Markets for Managers: A Managerial Economics Primer

CHAPTER 6 Capital Theory and Recalculation

‘The generic concept of capital without which economists cannot do their work has no measurable counterpart among material objects; it reflects the entrepreneurial appraisal of such objects.’

—Ludwig Lachmann¹

Nokia was founded in 1865 as a wood-pulp mill in southern Finland. Around 30 years later a rubber company was set up in the same town (which had become known as Nokia), and 20 years after that a cable company was created. In 1967 these three companies merged and the modern company was born.² Up until 1980 around 90% of their sales were in ‘rubber, cable, and other basic products’, and almost half of their customers were within Finland.³ When Jorma Ollila took over as President and CEO in 1992 the company was in a mess. They were an inward looking conglomerate without strategic focus. The collapse of the USSR dented a major trading partner and losses were mounting. But they had a plan. Nokia decided to focus on telecommunications and mobile phones (with a particular emphasis on the GSM digital standard), and over a few years sold off all other product lines.⁴ When they released the Nokia 2100 in 1994 they were hoping to sell 400 000. They sold 20 million.⁵

Not all stories of entrepreneurship have such stunning results, but they all share similar themes. The focus of a company often shifts over time, as product innovation and changing demand lead to new opportunities. Macroeconomic factors can cause disruptions, and attempts ...