Can Mike Z Work More Magic at Motorola?

Mike S Zafirovski had sobering news to deliver. Within 30 days of his

appointment last July as chief operations officer of Motorola Inc, 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 US 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 and

Sweden’s LM Ericsson. 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

38%, according to Deutsche Bank Securities. 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 the> brand," Zafirovski told BusinessWeek.

That doesn’t mean investors are thrilled. Many view Motorola as 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, 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

US, 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, 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.

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 and Qualcomm Inc for

the lead in the wireless chip market. And Intel Corp is now invading the

wireless space with chips that even Motorola’s phone unit is buying.

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

in BusinessWeek. Copyright 2003 by The McGraw-Hill Companies, Inc