Why Nokia lost, and Samsung won

September 4, 2013

How's this for a reversal of fortune: Nokia was once the world's biggest cell phone manufacturer, having introduced the first mass-market mobile handset. On Monday, it sold its devices division to Microsoft for $7.2 billion -- a fraction of the $250 billion it was worth at the turn of the century. The natural question becomes: What went wrong?

Disruption happens, of course. Incredibly innovative companies score smash hits, and then sink to nothing when they fail to see the next big thing coming. See Kodak, Research in Motion, Friendster, Netscape, Motorola, Newsweek...the list goes on.

That didn't need to happen with Nokia. It could have brought its design sensibility and precise engineering to a wide range of products, just like another company that's closely intertwined with its home country: South Korea's Samsung. Instead, like so many first movers before it, the Finnish phenom clung to the source of its greatest success, and couldn't adapt when the competition moved beyond it. For Nokia, becoming laser-focused on making great cell phones blinded them to consumer desire for a mobile device that could do much more than talk to friends.

Here's the confusing thing about Nokia's fall: It had already executed one of nimblest pivots in corporate history. The company, after all, used to be so much more than a cell phone maker. By its own telling, Nokia started life as a paper mill in 1865. Over the next 100 years, it expanded into rubber production, cable and electronics, personal computers and televisions.

In the early 1990s, Finland went into an economic slump. Its forestry and rubber divisions were losing money, so Nokia made a strategic decision to throw itself into the fast-growing mobile phone business, other industries entirely.

Source: ETLA – The Research Institute of the Finnish Economy
Source: ETLA – The Research Institute of the Finnish Economy

It worked. Over the next decade, Nokia became Finland's single most important business, contributing a quarter of national growth between 1998 and 2007, and a huge percentage of industrial production.

Source: ETLA – The Research Institute of the Finnish Economy, 2000
Source: ETLA – The Research Institute of the Finnish Economy, 2000

Unlike some businesses that ride a cash cow until it collapses, Nokia seemed determined not to get out-innovated, spending billions of dollars a year on research and development. It was also aided by Finland's national technology agency, Tekes, and worked closely with the country's universities, in a benevolent technology ecosystem that spun off other ideas and skilled workers. Many smaller companies relied on Nokia as a buyer for their products, and a route to the global market.

Nokia's web of collaboration with Finnish research institutions. (ETLA 2002)
Nokia's web of collaboration with Finnish research institutions. (ETLA 2002)

At the peak of its profitability, around 2000, Nokia was a case study of a dynamic, market-leading corporation with both a sophisticated manufacturing process and an endless pipeline of valuable intellectual property. James Utterback, a professor of strategic management at MIT, took a class of 150 business school students there and to Sweden's Ericsson in the late 1990s. Nokia not only had dozens of phones at different price points on the same operating system--it was also working on futuristic ideas like videoconferencing and mobile location sharing that the market wouldn't see for years.

"We went to Nokia and they were clearly superb at platform strategy," Utterback remembers his students' reactions. "They were predicting that Nokia would be a big success and Ericsson would fail."

They were wrong. Ericsson ended up pushing from mobile phones into wireless networking, and survived the telecom crash of the early 2000s. Nokia, by contrast, seemed unwilling to harvest the fruits of all its research, developing a stash of patents that were never used. It even came up with a tablet in the late 1990s, the Wall Street Journal reported last year, but decided to stick with its core mobile phone business. Ironically, it may also have been too focused on low-end competition from Microsoft to see other competitors coming in the fertile mid-market for phones with more features. Only after the iPhone proved that being a pocket computer is more important than simply a voice communication device did Nokia team up with Microsoft to produce the kind of rich experience that consumers now expect.

"What's happened with the new generation of phones is that there are many, many more applications," Utterback explains. "I think they were just focused on producing a superb phone that could reliably communicate."

That's a pretty classic way for a once-ascendant company to go under. But there was another path for Nokia: Leveraging its talent and its importance to the Finnish economy to move into parallel industries, like other kinds of electronics, so that falling behind in one of them wouldn't doom it to be sold for scrap.

In that counterfactual future, the example of Samsung is instructive. An economic omnivore that's so closely identified with the national identity of South Korea that citizens sometimes call their country the "Republic of Samsung," the company operates businesses from hotels and amusement parks to road construction and oil rigs at home, while selling a diverse range of electronics abroad. Companies that large can also get siloed and complacent, but Samsung has stayed ahead of its global competition on several fronts. Its CEO tells its employees to operate in a state of perpetual crisis. "The positions we currently hold will be obsolete and untenable 10 years from now," reads its 2011 corporate profile. "Across global business, attachment to laurels is folly. Staying comfortable and motionless is not an affordable luxury."

Sure, it's true that Samsung arose from pretty different circumstances: The chaebol system, under which giant companies were given favored treatment by the state. There are plenty of criticisms of such mega-corporations, which tend to have insidious power over governments, and also discourage entrepreneurs from starting their own competitors. But it's hard to argue with the model's business success. And if you're going to anchor your economy with one big company, it might as well be one that's diversified, and therefore less vulnerable to a bad strategic call or two.

It's tempting to imagine what Nokia would have looked like had it taken a similar route. Now, Finland is reeling from lost tax revenue, and unsure where to look for the kind of economic anchor that Nokia provided. Though Rovio's Angry Birds might be a global phenomenon, it's harder to structure an economy around a video game company than the global electronics powerhouse Nokia once was, and could have remained.

Lydia DePillis is a reporter focusing on labor, business, and housing. She previously worked at The New Republic and the Washington City Paper. She's from Seattle.
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