HOW MOTOROLA LOST ITS WAY

HOW MOTOROLA LOST ITS WAY

Business Week: May 4, 1998
Department: Information Technology
Headline: HOW MOTOROLA LOST ITS WAY
Deck: The inside saga of warring factions and strategic blunders
Byline: By Roger O. Crockett in Chicago, with Peter Elstrom in New York

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.

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Business Week: May 4, 1998 Department: Information Technology Headline: CHART: As Market Share Has Eroded...Motorola's Profits Have Slid...

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Business Week: May 4, 1998 Department: Information Technology Headline: TABLE: Motorola's History

It hit the pinnacle of success only to follow it with management missteps and ill-timed strategies

SEPT. 25, 1928

Paul Galvin and his brother Joseph Galvin found Galvin Manufacturing in Chicago.

1948

Designs the first portable FM two-way radio, a backpack walkie-talkie that's the predecessor of today's cellular phones. The company goes public.

1955

Introduces its first pagers--a business Motorola comes to dominate with 85% market share.

1974

Unveils its first microprocessor, the 6800. By 1997, Motorola's computer chip business grows to $8 billion in sales--21% of the company's revenues.

1983

After 20 years and $200 million in development, the company's first cellular telephone network begins commercial operation.

1988

The company's nine-year push to emphasize quality products culminates when it receives the Malcolm Baldrige National Quality Award from Congress.

1988

George Fisher succeeds Robert Galvin as chief executive officer, the first non-Galvin to head the company.

1990

Motorola discontinues development of wireless infrastructure based on astandard called TDMA in favor of an alternative, CDMA, which is supposed to have higher capacity to carry phone calls. Today, the lack of TDMA equipment means Motorola can't supply 25% of the digital U.S. wireless infrastructure market.

1990

GTE, Southwestern Bell, BellSouth, and Metro One drop Motorola because of poor switching capabilities in its wireless equipment.

1993

Gary Tooker takes over as CEO after Fisher leaves for Eastman Kodak.

1993

Motorola raises $800 million for the Iridium satellite system, which promises to supply communications to every part of the world.

1993

Motorola and Northern Telecom discontinue their joint venture for wireless equipment. Lack of a strong switch partner hurts Motorola' s ability to deliver end-to-end wireless networks.

1994

Top execs decide against buying General Instrument, a leader in cable TV set-top boxes. Tooker and others think Motorola's expertise is in wireless communications--not cable infrastructure. The decision keeps Motorola from wrapping its cable modem expertise into GI's set- top boxes.

1995

Execs decide not to buy CDMA chip from Qualcomm because of what it considers exorbitant costs. Developing CDMA chip internally slows introduction of Motorola phones.

SUMMER 1996

Discontinues production of its Marco and Envoy handheld computers, which are design marvels but commercial flops.

1996

Introduces the StarTAC, Motorola's smallest cellular phone. Motorola' s decision to limit distribution to carriers that buy most of their phones from the company infuriates customers.

JAN. 1, 1997

Christopher Galvin, grandson of the founder, becomes CEO.

AUGUST 1997

Apple Computer interim CEO Steve Jobs pulls the plug on licensing the Macintosh to cloners. Motorola, which developed the PowerPC chip used in the Mac and had launched a Mac-clone business, has to fold its clone operation.

MARCH 1998

Because its network shut down for up to two hours, wireless carrier PrimeCo replaces Motorola with Lucent Technologies as the supplier of wireless infrastructure for a $500 million contract.

APRIL 7, 1998

First-quarter earnings plummet to half those of a year ago, and Motorola warns that profits will remain below forecasts for several quarters. The stock plunges 11%.

MAY 1998

Galvin plans to announce a restructuring into three major groups: communications, semiconductors, and components. The goal is to better coordinate the R&D and marketing in the divisions making consumer products such as cellular phones and pagers.

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Business Week: May 4, 1998 Department: Information Technology Headline: PHOTO: Paul V. and Joseph E. Galvin (1940)

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Business Week: May 4, 1998 Department: Information Technology Headline: PHOTO: Motorola Envoy

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Business Week: May 4, 1998 Department: Information Technology Headline: PHOTO: Motorola StarTac 6000

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Business Week: May 4, 1998 Department: Information Technology Headline: TABLE: How Motorola Missed the Mark

CUSTOMER PROBLEM

PRIMECO Equipment problems in 1997-98 result in its network PERSONAL shutting down for up two hours. PrimeCo COMMUNICATIONS drops Motorola's equipment in favor of Lucent's gear.

BELL In early 1996, the carrier asked both Lucent and ATLANTIC Motorola for equipment to help prevent fraud. Lucent provided the technology within three months. Motorola took a year--and Bell Atlantic still isn't completely satisfied with its product.

AMERITECH In 1995, the Baby Bell told Motorola, which supplied most of its wireless phones, that it wanted to move to digital equipment. When Ameritech launched its digital network in spring 1997, Motorola still didn't have products ready. Ameritech turned to other sup- pliers, including Qualcomm and Sony.

U.S. CELLULAR The carrier is forced to test four batches of Motorola's digital wireless phones over a six-month span before they finally work. Meanwhile, similar phones--all used in its Tulsa (Okla.) market--have been supplied by rival Nokia for two years. U.S. Cellular still can't get digital phones from Motorola for its Knoxville (Tenn.) and Yakima (Wash.) markets.

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