Nokia’s agreement on Tuesday to sell its handset business to Microsoft for $7.2 billion is something of a minor business coup for Nokia, since a year from now that business might well turn out to have been worth nothing. It also demonstrates just how far and fast Nokia has fallen in recent years. Not that long ago, it was the world’s dominant and pace-setting mobile-phone maker. Today, it has just three per cent of the global smartphone market, and its market cap is a fifth of what it was in 2007—even after rising more than thirty per cent on Tuesday.What happened to Nokia is no secret: Apple and Android crushed it. But the reasons for that failure are a bit more mysterious. Historically, after all, Nokia had been a surprisingly adaptive company, moving in and out of many different businesses—paper, electricity, rubber galoshes. Recently, it successfully reinvented itself again. For years, the company had been a conglomerate, with a number of disparate businesses operating under the Nokia umbrella; in the early nineteen-nineties, anticipating the rise of cell phones, executives got rid of everything but the telecom business. Even more strikingly, Nokia was hardly a technological laggard—on the contrary, it came up with its first smartphone back in 1996, and built a prototype of a touch-screen, Internet-enabled phone at the end of the nineties. It also spent enormous amounts of money on research and development. What it was unable to do, though, was translate all that R. & D. spending into products that people actually wanted to buy.
One way to explain this is to point out that Nokia was an engineering company that needed more marketing savvy. But this isn’t quite right; in the early aughts, Nokia was acclaimed for its marketing, and was seen as the company that had best figured out how to turn mobile phones into fashion accessories. It’s more accurate to say that Nokia was, at its heart, a hardware company rather than a software company—that is, its engineers were expert at building physical devices, but not the programs that make those devices work. In the end, the company profoundly underestimated the importance of software, including the apps that run on smartphones, to the experience of using a phone. (...)
[ed. From the Comments Section: This article repeats common misperceptions: “Nokia was acclaimed for its marketing, and was seen as the company that had best figured out how to turn mobile phones into fashion accessories." In fact, Nokia had hired a good industrial designer and produced fairly good looking phones for awhile; this was not because of any deep consumer insight. It was a cool product from an interesting company that few had heard of from a country that few knew much about. Many within the company believed that their growing and soon-to-be-dominant market share was proof of marketing prowess. There was no traditional consumer research-based approach to product design. (As we have seen, you can skip that step if your company is headed by Steve Jobs.) So despite spending money on research and paying lip service to consumer needs, the product development process was never based on deep consumer insight. There was almost an attitude within the company that people had learned to use Nokia devices and the Nokia UI because they loved the company and the product, and therefore would stay with Nokia in the future.
This is a fundamental flaw that doesn't show up in a way that is plain enough for senior management to understand until you stop having the hot product from the cool company. We in the States saw this slip fairly early on when young people started telling us in research that Nokia phones were what their parents owned and not a product or brand that spoke to them. (Yes, there was an appreciation of industrial design within the company, but design was far removed, physically and metaphorically, from the company, where there was never a true design ethos—beyond the physical appearance of the phone.)
Nowhere was this gap between self-perception and reality greater than with the "Communicator." Referred to by some as "the brick," the company tried several iterations, with very little software or form factor innovation, and ultimately very modest sales (and a complete flop in the US). As with most large companies, they were operating within an echo chamber. Many top executives used Communicators, despite their un-user-friendly software and hardware, and you even saw administrative assistants using these expensive, high-end devices at Nokia's HQ in Espoo.
There was also a profound failure to understand the importance of the ecosystem that surrounds a platform, something that Apple has capitalized on masterfully. This mistake was grounded in the belief that it was hardware that mattered. The company’s approach to N-Gage, Nokia’s attempt to establish a mobile games platform, was a great demonstration of this. As a member of the global developer organization, I was sitting in the audience in Espoo when Anssi Vanjoki announced the device. We were shocked. No one had briefed the developer organization management, and as it turns out, that was by design. There was no plan for a broad games developer effort and no understanding of the importance of one. Instead, they had adopted the old console approach of working with a small number of hand-picked publishers. (It is no small irony that Finland’s most successful mobile phone export of the last few years has been the global game hit, Angry Birds.)]
