Motorolas Divestiture of its Handset Business - Essay Example

Strategic Management Customer Inserts His/Her Name Customer Inserts Grade Course Customer Inserts Tutor’s Name 23, 07, 2011 Motorola’s divestiture of its handset business After several month of thorough internal reassessment and evaluation of the competitive environment, Motorola Inc. finally ruled that it had reached a decision to announce a spin-off of its handset division in March 2008. This was as a result of the mounting pressure from the stakeholders who could no longer put up with the consistent and continuous incurrence of looses by the company. To begin with, Motorola Inc. decided to completely dispose of the handset division given that it had greatly suffered from a lot of bureaucracy and internal politics which was rendering poor performance by the handset unit. Therefore, the executive considered it wise to get rid of handset division to pave way so that the Motorola Company could focus more on what was benefiting the stakeholders other than dealing with a division which was not bearing any fruits since its inception. Increasing market competition was another factor that compelled Motorola Company to announce spin-off as a form of divestiture, this allowed them to outperform their rival competitors in the market. To achieve a wider market share, a Motorola required a lot of resource and extensive marketing strategy which at times was not feasible for the businesses to successfully run several subsidiaries, owing to complexities that were associated with multiple focuses on several subsidiaries. The focus complexity was evident in financial administration that was too complex, resource allocation to the subsidiaries and finally supervision of a vast man power called for extra effort. Motorola decided to spin-off the extra burden. The decision to break links with handset division, according to the top Motorola executive was to create two foremost companies that will grant improved flexibility, customized capital acquisition, raise the attention and focus to the executive and also target venturing opportunity from the shareholders. It was also understood that Spin-off creates a probability for businesses intending to restructure their business operations with the aim of fighting stiff competition. Analyst observed that, the spun-off businesses are likely to be significant when independent rather than when it is a larger business entity. In a pure spin-off, a company gives out 100% of its ownership interests as a dividend to its active shareholders. After the spin-off, completely two separate and publicly held businesses which have exactly the same shareholder emerge. This form of selling builds brilliant opportunities for the astute investor to uncover a good business in a positive direction. The amalgamation of accountability, responsibility, and straight forward incentives generally shows up in the operating act. Very diversified companies that were conglomerated frequently traded at a discount. Thus, the spin-off of such a company was likely to boost the value of the parent owners, since it may be valued at nothing as part of the present business as a whole. This was advantageous to the parent company in that, being independent implies that the stock price was assumed to be the total appraisals for to the parent company. Another reason was to separate the loss making business therefore sealing the primary business from being tarnished. This was indispensable in protecting the good will of the company that took an extensive deal of time to nature its growth and therefore it would have been of paramount importance for the company to spun-off the poorly performed division. Finally, the split of Motorola was expected to seize a form of tax exemption to its owners and this was known to consume a number of months working out the details of the disintegration plan. Splitting up the Motorola handset division, helped the primary company build a focal point of attention for enhanced leadership on its mobile devices business. Competitive forces operating in the mobile handset market Being the first to emerge in the market, Motorola Inc. had developed a lot of product and was expected to retain a large share of the market. However, Motorola failed to seize the open opportunity of the market share for the simple reasons of failing to stick to the strategies that were pertinent in the market. For instance, Motorola was among the first mobile phone oriented company that hit the market first before mushrooming of the competitors and therefore had a good opportunity to capitalize on the then monopoly and work hard to uphold if not to widen the market share. However, the company’s greater market share was easily dispossessed by the Nokia Company that brilliantly utilized the market strategies and had fully established a strong grasp of the vast mobile phone market. The latest heartbreaking news was that, LG Company that started late had also outperformed the Motorola. After developing the first product StarTAC in 1983, Motorola should have strategized on new features for it to fill the gaps that were left out during the first release via the feedback from the market. That is, instead of opting to developing a new phone, Motorola ought to have focused on the design of a new, affordable and a competent phone that is aimed at attracting a greater market share. Another marketing strategy that can be used to retain market share, is the delivery of a product that is affordable and efficient to all clients across the board. Seven years later (1990), Motorola came up with digital satellite phone that consumed a lot of investment and was also not economical. Therefore, the cost of the satellite phone was far too expensive to be sold in the market. Unfortunately, the satellite phone could not handle more than 1100 calls simultaneous. Apart from the above problems, the same cell phone could not be used within the building and could only be of used by users in the vicinity of the perimeter of the antenna. The satellite took a lot of resource from the Motorola Company, about US$5 billion to design and the phone itself and was sold at US$3000 in the market while the cost of each call was ranged between US$3 to $8. All these expenses ought to have been effectively used in market analysis and improvement of the already released devices to fit and be accepted in the market as per the customer’s responses. Even after the failure of the satellite phone project, the company did not withdraw the project but decided to continue investing heavily to a project that was no bearing fruits. The introduction of the signature program without careful consideration which allowed the customers to buy 75% of the StarTAC mobile phones from the Motorola Company was aimed at increasing the market share and expanding their profit. Unexpectedly, the customers ignored the signature program and indeed opted for handsets from other companies thus significantly reducing the market share from 51% to 34%. Motorola's handset unit also recorded a loss of US$1.2 billion during the fourth quarter of the year of 2007, while it total earning raised in the same time was US $100 million. This increased staff turnover and competitors gained from Motorola’s mistakes. Another unworthy move that tainted the company profile was the act of suspension of 3,500 workers at the beginning of the year Use of portfolio planning tools (such as the BCG matrix) in strategic planning Companies that are extremely large are finding it very challenging to equitably allocate the resource to each auxiliary company. As a matter of fact, allotment of resource necessitates a critically study and analysis of each unit by the administrators before allocating the resources. In 1970's the Boston Consulting Group devised a model that can be useful to companies that find it demanding while allocation of the scarce resource and may be use in the managing of portfolio of different business units. The BCG growth-share matrix describes a variety of company units on a chart of the market growth rate verses market share and the comparative to competitors. Resources are normally billed to the business units in relation to where they are positioned on the grid as in the following order. Motorola, may decide to identify the business that has the largest share in the market. According to Kurtz (2009, p.65), this is referred to as a cash cow and that it is not necessary to allocate much incentive to the cash cow since it’s already covering a wide market and should be given small share in favour of the fast growing units. In essence, it is the same cash cow that generates the cash used to nature small units that are developing. Another consideration of the BCG model is a star. A star is a business that has a great market share in a growing business and may generate income. But since the market is growing, the star need care and attention so that they can grow upward and constantly and therefore need investment to grow to a cash cow state as it matures. Another important element is the Question Mark (or Problem Child). Motorola could identify the entire subsidiaries that are young and growing in the market share. These are company units that are in need of the resources to grow in the market share so as to reach star point and finally to the cow stage. Finally, Kurtz (2009, p.65) described a company unit that has an undersized market share in fully grown business and referred it to as a Dog. A dog possibly will not call for large amount of cash. However, it ties up assets which may also be deployed to another unit. Unless a dog business is meant for other reasons, it ought to be liquidated should there be a little prospect for it to gain market share. The BCG matrix offers an outline for distributing funds among different business units and allows a company to contrast many business units at a glimpse. However, the technique has seen some criticism. Among the critics which includes; the relationship between market share and returns is open to discussion because rising market share can be very costly, the approach may overstress high increase, given that it ignores the prospect of deteriorating market shares and considers relative market share to be only one of many factors describing the competitive strength of the business unit. Balancing requirements for competitive culture that drives innovation Zander stated that Motorola’s DNA was too fragmented because of the fact that different divisions’ heads had autonomy over their divisions and hence competed with other divisions within the company. The competition was initially helpful but later proved ineffective as it resulted in disagreements due to bureaucracy and disputes within the company to achieve preeminence. Zander’s initial effort was to change the culture of the organization with an aim of improving customer satisfaction and also reinvigorate the company’s brand. He reorganized the company into four groups- automotive, home, mobile electronics and corporate. He also recruited new people from Nortel, GE and IBM and also introduced a new bonus plan of 25 % based on reliability, customer satisfaction and cost of poor quality. As stated by Albers (2004, p 35) the management of a company need to create a balanced environment for a competitive culture which generates constant innovation through coordination and corporation. In order to achieve this, it is imperative for the management to ensure that there are not direct competitions from different divisions within the company. Such competition breeds bureaucracy which derails the main objectives of the company. Considering this case study, it is clear that several divisions in Motorola struggled to achieve supremacy in the expense of the company’s objectives. Managers should thus promote a reward scheme that concentrates not on the achievements of different divisions within the company but based on the achievements of the company as a result of sound corporation and coordination among different divisions in the company. A bonus plan should as a result focus on customer satisfaction through quality and innovative products. Removing heads autonomy and encouraging corporation among different divisions through constant consultation will also promote a positive culture within the organization which will result in constant creativity (Lindsay 2009). The management should also thrive to build a culture of innovation by ensuring that there is a framework that handles three basic innovation strategies which are; focusing on the right challenges, finding the best solution for these challenges and also implementing the best solution. These innovative strategies translate to three major portfolios that a company must adopt and create, the three portfolios are; portfolio of handling challenges, portfolio of solutions and portfolio of projects. Portfolio of challenges will address technical challenges, ability of the organization to change or adapt to change and ability to accurately identify and provide solutions for the challenges. The portfolio of solutions will work on solving both simple and complex challenges. Complex challenges often call for competent or specialized expertise which requires the right person with adequate knowledge on the challenge (Narayanan 2010). In a company like Motorola, a complex challenge like lack of innovation and low sales can be tackled by dedicating a team of experts to jointly carry out the research and development (R&D) for better products using customer feedback information. The portfolio of project will be responsible for turning the selected solutions into programs or rather projects that can then be converted into reality. It is therefore imperative to ensure that value proposition for every project in the company is tracked and necessary adjustments incorporated. References Albers, S 2004, Cross-functional innovation management: perspectives from different disciplines : To Klaus Brockhoff for his 65. Birthday, VS Verlag, London. 34-45. Gaughan, P 2007, Mergers, Acquisitions and Corporate Restructurings (4th ed.,) Mc-Graw Hill, London. Kurtz, David & Snow , K 2009, Contemporary Marketing, Cengage Learning,Vancouver. PP.65-67. Lindsay, JD Perkins, CA & Karanjikar, MR 2009, Conquering Innovation Fatigue: Overcoming the Barriers to Personal and Corporate Success, John Wiley and Sons, Manchester. Malkiel, B 2007, A Random Walk Down Wall Street (9th ed.,). Mc-Graw Hill, London. Monks, R. and Minow, N 2008, Corporate Governance 4th ed., 2008). Sage, London. Narayanan, VK & O'Connor, GC 2010, Encyclopedia of Technology and Innovation Management, John Wiley and Sons, London. Yermack , D 2010, "Shareholder Value and Corporate Governance," Annual Review of Financial Economics, forthcoming, vol. 2, no. 1 pp 21-23. Read More