The Demise of Nokia

The Demise of Nokia—A Cautionary Tale of Restructuring Gone Wrong

Nokia’s implosion after the breakout success of its mobile phone business offers a cautionary tale of the many problems that often lead to—and result from—corporate reorganization. In fact, restructuring usually puts the business in an even worse position, which leads to additional, equally unsuccessful reorganizations. This article examines the underlying reasons why restructuring rarely solves the problems they were meant to correct, as well as how to end the cycle of fruitless reorganizations.

Collapse of a Market Leader

A recent article published in the South China Morning Post explored some of the reasons behind the fall of Nokia, many of which resulted from decisions made during the peak of the firm’s success. When explosive growth threatened to overwhelm Nokia’s supply chain in the mid-1990s, management commissioned a resource planning system that enabled it to scale up production faster than competitors. Nokia replaced Motorola as the market leader, and mobile phone revenues increased by 503% between 1997 and 2000. However, this inward, operational focus marked a drastic change from the innovative and entrepreneurial approach that had powered the company’s success during the early 1990s.

Moving forward, senior leaders wanted to focus on the dual objectives of growing the mobile phone business and finding new opportunities. Unfortunately, they made the common mistake of assessing new ventures by the same metrics used to assess the established phone business. High pressure for short-term performance limited developers to the pursuit of incremental improvements.

The quest for immediate results, however, did not entirely kill innovation. Nokia’s data group launched one of the world’s first smartphones in 1996, followed by a camera phone in 2001. Instead of rallying behind these successes, internal warfare broke out as the core phone business dismissed these software-focused developments. Because the mobile phone division represented the bulk of revenue, it regarded itself—and the overall firm by extension—as a hardware producer.

By 2004, the CEO initiated a major reorganization in an attempt to restore the entrepreneurial drive that had allowed Nokia to shape the industry only a decade earlier. The article characterized the result as a “matrix structure,” one where horizontal platforms provided shared resources for vertical product lines. The restructuring only made problems worse: key team members left, and collaboration across business units collapsed. Even so, Nokia attempted three additional reorganizations before finally selling its mobile phone business to Microsoft in 2013.

A New Approach to Restructuring

Common Organizational Issues

Sadly, the problems described above are not unique to Nokia. In fact, these symptoms are a natural consequence of the prevailing management operating system, one originally formalized during the 1950s—a much simpler era that was dominated by manufacturing, long before global supply chains and disruptive digital technologies. Early architects like Peter Drucker drew from management pioneers like Frederick Taylor, whose work followed the premise that optimizing the parts would produce an optimized whole. Cathy Cassidy, managing director of the Matrix Management Institute, refers to this system as “Vertical Management 1.0 (VM 1.0)” because it aligns organizations vertically around functions.

While VM 1.0 worked well enough for a number of years, its limitations have become apparent as organizations and their operating environments grow more complex. “The practice of optimizing individual functions creates silos, with each part focusing on its own contributions at the expense of the larger organization,” said Cassidy. “For example, we worked with a manufacturer in Ireland, where all the departments were committed to meeting their objectives. Unfortunately, the vertical operating system did not support cross-functional communication and collaboration. The engineering group, the production group, and the quality group all focused on their respective targets, but the organization had no end-to-end support to get customer deliverables out the door.”

Another problem with VM 1.0 is that it doesn’t allow alignment around multiple business strategies. In the example of Nokia, the operating system could not support the dual mandates of growth and innovation. Management made the common mistake of applying short-term metrics to evaluate attempts at innovation. Coupled with a blame-based accountability system, this approach discourages employees from taking risks and punishes those who make “mistakes,” such as pursuing a failed project. “We encountered a similar situation at a firm that was exploring digital assessments as an alternative to its core, paper-based testing services,” said Cassidy. “They dedicated a department to the effort and purchased a digital platform—only to declare it a failure after six months, based on an aggressive financial target that assessed the new initiative by the same metrics as their established product base.”

According to Cassidy, internal competition is yet another hallmark of VM 1.0, which uses authority-based accountability systems that optimize the parts over the whole. “Most of the organizations we work with can trace their issues to accountability because they are invariably held accountable for delivering a metric based on their functional results,” she said. Problems arise when those individual functions compete for internal resources, which creates roadblocks and inefficiency. “We worked with a medical device firm where the accountability system required leaders to meet specific goals in their geographic territories. As each region attempted to optimize its operations, it suboptimized the organization as a whole. Centralized functions did not have the capacity to meet the regions’ demands, and no one was willing to back down because the accountability system depended upon achieving individual goals.”

Like Nokia, most organizations attempt to solve the above problems through reorganization. This solution rarely works because the new structure follows the same dysfunctional rules as the previous one—namely, the VM 1.0 management system. Uncertainty and low morale drain talent and experience from the organization. New alliances are formed, and new turf wars emerge.

“Another firm we worked with spent millions of dollars on two separate reorganizations to break down silos that had formed in geographic markets that operated as independent entities,” said Cassidy. The company combined product development into a single global enterprise, with support services like sales and marketing centralized within each region. But the new organization followed the same rules, which prioritized the parts over the whole. Sales teams were accountable for meeting an overall sales quota, while product development was expected to meet financial targets across its product portfolio—with no influence over the sales function. “A subsequent restructure combined the sales and product development teams, but the damage was done. Over a three-year period, sales dropped, employees were miserable. They didn’t know how to work together, and a lot of people quit.”

Stop the Madness: Enter the Horizontal Dimension

The article characterized the Nokia restructuring as a shift to a “matrix organization,” but the company was already a matrix: it operated in two dimensions, even though the current management system only addressed the vertical dimension, represented by a classic organizational chart. While the vertical dimension identifies functions and reporting relationships, the horizontal dimension maps how inputs flow across those functions to create products and services for customers.

By contrast, Nokia created “horizontal” functions in name only; these vertical functions provided shared resources for its products. The company failed to undertake the crucial step of mapping the production process across the organization. In short, Cassidy said that Nokia’s mistake was implementing what she refers to as Matrix Management 1.0 (MM 1.0). Introduced in the 1970s, MM 1.0 recognized the multidimensional nature of complex organizations but attempted to address the challenge vertically, by assigning dotted-line authority—dual reporting—across functions.

To break the cycle of expensive, and pointless, restructuring, organizations need to upgrade to a new operating system with new rules, which we call Matrix Management 2.0 (MM 2.0).

Fundamental Shift: Horizontal, Not Vertical

First and foremost, organizations need to recognize the horizontal dimension: the cross-functional workflows that transform inputs—whether raw materials or information—into products and services that serve their customers.

“MM 2.0 prioritizes the horizontal dimension, aligning the organization with the customer. The vertical dimension is still present, but it takes a secondary role: supporting horizontal processes,” said Cassidy. By focusing on handoffs in the horizontal dimension, organizations can optimize the flow of business processes, which serve customers, and initiatives, which execute organizational strategy. “Many companies think that alignment comes from the organization chart, but it comes from the horizontal connections, not the vertical ones. Nokia is just one example of a company that ignored the second dimension.

“In MM 2.0, horizontal structure is only one piece of the solution. The more important piece involves upgrading to an operating system that runs the business two-dimensionally. Making this key shift would have allowed Nokia to integrate its team and focus on the dual goals of growth and innovation.”

Proactive, Negotiated Commitment

A critical aspect of MM 2.0 comes from its approach to accountability, based on co-creation and commitment. Unlike typical accountability systems, which focus on assigning blame after the fact, MM 2.0 uses a proactive system, where all key stakeholders participate in an up-front planning process. “VM 1.0 came from manufacturing, where unskilled workers needed a boss who knew everything,” said Cassidy. “This system doesn’t work with modern professionals, whose primary role is to contribute expertise in creating a deliverable.” MM 2.0 offers a way for these team members to apply their skills and knowledge to planning and implementation.

Cross-functional teams map out the horizontal workflow and co-create a plan of execution. Collaborative planning gives each participant a personal stake in the shared outcome, and it allows teams to set—and commit to—realistic goals that they negotiate, based on available capacity. By including risk management and contingency planning in the co-creation process, MM 2.0 fosters a culture of success. In concert with a multidimensional approach to management, this positive shift in accountability could have supported innovation at Nokia, encouraging new endeavors and applying appropriate metrics for assessment.

Cross-Functional Collaboration

Because these horizontal processes and projects involve multiple departments and functions, they need to be steered and managed by cross-functional teams comprised of key stakeholders. In addition, to prevent infighting, organizations need to reconfigure accountability systems to reward these teams for achieving their common goal. Accountability should put the needs of the organization first, followed by those of the team. Individual priorities should align to the team and the organization, not their specific function. This tiered approach to accountability, combined with proactive planning and negotiated commitment, removes the internal competition of VM 1.0 by giving all participants a stake in the outcome and aligning resources to the organization’s priorities.

“The internal warfare at Nokia is an example of misalignment and lack of prioritization,” said Cassidy. “Because the core phone business wasn’t held accountable for innovation, they saw it as separate from their activities. There was no way to really integrate the business, and that’s truly an example of an accountability issue.”

Leadership Without Authority

One of the most important principles of MM 2.0 is the shift to leading without authority. The cross-functional nature of horizontal processes means that no one functional leader is in charge. Instead, the collaborative nature of MM 2.0 means that leaders—whether of project teams or steering councils—move away from the role of primary decision-maker to become coaches and facilitators. The command-and-control approach is replaced by participation and collaboration, which leads to commitment. The teams co-create and commit to implementing the projects and strategies prioritized by organizational leaders. In the case of Nokia, their horizontal resources were centralized groups, most likely stretched thin and working in reactionary mode because all those product lines were the number-one priority to their respective leaders.

“Whatever vertical structure they settled on, the company needed to bring together the stakeholders of all product lines to drive the business forward,” said Cassidy. “If they were like most organizations, Nokia probably had a major gap in operational steering between the high-level executives making strategic directions and the people executing the projects, with no support in the middle to align the two.”

Rethink the System, not the Structure

As demonstrated by Nokia, restructuring won’t cure an organization’s ills when approached from the same mindset that created the current problems. Today’s complex, rapidly changing world requires a new operating system that provides organizations with the structures and processes to optimize their current core offerings, as well as the flexibility to develop new processes while responding to market changes. Structure is only one piece of the puzzle, and it depends on the unique strategy and complexity of each organization. The right operating system will allow entities to develop the right structure and to maintain the speed and agility required to survive and thrive in the modern era.

Mistina Picciano

About Mistina Picciano

As Managing Editor of OD Innovator, Mistina Picciano combines her passions for communication and peak performance. She researches and writes about leading practices to help individuals and organizations realize their greatest potential.

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