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………..

 

Sayonara Sony – How Industrial, MBA Management Killed a Great Company

Who can forget what a great company Sony was, and the enormous impact it had on our lives?  With its heritage, it is hard to believe that Sony hasn't made a profit in 4 consecutive years, just recently announced it will double its expected loss for this year to $6.4 billion, has only 15% of its capital left as equity (debt/equity ration of 5.67x) and is only worth 1/4 of its value 10 years ago!

After World War II Sony was the company that took the transistor technology invented by Texas Instruments (TI) and made the popular, soon to become ubiquitous, transistor radio.  Under co-founder Akio Morita Sony kept looking for advances in technology, and its leadership spent countless hours innovatively thinking about how to apply these advances to improve lives.  With a passion for creating new markets, Sony was an early creator, and dominator, of what we now call "consumer electronics:"

  • Sony improved solid state transistor radios until they surpassed the quality of tubes, making good quality sound available very reliably, and inexpensively
  • Sony developed the solid state television, replacing tubes to make TVs more reliable, better working and use less energy
  • Sony developed the Triniton television tube, which dramatically improved the quality of color (yes Virginia, once TV was all in black & white) and enticed an entire generation to switch.  Sony also expanded the size of Trinitron to make larger sets that better fit larger homes.
  • Sony was an early developer of videotape technology, pioneering the market with Betamax before losing a battle with JVC to be the standard (yes Virginia, we once watched movies on tape)
  • Sony pioneered the development of camcorders, for the first time turning parents – and everyone – into home movie creators
  • Sony pioneered the development of independent mobile entertainment by creating the Walkman, which allowed – for the first time – people to take their own recorded music with them, via cassette tapes
  • Sony pioneered the development of compact discs for music, and developed the Walkman CD for portable use
  • Sony gave us the Playstation, which went far beyond Nintendo in creating the products that excited users and made "home gaming" a market.

Very few companies could ever boast a string of such successful products.  Stories about Sony management meetings revealed a company where executives spent 85% of their time on technology, products and new applications/markets, 10% on human resource issues and 5% on finance.  To Mr. Morita financial results were just that – results – of doing a good job developing new products and markets.  If Sony did the first part right, the results would be good.  And they were.

By the middle 1980s, America was panicked over the absolute domination of companies like Sony in product manufacturing.  Not only consumer electronics, but automobiles, motorcycles, kitchen electronics and a growing number of markets.  Politicians referred to Japanese competitors, like the wildly successful Sony, as "Japan Inc." – and discussed how the powerful Japanese Ministry of Trade and Industry (MITI) effectively shuttled resources around to "beat" American manufacturers.  Even as rising petroleum costs seemed to cripple U.S. companies, Japanese manufacturers were able to turn innovations (often American) into very successful low-cost products growing sales and profits.

So what went wrong for Sony?

Firstly was the national obsession with industrial economics.  W. Edward Deming in 1950s Japan institutionalized manufacturing quality and optimization.  Using a combination of process improvements and arithmetic, Deming convinced Japanese leaders to focus, focus, focus on making things better, faster and cheaper.  Taking advantage of Japanese post war dependence on foreign capital, and foreign markets, this U.S. citizen directed Japanese industry into an obsession with industrialization as practiced in the 1940s — and was credited for creating the rapid massive military equipment build-up that allowed the U.S. to defeat Japan.

Unfortunately, this narrow obsession left Japanese business leaders, buy and large, with little skill set for developing and implementing R&D, or innovation, in any other area.  As time passed, Sony fell victim to developing products for manufacturing, rather than pioneering new markets

The Vaio, as good as it was, had little technology for which Sony could take credit.  Sony ended up in a cost/price/manufacturing war with Dell, HP, Lenovo and others to make cheap PCs – rather than exciting products.  Sony's evolved a distinctly Industrial strategy, focused on manufacturing and volume, rather than trying to develop uniquely new products that were head-and-shoulders better than competitors.

In mobile phones Sony hooked up with, and eventually acquired, Ericsson.  Again, no new technology or effort to make a wildly superior mobile device (like Apple did.)  Instead Sony sought to build volume in order to manufacture more phones and compete on price/features/functions against Nokia, Motorola and Samsung.  Lacking any product or technology advantage, Samsung clobbered Sony's Industrial strategy with lower cost via non-Japanese manufacturing.

When Sony updated its competition in home movies by introducing Blue Ray, the strategy was again an Industrial one – about how to sell Blue Ray recorders and players.  Sony didn't sell the Blue Ray software technology in hopes people would use it.  Instead it kept it proprietary so only Sony could make and sell Blue Ray products (hardware).  Just as it did in MP3, creating a proprietary version usable only on Sony devices.  In an information economy, this approach didn't fly with consumers, and Blue Ray was a money loser largely irrelevant to the market – as is the now-gone Sony MP3 product line.

We see this across practically all the Sony businesses.  In televisions, for example, Sony has lost the technological advantage it had with Trinitron cathode ray tubes.  In flat screens Sony has applied a predictable, but money losing Industrial strategy trying to compete on volume and cost.  Up against competitors sourcing from lower cost labor, and capital, countries Sony has now lost over $10B over the last 8 years in televisions.  Yet, Sony won't give up and intends to stay with its Industrial strategy even as it loses more money.

Why did Sony's management go along with this?  As mentioned, Akio Morita was an innovator and new market creator.  But, Mr. Morita lived through WWII, and developed his business approach before Deming.  Under Mr. Morita, Sony used the industrial knowledge Deming and his American peers offered to make Sony's products highly competitive against older technologies.  The products led, with industrial-era tactics used to lower cost. 

But after Mr. Morita other leaders were trained, like American-minted MBAs, to implement Industrial strategies.  Their minds put products, and new markets, second.  First was a commitment to volume and production – regardless of the products or the technology.  The fundamental belief was that if you had enough volume, and you cut costs low enough, you would eventually succeed.

By 2005 Sony reached the pinnacle of this strategic approach by installing a non-Japanese to run the company.  Sir Howard Stringer made his fame running Sony's American business, where he exemplified Industrial strategy by cutting 9,000 of 30,000 U.S. jobs (almost a full third.) To Mr. Stringer, strategy was not about innovation, technology, products or new markets.  

Mr. Stringer's Industrial strategy was to be obsessive about costs. Where Mr. Morita's meetings were 85% about innovation and market application, Mr. Stringer brought a "modern" MBA approach to the Sony business, where numbers – especially financial projections – came first.  The leadership, and management, at Sony became a model of MBA training post-1960.  Focus on a narrow product set to increase volume, eschew costly development of new technologies in favor of seeking high-volume manufacturing of someone else's technology, reduce product introductions in order to extend product life, tooling amortization and run lengths, and constantly look for new ways to cut costs.  Be zealous about cost cutting, and reward it in meetings and with bonuses.

Thus, during his brief tenure running Sony Mr. Stringer will not be known for new products.  Rather, he will be remembered for initiating 2 waves of layoffs in what was historically a lifetime employment company (and country.)  And now, in a nod to Chairman Stringer the new CEO at Sony has indicated he will  react to ongoing losses by – you guessed it – another round of layoffs.  This time it is estimated to be another 10,000 workers, or 6% of the employment.  The new CEO, Mr. Hirai, trained at the hand of Mr. Stringer, demonstrates as he announces ever greater losses that Sony hopes to – somehow – save its way to prosperity with an Industrial strategy.

Japanese equity laws are very different that the USA.  Companies often have much higher debt levels.  And companies can even operate with negative equity values – which would be technical bankruptcy almost everywhere else.  So it is not likely Sony will fill bankruptcy any time soon. 

But should you invest in Sony?  After 4 years of losses, and entrenched Industrial strategy with MBA-style leadership focused on "numbers" rather than markets, there is no reason to think the trajectory of sales or profits will change any time soon. 

As an employee, facing ongoing layoffs why would you wish to work at Sony?  A "me too" product strategy with little technical innovation that puts all attention on cost reduction would not be a fun place.  And offers little promotional growth. 

And for suppliers, it is assured that each and every meeting will be about how to lower price – over, and over, and over.

Every company today can learn from the Sony experience.  Sony was once a company to watch. It was an innovative leader, that pioneered new markets.  Not unlike Apple today.  But with its Industrial strategy and MBA numbers- focused leadership it is now time to say, sayonara.  Sell Sony, there are more interesting companies to watch and more profitable places to invest.

HP and Nokia’s Bad CEO Selections – Neither knows how to Grow – Hewlett Packard, Nokia


Summary:

  1. HP and Nokia have lost the ability to grow organically
  2. Both need CEOs that can attack old decision-making processes to overcome barriers and move innovation to market much more quickly
  3. Unfortunately, both companies hired new CEOs who are very weak in these skills
  4. HP’s new CEO is from SAP – which has been horrible at new product development and introduction
  5. Nokia’s new CEO is from Microsoft – another failure at developing new markets
  6. It is unlikely these CEO hires will bring to these companies what is most needed

Leo Apotheker is taking over as CEO of Hewlett Packard today.  Formerly he ran SAP.  According to MarketWatch.comHP’s New CEO Has a Lot To Prove,” and investors were less than overwhelmed by the selection, “HP Shares Slip After CEO Appointment.”  Rightly so.  What was the last exciting new product you can remember from SAP, where Apotheker led the company from 2008 until recently?  Well? 

SAP is going nowhere good.  Its best years are way behind it as the company focuses on defending its installed base and adding new bits to existing products  It’s product is amazingly expensive, incredibly hard and expensive to install, and primarily keeps companies from doing anything new.  Enterprise software packages are like cement, once you pour them in place nothing can change.  They reinforce making the same decision over and over.  But increasingly, that kind of management practice is failing.  In a fast-changing world software that can take 4 years to install and limits decision-making options doesn’t add to desperately needed organizational agility.  And during the last 10 years SAP has done nothing to make its products better linked to the needs of today’s markets. 

So why would anyone be excited to see such a leader take over their company?  If Apotheker leads HP the way he led SAP investors will see growth decline – not grow.  What does this new CEO know about listening carefully to emerging market needs?  The move to install SAP in smaller companies hasn’t moved the needle, as SAP remains almost wholly software for stodgy, low-growth, struggly behemoths.  What does this CEO know about creating an organization that can moving quickly, create new products and identify market needs to position HP for growth?  His experience doesn’t look anything like Steve Jobs, under who’s leadership Apple’s value has increased multi-fold the last decade.

Unfortunately, the same refrain applies at Nokia.  Just last week I pointed out in “Another One Bites the Dust” that Nokia was at grave risk of following Blockbuster into bankruptcy court.  Although Nokia has 40% worldwide market share in mobile phones, U.S. share has slipped to about 8% this year.  In smartphones Nokia has nowhere near the margin of Apple, even though both will sell about the same number of units this year.  Nokia once had the lead, but now it is far behind in a market where it has the largest overall share.  And that was the problem which befell Motorola – #1 for 3 years early in this decade but now far, far behind competitors in all segments and a very likely candidate for bankruptcy when it spins out a seperate cell phone business.

According to the New York Times in “Nokia’s New Chief Faces a Culture of Complacency” Nokia had a very similar product to the iPhone in 2004 but never took it to market.  The internal organization made the new advancement go through several rounds of “review” and the hierarachy simply shot it down in an effort to maintain company focus on the popular, traditional cell phones then being offered.  Rather than risk cannibalization, the organization focused on doing more of what it had done well.  Eschewing innovation for defending the old products is shown again and again the first step toward disaster.  (Would your organization use layers of reviews to kill a new idea in a new market?)

Meanwhile, when an internal Nokia team tried to get approval to launch the smart phones management’s responses sounded like:

  • We don’t know much about this technology. The old stuff we do.
  • We don’t know how big this new market might be. The old one we do
  • We can’t tell if this new product will succeed. Enhanced versions of old products we can predict very accurately.
  • We might be too early to market.  We know how to sell in the existing market.

Even though Nokia had quite a lead in touch screens, downloadable apps, a good smartphone operating system and even 3-D interfaces, the desire to Defend & Extend the old “core” business overwhelmed any effort to move innovation to market.  (By the way, do these comments in any way sound like your company?)

The new CEO, Mr. Elop, is from Microsoft.  Again, one of the weakest tech companies out there at launching new products.  Microsoft had the smart phone O/S lead just 3 years ago, but lost it to maintain investment in its traditional Windows PC O/S and Office automation software.  And again you can ask, exactly how excited have people been with Microsoft’s new products over the last decade?  Or you might ask, exactly what new products?

Both HP and Nokia need CEOs ready to attack lock-in to old technologies, old business practices, old hierarchies and old metrics.  They need to rejuvenate the companies’ ability to quickly get new products to market, learn and improve.  They need experience at early market sensing of unmet needs, and using White Space teams to get products out the door and competitive fast.  Both need to overcome traditional management approaches that inhibit growth and move fast to be first into new markets with new products – like Apple and Google.

But in both cases, it appears highly unlikely the Board has hired for what the companies need.  Instead, they’ve hired for a stodgy resume. Executive who came from companies that are already in bad positions with limited growth prospects.  Exactly NOT what the companies need.  We can only hope that somehow both CEOs overcome their historical approaches and rapidly attack existing locked-in decision-making.  Otherwise, this will be seen as when investors should have sold their stock and employees should have begun putting resumes on the street!

Overcoming metrics to grow – Motorola, Xerox, Kodak, Six Sigman, TQM, Lean

Do all good ideas originate outside the organization?  Of course not.  Motorola understood all the critical technologies for smart phones, and taught Apple how to use them in a joint development project that created the ROKR.  That's just one example of a company that had the idea for growth, but didn't move forward effectively.  In this case Apple captured the value of new technology and a market shift.

On the Harvard Business Review blog site one of consulting firm Innosight's leaders, Mark Johnson, covers two stories of companies that had all the technology and capability to lead their markets, but got Locked-in to old practices.  In "Have You Already Killed Your Next Big Thing" Mr. Johnson talks about Xerox and Kodak – two stories profiled in my 2008 book "Create Marketplace Disruption."  Both companies developed the technology that replaced their early products (Xerox developed desktop publishing and Kodak developed the amateur digital camera.)  But Lock-in kept them doing what they did rather than exploiting their own innovation.

One of the causes is a fascination with metrics.  Again on the Harvard Business Review blog site Roger Martin, Dean of the Rotman School of Management at the University of Toronto, tells us in "Why Good Spreadsheets Make Bad Strategies" that you can't measure everything.  And often the most important information about markets and what you must do to succeed is beyond measuring – at least in the short term. 

Measurements are good control tools.  Measurements can help force a focus on short term improvements.  But measurements, and the concomitant focus, reduces an organization's ability to look laterally.  They lose sight of information from lost customers, from small customers, from fringe customers and fringe competitors.  Measurement often leads to obsession, and a deepening of Defend & Extend behavior.  It's not accidental that doctors often find anorexia patients measure everything in (liquids and solids) and everything out (liquids and solids). 

Measurements are created when a business is doing well.  In the Rapids.  Like Kodak during the 1960s and Xerox in the 1970s.  Measurements are structural Lock-ins that help "institutionalize" the behavior which makes the Success Formula operate most effectively.  And they help growth.  But they do nothing for recognizing a market shift, and when new technology comes along, they stand in the way.  That's why a powerful Six Sigma or Total Quality Management (TQM) or Lean Manufacturing project can help reduce costs short term, but become an enormous barrier to innovation over time when markets shift.  These institutionalized efforts keep people doing what they measure, even if it doesn't really add much incremental value any longer.

To overcome measurement Lock-ins we all have to use scenario planning.  Scenarios can help us see that in a future marketplace, a changed marketplace, measuring what we've been doing won't aid success.  And because we don't yet know what the future market will really look like, we can't just swap out existing metrics for something different.  As we proceed to do new things, in White Space, it's about learning what the right metrics are – about getting into the growth Rapids – before we tie ourselves up in metrics.

Note:  To all readers of my Forbes article last week – there has been an update.  The very professional and polite leadership at Tribune Corporation took the time to educate me about the LBO transition.  As a result I learned that what I previously read, and reported in my column as well as on this blog, as being an investment of employee retirement funds into the LBO was inaccurate.  Although Tribune is in hard times right now, the very good news is that the employee retirement funds were NOT wiped out by the bankruptcy.  The Forbes article has been corrected, and I am thankful to the Tribune Corporation for helping me report accurately on that issue.

A Tale of 2 charts – AOL and Apple

Do you remember when AOL dominated the internet?  In the early 1990s most people who used the internet actually were AOL clients.  They bought their internet access, via dial-up modems, from AOL.  Their interface (browser) was from AOL.  And most of the sites – and navigation – was driven by AOL.  AOL was the "monster" of the web.  And it created enormous value for investors from this leadership position.  It's value stormed to over $160billion!

AOL chart
Chart from Silicon Alley Insider

But as we can see, once acquired by Time Warner AOL tried to Defend & Extend its position. These actions pushed AOL into the Swamp, an undefendable position in the rapidly growing internet world. Defending its position proved impossible, as people found better and lower cost solutions for accessing and using the web.  Now AOL is in the Whirlpool, fast disappearing – an historical anecdote about early internet days.

Apple has only about 2% market share in mobile phones.  On the one hand, this could appear nearly immaterial.  But if we look at usage, we see a very different story

Iphone apps
Chart courtesy Silicon Alley Insider

iPhone application growth, which is clearly becoming logarithmic, demonstrates a change in the marketplace.  People are clearly using these devices for more than making calls.  Unlike AOL, which tried to hold people into their environment – or even Motorola's RAZR which tried to dominate sales of phones with pricing – Apple isn't trying to Defend & Extend a market positionApple is creating a market disruption by changing how mobile devices are used.  Promulgating applications increases demand for the iPhone (and iTouch) as not just phones but as replacements for laptops and other internet devices.  Possibly ereaders like Kindle.  This pulls people toward Apple's devices, which will generate strong future growth.  By constantly bringing out new uses, Apple disrupts the market for phones, computers and internet access devices.  Positioning its own products to be big winners as demand continues growing, and keeping Apple in the Rapids.

PostScript –

I was pleased to see a recent Wall Street Journal article "What Kills Great Companies:  Inertia."  The message of Lock-in as a source of business problems keeps spreading.  This time Gary Hamel talks about some of the sources of Lock-in he sees.  Reads like he bought a copy of "Create Marketplace Disruption"!