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HOW MOTOROLA LOST IT’S WAY

Business Week: May 4,1998


Byline: By Roger 0. 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 it 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 I % 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, lridium, 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. lridium, 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 lridium 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. Strigi, 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 company wide
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 it 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 was 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 Suzefte
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 failing 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 ultra sleek 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 (NJ) 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 Strigi 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 Weisshappel. 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 Weisshappel's preoccupation with StarTAC.
Motorola tried buying semiconductors from rival Qualcomrn 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 Piano, 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, PrirneCo started getting complaints from customers because
Motorola's system would occasionally stop working- -the lapses lasted between 30 minutes and two
hours. PrirneCo traced the problem back to Motorola and, after Motorola tried in vain for several months
to repair it, PrirneCo 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.

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 Saldrige 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 a standard 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.
Motorola raises $800 million for the lridium satellite system, which promises to supply
communications to every part of the world.
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 cornmunications--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.
1996 - Discontinues production of its Marco and Envoy handheld computers, which are design marvels
but commercial flops.
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, becornes CEO.
AUG. 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 Mae-clone
business, has to fold its clone operation.
MAR. 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.
APR. 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 I I %.
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.