Nokia restructures from position of strength for mobile internet

This time, Nokia is to recombine all its handset activities into one unit, called Devices, having split them into three - Mobile Phones or basic handsets, Multimedia, and Enterprise - at the start of 2004. The other two business units will be Software and Services, which will spearhead the mobile internet push and is poised to stride out on the acquisitions trail; and Markets, which will house all sales, marketing, logistics and manufacturing operations. In a bid to streamline its already world class supply chain and simplify financial reporting too, Nokia will integrate the three divisions tightly, appointing an overall chief development officer (Mary McDowell, formerly head of the Enterprise unit) for this task. Financially, it will report just two operations - these three units combined under the label 'devices and services', plus the Nokia Siemens infrastructure joint venture. Some analyst complain that this will reduce Nokia's high current level of visibility.

The reorganization highlights several key elements of Kallasvuo's strategy, notably the shift to software architectures and mobile internet models, the continuing quest to set efficiency benchmarks, and the need to chase emerging markets without sacrificing too much margin. This last relies on driving the characteristics of the high end E-Series enterprise and N-Series multimedia internet handsets rapidly into midrange models that can then be targeted at volume markts and at the more affluent sectors of emerging economies - generating aspirational spending and eroding margin more gradually than chasing the ultra-low cost sector too aggressively.

This strategy is evolving to be quite differentiated from that of his predecessor Jorma Olilla -  contrary to some analysts' fears that, as a Nokia veteran, the new CEO would not be sufficiently radical in his thinking to break away from the powerful Olilla legacy when required. In fact, Kallasvuo has taken the seeds of mobile internet thinking planted under Olilla and has explicitly made it the centerpiece of his growth strategy, while seeking to build and improve further on Nokia's existing advantages over its rivals in terms of supply chain efficiency, purchasing weight and strong process control - as much elements of its success as cool handset designs.

Indeed, its impact in cool handsets has been more uncertain, with some very strong models, particularly within the N Series 'multimedia computer' range, driving market share to 36% again, but without a single killer model on the scale that Motorola's RAZR was. Nokia has avoided the worst mistakes of its rivals, notably by holding back on an over-hasty race for the margin-busting ultra-low cost market, and it has reignited the fire under its brand with a succession of solid marketing and channel decisions. It has achieved massive position in India and China without sacrificing as much of its precious margins as its competitors (apart from Sony Ericsson), but it remains weak and under pressure in the US, and its grandest strategies, to set and control mobile enterprise and mobile internet standards, although making some progress, are high risk and will take years to generate real revenues.

Mobile enterprise has been the most mixed of Nokia's 2004 new directions in terms of its fortunes, which perhaps explains why it will no longer have a dedicated business unit despite the very particular requirements of that sector. Strategically, the enterprise approach has been clear, and very vital to Nokia's vision of making a future evolution of the cellphone the key client device for business, rather than a future evolution of the PC. This bid is also important to its goal of sidelining Microsoft and usurping that company's role in setting device interfaces standards for itself - and has brought it into conflict of interests with Intel, as the chip giant's Ultra Mobile PC concept goes head-on with Nokia's mobile internet tablet ideas. These two devices are, in reality, hard to distinguish in functionality, but they demonstrate the challenges for Nokia in the enterprise sector, where it is an alien force and does not have the market clout of traditional players. Its devices can have impact - the Internet Tablet has been one of its stand-out products, taking it beyond the confines of the cellco networks into the IP world and in great demand from carriers old and new. But while such products, and activities in mobile email and other key corporate areas, are making Nokia a player in this space, it will be a long time before it can claim this as a major revenue generator.

The fortunes of the other division spun off from the main cellphones business in 2004, Multimedia, have been sunnier, perhaps because it played to existing Nokia strengths and so could have more immediate impact. In enterprise and internet, Nokia is learning new skills and business practises, but Multimedia was a chance to extend capabilities it already had, in high end, multi-function devices with strong design and brand and affordable price tags. The flagship range, the N Series, will be the key growth and profit driver for the reunited devices unit, balancing the shift to low cost models for emerging nations.

In the newly converged devices unit, Nokia says the opportunities for growth are in "emerging markets, multimedia and enterprise featured phones" (in other words, the three-way structure of 2004 was not wrong, it is just that there is increasing overlap between the categories, and the need to leverage scale). "We want to tackle all the segments of any phone market," said the company. "If you're strong overall, you have magnificent scale benefits."

Software and Services is the most important unit in terms of future growth and the overall aim to reposition Nokia as an internet player, shifting its influence up the value chain to software, where the key standards will be set. Nokia was one of the first companies to recognize that the eventual success of a mobile internet experience was predicated on making the user interface attractive, simple and heavily customizable to the user's preferences, thus driving greater usage (and online spending). This involved making mobile interfaces and content/services delivery entirely different from those on the PC, which have not been successfully shrunk down to fit a small screen and input mechanisms, and ensuring that they provide a more appealing environment than the PC,

especially for younger generations, and people in emerging economies, whose digital behavior is centered on the handset not the laptop.

The mobile internet is a great opportunity for a handset maker because the single most important feature in making a service succeed or fail is the device and its interface - not the operator brand as in the walled garden days. So the balance of power can swing back to the handset maker, while it increases profitability by moving more heavily into software and even operator and consumer services. This is provided the operators can be prevented from taking the upper hand themselves in mobile interfaces - as Vodafone is trying to do with its highly customizable new browser technology, and as Qualcomm is helping carriers like O2 do with its UIone platform. This means Nokia must be sure to steal a march on such efforts, and also on pure internet players.

With this in mind, Nokia has been working hard to try to drive standards in this area, with projects such as its co-development with Apple of a Safari-based multimedia browser and its rapid enhancement of the Series 60 interface platform and surrounding developer environment. Its first direct mobile internet business - which can operate separately from any Nokia products - is Widsets, which provides a widget-based platform for carriers, content providers and end users to create widgets (tiny applications) for delivering mobile services quickly and easily. It is also looking at mobile advertising platforms and other business models that could be adapted from the PC world, and as such will sometimes be working with internet giants like Google and Yahoo, but often threatening them too, setting its superior understanding of mobile architectures against their proven brands and commercial abilities in web-based business.

As for the Markets unit, it will help keep costs under control and ensure that Nokia's usually excellent logistics are not outwitted by other's innovations - Sony Ericsson has recently shown the strong positive impact of a new centralized procurement and logistics hub improved efficiency and even Motorola has put huge efforts into streamlining its supply chain, so Nokia needs to protect its efficiency lead. This unit will also have a key objective of bolstering and controlling the retail channel, at a time when Nokia is trying to sell more handsets directly - especially in the US - to reduce dependence on cellcos, and when, conversely, many mobile operators are going directly to OEMs and ODMs to try to dilute the phonemakers' brands and power.

Of course, while a company of the scale and ambition of Nokia has to adopt grand strategies to adapt to a changing world, the actual phones will remain its lifeblood for a long time. In the first quarter of this year, the mobile device business accounted for 57% of revenues of €9.856bn ($13.2bn), of which €5.583bn ($7.5bn) came from cellphones. Nokia said it expected to increase its current 36% market share during the second quarter.

Kai Öistämö, currently head of the mobile phone business group, will lead the new devices unit. Niklas Savander, who runs the technology platforms group, will move to head up the services and software unit. And Anssi Vanioki, head of the multimedia business group, will lead the markets unit. Mary McDowell, head of the enterprise solutions business, will take on the chief development officer position. Tero Ojanpera, currently the company's CTO, will undertake "business responsibility" for entertainment and communities services in services and software. Although the role seems narrower, Nokia has a tradition of avoiding straight up-and-down career paths and instead matching talent to critical need at any one time, rather than following US-style hierarchies. Nokia also has a habit of training high potential top management by placing executives in a wide variety of roles during their careers, like Kallasvuo himself.

The new structure will take effect on January 1 2008. The most positive aspect of this restructuring, compared to that of January 1 2004, is that it comes from a position of strength. Nokia has not quite achieved its dream of 40% handset market share globally, but 36% and growing is very respectable and, along with Sony Ericsson, it currently looks the shiniest of the big five phonemakers. The ploughing of Nokia Networks into the joint venture with Siemens was inspired, ending once and for all the debate over whether Nokia should exit the fluctuating infrastructure market, adding to its scale in a sector where size increasingly matters, reducing its management distraction while retaining the ability to tie equipment and handset contracts together, and bringing it Siemens' strengths in integration and convergence. The mobile internet and enterprise strategies are highly ambitious and therefore subject to risk and a host of new and powerful competitors, but so far Nokia has delivered reassuringly real products to support the high sounding vision - Internet Tablet and Widsets among them. And compared to its position a few years ago, when margins and market share were falling and investors losing confidence, the Finnish giant once again seems to have a reasonably strong position in its largest political conflicts, taking on the Qualcomm royalties machine, beating back Motorola, and making the most of Microsoft's continuing missteps in mobile operating systems and interfaces.

Nokia know that the years ahead will be tough for a mobile device company that wants to be far more than that, and so will have to leap head-on into the very tumultuous and uncertain waters of mobile internet, convergence and 4G business models. By restructuring when it is close to its peak, it is showing a proactive streak that will be denied, at least for a while, to its more pressurized challengers.