Motorola, Linkages and the Impact on Innovation

Radios. Televisions. VCRs. Cars. Mobile phones?

On January 31st Motorola announced it is considering getting out of the mobile phone business. This isn’t a huge shock, and has been pushed by some investors for a while, but will be detrimental to Motorola and the United States in the long run.

Last Fall I read Clyde Prestowitz’s Three Billion New Capitalists, which discusses the rise of Asia, specifically China and India, and the fall of U.S. dominance. It’s a fantastic read, spanning trade and government policy, innovation, outsourcing and the diminishing value of the dollar.

One area of his book, technological innovation, is incredibly relevant to the current situation with Motorola. In it, Prestowitz shares the story of a high-flying, post World War II tech company called Ampex and its battle with a small Japanese start-up, Sony, in the new area of recording, specifically magnetic tape recorders. Prestowitz’s broader argument in this section has to do with the importance of governments working with companies to create policies, and thereby opportunities, for technological dominance.

In his book, Prestowitz writes:

“The conglomeration boom of the time was supported (or at least rationalized by) new business theories arguing that the linkages between a company’s various products and technologies were of small importance, and that products should be managed like a portfolio of stocks.”

“Meanwhile, in Tokyo, Sony and the other Japanese makers were sticking to their knitting.” “They also began aggressively developing recorders based on the so-called helical scan technology that Ampex had licensed to them at a time when it was desperate to raise money to keep its conglomerate strategy alive. In particular, the Japanese began to use this technology to develop products aimed at potential consumer market.”

Prestowitz describes the ongoing battle and how, in 1970, Ampex unveiled the Instavideo, the first consumer recorder. Within five years, Ampex had cancelled the Instavideo due to unrelated financial improprieties, and Sony (Beta) and JVC (VHS) had rolled out their own consumer versions to huge success.

He writes:

“The pattern kept repeating itself. A U.S. company would introduce a new product that would enjoy success in the US market until a Japanese competitor introduced an improved model at half the price. Then the Americans would get out of the business. Ampex represented a milestone in that the VCR business was the first major business from which the Americans were excluded from the beginning.”

To deviate slightly from the central point on linkages, this also speaks to the dangers of focusing on short-term profits, which is incredibly problematic in the U.S. I believe the penchant for living for the next quarter is a huge hindrance to the ability to think big picture, take calculated risks and develop disruptive innovations that can fundamentally change the game for an industry (or if truly disruptive, industries), benefiting in a ridiculous number of ways the company that actually does it.

The competing East vs. West points-of-view of running a company was best captured in a presentation slide our professor, Jeremy Alexis, shared in last week’s Economics and Design class on value, highlighting the general differences of focusing on stakeholders vs. shareholders and balancing all stakeholder needs vs. creating predictable profits.

In last semester’s Design Planning class, Larry Keeley discussed the distinction between innovation and invention. As an example, invention is tinkering in the shop and coming up with the first MP3 player. Innovation is often taking several different existing ideas, technologies and needs and combing them in new ways to create something unique and compelling. As Keeley said in class, “Innovators are aware of lots of things on the arc of the frontier. They harvest from all over the world.”

In innovating you don’t need to be creating from scratch.

Building on that, Prestowitz tells a similar story:

“Although you may think that the development and manufacture of products are independent and separable operations, that is not necessarily the case. As Elkus [an Ampex manager] recalls, Sony president Akio Morita insisted that any technology pushed to its logical extreme is related to many other technologies. For example, anyone who is not involved in the VCR business will find it difficult to get involved in what arises from the VCR. Because of this dynamic and the huge size of the market, the Japanese dominance of the VCR contributed greatly to a shift in the technology balance of power that is still going forward. The VCR drove development of flat-panel display, battery and materials technology to new heights and to the Asian shores of the Pacific.”

“As more and more U.S. manufacturers struggled to stay in business, there were more and more things no longer made in America. Elkus and Morita were right about the importance of linkages. Flat-panel displays, though invented in the United States, had followed the television, VCR, and laptop computer to Asia – or perhaps it is more accurate to say the laptop went because the flat panels were there. The VCR had morphed into the digital camera, made in Asia along with the tiny motors that drive them and the displays that make them so user-friendly.”

There is so much potential, with the mobile phone industry really only in its infancy (short-term, mid-term, long-term). High-speed Internet and the mobile phone are leading to GPS, social networking, purchasing and more. And that’s only the beginning.

I realize there are a bunch of large issues raised here:
- the role of government in helping promote innovation
- Keynesian economics vs. Adam Smith’s Invisible Hand
- the perils of short-term behavior to feed profits to Wall Street

But my primary concern in this post is specific to linkages, and what that portends for Motorola and the U.S. If Motorola sells off its cell phone business it is out of the phone game, wherever that game leapfrogs to in all future iterations and permutations. And they won’t be able to get back in. And with the cell phone business otherwise dominated by non-American companies Nokia, Samsung, Sony Ericsson and LG, that means this is another technological arena that the U.S. won’t be participating in.

Is that a bad thing? From the viewpoint of pure competition and capitalism, I suppose not. It’s simply a choice by companies looking to “maximize shareholder value.” But for the U.S. and its self-assured feeling of eternal technological superiority and innovation dominance we’re definitely losing ground. And this latest news could reverberate for decades.

My hope? Since our government does not really intervene as they did in the past to ensure innovation opportunities are maintained in the national interest (which Prestowitz points out they did with airplanes - Boeing, electronics - RCA, and telephones - AT&T), our best chance is that Motorola says, “What the hell? Our stock is down. Wall Street is already beating us up. Let’s double down. We’re going to invest in this business unit, make a few, select, calculated bets and try the Radically Different. Find the Game Changers. The Blue Ocean. And be there to reap the rewards in the long term.”

I’m keeping my fingers crossed.

Comments

[mvellandi]

It would be too bad if Motorola left, but hey they'd know what's in their best strategic interests. They have a massive legacy of telecommunications equipment behind them.

If you're interested in the Japanese manufacturing phenomena, you might find the large influence of two of America's brightest process engineers, William Deming and Joseph Juran, in Japan after WWII to be quite fascinating.

[Vincent LaConte]

Bro, if you clean this up just a bit and maybe add a little more, it's going in our Top Secret Book. This is really interesting.

[A Lui]

It would indeed be bad for Motorola for leave the industry. In additional to leaving behind an industry that they practically invented, they would be leaving a highly profitable industry that will undoubtedly drive the next wave of technological advancements in consumer electronics.
The 2 big things that they need to figure out is -- 1) how can Motorola compete in the mobile manufacturing business that seems to change faster than the company can keep up? 2) can the internal problems that have been plaguing it's software development be resolved before they further cripples other operations?
Without finding a tangible solution to both of those questions, keeping the lights on is a hard act to keep up.