitive.’ However, the Nokia Group acted more radically. A deci- sion was made to concentrate more and more on telecommunications. Digital signal processing became the key concept in most of Nokia’s operations and in the group’s future strategy. This direction was further strengthened in 1993 when part of the cables and machinery businesses was divested. Tele- communications increased its share of net sales to 52 per cent. By this time Nokia had become a global leader in the manufacture and supply of telecommunication systems and mobile phones. The divestments continued. In 1995 Nokia divested all its remaining tyres and cable businesses. Finally, in February 1996 Nokia announced its total withdrawal from the consumer electronics business and its main product, colour TV sets. In April 1996 Nokia made a provision of FIM 2,000 million in order to close the consumer electronics plants in Germany. The only TV plant left after that was the Finnish Finlux. But in June 1996 Nokia announced that the Hong Kong-based group Semi-Tech Ltd had Exploring Corporate Strategy by Johnson, Scholes & Whittington 12
  13. 13. Nokia: The Consumer Electronics Business acquired the remaining TV business. After these moves Nokia has almost 100 per cent of its operations in the telecommunications and mobile phones industry. Jorma Ollila stressed in the annual report: This is an important milestone since we shall now have the structure in place to concentrate on the growth segments of the telecommunications industry, thereby improving our shareholder return. This strategy has already helped us to grow faster than the overall market during the past few years. With operations in 120 countries, manufacturing on four continents and with improved brandrecognition worldwide, we are now a truly global player. The internally much debated journey of Nokia into consumer electronics had come to an end. Appendix 1 Turnover and personnel of the Nokia Group, 1990–5 Turnover (FIM Millions) Personnel 1990 22,130 37,336 1991 15,500 29,100 1992 18,168 26,700 1993 23,697 25,800 1994 30,177 28,000 1995 36,810 31,900 Net sales as a percentage of total sales and number of personnel in each business group, 1991–5 1991 1992 1993 1994 1995 % No. % No. % No. % No. % No. CE 33 10,854 31 9,386 29 8,268 22 6,611 29 9,937 CM 20 7,766 25 6,307 20 5,070 16 4,560 MP 12 3,545 20 3,164 26 4,223 35 7,554 44 11,821 NT 16 4,474 17 5,219 19 6,365 22 8,082 28 11,297 OO 9 1,874 7 1,606 6 1,597 5 1,786 1 729 CE = Nokia Consumer Electronics MP = Nokia Mobile Phones NT = Nokia Telecommunications CM = Cables and Machinery OO = Other Operations Net sales by market area of the Nokia Group (%) 1990 1991 1992 1993 1. Scandinavia 45 38 32 25 2. Other western European countries 39 44 44 47 3. Other countries 16 18 24 28 1994 1995 1. Finland 11 9 2. Other EU countries 50 48 3. Other European countries 9 8 4. Other countries 30 35 Exploring Corporate Strategy by Johnson, Scholes & Whittington 13
  14. 14. Nokia: The Consumer Electronics Business Appendix 2 Nokia 1992–5 according to International Accounting Standards (IAS) 1992 1993 1994 1995 Profit and loss account (in millions of FIM) Net sales 18,168 23,697 30,177 36,810 Cost of sales (17,880) (22,232) (20,808) (25,518) Operating profits 288 1,465 3,596 5,012 Share of results of associated companies (5) 28 22 85 Net interest and other financial expenses (441) (347) 384 (164) Profit before tax and minority interests (158) 1,146 4,933 4,002 Tax (167) (299) (932) (769) Minority interests (88) (80) (75) (77) Profit before extraordinary items (413) 767 2,995 2,232 Extraordinary items (310) (1,917) 944 – Net profit (723) (1,159) 3,939 2,232 Balance sheet items (in millions of FIM) Fixed assets and other non-current assets 7,630 7,930 7,943 9,047 Current assets 13,608 14,653 19,906 23,714 Inventories and work in progress 3,840 5,129 6,803 9,982 Accounts receivable and pre-paid expenses 6,650 6,227 7,835 9,518 Liquid funds 3,118 3,297 5,268 4,214 Current liabilities 10,111 11,520 11,319 15,955 Accounts payable and accrued liabilities 4,314 5,976 8,086 9,388 Restructuring provision 342 1,436 – 1,652 Advance payments 399 534 502 396 Current portion of long-term loans 1,221 139 278 187 Bank overdrafts and short-term loans 3,835 3,435 2,453 4,332 Net current assets 3,497 3,133 19,906 23,714 Shareholders’ funds 6,727 6,511 12,418 13,806 Minority shareholders’ interests 695 536 555 422 Long-term liabilities 3,705 4,080 3,557 2,578 Long-term loans 3,124 3,397 3,071 2,121 Other long-term liabilities 581 683 486 457 Total assets 21,238 22,647 27,849 32,761 Key ratios Earnings per share (FIM) neg. 13.7 10.97 14.36 Dividend per share (FIM) 2.00 3.2 2.50 3.00 Shareholders’ fund per share 113 43.65 48.55 Return on capital employed (%) 5.9 12.5 25.4 29.1 Return on shareholders’ funds (%) neg. 12.4 31.6 31.2 Exploring Corporate Strategy by Johnson, Scholes & Whittington 14
  15. 15. Nokia: The Consumer Electronics Business Appendix 3 Key managers: approximate periods at top positions Kari Kairamo Chief executive officer 1976–88 Simo Vuorilehto Chief operations officer 1986–8 Chief executive officer 1989–91 Kalle Isokallio President of Cable Machinery 1983–5 Head of Nokia Information Systems 1986–7 President of Nokia Data 1988–9 Chief operations officer 1990–1 Jorma Ollila Corporate finance 1986–9 President of Mobile Phones 1986–9 Chief executive officer 1992– Kurt Wikstedt Head of professional electronics (industrial electronics) –1986 Antti Lagerroos President of Salora 1982–3 President of Salora–Luxor 1984 Executive board member 1985–8 (in charge of consumer electronics) President of Mobile Phones 1989 Heikki Koskinen President of Salora–Luxor 1985–7 Nokia Consumer Electronics, strategic planning 1988–9 Technology manager in Nokia 1990–1 General manager, Nokia Consumer Electronics 1992 Head Office positions 1993–6 Timo Koski President of Nokia Data 1985–7 Jacques Noels President of Nokia Consumer Electronics 1988–91 Hannu Bergholm Controller of Nokia 1987–91 President of Nokia Consumer Electronics 1992–5 Exploring Corporate Strategy by Johnson, Scholes & Whittington 15