Company Perspectives:Nokia is a leading international communications company, focused on the key growth areas ofwireline and wireless telecommunications. Nokia is a pioneer in digital technology and wirelessdata communications, continuously bringing innovations to the highly competitive and growingtelecommunications markets. Nokia is also actively involved in international R & D cooperation,including the development of the standards for third generation mobile telephony. Key Dates:Key Dates:1865: Nokia Company is founded as a maker of pulp and paper.1898: Finnish Rubber Works is founded.1912: Finnish Cable Works is formed.1915: Nokia shares are first listed on the Helsinki exchange.1967: Nokia merges with Finnish Rubber Works and Finnish Cable Works to form Nokia Corporation.1979: Mobira Oy is formed as a mobile phone company.1981: The first international cellular system, the Nordic Mobile Telephone network, comes on line, having been developed with the help of Nokia.1982: Nokia acquires Mobira, which later becomes the Nokia Mobile Phones division.1986: Company markets internationally the first Nokia mobile telephone.1993: The first Nokia digital cellular phone hits the market.1998: Nokia surpasses Motorola as the worlds number one maker of mobile phones.Company History:Nokia Corporation is the worlds largest manufacturer of mobile phones, with a worldwidemarket share of about 27 percent, far surpassing the number two player, Ericsson, which hasabout 17 percent. About two-thirds of the companys net sales are generated by the Nokia MobilePhones business group. Nokias other main business group is Nokia Networks, which isresponsible for about 30 percent of net sales. Nokia Networks is a leading global supplier ofinfrastructure for mobile, fixed, broadband, and Internet Protocol (IP) networks. With a salesnetwork that spans 130 nations, Nokia Corporation generated more than half of its sales inEurope, a quarter in the Americas, and about 22 percent in the Asia-Pacific region. Over the
course of its more than 135 years in business, the company has evolved from a concentration inpulp, paper, and other basic industries to a focus on telecommunications.19th-Century OriginsOriginally a manufacturer of pulp and paper, Nokia was founded as Nokia Company in 1865 in asmall town of the same name in central Finland. Nokia was a pioneer in the industry andintroduced many new production methods to a country with only one major natural resource, itsvast forests. As the industry became increasingly energy-intensive, the company evenconstructed its own power plants. But for many years, Nokia remained an important yet staticfirm in a relatively forgotten corner of northern Europe. Nokia shares were first listed on theHelsinki exchange in 1915.The first major changes in Nokia occurred several years after World War II. Despite itsproximity to the Soviet Union, Finland has always remained economically connected withScandinavian and other Western countries, and as Finnish trade expanded Nokia became aleading exporter.During the early 1960s Nokia began to diversify in an attempt to transform the company into aregional conglomerate with interests beyond Finnish borders. Unable to initiate strong internalgrowth, Nokia turned its attention to acquisitions. The government, however, hoping torationalize two underperforming basic industries, favored Nokias expansion within the countryand encouraged its eventual merger with Finnish Rubber Works, which was founded in 1898,and Finnish Cable Works, which was formed in 1912, to form Nokia Corporation. When theamalgamation was completed in 1966, Nokia was involved in several new industries, includingintegrated cable operations, electronics, tires, and rubber footwear, and had made its first publicshare offering.In 1967 Nokia set up a division to develop design and manufacturing capabilities in dataprocessing, industrial automation, and communications systems. The division was later expandedand made into several divisions, which then concentrated on developing information systems,including personal computers and workstations, digital communications systems, and mobilephones. Nokia also gained a strong position in modems and automatic banking systems inScandinavia.Oil Crisis, Corporate Changes: 1970sNokia continued to operate in a stable but parochial manner until 1973, when it was affected in aunique way by the oil crisis. Years of political accommodation between Finland and the SovietUnion ensured Finnish neutrality in exchange for lucrative trade agreements with the Soviets--mainly Finnish lumber products and machinery in exchange for Soviet oil. By agreement, thistrade was kept strictly in balance. But when world oil prices began to rise, the market price forSoviet oil rose with it. Balanced trade began to mean greatly reduced purchasing power forFinnish companies such as Nokia.
Although the effects were not catastrophic, the oil crisis did force Nokia to reassess its relianceon Soviet trade (about 12 percent of sales) as well as its international growth strategies. Severalcontingency plans were drawn up, but the greatest changes came after the company appointed anew CEO, Kari Kairamo, in 1975.Kairamo noted the obvious: Nokia was too big for Finland. The company had to expand abroad.He studied the expansion of other Scandinavian companies (particularly Swedens Electrolux)and, following their example, formulated a strategy of first consolidating the companys businessin Finland, Sweden, Norway, and Denmark, and then moving gradually into the rest of Europe.After the company had improved its product line, established a reputation for quality, andadjusted its production capacity, it would enter the world market.Meanwhile, Nokias traditional, heavy industries were looking increasingly burdensome. It wasfeared that trying to become a leader in electronics while maintaining these basic industrieswould create an unmanageably unfocused company. Kairamo thought briefly about selling offthe companys weaker divisions, but decided to retain and modernize them.He reasoned that, although the modernization of these low-growth industries would be veryexpensive, it would guarantee Nokias position in several stable markets, including paper,chemical, and machinery productions, and electrical generation. For the scheme to be practical,each divisions modernization would have to be gradual and individually financed. This wouldprevent the bleeding of funds away from the all-important effort in electronics while preventingthe heavy industries from becoming any less profitable.With each division financing its own modernization, there was little or no drain on capital fromother divisions, and Nokia could still sell any group that did not succeed under the new plan. Inthe end, the plan prompted the machinery division to begin development in robotics andautomation, the cables division to begin work on fiber optics, and the forestry division to moveinto high-grade tissues.Rise of Electronics: 1980sNokias most important focus was development of the electronics sector. Over the course of the1980s, the firm acquired nearly 20 companies, focusing especially on three segments of theelectronics industry: consumer, workstations, and mobile communications. Electronics grewfrom ten percent of annual sales to 60 percent of revenues from 1980 to 1988. In late 1984 Nokiaacquired Salora, the largest color television manufacturer in Scandinavia, and Luxor, theSwedish state-owned electronics and computer firm. Nokia combined Salora and Luxor into asingle division and concentrated on stylish consumer electronic products, since style was acrucial factor in Scandinavian markets. The Salora-Luxor division was also very successful insatellite and digital television technology. Nokia purchased the consumer electronics operationsof Standard Elektrik Lorenz A.G. from Alcatel in 1987, further bolstering the companys positionin the television market to the third largest manufacturer in Europe. In early 1988 Nokia acquiredthe data systems division of the Swedish Ericsson Group, making Nokia the largest Scandinavianinformation technology business.
Although a market leader in Scandinavia, Nokia still lacked a degree of competitiveness in theEuropean market, which was dominated by much larger Japanese and German companies.Kairamo decided, therefore, to follow the example of many Japanese companies during the1960s (and Korean manufacturers a decade later) and negotiate to become an original equipmentmanufacturer, or OEM, to manufacture products for competitors as a subcontractor.Nokia manufactured items for Hitachi in France, Ericsson in Sweden, Northern Telecom inCanada, and Granada and IBM in Britain. In doing so it was able to increase its productioncapacity stability. There were, however, several risks involved, those inherent in any OEMarrangement. Nokias sales margins were naturally reduced, but of greater concern, productioncapacity was built up without a commensurate expansion in the sales network. With little brandidentification, Nokia feared it might have a difficult time selling under its own name and becometrapped as an OEM.In 1986 Nokia reorganized its management structure to simplify reporting efforts and improvecontrol by central management. The companys 11 divisions were grouped into four industrysegments: electronics; cables and machinery; paper, power, and chemicals; and rubber andflooring. In addition, Nokia won a concession from the Finnish government to allow greaterforeign participation in ownership. This substantially reduced Nokias dependence on thecomparatively expensive Finnish lending market. Although there was growth throughout thecompany, Nokias greatest success was in telecommunications.Having dabbled in telecommunications in the 1960s, Nokia cut its teeth in the industry by sellingswitching systems under license from a French company, Alcatel. The Finnish firm got in on thecellular industrys ground floor in the late 1970s, when it helped design the worlds firstinternational cellular system. Named the Nordic Mobile Telephone (NMT) network, the systemlinked Sweden, Denmark, Norway, and Finland. A year after the network came on line in 1981,Nokia gained 100 percent control of Mobira, the Finnish mobile phone company that would laterbecome its key business interest as the Nokia Mobile Phones division. Mobiras regional saleswere vastly improved, but Nokia was still limited to OEM production on the internationalmarket; Nokia and Tandy Corporation, of the United States, built a factory in Masan, SouthKorea, to manufacture mobile telephones. These were sold under the Tandy name in thatcompanys 6,000 Radio Shack stores throughout the United States.In 1986, eager to test its ability to compete openly, Nokia chose the mobile telephone to be thefirst product marketed internationally under the Nokia name; it became Nokias make or breakproduct. Unfortunately, Asian competitors began to drive prices down just as Nokia entered themarket. Other Nokia products gaining recognition were Salora televisions and Luxor satellitedishes, which suffered briefly when subscription programming introduced broadcast scrambling.The companys expansion, achieved almost exclusively by acquisition, had been expensive. FewFinnish investors other than institutions had the patience to see Nokia through its long-termplans. Indeed, more than half of the new shares issued by Nokia in 1987 went to foreigninvestors. Nokia moved boldly into Western markets; it gained a listing on the London exchangein 1987 and was subsequently listed on the New York exchange.
Crises of Leadership, Profitability in the Late 1980s and Early 1990sNokias rapid growth was not without a price. In 1988, as revenues soared, the companys profits,under pressure from severe price competition in the consumer electronics markets, dropped.Chairman Kari Kairamo committed suicide in December of that year; not surprisingly, friendssaid it was brought on by stress. Simo S. Vuorileto took over the companys reins and beganstreamlining operations in the spring of 1988. Nokia was divided into six business groups:consumer electronics, data, mobile phones, telecommunications, cables and machinery, and basicindustries. Vuorileto continued Kairamos focus on high-tech divisions, divesting Nokiasflooring, paper, rubber, and ventilation systems businesses and entering into joint ventures withcompanies such as Tandy Corporation and Matra of France (two separate agreements to producemobile phones for the U.S. and French markets).In spite of these efforts, Nokias pretax profits continued to decline in 1989 and 1990,culminating in a loss of US$102 million in 1991. Industry observers blamed cutthroat Europeancompetition, the breakdown of the Finnish banking system, and the collapse of the Soviet Union.But, notwithstanding these difficulties, Nokia remained committed to its high-tech orientation.Late in 1991, the company strengthened that dedication by promoting Jorma Ollila frompresident of Nokia-Mobira Inc. (renamed Nokia Mobile Phones Ltd. the following year) to grouppresident.Leading the Telecommunications Revolution: Mid-1990s and BeyondForbess Fleming Meeks credited Ollila with transforming Nokia from a moneylosinghodgepodge of companies into one of telecommunications most profitable companies. Unableto find a buyer for Nokias consumer electronics business, which had lost nearly US$1 billionfrom 1988 to 1993, Ollila cut that segments workforce by 45 percent, shuttered plants, andcentralized operations. Having divested Nokia Data in 1991, Nokia focused further on itstelecommunications core by selling off its power unit in 1994 and its television and tire and cableunits the following year.The new leader achieved success in the cellular phone segment by bringing innovative productsto market quickly with a particular focus on ever-smaller and easier-to-use phones featuringsleek Finnish design. Nokia gained a leg up in cellphone research and development with the1991 acquisition of the United Kingdoms Technophone Ltd. for US$57 million. The companybegan selling digital cellular phones in 1993.Ollilas tenure brought Nokia success and with it global recognition. The companys sales morethan doubled, from Fmk 15.5 billion in 1991 to Fmk 36.8 billion in 1995, and its bottom linerebounded from a net loss of Fmk 723 million in 1992 to a Fmk 2.2 billion profit in 1995.Securities investors did not miss the turnaround: Nokias market capitalization multiplied tentimes from 1991 to 1994.In late 1995 and early 1996, Nokia suffered a temporary setback stemming from a shortage ofchips for its digital cellular phones and a resultant disruption of its logistics chain. Thecompanys production costs rose and profits fell. Nokia was also slightly ahead of the market,
particularly in North America, in regard to the shift from analog to digital phones. As a result, itwas saddled with a great number of digital phones it could not sell and an insufficient number ofanalog devices. Nevertheless, Nokia had positioned itself well for the long haul, and within just ayear or two it was arch-rival Motorola, Inc. that was burdened with an abundance of phones itcould not sell&mdashålog ones&mdash Motorola was slow to convert to digital. As a result, bylate 1998, Nokia had surpassed Motorola and claimed the top position in cellular phonesworldwide.Aiding this surge was the November 1997 introduction of the 6100 series of digital phones. Thisline proved immensely popular because of the phones small size (similar to a slim pack ofcigarettes), light weight (4.5 ounces), and superior battery life. First introduced in the burgeoningmobile phone market in China, the 6100 soon became a worldwide phenomenon. Including the6100 and other models, Nokia sold nearly 41 million cellular phones in 1998. Net sales increasedmore than 50 percent over the previous year, jumping from Fmk 52.61 billion (US$9.83 billion)to Fmk 79.23 billion (US$15.69 billion). Operating profits increased by 75 percent, while thecompanys skyrocketing stock price shot up more than 220 percent, pushing Nokias marketcapitalization from Fmk 110.01 billion (US$20.57 billion) to Fmk 355.53 billion (US$70.39billion).Not content with conquering the mobile phone market, Nokia began aggressively pursuing themobile Internet sector in the late 1990s. Already on the market was the Nokia 9000Communicator, a personal all-in-one communication device that included phone, data, Internet,e-mail, and fax retrieval services. The Nokia 8110 mobile phone included the capability to accessthe Internet. In addition, Nokia was the first company to introduce a cellular phone that could beconnected to a laptop computer to transmit data over a mobile network. To help develop furtherproducts, Nokia began acquiring Internet technology companies, starting with the December1997, US$120 million purchase of Ipsilon Networks Inc., a Silicon Valley firm specializing inInternet routing. One year later, Nokia spent Fmk 429 million (US$85 million) for ViennaSystems Corporation, a Canadian firm focusing on Internet Protocol telephony. Acquisitionscontinued in 1999, when a further seven deals were completed, four of which were Internet-related. Meanwhile, net sales increased a further 48 percent in 1999, while operating profits grewby 57 percent; riding the late 1990s high tech stock boom, the market capitalization of Nokiatook another huge leap, ending the year at EUR 209.37 billion (US$211.05 billion). Nokiasshare of the global cellular phone market increased from 22.5 percent in 1998 to 26.9 percent in1999, as the company sold 76.3 million phones in 1999.Nokias ascendance to the top of the wireless world by the end of the 1990s could be traced to thecompany being able to consistently, over and over again, come out with high-margin productssuperior to those of its competitors and in tune with market demands. The continuation of thistrend into the 21st century was by no means certain as the increasing convergence of wirelessand Internet technologies and the development of the third generation of wireless technology(which followed the analog and digital generations and which was slated to feature sophisticatedmultimedia capability) were predicted to open Nokia up to new and formidable competitors.Perhaps the greatest threat was that chipmakers such as Intel would turn mobile phones intocommodities just as they had previously done with personal computers; the days of the $500Nokia phone were potentially numbered. Nevertheless, Nokias 25 percent profit margins were
enabling it to spend a massive US$2 billion a year on research and development and continue tochurn out innovative new products, concentrating on the various standards being developed forthe third generation wireless networks.Principal Subsidiaries: Nokia Matkapuhelimet Oy; Nokia Mobile Phones Inc. (U.S.A.); NokiaNetworks Oy; Nokia GmbH (Germany); Nokia UK Limited; Nokia TMC Limited (SouthKorea); Beijing Nokia Mobile Telecommunications Ltd. (China); Nokia Finance InternationalB.V. (Netherlands).Principal Operating Units: Nokia Networks; Nokia Mobile Phones; Nokia VentureOrganization; Nokia Research Center.Principal Competitors: Alcatel; Telefonaktiebolaget LM Ericsson; Harris Corporation; KyoceraCorporation; Lucent Technologies Inc.; Matsushita Communication Industrial Co., Ltd.;Mitsubishi Electric Corporation; Motorola, Inc.; NEC Corporation; Nortel NetworksCorporation; Oki Electric Industry Company, Limited; Koninklijke Philips Electronics N.V.;Pioneer Corporation; Qualcomm Incorporated; Robert Bosch GmbH; Samsung Group; SanyoElectric Co., Ltd.; Siemens AG; Sony Corporation; Tellabs, Inc.; Toshiba Corporation.