Thursday, June 14, 2012

Cutting their way to greatness, Espoo Edition

The news from Espoo this morning was grim: Nokia is axing 10,000 (about 8%) of its workers over the next 18 months, in hopes of getting operating expenses (for its core Devices & Services division) down to €3 billion by the end of 2013 (vs. €5+ billion in 2010). The company will be closing R&D facilities in Germany and Canada and a factory in Salo, Finland.

In conjunction with a new earnings warning, Nokia’s market cap fell to €8.3 billion, shares shares fell to their lowest level in 16 years, less than 3% of its peak back in late 2000. The cumulative effect of the layoffs mean that in five Nokia employees will be gone by the end of 2013.

In conjunction with the announcement, three executive vice presidents are resigning at the end of the month “to pursue other opportunities outside of Nokia”. CEO Stephen Elop offered touching testimonials upon their departure:

"Jerri has made a positive impact on Nokia's advertising, marketing and brand efforts. Our marketing has made great strides under her leadership," said Stephen Elop. "I will particularly miss the fresh insight and new energy that Jerri injected into the Nokia brand."

"Mary's leadership has been instrumental in our efforts to connect the next billion people to the Internet through innovation in new devices and services," said Stephen Elop. "Under her direction, Nokia has brought new opportunities to consumers throughout growth markets and contributed strongly to Nokia's business. I will miss the value she has brought to Nokia."

"During his 16-year Nokia career, Niklas has successfully supported our growth and transformation through leadership roles in groups ranging from services to, most recently, sales, marketing, supply chain and IT," said Stephen Elop. "Niklas has been a valued partner to me during my tenure at Nokia and his many ongoing contributions will be missed."
If that were true, why were they all forced out? For that matter, why are these execs being forced out and not the CEO? So far, there’s no evidence that any part of Elop’s strategy is working.

Mercury News tech columnist Troy Wolverton was even more cynical about Nokia’s announcements, as he tweeted:
Troy Wolverton @troywolv
Nokia's press release about its restructuring is an amazing collection of Orwellian doublespeak, starting with its headline...

Troy Wolverton @troywolv
Here's the headline: "Nokia sharpens strategy and provides updates to its targets and outlook"

Troy Wolverton @troywolv
What that really means, in plain English: "We're firing 10,000 people and our bottom line is going to be much worse than we forecasted."

Troy Wolverton @troywolv
I love this line too: "...Nokia is making changes to its management team by tapping into the strong leadership bench at the company."

Troy Wolverton @troywolv
What that really means, of course: We're firing a bunch of executives...
Nokia was the world’s largest handset vendor from 1998 until this year, when it was passed by Samsung. Its market share has been in a freefall, and the profitability story has been even worse as it lost the profit sanctuary that the N-series phones once provided b.i. (before iPhone).

Part of the problem is that Nokia didn’t move quickly enough to respond to the iPhone. I was a consultant to Symbian (which made the N-series operating system) from Dec. 2006 to Dec. 2008, and while there was an appreciation of some of the iPhone features, I don’t think the company was really worried. For indirect evidence, it appeared that the Nokia execs were even more confident than their English software supplier — until Android came along. Today, Apple sells more smartphones than Nokia and earns most of the handset industry profits.

Right now, I don’t see how Nokia’s going to turn things around. On the one hand, as they phase out Symbian they’ve given up platform control for most of their smartphones — having cast their lot with Microsoft. On the other hand, Samsung is also dependent on others for its smartphone platform — i.e. Google — with only about 12% of its phones that carry the Bada operating system.

Theories for the differing outcomes abound. One is that Samsung bet on the right smartphone and Nokia didn’t. Certainly no one is enjoying great success with Windows mobile phones, while Android is the bulk of the smartphone market. However, I think the Nokia’s long indecisiveness was part of the problem: it shipped its first Windows in late 2011, 2 1/2 years after Samsung’s first Android phone.

Today, there‘s one differentiated platform — the iPhone — and a bunch of commodity smartphone suppliers competing on execution — via time to market, small feature enhancements, and of course price. Nokia made its money when it had customer lock-in as the only game in town, and its DNA is not well-aligned for today’s competitive price-sensitive markets.

But in hearing about the latest round of cuts reminded me of Silicon Valley companies also trying to cut their way to greatness, notably HP and Yahoo. Cuts will not make a mediocre company great — they will only cause it to lose less money. Success will come from growing the top line, and thus far Nokia under Elop (and his immediate predecessors) has been heading in the wrong direction.

Nokia resembles HP in that both were once world-renown innovative companies, and both have stumbled as the market matured and price premiums disappeared. Apple was in this place 15 years ago, but were turned around by brilliant market-driving innovation. However, the Apple Steve Jobs turned around was smaller, more nimble — and more scared — than Nokia is today. If there’s a reason that Nokia’s slide will eventually end, so far I haven’t seen it.

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