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Motorola: Losing the Mobile
Phones War
This case was written by Philippe Silberzahn, Research Associate, and Morten T. Hansen, Professor of
Entrepreneurship, both at INSEAD. It is intended to be used as a basis for class discussion rather than to illustrate
either effective or ineffective handling of an administrative situation.
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In ten years, Motorola - an American icon - went from undisputed technological and market
leader of the mobile phone market to a declining number two, ceding the market leadership in
1998 to rival Nokia, a Finnish conglomerate once known for selling trees, shoes and toilet
paper. In 2008, Motorola’s mobile phone division was fighting for its life, and would have
long been bankrupt had it not been part of the Motorola group. Why did Motorola lose its
leadership position?
Motorola history: 1928-1993
Motorola was a technology conglomerate founded by Paul Galvin in 1928 under the name
Galvin Manufacturing Corporation (GMC). The company’s first product was a battery
eliminator. In 1930, GMC introduced the Motorola radio, one of the first commercially
successful car radios. This product was also the first in a long line of innovative products
introduced by Motorola over the years in the area of electronics and communications. Such
products included the world’s first FM Portable two-way radio for the U.S. Army in 1943,
which became known as the “walkie-talkie”. In 1947, the company was renamed Motorola
and introduced its first TV, a business that represented up to 70% of its sales until it was sold
in 1974.1
In 1993, Motorola was one of the world’s leading providers of electronic equipment, systems,
components and services for worldwide markets. The company’s products included two-way
land mobile communication systems, paging and wireless data systems and other forms of
electronic communication systems; cellular mobile and portable telephones and systems;
semiconductors; information systems products such as modems, multiplexers and network
processors; electronic equipment for military and aerospace use; electronic engine controls;
and computer system. Motorola also provided services for paging, cellular telephone and
shared mobile radio. By 1995, the company had 120,000 employees, and a turnover of $16
billion. 2
Cellular communications: 1970-1993
The idea of cellular communications was introduced by Bell Laboratories as early as 1947 but
it was not until the early seventies that the U.S. Federal Communications Commission
allocated proper frequencies for the service to be developed. In a cellular network, the
serviced area was divided in multiple cells, each served by a fixed transmitter, known as a
base station. The phone connected to the base station serving the cell where the user was, and
as the user moved from cell to cell, the call was transferred from base station to base station.
Accordingly, there were two parts to the cellular business: The first was the infrastructure, i.e.
the base stations that were sold to the carriers to operate their cellular networks. The second
1
2
Source : http://en.wikipedia.org/wiki/Motorola, Company reports.
Source: Company report
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was the cellular phones, which were sold to end customers either through retail or through the
carriers.
Motorola was the first to incorporate the technology into a portable device. Initially mobile
phones were too big to be carried, and could only be used in cars (hence the initial name ‘car
phones’).
In December, 1983, the world’s first commercial handheld cellular phone, Motorola’s
DynaTAC, received approval from the U.S. Federal Communications Commission (See
Exhibit 1). The 28 ounce (793g) phone became available to consumers in 1984. That same
year, the Advanced Mobile Phone System (AMPS) network, developed by Bell Labs, was
officially introduced in the US.
Europe was also active. Nordic Mobile Telephone (NMT), the first international mobile
phone network, had been built in Sweden and Norway in 1981. It was extended to Denmark
and Finland. In February, 1987, Finland’s Nokia, then a conglomerate present in a large
number of industries, launched the Mobira Cityman, the first NMT phone.
With networks such as AMPS and NMT, the first generation of mobile telephony had been
using analog technology. In the late 1980s, the industry started working on digital
technology.3 Digital telephony offered a much more efficient use of the spectrum, allowing
more simultaneous phone calls over the same network at any point in time. Adoption of
digital telephony was key to managing the growing use of mobile telephony and avoiding
network saturation. Initially, there were two digital standards competing for adoption: GSM
and TDMA. GSM, created in Europe, was imposed in 1987 by European telephone
administrations as the sole standard in Europe for digital communications with an aim to go
live by 1991. Unlike Europe, the US government decided not to impose any digital standard.
GSM and TDMA started to compete for adoption until a new startup called Qualcomm
introduced a third standard called CDMA, which quickly gained traction, mostly in the US
and Korea.
With a strong European base, GSM gradually became the dominant standard across the world,
but the US market remained fragmented, never unifying around one standard.
Thanks to its early moves, Motorola was the world market leader in mobile phones with a
40% market share in 1993. The company was profitable and its telecom business represented
about 27% of its total revenue.
Motorola’s improbable Nemesis: Nokia in 1992
In 1992, there was little reason to think that little Nokia would one day overtake mighty
Motorola in the mobile phone market. Nokia was the result of the merger of two Finnish
companies going back to 1865. Over the years, Nokia had transformed itself into a
conglomerate that was one of the largest companies in Finland. The company was active is
3
An analog signal is any continuous signal for which the time-varying feature of the signal is a representation of
some other time varying quantity, i.e. analogous to another time varying signal. By contrast, a digital system
uses discrete (discontinuous) values to represent information.
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such diverse businesses as trees, shoes, electric cables, toilet paper, electricity generation, etc.
In the 1970s, Nokia had ventured in technology businesses, building on its knowledge in
electricity. The company got involved in computers distribution, software development and
eventually in radio communication. As a result, it was one of the leaders in the development
of the NMT analog mobile telephony network in the seventies. It was also a leader in the
development of the GSM digital standard in the late eighties. Nokia was a company with a
strong international exposure, selling its products and services far beyond Finland.
Under the direction of Kari Kairamo, a visionary CEO appointed in 1977, Nokia had
embarked on an ambitious strategy of acquisition and internationalization. However, the late
eighties were difficult times for the company. In December, 1988, Kairamo committed suicide
for a reason never clearly explained. Growing financial difficulties for the company and
tensions among shareholders probably aggravated existing psychological problems. Then, two
years later, the Soviet Union collapsed. Finland and the Soviet Union shared a border and a
long history together. The collapse meant that about $200 million of Nokia’s revenue
disappeared in just a few weeks. Added to this were substantial problems in its recently
acquired TV business, and a severe recession in Finland4.
In February, 1991, Nokia reported a substantial fall in sales (-16%) and swung to a $55
million loss for fiscal year 1990. Problems continued well into 1992, and in March 1993,
Nokia reported a loss of $23 million for the year 1992, following the loss of $36 million the
year before. By 1993, Nokia’s ability to survive was questioned and the company was the
subject of takeover rumors.
Industry shift: from analog to digital
The mobile phone market experienced two big shifts in the early nineties: the transition from
analog to digital technology, and the explosion of the consumer market. Motorola struggled to
respond to both of them.
Market evolution
Unlike in Europe where GSM rapidly became the unique mobile standard, in the US analog
remained the dominant technology for a long time. It was not until 1999 that the US digital
subscriber base reached 50% market penetration.
As shown by Figure 1, the US market lagged the rest of the world in the transition from
analog to digital by about 4-5 years. There were several reasons why the transition from
analog to digital was delayed in the US. The main one was that in most countries, the decision
to switch to digital was taken by governments with a clear and mandatory time table. One
unique standard, GSM, was chosen, with few exceptions5. Given the role that governments
played in the telecom sector at that time, there was little doubt about where the industry was
Main sources on the history of Nokia : Steinbock, D. “The Nokia revolution : The story of an extraordinary
company that transformed an industry”, Amacom, 2001 ; and Häikiö, M. “Nokia: The inside story”, Financial
Times Prentice Hall, 2002.
5
Japan is one major exception and has an altogether different story as far as its mobile phone industry is
concerned.
4
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going once the decision to switch was made. It was altogether different in the United States
where the government never was involved in choosing one standard. In addition, just as the
main industry body, the CTIA6, was about to select the TDMA standard, a startup called
Qualcomm unexpectedly entered the fray and pushed for its own new standard called CDMA.
The game was reopened entirely, CDMA rapidly gaining significant acceptance, but then its
delay further delayed the growth of digital networks.
Figure 1: Worldwide vs. US penetration rate of mobile digital technology7
As a result, when digital technology appeared in the late eighties, there was a high uncertainty
as to which standard would emerge in the US. Adding to this uncertainty was the constant
improvement of analog technology and network engineering techniques, which gradually
became more efficient. It seemed to analysts that digital’s primary benefit, added capacity,
was not so crucial after all. It so happened that in the early nineties, overall subscriber usage
rates fell, further reducing the pressure for more capacity, and hence reducing digital’s appeal.
Last but not least, the initial performance of digital telephony was poor. Users experienced
many dropped calls, and the first digital handsets were 25% bigger and 50% more expensive,
and therefore less attractive than analog ones. Everything seemed to conspire to cast doubt
about digital technology’s interest, or at least about the need to quickly switch to digital
technology.
Despite this, US carriers eventually decided to push for digital technology. The shift occurred
around 1998-1999 when operators drove the conversion to digital. For instance, in May, 1998,
AT&T Corp., the leading US operator with 38% market share, introduced Digital One Rate, a
nationwide pricing plan targeting business travelers and subscribers who frequently made
wireless long-distance calls. The plan was the first really simple pricing plan and a way for
6
CTIA (www.ctia.org) is an international nonprofit membership organization founded in 1984, representing all
sectors of wireless communications. The association also operates the industry’s leading trade shows, as well as
equipment testing and certification programs to ensure a high standard of quality for consumers. CTIA is mostly
active in the United States.
7
Sources: Al Najjar, N. and Besanko, D., Motorola in the wireless handset market, Case study #KEL023, Kellog
School of Management, 2004, and CTIA.
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AT&T to migrate its customers to the TDMA digital service. The plan proved successful:
Some 45% of its subscribers used digital service at the end of the second quarter of 1998, up
10 percentage points in two months, and compared to 21 percent at the midway point of
19978.
Motorola’s slow response to the analog-digital shift
Motorola had been developing digital technology for a long time. The company made its first
TDMA call in January, 1991, and its first GSM call in March, 1991, very early dates indeed.
Despite this, Motorola took a long time to switch its business focus to digital phones. In 1996,
65% of its handsets sold were still analog, and that figure was still 22% as late as 1999.
Motorola was far behind the US market evolution in that regard.
Motorola’s slow response resulted in a small share of the US digital handset market. As
evidenced by Table 1, Motorola’s US digital handset market share was significantly below its
overall US handset share.
Table 1: Motorola’s US market numbers 1995-1998
Digital handset sales (units)
Motorola sales (units)
Motorola US Digital Market Share
Motorola overall US Market Share
1995
431 000
305 000
70,8%
36,7%
1996
2 558 000
117 000
4,6%
37,8%
1997
1998
7 166 000 16 425 000
360 000 1 900 000
5,0%
11,6%
40,8%
29,7%
This is also illustrated by Figure 2. Motorola’s US market share dropped in 1997, the year
when digital handsets started growing quickly in volume. Motorola failed to introduce digital
handsets in time.
Figure 2: US handset market share9
8
9
Source : Wireless today, 2(142), 23 July 1998
Sources : company reports
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The lag is also reflected in the analog-digital product mix of Motorola, as shown in Figure 3.
Motorola lagged the worldwide market until 1999.
Figure 3: Product mix, % of digital handsets sold10
This lag also existed in the infrastructure business: In 1996, Motorola had just 12% of the US
digital equipment market, well below its 20% share in conventional cellular transmission
equipment in the USA11. This was also the case worldwide: “The erosion of Motorola’s
market share is shown by the fact that its digital handset volumes are trailing industry trends.
While more than 50 per cent of net subscriber additions worldwide are selecting digital
networks, Motorola’s digital handset sales account for just 30 to 35% of its total cellular
telephone sales.”12
Expecting delays in digital deployments, Motorola tried to hedge its bets by promoting a dual
mode technology called NAMPS in 1992. However, NAMPS was unsuccessful. When
Motorola belatedly decided to push for digital, in 1996, it chose CDMA in the US, at that time
a new and unproven standard. “We’re focusing on CDMA [as opposed to GSM] because we
think it’s the best technology in features and functions” declared Jack Finlayson, corporate
vice-president and general manager of Motorola’s Pan-American Wireless Infrastructure
Division.13 But it was not what carriers and consumers wanted: “Motorola has chosen to push
only CDMA technology in the US market and does not offer GSM, even though a quarter of
the new PCS [i.e. digital]14 operators plan to use GSM,”15 wrote an analyst.
It only added to Motorola’s problems that CDMA was delayed significantly, so its share of
the digital market lagged behind both GSM and TDMA. Another analyst commented:
“Motorola has plumped for CDMA because it argues that it is the best technology for the new
systems, even though it sells GSM throughout other markets outside the USA. The new
10
Sources : company reports, CTIA
Yankee Group, 1997
12
Mobile Communications, August 1996
13
Business Week, 23 July 1996
14
PCS (Personal Communications Service) is the name for the 1900 MHz radio band used for digital mobile
phone services in Canada, Mexico and the United States (Source: Wikipedia).
15
Mobile Communications, August 1996
11
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operators have their doubts. There are only a handful of commercial CDMA systems in
operation across the world, with just one in the USA, while GSM has been used for years in
Europe.”16
By contrast, Nokia never had to worry about standards. The switch to the new digital standard
in Europe was mandated by governments. GSM was the only standard allowed, and the
decision had been made as early as 1987. So Nokia acquired an early lead in that standard.
However, thanks to its international orientation, Nokia was aware that other standards existed.
Because mobile telecoms were its new focus, the company decided it could not afford to bet
on the wrong standard. In February, 1991, Nokia became technology agnostic and decided
that its phones would be made for all the main standards: GSM in Europe, TDMA in the US,
and PDC in Japan. This was part of a strategy to decouple Nokia’s brand from GSM only. As
a result, the company could ride on the back of the GSM growth, most notably in Europe, and
extend its lead to other geographies from this solid base.
By 1996, Nokia enjoyed a higher market share than Motorola in the US digital market:
Table 2: Market shares in the US digital handset phones (%)17
Nokia
Motorola
1995
28.8
36.3
1996
33.0
8.0
1997
19.8
6.3
1998
40.3
11.5
The democratization of mobile phones
Market evolution
Motorola struggled to respond to market changes and demands in the 1990s. One major
change was the democratization of mobile phones marked by the explosion of consumer
demand. When mobile phones were introduced in the early eighties, there were used by
governments and large corporations. They were a business tool, and few could imagine that
they would be a mass market less than ten years later: why would people want a mobile phone
when phone booths were available on every corner of every street? The shift was gradual, but
really started to accelerate around 1995 in the US, with more than 33 million subscribers,
representing a penetration of 13% of the total population. The penetration had jumped to 31%
by 1999.
This was accompanied by a decline in the average monthly bill resulting from increased
competition around 1995. Between 1987 and 1997, the average cellular bill declined roughly
64%.
In 1996, personal and consumer users of cellular equipment represented the fastest growing
segment of the overall market for Cellular equipment, which in 1995 was more than $7.14
16
17
Mobile Communications, August 1996
Source : Dataquest
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billion and was expected to grow to over $15.78 billion in the year 2002 18. The following
trends, both reflecting and compounding the democratization, could be observed:
Figure 4: Total US mobile subscriber base19
Commoditization: Progresses in technology and increased competition led to a sharp decline
in average phone prices. While in 1983 the average lowest price phone cost $2,628, it was
only $53 in 199520. As a result, network operators and retailers increasingly viewed the
phones as little more than giveaway commodities, useful for signing customers up for
services.
The “free-phone movement.” In 1995 the cost of a cell phone to a carrier averaged about
$375. Around this time network operators bundled a “free” phone with a service contract,
making them affordable to the everyday consumer.
Prepaid. In October, 1997, Ameritech Cellular Services introduced “Pick Up & Go”, a
cellular service available in the Chicago and Detroit markets. With this new prepaid program,
customers were able to purchase cellular airtime as they needed it, without having to sign a
long-term contract or to deal with monthly bills. Prior to the introduction of prepaid cards, the
cell phone was something available only to creditworthy customer, and carriers used to turn
down about 30% of applications. With prepaid, this barrier disappeared, and a whole new
segment opened.
Motorola and Nokia’s response
The democratization of mobile phones had a profound impact on the market’s key success
factors. While business people were ready to pay high prices for leading-edge, technologyrich phones, consumers were mostly interested in price and design. The business segment
played to Motorola’s strengths, while the consumer segment played to Nokia’s. Product
technology leadership was being supplanted by “free phones” which served to greatly devalue
Motorola’s product leadership.
18
Frost & Sullivan, 1996
Source : CTIA
20
Source: Herschel Shosteck Associates, 1995
19
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Focused on its technical excellence, Motorola found it difficult to respond to the crucial
market shift to less costly phones, although it was well aware of the shift. In 1996, its
marketing vice president acknowledged that while in 1986 nearly all the purchasers of the
company’s cellular phones were business buyers, nearly three-quarters of those purchasing
cellular phones now used them for personal reasons such as safety, convenience or household
management21.
When that shift to lower-price models became irresistible around 1995, Motorola was caught
without its own inexpensive phones, and instead had to slash prices for its higher-end models
and forfeit profit margins. On the contrary, Nokia had anticipated the shift long in advance.
The company explicitly set out to respond to that trend by understanding the implications,
mainly that the basis of competition would shift from technical excellence at a high cost to
design and convenience at low cost. This shift played to Nokia’s strengths because it meant
R&D power, which the small company couldn’t afford, would not matter much. A focus on
design, which required more of nimbleness and a state of mind than deep pockets, suited
Nokia just fine, and the company hired high profile designer Frank Nuovo as early as 1990.
Nuovo quickly took a leading role in the creation of new handsets.
Motorola’s inability to respond to the democratization of the market was compounded with
other market misreads and a lack of responsiveness to customer demands. In 1999 and 2000,
for instance, Motorola insisted on making expensive or technologically innovative phones
(e.g. WAP phones, which were a flop in 2000) when buyers wanted simple, stylish, sub-$100
phones, a domain where Nokia reigned unchallenged. “Motorola has technical prowess, but it
is hopeless in addressing consumer needs,” commented Choi Dong June, marketing director
for Korea’s Appeal Telecom, in 200122.
Furthermore, up until 2001, Motorola was described as a bossy, know-it-all supplier, a
holdover from the days when the company was the market leader with the hottest products.
“Listening, for Motorola, was waiting for you to stop speaking so they could tell you what to
buy,” said Verizon’s Mr. Stratton. “It was endemic to their culture.” Cingular’s Mr. Boyer
said it was tough to get the attention of Motorola’s top executives. By contrast, he talked to
Nokia’s head of U.S. sales monthly23.
Leadership
For Motorola, the critical 1993-2003 period exactly corresponds to the ascent of Chris Galvin,
the grandson of Motorola founder, and son of its legendary CEO Robert Galvin. Chris Galvin
became a VP in 1990, joined the executive office in 1993, and became CEO in 1997. During
this period, Motorola was plagued by a high turnover on executive positions illustrated by the
abrupt departure of Georg Fisher in 1993.
21
Wall Street Journal, 12 January 1996
Business Week, 28 May 2001
23
Wall Street Journal, May, 2001
22
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The shadow of the Galvin family
Born in 1950, Christopher Galvin had joined Motorola in 1973. Beginning as a salesman, he
moved through a variety of sales, marketing and product management positions. Along the
way he earned an MBA from Northwestern University's business school. Galvin’s rise to the
top job at Motorola in 1997 had long been anticipated by observers: As early as 1989, a
Business Week article observed: “Many Motorola watchers expect that his [Robert Galvin]
39-year-old son, Christopher, a senior vice-president and chief corporate staff officer, will one
day take over as chairman24.”
In January 1990, as part of the series of promotions, Galvin was named senior executive vice
president and assistant chief operating officer, posts that made him a part of Motorola’s chief
executive office. Motorola spokesman declined to say whether Galvin was in line to succeed
CEO Fisher as chairman, although he acknowledged that view was widely held. “It’s really
too early to ask that question, but ask any Motorolan and they can’t imagine the company
without a Galvin on the way to the top,” he added25.
“Sources close to Motorola say Christopher Galvin …. is being groomed for the top job at the
$13 billion telecommunications company. Bob Galvin (now chairman of the board’s
executive committee) had made it clear on several occasions that he was preparing the way
for his son,” said one source close to top management at Motorola. “I’ve heard him say that
Fisher was preparing the way for Chris.”26
Motorola’s CEO Georg Fisher did not see it that way: upon Galvin’s promotion, he made it
clear his role was not to keep the chairman’s seat warm for a third-generation Galvin, and
added his plans was to retire ‘in 15 or 20 years’27. When it became clear that that would not
be the case, Fisher left abruptly in 1993, stunning the corporate world and leaving Motorola
embarrassed28. Added a top executive recruiter: “Fisher is a very talented guy who realized
that no matter how successful he was, he isn’t a Galvin.”29
When Fisher left, Gary Tooker, an experienced manager, became acting CEO. Instead of
confirming him, the board later opted for a team approach and named three members of its
interim management team to permanent posts as its top executives. Tooker became chief
executive officer and vice chairman. Galvin became president and chief operating officer, and
William J. Weisz was named chairman. Conventional wisdom inside Motorola was that
Tooker eventually would be succeeded by Galvin. That proved true in 1997.
Problems at the top
Galvin seemed to struggle in the chief executive’s seat. The biggest problems, analysts said,
was his hands-off management style bordering on aloofness in an industry that increasingly
demanded speed and conviction, and his indecisiveness. Galvin took years to put a top
24
Business Week, November 13th, 1989
Chicago Sun-Times, January 13th, 1990
26
Ibid
27
Forbes, April 30th, 1990
28
No interview could be found of Fisher confirming that he had actually left for this reason, but there is
widespread agreement in the industry and much evidence that that was the case.
29
Chicago Sun-Times, October 29th, 1993
25
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executive in charge of wireless phones, Motorola’s largest business. He stood by while costs
spun out of control and the company failed to deliver on promises to customers. He allowed
competitors to beat Motorola to market with everything from cell phones to the latest
microprocessors. And when opportunities arose to sell or close poorly performing businesses,
Galvin took his time, losing money and dampening employee morale at the same time. “From
1997 until now, he has made every wrong bet,” commented James E. Schrager, professor at
the University of Chicago Graduate School of Business, in 2001. “His radar screen is so bad.”
The Iridium project exemplifies the wrong bets that were made by Motorola’s leadership.
Wrongly estimating that cellular technology would soon become saturated, Motorola
launched a very ambitious program to create a mobile phone service based on a constellation
of 77 satellites. The relevance of Iridium was immediately questioned by the industry. When
it was introduced in 1998, two years late and well beyond its initial budget, the service
quickly failed to attract customers. Despite this, it took Galvin two more years to pull the plug
on what he kept calling “the eighth wonder of the world.” (See Exhibit 3)
Realizing that Motorola was plagued by what the industry called “the warring tribes”, ie the
inability of Motorola’s various business units to work together, Galvin ordered a major
reorganization in 1998 that brought all communication-related businesses under Merle L.
Gilmore, a Motorola veteran and a personal friend. The move distanced him even more from
the business, and eventually proved disastrous. According to an insider, “the whole
organization was in paralysis for one year”. This happened to be the year little Nokia finally
to over as the number one handset manufacturer worldwide.
In June, 2000, Mike S. Zafirovski, a well-respected executive, was hired from GE to head the
wireless-phone division. In October 2000, after Motorola posted a 23% decline in new cell
phone orders for the third quarter, and lowered its earnings expectations through 2001, Galvin
finally pushed out Gilmore. Over the following year, 11 out of the 19 managers in the
wireless group were replaced30.
Nokia leadership
After the suicide of Kairamo in 1988, Nokia was led by Simo Vuorilehto, an effective but
rather dull manager. Vuorilehto was credited for divesting loss-making businesses and
restructuring Nokia, but after a few years, his lack of strategic vision became problematic.
The appointment of Jorma Ollila at the end of 1991 to replace him came as a surprise, but it
probably should not have.
Born in 1950, Ollila had joined Nokia from Citibank in 1985 to run its international
operations. After a stint as CFO, he had been put in charge of Nokia’s mobile division in
February 1990, at a time when the division was in trouble. He successfully turned it around in
one year only. Ollila, just like all of the Nokia managers, was a smart, modest and hard
working manager. He emphasized teamwork; he was not a lone star, but exerted strong
leadership.
The new leadership corresponded to profound changes within Nokia in terms of strategy: the
company decided to focus exclusively on telecoms, and sell all other businesses. Despite this,
the executive team was very stable during the growth period (and after). For the most part,
30
BusinessWeek, May 28th, 2001
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Nokia’s management team all rose through the ranks and had very long tenures with the
company. Ollila was CEO from 1992 until 2006.
Execution challenges for Motorola
Over the years, Motorola developed a reputation for owning killer technologies that it could
not properly bring to market. One of the reasons was operational issues that the company
experienced regularly. Here are a few examples. In 1996, trying to take advantage of the
popularity of its “StarTAC” model, Motorola alienated carriers and distributors with a
marketing program called “signature”, which in effect forced distributors to buy large
quantities of the model if they wanted to keep the distribution rights. Around the same time,
Motorola got into the carrier business through a series of investments, a move that carriers,
which happened to be the company’s customers in the mobile business, responded buy
favoring competitors when buying handsets.
Operational glitches
Motorola was also plagued by operational glitches. In January, 1998, manufacturing
constraints limited GSM StarTAC (a popular offering) growth from achieving its full
potential, and the company continued to experience a shortage of semiconductor components
well into 1998. More generally, Motorola missed several commercial launch targets in 1997
and commercial quantities of CDMA products.31
Motorola also experienced quality problems. For instance, in 1998, defects in Motorola’s
CDMA cellular equipment prompted carrier PrimeCo to cancel a $500 million contract, a
highly publicized and embarrassing decision. In the summer of 2000, Motorola proved unable
to deliver the “Mission: impossible” phones when the movie was released, prompting SBC
Wireless to cancel a big marketing operation at the last minute. And the list goes on.
Slow response to customers’ needs
In 2000, when Nokia created a series of face plates for the phones it sold to Alltel featuring
the colors and logos of college sports teams such as Duke, Alabama and Arkansas in Alltel’s
coverage area, the sales of those phones - and Alltel’s service plans associated with them surged by 20% to 30%. Alltel didn’t even approach Motorola to do something similar. “We
knew they didn’t have the capability to do it,” said Alltel’s Mr. Beebe.
When the campaign to stop drivers from using phones in the car heated up in 2001 in the US,
SBC asked its suppliers to display a safety message – “Safety is your most important call” on phones it sold when they were first turned on. It took Nokia 24 hours to respond to the
request. It took Motorola two weeks. “It speaks to Nokia’s nimbleness,” said Mr. Boyer of
Cingular, a joint-venture of SBC Communications Inc. and BellSouth Corp. And when SBC
Wireless asked Nokia to come up with a unique ‘technoblue’ color for its 8200 series phones -
31
Source : Deutsche Bank report, Jan 1998
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a color that only SBC would have - Nokia delivered the phone. As for Motorola? “I can’t
recall if Motorola ever offered a proprietary color,” added Boyer32.
Motorola also suffered the classic inefficiencies of a conglomerate. It was too thinly spread to
compete vigorously in all these markets. Nor did it benefit from its scale: quite the opposite,
in fact. Motorola’s divisions were, in effect, run as separate firms akin to fractious children
vying for parental attention, hence the “warring tribes” expression. Each division was its own
small company.
Delayed deliveries
Carriers said that the biggest test was always whether Motorola could deliver products on
time. In early 2000, Alltel was waiting on an inexpensive Motorola model. It didn’t arrive
until three months past the deadline. So the company turned to Nokia, which promptly
delivered a similar product.
After a growth crisis resulted in serious supply chain issues in 1995, Nokia reviewed its
operating mode. The subsequent ability to execute allowed the company to reduce costs,
generating superior margins. Nokia’s new supply chain excellence was exemplified by its
reaction to the component shortage that the wireless industry experienced in 2000. At the peak
of demand, a major earthquake in Taiwan - a key source for cell-phone screens and other
components - interrupted deliveries of critical parts. Thanks to its attention to the supply chain
right from the top, Nokia was able to spot the problem early on. The top management
immediately went to see the suppliers to secure the supply before the competition reacted.
High manufacturing costs
A product of the company’s prided engineering capabilities, many of Motorola’s devices were
very complex, which contributed to their relatively high costs. “Even if you had two black
StarTACs next to each other, they might only have 5% to 15% of the software and hardware
in common,” said Zafirovski in 2000. The “skunk works” approach, in which separate teams
developed different phones, was Motorola’s approach to product line management. The teams
used different parts, making manufacturing and purchasing an expensive headache. In 2000,
Motorola had 128 different phone types and used a staggering 550 different silicon pieces on
the circuit boards inside the handsets. In contrast, early on, Nokia designed its phones to be as
similar as possible and share as many parts as possible to hold down manufacturing costs.
This ‘platform’ approach was deliberate.
Delays in digital phones
One of the critical execution problems was Motorola’s inability to deliver digital phones when
the US market demanded them, from 1996 onwards. 1996 was the transition year, with sales
of digital handsets jumping from 431,000 in 1995 to no less than 2.6 million in 1996, and 7
million in 1997. Although Motorola had announced upcoming CDMA phones in September
1996, the introduction of the phones was delayed until the end of 1998 due to multiple
technical problems, at a time when the CDMA market itself already represented 7 million
handsets. One of the reasons of the delay was the decision by Motorola to drop chip
32
Source : Wall Street Journal, 18 May 2001
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manufacturer Qualcomm, the inventor of CDMA and its early partner, in favor of its own
chips, but those came late. In 1997, Motorola and Qualcomm had a highly public fallout with
suits and counter suits over patent infringement, until the two companies finally agreed to
dismiss all lawsuits against each other in 2000.
Motorola’s first TDMA phone also shipped in end-1998, a considerable delay given the
strength of the TDMA market at that time (12 million units in the US). Motorola was simply
absent from the already large and most rapidly growing segment of the market for a full two
years. The difference between Nokia and Motorola is apparent when considering the launch
date of handsets for each of the dominant standards, as shown in Table 3.
Table 3: Introduction date for new technologies, Nokia vs. Motorola33
First GSM Phone
First TDMA Phone
First CDMA Phone
Nokia
1992
1996
1997
Motorola
1994
1998Q4
1998Q3
On average, Nokia was two years ahead of Motorola for a breakthrough technology. The case
of CDMA is particularly interesting: the unexpected choice of CDMA by Sprint in June 1995
caught Nokia by surprise. Despite this, Nokia had a CDMA phone for the US market by 1997.
On the contrary, while Motorola was one of the first supporters of CDMA, working closely to
Qualcomm almost from day one, it was not able to introduce a CDMA phone until the end of
1998, one year after Nokia.
Reversal of fortune
The reversal of fortunes between Motorola and Nokia is summarized in Table 4. Motorola
went from being a market leader in the early 1990s to becoming and also-ran a decade later.
Table 4: Motorola and Nokia in 1993 and in 2003.
Motorola
In 1993
WW Market share: 40%
Handset revenue ($billion): 5
Total revenue ($billion): 18.4
Profitable
In 2003
WW Market share: 14.7%
Handset revenue ($ billion): 10.9
Total revenue ($billion): 23.5
Loss making
Nokia
In 1993
WW Market share: 20%
Handset revenue ($billion): 1.2
Total revenue ($billion): 4.8
Loss making
33
In 2003
WW Market share: 36%
Handset revenue ($billion): 23
Total revenue ($billion): 29.7
Profitable
Source: Wikipedia
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Exhibit 1- The Motorola DynaTAC
The Motorola DynaTAC 8000X was the first mobile phone to receive FCC acceptance in
1983. DynaTAC was actually an abbreviation of Dynamic Adaptive Total Area Coverage.
The product accepted by the FCC weighed 28 ounces (793g) and was 10 inches (25cm) high,
not including its flexible antenna34.
34
Source and picture: http://en.wikipedia.org/wiki/Motorola_DynaTAC
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Exhibit 2- Analog vs. Digital : Definitions
An analog signal is any continuous signal for which the time varying feature (variable) of the
signal is a representation of some other time varying quantity, i.e analogous to another time
varying signal. It differs from a digital signal in that small fluctuations in the signal are
meaningful.
Advantages
The main advantage of analog technology is the fine definition of the analog signal which has
the potential for an infinite amount of signal resolution. Compared to digital signals, analog
signals are of higher density.
Another advantage with analog signals is that their processing may be achieved more simply
than with the digital equivalent. An analog signal may be processed directly by analog
components, though some processes aren't available except in digital form.
Disadvantages
The primary disadvantage of analog signaling is that any system has noise – i.e., random
unwanted variation. As the signal is copied and re-copied, or transmitted over long distances,
these random variations become dominant. Electrically, these losses can be diminished by
shielding, good connections, and several cable types such as coaxial or twisted pair.
The effects of noise create signal loss and distortion. This is impossible to recover, since
amplifying the signal to recover attenuated parts of the signal amplifies the noise
(distortion/interference) as well. Even if the resolution of an analog signal is higher than a
comparable digital signal, in many cases, the difference is overshadowed by the noise in the
signal.
Source: Wikipedia.
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Exhibit 3- Motorola’s white elephant: Iridium
In June, 1990, Motorola announced Iridium, a mobile phone venture based on a constellation
of 77 satellites, scheduled to go into service in 1996. Motorola estimated that cellular
technology would soon become saturated and needed a complement. In addition, the system
could offer mobile phone services into areas not covered by, such as rural or desert areas, the
sea, mountains, etc. While the relevance of the service was questioned - how many people did
need to call from the top of a mountain? - company officials forecasted that the system could
attract as many as five million subscribers worldwide paying at least $100 a month by the
year 2000.
Iridium began commercial telephone service on November 1, 1998, two years late. Take-up
was immediately slow, and it quickly became evident that it would never be able to attract
enough customers to break even. Between its inception and the launch, cellular telephony had
become widely developed, and the saturation anticipated by the company had not
materialized. Ironically, this was largely due to the switch to digital technology, which was
inherently more bandwidth efficient, and which Motorola had been so reluctant to push in the
US. The fact that Iridium’s phones were expensive ($1,500), clunky, and the service spotty
didn’t help.
By late 1999, some of Galvin’s most trusted managers were advising him to abandon the
business. To them, it was clear that no viable market existed for the service and its expensive
phones. With only 50,000 subscribers, Iridium had already filed for Chapter 11, its investors
were frustrated, and last-ditch negotiations to sell the system were stalling. Despite this, and at
a time when Nokia was successfully challenging Motorola’s leadership in mobile telephony,
Galvin kept calling Iridium “the eighth wonder of the world.” To him, holding on was
important to Motorola’s image and the company needed to stand behind the venture’s
investors. Indeed, Galvin stood behind the money-losing satellite system until December,
2000, a year after colleagues first advised him to cut the cord. Motorola’s estimated financial
exposure to the bankruptcy of Iridium was $2.2 billion.
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