Strategic Management Accounting Research Unit

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Erkki K. Laitinen and Rolf Leppnen

Global Success and the Role of Strategic Steering and Management Accounting Systems
Case Nokia Group

VAASA 2000

CONTENTS

ABSTRACT
1. INTRODUCTION
2. NOKIAS BUSINESS ORGANIZATION
3. FINANCIAL SUCCESS OF NOKIA
4. BUSINESS ENVIRONMENT
5. FRAMEWORK FOR EVALUATING CORPORATE STRATEGY
6. NOKIAS STRATEGY SYSTEM
7. STRATEGY DEVELOPMENT: HOW NOKIA GROUP BUILDS ITS STRATEGIES?
8. NOKIAS MANAGEMENT ACCOUNTING SYSTEMS
9. CONCLUSIONS

ACKNOWLEDGEMENTS
REFERENCES
APPENDICES

ABSTRACT

Laitinen Erkki K. & Rolf Leppnen (2000): Global success and the role of strategic steering
and management accounting systems: Case Nokia Group. Vaasan yliopiston julkaisuja. 59 p.

The purpose of this case study is to analyse the strategic steering and management accounting
systems as determinants of global success. The study concentrates on the case of Nokia
Group on the corporate level. The case description is focused on strategic elements of
corporate management, since it is believed that understanding these elements will also
explicate to some extent the overall economic success of the company playing in the global
arena. It is also believed that management accounting systems as routine tools of
management have lesser explanatory value of economic success in the Nokia case. This case
is part of a larger research project that investigates modern economic steering systems in
technology based companies.
Erkki K. Laitinen. Professor in Management Accounting, Department of Accounting and
Business Finance, Faculty of Accounting and Industrial Management, University of Vaasa,
P.O. Box 700, FIN-65101 Vaasa, Finland Phone: +358 6 324 8275, Fax: +358 6 324 8344,
Email: ekla@uwasa.fi

Key words: Global success - Strategic steering - Management accounting system - Nokia
Group

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, Nokia's internet pages, and presentations of
Nokia's strategic managers. No direct interviews of Nokia's 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 Nokia's strategy. The second section introduces
Nokia's 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 Nokia's current strategic management and control system in this framework while
the seventh section shortly concentrates on Nokia's 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

Nokia's 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.
Pulkkinen's study supports the view that firm breakthroughs stem from management's 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 Kaplan 1991, Clarke 1995
and Ittner and Larcker 1998: 205). Therefore many organizations have implemented new and
innovative MASs (Green and Amenkhienan 1992 and Lukka and Shields 1999). Figure 1
demonstrates some of these innovations in management accounting.

It is important to notice that the basis for the success of Nokia has already been founded
before the emerge of many of these innovations. In addition to that it is worthwhile to notice
that the new MAS designs and general ideas tend to converge globally on a global
management accounting practice model (see Granlund and Lukka 1998 and Shields 1998).
Therefore it is not expected that a long-term and sustaining competitive advantage could be
reached by even novel, but well-known MASs alone. While being among the first companies
to implement modern approaches, Nokia has MASs of its own.This means that Nokia's MASs
on an average have not been worse than any of its competitors, but may, for the sake of their
originality, contain some additional value to success creation. Anyway, we argue that the
efficiency of existing MASs have been necessary for Nokia to ensure that the global strategy
has been successfully carried out.

Figure 1. Developments in Management Accounting Systems (source: Clarke 1995).

2. NOKIA'S BUSINESS ORGANIZATION

Nokia is the world's leading mobile phone supplier and a leading supplier of mobile and fixed
telecom networks including related customer services. Nokia also supplies solutions and
products for fixed and wireless data communications, as well as multimedia terminals and
computer monitors. Nokia comprises three business groups: Nokia Telecommunications,
Nokia Mobile Phones and Nokia Communications Products. In addition, Nokia includes a
separate Nokia Ventures Organization and a corporate research unit, the Nokia Research
Center.

In 1998, the combined net sales of the business groups totalled EUR 13.3 billion (USD 15.7
billion). Headquartered in Finland, Nokia is listed on the New York (NOK), Helsinki,
Stockholm, London, Frankfurt and Paris stock exchanges, has sales in over 130 countries and
employs more than 47,000 people world-wide. In short, Nokia's business organization as
outlined in internet pages (in autumn 1999) can be described as follows.

Nokia Group

Chairman of the Board and CEO Jorma Ollila

President and Member of the Group Executive Board, Pekka Ala-Pietil
Mr. Ala-Pietil is also the President of Nokia Communications Products.
Business Groups
1. Nokia Communications Products

Nokia Multimedia Terminals is a leading supplier of satellite and other terminals designed for
reception of digital broadcasting and multimedia applications. Nokia Multimedia Terminals
collaborates closely with programme and content providers world-wide to offer consumers
attractive products and services, such as online education, entertainment, and shopping. The
product development centers are located in Finland, Germany and Sweden, and Nokia has
sales offices in all major European markets as well as in Asia-Pacific and the Americas.

Nokia Display Products develops and manufactures computer and workstation monitors. The
offerings include applications for professional desktop communication and new technology
displays. Nokia is one of the leading manufacturers of professional computer and workstation
displays in Europe, and the products are known for their outstanding picture quality,
ergonomic design and user-friendliness.

Nokia Industrial Electronics' main products are battery chargers for mobile phones. Nokia is
strongly positioned in volume production of chargers due to the growth in the mobile phone
market. Additionally, Nokia manufactures other power supply applications for wireless
communication, advanced RF filters, and antennas. Nokia Industrial Electronics has
production facilities in Finland, Hungary and Sweden, and research & development activities
in Finland and Sweden.

2. Mobile Phones
Nokia is the world's largest manufacturer of mobile phones. Nokia develops sophisticated
mobile phones and accessories for all major digital (GSM, AMPS, CDMA, TDMA, and so
on) and analog standards. Sophistication aside, all features of Nokia mobile phones have been
developed to make communicating easier for real people. As mobile phones become more
and more widespread, they must overcome a major challenge: they must be as easy to use as
a home or office phone, yet still provide all the advanced services made possible by new
telecommunications technology.

Nokia phones meet this challenge through their unsurpassed functionality. Mobile phones
have moved from being strictly a tool for business to being an item of everyday convenience.
Nokia understands this. That's why Nokia offers different phone features for different users.
For example, the Nokia 9110 Communicator, an all-in-one mobile phone that offers fax, e-
mail, and even Internet capabilities, is ideal for the serious business user, while the fun and
economical Ringo is the perfect choice for the first-time user.

3. Telecommunications

Although Nokia has built a solid reputation for manufacturing stylish, high-quality mobile
phones, without networks the phones could not function. That's where Nokia
Telecommunications comes in. A global leader in telecommunications technology, Nokia
Telecommunications develops and manufactures the equipment and systems needed to run
communications networks. Nokia offers systems and infrastructure for both analog and
digital wireless networks and fixed access networks. Our dedicated network products include
switching, transmission, network management, and intelligent network (IN) solutions. These
products are designed to meet the diverse needs of wireless, fixed, and convergent
environments.

Nokia works closely with telecom operators so they can better serve their customers. Nokia
offers operators a full range of network equipment and services, including tools for
transmission, network management, and network planning. Operators can use these tools to
construct an efficient network that meets both customer needs and their own business
objectives. Nokia realises that in order to be competitive, their networks must provide value
at a reasonable lifetime cost. Nokia networks are designed to be modular and are thus
inherently flexible. This results in two major benefits for operators: they can start small and
develop their networks as their customer base grows, and they can rapidly introduce new
network elements in response to market opportunities. Through this system of progressive
upgrades and expansions, operators avoid over-investment and at the same time preserve
their initial outlay.

Nokia's global market share in GSM-based infrastructure is well over 20%, and the company
has achieved success in the US market with its GSM 1900 products. Nokia has also managed
to retain its lead in NMT analogue systems, which it has supplied since the mid-1970s.
Furthermore, Nokia customers benefit from proven total systems capability - Nokia is a top
manufacturer of mobile phones and has unsurpassed network testing and integration facilities.

Nokia Ventures Organization

The Nokia Ventures Organization expands Nokia's business scope into promising new areas
in communications solutions, products and services, to acquire new knowledge. Seeking to
exploit growth opportunities in the competitive arena emerging from the convergence of the
telecom, datacom and IT industries, the Nokia Venture Organization focuses primarily on
new telecommunications and datacommunications solutions. In addition, other major focus is
software for corporations and other multiple-customer groups.

The Nokia Ventures Organization includes in 1999 three business units:

Wireless Business Communications focuses on the development of new wireless

solutions for corporate customers.
Wireless Service Applications develops new solutions for the wireless environment, at
this stage especially in the area of health care.
Wireless Software Solutions focuses on the development of software solutions based on
the Wireless Application Protocol (WAP) and other platforms.
To fuel future growth and to boost both new product development and long-term business
development, Nokia has also established a USD 100 million Venture Capital Fund. Based in
Silicon Valley, California, the fund's global investment scope covers start-up businesses and
new technologies, with a special emphasis on innovation centers. The Nokia Ventures
Organization is a separate organisation running in parallel with the business groups.
3. FINANCIAL SUCCESS OF NOKIA

Table 1 presents consolidated financial information for Nokia Group in the period of ten
years 1989-1998. In general, this table shows that the ten-year development of Nokia can
clearly be divided into three strategic phases. In the first four years, 1989-1992, the economic
situation of Nokia was not good at all. The development of net sales and profit was unstable.
The profitability was low as indicated by the values of the return on investment ratio between
3.9 and 7.1. Net profit was negative in 1991-1992 that also made return on equity, return to
the owners of the company, negative. However, Nokia was not in a financial crisis. Its
solidity was good and the equity to assets ratio was about 40%. Liquidity as measured by the
quick ratio showed a standard level. Anyway, poor profitability indicated that time for the old
stategy was finished.

The economic situation in 1992 was extremely difficult in Finland that is demonstrated by the
figures in Table 2. The level of investments was low and that of interest extremely high. The
number of unemployees had increased with more that 100.000 people in one year and the
number of bankrutpcies made a new record. This means that the domestic economic
environment did not provide Nokia with best opportunities to launch a new strategy.
However, Nokia's strategy was targeted to global markets that were just started to recover.

The second strategic period covers the years 1993-1996 that is characterized by a life cycle of
a rapid growth until the stagnation in 1996. Nokia's profitability on both investment and
equity was good and, in spite of rapid growth, the solidity improved all the time. The "golden
rule" tells that to keep the outside finance of the company in control, the return on investment
ratio should exceed or be equal to the rate of growth. This golden rule leads to a balanced
growth. For Nokia, the return on investment ratio does exceed the growth rate except the
initial year 1993. Consequently, Nokia was continuously able to increase its solidity so that in
1993 the equity to total assets ratio is already 47%.
Table 1. Financial ratios of Nokia 1989-98 (Source: Balance Consulting Oy).

The third strategic period includes the last years 1997-1998. These years are characterized by
a very fast global growth and, simultaneously, by exctremely good profitability. The growth
of Nokia was financially very well balanced keeping the rate of growth comparable to the
return on investment in both years. This period also led the quick ratio to increase to a new
level and the equity to total assets ratio to exceed 50%. . In summary, financial control of
Nokia seems to have been in good hands during the strategic periods 1992-1998. In spite of
rapid expansion, the growth rate has maintained at the same level as profitability to ensure
financial control. Although Nokia's profitability was poor in 1992, the good solidity provided
the company with financial resources to launch the new strategy. The strategy was financially
extremely successful in spite of the serious economic difficulties in Finland in that time.

Table 2. Finnish economic statistics 1987-1995 (Source: Statistical Yearbook of Finland

1996).
Amir and Lev (1996) showed that, on a stand-alone basis, financial information (earnings,
book values, and cash flows) are largely irrelevant for secuarity valuation in wireless
communications industry. This is mainly because technology companies invest heavily in
intangibles, such as R&D. Such investments are either immediately expensed or arbitrarily
amortized. Thus key financial indicators may be negative although the company creates a lot
of market value through production and investment activities. Consequently, financial
indicators tend to be unrelated to market values. Their sample was consisted on 14 cellular
companies. Nokia has for example in the period 1996-1998 spent about 9% of its net sale on
R&D. In spite of heavy investments financial indicators refer to an excellent success that is
consistent with the market price development.

Figure 2. Price development of Nokia's share in the Helsinki Stock Exchange.

However, we argue that it is uncertain whether the intensity of market reactions is

comparable to financial progress. Table 3 presents market-based financial information to
Nokia for 1994-1998.
Table 3. Market-based financial ratios of Nokia 1994-1998 (Source: Financial analyses by
Kauppalehti).

These figures show that even taking account of the excellent financial success of Nokia, the
market price is very high. The market value of the company in relation to the book net worth
of the company was in 1997 about 5.2 but in the next year already as high as 11.5. In 1997,
the dividends were less than 2% of the market value and in 1998 less than 1%. These low
percentage show that investors do not rely on dividends but on the future development of
share price. Thus, the main part of the market price is based of future expectations. Especially
in the year 1998, these expectations have been extremely high. In summary, market reactions
follow the financial success of Nokia but they may be overdimensioned. In order to fulfill the
market expectations set on the share price, Nokia should continue the path of very rapid
growth.

4. BUSINESS ENVIRONMENT

Business environment analysis is crucial in all industries, especially in telecommunications,

where changes are very fast. In the following text we try give the reader a picture of the new
business environment, where Nokia has to operate and which is simultaneously creating. This
vision is based on a larger document written by working group led by Professor Dick Rumelt
in Telecom Italia Spa during summer 1998 (Rumelt et al. 1998).

The telecommunications industry is facing a dramatic change in its underlying technology. IP

data is replacing voice as the basic form of traffic. Furthermore, IP telephony and IP fax are
technologies that are both ready to cut deeply into long-distance and international voice
revenues. "Convergence" means that the logic and economics of computers is replacing the
old economics of communications. In 1980s experts thought convergence meant that IBM
would compete with telco equipment makers. Instead, it has meant that the economics of the
PC industry has overtaken the old telco equipment industry. And the economics of the
Internet is about to overtake the telecommunications network industry. Millions of people
who have logged onto the world-wide web have discovered that it costs no more to move a
page of data from Japan to Paris than it does to move a page of data across town. And they
have discovered that it doesn't cost very much. Whereas France Telecom may charge $ 100
for a half-hour conversation between Paris and Tokyo, moving the equivalent amount of data
costs less than 1% as much.

The IP Data (Internet) model provides a clear vision of the future telecommunications
industry:

All traffic is data

The customer interface is standardized around IP. Packets of IP data move over packet-
switched and frame-relay networks as well as over ATM networks.
Voice, fax, video, music, web pages, commercial transactions, e-mail, voice-mail, and
business operations information all move as data packets.
There is a zero distance premium. Tariffs are based on bandwidth and the amount of
data moved. The costs of call-by-call accounting is avoided.
Value-added services exist as software programs running on the gateways or routers a
company uses to access the IP network.
Because the intelligence in the network migrates to the periphery, value-added services
move from the hands of the incumbents -they can be supplied by small energetic firms.
The dynamics of Moores's Law drive the prices of hardware and platforms as rapidly as
computer prices have been falling.
As in the modern computer and consumer electronics industries, competence, speed and
agility are the competitive resources, with speed outweighing competence in many
battles.
If the above vision is true, Nokia has a challenge to move from a position of an equipment
manufacturer to move value-added services by creating e.g. new businesses in IP Data
Networks and Services.
Nokia has transformed very quickly into a focused telecommunications company. In 1987
Nokia Group turnover was 2.6 billion USD as in 1997 it was 9.8 billion USD. During the
same period the share of telecommunications had grown from 17% into 100% including
presently mobile phones, telecom networks, multimedia terminals, monitors and new
ventures. According to CEO Ollila (1999) clear business focus has led to a very fast global
growth. In 1987 Finland has 40% share of the company's turnover and rest of Europe about
45%. Today the home market Finland represent 5%; rest of Europe has 51%, Asia- Pacific
23%, Americas 18% and other countries 3%. Nokia has grown global. CEO Ollila also argues
that focus and global growth have led to a good profitability. The laser-like focus on digital
and networks has helped to boost Nokia's market capitalization from 1.5 billion USD in 1988
to 70 billion USD in 1998, when the company edged past Motorola to become the world's
leading manufacturer of mobile phones.

Table 4 presents Nokia's view of market development and challenges. The implementation of
this view is based on the following trends (Ollila 20.1.1999):
 1. Benefit of discontinuities. Nokia believes that the network economies will bring
significant changes in the economic success factors. When one firm adopts a new way to
operate, other firms in the same industry will follow.
2. Creative interaction and communication. Creating new markets and shaping the old
ones through right timing, co-operation and standardization. Organizational change is
some times the only way to implement new thinking and strategy.
3. "Simultaneous/take both" -thinking. Competitive advantage should not be built only
on one factor. In dynamic markets one needs and can built several competitive
advantages simultaneously. E.g. software products allow fast differentiation and /or
localization keeping the platform constant. Modern information technology makes also
possible to combine previously conflicting goals.
Small home markets are no more a barrier for growth in a global economy were step by step
internationalization is too slow and simultaneous globalization is needed.
Table 4. Nokia's View of Market Development and Challenges (Source: Nokia 1999/J.O.
20.1.1999).

Silberman (1999: 138) argues that in many ways, the story of Nokia's success is the story of
the digital-telecom standard that helped create a unified European mobile market in the
1990's: the Global System for Mobile Communications. The widespread adoption of GSM
was not locked in from the start. In development from 1982 on, the project was dubbed the
Great Software Monster by engineers debugging the slew of new applications required to
support such ambitious features as international roaming, call forwarding, and SMS
messaging.

When Nokia poured its resources into GSM, it was a moderately successful company from a
small country betting against billions of dollars of entrenched infrastructure and a widely
accepted standard. GSM took off- not only all over Europe but also in Asia, Latin America,
and elsewhere. Now Nokia is taking a leadership role in development of third-generation
wireless services, or 3G. In telecom speak, analog cellular was the first wave, and digital
networks the second. The third generation of data and voice communications- the
convergence of mobile phones and Internet, high-speed wireless data access, intelligent
networks, and pervasive computing - will shape our way of life in the next decade.

5. FRAMEWORK FOR EVALUATING CORPORATE STRATEGY

In order to be able to assess Nokia's strategy formulation and control system, we have chosen
to introduce a framework developed by Collis and Montgomery (1995). There is no one right
corporate strategy. Instead, a corporate strategy is any internally consistent set of five
elements that create a "corporate advantage" (see also Goold et al. 1994). In evaluating a
corporate strategy, therefore, there are five tests that can be applied - vision, internal
consistency, external fit, corporate advantage, and feasibility. An effective corporate strategy
that creates value will pass all the five tests.

A corporation should first posses an appropriate vision. This should be predicated on the
likely evolution of the environment and should stretch and challenge the organization.
However, it is vital that the vision also suggests a sense of the value the corporation is
contributing to society. Part of its purpose is to provide employees a sense of belonging and
commitment to the company. To achieve this the vision must articulate something more than
just a return to shareholders. It must convey how in an ethical fashion the company will in
some small way change the world for the better.

The five elements of the corporate strategy must also be internally consistent. As in
competitive strategy, all elements of the strategy need to be aligned if the system as a whole
is to move in one direction and not be pulled apart by internal dissonance. The corporate
advantage must contribute to competitive advantage in the businesses in which the company
chooses to compete. The structure, systems, and procedures of the corporation must fit with
the tasks the headquarters performs. The goals and objectives must be leading towards
fulfillment of the vision. Each element of a good corporate strategy depends on and supports
the other elements. Thus, the elements must be internally aligned if the strategy is to have a
chance of successful implementation.

The strategy should also fit with the external competitive environment. Corporations do not
act in isolation, but against competitors in various markets. Thus, the strategy must stand up
to competitive challenges, and be robust to predicted changes in the environment. An under-
standing of technology changes and evolving consumer needs as well as the relative position
of competitors and their likely strategic moves is therefore necessary to the evaluation of any
corporate strategy.

The fourth and most important test of corporate strategy is whether it truly builds and exploits
a corporate advantage. In turn, this test can be thought of as having four parts. The first is
whether the strategy is based on unique and valuable resources. As it is these which underpin
corporate advantage, the strategy must be able to concisely identify and articulate exactly
what resources are the source of value creation in this company. The strategy must then
develop programs to invest in those resources. The third part of the test is whether the
strategy maximizes the leverage of these resources.

Many corporations posses resources that are underutilized. An effective strategy will expand
the scope of the firm to fully employ these resources and so maximize the return to the
corporation. A change in corporate control often results when a strategy fails this part of the
test. The fourth part of the test is whether the strategy is creating, renewing, and upgrading
vital corporate resources. The activities the corporation performs, whether in the businesses
or at headquarters, both use and create resources. A good corporate strategy ensures that
those resources critical to corporate advantage are not being depreciated but rather are being
invested in and expanded. Indeed, for those corporations that do not currently possess a
corporate advantage, a clear articulation of how to acquire or build the resources that will in
the future provide the advantage is the single most important part of the corporate strategy.

The fifth and final test is whether the strategy is feasible. This does not involve the
competitive test described earlier under external fit, but rather evaluates whether the
corporation's growth path is achievable and of acceptable risk. Any strategy involves change
and the question is whether the corporation possesses the capability to change fast as, and in
the direction that the strategy specifies. Is the organization simply asked to do too much? Will
the capital market provide the financial resources needed? Are there too many uncertainties
which must resolve themselves favorably for the strategy to succeed? Striking the right
balance between setting a challenging strategy and overextending the organization is a
difficult task, but the evaluation of a strategy must involve a judgement that the planned
development of the company is indeed attainable.
Ultimately, a good corporate strategy, like a good competitive strategy, should be able to be
described in one or two sentences. Its essence-how to create economic value through multi-
market activity-is not difficult to understand. Its practice, as recent history demonstrates and
detail of the framework suggests, is more complex.

6. NOKIA'S STRATEGY SYSTEM

Vision

Nokia is a global company whose key growth areas are wireless and wireline
telecommunications. As a pioneer in mobile telephony, Nokia is the world's leading mobile
phone supplier as well as a top supplier of mobile and fixed telecom networks and services.
Nokia also creates solutions and products for fixed and wireless data communications.
Multimedia terminals and computer monitors round out our expertise in communications
technology.

For many companies, it's a challenge to simplify these technologies of the future and still
offer feature-rich products. Nokia, accepts it as an everyday goal. After all, at Nokia,
"Connecting People" is not just the slogan, it's the mission of the business. Nokia has a clear
set of targets for the future. It aims at making the right decisions made at the right time,
believing that this will breed success. The company also believes that success is earned
through determination and by foreseeing developing market opportunities as well as by
courageously creating new markets and opportunities.

Characteristics of Nokia's strategic vision

View of the Markets: Creating New Knowledge

Nokia's success as a mobile network supplier has provided a good base for also building the
company's presence in the fixed network markets. During the 1990s, liberalisation of
telecommunications markets has rapidly advanced in Europe and Asia. Today both
accelerating liberalisation and a growing demand for bandwidth, especially in access network
markets, offer new opportunities for new operators and system suppliers.

Digitalisation and broadband technologies are changing the nature of telecommunications in

a profound way. Voice and data networks are converging and their services will be available
through one device in the future. Nokia invests in future technologies through research and
development in key growth areas of telecommunications. Future broadband solutions,
wireless data applications, increasingly user-friendly mobile devices and third-generation
mobile telephony are good examples of Nokia's businesses today and tomorrow.

Sustainable innovation means investing in research & development. Nokia's research &
development work embodies the entrepreneurial spirit and drive of a small organization
expanded to meet the needs of a global environment. Nokia's primary research &
development resource is the Nokia Research Center, an independent business unit serving all
of Nokia. Smaller, more focused research & development units work closely with the Nokia
Research Center. Together, they cover a full range of activities, from the exploration of new
technologies and concepts to the development of actual products that fulfil consumer needs.

Nokia is actively involved in many important research & development projects within the
European Union Framework programs. The company participates in work at research
institutions such as the Media Lab at MIT (Massachusetts Institute of Technology). Perhaps
most importantly, Nokia's research groups work closely with global standardisation bodies to
further develop and define standards for telecommunications. In fact, our voice codecs are
widely used in many GSM-based systems.

Nokia Research Centers:

o Finland
o Germany
o Hungary
o Japan
o U.S.A.
R & D Units within Business Groups:
o Australia
o Denmark
o Finland
o Germany
o Hungary
o Japan
o Malaysia
o Sweden
o United Kingdom
o U.S.A.
Every fourth Nokia employee works in research & development
Tuomi (1999: 34-44) reports of a state-of-the-art strategy and knowledge creating project
called the "Future Watch" that failed. The project started in June 1992 when Nokia Research
Center (NRC) and Nokia Telecommunications (NTC) arranged a small informal meeting.
The topic of the meeting was to discuss whether Nokia Research Center could contribute
some ideas how NTC's information systems should be developed as NTC was moving into a
new competitive landscape. The project was strategic for NTC. At 1992 NTC was
undergoing a major change from product-based businesses to a system-based business model.

Future Watch had several stages. The challenge was basically about distributed real-time
strategic thinking. More specifically, Future Watch addressed the following problems:

Communication, language, coordination: How to tell 30,000 people where their

contribution matter? How to create a shared world?
 Organizational cognition: How to build a sensemaking network that covers the most
critical developments in real-time?
Knowledge flows: How to propagate valuable contributions so that they can change and
renew the organization? How to avoid unproductive chaos and cognitive overload?
Organizational memory: How to accumulate knowledge?
Action: How to create commitments and social institutions that make things happen?
The systems of Future Watch represented state-of-the-art information systems, and many
interesting ideas were implemented both in the processes and the tools. There was also
extensive effort to address the human aspects of technology use.
So, why did Future Watch fail? There are several obvious answers to this question. People
don't like computers. There was not good enough infrastructure support, there were too many
systems in use already, and there was not enough time to learn yet another one. Some people
in the informal networks were so enthusiastic that they overflooded the discussion, and more
passive observers wondered whether the quality of contributions is high enough. Even in the
core teams, where people were committed to work, it seemed that there was not enough time
to do all the work required. Moreover, it really didn't matter: no-one made a lot of noise if the
work was left undone. In practice, the line-managers of core team members often didn't see
any clear value in the informal networks that operated outside existing businesses, and , as a
result, didn't push for any great accomplishments in these areas.

So, as a result even world-class concepts and supports systems can fail.

7. STRATEGY DEVELOPMENT: HOW NOKIA GROUP BUILDS ITS STRATEGIES

New Management Paradigm

In the early 1990's Nokia had no other choice but to change and change fast. It had to build a
conceptual framework that would help the top management to turn the company around.
During those days professors C.K. Prahalad and Gary Hamel had build a reputation as
strategic visionaries and professor Hamel was a frequent visitor at Nokia headquarters.

In 1994 Hamel and Prahalad introduced Three Phases of Competition for the Future Hamel
and Prahalad 1994: 47):

Intellectual leadership

Gaining industry foresight by probing deeply into industry drivers

Developing a creative point of view about the potential evolution of a) functionality, b)
core competencies, c) customer interface
Summarizing this point of view in a strategic architecture
Management of migration paths
Preemptively building core competencies, exploring alternate product concepts, and
reconfiguring the customer interface
Assembling and managing the necessary coalition of industry participants
Forcing competitors onto longer and more expensive migration paths
Competition for market share
Building a worldwide supplier network
Crafting an appropriate market positioning strategy
Preempting competitors in critical markets
Maximizing efficiency and productivity
Managing competitive interaction
Nokia's framework for Strategy development in shown in appendix 1 and is built on the main
elements of the Hamel -Prahalad thinking.
Hamel and Prahalad (1994: 134, 146) speak of strategic intent that provides the emotional
and intellectual energy of the firm. Strategic intent also includes goals that first seem
impossible to achieve with current capabilities and resources. Strategic intent also implies a
particular point of view about the long-term market or competitive position that a firm hopes
to build over the coming decade or so. Strategic intent is as much about the creation of
meaning for employees as it is about the establishment of direction.

CEO Ollila present Nokia's strategic intent in 20.1.1999 was as follows:

Nokia strives for leadership in the most attractive global communications segment through:

Speed in anticipating and fulfilling emerging customer needs

Quality in products and processes
Openness with people and to new ideas and solutions
The result of the strategy work at Nokia Group aims at a New Management Paradigm (Ollila,
21.1.1999). This paradigm is the combination of major schools of thought in strategic
management, the resource based view and market based view, as shown in the following
figure (see Figure 3).

Figure 3. Nokia's New Management Paradigm.

The basic idea behind Nokia Group's strategy concept is in fact the "market making
strategies". The company is creating the future, where it will operate. The market making
strategy combined the following elements in a dynamic way (see Figure 4).

In practice this means that Nokia management aims at combining winning foresight and
excellent execution in a balanced way. To achieve this means reading the market through
wide and open market interface, being able to translate intuitive foresight into right actions at
the right time and being able to execute a global strategy fast.

Figure 4. Market Making Strategies.

On the human resources side this would imply providing a platform for personal growth
through value-based leadership. In practice this means a challenging environment, clear
vision and stretched targets that encourage people to give their best and shared management
principles that help people to achieve more together. All company principles must be in
harmony with the company vision and values and feel good and right.

After Hamel and Prahalad, Nokia management has used also the ideas of Geoffrey A. Moore,
the Silicon Valley marketing strategy consultant and writer of two best selling books:
Crossing the Chasm and Inside the Tornado. Later Moore joined with Paul Johnson and Tom
Kippola in writing The Gorilla Game (1998), which is a text-book for investors helping them
to pick winners in high technology. Moore's ideas stem from the "home" of the Internet world
and base the approach on how companies can build value in market capitalization in the new
economy. Also most of Nokia's value is based on future expectations, not on the present
performance. In the assessment of future growth of a company, expenditure in R& D is a
widely used measure. The most important characteristic of innovation power is the ability of
the company to renew its products and production processes. Nokia had great difficulties in
from 1993 until 1996 in process control and logistics in the mobile phone business. The
situation cooled down for a while, but the problem still remains.
Nokia has adopted a strategy to buy all its components and not to have its own semiconductor
production, which is very expensive. On the other hand, Nokia is putting itself in a position,
where it is very vulnerable to delivery and market disturbances. Those manufacturers who
have their own component production have also a possibility to gain a temporary competitive
advantage.

Compared to other Finnish companies, Nokia's R&D expenditure is high, but on the world
class it is only average and lower than Ericsson has. Ericsson is also a less focused company
than Nokia. Focusing activities is important as is equally important to keep a sufficient level
of diversity. (Lemola 1999: 149-154). Nokia's strength is its young personnel and its original
company culture. In a longer run, when the business environment of the telecommunications
industry has changed enough, these strengths might develop into a handicap. During the year
Nokia has also built many R&D flavored alliances. Some of these have been successful, but
many alliances have also failed (Lemola 1999: 170). These alliances Nokia doesn't want to
remember in public.

Incentive Program

Nokia's Board of Directors proposed in January 29,1999 for the General Annual Meeting an
enlarged stock option incentive plan for the key personnel, that is "New stock option plan to
key personnel". The Board will propose that as part of Nokia's incentive program, a new
stock option plan be issued to key personnel. It will also be proposed that the Board be
authorized to decide on an issue of new shares. The other proposals relate to the nomination
committee of the Board, amendments to the terms and conditions of the existing stock option
plans and an increase of the share capital of the Nokia Foundation.

The Board will propose that a total of 36,000,000 stock options top be issued to Nokia's key
personnel. The intention is to extend the stock option plans to cover approximately 3,500 key
persons of the company world-wide. The new stock options will provide an important
addition to Nokia's already extensive stock option plans, which form an essential part of the
company's global incentive program. Nokia will also continue the Nokia Connecting People
Bonus Plan, which was introduced in 1997 to cover other employees than those participating
in the stock options plans.

The stock options will be divided into three groups of 12,000,000 pieces each (A, B and C).
Each stock option will entitle to a subscription for one share with a nominal value of 24 cents
as of April 1, 2001 (group A) or as of April 1, 2002 (group B) or as of April 1, 2003 (group
C). The share subscription price is determined separately for each group of stock options on
the basis of the market price of Nokia A share during 1999-2001, as provided in the proposal
in more detail. The share capital would be increased due to the share subscriptions by
36,000,000 shares and EUR 8,640,000 at the maximum.

8. NOKIA'S MANAGEMENT ACCOUNTING SYSTEMS

Framework for analysis

Mouritsen (1995: 317) gives a good description of the role of management accounting in
global firms: "The role of management accounting in international firms is related to their
strategies of co-ordination and integration. In the global firm, management accounting
supports a dispersed configuration of the value-chain located across the world. The
dispersed location of activities calls for extensive co-ordination and central management
intervention in the affairs of its subsidiaries. Through attention to global product-line
profitability, central management can use management accounting to establish an integrated
organisation. Production, sales, R&D, etc. are positioned globally according to specific
locational advantages and they are integrated through planning and budgeting activities.
Management accounting in the global firm is a finely tuned information mechanism. It relies
not only on composite financial measures but also on non-financial measures that help
integrate different subsidiaries in the furtherance of global rather than local
objectives." Thus the main task of MASs in an international firm is to support the
management to co-ordinate all the global business activities and to integrate them through
planning and budgeting activities.

The task of MASs in a global firm defined above factually means that the primary general
objective for them is to support the management to realize the strategy chosen to the
company by facilitating the co-ordination and integration of a very complex system. More
specifically, in a telecommunication company with a very fast growth of novel high-
technology products, a great deal of attention in MASs should be paid to support the core
R&D (new product development) and marketing (customer-oriented selling) activities that
play the central role in global growth. We think that in order to reach a global success, the
MASs should efficiently take care of these tasks. This means that efficient MASs from the
perspective of fulfilling these tasks are necessary conditions or success. However, in order to
create a additional competitive advantage for a company they should include some special
characteristics of their own.

Thus we define the following tests for the management accounting systems to evaluate their
role in the global success of Nokia:

1) MASs should support the management to realize the chosen strategy by facilitating co-
ordination and integration of business activities (general requirement)

2) MASs should especially support R&D and marketing activities (special requirement)

3) MASs should include special and unique features in order to create additional competitive
advantage by themselves (additional requirement)

If the first and second tests are successfully passed, we can say that MASs have supported
global success. However, if also the third test is passed, their role in global success may have
be decisive.

Nokia's MASs

Nokia has emphasized the role of knowledge management in global success. Ilkka Tuomi
(1998), the chief researcher of Nokia Research Centre, states that knowledge creation, supply,
and utilization is the most essential task in modern business world. Out of all information
Tuomi regards tacit (implicit) information as the most important one. In order to reach a
global success, Nokia was forced to manage with the explosive increase of knowledge
intensity. Thus it was extremely important to co-ordinate all the factors that are associated
with knowledge management, that means personnel, information systems, strategy, quality,
and process developers. Furthermore, Tuomi says that the theory of knowledge management
provides Nokia with new ideas about future organizations and their nature of activities. This
is very essential because successful new product development is based on strict priorization
of pilot projects which are used to test future visions. In fact, Nokia does not predict the
future but create knowledge that can be used to understand it when it is present. It may be so
that the modern knowledge management philosophy underlying all the information systems,
including MASs, in Nokia has played an important role in supporting the realization of global
strategies (see Tuomi 1999).

The Strategic Manager of Nokia Telecommunications (NTC), Mikko Kosonen (1995) has
presented four elements for the role of MAS in Nokia that have used to drive for excellence
in performance. Firstly, the atmosphere in Nokia should create a culture for continuous
improvement. The urgency for change to excellence in performance should be emphasized in
all activities. The vision and the strategies based on it should have a clear focus on global,
telecommunication, high value-added business. The Nokia values should be present in every
activity and business. These values are:

1. Customer satisfaction
2. Respect for the individual
3. Achievement and
4. Continuous learning
These values should be communicated to as well as understood and applied by each
employee at each organization level of Nokia.
Secondly, performance management should be aligned to corporate strategies and Nokia
values. This alignation factually means that:

1) Each business unit should define and give a priority to its own targets and performance
indicators for customer satisfaction (correct time to market, price vs. performance and
features, field reliability, delivery accuracy and lead time), operative efficiency (cycle time,
first time pass yield, cost efficiency, working capital in days), and people involvement (target
setting and understanding, communication, enpowerment, team-work),

2) All the measures above are measured and linked to the three core processes, that is product
process, customer commitment process, and management and support processes.

Therefore, the performance measurement system forms a matrix where the three core
processes are rows and the three performance areas are columns.

Each performance area is measured for each core process. The product process includes
activities from identification of needs to development and launching of new systems,
products, and features. The customer commitment process comprises activities from
tendering to order-delivery, implementation and after sales. The management and support
processes include strategy setting (direction setting), finance and control (measuring), and
human resource management (HRM) process (competence development). Customer
satisfaction is measured by customer surveys and internal measures (like milestones),
operative efficiency by internal measures that include traditional financial measures, and
people involvement by employee and involvement surveys. The goals for performance
improvement are strong market position and good profitability that are consisted with the
vision and the strategy. These goal measures are also included in the performance matrix (see
Table 5). Thus, it seems to be that at Nokia Telecommunications the performance systems is
efficiently built to support strategy realization through the core processes.

Thirdly, the organization should be re-engineered to create value. Kosonen states that
organization is factually consisted of "software" and "hardware" to affect people. In his
definition software includes values, management philosophy, and core competences while
hardware is consisted of organizational structure, processes, and management systems.

Table 5. Performance measurement matrix in Nokia Telecommunications.

Consequently, organization (software and hardware) is used to make the strategy to reach the
vision through value creation. Thus, the idea at Nokia Telecommunications has been to re-
engineer the organization to support strategy realization in an consistent way. Fourthly,
controllership should be aligned to business development. This means for example that there
should be account teams (dedicated to specific customers) with controllers close to customers
that understand their business and help them to prepare long-term financial plans. Hence
account teams should have strong competencies to evaluate customers' long-term viability
and the value of Nokia's solution to the customer over time. This is the key question because
Nokia is using value-based princing.

Moreover, also controllers in business units should have strong competencies to evaluate new
market opportunities, to support account teams, and to develop right solutions and to make
right products. Kosonen says that global competition and price erosion set extra demands on
all functions to better understand profitability and to improve business processes and
operations. Thus finance and control needs to be embedded in all core processes that means
decentralized controllership. In summary, controllership is built to efficiently support product
and customer commitment processes but also management and support processes.

Tapani Lehtinen (1997), Development Manager (Finance) at Nokia Mobile Phones (NMP)
share the main ideas of controllership with Kosonen. He states that controllership should be
influenced by corporate culture and philosophy, that means Nokia values and the Nokia way,
as well as by business environment and dimensions (customers, business lines, processes),
and changes in all of them. The performance measurement matrix at NMP is consisted of
business lines as rows and regions and functions as columns (see Table 6). Through the
matrix, customer information is highlighted. Controllership partly follows current reporting
structure (regions and functions) and partly business enviroment and dimensions (customers,
business lines, and processes). The core processes within NMP are product creation, product
delivery, and management processes. The starting point for each process is the customer.
Controllers are seen as a part of management, not for example as a cost police or
beancounter. Their roles and tasks should be support strategy implementation based on
customer satisfaction, understanding the business and processes, and decentralized
responsibility (region, business line, function, business unit). Lehtinen states that for
controllers, the future (to see opportunities) is more important than the past. However, the
past helps in understanding the dependencies and key businesses, products and customers.

The standard performance measurement system in Nokia has been built to be consistent with
the strategic and operational planning process of the company. Tahvanainen (1999: 100)
gives a good description about the process within Nokia, especially NTC. This process can be
divided in the following phases:

1. The strategic and operational planning process begins with company wide vision
planning in January-February each year.
2. After this phase, strategic planning is continued at the business unit and functional level.
3. In March, the top management meets again with the purpose of deciding which
businesses the company wants to be part of in the future.
4. During April-May, the visions and key strategic goals are operationalized into long run
plans for the next three years.
5. From August onwards, the business planning process continues through annual planning
where the first year of the three year plan is brought under focus and an operational plan
is drawn down to the cost center level. The need for additional employees is also
determined.
The planning process is surprisingly heavy taking account that the telecommunications
industry is very turbulent. Nokia's corporate planning director explains the practice as follows
(for the original Finnish text see Vihma 1997): "The more turbulent the market, the more
important it is to have a shared understanding of the future so that there is a clear reference
point to which everyone can reflect his or her observations".
Table 6. Performance measurement matrix in Nokia Mobile Phones.
In 1995, top management decided to make a move towards harmonizing the different
performance measurement systems (PMS) in NTC for several reasons (see Tahvanainen
1999: 107):

1) Having a common performance management system in all company units and locations
would simplify performance measurement (PM) implementation in the future when
increasing number of NTC employees would be rotating from one job to another across
business units and countries.
2) Nokia values could be built into performance measurement
3) The new PM system could support team work.
4) I t could also support the recently established process management in NTC.

An HR manager at Nokia Head Quarter in Finland stated the following (Tahvanainen 1999:
107): "Performance management is one of the most important human resource management
processes, and it has to be efficient and effective. We at NTC think that for our future
success, having such a process is a basic requirement" (April-June1996).

The performance management (PEM at NTC) process is considered to be an integral part of

NTC management and thus it has to be consistent with the strategic and operational planning
process of the company as well as company values. The main objectives of the PEM are
(Tahvanainen 1999: 108):

1) Key actions are planned and main objectives are realistic and agreed upon together
between manager and employee.
2) Key results are reviewed, feedback is given and necessary corrective actions are taken.
3) Both long and short-term plans and objectives, which take into account the unit's own
responsibility area as well as neighboring departments/functions, are consistent throughout
the organization and are taken into account by all managers.
4) Strategy, policies, short-term targets and results of the organization are known by the staff.
5) Performance is evaluated both quantitatively and qualitatively with clear measures which
take into account both short and long term objectives as well as relevent reference groups
(customers, owners, personnel).
6) Good performance is rewarded.
7) Development of the people in NTC is systematically taken care of.

Moreover, the overall objective of the PEM is stated to be the continuous improvement of
performance. The interests of both the company and the individual are taken into
consideration and combined within the workplace environment. The cornerstones of PEM are
objective setting, reviewing/coaching, evaluation, and development. NTC managers see that
the central element in conduncting the PEM process is the Planning and Development
discussion.

Marko Jrvenp (1998) has analyzed NTC from the perspective of strategic management
accounting systems (see especially the summary table in pages 233-236). His research gives
us an opportunity to make the following conclusions about the central innovations of MAS in
NTC:
1) Activity based costing (ABC): ABC was applied in some units but was not generally
regarded as useful. Strategically the benefits were small.
2) Strategic cost management (SCM): There were no observations of SCM.
3) Target cost management (TCM): Some elements of TCM were implicitly applied.
4) Life cycle accounting (LCA): LCA was applied by ad hoc basis. There was difficulties in
cost allocation. Interest for profitability calculations for the cuctomer life cycle.
5) Value-based pricing (VBP): VBM was implemented but was technically regarded as
difficult to carry out.
6) Customer profitability analysis (CPA): CPA was widely adopted and strategically regarded
as very important. The role of MA in CPA was important.
7) Customer business analysis (CBA): CBA was actively made by account teams and was
seen to be a central trend in the future.
8) Nonfinancial performance measurement (NPM): NPM was widely applied and regarded as
important.
9) Strategic investment appraisal (SIA): There were no observations of SIA.

Thus, NTC has been very selective in choosing MA innovations. The main principle has been
that only those novel MASs or their elements have been implemented that can be see useful
through a benefit-cost analysis. The implementation of a novel MAS is not a value an sich.
Therefore, the MASs in Nokia are hybrid systems including features from both traditional
and innovative MASs.

Jrvenp (1998) noticed several signs that the MASs in NTC did not operate perfectly and that
the MAS in general did not differ from systems in other large companies. The following
comments throw light on these points:

1) The key figures and ratios that are primarily used in steering, are quite traditional (p. 85).
2) The Nokia values are not well connected to MASs (p. 86).
3) It is not clearly defined what should be reported, to whom and when. Due to the rapid
growth, there has been a tendence to increase reporting with eliminating anything (p. 93).
4) MA is poor because of lack for clear definitions (see above) but also because it lacks
relevant dimensions, for example, customer and country profitability (p. 128).
5) There is no time to develop MASs because reporting all the basic information (p. 128).
6) Many product profitability analyses are badly biased so that verbal descriptions can be
regarded as more important (p. 130).
7) Multitude of routine reporting, unappropriateness of MASs, difficulties in MA change,
lack of competence, and the incomparability of financial and nonfinancial matters are seen
problematic. Thus all the problems of strategic MA mentioned in literature are also present in
NTC (p. 131).
8) MA that plays with numbers, has in fact a minor role in business steering (p. 132).
9) NTC is an organization that is very difficult to support by MASs because it factually
includes an incorporated conflict (p. 133).
10) MA has a quite meachanistic and passive role in formal strategic planning (p. 144).

Jrvenp (1998: 151) concludes that the internal reporting in NTC corresponds to a typical
practice in large companies. The basic accounting system (BAS) in Finland is INTIME
OPEN and in daughter companies SCALA. Information from the BAS is directed for
consolidation to HYPERION that is a reporting system that may include forecasted
information, too. Furthermore, account managers use LATEST ESTIMATE TOOL (LE-tool)
to predict key financial statements. LE-tool is based on the EXCEL spreadsheet program (p.
148-149). Moreover, Nokia makes use of ERP (Enterprise Resource Planning) system SAP
R/3 and an OROS system in ABC (Kytsalmi 2000).

Jani Taipaleenmki (1999) has analyses the role of MA in new product development (NPD) in
NMP. He states (p. 24) that the following concurrent engineering (CE) features were agreed
on in 1990: clearly defined milestones, cross-functional teams, breaking up traditional
functions, clear role of management in decision making, target setting and performance
appraisal. The NPD products are steered by the milestone model. Management accounting is
organized to support NPD as a controller function so that there are local R&D center
controllers, global R&D program controllers, R&D controllers responsible for the process
accounting and, in addition, R&D controllers as a part of finance and control support function
who sell their services to single product programs. Taipaleenmki states (p. 26) that there is an
aspiration towards globally common management accounting processes as far as possible.
Moreover, in the future, it is expected that the process-orientation will be more and more
emphasized in the organization with respect to management accounting in NPD: controllers
in the functional organization could be moved to the process, regional, and product line
organizations.

The management accounting change projects include also IT to a great extent: the PS-module
of SAP R/3 for the project cost planning was under implementation and the R&D controllers
were training to use it. Taipaleenmki (p. 29) states that the most important role of R&D
controllers is to increase the business-orientation in the NPD through taking financial
perspective and communicating financial figures and challenging the NPD teams. The
importance of management accounting information was experienced to be very high although
the excellent economic success of Nokia diminished this importance in the eyes of managers.
However, many values such that quality, image were difficult or even impossible to measure
financially (p. 30). It was also comprehended that the cumulative profitability is critical with
regard to the existence of a company. Thus, R&D controllers have extended their role from
the routine accounting to include calculating and analyzing profitability, following the
process performance measures, and planning the future together with the NPD staff from
other functions.

The product life cycle with the profitability dimension is the most important concept in
controlling the NPD activities. The product lifecycle profitability or PLP calculation has the
following form (p. 32):

sales revenue (regions, sales, marketing)

- variable product cost (factories, product program)
= sales margin
- fixed product cost (factories, product program)
= gross margin
- development costs (product program)
- marketing costs (marketing function)
- other costs (administration)
= product contribution
Thus, it is a typical product profitability calculation with traditional variable and fixed costs.
However, the PLP calculation is seen as the most challenging accounting process with regard
to cross-functional co-operation due to the long time range.
Tapaleenmki (p. 34) states that performance measurement is becoming more and more
important as a control mechanism in the NPD in NMP. There is a keen need for financial and
non-financial indicators because the relationship between the input and output of the process
is extremely complex. In the performance matrix there are four kinds of measures
(dimensions):

1) Financial: R&D costs, R&D costs/net sales, profitability, licencing, ligitations, savings.
2) Customer: new product revenue, warranty costs/sales, customer satisfaction, market
strenght, attractive product portfolio, standards, alliances.
3) Process: time accuracy & speed, direct costs, process quality, market orientation & product
quality tools, innovation.
4) People, learning and knowledge: process quality tools, managing resources, technology
tools and methods, technology strategies update, employee satisfaction, recruiting &
retention, development learning.

In addition, for single NPD projects there is a management tool (scorecard) that resembles the
balanced scorecard approach (see Table 7).

Taipaleenmki (p. 37) states that all comes down to the profitability: the final target are
profitable products and successful company. Therefore the traditional cost management
thinking is discarded in NMP and the key concept to increase profit consiousness and
business-orientation among the NPD team members is product lifecycle profitability (PLP).
PLP includes the idea of satisfying customers' needs and increasing investor's profits during
the lifecycle of profitable new products. To sum up, the management accounting practices
related to NPD in NMP include most traditional and some strategic MA (SMA) techniques
(p. 46).

In summary, Taipaleenmki concludes that controllers will play a very significant role in the
company's future success if Nokia will remain in strong position to lead the development
toward the third and successive generations of mobile communications and new wireless data
applications.

Table 7. Performance measurement matrix in Nokia Mobile Phones concurrent engineering

process (CE).
Conclusion

In the present case it seems to be useful to classify MASs into inofficial and official systems.
One of the cornerstones in Nokia's inofficial management accounting systems is no doubt the
way that information is created and communicated. Nokia has emphasized that knowledge
creation, supply and efficient use is one of the success factors. Systematic knowledge
management to create insights of future organizations and products has been essential in new
product development. Investments on people and customer-based information through
continuous learning, functional rotation (cross-functional teams, inter-team learning), and
decentralization of controllership have increased customer-orientation but also cost
consiousness (and thus business and profit consiousness). Furthermore, open and frank
communication is typical of the way Nokia (NTC) operates (Tahvanainen 1999: 99). This
means that employees are well aware of their performance goals that is an indication of the
value achievement. In fact, the personal planning and development discussion where the
goals are set and discussed in detail, is said to be the most important tool in conducting the
performance management process (Tahvanainen 1999: 109). Non-hierarchical
communication and networking is the norm. Thus, to summarize, the inofficial information
systems to create and use of tacit information in Nokia have been desirable for a
telecommunication company with a rapid and global growth.

The vision and strategies of Nokia have been clearly focused and communicated to all the
organization levels through a heavy annual planning process. This process has factually
formed a ritual against the high uncertaintly of environment. The strategies have seamlessly
linked to the performance matrices used to steer the operations. The performance has been
consistently controlled by a decentralized business controller organization. Furthermore,
bonuses are based on the achievement of the goals expressed in the performance matrices.
Business controllers in decentralized account teams have been as customer oriented as
possible and helped customers to prepare long-term profitability calculations. Pricing of
products is based on the value that is created to the customer (value-based prining) that
enables a successful long-term operation with customers. New product development is
systematically supported by customer-orientation, cross-functional teams and inter-team
learning. Plans are based on the visions created by the top management but they are built up
using the basic information delivered by the account teams close to customers. Thus, the
MASs in general have been successfully planned to support the decision making of the
management in strategy realization (first test: general requirement).

The starting point of all the activities in Nokia seems to be the customer: all the main
measures of performance are customer-oriented (note that the second starting point is
profitability: thus customer profitability is the key concept). Moreover, Nokia has a process
organization that highlights the importance of the customer and new products. In NTC, the
core processes are product process, customer commitment process, and management and
support processes while in NMP they are product creation, product delivery, and management
processes. In new product development, a special attention is paid to customer-orientation
and satisfaction. The performance matrices of Nokia, that describes the measurement and
reporting practices in MASs, are based on the core processes above and customer-related
measures. Thus, we can conclude that the MASs in Nokia clearly support the R&D (new
product development) and marketing (customer-related) processes (second test: special
requirement).

The MASs in Nokia seem to mixed systems of traditional and new MA approaches. Jrvenp
(1998: 151) has shown that the MASs in NTC closely correspond to the familiar practice in
large companies. Some of the new strategic MA (SMA) tools have been adopted, but not
usually in their original form. Similarly, Taipaleenmki (1999: 46) summarize that MA
practices related to new product development in NMP include most traditional and only some
SMA techniques. Thus it seems to be so that Nokia has its own way, Nokia way, also to
apply MASs. These systems are not purely traditional but not purely novel or exceptional
either, if you analyse them in detail. However, more important is the overall framework of
MAS: it seems to be elastic and effective enough to enable controlled fast global growth.
Moreover, this overall framework includes a speciality that may make it exceptional. This
speciality is that the heavy emphasis on long-term product profitability calculations, prepared
especially for customers. For example, Taipaleenmki (1999: 31) states that these life cycle
calculations and reports with the profitability dimension are the most effective tools of
control and support for decision-making. In conclusion, we can state that MASs in Nokia
may have provided at least a little additional contribution to the global success of the
company (third test: additional requirement) although there are several discrepancies, too (see
Jrvenp 1998).

9. CONCLUSIONS

In less than a decade Nokia Group has moved from a position of a market follower to a
position of a market maker. During the same period the company has transformed itself from
a diversified European company into a focused global firm. Pulkkinen (1997) gives a partial
explanation to Nokia's growth and success through coincidental preconditions. But there must
be also other factors. In the present study, we did not notice essential elements in the Nokia's
strategic planning or control system that would differ much from what we have used to see in
other global firms. The strategic planning framework and the Nokia way of management are
common and could be from any management textbook.

There are also imperfection in the system as reported by Tuomi (1999) in the case of Future
Watch. So, the company has no "secret weapon" in forecasting the future of its business. The
MASs "normal" and may not, in many characteristics, be as state-of-the art as for example
ABB's ABACUS system. Anyway, they have supported the management to carry out
strategies especially in R&D (product) and customer-related (core) processes. A clear and
distinctive feature of the MASs is however their customer-focused long-term nature of
profitability (life-cycle) calculations associated with recentralized controllership. This feature
may have provided Nokia with an additional value although experience is not entirely
positive.

Key strategic and management parameters are ordinary - sometimes even trivial. They
remind simple propaganda messages that the work force is expected to repeat after the leader.
The incentive system is state-of-the art compared to the Finnish standards, where net salaries
are very low. So, the huge growth of Nokia has made many people better off.

One distinctive trait, which is difficult to investigate is the way of interaction and
communication. Nokia's late CEO Kari Kairamo, who at the end of the 1980's started the
globalization process of the company, initiated a very blunt and straightforward
communication style inside the company. Things were called by their own names. To an
outsider this communication style seemed strong - even "uncivilized." The present CEO,
Jorma Ollilla who comes from province of South Bothnia in Finland was very eager to learn
this style and to continue. South Bothnia is an independent, strong minded region in Finland.
The following citation is characteristic to Ollila's style (Silbermann 1999: 140): "Ollila, who
earned graduate degrees in political science, economics, and technology before coming to
Nokia, combines Finnish directness with a an almost confrontational intensity".

Simple, strong communication style has benefits for the organization. There are less political
games, there are less hidden agendas. In a situation where many people have to commit
themselves to a join vision, simple messages are the only effective ones. The energy of the
organization is not lost in bureaucracy or internal conflicts. Most of the organizational energy
is directed in a "positive" way.

A second strength is the eagerness of the Nokia management to meet people all over the
world and to interact and learn. "Nokia is all over the world - it learns what's good in every
culture it works in and combines it all." Nokia president Pekka Ala-Pietil calls his company's
readiness to adapt to local conditions "selecting horses for courses." (Silberman 1999: 140).

Will these strengths be able to help Nokia in its continuous transformation also in the next
millennium is a 100 billion dollar question. Lemola (1999: 171) says that a vision and
madness are factors that Nokia people like to characterize themselves, when talking about
their business success. Lemola adds a third factor, which is change. Pulkkinen called it
coincidental preconditions. But usually good players are lucky. Lemola concludes that if
Nokia had had only one support pillar, e.g. mobile phones, or wireline centrals, mobile phone
networks would not have developed into such a success as they are. Finding the right balance
between focusing and diversity is the core question for the Nokia management. When the
pressure is to build short - term value, the issues of future development can be easily ignored.
This would be fatal for the company.

ACKNOWLEDGEMENTS

This project is financed by Technology Development Centre (Tekes) and the Academy of
Finland and this is gratefully acknowledged.
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APPENDICES

APPENDIX 1. Nokia's Framework for Strategy Development.