Can Mike Z Work More Magic at Motorola?

Having revitalized the cell-phone unit, COO Zafirovski must now do the same for the rest of the company

Mike S. Zafirovski had sobering news to deliver. Within 30 days of his appointment last July as chief operations officer of Motorola Inc. (MOT ), Zafirovski, say current and former executives, met with managers and delivered a stinging message: Motorola is not as good as it thinks. Zafirovski candidly graded each of the businesses in areas ranging from market share and profitability to customer satisfaction -- some B's and C's, and even some D's. But he expected straight A's.

Zafirovski had little time for niceties. On July 25, his predecessor, Edward D. Breen Jr., had bolted for the top job at troubled Tyco International Ltd., sowing distress at Motorola. Under Breen and CEO Christopher B. Galvin, Motorola was beginning to rebound from a dismal 2001, when it lost $5.8 billion. Breen, who declined to comment for this story, symbolized the sort of urgency and go-get-'em toughness that Motorola had lost over the years. He helped Galvin implement a cost-cutting program that shuttered U.S. manufacturing plants and will eventually shed more than a third of Motorola's 150,000 workers.

When Breen left, Galvin and the board promptly tapped Zafirovski, who had come to Motorola from General Electric Co. two years earlier. Known widely as Mike Z, he had hoisted Motorola's flagship cellular-phone business from the red in 2001 to a nearly 7% profit margin last summer. "Mike Z's leadership style is the best I've seen at energizing a broad-based organization while driving it to make the tough, but right, decisions," says Galvin.

Together they have steered Motorola toward recovery. Its balance sheet is strong. And after six quarters of losses, Motorola returned to profitability in the third quarter of 2002, ahead of rivals such as Lucent Technologies (LU ) and Sweden's LM Ericsson (ERICY ). And Zafirovski, with his lunch-bucket operating style, has complemented Galvin's big-picture focus.

It will take every last drop of turnaround magic, however, to bring once-dominant Motorola back to full strength. While the cell-phone unit has improved, its 17% market share leaves it a distant second to rival Nokia Corp.'s (NOK ) 38%, according to Deutsche Bank Securities Inc. Moreover, Motorola has lost its lead in communications chips to Texas instruments Inc., says Gartner Inc. And the wireless-networks business finished 2002 in the red and has gaping holes in its product portfolio. While Motorola's other units eke out profits, they account for less than a third of the company's $26.7 billion in revenues. "He has a big job," says Kevin Rendino, senior portfolio manager of the Merrill Lynch Basic Value Fund, which holds nearly 11 million Motorola shares. "This is a training ground to see if he's capable of running an entire business."

The good news for Mike Z? In the sputtering businesses in which Motorola competes, the company doesn't have to rocket to riches or blow by the likes of Nokia. Zafirovski and Galvin can succeed by achieving modest goals that appear within reach: 10% top-line growth and profits boosted by smoother operations. How to get there? "By gaining market share across the board, and [driving the] brand," Zafirovski told BusinessWeek.

That doesn't mean investors are thrilled. Many view Motorola as a conglomerate bogged down in slow-growth industries, and they're pushing for a divestiture of the struggling telecom-equipment business or a spin-off of the semiconductor division. Galvin shopped the equipment business last year and found no buyers. And he shows no sign of spinning off chips. With little prospect of a strategic fix, investors have driven down Motorola's stock 42% in the past year, to $8.35, keeping it in step with beleaguered telecom rivals. "They've made a lot of progress in cutting costs," says Tony Kim, an analyst at Credit Suisse Asset Management, which owns Motorola shares. "But it's not enough. They need to do more."

Zafirovski has plenty to keep him busy on the operations side. Borrowing from the playbook of Jack Welch, his old boss at GE, Zafirovski endorses Galvin's plan to weed out the lowest performing 10% of managers. He has pushed for employee bonuses based on profitability and cash flow. And he's "very focused on the customer," says Greg Santoro, vice-president of Web services at Nextel Communications (NXTL ), one of Motorola's biggest customers. The company's first quarter results, due Apr. 15, are likely to show net income of $70 million vs. a $174 million net loss, excluding charges, the year before, according to Bear, Stearns & Co.

Zafirovski's driving ambition was apparent from a young age. When he was 16, his parents moved the family from the then-Yugoslavian region of Macedonia to the west side of Cleveland, where they found factory work. Despite knowing only a few English words when he started school a few days after arriving in the U.S., Zafirovski spent three weeks mastering a 15-minute presentation to his American history class about his native country and received a standing ovation.

He shows the same dedication to fitness. At last year's Ironman competition in Lake Placid, N.Y., he finished 9th among men over 40, ending the grueling running, biking and swimming race in 13 hours and 37 minutes. He then flew to Chicago late that night and reported to work hours later for Day One as COO.

Zafirovski earned plaudits at GE by turning around the lighting business in Europe -- a job that called for shutting down several plants in Hungary. "He never missed," says Welch.

That experience came in handy when he moved to run Motorola's ailing cell-phone division in 2000. He promptly reduced Motorola's offering from 128 different phone types. Today fewer than 20 remain. He slashed operating expenses by 14%, to $3.1 billion, Deutsche Bank says. When managers told him that relations with customers were improving, Zafirovski demanded proof. Says a former manager of Mike Z's style: "Make the numbers or your ass is grass, and he's behind the mower."

Still, Motorola is miles behind Nokia. With a lead in multimedia phones, the Finnish company's margins in handsets reached 24.7% in the fourth quarter, far above Motorola's 9.1%. Zafirovski's goal is 15% margins, but first-quarter margins are expected to drop to 6%, according to Bear Stearns. "I don't know if the targets are realistic," says Bear Stearns analyst Wojtek Uzdelewicz.

If only Zafirovski's challenges stopped with wireless. Motorola's $5 billion semiconductor division faces an uphill slog. After reorganizing, closing several plants, and introducing new products, the unit is expected to boost revenue by 15% in 2003 to $5.5 billion and turn a $300 million profit, says Bear Stearns. But Motorola is in a tooth-and-nail fight with TI (TXN ) and Qualcomm Inc. (QCOM ) for the lead in the wireless chip market. And Intel Corp. (INTC ) is now invading the wireless space with chips that even Motorola's phone unit is buying.

Hard-pressed to sell the networking unit, Motorola is investing in the business. It's pumping money into honing the software that serves as the brains for switching cell calls. It's developing Internet-based gear that it hopes will position the division for next-generation telecom systems. And the company is focusing on those few markets where it has thrived, such as China.

For the moment, Zafirovski's own report card is marked incomplete. The wireless-phone business is well on track toward recovery, but huge challenges remain in wireless infrastructure and semiconductors. Now it's up to Mike Z to pull off those straight A's.

Corrections and Clarifications "Can Mike Z. work more magic at Motorola?" (Information Technology, Apr. 14) should have said that in last year's CEO Ironman Challenge in Lake Placid, N.Y., Motorola Inc. COO Mike S. Zafirovski finished ninth among men over 40. The CEO Challenge is a subset of the overall competition, in which he placed 78th out of 143 men in his age group (45-49).

By Roger O. Crockett in Chicago, with Andy Reinhardt in Paris

— With assistance by Andy Reinhardt

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