Performance Appraisal System In Nokia

This report is aimed at critically analysing the performance appraisal and their strategic implications in contemporary firms operating in turbulent and changing business environment, requiring valuable, rare and inimitable business processes to achieve sustainable competitive advantage. In order to achieve the aim of this report, the researcher has chosen Nokia, the Finnish telecom giant that has been highlighted as the best telecommunication company to work for by Forbes International (Datamonitor, 2009). The company is also among one of the largest in terms of market capitalisation within Europe and therefore owes much to the Finnish national culture within its management, especially human resource management. Drawing upon Times (2005), the company has its modest roots as one of the many forestry firms a century ago in Finland; however it has evolved over the years through its effective human resource policies to employ more than 50,000 people across the globe with operations spanning all the developed, emerging and developing economies. It has been argued by Nokia (2009a) that ‘people policies’ have played an important role in the rise of the firm within telecommunication sector that required high degree of creativity and innovation by its employees and workforce. The company is among the few firms within telecommunication industry that has profit margins in excess of 20% to 25% for more than a decade, which have not been effected by the fierce competition by other firms in contemporary firms (Nokia, 2009b). It can therefore be highlighted that intellectual capital has been one of the key source of achieving these efficiencies and effectiveness within the business that have been translated into sustainable competitive advantage.

Nokia – Organisational Background:

Nokia has held the leadership position within the global mobile handset sector for more than a decade, which has however been challenged at different points in time by a range of other manufacturers but the company has evolved its business model to align itself with the changing business environment. Drawing upon Datamonitor (2009), the company has diversified into related business in the wake of stiff competition from value and luxury segments, therefore requiring both high degree of differentiation and cost leadership by the firm. The company is currently actively pursuing its position within telecommunication equipment, TV set-top boxes, and mobile telephony software and hardware development.

In the light of Nokia (2009c), the company has its roots like many other traditional Finnish companies within forestry in 1865, however the company evolved over the decades and become one of the leading players in mobile technology in 1960’s. It is argued by Pollitt (2004) that the key changes within strategy of the firm came in 1980s when senior management become focused on developing intellectual capital and retaining high performance of the company, which was coupled with public offerings of the firm. The company became part of the global corporations after starting trading in London (1987), Frankfurt (1988) and New York (1994). The company has acquired a number of firms during its evolution and has strategically accumulated the human resources from these firms, which has again benefited from its performance appraisals, pay-for-performance, and talent retention strategies, which have been critically analysed in this report.

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Human Resource Strategy:

Nokia has been highlighted by both academic and commercial literature as one of the organisations that can be used for comparison and benchmarking due to the fact that it is flat structured and networked across its global operations (Christopher, 1995). This structure of the firm has led to the fact that it is agile and flexible to grab any window of opportunity that appears within the business environment of the firm. This structure has been aligned with the corporate strategy of the firm to achieve broad market competitive focus within the market that has underlying differentiation competitive advantage in terms of Porter’s Generic Strategies, which can be illustrated as follows:

Cost Leadership

Differentiation

Focus

Narrow Target

Broad

Target

Lower Cost

Differentiation

Competitive Advantage

Competitive Scope

Nokia’s Position on Porter’s Generic Strategies

Adapted from Porter (1985)

Strategic Core

Strategic Periphery

*

It can be argued that in order to achieve the strategic aim and objectives of the firm to become an agile and flexible entity that can achieve competitive advantage, the firm required a robust human resource strategy that is in line with these changes. Drawing upon Briscoe & Schuler (2004), there has been radical change within the HRM strategy of the company after the appointment of Mr. Jorma Ollila as the CEO of the firm in 1992, who initiated the pay-for-performance concept within the company. The philosophy behind the refocus of the HRM strategy has been to create a compensation mechanism that in aligned with the performance and hard work of employees, therefore motivating employees to achieve the key performance indicators that are assigned to them. This was aligned with the “Nokia Way”, the values of the firm, which were defined to incorporate performance of employees as one of the key in achieving overall objectives of the firm. It has been argued by Nokia (2009d) that Nokia Way has been seen as the common glue that has held the HRM strategy of the firm aligning it with the business environment. There has been significant discussion within literature highlighting the “best fit” approach of the company towards its retaining talent through appraisals and compensations that are effective and efficient.

Performance Management and Nokia:

The Nokia Way has been highlighted within the literature as one of the key documents consolidating the HRM strategy of Nokia and it is this document that has highlighted retention of high performers. Drawing upon Stanley et al (2000), it can be argued that the document is no different from HRM policies presented by many other organisations; however the way in which it is processed on day to day activities has been highlighted as the key advantage of the firm. Drawing upon Nokia (2009a), performance of individuals working within Nokia is undertaken from a range of dimensions, but three of them are considered very important, which include: (a) overall customer satisfaction added by the individual; (b) respect for others within the team; and (c) achievements of individuals and their continuous learning.

The literature has highlighted that there has been number of issues within management of performance of individuals and their appraisals within companies. Drawing upon Rutter (2002), within Nokia managers and employees have been given high degree of independence in developing the dimensions into quantifiable goals, aims and objectives, which can therefore be related to the overall performance of their team, department and the organisation. This has been because of the initiative of the company to keep entrepreneurism alive within the firm, where the focus is on “getting things done” rather than follow prescriptive steps and procedures.

According to Lynn (2002), these characteristics of performance appraisal have been achieved through a range of in-house programs, which include: “listening to you”, “investing in you” and “pay-for-performance”. The aim of these programs can be seen to be aligned with the overall business strategy of achieving high degree of efficiency and effectiveness of the business, which would therefore help create value for the stakeholders. Erik & Jonathan (1995) have argued that all these programs are a means to an end i.e. to develop an integrated system of performance goals setting, development of strategies to achieve these goals, and quantification of the overall performance. It should be noted that in order for the seamless flow of performance management between these different programs, the culture of the company plays an important role. This is the reason that the company has developed a team orientated internally competitive culture, which deters negative implications of the competition, however highlighting the positive aspects of it to achieve strategic goals and values.

The performance management of the firm also has been expanded into other reigns of HRM, which can be highlighted from the diversity management within the firm. Drawing upon Briscoe & Schuler (2004), it can be argued that the business environment of the company highlights that there is high number of diversity within the demands of the customers across the national markets. In order to fulfil these demands, the company should mimic the business environment in its internal business environment, making its resources and competencies aligned with it. This according to Nokia (2009d) can be achieved through the diversity management and planning of the firm that require performance appraisals to include features and quantification of diversity of thinking. There are number of characteristics that have been highlighted within the literature surrounding performance management in terms of diversity inclusion and management. However, Rutter (2002) has highlighted that it should be achieved at product, functional and cultural level, therefore providing the direction for companies to use and include in their performance management.

The performance appraisals also have to include the achievement of individuals within corporate social responsibility (CSR) area, which has become one of the key criteria for performance at corporate level. Drawing upon Nokia (2009a), in 2009 the company has highlighted that reducing its carbon footprint and making employees to volunteer for educational sectors in developing countries would be included into the performance appraisals of the employees. This would help the firm in achieving high degree of strategic alignment with the current demands of firms to be responsible for the extended social and environmental issues within national and international economies, where they operate.

It can therefore be argued that performance appraisals within Nokia are used as strategic tools, which can help achieve the extended aims and objectives of the firm. It has been argued that these appraisals has helped the firm in retaining intellectual capital that is aligned with the overall philosophy and “Nokia Way”, which have been at the heart of developing sustainable competitive advantage. It can be argued that performance appraisals undertaken by the firm are valuable, rare and inimitable competency of the firm, which contribute a lot in achieving the overall aim and objectives of the company.

Pay for Performance and Motivation:

The review of the commercial literature surrounding performance appraisals has highlighted that at Nokia performance, rewards and motivation management are all interlinked with each other, so that there is an integrated component that can be used to achieve the aim and objectives of the firm. It should be noted that the company uses pay-for-performance as the key tool which logically flows from effective and efficient performance appraisal techniques used by the firm. Harry (1999) has argued that one of the key vulnerability of per-for-performance management systems is that performance needs to be constantly monitored across the business and its functions so that the strategy can work in synch with realities on ground. The reward structure other than pay within Nokia has also been designed in a way that performance appraisals and motivation tendencies of individuals feed into the system to achieve optimal results.

The key issue that has been faced by the management at Nokia is to analyse the performance appraisals of employees working in different economic and social conditions, therefore making their external environment an important driver in how the compensation is perceived. This is the reason there has been discussion surrounding the overall standardisation of the pay and reward structure in the company or localise it according to the national and regional economic conditions. Nokia being a truly global company has therefore been faced with this issue more so than any other organisation, which also stems into the overall reward management and bias of individuals in terms of intrinsic and extrinsic reward structures.

Nokia has therefore taken performance appraisals very seriously, where there are segments within these appraisals, which have been linked with the overall pay and reward structure of the company. It is highlighted that company has included both hard and soft aspects of compensations and rewards in the light of the appraisals (Pfeffer & Langton, 1993). Therefore, it can be argued that the appraisals are not only responsible for the development of overall pay of the individual, but also the type and mix of motivational tools that are applied to their particular performance regimes and trends over the months.

The performance appraisal process adopted by Nokia has been seen very open, broad focused, yet inclusive of employees and their respective teams. The compensation of individuals within Nokia comprises on the results of these appraisals in the form of pay, bonuses, incentives, company stock options and other benefits. The company uses “investing in people” (IIP) as an annual meeting between managers and employees, where discussion surrounding their focused function along with broad company goals are discussed, which are then quantified into the key dimensions that are set out in the light of changing business objectives of the firm. It should be noted that Tahvanainen (1998) has conducted an empirical research on the link between performance appraisals and pay structures at Nokia. The research has highlighted that pay structure within Nokia is considered highly competitive in regards with the other competitors, which is based on 360 degree feedback called “listening to you”, which is an informal discussion between different teams, which leads to making them discuss their objectives and negotiate their access to resources and information, which can help them all in achieving their own respective goals and performance objectives. The company has also rolled out the electronic version of IIP, which uses company’s intranet to discuss and appraise the performance of virtual teams that uses competencies of individuals across the globe to achieve high degree of efficiency and effectiveness in achieving the overall goals of the firm.

Key Recommendations:

The critical review of academic and commercial literature surrounding Nokia’s performance appraisals has been highlighted as a successful model within this report. The critics however argue that in recent developments the company has lost its leadership position within mobile handset sector, which has led to its shifting focus towards other sectors. The strategic development and deployment has both been suggested within the report as key performance indicators of the firm, which has been seen as resulting from open, clear and inclusive performance management and appraisal techniques. In order to further improvise the performance management and its appraisals, the researcher has discussed recommendations in the following discussion.

There have been critics that have argued that although Nokia has strategically aligned its performance management with the aims and objectives of the organisation, however there are still key gaps with its alignment with the business environment, which require attention. It can be argued that although pay-for-performance have its motivating capabilities for the high performers, however for the average performing, which are the majority within any organisation, this can act as a demotivating factor. It can be suggested that Nokia, like any other company would have normal distribution of performance among its employees, suggesting that not more than 15% of the total employee population would be in the high or underperforming categories, while the rest of 85% of workforce would fall into the average performance. This, according to Pfeffer & Langton (1993) has led to the vulnerability within the organisation to alienate these 85% of the workforce, which would add value into the products and services of the company. The performance appraisals should therefore be realistic and standardised across the organisation, where like-for-like comparisons are undertaken, which are abridged between functions to achieve high degree of effectiveness and efficiency.

It can be suggested that the open criteria used within the firm, which boils down to the discussion between managers and employees suggest that each appraisal cannot be compared with the other appraisals, therefore making it hard to compare on like-to-like grounds, which can lead to distortion of performance results. It can also be argued that commercial segment of the company has been one of the high performing section across the firm, which can be due to the fact that sales, revenue and profit margins are quantifiable variables, while performance of employees in support functions is much harder to access through tangible performance indicators, which is also true about these functions. This, according to Storey (1992) can add insecurity among the intellectual capital of the firm regarding their job, pay and other benefits received from the firm. It can therefore be highlighted that the company has to provide the security of pay and then add bonus-per-performance on top of that to make it more plausible in contemporary uncertain times, with job losses and market failures. The internal competition between teams can lead to deterring forces that would affect the overall performance of the company, as team members would engage themselves in negative activities to undercut access to information and resources for other teams, making the organisation lack efficiency and effectiveness.

Conclusive Remarks:

In the light of the critical review of literature and practice of Nokia in the field of performance appraisals, it can be argued that this HRM strategy of the firm has become a source of competitive advantage for the firm. It has been found out that pay-for-performance has only been applicable within Nokia due to the effectiveness and efficiency of the performance appraisal systems, which are seen just, clear and inclusive by employees. The fact that the system is inclusive, the report suggests that it acts as an implicit form of motivation for employees to have a competitive internal business environment, where teams compete to achieve high degree of overall performance for the company. It can be argued that performance appraisal strategy of the firm is in line with its broad focused differentiation based corporate strategy, therefore leading to achieve the strategic goals and objectives.