Factors That Contribute to Financial Success or Failure of Nokia Corporation - Essay Example

FACTORS THAT CONTRIBUTE TO FINANCIAL SUCCESS OR FAILURE OF A COMPANY This paper is about the factors that contribute to financial success or failure of a company. Our task consists of doing a survey of literature concerning the topic, analyzing the body of information that we’ve culled through our research, and formulating a thesis statement that consists of general description of the factors resulting to financial success or bankruptcy. To make the discussion “grounded on reality,” we shall make references to Nokia Corporation – about which we shall validate our thesis statement or the information that we’ve reviewed. A. Background Information on Nokia Corporation Nokia Corporation was formed after the three Finnish companies Nokia Ab (founded in 1865), Finnish Rubber Works (1898), and Finnish Cable Works (1912) formally merged. The newly-formed Nokia (for brevity, from hereon) in 1967 was ideally positioned for a pioneering role in the early evolution of mobile communications, particularly when European telecommunications markets were deregulated and the mobile networks became global after the first international mobile phone network – the Nordic Mobile Telephone (NMT) is built in 1981. On the decade immediately prior to the turn of the century, Nokia made probably the most important strategic decision in its history as it adopted the GSM standard. This move has put Nokia at the head of the mobile telephone industry’s global boom, and made it the world leader before the end of the same decade. Currently, Nokia continues with 3G, mobile multi-player gaming and multi-media devices as it looks to the future. Providing us with summary-information on current financial conditions of Nokia, Olli-Pekka Kallasvuo, Nokia’s CEO, declares: “As a result of (Nokia’s) strong operational management and market position, Nokia was able to achieve solid margins and operating cash flow of 1.3 billion Euros for the third quarter of 2008.” This is, of course, notwithstanding the descending trends that the company has on its net sales (down 5% year on year), its sales of devices and sales (down 7%), and estimated mobile device market share (which is 38%, down from 39% in Q3 2007 and down from 40% in Q2 2008). B. Thesis Statement What can we reasonably expect to find as determinants of failure or success of companies? Our subject matter, at the surface level, tends to limit the determinants of financial success or failure of any given company to elements that are strictly pecuniary, if not economic. This is to say that what makes a company either financially robust or bankrupt are strictly, say, mistaken decisions relative to revenue and expense – i.e., the revenue is too little to support a consistently ballooning expenditures. However, if one does a survey of what financial managers are saying as factors that contribute to financial health of business institutions, one is going to find a rather encompassing list of causes that range from people or staff management and training to brand positioning, to cultivation of corporate values or doing a value shift, to employment of various tools particularly the strategy analysis (to complement financial analysis), to bridging the gap between the pace of internal operations and the speed of changes in the external environment of business companies, and to – of course – taking a closer focus and attention to what is rigorously pertinent to finances (e.g., synchronicity of revenue and expense, adjustments to balance the current assets, consideration of operational and financial leverage, and paying attention to debt maturity) and financial management (particularly, proper management of one’s debt). That financial success or failure is not only determined by purely financial decisions is verified by Nokia experience, so far. While in neck-to-neck competition with other mobile phone companies like Motorola and Ericson – among others – Nokia is being credited to have a much healthier financial condition. And this is so because Nokia has made right decisions (that is, it has the better business concept), chosen the right partners (i.e., has the edge in terms of modes of operations), being cost effective in their operations (i.e., referred to as internal value chain), and has built a successful global brand (i.e., referred to as industry level value chain). All in all, Nokia has succeeded financially because it has the better business model. C. Survey of Related Literature Kravetz (1996) draws a direct correlation between innovative work on people management and financial success. Decades ago, there was hardly any academic or formal study to back the correlation up; what was handy then were simply anecdotal testimonies. Spearheading a ten-year study that commenced in 1984, Kravetz is now telling us the “soft stuff” or the people component of any company needs to be managed very well if companies would want to be financially conquering – that is, Kravetz is telling us that between people management and financial success causality, and not just correlation, exists. In a separate study done by the American Society for Training and Development, Incorporated (ASTD) cited by Koehle (2000), it is said that there is a definitive proof that investments in workforce training predicts a company’s future financial performance, including its total stockholder return (ITR). Too, from the same study one learns that investors improve their portfolio performance if they have access to information about training expenditures when making investment decisions. In similar vein, the study found out that in companies that train more their employees, lower turnover rates are observed and higher employee satisfaction is recorded. Still, batting for the “soft stuff,” one finds Jerralds who brings to the fore the powerful link between employee performance and financial success. He observes that many companies are relying more heavily on human capital to address consumer demands while lowering operating costs, and improving financial position. Insofar as employee performance is measured by appraisal instruments, Jerralds points out that the employees generally are more motivated, empowered, and appreciated when performance appraisals are executed properly. Subsequently, this leads to higher productivity levels, increased employee performance and improved quality results. Mazella (2008) cites a study by Oregon State University demonstrating the fact the business that is “family business” positively influences customer purchasing decisions. Positive customer purchasing decisions have as their consequence positive financial performance – that is growth and profitability -- for the (family) businesses. This is because to leverage family history is to create an identity that appeals to consumers. For when consumers think family business, what comes to their mind are quality, wholesome, continuity. Schmidt (2008) names three secrets of successful companies. His definition of a successful company equates it to a good stock where one can invest in. That means, a successful company is – among other things – a financially stable company. According to Schmidt, these three secrets of successful companies are the generalities of what an accountant, an economist, a marketer or a human resource practitioner can chip in into the discussion. And these three secrets are competitive advantage, above-average management, and market leadership. Companies that have these three secrets are practically recognized as worth investing into. Competitive advantage is two-fold: one, it is when a company provides a superior service or product for the same price charged by the market; and, two, it is when a company provides the same service or product as the market, but a lower price. Above-average management is an experienced management, which can do both the task of leading a company through market cycles and provide mentorship for the next generation of managers. Likewise, a quality management is with the company for a long period of time; for its loyalty cannot be swayed by higher remuneration that other companies offer. Market leadership is almost synonymous to reputation – which is inclusive of quality, innovation, customer service or even warranties. Harbour-Felax (2007), writing about the challenges from Japanese, European and Korean automobile companies that the so-called Detroit Big Three’s – the Chrysler Group, the Ford Motor Co., and the General Motors – are now facing, makes a rather incisive observation about what separates a struggling from a competitive company. She says, a consistent focus on long-term strategy and with discipline to this plan is an unmistakable mark of a successful company. By focus on long-term strategy, she means that when a crisis occurs, the management sticks to it. Of course, she clarifies, it does not mean inflexibility in particular the refusal to move with the times to make improvement. Rather, it specifically means that the management responds to the fires with the same consistency and vision, adapting as necessary. The meat of Harbour-Felax’s article is her observation that the companies that currently struggle – financially, specifically – are those that tend to focus on the short-term, financially-focused and work daily to ensure that Wall Street keeps their stock prices at the right level. To Harbour-Felax’s judgment, such is a bad behavior and forces the company not to optimize its long-term potential. This is, indeed, ironic. A company that is too focused on itself – and its resources – are losing in the long-term. Gahagan (2003) recognizes that there is an abyss between rapid changing business environment and the traditional financial planning and budgeting process. The former is externally happening; the latter is internally occurring. He sagely points out that budgeting and planning forecasts that are intended for a single planning period are reduced to naught the moment the external environment of doing business radically changes. And, as history would attest, the business environment indeed changes almost at a blink of an eye! What brings success or failure, according to Gahagan, to most companies is their capacity to do anticipation of these radical changes while simultaneously trying to come up with accurate forecasts (that are characteristic of Wall Street). In the concrete, it means to stay financially viable, companies should close the gap between the quickening pace of business operations and the much slower rate of the traditional planning and budgeting process – (for which Gahagan likewise cites existing solutions). A study that was spearheaded by The Aspen Institute and Booz Allen Hamilton (2005) attests to a substantial link between financial success and focus on corporate values. It means that companies that align ethics and operational strategies usually have fostered financial growth. For the study reveals that ethics-related language in formal statements – such as the vision or mission statements of companies – do not only set corporate expectations for employee behavior; this is also being used as a shield in increasingly complex and global legal and regulatory environment. For instance, financial leaders now believe social and environmental responsibility have positive financial impact. Thus, many companies are now turning their corporate values into a competitive asset. Earlier, Paine wrote a book, entitled Value Shift, that vouched for similar connection – that is, between ethics and good financial performance. According to her, ethics pays; and she cites how ethical patterns of thinking, behaving and interacting with others can lead directly or indirectly to financial gains: thorough better cost control and risk management; through enhanced employee creativity and contribution; through strengthened reputation among key constituencies; and through expanded access to resources and opportunities. More explicitly, economic gains are generated or preserved by observing ethical requirements through lower complaint costs, lower monitoring costs, lower compliance costs, greater trust, more knowledge sharing, improve product or service quality, strengthened brand equity, increased access to talent, among others (Paine 2003, pp. 51-52). Grant (2005) underlines in his book requirement for strategic analysis to identify and exploit the sources of financial value or profitability. He argued that financial analysis and strategic analysis can be combined to discover how profit or value is created (and where it is being destroyed). Said Grant that financial analysis especially by what he calls the disaggregation of corporate-wide profitability ratios can be revealing, but ultimately what is needed is strategic analysis to let loose the drivers of industry profitability and competitive advantage. Ventura (2008) equates financial failure with mismanagement of debts. Sihler, Crawford, and Davis, H. (2004), in their effort to help especially the managers of small enterprises, provides a careful elaboration of the rudiments of financial management. According to them, financial management – at least, the emphasis that it places on what aspect, etc. – is matching up with the life cycle of the company. Presupposing that all things being equal, sound financial management in whatever life cycle of company should result to not running out of money, wise allocation of firm’s resources, and exiting from the business with the value created. Platt (1999) explains how financial failure, or bankruptcy, ensues out of the five financial areas of cash-flow cycle, current assets, operating leverage, financial leverage and debt maturity. Cash-flow cycle is concerned with the relationship between the revenue that is received and the expense that is paid. Ideally, revenue and expense are synchronously matched. The asynchronicity between revenue and expense creates the potential cash-flow cycle problem that could culminate in bankruptcy. Current assets – or the cash, inventory, accounts receivable, and other short-term assets -- must be maintained in an acceptable balance. Bankruptcies result from an imbalance in current asset, which is a result of manager’s inability to monitor and adjust the levels of each current asset. Operating leverage is about a firm’s fixed or unavoidable cost relative to the profits it can earn from additional sales. Firms consider alternative operating leverage levels as part of their strategic plans as they compare various acquisitions of machines and equipments. While machines tend to lower average costs, they also tend to raise number of units of products that must be sold to break even. And bankruptcy results if too many machines are acquired. Financial leverage reports on the impact on net income of the firm’s choice of financing. The two basic choices are to finance with debt (borrowed money) or equity (money raised from the owners). Some aggressive entrepreneurs prefer to finance with as much debt as possible since ownership is thereby restricted. The disadvantage to this approach is that debt holders require periodic interest payments (which raises costs) and the eventual return of their funds (which imposes a refinancing problem). With equity funds, on the other hand, annual interest payments are lower. If, however, a large number of common shares must be sold in order to raise the equity capital needed, it becomes more difficult to report sizable per share earnings or to have the common stock price rise. The choice between using debt or stock is important since it affects both the firm’s likelihood of bankruptcy and its potential future earnings. Finally, debt maturity concerns a firm’s decision to borrow money in either the short or long term. The perfect example of this in our personal lives is the decision to buy a home with a fixed rate mortgage or to take the chance that interest rates will not rise and use a variable rate mortgage. If interest rates stay the same or fall, the interest rates rise, monthly payments rise with a variable mortgage, and people not able to make the higher payments lose their homes. Companies also gamble on interest rate changes. Sometimes, they win and they report higher profits; sometimes they lose and go bankrupt D. The Nokia Case Suojapelto (2001), in his master’s thesis, made a study that focused on Nokia’s business model (that is unarguably explaining what accounts for the success of Nokia). He focused on the four elements that are: business concept (which describes what is the company’s business, the products that it makes and the customer that it has); modes of operation (that is about the kind of [and with whom] external relationships the company has with other companies in order to operate in the markets; the internal value chain revealing how a company has arranged its internal processes for creating value; and the external or industry level value chain showing what is company’s position(s) in the industry value network and how it has arranged its relationships with other companies into one network. Suojapelto (pp. 171) further notes that at the moment (and for some time already) Nokia seems to have done the best way in telecommunications business. It has made right decisions, chosen the right partners, being cost effective in their operations, and has built a successful global brand – among others. Suojapelto moreover noted that Nokia’s bullish stance in the market is attested by the fact that while other companies are suffering from the depression of the industry, Nokia is still making a relatively strong result. E. Conclusion The lesson that we have learned so far from the preceding concerns the interconnectedness of elements that make up the totality of any business enterprise. We began by positing the question of what determines the financial success or failure of a company – with the stress on the word “financial” – and ended up with the thought that business enterprises are to be taken as organic whole. That is, the financial success or failure of a company is determined to a great extent by how other aspects of organizational life are run and managed, in the same vein that each and every organizational dimension of business entities are influenced by how finances are being managed. References: Bozz Allen Hamilton (2005). New study finds link between financial success and focus on corporate values. New York, Bozz Allen Hamilton. Available from: http://www.boozallen.com/publications/article/659548[Accessed on 19 November 2008]. Gahagan, J. (2003). “Reaching for financial success: companies must synchronize budgeting and planning with fas-changing business operations to stay financially viable,” Institute of Management Accountants. http://www.accessmylibrary.com/coms2/summary_0286-21843700_ITM Grant, R. (2005). Contemporary strategy analysis. Victoria: Blackwell Publishers, Ltd. Harbour-Felax, L. “Focus on the right model: what makes a company successful in the long run? A long-term view and a commitment to keep it,” Gale Group. http://www.thefreelibrary.com/Focus+on+the+right+model:+what+makes+a+company+successful+in+the+long...-a0163868585 Jerralds, G. “Performance Appraisals – The Ultimate Link Between Employee Performance and Profitability,” Performance Appraisals – The Ultimate Link Between Employee Performance and Profitability EzineArticles.com. http://ezinearticles.com/?Performance-Appraisals---The-Ultimate-Link-Between-Employee-Performance-and-Profitability&id=1298575 Koehle, D. (2000). “Investing in Workforce Training Improves Financial Success,” American Soceity for Training and Development, Inc. http://findarticles.com/p/articles/mi_m4467/is_/ai_67590813 Kravets, D. (1996). People management practices and financial success. Mesa, AZ, Kravetz Associates. Available from: http://www.kravetz.com/art1/art1p1.html [Accessed 18 November 2008]. Mazella, D. (2008). Promoting ‘family’ brand linked to companies’ financial success. New Jersey, SBProfits. Available from: http://www.sbprofits.com/Promoting-Family-Brand [Accessed 19 November 2008]. Platt, H. (1999). Why companies fail: strategies for detecting, avoiding, and profiting from bankruptcy. Washington, D.C.: Beard Books. Paine, L. S. (2003). Value shift: why companies must merge social and financial imperatives to achieve superior performance. USA: McGraw-Hill Professional. Sihler, W., Crawford, R. and Davis, H. (2004). Smart financial management: the essential reference for the successful small business. New York: American Management Association Schmidt, M. “3 Secrets of Successful Companies,” Investopedia. http://biz.yahoo.com/investopedia/081105/4057.html?.v=1 Suojapelto, K. 2001. The business models of telecommunication equipment manufacturers: case Nokia. Master’s Thesis, Lapeenranta University of Technology. Thomsitt, R. “How to Evolve a Financial Success System.” How to Evolve a Financial Success System EzineArticles.com. http://ezinearticles.com/?How-to-Evolve-a-Financial-Success-System@id=220549 Ventura, J. (2008). The bankruptcy handbook. New York: Kaplan Publishing. www.nokia.com Gregory Jerralds Level: Basic Gregory Jerralds is Chief Operating Office with Profit InnerCircle, LLC (profitinnercircle.com) Greg shares the responsibility of growing Profit InnerCircle business in the United States and ... ... Read More