Motorola: The End of the Zander Era

Ed Zander's exit was hastened by a failure to anticipate demand for 3G phones. Can Greg Brown help Motorola regain market share?

You could sense it coming. The departure of Motorola (MOT) Chief Executive Ed Zander seemed imminent as the company's bread-and-butter mobile-phone unit spiraled downward for more than a year. The market-share losses have become so pronounced that researcher Gartner (IT) recently said Motorola, long the second-largest maker of cell phones, behind Nokia (NOK), had fallen to No. 3, behind Samsung, whose 14.5% share now trumps Motorola's 13.1%.

So there was little surprise when Motorola announced on Nov. 30 that Zander, 60, will step down as chief executive on Jan. 1. Into the hot seat steps current President and Chief Operating Officer Greg Brown, 47, a possibility BusinessWeek noted in July (BusinessWeek, 7/30/07).

Zander will remain chairman until the company's annual shareholder meeting in May, 2008, and then serve as a nonexecutive adviser to Brown until January, 2009. "I had a vision in my mind that four years would be it," Zander said in an interview. "I told that to the board when I joined. A couple of years into this, we started to do succession planning and identified Greg as the guy that could lead this company."

Riding on the Razr's Edge

Since joining Motorola in 2003, Brown has led several of the company's key businesses, including the telecom infrastructure business and the government equipment business. He also headed the $3.9 billion acquisition of enterprise gearmaker Symbol Technologies, the company's second-largest transaction ever.

As chief of Motorola's automotive business, he returned that unit to profitability and then spun it off and sold it to Continental for $1 billion. "We gave him just about every tough assignment that there is in this company," Zander says. "He took cost out of all those groups and hired great people."

But restoring luster to Motorola's ailing cell-phone business will take more than cost-cutting skill. After the Razr's roaring debut in 2004, Motorola quickly gained share and became an industry darling. By the middle of 2006, some speculated that Motorola would soon overtake Nokia as the world's top-selling cell-phone maker. But later that year, its fortunes began to sink.

Missed Market and Supplier Trouble

Under then-phone-czar Ron Garriques, Motorola focused on grabbing share. But the strategy backfired as margins shriveled. Worse, Motorola executives failed to read the market correctly, miscalculating what sorts of phones consumers and its carrier customers wanted most. By 2007, especially in overseas markets, consumers were thirsting for so-called third-generation, or 3G, phones that can handle a variety of multimedia functions, including sharing picture and video files, storing loads of music, playing interactive games, and surfing the Web smoothly.

If the triumph of Zander's era is that he provided the urgency and vision to get Razr out the door quickly and sell it widely, the real tragedy of his tenure is that the company missed the transition to the next generation of phones. "There was a complete misreading of the market in terms of what carriers wanted to buy," says Ittai Kidron, an analyst with CIBC World Markets. "They still aren't competing in that 3G market." Kidron estimates that Motorola is selling less than 1 million units a quarter in 3G phones, while Nokia is selling 15 million to 18 million.

To its detriment, Motorola also tied itself to a supplier that couldn't deliver cutting-edge components. Motorola bought its chips, the brains of the phone, from Freescale Semiconductor, a company it spun off a few years earlier. But Freescale couldn't deliver 3G chips that were small, powerful, and didn't hog battery strength.

Motorola has since broadened its chip relationships to include Texas Instruments (TXN). The company has indicated it would also work with Qualcomm (QCOM), maker of a 3G chipset that's even more efficient than comparable Texas Instruments products. "Qualcomm is the one player that could help them in time to market," says Deutsche Bank (DB) analyst Brian Modoff.

Slashing Costs and Redirecting Strategy

Some who have watched Brown over the past several months think he's up to the challenges. The board of directors appointed him president and COO in March and named him to the board near the end of the summer. Since last spring he has much time, along with Motorola Chief Financial Officer Tom Meredith , trying to fix problems in the mobile-phone unit.

Motorola executives and partners say he has attended the cell-phone team's weekly meetings, trying to understand the problems and taking action. He has appointed new leaders, including Stu Reed, to handle mobile phones and booted others. He has slashed costs and is redirecting strategy. "In February and March when the mobile business came unglued, I said I needed some help," Zander says. "He went into mobile devices and changed the management that needed to be changed."

Brown's strengths are his operations acumen, his penchant for working hard, and an ability to bring out the best in people, says Robert Laikin, CEO of Brightpoint (CELL), a key Motorola customer and a major distributor of mobile devices. It helps, observers say, that he has experience at major telecom service providers including former Baby Bell Ameritech, where he worked in the late 1980s.

Brown also has software leadership experience from his days as CEO of Micromuse (MUSE), a network management software company. Laikin says Brown can be expected to recruit the expertise he lacks. "Greg Brown isn't going to design the next great phone," Laikin says. "But he's smart enough to hire someone that will create great designs."

No Quick Turnaround Possible

Like Zander, Brown is likable, which analysts and customers say is important. Laikin first met Brown nearly a year ago at Motorola's Schaumburg (Ill.) headquarters. Laikin came to the meeting in a coat and tie, expecting the same from Brown. But Brown showed up with Meredith, both wearing sweaters, "looking like guys playing golf or hanging out," Laikin says.

During the meetings, Brown didn't duck issues Laikin was concerned about. As a distributor, Laikin had questions about the pricing and packaging of product—business issues related to moving products through the supply chain. "I thought they would hide from issues and defer resolutions," he says. But Brown "stepped up and took responsibility, and a few weeks later our issues were resolved…he's the right guy."

It will probably take analysts and investors a lot longer to reach the same conclusion, if they ever do. Motorola shares gained 2%, to 15.97, the day Brown's appointment was announced. Analysts say it will take at least 12 months before Motorola can work through its myriad troubles. And Brown knows it. "In mobile devices we're stabilizing and improving, but it's not where it needs to be," he says. "We need to return to consistent profitability and extend the product portfolio. It's going to take a little time." If it takes too long, Brown's tenure could be much shorter than his predecessor's.

Check out the slide show for Zander's Motorola timeline.

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