Strategic changes in what a company's core business is are always risky, but I have been thinking about the contrasting fortunes of two conglomerates that both decided to focus on telecommunications.
The two companies could not be a greater contrast Nokia and Marconi. They were both conglomerates largely engaged in boring but cash generative businesses. Both had high tech telecoms related businesses, both decided to concentrate on telecoms and sell everything else. As everyone knows, this was ultimately spectacularly successful for Nokia and a disaster for Marconi which effectively destroyed itself.
Some of what was different is obvious, at least with hindsight: Marconi paid far too much and it became highly geared by borrowing heavily. The differences that most interest me are:
- timing
- identification of the right business to be in,
- the existence of a problem that needed solving through refocusing, and,
- organic vs acquisitive growth.
Nokia's timing was clearly pretty good. Although its mobile phone and telecom equipment still generated only half its sales in 1993, it was by then well into the process of focusing on the business and the business was growing rapidly.
Marconi's transformation, in contrast, took place at the height of the dot com boom. It made two major acquisitions in 1999, when the market was close to its peak. Growing through acquisitions during a bubble was very expensive. Marconi went from having a large cash pile to being heavily indebted.
This, takes us to another difference. While both companies invested in their telecoms businesses, Marconi was far more acquisitive. Nokia spent a greater proportion of its money on capex, R & D, and other investment in organic growth rather than acquisitions
Marconi's acquisitiveness may also reflect a bad choice of a core business. If it needed so many acquisitions to transform the telecoms equipment business into a significant player, why pick it as a core business. It would have been more natural to sell it and concentrate on a business where Marconi (of GEC as it then was) was already strong enough not to need more than fill in acquisitions.
The shareholders who bought GEC shares prior to the transformation were presumably happy to buy into a stable, if unexciting business. They did not really need the change. If they wanted value released a simple break-up and returns of capital would have done it. If nothing was broken, what were Marconi's management trying to fix by refocusing?
In contrast Nokia did have a problem. Some businesses were performing badly and electronics other than telecoms were making losses that wiped out most of the profit from the better businesses. The telecoms business was already doing well and investment in it was further strengthening a good performer: despite the changes were aimed at concentrating on what the company had proven itself to be good at.
The interesting twist to the latest instalment of the story is that Nokia has, in recent years, been widening its business again. It has launched some products (such as web pads) that are not phones — but these are mobile devices that need the same engineering talent as phones. It has launched web services — such as a music store, which has synergies with phones with built in MP3 players.
Nokia has moved into software, but starting with software that is incorporated into phones. The acquisition of Trolltech does take it into desktop software, but Nokia's motive was Trolltech's, Qtopia, used to develop software for mobile devices. How Nokia develops Trolltech will be interesting, particularly for those of us who use KDE, Opera, Google Earth and other products based on Trolltech's flagship Qt.
Despite this, I think Nokia's strategy continues to make sense. A focus on well designed hardware and complementary software can work as Apple as demonstrated. The acquisitions continue to be of manageable size in contrast to Marconi's balance sheet wreckers, as well as complementary to the core. Although the core business is broadening, it is not a drastic change: even though it takes Nokia back towards the consumer electronics business it once withdrew from.