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Rise and Fall of Nokia

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Rise and Fall of Nokia

This paper explains major causes of organizational decline – through the Nokia fall. The Major causes are explained in following summary.

Having Excessive Cash and Acquisitions

During 1977-88 period Nokia was having excess cash. Then CEO went on acquisitions – they started acquiring good companies. To acquire good companies, they had to pay premium. Now Nokia could not make any way to recover the extra premium.  Companies generally expect to get return from acquisition in one of the three ways – Expansion, Synergy or improvement. Because the company they acquired are already good companies, there wer not much scope of improvement. The synergy (by consolidating sales, operation etc.) did not recover much as the premium paid to acquire those companies was large. Expansion was not also possible – therefore Nokia started losing cash in those acquisition.

Typically acquiring Bad company due to internal issue is good investment – because turning around a bad company due to internal factor is relatively easy.

Therefore, having excessive cash in early to mid 80s leading to expensive acquisition problem was the beginning of the problem for Nokia.

Imbalanced Portfolio

Following the above, Nokia was trapped into poor cash situation. When Mr. Ollila took over as CEO in 1992, he started from basics. He started divesting in companies to generate cash. Now, as per BCG matrix, there are four different quadrants –

  1. Dog – Low Market Growth and Low Market Share
  2. Cash Cow – Low Market Growth and High Market Share
  3. Question – High Market Growth and Low Market Share
  4. Start – High Market Growth and High Market Share

Now, company should exit from Dog quadrant, carefully invest in star quadrant. In Nokia’s case, Mr Ollila divested in cash cow companies and focused on the star companies. The problem with the star companies are always in dire need of money – they need continuous investment to cater for growing market. Nokia started to feel pressure of these star companies and lost their cash source from the “Cash cow” companies.

Disruption and Mistaken Duality

There is a duality concept in the business. In class it was explained with the analogy of the magnet. Every magnet has two poles – both with equal and opposing strength. If magnet is cut in two pieces – two magnets come out. If one end is beaten to weaken – both ends weakens. In magnet the two poles are inseparable, and they are actually part of same magnetic field.

The duality concept is to have two seemingly opposite forces co-exist in equal amount and in plenty of amount.

Nokia missed that duality, when they took the decision of exiting the CDMA market.

USA was a major market of CDMA – Nokia focused one other markets with GSM technology only. While the focused on GSM market, they completely ignored the US market. They were not aware of that market at all. That’s where the next innovative disruption came in for mobile phone market. Apple launched iPhone, Google came out with Android and Qualcomm came with mobile chip. While Apple took the high-end market, Google’s android with cheap hardware flooded the low end market. Nokia did not have any clue, because they were not present in US. They started investing in new technology, but it was too little too late.

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