To all: Here's an extensive article on Motorola on the current issue of Business Week. Your thoughts?
HOW MOTOROLA LOST ITS
WAY
The inside saga of warring factions and strategic blunders
For years, Motorola Inc. had supplied virtually all the wireless phones to
Ameritech Corp. But when it came time to switch to the new digital
technology, something went haywire: Motorola wasn't ready. So in the
summer of 1997, Ameritech rolled out its digital service using phones
from rival Qualcomm Inc., a San Diego upstart. ''I could not stop my
strategy or my business plan and was forced to go with vendors that
were ready,'' says Marc Barnett, Ameritech Cellular's director of
product marketing.
An isolated case? If only. Instead, one of the world's most admired
companies, known for cutting-edge technology and gold-plated quality,
is coming up stunningly short these days. The former trailblazer in
two-way radios, cell phones, pagers, and computer chips has missed a
digital beat and now finds itself scrambling to catch up. Even then, its
products don't always pass muster. In 1994, Motorola claimed 60% of
the U.S. market in wireless phones, according to Herschel Shosteck
Associates. Today, it has 34%.
The company's wireless-equipment business hasn't fared any better. In
the U.S., Motorola has lost crucial ground to Lucent Technologies Inc.
and Northern Telecom Ltd.--in part because it has sold faulty products.
On top of the problems Motorola has created for itself, a downturn in the
semiconductor and paging industries and turmoil in Asia haven't
helped.
Now, the go-go growth company of a few years ago is barely inching
along. Revenue growth, which soared an average 27% a year between
1993 and 1995, has slowed to 5% in the past two years, to $29.8 billion
in 1997. Profits have tumbled, too: down 33% since 1995, to $1.2
billion in 1997, with a 25% plunge expected this year. As for
shareholder return, it has averaged less than 1% annually in the past
three years, vs. an average 54% in the previous three years. Says
Steven Goldman, a professor at Lehigh University who has done
consulting work for Motorola: ''It's hard to imagine that six or seven
years ago Motorola was one of the most admired companies in the
world. Now, you talk about Nokia and Ericsson and how they're eating
Motorola's lunch.''
Even worse for Motorola in the long haul, its hard-earned reputation for
quality is being questioned. The same company that won the Malcolm
Baldrige Quality Award in 1988 and once insisted that every executive
presentation begin with an example of how to improve quality, now
finds itself fielding customer complaints. These came to a head in
March, when Motorola lost a $500 million contract with wireless carrier
PrimeCo Personal Communications. The carrier's beef: Motorola's
equipment would sometimes shut down, leaving customers unable to
make calls.
Motorola admits to having problems in recent years but insists the
future is bright. CEO Christopher B. Galvin declined to comment for this
article, but Motorola executives who report to him say he has set a
hurdle of 15% to 20% revenue growth and, despite the company's
problems, expects to achieve that within the next year or two. Galvin is
betting that the industries the company is in will grow 15% a year, and
expansion into new markets will be frosting on the cake. ''We're not very
happy with the last few years of business results,'' says Merle L.
Gilmore, an executive vice-president. ''Just as we have renewed
businesses regularly in our history...we expect to be able to renew our
business again.''
One promising new market: satellite communications. Motorola's
flagbearer there, Iridium, will blast the last two pieces of a 66-satellite
constellation into the sky on Apr. 30 and begin offering new voice and
paging services for business travelers in September. Iridium, 17.7%
owned by Motorola, could generate revenues of $2.6 billion by 2000,
says Chase Securities Inc. ''If you throw our product in your briefcase,
you know you can make a call from anywhere on the planet, and people
can get to you,'' boasts Iridium chief Edward F. Staiano. Motorola has
$6.3 billion in Iridium contracts and it's developing satellite expertise
that should help win future business.
To be sure, Motorola remains a force to be reckoned with. Even with its
market-share losses and customer complaints, it's still the world's
largest maker of mobile phones and a top supplier of wireless
equipment. It's a leading maker of digital phones overseas. And it
remains the most sought-after brand name in mobile phones. Almost
every carrier that criticizes the company for its late products says it
does so because it wants them so badly. ''We need them back in the
game,'' says Dennis F. Strigl, CEO of Bell Atlantic Mobile.
But time is crucial. Galvin, 48, the grandson of Motorola's founder, is
working furiously to stem market-share losses and return the company
to its roots as a creator of top-notch products. Since taking over 16
months ago, he has replaced the heads of the wireless-phone and
-equipment businesses and has installed top lieutenants in key posts
throughout the company.
Galvin also has railed against a culture that he thinks, at times, has
been too smug, too engineering driven, and too focused on internal
rivalries. To foster cooperation among divisions, he's starting to pay top
execs based on companywide performance--not just their own
division's results. At the same time, Galvin has insisted that sales reps
better serve customers. Already Motorola is working closely with AT&T
Wireless Services to develop an innovative digital phone. ''They're
bending over backward for us,'' says an AT&T executive. ''That's never
happened before.''
''WARRING TRIBES.'' The most dramatic change is expected later
this spring, when Galvin will restructure the company for the second
time in his short tenure. His aim: to consolidate operations into three
major groups, including a communications division that will pull together
mobile phones, wireless equipment, two-way radios, pagers, and cable
modems. This will encourage the communications teams to coordinate
business plans, share ideas, and cut down on development costs.
This also could go a long way toward curbing Motorola's culture of
''warring tribes.'' In recent years, division heads had almost total control
of their operations, which meant they could compete or simply refuse to
cooperate with other divisions. That culture worked well at times,
especially when the cellular operations cannibalized Motorola's own
two-way radio business and became a much bigger business. But
recently, internal fiefdoms left Motorola's divisions badly out of step.
The semiconductor group wouldn't make chips other divisions wanted
to use. And the wireless-equipment group sold customers digital gear
two years ago--while the wireless-phone unit is just now coming out with
digital phones for those systems.
Hopes are high that these efforts will put the company back on track. To
head the new communications division, Galvin has tapped Gilmore, a
long-time confidant who had been running the company's operations in
Europe, Africa, and the Middle East. ''The most important objective,''
says Gilmore, ''is that the organization will be able to serve the
customer better.''
But will it? Motorola has a good shot at recovering if Galvin is willing to
make bold moves. Top of the list: He needs to decide whether to sell
the company's struggling wireless-equipment business or buy a
telecom-switch maker to bolster it. More important, he must take the
starch out of Motorola's culture so its executives get back to listening to
customers--instead of dictating to them.
JARRING PICTURE. So how did the once mighty Motorola lose its
way? How could a company once dubbed the ''American Samurai'' for
blazing a trail overseas, find itself being beaten to the punch by
European giants and outfoxed by U.S. startups? Interviews with current
and former Motorola executives, customers, rivals, and analysts paint a
jarring picture of the company's fall from grace.
Motorola's tale is a cautionary one. It's a lesson in how a company
reaches the pinnacle of its industry--and becomes blinded by its own
success. It was hubris, say insiders, that kept executives from
recognizing better technologies, changing markets, and customers'
needs. What followed were management missteps, ill-timed strategies,
and spotty execution.
It began in the heady days of 1995. At the helm of the company sat
Gary L. Tooker, a personable if not charismatic executive who had
started working in Motorola's semiconductor operation 33 years earlier.
He had replaced the much praised George M.C. Fisher, who had left to
head Eastman Kodak Co. in 1993. At the time, Robert L. Galvin, the
son of the founder and the company's chief for 27 years, polled the
board to find out if they would name his son, Chris, then a senior
executive vice-president, as CEO.
Board members balked. They thought the younger Galvin, then 43, was
too green. He had started out at Motorola in 1973 selling two-way
radios and had headed several key businesses, including the paging
division. But some executives still considered him a lightweight, in part
because he did not have an engineering degree like most of the other
top brass. Still, it was a matter of when Galvin would become CEO, not
if. ''Inside, people knew it was a monarchy,'' says one former senior
executive.
Tooker, by contrast, was an engineer who had helped Motorola prosper
largely by giving division heads free rein to run their own show. The
company owned the wireless-phone business: Its share of the U.S.
market had increased to 60% in 1994--Nokia Corp. and L.M. Ericsson
were barely a blip on the wireless scene. In January, 1995, Motorola
announced results for 1994 that brought Wall Street to its feet:
Revenues were up 31%, to $22.2 billion, and profits soared 53%, to
$1.6 billion.
But this also was the year that U.S. wireless carriers began waking up
to digital technology. The digital era promised new services like Caller
I.D., paging, and short messaging. The carriers were hooked.
Not so Motorola. In one telling meeting in February, 1995, top execs
from Ameritech met with Motorola's brass at the cellular industry's big
trade show in New Orleans. ''I need [digital] handsets...in a year,''
Barnett recalls saying. Motorola's cellular-phone chief, Robert N.
Weisshappel, wasn't there, but his second-in-command did her best to
reassure Barnett. ''We want to meet your goals,'' said Suzette Steiger,
according to Barnett. ''Let me take it under review.'' AT&T, Bell Atlantic,
and others were delivering the same message.
But inside Motorola, it was falling on deaf ears. Weisshappel, a
bespectacled former engineer, had spent 24 years at Motorola and
deserved much of the credit for making its cellular-phone business
dominant. Known for his explosive temper, his greatest skill was in
designing ever smaller stylish phones.
In 1995, he believed that what most consumers wanted was a better
analog phone, not a digital phone that would have to be big and bulky
because the technology was so new. ''Forty-three million analog
customers can't be wrong,'' he told a small gathering of execs at the
cellular group's headquarters in suburban Chicago, according to one
former employee. ''It was hard to get him to stop talking about [analog],''
recalls one executive. ''The rank and file were scared to death.''
But Weisshappel had what he thought was an ace up his sleeve. In
January, 1996, Motorola introduced the ultrasleek StarTAC phone. The
phone had taken two years and millions of dollars to develop--and it
was a design marvel, smaller than a cigarette pack. ''Motorola has
taken what was never thought possible and made it a reality,''
Weisshappel crowed at the time.
Sure, the StarTAC wasn't digital, but Weisshappel thought he could use
his design breakthrough to hold back the tide of technology. In the
summer of 1996, he and his top execs introduced the so-called
Signature program. The idea was simple: Motorola would distribute the
StarTAC only to carriers that had bought a high percentage, typically
75%, of their mobile phones from Motorola--and agreed to promote the
phones' features in stand-alone displays. The goal was to boost
margins with higher-priced products such as the $1,500 StarTAC and,
at the same time, protect Motorola's market share.
The Signature program turned into a fiasco. In one meeting in Bell
Atlantic Mobile's executive conference room at its Bedminster (N.J.)
headquarters, Weisshappel and his team laid out the requirements for
the carrier's executives with what Bell Atlantic Corp. says was a
''you-must'' attitude. The carrier's Strigl quickly became furious. ''Do you
mean to tell me that [if we don't agree to the program] you don't want to
sell the StarTAC in Manhattan?'' he recalls telling Weiss-happel.
Weisshappel declined comment on the incident. Bell Atlantic wasn't the
only company to take exception. GTE Corp. and BellSouth Corp.
refused to participate in the program, and sales to both carriers
dropped.
The company's digital delays weren't caused only by Weiss-happel's
preoccupation with StarTAC. Motorola tried buying semiconductors
from rival Qualcomm to get into the digital game faster. But
Weisshappel felt Qualcomm's prices were excessive, and he stopped
buying in 1995 to develop the chips internally. As it turned out, the
development took two years, cost millions of dollars, and lost the
company precious time.
TENSE MEETING. Meanwhile, customers were launching digital
service--without Motorola phones. In February, 1997, two years after he
had first asked for digital phones, Ameritech's Barnett met again with
Steiger. ''We're placing orders now,'' he told her. ''Do you have
phones?'' She didn't. Ameritech reluctantly turned to Qualcomm.
By early 1997, newly minted CEO Chris Galvin had had enough. Rivals
Nokia and Qualcomm were putting a painful dent in Motorola's market
share. In a tense meeting at Motorola's headquarters, Galvin
demanded to know why the mobile-phone group hadn't released key
digital phones. Weisshappel had heard all this before and was tired of
the badgering. ''I guess I'll just buy Qualcomm,'' he joked, according to
one person at the meeting. Weisshappel left the company the following
August.
By that time, Motorola had long ago made the decision to make digital
phones. But it wasn't that simple. There were three competing digital
standards to choose from in the U.S. Code Division Multiple Access
(CDMA) technology offers six times the capacity of analog
systems--and is now the most popular, with 50% of the U.S. market.
Time Division Multiple Access (TDMA), which has three times the
capacity, accounts for one-quarter of today's market. And Global
Standard for Mobile Communications (GSM), the third standard with
two to three times the capacity, claims 25% of the U.S. market and is
the technology of choice in Europe.
Motorola developed its GSM phones first and has become a big
supplier overseas, as well as in that segment of the U.S. market. But it
has been slow to develop phones for the other two U.S. standards. ''We
underestimated the engineering effort to bring these products to
market,'' says James P. Caile, corporate vice-president for marketing
in Motorola's mobile-phone group. ''It's an embarrassment to us.''
By all accounts, Motorola's wireless-equipment group should be
red-faced, too. In 1995, executives had been aggressively developing
digital products, but they put all their chips on just one standard in the
U.S.--CDMA. As it turned out, that eliminated Motorola from 50% of the
U.S. market. The irony, say former executives, is the company had
been developing TDMA equipment but abandoned it to focus on
CDMA. ''We were way ahead of everybody,'' laments one engineer who
worked at the company during that period. Motorola says it dropped
TDMA because it didn't think it had strong enough relationships with
TDMA carriers to land deals.
Still, Motorola did have some big CDMA wins. In September, 1995,
Primeco tapped the company to help build its national network. And
Motorola would go on to nab $5 billion in equipment contracts in 1997.
While Motorola was scrapping for contracts, it had to protect what has
been the Achilles' heel of its wireless-equipment business: its lack of a
telecom switch. A switch, a type of computer, is particularly important in
digital networks, which need much more intelligence than the old
analog systems. It's the switch that makes the snazzy new services
possible. Motorola has established itself as the king of base stations,
which send and receive sound over radio frequencies to mobile
phones, but it doesn't make switches. Traditional telephone-company
suppliers, such as Lucent and Northern Telecom, make both pieces so
they can offer customers no-fuss integrated networks.
By 1995, the company had been trying for more than a decade to get a
strong switch partner. In 1984, it signed an agreement with DSC
Communications Corp. in Plano, Tex., for the two companies to market
their equipment together. But in 1990, Motorola got dumped for poor
switching capabilities by four key customers--GTE, Southwestern Bell,
BellSouth, and Metro One Communications. In 1992, Motorola instead
formed an alliance with Canada's Northern Telecom--but the
partnership fell apart two years later when the competitors couldn't put
aside their differences. The company again turned to DSC and at times
Siemens and Alcatel Alsthom.
But problems continued. In early 1996, Bell Atlantic was getting more
concerned about cellular fraud and asked its two equipment providers,
Lucent and Motorola, to come up with solutions. Lucent provided a
product within three months. In part because of switching problems, it
took Motorola more than a year--and Bell Atlantic is still not satisfied.
Strigl replaced Motorola with Lucent as his equipment provider in
Connecticut. ''We were very concerned that we were getting such fast
response from Lucent and we were getting promises but no action from
Motorola,'' he says. ''I couldn't take them at their word anymore.''
It got worse. In late 1996, PrimeCo started getting complaints from
customers because Motorola's system would occasionally stop
working--the lapses lasted between 30 minutes and two hours.
PrimeCo traced the problem back to Motorola and, after Motorola tried
in vain for several months to repair it, PrimeCo decided to bring in
Lucent.
PRICE WARS. AirTouch Communications Inc., which owns half of
PrimeCo, also has been experiencing a high number of dropped calls
in its Los Angeles market, where it uses Motorola equipment. An
AirTouch spokesperson declined to comment on whether Motorola
would remain an equipment supplier. The stumble in digital has taken
its toll: Motorola's share of the U.S. digital equipment market was 13%
last year, vs. Lucent's 38% share, says the Yankee Group.
Not all of Motorola's problems are of its own making. Despite a huge
share of the pager and paging-equipment markets, price wars have left
paging companies without the money to buy products. Revenues in the
Motorola group that includes paging dropped 4% in 1997, to $3.8
billion. The problems at Apple Computer have devastated Motorola's
computer-chip business, so it is pushing harder on specialized chips
for airbags and other products.
The Asia turmoil also has contributed to Motorola's woes. In 1995,
Motorola was beginning to reap substantial benefits from its
two-decade push overseas, particularly in Asia. The company
dominated the Asian market for two-way radios and pagers. It was
running neck-and-neck with Ericsson for leadership of the mobile
phone market and, after battering its way into Japan's protected
telecom market, it held close to a quarter of the mobile-phone market.
But trouble lay ahead. The 200 engineers at Motorola's headquarters
who were focused on the Japanese market were wedded to analog
products--despite protests from Motorola's executives in Japan.
''Motorola could be revered today if only it had embraced digital,'' says
a former Motorola executive who was in Japan at the time. Motorola
was late with digital phones and, in the past three years, has seen its
market share slide to 3%. The recent economic downturn in the region
also has hurt demand.
Questions about the company's future remain. Can it catch up in digital
phones? Will it sell off its wireless equipment business? Can Galvin fix
its culture, a task of no small magnitude?
Despite its problems, a sense of optimism is creeping through the
company's headquarters. Galvin is telling executives that Motorola must
strive for ''renewal''--completely new businesses in which the company
can recreate itself. After all, Motorola got its name because founder
Paul V. Galvin developed a market in car radios, and then the company
abandoned it as cellular service was taking off.
Now we'll see if Chris Galvin can truly follow in his grandfather's
footsteps.
By Roger O. Crockett in Chicago, with Peter Elstrom in New York
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PHOTO: Paul V. and Joseph E. Galvin (1940)
PHOTO: Motorola Envoy
PHOTO: Motorola StarTac 6000
TABLE: How Motorola Missed the Mark
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Updated Apr. 23, 1998 by bwwebmaster
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