Motorola’s Road to Irrelevancy – Focusing on Its Core

Motorola’s Road to Irrelevancy – Focusing on Its Core

Remember the RAZR phone?  Whatever happened to that company?

Motorola has a great tradition.  Motorola pioneered the development of wireless communications, and was once a leader in all things radio – as well as made TVs.  In an earlier era Motorola was the company that provided 2-way radios (and walkie-talkies for those old enough to remember them) not only for the military, police and fire departments,  but connected taxies to dispatchers, and businesses from electricians to plumbers to their “home office.”

Motorola was the company that developed not only the thing in a customer’s hand, but the base stations in offices and even the towers (and equipment on those towers) to allow for wireless communication to work.  Motorola even invented mobile telephony, developing the cellular infrastructure as well as the mobile devices.  And, for many years, Motorola was the market share leader in cellular phones, first with analog phones and later with digital phones like the RAZR.

Dynatac phone

But that was the former Motorola, not the renamed Motorola Solutions of today.  The last few years most news about Motorola has been about layoffs, downsizings, cost reductions, real estate sales, seeking tenants for underused buildings and now looking for a real estate partner to help the company find a use for its dramatically under-utilized corporate headquarters campus in suburban Chicago.

How did Motorola Solutions become a mere shell of its former self?

Unfortunately, several years ago Motorola was a victim of disruptive innovation, and leadership reacted by deciding to “focus” on its “core” markets.  Focus and core are two words often used by leadership when they don’t know what to do next.  Too often investment analysts like the sound of these two words, and trumpet management’s decision – knowing that the code implies cost reductions to prop up profits.

But smart investors know that the real implication of “focusing on our core” is the company will soon lose relevancy as markets advance.  This will lead to significant sales declines, margin compression, draconian actions to create short-term P&L benefits and eventually the company will disappear.

Motorola’s market decline started when Blackberry used its server software to help corporations more securely use mobile devices for instant communications.  The mobile phone transitioned from a consumer device to a business device, and Blackberry quickly grabbed market share as Motorola focused on trying to defend RAZR sales with price reductions while extending the RAZR platform with new gimmicks like additional colors for cases, and adding an MP3 player (called the ROKR.)  The Blackberry was a game changer for mobile phones, and Motorola missed this disruptive innovation as it focused on trying to make sustaining improvements in its historical products.

Of course, it did not take long before Apple brought out the iPhone and with all those thousands of apps changed the game on Blackberry.  This left Motorola completely out of the market, and the company abandoned its old platform hoping it could use Google’s Android to get back in the game.  But, unfortunately, Motorola brought nothing really new to users and its market share dropped to nearly nothing.

The mobile phone business quickly overtook much of the old Motorola 2-way radio business.  No electrician or plumber, or any other business person, needed the old-fashioned radios upon which Motorola built its original business.  Even police officers used mobile phones for much of their communication, making the demand for those old-style devices rarer with each passing quarter.

But rather than develop a new game changer that would make it once again competitive, Motorola decided to split the company into 2 parts.  One would be the very old, and diminishing, radio business still sold to government agencies and niche business applications.  This business was profitable, if shrinking. The reason was so that leadership could “focus” on this historical “core” market.  Even if it was rapidly becoming obsolete.

The mobile phone business was put out on its own, and lacking anything more than an historical patent portfolio, with no relevant market position, it racked up quarter after quarter of losses.  Lacking any innovation to change the market, and desperate to get rid of the losses, in 2011 Motorola sold the mobile phone business – formerly the industry creator and dominant supplier – to Google.  Again, the claim was this would allow leadership to even better “focus” on its historical “core” markets.

But the money from the Google sale was invested in trying to defend that old market, which is clearly headed for obsolescence.  Profit pressures intensify every quarter as sales are harder to find when people have alternative solutions available from ever improving mobile technology.

As the historical market continued to weaken, and leadership learned it had under-invested in innovation while overspending to try to defend aging solutions, Motorola again cut the business substantially by selling a chunk of its assets – called its “enterprise business” – to a much smaller Zebra Technologies.  The ostensible benefit was it would now allow Motorola leadership to even further “focus” on its ever smaller “core” business in government and niche market sales of aging radio technology.

But, of course, this ongoing “focus” on its “core” has failed to produce any revenue growth.  So the company has been forced to undertake wave after wave of layoffs.  As buildings empty they go for lease, or sale.  And nobody cares, any longer, about Motorola.  There are no news articles about new products, or new innovations, or new markets.  Motorola has lost all market relevancy as its leaders used “focus” on its “core” business to decimate the company’s R&D, product development, sales and employment.

Retrenchment to focus on a core market is not a strategy which can benefit shareholders, customers, employees or the community in which a business operates.  It is an admission that the leaders missed a major market shift, and have no idea how to respond.  It is the language adopted by leaders that lack any vision of how to grow, lack any innovation, and are quickly going to reduce the company to insignificance.  It is the first step on the road to irrelevancy.

Straight from Dr. Christensen’s “Innovator’s Dilemma” we now have another brand name to add to the list of those which were once great and meaningful, but now are relegated to Wikipedia historical memorabilia – victims of their inability to react to disruptive innovations while trying to sustain aging market positions – Motorola, Sears, Montgomery Wards, Circuit City, Sony, Compaq, DEC, American Motors, Coleman, Piper, Sara Lee………..

 

Do you think you can fix that? – Filene’s, Syms, Home Depot, Sears, Wal-Mart


In the back half of the 1990s Apple was clearly on the route to bankruptcy.  Sun Micrososystems seriously investigated buying Apple.  After a review, leadership opted not to make the acquisition.  Sun’s non-officer management, bouyed on rumors of the acquisition, was heartbroken upon hearing Sun would not proceed.  When Chairman Scott McNeely was asked at a management retreat why the executive team passed on Apple, he responded with “Do you think you can fix that?”

Sun leadership clearly had answered “no.”  Good for a lot of us that Steve Jobs said “yes.” 

Sun has largely disappeared, losing 95% of its market cap after 2000 and being acquired by Oracle.  Why did Mr. Jobs succeed where the leadership of Sun, which couldn’t save itself much less Apple, feared it would fail?

For insight, look no further than the recent failure of Filene’s Basement (“Filene’s Saga EndsBoston.com) and its acquirer Sym’s (“Retailers’s Sym’s and Filene’s Go Out of BusinessChicago Tribune.)  Most of the time, when a troubled business is acquirerd not only is the buyer unable to fix the poor performer, but investments incurred by the buyer jeapardizes its business to the point of failure as well.  Given the track record of corporations at fixing bad businesses, Mr. McNeely was on statistically sound footing to reject buying Apple.

Why is the track record of corporate management so bad at fixing problem businesses?  Largely because most of their time is spent tyring to extend the past, rather than create a business which can thrive in the future.

The leadership of Sun didn’t see a future filled with mobile devices for music, movies or telephony.  They were fixated on the Unix-based computers Sun built and sold.  It was unclear how Apple would help them sell more servers, so it was a management diversion – a “poor strategic fit” – for Sun to acquire a technology intensive, talent rich organization.  They passed, stayed focused on Unix servers and high-end workstations, and failed as that market shifted to PC products.

Much is the same for Filene’s Basement.  A great brand, Sym’s bought Filene’s in an effort to continue pushing the discount model both Filene’s and Sym’s had historically pursued.  Unfortunately, the market for discount department store merchandise was rapidly shifting to higher end middle-market players like Kohl’s, and for deeply discounted goods the internet was making deal shopping a lot easier for everyone.  Because management was fixated on the old business, they missed the opportunity to make Filene’s and Sym’s a leader in new retail markets – like Amazon has done.

Remember in 2006 when Western Auto’s leader (and former hedge fund manager) Ed Lampert bought up the bonds of KMart, then used that position to acquire Sears?  The market went gaga over the acquisition, heralding Mr. Lampert as a genius.  Jim Cramer urged on his television program Mad Money that everyone buy Sears.  Now the merged KMart/Sears company has lost much of its value, and 24×7 Wall Street claimed it was the #1 worst performing retail chain (“America’s Eight Worst-Performing Retail Chains“.)

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Chart courtesy Yahoo.com 11/11/11 (note vertical scale is logarithmic)

Both KMart and Sears were deeply troubled when Mr. Lampert acquired them.  But he largely followed a program of cost cutting, hoping people would return to the stores once he lowered prices.  What he missed was a retail market which had shifted to Wal-Mart for the low-end products, and had fragmented into multiple competitors in the mid-priced market leaving Sears Holdings with no compelling value proposition. 

Mr. Lampert has turned over management, fired scores of employees, closed stores and largely led both brands to retail irrelevancy.  By trying to do more of the past, only better, faster and cheaper he ran into the buzz saw of competitors already positioned in the shifted market and created nothing new for shoppers, or investors.

And that’s why investors need to worry about Home Depot.  The company was a shopper and investor darling as it maintained double digit growth through the 1980s and 1990s.  But as competition matched, or beat, Home Depot’s prices – and often the capability of in-store help – growth slowed. 

The Board replaced the founding leader with a senior General Electric leader named Robert Nardelli.  He rapidly moved to operate the historical Home Depot success formula cheaper, better and faster by cutting costs — from employees to store operations and inventory.  And customers moved even more quickly to the competition.

As the recessions worsened job growth remained scarce and eventually home values plummeted causing Home Depot’s growth to disappear.  The company may be good at what it used to do, but that is simply a more competitive market that is a lot less interesting to shoppers today.  Because Home Depot has not shifted into new markets, it is in a difficult situation (and considered the 5th worst performing retailer.)  Who cares if you are a competitive home improvement store when your house is only worth 75% of the outstanding mortgage and you can’t refinance?

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Chart source Yahoo Finance 11/11/11

And it is worth taking some time to look at Wal-Mart.  The chain is famous for its rural and suburban stores selling at low prices, both as Wal-Mart and Sam’s Club.  But looking forward, we see the company has failed at everything else it has tried.  It’s offshore businesses have never met expectations and the company has left most markets.  It’s efforts at more targeted merchandise, upscale stores and smaller stores have all been abandoned.  And the company remains a serious lagger in understanding on-line sales as it has continued pouring money into defending its historical business, providing almost no return to investors for a decade. 

The market is shifting, competitors have attacked its old “core,” but Wal-Mart remains stuck trying to do more, better, faster, cheaper with no clear sign it will make any difference as people change buying patterns. How can any brick-and-mortar retailer compete on cost with a web page?

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Chart Source Yahoo Finance 11/11/11

All markets shift.  All of them.  Poor performance is most often an indication that the company has not shifted with the market.  Competition in lower growth markets leads to weak revenue performance, and declining profits.  Trying to “fix” the business by doing more of the same is almost always a money-losing proposition that hastens failure. 

It is possble to fix a weak business.  Moving with shifting markets into mobile has been very valuable for Apple investors.  Two decades ago IBM shifted from hardware sales to a services focus, and the company not only escaped bankruptcy but now is worth more than Microsoft.  

“Fixing” requires focusing on the future, and figuring out how to compete in the shifting market.  Rather than applying cost-cutting and operational improvement, it is important to determine what future markets value, and deliver that.  Zappos figured out that it could take a big lead in footwear and apparel if it offered people on-line convenience, and guaranteed taking back any products customers didn’t want (“What Other Businesses Can Learn from ZapposCMSWire.com.)  It’s sales exploded.  Toms Shoes tapped into the market desire for helping others by donating a pair of shoes every time someone bought a pair, and sales are growing in double digits (CNBC video on Tom’s Shoes).

History has taught us to be pessimistic about fixing a troubled business.  But that is largely because most management is fixated on trying to defend & extend the past.  But turnarounds can be a lot more common if leaders instead focus on the future and meet emerging needs.  It simply takes a different approach. 

In the meantime, in retail it’s a lot smarter to invest in Amazon and retailers meeting emerging needs than those fixated on cost cutting and operational improvement.  Be wary of Sears, Home Depot and Wal-Mart as long as management remains locked-in to its past.

Defend & Extend leads to mistakes and missed opportunities – Microsoft


This week Microsoft’s CEO Steve Ballmer said the company would get out a tablet soon, and that it would be a big success. Do you believe him? You have good reason to be doubtful.  When it comes to new products, Microsoft has been a big dud under his leadership.  But I’m not the only one complaining.  Mediapost.com ran an article quoting some very well respected sources who are very, very skeptical. Below is part of the article.  You can read the whole thing here:

“Of course that’s often the case with Microsoft,” notes Digital Daily.
“The problem is, it doesn’t always manage to do things really right.
Certainly, it didn’t manage it with Windows Vista. Or Windows Mobile. Or
Zune. Or, more recently, Kin.
Who’s to say this time will be any
different?”

“As it stands now, Microsoft’s lack of details on
the upcoming Windows tablets is not encouraging,
despite Ballmer’s
promises,” concludes PCWorld.

Seemingly overwhelmed by the rapid innovation and successes of rivals like Apple, Google, and even Facebook, Fortune
calls Ballmer “a train wreck,”
and “a salesman whose only answer to
technological change seems to be the operating system he inherited from
Bill Gates.”

Thinking of Microsoft as an “innovator,”
however, will leave you disappointed every time, Jefferies analyst
Katherine Egbert wrote in a note Friday morning. “If you stop thinking
of Microsoft as an innovator and start thinking of them as a fast, low
cost, mass market follower, you’ll stop being disappointed in their
inability to divine new markets and realize they are staring at some of
their largest growth opportunities ever.”

Microsoft is too focused on its core business to do new things correctly.  Long ago Mr. Ballmer took a Defend & Extend approach to the business.  The company doesn’t do much scenario planning to determine how markets can be disrupted – in fact they hope the opposite.  They do very little competitor analysis, because they view themselves as market dominant so beyond having to study competitors.  They ignore fringe competitors – including upstarts like Apple and Google.  Internal disruptions are verboten, and politics abound.  And there is no white space where teams can violate old lock-ins to develop a new success formula that will compete better with the likes of Apple, Google and Cisco.

Focusing on your core can get any business in trouble (read Forbes article “Stop Focusing on Your Core Business” here).  Even one with a near monopoly.  Over time, all markets shift.  When they do, the least prepared are the ones who think they “dominate” their industry.  Maybe Mr. Ballmer should have lunch with Mr. Wagoner of GM to learn what happens when you take your industry position for granted.