Case Study Note: Nokia's 5G Reorganization
Corporate
Nokia Corporation, headquartered at Karakaari 7, 02610 Espoo, Finland, has undergone a significant transformation in its business model and strategic focus since 2020. Pekka Lundmark, who had previously worked at Nokia between 1990 and 2000, was appointed as CEO in August 2020 with the specific mandate to revitalize the company's 5G business and improve its competitive position. Nokia operates in a highly competitive telecommunications equipment market, competing primarily with Ericsson and Huawei, with the company's reorganization designed to recapture market share in the critical 5G infrastructure segment. The company's restructuring of divisions and leadership was part of a three-phase strategy that took effect on January 1, 2021, abandoning the previous "end-to-end" approach in favor of a more focused business structure aligned with customer needs and market opportunities. This strategic shift represented a fundamental rethinking of Nokia's approach to the market, moving away from trying to be everything to everyone and instead concentrating resources where the company could establish genuine competitive advantage. The new organizational structure created clearer lines of accountability and more direct connection to customer needs, addressing internal inefficiencies that had contributed to Nokia's market challenges.
Source: Fourester Research
Market
The global 5G infrastructure market reached approximately $13.4 billion in 2022, with a compound annual growth rate exceeding 40% as telecom operators worldwide accelerated network deployments. Nokia's market position had slipped from 27% share in 2019 to 26% in mid-2021 in the 4G/5G Radio Access Network (RAN) market outside China, putting significant pressure on the company's revenue and profitability. The 5G enterprise segment represents another significant growth area, with 47% of enterprise decision-makers planning 5G deployments according to Nokia's research, presenting opportunities beyond the traditional carrier business. Nokia's reorganization aimed to capitalize on market transitions toward open interfaces, virtualization, and cloud-native software while expanding its enterprise customer base in the rapidly growing industrial automation and digitalization segments where connectivity solutions create substantial value. This market evolution created both threats and opportunities for Nokia, requiring the company to balance defending its position with traditional telecom service providers while simultaneously expanding into new customer segments with different requirements and competitive dynamics. The convergence of telecommunications and information technology sectors further complicated the competitive landscape, introducing new players with different capabilities and business models.
The Issue: Confronting Brutal Realities
Nokia faced an existential market challenge in 2020 that demanded immediate and dramatic action. The company had stumbled badly in the transition to 5G, with significant technical missteps including overreliance on Intel's delayed 10nm chipsets and subsequent dependence on costly Xilinx field-programmable gate arrays (FPGAs) that severely undermined product competitiveness and profit margins. By late 2019, these issues had reduced Nokia's networks business gross margin to just 29.1%, while group-wide margins fell to 35.3%, creating substantial financial pressure. Nokia's market position was deteriorating rapidly as customers opted for competitors, with the company losing key contracts such as Verizon's $6.6 billion 5G agreement to Samsung and a significant portion of Deutsche Telekom's business to Ericsson. The combination of technical problems, operational inefficiencies, and market share losses created a dangerous downward spiral that threatened Nokia's long-term viability in the telecommunications equipment market.
The challenges extended beyond product development to operational inefficiencies and organizational structure. Nokia's CEO Pekka Lundmark identified "complacency" as a significant internal issue that needed decisive action, recognizing that the company's organizational setup was inhibiting its ability to respond to market changes. The company's "end-to-end" philosophy had created complex internal silos and diminished accountability, slowing decision-making and obscuring commercial focus. Nokia's mobile networks division was particularly affected, with the late arrival of competitive 5G products creating a vicious cycle of declining market share and reduced investment capacity compared to rivals. This organizational complexity made it difficult to identify and address performance issues in specific business areas, as problems in one segment could be masked by stronger results elsewhere, further complicating Nokia's ability to diagnose and treat the root causes of its competitive decline.
Financial pressures magnified these technical and market challenges. Despite Huawei's geopolitical problems potentially creating market opportunities, Nokia was lagging behind in securing 5G contracts, with only 68 deals compared to Ericsson's 81 and Huawei's 91 as of early 2020. Investor confidence had plummeted, with Nokia suspending its dividend in October 2019 after slashing its profit outlook, signaling the severity of its financial situation. The company's stock price had already suffered an 18.5% drop following its reorganization announcement and third-quarter results in 2020, reflecting deep market skepticism about Nokia's ability to recover from its 5G missteps. This loss of investor confidence created additional pressure on Nokia's leadership team, making it even more difficult to secure the resources and time needed for a comprehensive transformation.
Nokia's existential crisis was further complicated by the COVID-19 pandemic, which created supply chain disruptions and economic uncertainty while simultaneously accelerating digital transformation trends that made 5G success even more critical. These brutal realities demanded a comprehensive response that would address immediate product competitiveness issues while reshaping Nokia's organizational structure, market approach, and investment priorities to create a foundation for long-term recovery. The combined technological, operational, competitive, and financial challenges presented a clear inflection point that would determine whether Nokia could remain a viable competitor in the telecommunications equipment market. The scope and severity of these challenges required Nokia's leadership to confront uncomfortable truths about the company's performance while simultaneously developing and communicating a credible path to recovery that could restore confidence among customers, employees, and investors.
The Solution: Unwavering Faith in Transformation
Despite these daunting challenges, Pekka Lundmark and Nokia's leadership maintained unwavering faith in the company's ability to transform and reclaim 5G leadership. Lundmark boldly declared that Nokia would "invest whatever it takes to win in 5G," signaling the company's commitment to technological leadership even in the face of financial pressures. This statement reflected the psychological duality at the heart of Nokia's transformation - acknowledging serious problems while maintaining absolute conviction that they could be overcome through decisive action. The solution Nokia developed was comprehensive, addressing product technology, organizational structure, market focus, and operational efficiency simultaneously. This multi-dimensional approach recognized that Nokia's challenges were too fundamental to be solved through incremental improvements in any single area, requiring instead a coordinated program of change that would reinvent the company from the inside out.
The technical foundation of Nokia's transformation was the development of the ReefShark System-on-Chip (SoC) portfolio to replace the problematic FPGAs that had undermined both product performance and profitability. Nokia expanded its semiconductor supplier base beyond Intel to include Broadcom and Marvell, reducing dependency risks while accelerating 5G product competitiveness. This multi-vendor chipset strategy allowed Nokia to rapidly improve its product portfolio while systematically phasing out the costly FPGA-based solutions that had damaged margins. Engineering resources were refocused on areas where Nokia could establish demonstrable leadership, particularly in Open RAN, virtualized RAN, and 5G core technologies. The company maintained its commitment to research and development excellence despite financial pressures, recognizing that technological leadership would ultimately determine its ability to win in the market.
Organizationally, Nokia implemented a radical restructuring that took effect January 1, 2021, replacing the "end-to-end" approach with four focused business groups: Mobile Networks, Network Infrastructure, Cloud and Network Services, and Nokia Technologies. Lundmark explained the rationale as better aligning with customer needs, increasing accountability, reducing complexity, and improving cost-efficiency. Each business group was given clear profit responsibility and the autonomy to move at the speed required by its specific market segment. This restructuring streamlined decision-making and created sharper customer focus, allowing Nokia to respond more rapidly to changing market conditions. The new structure also provided greater transparency into the performance of individual business areas, enabling more targeted interventions where needed and clearer communication of progress to external stakeholders.
Nokia's market approach was recalibrated to focus resources on segments where it could win, while expanding beyond traditional telecom service providers to enterprise customers. The company maintained faith in its ability to capture significant value from industrial digitalization, despite short-term setbacks. Even while announcing 10,000 job cuts over 2021-2022, Nokia emphasized this was about shifting resources to R&D and growth areas rather than simply reducing costs. The company remained committed to increasing overall R&D investment, particularly in 5G, cloud, and digital infrastructure, demonstrating confidence that technological leadership would ultimately restore market position. This willingness to make difficult workforce decisions while protecting innovation capacity reflected Nokia's conviction that the path to recovery required both operational discipline and continued investment in future technologies.
Financially, Nokia made difficult choices to create runway for its transformation. Beyond the dividend suspension, the company implemented a substantial cost reduction program aiming to cut €600 million in expenses by 2023 compared to 2020 levels. These savings were redirected to increase R&D spending by 11% between 2020 and 2022, reaching nearly €4.6 billion annually. This willingness to prioritize technological investment over short-term financial performance reflected Nokia's faith that product leadership would ultimately restore both growth and profitability, validating the difficult transformation process. The company maintained this investment discipline despite pressure from some investors for more immediate financial returns, demonstrating the leadership team's conviction that Nokia's future depended on regaining technological leadership rather than short-term financial engineering.
Business Benefits: The Results of Confronting Brutal Reality
Nokia's courageous confrontation of brutal reality while maintaining faith in transformation has yielded impressive business results across multiple dimensions. By the end of 2021, Nokia reported full-year revenues of €22.2 billion, representing 3% growth in constant currency terms, while operating profit increased by 33% to €2.78 billion compared to 2020. This financial improvement validated Nokia's strategic reset and created momentum for continued growth. The company's operational efficiency initiatives successfully reduced costs while redirecting resources to critical R&D investments, improving overall competitive positioning. These results provided concrete evidence that Nokia's transformation strategy was working, reinforcing confidence among stakeholders and creating a virtuous cycle of improvement as initial successes generated resources and credibility for further change.
Product competitiveness has dramatically improved through the successful transition to the ReefShark SoC portfolio. By the end of 2022, Nokia had reduced FPGA-based 5G shipments to just 3% of the total, enabling the Mobile Networks business to achieve a 38.4% gross margin compared to the dire 29.1% level of 2019. This margin expansion became a powerful engine for additional R&D investment, creating a virtuous cycle of improving product competitiveness. The multi-vendor chip strategy not only improved economics but created supply chain resilience that proved valuable during industry-wide semiconductor shortages. Nokia's renewed focus on technological leadership has restored its credibility with customers, allowing the company to compete on product capabilities and value rather than merely on price, strengthening both market position and financial performance.
Market position stabilized and began to improve following the reorganization. According to research from Dell'Oro and Omdia, Nokia emerged as one of the biggest gainers in Radio Access Network market share in 2022, alongside Samsung. This market share improvement represented the first concrete evidence that Nokia's 5G turnaround was gaining traction with customers. The company has successfully expanded beyond traditional telecom customers, with the Network Infrastructure business growing 15% in 2021 by capturing enterprise opportunities in areas like private wireless networks and industrial automation. Nokia's ability to grow in new customer segments while stabilizing its position with traditional telecom operators demonstrated the success of its more focused and differentiated market approach, validating the strategic choices made during the reorganization.
Organizational effectiveness has significantly improved through the new structure. Each business group now operates with clear accountability and customer focus, enabling faster decision-making and more targeted innovation investments. By early 2023, Nokia reported that not a single business unit was unprofitable, demonstrating the success of this focused approach. The Cloud and Network Services unit exemplified this improvement, achieving a 13.9% operating margin by refocusing on higher-value opportunities in 5G core and enterprise services. These organizational improvements have created a more agile Nokia that can respond more effectively to market opportunities and competitive threats, with clearer accountability driving better operational execution across the company.
Investor confidence has returned as Nokia's transformation has gained credibility, with the company's share price recovering from its 2020 lows. When Nokia reported strong Q1 2021 results reflecting the initial impact of its transformation strategy, shares jumped by 13.7%, signaling renewed market faith in the company's direction. The consistent execution against strategic commitments has allowed Nokia to restore credibility with customers, employees, and investors alike, creating a foundation for sustainable long-term success. This restoration of stakeholder confidence has been perhaps the most important achievement of Nokia's transformation, as it provides the company with the support and resources needed to complete its journey back to industry leadership.
Bottom Line
Those seeking a model of successful technology transformation should look to Nokia's 5G reorganization beginning in 2020, which exemplifies the Stockdale Paradox by simultaneously confronting brutal market realities while maintaining unwavering faith in the company's ability to rebuild competitive advantage through focused execution. The company's willingness to acknowledge serious product missteps, declining market share, and operational inefficiencies created the foundation for genuine transformation, rather than incremental improvement. As CEO Pekka Lundmark declared, Nokia would "ensure we are well positioned to leverage these trends, improve our performance and position the company for long-term value creation." This combination of brutal honesty with absolute conviction in a positive outcome enabled Nokia to make difficult decisions that have restored its viability in the 5G market. The transformation journey remains ongoing, but the results achieved thus far validate the power of the Stockdale Paradox approach in navigating complex business challenges.
Organizations in any industry can learn from Nokia's application of discipline, focus, and long-term thinking in their transformation journey. The company has demonstrated that confronting uncomfortable truths about technical missteps and organizational weaknesses, rather than denying or minimizing them, creates the conditions for authentic renewal. Nokia's willingness to direct resources toward R&D investment despite financial pressure reflected confidence that product leadership would ultimately determine market success. The reorganization into focused business groups with clear accountability simplified decision-making and created customer-centric innovation, replacing a complex structure that had become an impediment to agility. Most importantly, Nokia maintained faith that its talented people could overcome seemingly insurmountable challenges when given clear direction and appropriate resources, validating the core principle of the Stockdale Paradox that optimism grounded in reality is the true foundation of resilience.