Global Success And The Role Of Strategic Steering And Management Accounting Systems

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Global Success and the Role of Strategic Steering and Management Accounting Systems

1. INTRODUCTION

Research approach

The objective of the present study is to evaluate corporate global success and some of its

determinants as a single case study of Nokia Group. The rationale for the research

approach of a single case is that Nokia represents an extreme and unique case of reaching

global success in telecommunications industry (see Yin 1994: 39). Global success in the

scale like Nokia occurs so rarely that we have been unable to establish any common

patterns for success. Thus, any single case is worth documenting and analyzing. For global

success cases see for example Benjamin (1993) for Honda, Shibata (1993) for Sony, and

Pulkkinen (1997) for Nokia (see also Zhan 1998). In general terms global success is a

determinant of large number of factors, such as environment, management, products,

strategy system, and information systems. In this study we shall concentrate mainly on

three such factors: environment, strategy system and management accounting systems. The

case description and analysis is based on several sources, for example papers, articles,

researches and books published of Nokia in English and in Finnish, Nokias internet pages,

and presentations of Nokias strategic managers. No direct interviews of Nokias

management are used at the present stage of research.

We have organized the paper in nine smaller sections. First, the introduction describes the

research approach and the background of Nokias strategy. The second section introduces

Nokias business organization while the third section gives background figures about its

financial success. We mainly define success in terms of growth and profitability but pay

attention also to finance. Especially, we are interested to see how MASs in Nokia have

succeeded to balance growth and profitability to control finance. The fourth section deals

with business environment describing the strategic challenges that Nokia is facing. Fifthly,

we evaluate corporate strategy to introduce a framework for assessment. The sixth section

describes Nokias current strategic management and control system in this framework while

the seventh section shortly concentrates on Nokias way to build its strategy. Thus this

section tries to assess the importance of the strategy system to success. The characteristics

of MASs implemented in Nokia are critically discussed in the eighth section to show their

role in success. Finally, the last section makes a summary and an evaluation of the case.

Background of the case

Nokias history dates back to 1865 when the Finnish mining engineer Fredrik Idestam

established a wood-pulp mill in Southern Finland and started manufacturing paper. Since

those early days, the company has evolved first into a conglomerate encompassing several

industries ranging from paper to chemicals and rubber products and in the 1990s with a

clearly defined strategy into a dynamic, global telecommunications company. The

groundwork for telecommunications was already laid in the 1960s, as Nokia was

researching the field of radio transmission in its electronics department. In the late 1970s,

mobile phones and telecommunications infrastructure products were developed for both

domestic and international customers. In the 1980s and 1990s, Nokia became a global

leader in digital communication technologies.

From the very beginning, Nokia has faced competition from established international

competitors in the open domestic telecommunications markets. Among other factors, the

ability to exploit the opportunities created by continuous technological and market change

has helped Nokia develop into the company it is today. Rumelt et al (1995: 567-568)

present two competing approaches as regards to the role of corporate level in multibusiness

firms. Corporate-level strategic management can give:

1. Emphasis on value creation or

2. Emphasis on loss prevention.

According to the first viewpoint, the headquarters unit formulates the overall strategy for

the corporation, including its degree of diversification and organizational form. Also, it

manages the process of resource allocation among constituent businesses. It maintains the

existence of key shared resources and manages the processes by which business units share

these resources. We can call this approach entrepreneurial.

The other approach, the loss prevention-school of thought sees management as reviewing

strategies of business units, apparently to make sure that egregious logical errors are not

made. The headquarters monitors the operations of subunits, providing surer supervision

than independent board of directors. HQ can also extract free cash flow at a lower cost

than can unaided capital markets. We can call this approach administrative. Our window to

the Nokia case will use the entrepreneurial, value creating approach. By making this

choice we have already made an important decision on the role of the headquarters unit in

a multibusiness firm.

We are assuming that value creation in a global, fast moving business environment is more

important than careful administrative control of activities. Clearly both are needed, but the

first has to dominate over the second. Why? The answer sounds almost trivial. Timing is

the key. Hokkanen and Kivikko (1996: 18-19) have noted in their article about Nokia

Mobile Phones that in the new global competition every player tries to achieve

technologically dominant designs, de facto standards. The key factor to success is speed.

This further accelerates the overall speed of competition and growth.

For firms the situation of new growth seems very complex and impossible to forecast. The

interrelated network of technology, customers, and competitors has too many unknown

factors to be managed in an efficient way. On the other hand, this “chaos” contains the

elements for success, which can be reached by building such capabilities that survival in

change requires. Many times this means the capability to manage paradoxes: highly

organized behavior in a highly flexible manner. So, the entrepreneurial and administrative

approaches are both needed as parts of the recipe. The question is how much of each to use

in a particular situation. Although the basic elements of the recipe are the same, the

application differs depending on the business environment, industry, and the organization

and resources of the firm.

Based on their analysis on Nokia Mobile Phones, Hokkanen and Kivikko (1996) have

created an approach of steps needed in managing high growth:

1. The challenge to create the framework of growth

2. The challenge to integrate new personnel

3. The challenge to be humble in success

Hokkanen and Kivikko (1996: 32-34) argue that a high growth firm has to be able for

effective implementation simultaneously questioning its doings. This requirement is built

in all core processes. For example all product development processes have to be

understood also as learning processes, where new information is identified in a systematic

way and used in future projects.

In strategic control and business development firms have to make assumptions about the

business environment continuously. At the same time, firms have to test the validity of

these assumptions and sense signal of alternative possibilities. The key is to understand

fundamental changes and crucial turning points. In strategy formulation, firms built

scenarios around these turning points. The result of this work should be understand timing,

the right moment to take action. Even as early as 1987 it was said inside Nokia that we

must prepared for time when mobile phones will be sold like candies. History has proved

this strategy to be highly successful. Silberman (1999) in one of the most influential

journals of the digital economy The WIRED journal, can write “Nokia designs look like

mobile phones to us.”

Pulkkinen (1997) has analyzed the role of design in the breakthrough of Nokia Mobile

Phones. He argues that even in a peripheral geographical position and with limited

resources a firm can rise to industry leadership by utilizing specific institutional traits in

home markets. Pulkkinens study supports the view that firm breakthroughs stem from

managements ability to exploit these contextual traits in the competitive environment and

turn tem into internal capabilities of the firm. According to Pulkkinen (1997) a new

Nokia-case would require at least three coincidental preconditions, that is:

1. A solid technological infrastructure (e.g. standards to facilitate the firm/ industry

growth)

2. Sophisticated demand

3. An incremental growth pattern (to avoid need for complementary assets)

The above historical example presents a typical case where a firm tries to adapt to the

business environment created by other players. The industry leaders have a different

challenge. They must create the future. After several years of success, Nokia has also

entered the small club of industry leaders with the mission to create the future.

Global success may however be impossible without information systems that support

management in strategic decision making. The role of management accounting systems

(MASs) in the global success of Nokia may have not been decisive. We want however to

stress that the efficiency of these systems is a necessary condition for success. This

efficiency is by no means the sufficient reason for success but, without it, it is almost

certainly impossible to reach a global growth and financial success. We emphasize that

performance measurent is one of the core areas of MASs. This are is closely tied within the

strategy systems as stated by Ittner and Larcker (1998: 205): “Performance measurement

systems play a key role in developing strategic plans, evaluating the achievement of

organizational objectives, and compensating managers.” However, many managers feel

that traditional MASs are inefficient in modern fast-growing technology-based companies

like Nokia, and do not properly fulfill these functions (see for example Johnson and