How Nokia Bounced Back (With the Help of the Board)

Business a.m. - - EXECUTIVE KNOWLEDGE SERIES - Quy Huy

NOKIA’S MO BILE-phone down­fall – from a 40 per­cent mar­ket share to near bank­ruptcy in just a few years – has be­come a fa­mil­iar cau­tion­ary para­ble on the per­ils of in­dus­try dis­rup­tion. Less well-known is the equally in­struc­tive tale of how Nokia clawed its way back from the edge of de­struc­tion. In­deed, since touch­ing bot­tom in 2012, its mar­ket cap­i­tal­i­sa­tion, while not at the level of its pre-smart­phone heyday, has in­creased more than five-fold.

Nokia’s re­cov­ery was due to a whole­sale strate­gic shift to­wards telecom­mu­ni­ca­tions net­works, cul­mi­nat­ing in the US$16.6 bil­lion ac­qui­si­tion of Al­ca­tel-Lu­cent, a deal com­pleted in 2016. Rarely has any large com­pany rein­vented it­self so quickly and rad­i­cally. But be­fore the strate­gic re­di­rect­ion could be ac­com­plished, the com­pany needed to re­pair deep-seated cul­tural prob­lems. Nokia’s re­vamped board of di­rec­tors (a new chair­man was ap­pointed in 2012) proved in­te­gral to this ef­fort. The emo­tion-reg­u­lat­ing pro­cesses used by Nokia’s board to counter in­ter­nal dys­func­tion are the sub­ject of our re­cent ar­ti­cle, which won the 2018 Best Paper Award of the Academy of Man­age­ment’s Strate­giz­ing Ac­tiv­i­ties and Prac­tices In­ter­est Group.

A cul­ture of fear

From 2012-2017, we con­ducted in-depth in­ter­views with 120 Nokia per­son­nel, rang­ing in rank from up­per­mid­dle man­agers to board mem­bers and C-suite lead- ers.

In­ter­vie­wees who ex­pe­ri­enced Nokia’s de­cline first­hand de­scribed to us how nega­tive emo­tional dy­nam­ics at the very top harmed com­mu­ni­ca­tion and strate­gic de­ci­sion mak­ing. An au­thor­i­tar­ian cul­ture of fear per­vaded mul­ti­ple lev­els of man­age­ment, pro­duc­ing a shoot-the-mes­sen­ger men­tal­ity and ram­pant de­fen­sive­ness. Fear­ing for their jobs, man­agers stayed quiet when top lead­ers latched onto los­ing strate­gic op­tions – such as stick­ing with the Sym­bian op­er­at­ing sys­tem de­spite se­ri­ous tech­ni­cal is­sues. The com­pany re­mained paral­ysed as plum­met­ing per­for­mance led to the CEO’s exit in 2010.

With the new CEO in­stalled, Nokia had to choose an ex­ter­nal op­er­at­ing sys­tem to re­place Sym­bian. Win­dows and An­droid were the front-run­ners. Two emo­tional ob­sta­cles con­trib­uted to the ill-fated de­ci­sion in favour of Win­dows (con­trary to the ad­vice of McKin­sey con­sul­tants). First was the fear fac­tor: Since the CEO had pre­vi­ously worked at Mi­crosoft, some man­agers as­sumed the only mind that mat­tered had al­ready been made up, and dis­senters would be tar­geted for ter­mi­na­tion. Se­cond, top man­agers were able to avoid cop­ing with the enor­mity of the de­ci­sion by fram­ing it in­ter­nally as a tem­po­rary mea­sure to stop the bleed­ing. Of course, the hem­or­rhage only wors­ened after the al­liance with Mi­crosoft was an­nounced; mar­ket cap­i­tal­i­sa­tion de­clined by 50 per­cent be­tween Jan­uary 2011 and Jan­uary 2012.

Good strat­egy starts with emo­tional safety

In 2012, Nokia re­placed its chair­man along with three board di­rec­tors. Right from the start, the chair­man fo­cused on rad­i­cally im­prov­ing the emo­tional re­la­tion­ship be­tween the board and man­age­ment. He recog­nised that Nokia’s strate­gic sta­sis was linked to a lack of open­ness. “If the board is a place where the man­age­ment comes with knees trem­bling, a sin­gle so­lu­tion in their mind, that they need to sell to the board, there is no way for the board to con­trib­ute,” he told us.

The board coaxed hy­per­cau­tious and self-pro­tec­tive man­agers out of their shells with prin­ci­ples such as “No news is bad news, bad news is good news, and good news is no news.” Con­se­quently, con­ver­sa­tions be­tween di­rec­tors and man­agers took on new­found can­dor and depth.

Dis­en­gag­ing from past strat­egy

The new board also per­ceived that man­agers’ emo­tional at­tach­ment to the ex­ist­ing Win­dows strat­egy – about which warn­ing signs were al­ready flash­ing – could pre­vent them from con­sid­er­ing other op­tions. Rather than thor­oughly re-eval­u­at­ing the sit­u­a­tion and cre­at­ing new op­tions, they were at risk of be­hav­ing de­fen­sively and avoid­ing the whole is­sue.

Di­rec­tors, then, sought to dis­pel the dread by ex­plic­itly rais­ing the prospect of fail­ure in open con­ver­sa­tions. They also pre-empted man­agers’ de­fen­sive­ness by es­tab­lish­ing agreed-upon courses of ac­tion should the Win­dows Phone con­tinue to un­der­per­form. By peg­ging fu­ture ac­tions to ob­jec­tive per­for­mance data rather than mak­ing them sub­ject to later dis­cus­sion, di­rec­tors re­duced the bi­as­ing role of emo­tions in plan­ning the next strate­gic steps.

This ap­proach also forced man­agers to be­gin mak­ing con­tin­gency plans. Di­rec­tors in­sisted on see­ing a range of prospec­tive sce­nar­ios ac­cord­ing to a sys­tem­atic process. The board’s guid­ance helped man­agers bal­ance out their ap­praisal of the var­i­ous op­tions and achieve a more nu­anced emo­tional stand­point. As a re­sult, they were able not only to conceive of rad­i­cally new strate­gic pos­si­bil­i­ties but also to an­tic­i­pate out­comes – both good and bad.

The idea of ex­it­ing the mo­bile phone busi­ness pre­sented it­self when lead­ers re­alised that a con­tin­u­a­tion of Nokia’s cur­rent strat­egy would re­quire large ad­di­tional in­vest­ments from its part­ner Mi­crosoft. But what value could Mi­crosoft pos­si­bly de­rive from res­cu­ing Nokia? It be­came clearer and clearer that the Win­dows strat­egy was un­ten­able. A more likely sce­nario was that Mi­crosoft would of­fer to buy Nokia’s mo­bile phone di­vi­sion – which would lead Nokia into truly un­charted ter­ri­tory. Here again the board’s ef­forts to root out emo­tional in­vest­ment in the sta­tus quo en­abled man­agers to en­vi­sion a post-phone fu­ture for the firm. The deal with Mi­crosoft was pur­sued and, in Septem­ber 2013, com­pleted for US$7.2 bil­lion.

Con­cur­rently, Nokia jumped into net­works with both feet by buy­ing back the joint ven­ture Nokia Siemens Net­works (NSN). The pur­chase of NSN was made pos­si­ble by a hefty fi­nanc­ing pack­age that was ne­go­ti­ated as part of the larger Mi­crosoft-Nokia deal. “So in a funny way, we got Mi­crosoft to fund the new Nokia and help [re­build] it”, the chair­man told us.

Even though the di­vest­ment of the phone busi­ness shat­tered Nokia’s old iden­tity, top man­agers’ emo­tions trans­formed dur­ing the strat­egy for­mu­la­tion process and even­tu­ally sup­ported the new strat­egy. Out of the tu­mul­tuous anx­i­ety of com­pet­ing per­spec­tives arose a shared en­thu­si­asm for the course the com­pany had cho­sen. A top man­ager cred­its his own em­brace of the strate­gic di­rec­tion to the “crazy amount of ground­work”, i.e. the ex­ten­sive sce­nario analy­ses and num­ber-crunch­ing, ne­ces­si­tated by deep and fre­quent di­a­logues with the board.

We all are Nokia

Nokia’s come­back story is unique: Where else have we seen an iconic com­pany fail ut­terly at what it’s fa­mous for, then promptly pivot to find suc­cess in a vastly dif­fer­ent area? This was not a turn­around akin to IBM’s, where the com­pany learnt to lever­age ex­ist­ing core strengths (i.e. main­frames) in a new way.

But in our fast-chang­ing world, we may be see­ing more and more cases like Nokia’s. As dis­rup­tion ac­cel­er­ates, com­pa­nies will in­creas­ingly have to reckon with the un­rav­el­ling of en­tire busi­ness mod­els, if not en­tire in­dus­tries. Rather than de­fen­sively cling­ing to the mast of their sink­ing ship, man­agers will need to take to the lifeboats and never look back.

But it isn’t easy to be stoic when you’ve worked tire­lessly for years to make the ob­so­lete strat­egy work. Inevitably, man­agers will feel emo­tion­ally in­vested in the sta­tus quo, with their egos bound up in the com­pany’s past suc­cesses. Con­fronting the re­al­ity of rad­i­cal strate­gic change raises fears and vul­ner­a­bil­i­ties that few of us are com­fort­able with, least of all the high-fly­ing over­achiev­ers in the C-suite.

Day-to-day busi­ness in most or­gan­i­sa­tions of­fers scant op­por­tu­nity for se­nior man­agers to work out their nega­tive emo­tions about rad­i­cal change. Ac­cord­ing to the main­stream pro­fes­sional mind­set, emo­tions have no place at work. So man­agers learn to cloak their emo­tional bi­ases in sup­pos­edly “ra­tio­nal” ob­jec­tions. They of­ten con­vince them­selves that these ra­tio­nal­i­sa­tions con­sti­tute sound ar­gu­ments and will staunchly de­fend them. Un­der such con­di­tions, it is al­most im­pos­si­ble to de­vise a thought­ful and cre­ative strat­egy for deal­ing with rad­i­cal change.

The board, there­fore, is uniquely po­si­tioned to per­form in­ter­ven­tions de­signed to reg­u­late top man­agers’ emo­tions, thus en­sur­ing the qual­ity and in­tegrity of the strat­egy-for­mu­la­tion process. Why the board? Di­rec­tors ideally re­side above the fray, only pro­vi­sion­ally com­mit­ting to a par­tic­u­lar strate­gic di­rec­tion. Rel­a­tive to out­siders such as man­age­ment con­sul­tants, di­rec­tors are also more con­text-savvy and share with top man­agers the com­mon goal of see­ing the firm suc­ceed in the long term. While the man­date of the board does not tra­di­tion­ally en­com­pass emo­tional reg­u­la­tion, such a role is well within the board’s cen­tral duty to over­see or­gan­i­sa­tional strat­egy.

Quy Nguyen Huy is the Solvay Chaired Pro­fes­sor of Tech­no­log­i­cal In­no­va­tion and a Pro­fes­sor of Strate­gic Man­age­ment at INSEAD. He is also a di­rec­tor of the Strat­egy Ex­e­cu­tion Pro­gramme, part of INSEAD’s suite of Ex­ec­u­tive Ed­u­ca­tion pro­grammes.

Timo O. Vuori is an As­sis­tant Pro­fes­sor of Strate­gic Man­age­ment at Aalto Univer­sity, Fin­land.

“This ar­ti­cle is re­pub­lished courtesy of INSEAD Knowl­edge(http://knowl­edge.insead.edu). Copy­right INSEAD 2018

With the new CEO in­stalled, Nokia had to choose an ex­ter­nal op­er­at­ing sys­tem to re­place Sym­bian. Win­dows and An­droid were the front-run­ners

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