One of the major challenges for modern business is focus. Every since the conglomerates of the 1950s and 1960s, there has been a temptation for executives to embrace ever expanding lists of businesses. The concept seems sound at first. A corporation can share some types of common resources -- IT, accounting, and purchasing are examples -- and then use the variety of business lines to help offset potential dips in the performance of any one of its markets. It's a major diversification play, and over dependence on a narrow revenue source will eventually lead to trouble. (I'm convinced that Google will face difficulty in the future unless it can become less reliant on the online ad money tree.)
That's the theory. In actual practice, executives in conglomorates must oversee diverse businesses that might require significantly different strategy and operations to succeed. Contrary to a common misconception, you really do have to understand a given business, and its industry and markets, to run it.
A number of big names in technology -- Motorola among them -- have, over time, have taken on key characteristics of conglomerates. For high tech companies, conglomeration is a siren call because often a given technology or engineering discipline has more than one use. The initial reasonable thought is, "Why not leverage what we have?"
The answer is, "Because marketing, sales, customers, and habitual behavior are different." The further you spread those factors, the more difficulty you have managing the variety of operations. Motorola was in a wide range of markets, including:
- television set-top boxes
- two-way radios for business and military use
- manufacturing automation control
- TV video distribution
- telecom networking equipment
Only, the proposed split seems odd. Sanjay Jha, former COO of Qualcomm (QCOM) and current head of the handset group, will head one of the companies and take both smartphones and set-top boxes with him. But his background is in business-to-business markets, and smartphones are clearly a consumer play. Yes, Motorola has been doing better with its Droid phone than it had been; however, Jha will need marketing people who know what the market wants and can get attention in the face of the Apple (AAPL) iPhone.
Even more puzzling to me is adding the set-top boxes. Sure, they sit in consumer homes, but they're generally sold to cable companies that then parcel them out in turn to their own customers. But traditionally, these companies -- Motorola being one of them -- have offered more than just the consumer products; They also sold equipment for cable and satellite TV companies to deliver signals. (Motorola's major competitor, Cisco (CSCO), still does in a way that will become more important as TV continues to move toward IP network delivery of programming.) One would think that set-top boxes should remain in Motorola's other spun-off company that will retain the rest of the television networking equipment business. But no.
It's not how Jha describes it, as Bloomberg notes:
"It's definitely a differentiator," said Sanjay Jha, Motorola's co-chief executive officer who will head the new company. Consumers want access to content "across three screens -- TV, desktop, mobile," he said in an interview.Interesting argument, but the same logic would suggest that Motorola should also develop products for desktop computers and for laptops. As more intelligence goes into TV sets, the need for set-top boxes is likely to decline.
Jha's pitch strikes me as a rationalization, not a reason. Motorola needs to buoy the handset losses somewhat to give the newly spawned company a fighting chance. However, Jha had better quickly perform whatever magic he was hired to bring, because he's running out of time.
Maybe the real explanation has more to do with Jha's other hurdle: money. Handsets have become, for Motorola, a net consumer of cash. Take a look at these numbers from the last public filing, for the third quarter of 2009, that I can find on Motorola's site:
That's one big loss on the handset side. The drop in all sales categories between 2008 and 2009 suggests that at this point, increased focus can't hurt. But if the focus is unnatural and even politically-based, the result will be two companies doing badly instead of just one.
Image via Erik Sherman.