Originally created 07/09/98

Motorola finds bigger is not always better, looks to reorganize



CHICAGO -- Motorola Inc., the world's largest maker of telecommunications equipment, must make radical changes to control its immense size and spark a turnaround, analysts said Wednesday.

Motorola is putting the finishing touches on a long-awaited reorganization plan, to be unveiled as early as Thursday, after its 13-year string of profitable quarters was halted. The company has already announced plans to lay off 15,000 workers.

Motorola on Tuesday reported a second-quarter loss of $1.3 billion on huge restructuring costs and sharply lower sales in all but one of its divisions. Its stock tumbled $2.81¨, or 5 percent, to $52.18Ü per share Wednesday on the New York Stock Exchange after executives warned the third-quarter results will be just as dismal.

While the economic downturn in Asia is an important component in Motorola's troubles, analysts said an underlying problem also has surfaced.

"They became too big," said analyst William Gorman at PNC Institutional Services in Philadelphia. "They are more diversified, in several different businesses, which allowed for some missed execution in key areas. Competitors with a single focus also were able to move faster than them in getting out and selling new products."

For decades, the company's disparate divisions have operated as virtually autonomous units, performing their own research and development and selling their own products.

But executives failed to consider the problem of having one division competing against another, said Phillip Redman, program manager in the wireless mobile communication division of the Yankee Group, a Boston-based consulting firm.

"We sometimes refer to them as the warring tribes of Motorola," Redman said. "The communications and integration of the divisions have eroded nearly completely over the last 10 years, which means the best ideas and practices in one part of the company were being lost to other parts."

That has led to major missteps in the past few years in the two areas that have accounted for the lion's share of company profits: wireless telephones and semiconductors.

On the wireless side, Motorola made a serious mistake in believing American consumers' switch to digital phone service would take many years amid a battle to set a national technological standard, analysts say.

It held a commanding analog market share of nearly 50 percent, and unveiled its popular StarTac analog phone models three years ago just as some companies began building digital networks.

Motorola still retains a leading share of the analog phone market despite heavy competition, but "that doesn't mean much when analog sales are dropping off the charts," Redman said.

Competitors such as Finland's Nokia Corp. and Sweden's LM Ericsson, meantime, have taken the lead in the digital phone market, while Motorola been saying for nearly a year it will introduce a phone based on a standard that is gaining popularity in the United States.

Embattled chief executive Christopher Galvin, the grandson of the company's founder, admitted to business school deans in June that executives were "just plain lacking in judgment" by being reluctant to invest heavily and quickly in digital technology.

But Motorola's efforts to catch up so far have been poor. Early digital handsets failed to operate properly, while digital infrastructure networks also proved poor, with the company earlier this year losing a $500 million to $1 billion contract with PrimeCo Personal Communications Inc.

On the semiconductor side, companies needing computer chips have begged Motorola since 1992 to produce more. After seeing its market share erode, it did just that by building new plants -- only to see the market crash in part because of the Asian troubles, analysts said.

Galvin now appears to have little time to make drastic changes amid grumblings from Wall Street and major institutional investors, and analysts say his reorganization plan must not only sharpen the company's focus but engineer a radical makeover.

"As it stands right now," Redman said, "the pieces of Motorola might be worth more than the whole."