What You Can Learn From Motorola’s Fall


Americans love a good comeback, whether it's the Steelers pulling off a Super Bowl win in the final minute or Mickey Rourke snagging an Oscar nomination for The Wrestler. But for U.S. corporations, clawing your way back to the top is harder than ever.

For once-mighty Motorola, it might well be impossible. Given the current economic climate, the company's plummeting cell-phone sales threaten to drag down its profitable divisions.

That leaves Motorola (Stock Quote: MOT) with some tough choices. When your business is on life support, layoffs and budget cuts alone don't cut it. Like Motorola, you may be forced to re-evaluate your entire business model, shedding units and products that don't measure up.

Can Motorola pull it off? Could you?

A decade ago, Motorola seemed perfectly positioned to take advantage of the booming cell-phone business. For years, its Razr was the best-selling handset in the U.S. But this week, Motorola announced that fourth-quarter sales fell 26% from a year earlier. Cell-phone sales dropped by half.

Just as punishing to the company's self-esteem was the news that Apple's iPhone (Stock Quote: AAPL) edged out the Razr as the best-selling phone in the U.S. According to the NPD Group, which released the sales numbers, four of the five best-selling handsets were optimized for messaging and other advanced Internet features. The only one that wasn't? The Razr.

Motorola rushed to show that it's taking aggressive action, announcing savings of $1.5 billion for 2009 and suspending its dividend. But news that the company's CFO is leaving, without a successor in place, didn't exactly instill confidence. And more rounds of layoffs will further demoralize an already beaten-down workforce.

So what went wrong? "The success of the Razr ended up masking larger problems," says Rick Summer, managing director of Relevant C Business Group, a Chicago-based advisory-services firm that includes a number of former Motorola employees.

At the high end of the market, Motorola's designs didn't keep up with consumer expectations, and the game-changing iPhone set back the company further. Motorola also got squeezed out by competitors at the lower end, where the cell-phone business had the most potential for growth globally.

"Nokia (Stock Quote: NOK) has the best ability to secure components in the business," Summer says. "Their supply chain is the envy of everyone, and that typically has been Motorola's weakness. Motorola's R&D yield is higher, but their ability to translate a dollar of research into a dollar of revenue is much less efficient."

In an effort to avoid irrelevance, Motorola announced a new generation of devices that will run on Google's new Android software; like the iPhone, it will allow anyone to develop new applications. But other cell-phone manufacturers, including HTC and Samsung, will be using the software as well, and according to a recent report in the Wall Street Journal, Dell (Stock Quote: DELL) also has an Android-driven cell phone in the works.

Motorola's move toward a smartphone is a last-gasp, swing-for-the-fences move. It may pay off big, or it may drain money and time to little effect. "Android is not a competitive advantage," Summer says. "It can't be the only thing that turns them around."

There was some good news buried in the fourth-quarter report. Motorola's non-cell-phone units, which produce cable boxes, police radios and cellular-network equipment, posted earnings increases. Which begs the question: Should Motorola even be in the cell-phone business?

Perhaps not. And while the company has tried to put that division up for sale, no buyers have come forward.

For decades, Motorola was an engineering-focused company that was, to be honest, somewhat boring. Then came the Razr, and the company hit the tech big time. Giving up its signature product would be a blow, but it may be the only way to salvage the rest.

"They have talented managers, good technology and they're trying to invest in new businesses," Summer says. "There are hidden gems. The question is, is Motorola willing to be smaller and focus on their profitable businesses?"

And that's the question for any business, no matter what its size, when losses mount. What are you willing to give up to survive? Until you can answer that question, you'll be where Motorola is now, facing an uncertain future.



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