Can Nokia Read the Signals?

With CEO Jorma Ollila stepping down, his successor faces a tough task: Consolidating recent gains in an ever-evolving market

By Andy Reinhardt

Only the timing of the announcement was a surprise. On Aug. 1, Jorma Ollila, the legendary leader of Nokia (NOK ), said he will step down as chief executive on June 1, 2006, and become the company's non-executive chairman for a "limited number of years." His widely anticipated successor will be 25-year Nokia veteran Olli-Pekka Kallasvuo, who served 10 years as chief financial officer and most recently ran the company's giant mobile-phone division.

Ollila admits the decision to leave at the end of his current five-year contract wasn't easy. But the crisp, 54-year-old executive who built a little-known Finnish manufacturer of cables, rubber boots, and paper products into the world's leading mobile-phone maker insists he is ready for a change.

When he became CEO in 1992, Ollila says, he told his wife he would likely serve 10 years to 12 years. By the time he steps down, it will have been 14½ years. "It's time to move on to other things," Ollila says, though he won't reveal what might come next. "Nokia could benefit from a bit of change at this level."


  Nobody questions what Ollila has accomplished. When he assumed the top job, Nokia had revenues of $3.7 billion and was losing money. By last year, profits hit nearly $4.4 billion, on sales of $40 billion. Despite a rough 2004, in which first-half sales slumped and market share dropped below 30% for the first time in a half-decade, the company's dominance of mobile phones remains unchallenged.

Nokia's share has since bounced back to nearly 33%, and sales for the first half of the year are growing again. Still, annual revenues have been in retreat since 2001, and profit margins are under attack from fierce global competition. As a result, Nokia's stock has hovered around $15 a share since September 2001.

In other words, Kallasvuo is stepping into a tough job. The 52-year-old Finnish exec is better known for helping build Nokia's super-efficient operations and tight financial controls than for strategic vision. But Nokia will need plenty of both as it confronts what even Kallasvuo concedes is a very difficult juncture. "The industry is experiencing interesting new dynamics," he says in typically Nordic understatement. "Customer demands are changing, and there is more demand for customization."


  Translation: It's going to be a long slog to turn Nokia back into a sizzling growth company (see BW Online, 07/22/05, "Nokia's Disconnect"). The average selling price of its phones has sagged in recent quarters, due in part to aggressive discounting to boost market share.

But there's also a big market transition underway: Sales growth is shifting from wealthy Western and Asian countries to emerging markets in China, India, Eastern Europe, Latin America, and even Africa." Buyers in those less-developed regions are driving most of the global gains in unit sales, but they also tend to buy cheaper phones that generate less revenue and profit.

At the same time, Nokia faces a dramatic change in the more saturated markets of Europe and North America. Increasingly powerful mobile operators, desperate to differentiate themselves from rivals, are insisting on handsets tailored to their specific demands. For Nokia, whose global production system was designed to churn out tens of millions of cookie-cutter handsets, moving instead to mass-customization of models for carriers taxes its logistics systems and threatens profits.

On top of that, Nokia continues to struggle in the important North American market, where its market share is relatively weak. Plus, it faces increased competition from a resurgent Motorola, under the guidance of CEO Edward Zander, whose hot-selling Razr phone has kicked up sales and restored buzz lost during Motorola's long slide (see BW Online, 07/28/05, "Motorola: Getting Its Groove Back"). Korean players such as Samsung and LG Electronics also have surged to the fore in recent years, though their results in recent quarters haven't been as strong.


  For all of these reasons, analysts are generally receptive to Kallasvuo's appointment. After joining the company in 1980, the trained lawyer served in the corporate-counsel's office and then migrated to finance. He was named CFO in 1992, but five years later went to Dallas to run Nokia's North American operations. His two years in the U.S. gave Kallasvuo firsthand knowledge of one of the world's largest mobile markets -- an experience Ollila never shared.

After returning to Helsinki for five more years as CFO, Kallasvuo in 2004 became the head of Nokia's core mobile-phone group, which generates 60% of revenues. Other groups in the company focus on lower-volume multimedia devices, business systems, and mobile networks. But the mobile group is the one that faces the biggest operational challenges -- ideal training for managing Nokia's mind-numbingly complex logistics and tackling continued cost pressure.

"He provided very good and steady management of finance, and has done a reasonable job with mobile phones," says Richard Windsor, an equity analyst with Nomura International in London. Kallasvuo took over the mobile-phone group "just when everything went wrong," Windsor adds, "and he has managed to gain back share due to his operational focus."


  Question is, does he have the vision thing? Kallasvuo has sat on the company's executive board since 1990 and has helped steer Nokia's moves into fashion phones, multimedia, and other new markets. But as the consummate insider, worries Neil Mawston, mobile analyst for researcher Strategy Analytics, Kallasvuo may not bring as much new thinking as would an outsider. "Motorola had an external candidate come in who really refreshed the company," Mawston says. "Nokia has recovered from the downturn in 2004, but an outsider might bring in more fresh ideas."

For all its operational success, Nokia could use a bit more buzz. It still owns the sixth most valuable brand in the world, according to the annual BusinessWeek/Interbrand survey (see BW Online, 08/01/05, "Global Brands"). But its brand image in the important youth market lags behind those of rivals.

To remedy the situation, Nokia has rolled out an impressive new line of high-end camera and music phones, called the N-Series, but they're pricey and won't likely hit big volumes until sleeker successors roll off the line next year.


  Yet, the team of new managers around Kallasvuo may help him put his stamp on Nokia. Over the past few years, most of the executive group that transformed Nokia after 1992 has drifted off into retirement or other jobs.

In their places are a crop of younger -- and more global -- executives, including American CFO Rick Simonson, 46, and American Mary McDowell, 41, a former Hewlett-Packard (HPQ ) exec who runs Nokia's new Enterprise Solutions division. Also new at the top: Anglo-Australian Simon Beresford-Wylie, 47, who took over the Nokia Networks division when long-time exec Sari Baldauf retired this year.

Ollila is surprisingly candid in assessing his own history as CEO. "I was totally inexperienced and too young for the job [in 1992]," he said Aug. 1. Kallasvuo may not be an outsider, but he has a stronger track record and much more knowledge of mobile phones than Ollila did when he stepped into the top job.

Nokia is also a far more sophisticated company with a worldwide reach. Kallasvuo may not be able to grow revenues tenfold in the next decade, but if his era produces anything like the bold strategies and relentless execution that Nokia perfected under Ollila, investors may finally see their shareholdings spring back to life.

Reinhardt is a correspondent in BusinessWeek's Paris bureau

Edited by Ira Sager

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