How did Nokia lose the smartphone battle?

Jonathan Faurie
Founder Turnaround Talk

One of the common themes when it comes to distress is fear can become paralysing. One such company was Kodak who almost missed the digital revolution completely because management within the company felt that going digital would cannibalise its business model. You can read more about this in an exclusive article that can be found in the special features section.

One of the biggest examples of how fear can be paralysing is Nokia. Once a giant of the telecommunications industry, the company fell completely off the map for a number of years as Apple and Android devises (in particular Samsung) cornered the market.

A lot of this fear had to do with the fact that while Apple and the developers of Android felt that operating systems would drive demand when it came to smartphones, Nokia felt that aesthetics would be the main driver.  This obsession cost the company dearly and led to a number of challenges that had a telling impact on the company. These challenges were profiled in a report called Distributed Attention and Shared Emotions in the Innovation Process: How Nokia Lost the Smartphone Battle which was published by Tim O. Vuori, an Assistant Professor in Strategic Management at Aalto University and Qui Huy, Professor of Strategy at INSEAD Singapore.

Structural distribution of attention

The report points out that the structural distribution of attention at Nokia and top managers (TMs) past aggressive behaviors generated external and internal fear among TMs and middle managers (MMs), respectively, and these different types of fear caused decoupling interactions between groups of TMs and MMs.

These interactions produced an assessment gap of organizational capability between TMs and MMs that contributed to Nokia’s innovation underperformance. In particular, internal and external fear led to TM–MM interaction cycles that led TMs to believe they could allocate resources to short-term developments without compromising long-term developments. The outcome was that long-term software development suffered, which hindered Nokia’s ability to implement its strategy successfully. The authors of the report also identified how MMs’ dependence on organizational status amplified their internal fear; how a feedback loop from different groups’ perceptions had the same effect; and how TMs’ low technological competence increased their dependence on MMs’ reporting, amplifying the effects of fear based interactions.

On a broader theoretical level, the organisational structure of Nokia at the time suggests how organizational structures can influence micro-level factors such as emotions, TM–MM interaction, and cognition, which influence choices made during the innovation process and thus contribute to innovation outcomes at the organizational level. The model also includes the possible direct effect of top managers’ low technological competence with a dashed line. By identifying these macro–micro–macro linkages in the model, we provide textured multilevel theorizing on innovation, strategy, and organization.

Communication caused many problems at Nokia
Photo By: Nokia

Structurally Based Fear
The report suggests that the structural distribution of attention in an organization (Ocasio, 1997) could lead TMs and MMs to experience external and internal fear, respectively, and that these emotions can have a substantial influence on behaviors and communication patterns in the innovation process. The report suggests that external fear might result when a group’s organizational role is to focus mainly on threats in the external environment. Internal fear might result when a group’s organizational role is to focus mainly on implementing and responding to other members’ directives and requests.

External and internal fears are primarily related to the focal group’s roles in the organizational structure and could be more generally labeled as structurally based fear.

In contrast to prior research, which has investigated attention structures and their effects mainly from an unemotional, information-processing perspective (e.g., Ocasio, 2011; Gavetti et al., 2012), the report shows how attention structures could generate shared emotions among groups.

Emotional reactions occur because when groups attend to information, it is not merely processed analytically to determine a satisfactory course of action but also triggers appraisals of the person–environment relationship that generate emotional reactions (Lazarus, 1991). During such appraisals, groups do not just process events through a retrospective lens but may also use the information to anticipate a future outcome (cf. Gavetti and Levinthal, 2000). Previous research has shown how such anticipation can happen through analogical reasoning (Gavetti, Levinthal, and Rivkin, 2005), discussions with venture capitalists (Maula, Keil, and Zahra, 2013), or collective sensemaking among members of the groups (Balogun and Johnson, 2004), but it has not investigated how the processes also trigger emotional reactions and how they influence subsequent behaviors.

Although prior research has focused on the evolution of cognition during innovation processes, our study reveals that the same processes can also elicit emotional reactions that cause the processes’ trajectory to diverge from the path predicted by purely cognitive accounts. A purely cognitive account might predict that distributed attention and frequent changes in MMs’ positions would enable the organization to collect more comprehensive information (with each MM focusing on his or her specialized segment) and integrate such information through communication channels (cf. Joseph and Ocasio, 2012) to avoid various types of myopia (cf. Levinthal and March, 1993).

Instead, the report shows how the emotions that emerged as the outcomes of these practices hindered the integration of attention, leading to temporal myopia. This suggests that future research could shed new light on organizational structures by examining the shared emotions they create for different groups. Even if the organization in aggregate had accurate information about the environment, and TMs made choices accordingly, diverse groups’ shared emotions could still influence the quality of information exchange.

Secondary harm
The report focuses on what occurred in a traditional hierarchy, but Vuori and Huy could think of other structural arrangements that might generate emotional reactions that harm organizational action and performance. For example, time-pacing and semi-structures (Brown and Eisenhardt, 1997) might, over time, inadvertently amplify MMs’ internal fear and reduce their external fear, thereby causing innovation underperformance.

Time-pacing ‘‘creates a relentless sense of urgency’’ (Brown and Eisenhardt, 1997: 24–25) that, if left unmanaged at the emotional level, might translate into internally focused fear and short-termism. Likewise, the inherent ambiguity of semi-structures may exacerbate MMs’ focus on intra organizational matters, as they strive to make sense of how and with whom they should exchange information. This excessive internal focus risks reducing the attention devoted to processing external threats, generating high internal fear and low external fear, which influence subsequent behavior.

Our data also suggest that employees such as MMs may seek to anticipate how future structural changes will affect their personal status and privileges, and this can trigger further emotional reactions that are not necessarily related to general business conditions. This suggests that some earlier ideas on the benefits of frequent structural change (e.g., Ethiraj and Levinthal, 2004; Teece,

2007) might need to be nuanced. For example, although simulation-based studies have suggested that frequent structural changes help avoid myopia in organizational attention (e.g., Siggelkow and Levinthal, 2005), our study reveals that these changes might also elicit high internal fear among MMs and cause harmful deceptive behavior.

Organizational structures could, moreover, influence MMs’ fears through formal

hierarchy. Existing research has shown that people are particularly sensitive to the behavior of individuals of higher power and status (Kish-Gephart et al., 2009). Some of Nokia’s TMs expressed aggression toward MMs, and MMs shared stories about such instances widely.

The emotional story sharing increased MMs’ internal fear toward all TMs as a powerful group. This suggests that one reason less-hierarchical structures might foster innovation (Burns and Stalker, 1961) is that more organic, egalitarian structures dampen the effects of hierarchy-based fear and the potentially harmful effects of more powerful groups. When the power difference between TMs and MMs is perceived as modest, TMs’ aggression is less likely to amplify MMs’ internal fear and thus less likely to cause extreme protective behavior.

MMs’ dependence on organizational status could also affect how strongly the afore mentioned structural factors influence MMs’ internal fear. In Nokia’s case, MMs’ dependence on the status of their company was particularly high because Nokia was one of the few globally successful high-tech companies in small-population Finland. When MMs’ status is highly dependent on their organization, they are likely to be more sensitive to threats inside the organization, because those threats exert a more immediate effect on MMs’ perceived person–environment relationship; this increased sensitivity evokes emotional reactions (Lazarus, 1991).

Organization-independent and organization-dependent factors
Central to such dependence is the relative weight given to organization-independent and organization-dependent factors in one’s status. Greater personal achievements should increase a person’s independent status whereas the high status of the organization should increase the effect of organizational membership on personal status.

For example, a junior software engineer joining Google would enhance his or her personal status because of the company’s high profile, whereas a Nobel Prize winner making the same move would receive less of a reputational boost, as he or she already had significant personal achievements.

Hence, once hired, the engineer would probably experience higher internal fear than the Nobel Prize winner. This suggests the intriguing hypothesis that organizations might consider retaining their longer-tenured, successful MMs not just because of their rich tacit knowledge (e.g., Droege and Hoobler, 2003) but also because they are less likely to experience high internal fear and are therefore more likely to communicate honestly about organizational reality to people in higher formal positions—in particular, to be the bearers of bad news.

Influencing organisational outcomes
Though Vuori and Huy’s data suggests how the structural distribution of attention and hierarchy can lead to different types of shared fear among diverse groups, organizational structures could also induce fear in other ways. For example, organizational structures that encourage groups to compete with one another likely generate different shared emotions than structures that promote collaboration (cf. Ouchi, 1977).

Likewise, functional and divisional structures expose groups to diverse groups of actors and interests inside and outside the organization and could thus generate different emotional reactions. Future research could investigate more comprehensively how various structural factors influence diverse groups’ emotions—both the discrete emotions that are experienced and the diverse targets of those emotions—and how these shared emotions subsequently influence organizational outcomes.

The full report can be accessed below.