Leading The Field In Financials

Dec. 21, 2004

If corporations, like people, are known by the company they keep, then Nokia Corp., the world's premier mobile-phone producer, is in the finest of financial company. On IndustryWeek's roster of the world's 1,000 largest publicly traded manufacturers, Nokia, a best-managed company for the fifth consecutive year, can count itself in the select circle of the 10 best financial performers. Nokia, for example, shares honors with Oracle Corp., a Redwood City, Calif.-based maker of database-management systems and application software, for the best absolute profit margins within the exclusive group of 10. Nokia joins Oracle, Dell Computer Corp., and Porsche AG in posting the best revenue-growth numbers for the years 1996 to 1999, the base period for this year's financial ranking. Nokia, like each of the nine other firms in the top 10, is a leader in rates of return on equity. And Nokia and eight others in the top 10, including Herman Miller Inc., a Zeeland, Mich.-based office furniture firm, post top-rated returns on assets. Indeed, among all the companies on the IW 1000, Nokia is second only to Herman Miller in overall financial performance, according to IndustryWeek analysis. Exceeding its financial targets for the third consecutive year, Nokia in 1999 substantially increased profits, sales, and earnings per share (EPS), three of the measures of performance that matter a lot to both management and investors. Operating profit for the Espoo, Finland-based tele-communications producer increased an impressive 57% from its 1998 mark to US$3.94 billion (3.91 billion euros). Net sales advanced to $19.93 billion (19.77 billion euros), a 48% gain. Earnings per share (EPS) grew 51% to $2.26 (2.24 euros). But as remarkable as 1999's results were, Nokia managed to do even better, in percentage terms, during this year's first half. Operating profit rose 66% from 1999's first six months to $2.6 billion (2.7 billion euros). Net sales rose 62% to $12.8 billion (13.5 billion euros). EPS, up 77% to 37 cents (0.39 euros), brought more smiles to the faces of its shareholders. Part of Nokia's success in the highly competitive, fast-paced, high-tech world of telecommunications stems from its commitment to R&D. In 1999 Nokia had 52 R&D centers in 14 countries employing 17,134 people, about 31% of the company's total payroll. And against companies in other industries in which innovation also is an operating principle, Nokia's record is impressive. Investing 7.7% of sales in R&D in 1999, for example, Nokia outpaced highly regarded Merck & Co. Inc., the revenue leader in the research-intensive pharmaceutical industry, and Du Pont & Co. in the life sciences. In fact, in R&D investment, Nokia last year topped 926 other companies on the IW 1000-firms whose basic businesses range from autos and aircraft to petrochemicals and steel. However, Nokia is not just R&D savvy. Its impressive revenue-growth figures coupled with top-ranked profit margin, return on assets, and return on equity suggest there's a much broader base to its market success. Nokia is No. 1 in the mobile-phone market-ahead of Germany's Siemens AG, Sweden's L.M. Ericsson Telephone Co., and Motorola Inc., the Schaumburg, Ill.-based cell-phone leader until 1998. The Finnish company also is a leader in wireless infrastructure, specifically in GSM (global system for mobile communications) technology, notes A. Marshall Acuff Jr., a financial analyst at Salomon Smith Barney Inc., New York, a unit of Citigroup. And he believes that Nokia will benefit from the emerging third-generation wireless technology that combines mobile phones, the Internet, and person-to-person communication. "I would continue to rate Nokia of Finland as one of the most innovative and dynamic companies in high-tech manufacturing-and marketing," says James C. Bryant, director of marketing communications at Fujitsu Microelectronics Europe GmbH, Liederbach, Germany. It seems the only folks Nokia may be disappointing these days are those looking for a simple formula to explain the company's market success. "There are no miracles. There are no secret recipes," insists Pekka Ala-Pietil, Nokia's president. Rather, "many elements [have been] built and executed in a swift and timely manner," he states. How many? In addition to R&D, three others stand out: vision, growth, and risk taking. In less than a decade, under the tutelage of Jorma Ollila, whom Nokia's board unexpectedly elevated to CEO in 1992, Nokia has been restructured and reinvented. A loose conglomerate that once counted rubber boots among its lines of business is now a focused telecommunications company. "I think it's important that we have had a clear vision," says Ala-Pietil. Back in the early 1990s, for example, Nokia's management was among the first to see potential of wireless communication and its vision was that voice communication would go wireless. "And we invested a lot. We built the organization and the elements to respond to that challenge and opportunity," relates Nokia's president. Something similar is going on now. Nokia's management sees mobile communications and the Internet coming together. "We call it [the] Mobile Information Society," says Ala-Pietil. Basically that translates to putting the Internet in a person's pocket. "And we are in a position to provide people with terminals with which . . . they can make the most of the information available." There's a bit of Jack Welch at work at Nokia. Reminded of CEO Welch's dictum at General Electric Co. that a business not No. 1 or No. 2 in its field is to be fixed, sold, or closed, Ala-Pietil states, "When [internal growth] targets are not met, you have to give [that] serious consideration and look at the different means of getting things done." And he wants to leave no doubt that Nokia has a growth bias. "We want to focus on those that have the best growth opportunities." Reportedly, Nokia culls from the company any line of business that isn't growing revenues at the rate of 25% annually. Ala-Pietil demurs. "One should not take that [25% figure] literally," he says. There is no single minimum business-growth-rate mark at Nokia, he stresses. Rather, he reveals-without disclosing the details-that the company's several businesses have individual growth targets that take into account such factors as the maturity of their markets. The company's president is more forthcoming, however, on the deliberately and carefully crafted culture of risk taking at Nokia. "It's a curious mind-set in every respect of operating," Ala-Pietil says. "You are after innovation. You take risks. You experiment. You try issues. You don't take the conventional answers." And, he says, you learn from mistakes-even as you must recognize the competitive need for speed. "When you move fast, you will make mistakes. And the key element is that you can turn those mistakes [into] important sources for your learning," he adds. "Every day you have to wake up with the mind-set that this is a new, great day when we can make a difference, we can improve, and we can be better." Nokia made innovation and risk taking the theme of this year's report to shareholders. "There are no limits to the human imagination," it states. "There are no limits to our capacity to change . . . to our capability to improve. . . . There are no limits except those we set ourselves." It doesn't take a business-school case study or a high-priced management consultant to know that other companies-and not only those in the global telecommunications market-can profit from Nokia's operating principles.

About the Author

John McClenahen | Former Senior Editor, IndustryWeek

John S. McClenahen, is an occasional essayist on the Web site of IndustryWeek, the executive management publication from which he retired in 2006. He began his journalism career as a broadcast journalist at Westinghouse Broadcasting’s KYW in Cleveland, Ohio. In May 1967, he joined Penton Media Inc. in Cleveland and in September 1967 was transferred to Washington, DC, the base from which for nearly 40 years he wrote primarily about national and international economics and politics, and corporate social responsibility.

      McClenahen, a native of Ohio now residing in Maryland, is an award-winning writer and photographer. He is the author of three books of poetry, most recently An Unexpected Poet (2013), and several books of photographs, including Black, White, and Shades of Grey (2014). He also is the author of a children’s book, Henry at His Beach (2014).

      His photograph “Provincetown: Fog Rising 2004” was selected for the Smithsonian Institution’s 2011 juried exhibition Artists at Work and displayed in the S. Dillon Ripley Center at the Smithsonian Institution in Washington, D.C., from June until October 2011. Five of his photographs are in the collection of St. Lawrence University and displayed on campus in Canton, New York.

      John McClenahen’s essay “Incorporating America: Whitman in Context” was designated one of the five best works published in The Journal of Graduate Liberal Studies during the twelve-year editorship of R. Barry Leavis of Rollins College. John McClenahen’s several journalism prizes include the coveted Jesse H. Neal Award. He also is the author of the commemorative poem “Upon 50 Years,” celebrating the fiftieth anniversary of the founding of Wolfson College Cambridge, and appearing in “The Wolfson Review.”

      John McClenahen received a B.A. (English with a minor in government) from St. Lawrence University, an M.A., (English) from Western Reserve University, and a Master of Arts in Liberal Studies from Georgetown University, where he also pursued doctoral studies. At St. Lawrence University, he was elected to academic honor societies in English and government and to Omicron Delta Kappa, the University’s highest undergraduate honor. John McClenahen was a participant in the 32nd Annual Wharton Seminars for Journalists at the Wharton School at the University of Pennsylvania in Philadelphia. During the Easter Term of the 1986 academic year, John McClenahen was the first American to hold a prestigious Press Fellowship at Wolfson College, Cambridge, in the United Kingdom.

      John McClenahen has served on the Editorial Board of Confluence: The Journal of Graduate Liberal Studies and was co-founder and first editor of Liberal Studies at Georgetown. He has been a volunteer researcher on the William Steinway Diary Project at the Smithsonian Institution, Washington, D.C., and has been an assistant professorial lecturer at The George Washington University in Washington, D.C.