Operations Management

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________________________________________________________________________________________________________________ Professor Örjan Sölvell and Professor Michael E. Porter, Institute for Strategy and Competitiveness at Harvard Business School, prepared this case from published sources with the assistance of Pekka Yla-Anttila, Laura Paija, and Christian Ketels. HBS cases are developed solely as the basis for class discussion. Cases are not intended to serve as endorsements, sources of primary data, or illustrations of effective or ineffective management. Copyright © 2002, 2004, 2005, 2006, 2007, 2008, 2011 President and Fellows of Harvard College. To order copies or request permission to reproduce materials, call 1-800-545-7685, write Harvard Business School Publishing, Boston, MA 02163, or go to http://www.hbsp.harvard.edu. No part of this publication may be reproduced, stored in a retrieval system, used in a spreadsheet, or transmitted in any form or by any means— electronic, mechanical, photocopying, recording, or otherwise—without the permission of Harvard Business School.

Ö R J A N S Ö L V E L L

M I C H A E L E . P O R T E R

Finland and Nokia: Creating the World’s Most Competitive Economy

When an inventor in Silicon Valley opens his garage door to show off his latest idea, he has 50% of the world market in front of him. When an inventor in Finland opens his garage door, he faces three feet of snow.

—J.O. Nieminen, CEO of Nokia Mobira, 1984

Until the 1990s, Finland was considered a remote and sleepy country in the northeastern corner of Europe, lying in the shadow of its large neighbor Russia. Finland had been part of Sweden for six centuries until 1809, when it was ceded to Russia. The Bolshevik revolution in 1917 and the collapse of the Romanov dynasty led Finland to unilaterally declare independence on December 6, 1917 (still the national day). After difficult years during World War II, Finland remained somewhat isolated, and its economy remained highly dependent on the Soviet Union. Following the model of its Nordic neighbors in the post-war years, Finland was characterized by heavy investments in social welfare and public infrastructure. There was a history of government involvement in the private sector. The government had large holdings in many top Finnish companies (see Exhibit 1) and, through its active involvement in mergers and other investments, influenced the ownership structures of key industries.

Finland’s prosperity level caught up to the OECD average only slowly. With few exceptions, notably in pulp and paper and specialty shipbuilding, Finnish companies were absent from international business rankings.

By 2001, however, Finland had become one of the fastest growing and most competitive economies in the world. A member of the European Union, it was known for fiscal stability and was the only Nordic country introducing the Euro in the first wave. In the Competitiveness Rankings of the Global Competitiveness Report, Finland won the top spot from the United States in 2000. One Finnish company, Nokia, had outpaced others and cast a long shadow on the entire economy. Its emergence as the global market leader in mobile telecommunication equipment had made the company the leading contributor to Finnish exports, R&D expenditures, and market capitalization.

With the slowdown of the global telecommunication market, however, both Nokia and the Finnish economy were facing challenges. Some experts were raising questions about the sustainability of the company, and the country’s, recent achievements.

For the exclusive use of G. Wu, 2019.

This document is authorized for use only by Guohua Wu in Competitive and Strategic Analysis-1 taught by JERAYR HALEBLIAN, University of California – Riverside from Jan 2019 to Jul 2019.

702-427 Finland and Nokia: Creating the World’s Most Competitive Economy

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Country Background

Finland was a sparsely populated European country, surrounded by the Baltic Sea in the South and the West, a 1,000-mile plus border with Russia in the East, and Sweden and Norway in the Northwest. The country’s capital Helsinki was located at the same latitude as southern Alaska and Greenland. Finland’s population of 5.3 million in 2001 was spread thinly across the country’s 130,000 square miles. Only the region of the southern cities of Helsinki, Espoo, and Vantaa was more heavily populated, accounting for about 20% of the total population.

Finland was one of the world’s most homogenous societies with a very low proportion of immigrants. Finns shared one culture, although about 6% of its population belonged to the Swedish minority. Finland had close cultural ties to its Nordic neighbors but had followed a separate path in many other respects. The Finnish language was part of the Finno-Ugrian language group and was related only to Estonian, Hungarian, and to the Inuit language spoken in the far north. Apart from Finnish and Swedish, the two official languages, most of the population also spoke English. With the establishment of the common Nordic labor market in 1954, large numbers of Finns moved to Sweden to work in the car and textile industries, making Finns the largest immigrant group in Sweden. Very few Swedes, however, had moved to Finland.

Beginning in 1919, the Finnish constitution had enshrined a so-called “semi-presidential” form of government. The president, directly elected by the people for a 6-year term, had some policy making powers, especially in foreign relations and the right to dissolve parliament and call elections. He or she (Tarja Halonen was elected the first female Finnish president in February 2000) also formally nominated government ministers that had to be confirmed by parliament. The Prime Minister is elected by Parliament, and proposes the Ministers who are formally appointed by the President. 200 members of the one-chamber parliament were elected for four years. Legislative proposals were usually initiated by the government, but could also come from any member of the parliament. On March 1, 2000, Finland adopted a new constitution that integrated four previously separate constitutional acts which had shifted more powers to parliamentary control.

The country’s vulnerable geopolitical position vis-à-vis the Soviet Union, plus the constitution, had allowed President Urho Kekkonen to dominate the country’s political agenda during his 26 years of office from 1956 to 1982. The parliament was controlled by coalitions often encompassing the whole spectrum of left- to right-wing parties. Kekkonen had forged these broad coalitions, which were accepted out of a desire to avoid discord on domestic policies that could destabilize Finland’s external relations. This logic lived on in the government that had been elected in 1999. Only one party, the rural Center party, was not included in the government coalition.

The Finnish Economy Prior to 1990

The Finnish economy was historically driven by the wealth of the country’s natural resource endowment and its long coastline. The economy was dominated by manufacturing industries and had a service sector smaller than in many comparable European countries. The three largest clusters were pulp and paper, wood products, and engineered metal products. In 1970, pulp and paper accounted for 40% of exports, wood products for 16%, and engineered metal (including shipbuilding) for 23%.

The pulp and paper cluster had emerged based on the large forests covering 76% of the country’s total land area. The cluster had achieved a leading role in the world despite slower growing forests than competing regions of the world as well as higher energy costs than other parts of Scandinavia. A shipbuilding cluster was focused on specialized ships such as icebreakers and ferries. Domestic

For the exclusive use of G. Wu, 2019.

This document is authorized for use only by Guohua Wu in Competitive and Strategic Analysis-1 taught by JERAYR HALEBLIAN, University of California – Riverside from Jan 2019 to Jul 2019.

Finland and Nokia: Creating the World’s Most Competitive Economy 702-427

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demand, for example from ferry lines connecting Finland to Sweden and continental Europe, was an important market for the cluster.

Finland’s post-war economic performance was characterized by slow catch-up to the more advanced western economies from an initially low level. In 1950, Finland’s GDP per hour worked was at 46% of the U.S. level, falling in between its Nordic neighbors and war-torn Germany and Austria. GDP per hour reached 69% of the United States level in 1970, closing some of the gap to its neighbors but falling behind Germany and Austria. From the 1960s through the 1980s, GDP growth rates stayed between 3 and 5% per year, investment rates were high, and total factor productivity growth outperformed many other European countries. Wage dispersion in the Finnish economy was low. Company profitability in Finland was also historically low compared to other OECD countries.

Finland’s trade was heavily affected by the Soviet Union. Having joined forces with Germany during World War II, Finland lost some territory, requiring the relocation of 15% of its population, and was made to pay substantial war indemnities in the form of steel, ships, textiles and machinery sent to the Soviet Union. This created important business linkages in the east. Between the 1950s and the 1980s, some 20% of all Finnish exports were sent east and Finland became an important supplier of manufactured products to the Soviet Union. The Soviet trade was barter trade, with payments for industrial exports usually made in natural resources, often oil. Other important Finnish export markets were in Europe, primarily Sweden and Germany, with the United States accounting for 3% of Finnish exports in the early 1980s. The country joined the European Free Trade Association (EFTA) as an associate member in 1961.

Finland’s economic policy in the 1970s and 80s followed Western European and Nordic patterns. Finland had traditionally been a country with a large public sector and strong welfare aspirations. Taxes were high after an era of active intervention by government in the 1960s and 1970s. Transfer payments and public spending on services were high. Macroeconomic policy featured a fixed nominal exchange rate, centralized wage bargaining, and increasing fiscal budget deficits through the 1980s. After World War II, Finland experienced at least one large devaluation every decade; 30.7% in 1949, 28.1% in 1957, 23.8% in 1967, and more than 20% in a series of devaluations in the 1970s.

Finland had a sophisticated public education and university system. Education between the ages of 7 and 16 was compulsory and most students stayed on for three to four more years in upper secondary or vocational schools. Public spending on education relative to GDP was traditionally above the level of many other European countries, and had increased at a steady rate. The quality of education was considered good, and Finnish students generally performed well in international school performance tests. Nearly 60% of the population had completed a secondary education or beyond.

Finland also was home to 20 universities and other institutions of higher education, with a student population of approximately 270,000. A number of universities had a long tradition; the University of Åbo was founded in 1640 but moved to Helsinki in 1828. A number of additional universities were created in outlying regions in the late 1950s and 1960s. For example, a university was founded in Oulu, a remote city in northern Finland with a population of about 50,000, in 1958. Nearly 13% of the population had a university degree or the equivalent.

Finland’s financial markets were characterized by strong ties between companies and their banks, not unlike the system prevalent in the Germanic countries. Financial regulation was tight, making credit approval restrictive. Finnish competition policy, not unlike other Nordic countries, had a history of lax enforcement. Mergers and acquisitions were decided and negotiated by a small elite group of managers and owners (the so called “bergsråd”), together with the large banks and government officials.

For the exclusive use of G. Wu, 2019.

This document is authorized for use only by Guohua Wu in Competitive and Strategic Analysis-1 taught by JERAYR HALEBLIAN, University of California – Riverside from Jan 2019 to Jul 2019.

702-427 Finland and Nokia: Creating the World’s Most Competitive Economy

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