Digging Nokia Out of a Hole

Can a company regain its dominant position by changing its CEO? This is a common theme in business, with new examples nearly every day, although we usually only notice those companies that are especially prominent (or if they are in our investment portfolios). Nokia is now trying the same trick.

I have to wonder if the frequent fixation we have on the person at the top of a hierarchy is deeply-rooted in the human psyche. Whether it be president, CEO, dictator, general or heroic action figure, the fixation of our attention on the archetypal alpha male (or female) figure distracts us from the many thousands or millions of individuals in the hierarchy that contribute to the organization success or failure. This does not mean that a CEO change is unimportant, in fact it can be crucial, but whether it can have a positive impact depends on many, many factors. We sometimes have an almost comic book view of power and power structures since the majority of people, as employees, have rarely wielded real power in an organization. Those that have done so know just how difficult it can truly be.

A CEO often has substantial power, but it is never unlimited. When anyone is give the responsibility and accountability to achieve a lofty goal it is incumbent on those assigning the objective to give the person the necessary tools to get it done. When that person is the CEO, the giver of the tools is the board of directors. The toolkit includes capital and authority. The CEO combines those tools with his or her own skills, connections and other assets to do the job.

One immediate challenge is that business operations cannot be changed quickly. That alone is responsible for the company's existence -- its customers and revenue -- and provides a base, and the time, for the CEO to redirect and invigorate the business. Nokia is blessed in this respect since it has a strong base business, although one that is losing share in the high-end, high-margin, high-growing smart phone market. More importantly, its product pipeline appears to be running on inertia with little coming to market that is likely to change the situation. Elop, the new CEO, has quite the challenge on his hands.

To give an example of how an ailing, large technology company can fail even with a new, capable CEO, we need look no further than Nortel. By all accounts Mike Zafirovski is a talented and capable CEO. Yet he failed utterly at the task of renewing Nortel. There were many reasons for this but to my mind there were a couple that stand out: the product and technology decline had gone on for so long that not only were customers abandoning the company, there was nothing substantial in the product pipeline; and, the culture in senior management was out of touch and internally-focused on its own difficulties, not those of customers. There is also some question as to whether the board gave Zafirovski the authority he needed to solve these monumental problems or if they impeded his attempts to change management and inject capital into the areas where it was needed. Big holes like the ones that Nortel and Nokia have dug themselves into took a lot of digging by many hands, not only that of the CEOs.

One thing that a company's investors can fixate on, especially those that come on board when the pain is most acute, is that if the new CEO achieves any measure of success the returns will be enormous. One extraordinary example is Apple: looks what Steve Jobs accomplished, and how far they've come from the $7 share price before iPod and iTunes began to conquer the world. Any investor in a sick but formerly great company can dream of such out-sized returns. However the reason that share prices go down to such depths is that it is uncommon for the turnaround to succeed; often the shares either go to $0 (like Nortel) or the company is liquidated.

Apart from its still-dominant global position in the mobile phone market, Nokia has some definite talents when it come to phone technology and design. Unfortunately their typically excellent radio performance is not recognized by customers, who will often not notice or overlook if the product draw is strong. The recent very public airing of Apple's difficulties in this regard demonstrate that very nicely. Assuming that Nokia's design talent hasn't all left the company, there is an opportunity for the new CEO to empower their designers to take some chances, to make a few mistakes in the hope that they can come up with phones and other mobile or portable devices that are unique, attractive and can inspire.

As many have noted, however, a deeper technology problem is their dependence on Symbian as the platform OS. It is old and difficult to modernize, with next generation versions coming too late and lagging in features. There are also the business structures and partnerships that are dependent on Symbian, where if they make drastic changes they stand to risk disrupting their ongoing business by alienating the carriers, users and app developers. However if they don't change all of them will abandon Symbian, and therefore Nokia as well, if they do not make a bold move.

This is another critical area where the new CEO can have a major and positive impact. I believe that they will have little choice in their corporate renewal in leaving Symbian behind since they stand to gain more than they will lose. In my opinion it is very likely that within several months Nokia will announce their shift to Android for their future high-end phones. They may delay publicizing the fact until the first phone is closer to release. I just don't see any other way they can move quickly to become a contender in the smart phone market. Symbian can continue to be used for the other, lower-end products for some time, so that the move is not too disruptive, but it is likely that a strategy shift of this magnitude will ultimately doom Symbian.

What I now want to see is whether Nokia board is ready for this degree of change and risk, and whether Elop can successfully steer this large company and its culture onto a new trajectory. Unlike Nortel, I think Nokia has an excellent chance of pulling this off, by exploiting their many strengths, if they make the necessary commitment. If they don't do it, I fear they will soon be relegated to selling low-margin $25 phones (but lots of them!) to new users in developing countries.

Update: An opposing viewpoint regarding Nokia switching to Android, but agreeing on other points.