All; Sorry MOT;
Wrong path: Motorola managers were reluctant to accept
change
Chicago Daily Herald
[ Motorola Inc. ] 's rise and fall could be a case
study of the perils of being on top.
The story of Motorola, like those of IBM and
Sears a few years back, tells the same cautionary
tale: A successful company at the top of its
industry allows its market dominance to keep it
from making essential changes to stay in the lead.
"In some ways, it's a classic case," said John Kohlmeier, professor of
management of information technology at DePaul University and a retired
Andersen Consulting consultant. "At what point does a market leader
recognize it has to make a shift? That is a very difficult thing to manage."
Today, chastened by its own blunders and the success of wily competitors
who seized on its temporary weakness, and dragged down by the flailing
overseas economies and sagging industries in which it operates, Motorola is
making difficult changes - too late, some say.
Suburban residents have reason to pay attention. Local economies have
ridden along with Motorola's heady growth in the last several decades. The
company has become one of the suburbs' biggest taxpayers, paying more
than $10.5 million in property taxes annually in the Northwest suburbs alone.
It is the region's largest private employer and a driver of the state's
technology industry.
As Motorola grew in the early 1990s, it added people and operations,
including new cellular phone plants in Harvard and Libertyville. It chose a
130-acre site in Elgin for a new paging headquarters, but later scrapped the
plan when sales slowed.
Now, suburban jobs are at stake as Motorola scrambles to catch up with
wireless competitors who have knocked it from dominance in the wireless
industry. As competitors celebrate strong profits in a booming market,
Motorola struggles to stay in the black.
Only three years after its profit peak, Motorola barely broke even on
operations in the second quarter of this year. And after factoring in
restructuring costs, it reported a net loss of $1.3 billion. Sales fell 7 percent
to $7 billion.
Motorola has closed or sold units that are not profitable or do not fit with its
stable of core businesses.
It is reorganizing its major semiconductor and communications businesses
and is cutting costs to boost profits.
It will trim 15,000 jobs by the end of the year, many of them in its locally
based communications operations and Schaumburg headquarters.
Chief Executive Officer Christopher B. Galvin, who took over in January
1997, said the makeover will make Motorola more responsive to customer
and consumer needs, leaner, more cutting edge and, ultimately, more
profitable.
Nevertheless, the short-term outlook shows the company has not yet
conquered its demons. Wall Street analysts predict the company will report
a 1 cent per share profit in the third quarter, compared with 44 cents per
share during the same quarter last year.
Why?
In part, the answer lies in Motorola's recent glory days themselves.
A cellular pioneer
Motorola was a pioneer in the wireless phone business at a time when few
predicted the day would come when everyone from business people to
stay-at-home moms would be carrying a cellular phone.
Motorola saw the potential. After investing about $200 million and two
decades, its first cellular network, the DynaTac system, debuted in
Baltimore in 1983 as one of the earliest analog cellular systems.
By 1989, Motorola had become a top supplier of cellular equipment and
stood to gain as wireless phone use spread. It did.
Just 340,000 Americans had a cell phone in 1985, but by 1990, as phones
became mobile and smaller, more than 5 million people had one. Five years
later, 34 million Americans used a cellular phone, according to estimates by
the Cellular Telecommunications Industry Association.
The boom helped fuel Motorola's growth and profits. In 1994, sales of its
cellular phones and equipment exploded 64 percent to $8.6 billion.
Operating profit in cellular jumped 69 percent to $1.2 billion.
The stellar results may have drowned out an important shift occurring in the
industry.
Motorola built its cellular empire using analog technology. But by the early
1990s, some wireless companies already were looking ahead to new digital
technologies.
Digital networks carry calls more efficiently, giving phone companies more
capacity. Digital phones also provide features like call waiting and caller
identification and are more secure.
Motorola fails to react
But Motorola tread slowly into the up-and-coming technology, unwilling to
divert attention from its market-leading analog technology.
Top managers in the cellular business units believed consumers would be
slow to adopt the new digital technology, particularly in the United States
where wireless providers and manufacturers could not agree on a uniform
technical standard.
"Any time a company has as big a market lead as Motorola did with analog,
it uses a lot of wishful thinking about how that advantage is going to be a
continuing advantage," said one former executive. Motorola, like other
companies in its position, did not want to cannibalize sales of its analog
technology with some new product.
Telecommunications analyst Herschel Shosteck believes Motorola should be
faulted not with staying so long with analog, but with failing to respond
quickly to the shift to digital cellular technologies.
"Analog lasted a lot longer than some thought. They (Motorola executives)
were very astute at expanding their analog R&D for a maturing industry,"
Shosteck said. "They didn't recognize the digital market would be as good
as it was."
Motorola is not pointing fingers now at specific individuals, but Chris Galvin
has brought in new people as top executives of the major businesses.
The company also underestimated how long it would take to develop
phones and networks in the digital technology, putting it 12 to 18 months
behind competitors, Shosteck said.
Its development of phones for the leading U.S. digital standard, Code
Division Multiple Access (CDMA), hit a snag when Motorola refused to
buy computer chips developed by Qualcomm and decided to develop its
own, a process that took much longer than expected.
Its cellular network business also stumbled. Motorola lost a $500 million
contract from PrimeCo Personal Communications after its equipment broke
down and dropped customer calls.
Further, Motorola lacked internal expertise about certain digital network
components, particularly the switches that manage call traffic. A partnership
with [ Northern Telecom ] to provide that equipment fell apart. Motorola
continues to look for a solution to its switching deficiency, which keeps it
from providing customers with complete networks.
In that vacuum, competitors pounced.
Nokia Oyj of Finland and Ericsson AB, a Swedish company, unable to best
Motorola in analog phones, poured money into the emerging digital
technologies.
Now they are reaping the benefits. While Motorola struggles, Ericsson and
Nokia are reporting glowing financial results.
With few digital phones of its own other than those for the main European
standard, Motorola lost ground. The company that has enjoyed a 50
percent market share in the analog world held an 8 percent share of U.S.
digital phone sales in 1997, according to recently released figures from
Dataquest.
Big player in paging
Paging has been another boon to Motorola over the years. The company
remains a primary manufacturer of pagers and paging equipment.
Yet the paging industry is neither as big nor as fast growing as the wireless
phone business.
Unit sales continue to grow, but not at the frenetic 25-percent-a- year pace
of the early 1990s, said Craig Stephens, vice president and general manager
of public communication for [ GTE Corp. ]
U.S. paging companies have committed to becoming profitable after years
of slashing prices to win new customers, Stephens said. Companies like
GTE are going after customers more selectively and packaging paging with
other telecommunications services.
"We fully expect that we'll be selling less pagers than we have, but because
of the way we package them our customers will find more value," Stephens
said.
Other companies like [ Paging Network Inc. ] are beginning to focus on
higher profit products like two-way messaging and customized information
services, more advanced technologies that won't be as broadly used as
standard paging.
Meanwhile, demand in Asia has dropped with the rise of economic
problems there. The Chinese paging market also is in flux because the
government is changing distribution channels.
Motorola's results reflect the upheaval in the paging industry. Paging
generated a $282 million operating profit in 1994 and $310 million in 1995.
By 1997, however, paging's operating profit had fallen to $80 million.
What now?
Merle Gilmore, head of Motorola's new Communications Enterprise, said
competitors like Nokia and Ericsson benefited from lower manufacturing
costs, which freed up money to invest in new technologies.
For its part, Motorola failed to strategically invest its money in the
fastest-growing technologies.
Motorola has produced key new products in two-way radio and paging,
including the ReFlex two-way messaging standard and the iDEN wireless
phone system that combines two-way radio and cellular technologies. The
problem is that those industries are growing more slowly than cellular.
"The cellular market is four times the size of paging and land mobile
(two-way radio) and it will grow three times as fast, but we have invested
the same amount in paging and land mobile" as cellular, Gilmore said during
a recent meeting with analysts. "We will be more strategic in the future."
Motorola's culture also kept it from being as responsive to customers as it
should have been, Gilmore said. In the past, employees placed their loyalty
first with the product they worked on, next with their business unit, and,
finally, with the company, he said. "Often the customer wasn't even in the
picture."
Some observers wonder how much different business units even talked to
each other. Motorola's network unit had digital products on the market two
years before the company's phones were available in some technologies.
The culture going forward will put the customers' needs first, Gilmore said.
"We have to provide customers with what they need, not just what products
we have available," Gilmore said.
Motorola is reorganizing its communications businesses into a single entity to
avoid some of the clannishness of the past. Working in collaboration
internally and with external partners will become increasingly important as
customers demand broad solutions to their needs and as technologies
converge, Gilmore said.
Also criticized for its spotty marketing efforts, Motorola is touting its
products with a $100 million advertising campaign called Wings.
Many employees say they like what they see from top management.
Changes were long in coming, said one systems engineer. "I really think they
fixed some of the major issues we had," he said.
"Right now they are trying to do everything possible to make things different.
I would have to say people are optimistic," added one longtime Motorola
veteran.
Yet other employees, particularly those fearing they will get caught in the
cost-cutting net, decry the confusion created by the vast changes. Others
have complained the company hasn't kept employees more informed about
how they will be affected.
As jobs are being cut, Motorola has restricted employee travel, canceled an
annual company picnic and told executives they will not get new cars this
year.
"There's enthusiasm, but there's a lot of cynicism with that because, if we're
supposed to be so great, why are we restructuring, why are we losing
profits, why did we miss the boat with digital phones," questioned one
engineer in Motorola's network business.
Can Motorola follow in the footsteps of companies like IBM and Sears that
have fallen off the pedestal, then fought their way back?
Motorola watchers say they are seeing signs of improvement.
In July, Motorola introduced a new line of digital phones for the U.S.
market, including digital versions of its popular StarTac phone, that will
begin shipping this year.
Many analysts and observers believe Motorola will quickly claim a solid
share of the digital phone market once it starts to get its phones to wireless
providers.
"Motorola has three advantages: its brand, its distribution and the third is it
has the largest installed base of customers," said Matt Hoffman, an analyst
with Dataquest Inc. in San Jose, Calif.
People know of and want its products and, particularly in the United States,
cellular phone companies carry Motorola phones, Hoffman said. Finally, the
company builds loyalty by making its new phones compatible with the old,
so a battery bought for one phone can be used with the next.
"People are dying for the digital StarTac," said Mindy Grinka, a
spokeswoman for Cellular One in Chicago.
Motorola also chalked up one big win recently: a $100 million contract to
provide digital phones to [ Bell ] Atlantic.
That contract validates the demand for Motorola phones and demonstrates
that the company is pricing them right, Hoffman said.
"They have turned it around just in time," Hoffman said. "Instead of riding
behind the engine, they are catching the caboose. We expect them to rejoin
the other two - Nokia and Ericsson - to be the big three."
While conceding the company's mistakes, Motorola executives say the
march of constant change in technology gives it the opportunity to improve
its position and boost its profits back to the levels of the glory days.
Telecommunication equipment companies are developing the next
generations of digital systems, and Motorola is at the table.
"In this shifting environment," Gilmore said, "change equals opportunity."
TOMORROW: Motorola set the standards in quality initiatives and training
during the 1980s and '90s. Do Motorola's current troubles repudiate those
efforts? Also, we look at how Motorola's struggles have affected suburban
economy.
"It was frustrating, particularly in the communications area, getting anything
done."
- Former Motorola executive
"It would be unfair to the many Motorolans to say everybody at Motorola is
arrogant, because they really aren't. That just isn't the case. There may have
been individuals or pockets of people who were uniquely proud and,
therefore, gave an impression they didn't intend."
- Christopher B. Galvin, Motorola CEO
"Motorola is a champion. They had a bad round where they did not
anticipate the speed at which the digital phones would sweep the market. ...
They will return."
- Mel Boldt, president of BMI
"Smarter, Faster, Together"
- a sign in Motorola's Harvard plant
(Copyright 1998)
_____via IntellX_____
Publication Date: September 29, 1998
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