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TheFireThatChangedanIndustry:ACase
StudyonThrivinginaNetworkedWorld
ByAmitS.Mukherjee

Date:Oct1,2008

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AmitMukherjeepresentsfourDesignPrinciplesthatseniorexecutivescanapplytotransformtheircompaniesinto
businessesthatwillthriveinanetworkedworld.

About8p.m.onMarch17,2000,alightningboltstruckahighvoltageelectricitylineinNewMexico.Aspowerfluctuated
acrossthestate,afirebrokeoutinafabricationlineoftheRoyalPhilipsElectronicsradiofrequencychipmanufacturing
plantinAlbuquerque.1Plantpersonnelreactedquicklyandextinguishedthefirewithintenminutes.Atfirstblush,itwas
clearthateighttraysofsiliconwafersonthatlineweredestroyed.Whenfullyprocessed,thesewouldhaveproduced
chipsforseveralthousandcellphones.Asetback,nodoubt,butdefinitelynotacalamity.

Atachipfactory,productiontakesplaceincleanroomconditions.Thecleanestofsuchfacilitieshavenomorethan
onespeckofdustpercubicfoot.Stateddifferently,thesefacilitiesaretenthousandtimescleanerthanhospital
operatingrooms.2Andthereinlaytheproblem.Fireproducessmokeandtriggerssprinklers.Fireandsmoketakelives,
andsprinklerssavethem,butallfire,smoke,andwaterwreakhavoconproperty.Astheydugdeeper,plant
personnelfoundthatsmokeandwaterhadcontaminatedmillionsofchipsthathadbeenstoredforshipment.Damage
thisextensivewasdefinitelyacalamity.

Fourthousandmilesaway,ataNokiaplantoutsideHelsinki,aproductionplannerwhowasfollowingawellarticulated
processformanagingchipinflowsfromPhilipsfailedtogetaroutineinputheneededfromPhilips.Thefailurecouldwell
havebeenananomaly.EvensocalledSixSigmafacilities(ofwhich,despitethehypeabouttheterm,thereareveryfew
anywhere)produce3.4defectspermillion.Nevertheless,heinformedtheplantspurchasingmanager,andagain
followinganestablishedprocess,theypassedonwordofapossibleproblemtoTapioMarkki,thetopcomponent
purchasingmanager.

InAlbuquerque,Philipsengineersandmanagersgrappledwiththeaftermathofthefire.Theyrealizedthatcleanup
wouldtakeatleastaweek,whichmeantthatcustomerswouldbeaffected,atleasttemporarily.Nokiaanditsarchrival,
Ericsson,accountedfor40%oftheplantsshipments.Philipsmanagementdecidedthattheirorderswouldbefilledfirst
whentheplantreturnedtonormal.

OnMarch20,Philipscalleditscustomers,includingMr.Markki.HerecallsthatPhilipssaidthatthedisruptionwouldlast
aboutaweek.TheWallStreetJournalarticle(citedearlierandpublishedmonthslater)impliedthatPhilipshad
underestimatedtheextentoftheproblem.

Mr.Markkihad,earlyinhiscareer,workedforfiveyearsatasmallsemiconductorcompanythatsuppliedNokia.Hetold
me,Iknewthecleanupwouldtakemorethanoneweek(but)formeitwasntspecial.Nevertheless,inaculturethat
encourageddiscussingpossibleproblemsopenly,heinformedhisbosses,includingPerttiKorhonen,thenSeniorVice
PresidentofOperations,Logistics,andSourcingforNokiaMobilePhones.Nokiasproductionplannerbegancheckingthe
statusofthefivepartsmadeinNewMexicoonceadayinsteadofthecustomaryonceaweek.Nokiahaddevelopedthis
enhancedmonitoringprocessoverthepriorfiveyears.Severalcomponentsalmostallfromnormallyfunctioning
plantsreceivedthesametreatmenteachyearifNokiabecameconcernedwiththeirmakersperformanceforany
reason.

Afewhundredmilesaway,executivesatEricssonalsogotacallfromPhilips.Untilthiscall,Ericssonsplannersand
managershadnotsensedanydiscrepancyinPhilipsperformance.Assuch,itsmanagementhadnoreasontodisbelieve
Philipsexplanations.Theycertainlydidnotperceiveaneedforconcernorsteppedupaction.

NokiasintensifiedtrackingandcommunicationswithPhilipsdidnotraiseNokiasconfidencethatitspartnerhadthe
problemundercontrol.ItsexecutivesbeganregularlyurgingtheircounterpartsatPhilipstotakestrongeraction.They
alsomovedtowardadoptingtheresponseroutinestheyhaddevelopedforsucheventualities.OnMarch31,exactlytwo
weeksafterthefire,Philipsadmitteditwouldneedmoretimetofixtheproblem;ultimately,theplantremainedoutof
actionforsixweeks.

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RecognizingthatPhilipsproblemcouldaffecttheproductionofseveralmillionmobilephones,Nokiatookthreekey
steps:

OneteamofexecutivesandengineersfocusedonPhilips,seekingamajorroleindevelopingalternativeplans.
GuidedbyMr.KorhonenandassistedbyCEOJormaOllila,itpressedNokiascasewithPhilipsexecutives,
includingitsCEO,CorBoonstra.PhilipsrespondedbyrearrangingitsplansinfactoriesasfarawayasEindhoven
andShanghai.
AsecondcrosscontinentalteamredesignedsomechipssothattheycouldbeproducedinotherPhilipsandnon
Philipsplants.Whereappropriate,itconsultedwithPhilipstoassessthepossibleimpactofitsactions.
AthirdgroupworkedtofindalternativemanufacturerstoreducepressureonPhilips.Twocurrentsuppliers
respondedwithinfivedays.

ThemagnitudeofthecooperationbetweenNokiaandPhilipscannotbefullyappreciatedwithoutafewwordsonPhilips.
Onceconsideredaleadingedgetechnologycompany,bythemid1990sPhilipswasbeingcriticizedbymanyananalyst.
Mr.Boonstraignoredtheircallstodismemberthecompanyandinsteadspentthreeyearsreshapingitandrebuildingits
reputation.In2000,PhilipsSemiconductorDivisionwasfunctioningverywell.3IthadacquiredseveralplantsfromIBM
andboosteditsproductioncapacity40%over1999levels.Itsseventeenplantswerechurningouteightymillionchipsa
day;thesechipswereusedin80%ofthemobilephonessoldworldwide.Thatyear,chipvolumegrew33%andrevenues
55%.DespitethefirewhichdidnotmeritasinglesentenceinPhilips2000annualreportdivisionaloperatingincome
rose119%.4ThissuperbperformancemeantthatPhilipssimplyhadnosurpluscapacity.HelpingNokiarequired
managerialandtechnicaleffortequivalenttopullingarabbitoutofahat.

Philipspredicamentwasnotunique.In2000,themobilephonemarketwasgrowingatover40%perannum,butso
werethemarketsforlaptopsandotherelectronics.Componentmakers,rangingfromchiptoliquidcrystaldisplay
producers,wereworkingatcapacity.5Someconsumerelectronicscompanieswerereadytopayvirtuallyanypricefor
keycomponents.Bymidyear,Sony,MicronTechnology,Dell,Sun,andevenPhilipsitselfhadannouncedthatcomponent
shortageswouldreinintheir(verystrong)financialperformances.Shortageswereexpectedtocontinueunabatedtill
yearend.

AttheendofMarch,inthismarketenvironment,Ericssonfinallycametoappreciatethegravityofitsproblem.However,
forreasonsaboutwhichonecanonlyspeculate,itstilldidnotactspeedily.JanWarby,theexecutivewhoheadedthe
mobilephonedivision,didnotgetinvolvedtillearlyApril.BythenEricssonhadveryfewoptionsleft.

Nokiasinitialsensingoftheproblemanditsrapidandeffectiveresponsecarriedtheday.Inthethirdquarterof2000,its
profitsrose42%asitexpandeditsshareoftheglobalmarketto30%.Itsquarterlystatementsandannualreportfor2000
didnotevenmentionthefire.

OnJuly20,2000,Ericssonreportedthatthefireandcomponentshortageshadcausedasecondquarteroperatinglossof
$200millioninitsmobilephonedivision.Assuch,annualearningswouldbelowerbybetween$333millionand$445
million.6Sixmonthslater,itreporteddivisionalannuallossesof$1.68billion,a3%lossofmarketshare,andcorporate
operatinglossesof$167million.ItalsoannouncedtheoutsourcingofcellphonemanufacturingtoFlextronicsandthe
eliminationofseveralthousandjobs;FlextronicstookoverEricssonsplantsinBrazil,Malaysia,Sweden,theU.K.,andthe
U.S.InApril2001,itsignedaMemorandumofUnderstandingtocreateSonyEricsson;theinformalnegotiationsthatled
tothisstephadstartedattheheightofthecrisisinJuly2000,thoughEricssonhaddenieditinpublic.Thedealwas
finalizedinOctober2001.

Ericssonswoesspreadbeyondmobilephonesandcontinuedintosubsequentyears.Itfinallyreturnedtohealthin2004,
butasamuchsmallercompany.Comparedto2000,itsrevenueshadfallen52%,totalassetsabout30%,andnumberof
employees52%;netincomeandoperatingincomewerealmost,butnotquite,thesame.

Thefaceofthemobilephoneindustryhadchangedforever,allbecauseofafirethathadbeencontainedintenminutes.

Thatwasanexcitingstory,butsowhat

http://www.ftpress.com/articles/printerfriendly.aspx?p=1244469 08.05.2012