Nokia, & organizational capital

The trouble at Nokia shows that Joseph Schumpeter put the word “destruction” into creative destruction for a good reason. 
One word haunts Stephen Elop's email - Polaroid, a once-innovative firm that failed to adapt to competition from new technology and so went bust.
This highlights an important point - that, for all their talk about flexibility, firms - especially large ones - are quite inflexible. A big reason for this is described in a paper by Peter Rousseau and Boyan Jovanovic. A firm’s organizational capital, they say, has a particular vintage - it embodies the technologies that existed when it was founded. But there is a big danger that subsequent developments will render such capital obsolescent, and the firm will not be able to adapt. Companies, like societies, can be trapped by their own history.
Ironically, successful firms might be more prone to this than others - as past success breeds complacency, creates large pressure groups who are loath to change, and encourages the “not invented here” syndrome.
If you doubt this, just think of any firm. Chances are, it does what it always did. Banks remain banks, supermarkets remain supermarkets and so on. Firms can branch out a little, but it is rarer for them to change business model completely - the delicious irony is that Nokia is a rare exception here - and many of those that do fail spectacularly. Think of Marconi, or perhaps AOL. 
This helps explain two facts. One is that the death rate amongst even large firms is high.  100 years ago, Armstrong Whitworth, Bleachers Association and Brown & Co were among the UK’s largest firms. No-one’s heard of them today.
Secondly, Paul Ormerod has pointed out (pdf) that the statistical distribution of corporate deaths is very similar to that of species‘ extinctions. This hints at an intriguing possibility - that just as species cannot foresee their demise or avoid it by adapting (carnivores don’t become herbivores), nor can companies. As Paul says (pdf), “firms have very limited capacities to acquire knowledge about the likely impact of their strategies.” (Translation: bosses are bullshitters.)
There are three implications here.
1. This might (only might) explain a key fact about western economies in recent years - the dearth of investment opportunities and lack of capital spending. It could be that past vintages of capital have picked the low-hanging fruit, and new ones have yet to emerge in sufficient number or vigour.
2. Technical progress comes from markets, not companies. As Jonathan Haskel has shown (pdf), most total factor productivity growth comes from firms entering and exiting the market, not from existing ones doing better. This is consistent with firms being trapped by their vintage capital.
3. It is unreasonable to expect the public sector to increase its efficiency significantly. After all, if firms cannot often greatly improve their performance, despite the threat of death and competition, what hope is there that the public sector can do so?

Comments

[Anthony]

On point 3, surely the lesson is not to say it is unfair to criticize the public sector's inefficiencies, but to take the lesson from point 2. That is market reform of public services is the way forward, as Legrand might argue.

[Glenn]

Well Nokia started out making tyres I think!? so they've been skating on thin ice for a while, eh?!?

Research into high tech companies shows that even with the demise of corporate entities, people take the most useful bits to make new enterprises. Even if there are some innovative ideas being stifled, corporate failure frees up these ideas to be used commercially. e.g. Acorn Computers disappeared, but some of the semiconductor design technology and the staff went on to form ARM - the world leader in microprocessor design.

However some corporates do things which are hard to dislodge such as banks and mobile phone operators (who are essentially utility providers) who can happily trade on a large base of retail customers without having to engage in major changes of products or capital equipment.

[Luis Enrique]

I think this is all very true - I'm not sure it's even complacency - you can tell stories in which it is rational to invest organizational and human capital in doing what you do best, and riding it until it dies. There might be better returns to that than perpetually trying to reinvent yourself.

[Barbara]

Point 2 has left me thinking. It's true, companies that grow are the ones that offer new things to the market but because the market is demanding new things, not just new things on their own make companies grow.

[Jim]

Er, so because firm A gets big and sclerotic, and gets destroyed by up and coming firm B, because firm B provides a better service, or a cheaper product, or a more innovative product at a similar price, you therefore conclude that the State should be allowed to continually provide a low level of service improvement(if any), at a constantly increasing cost to the taxpayer, ad infinitum?

[Adam Bell]

@Jim:
To be fair, I suspect Chris would rather disband public sector monoliths and replace them with state-funded co-operatives, allowing competition but still retaining a public service ethos.

[chris]

Thanks, Adam - that would be my preferred option. I fear Jim is confusing explanation with justification, which is an easy mistake to make giuven that so many people offer opinions rather than analysis.

[charlieman]

@Glenn

A good comparison with Nokia is British Insulated Callender's Cables (BICC). BICC realised that their customers also needed devices to join cables together and became one of the first European companies to develop ethernet switches. However, they failed to spot where the money would be in the future, selling off the networking business.

[Boursin]

I'm not saying this to dismiss the discussion so far, but as a Finn I have to wonder how much of Elop's message had to do with the culturally peculiar horizon of expectations of the Finnish portion of his audience.

This is an almost comically overpessimistic culture, and disproportionately so in all matters economic. (Extending into policy, too, incidentally; Keynesianism, for instance, never made any real headway in Finland even during its post-war heyday, as the received view on dealing with recessions has been that there simply isn't anything much to do at all except wait until it's over, as with bad weather!). Nokia is a profit-making, solvent, dividend-issuing company. It's not about to disappear overnight (unless bought out outright by Microsoft). But if it has some degree of difficulty in the market, the local way of putting it would be to say that there is a near-apocalyptic, feverishly urgent matter of life and death.

[Jim]

@Adam and Chris: So which part of the 'public sector monolith' are you suggesting be opened to competition, and will the customer be able to take his or her money elsewhere, to the extent that the publicly owned body fails entirely, as happens in the private sector? Or will it be more of the 'The customer can have what they're given' that we get currently from the public sector?

[Keith]

I may be missing something about reforming public services but what exactly are these magic poney "reforms" that are so good? That we hear about periodically. Right wing critics never have a good word to say for anything the public sector does yet they never produce any constructive proposals except to sell off and contract out services so they and their rich mates can rip of the taxpayer and employ workers on poverty pay.
Which means worse services at higher cost. Or can the tory trolls provide a workable concept of reforms not enriching Gideon and his trustifarians.

[rogerh]

Maybe Nokia will be making trans-galactic communicators in 2700CE and maybe not. But at least the shape of the communicator will be Nokia's (or its replacement's) choice.

Exploiting cash-cows and divesting dogs is normal business. Government looks like a business but is it really? Seems to me governments lack an ability to unload accreted processes. Furthermore the jobs democratic governments do carry a big profit-uncertainty so divesting is expensive. Worse still, the cash-cows have learnt mobility. Not a nice business model - it lacks choice.

No surprise that government seems inefficient but hard to see how to change, nicely anyway.