FORTUNE -- At least there was no place to go but up: When Sanjay Jha joined Motorola as chief of its cellphone business in 2008, the division was losing billions and on the verge of failure. The RAZR phone's success had evaporated, Apple's (AAPL, Fortune 500) iPhone had revolutionized the industry, and the recession was pounding down demand. The division's employees were depressed and cynical, having seen 10 presidents in 12 years. Jha's assignment was to fix the business.
Born in India and educated in Britain, Jha had risen to COO of Qualcomm (QCOM, Fortune 500), which designs chips for cellphones, when Motorola called. He quickly abandoned Motorola's own cellphone operating system in favor of Google's (GOOG, Fortune 500) Android (see "One Hundred Million Android Fans Can't Be Wrong") and created a little more marketplace buzz by introducing innovative products, most recently the Xoom tablet. But progress remains a struggle; Motorola is still an also-ran in global market share by units and by revenue. Jha, 48, is now captain of his own ship -- Motorola Mobility Holdings (MMI) separated from the rest of the company in January and is publicly traded. He talked recently with Fortune's Geoff Colvin about differentiating in a crowded market, his toughest challenge, why people cry when their cellphones are taken away, and much else. Edited excerpts:
FORTUNE: It's the year of the tablet, and you introduced the Xoom to good reviews in January. We've since seen the iPad 2, RIM's PlayBook, the HTC Flyer, T-Mobile's G-Slate, and many others. How do you differentiate yourself?
SANJAY JHA: The biggest thing we could do is think about what audience we're addressing. We see large corporations switching entire IT systems to tablets. One reason CIOs like the tablet is that it delivers cloud-based computing and renders it very easily. Consumers love it, and enterprise users love it, because of the immediacy of interaction. Second, we need to deliver the best browsing experience. We support Flash 10 [a media player], and that makes a huge difference. A large portion of the web is now viewable, where in some other devices [notably iPads, which do not support the Flash player] it's not viewable. Third, we believe you must be able to view all your content, anywhere you keep it, in a mobile environment. We've made some acquisitions that will allow you to access all your content on your tablets. Of course, size and form factor are always important, and our brand name has always played an important role in the U.S., Latin America, China, and increasingly in Europe.
Why focus so much on making your tablets highly useful in a big enterprise setting?
About 65% of the devices -- tablets and smartphones -- that show up on an enterprise network are actually purchased by consumers, because CIOs' budgets have been cut. These devices must be attractive for consumers and must also have the security to meet the CIOs' standards.
CIOs get terribly nervous when people bring their personal devices into the business.
That's right. We call this trend consumerization of the enterprise. There was a time when CIOs said, "There's just no way you can bring that device." But increasingly they're accepting the devices, and we work with CIOs to deliver the security that makes them comfortable.
A lot of managers don't fully understand the business usefulness of tablets and smartphones. How do you use mobility in Motorola Mobility?
We're a global company, and we're really interested in collaborating through videoconferencing. In the olden days audioconferencing quite frankly was better than videoconferencing. Now, with high definition, you can see body language, and that's a huge amount of the communication in any meeting. And increasingly our people are not in their offices, so being able to participate in videoconferencing using their tablets or smartphones is very important. In addition, the vast majority of our services are being delivered through cloud services. That's also very important. Of course the normal capabilities of secure e-mail, the ability to wipe the tablet clean if it falls into the wrong hands -- we're using all those things.
Something like 20 manufacturers, including Motorola, are making or will be making Android-based smartphones. Distinguishing yourself in that environment has to be a challenge.
It certainly is. [But it is] probably the largest opportunity in technology in my lifetime. People are saying that in the Asia Pacific by 2015 there will be 3 billion phones [of all types]. Some predictors are saying there will be a billion smartphones in 2014. The compound annual growth rate is over 35% -- a great opportunity. But we're not the only ones playing in this marketplace. We've chosen to focus on delivering consumer experiences and simplifying people's lives. Technology that doesn't simplify people's lives is not a technology that resonates over a long period. We're very focused on our design process. It involves a huge amount of consumer testing. Our designers are nearly always interacting with consumers to find out what will resonate. And again, enterprise and multimedia are two very important areas where we want to differentiate ourselves.
That gets to a really important issue, because you're doing all this on the Android platform, which is available to anyone. An analyst said recently, "Android is a commodity platform, and to compete, you need scale. They [Motorola] clearly don't have it now." Is that a valid concern, and if so, what do you do about it?
Scale is a factor in every business. But over the past 30 years the correlation of a company's profitability with market share is weak. The stronger correlation is actually with consumer loyalty. You want your consumers to come back and buy your devices over and over. J.D. Power recently showed us to have the second-highest loyalty in the smartphone market. So scale is a factor, but I do not believe that scale is a determining factor. Lots of companies used to have very large scale, and they lost their way. We need to innovate and meet consumer expectations, and that's going to be our focus.
Before you came to Motorola it had a record of strong innovations, but they were intermittent. The RAZR phone was a big success in 2005, but there was nothing to follow it up. Can you keep a business continually innovative?
Innovation itself is not enough -- I sometimes call it corporate entertainment. Lots of things in American corporations are done in the name of innovation. It's wasted money unless it solves consumer problems. The central thing I have tried to bring to Motorola is how we solve the right problems. It has to be unique and relevant, and I'm very focused on that. Very often, innovation is associated with being unique. Unique is not enough. There's no one way of doing innovation. You have to create a culture where people are prepared to fail once in a while if you're not prepared to fail, there's no chance of success in a sustained way. So we're taking more chances. We're creating a culture where people are prepared to say 20% of the time, "This is a high-risk business proposition or a high-risk technology proposition." We will engage with it. We have what we call a retrospective review process. We reward people on how -- given the circumstances -- they made decisions and acted, as opposed to setting objectives. We set objectives too, but we look at how people acted toward accomplishing those objectives.
You came to Motorola when it was losing billions of dollars. This was an emergency situation. What were your top priorities?
My No. 1 priority was to make some clear business decisions and focus the organization on objectives. Before my arriving here, we were chasing market share, scale, and a number of different objectives that weren't clear. As soon as I arrived, I said that within 90 days we'll make some decisions about the direction of the organization. One of the core decisions we made was to select Android as our platform. It certainly wasn't clear that Android was a winner, and it didn't have the scale it does today. Lots of folks felt I had burned my boats and had chosen one path. I believe in making your bets. I believe you fail if you don't decide which path to choose. If you take too many paths, sometimes there's no path to success. That decision to focus made a big difference. We still have to focus more, so that what Motorola stands for and how it differentiates itself show more clearly in our products.
What about dealing with employees who were uncertain about their future and uncertain about you, because they didn't know you. How could you help them understand they could be winners again, and change the psychology of the place?
That was the largest challenge. We had a town hall meeting, and one of the first questions I got was, "Why should we trust you?" My response was, "You shouldn't. I will promise you a certain number of things, and if I deliver them, then you should begin to trust me." But it was one thing to trust me. Trusting themselves to be winners was another issue, and we did it with small successes. We set small objectives, and as we began to see ourselves doing well financially and delivering products we could all be proud of, that made a big difference. The challenge was that I was taking $5 billion of costs out -- it was done not in one fell swoop. So everyone had some uncertainty about their position, and it's a testament to the commitment of the employees that they stuck with it. I think it's broadly recognized as having been the right course of action. But it was very difficult to have two or three cycles of layoffs while you're asking people to work harder.
Does personal infotech over time end up focused almost entirely on the phone?
I believe the device you carry with you at all times is much, much more important than a tablet, which most of us will carry about 30% of the time. And I absolutely believe that the phone is going to be the best computer, because it's with you at all times. It's going to be the best camera, because it's there when you need it. It will be the best music player because it's with you at all times. We do surveys and sometimes take phones away from people, and they start crying. They have that amount of personal investment in the relationship. It becomes the digital hub of your life. So I think this is the biggest opportunity. Mobility, Internet, content, computing -- all of that is converging into this device.
There's an argument that this business is fundamentally a hit business -- each product is a hit or it's not. Such businesses are fundamentally volatile, and investors discount their value for that reason. Is there a way to escape that?
I think there is. In the history of this business Nokia (NOK) accomplished that, and todayApple has accomplished it. You're right though in saying this is a hit business. It's very much like a Hollywood movie business or a drug selection business. What we need is a business machine that works at a modest profitability level at all times, and then on top of that you can have hits. The question isn't whether there's volatility. There is definitely volatility in this business. You're only as good as your last product. But we have a distribution machine, a supply-chain machine, a development machine, a branding machine, a go-to-market machine, which delivers a level of profitability. I think it's possible to get that machine to be efficient enough, and then on top of that you take this 20% or 30% innovative bet that some of them could be hits.
History says an industry like this eventually consolidates to a handful of players. Do you expect that to happen, and does Motorola survive as an independent company?
I expect consolidation to occur. Our customers are consolidating, and our supply base is also consolidating. But my view is that consolidation occurs in some interesting ways. I'm not convinced that handset manufacturers acquiring other manufacturers is the best way for value to be created for shareholders. Consolidation across content manufacturers and hardware and software manufacturers -- I see a bunch of different ways for this consolidation to occur, to create shareholder value and create different structures to the industry. You've already seen the acquisition of Palm by HP (HPQ, Fortune 500), a very interesting acquisition that brought software and hardware assets together. The relationship between Microsoft (MSFT, Fortune 500) and Nokia (NOK) also speaks to that. Do we expect Motorola to be an independent company? I don't know yet. I hope very much that we are. I believe our strategy is the right strategy and will deliver the shareholder value we've promised.
It sounds as if Motorola consolidating possibly with a software outfit of some kind is not unimaginable.
There are lots of opportunities for us to combine different resources and create more shareholder value.
The stock market seems to think Apple is going to rule the world -- it's the second most valuable company in America, after Exxon Mobil (XOM, Fortune 500). What are Apple's vulnerabilities?
I'm loath to comment on vulnerabilities of a company that has been incredibly successful in delivering world-class products. On the other hand, I would say that scale and innovation very often don't mix. Defense of market share and other defensive actions very often set in, and middle management begins to drive the culture and strategy of a company. I'm certain the folks at Apple are very cognizant and are prepared to make sure that doesn't occur. But not speaking about Apple in particular, the scale that comes with that level of success is very often the beginning of a decline.
You're a global CEO running a global business. What's the key to America's competitiveness in the world economy?
Innovation and the education system. We have -- or we've had -- the best secondary- and [college]-education system in the world, and we by and large changed the world -- not just ourselves, but also England and some other places. We definitely want to encourage the brightest people in the world to come and innovate here in America. Some of our immigration policies are slightly counter to that direction. We ought to look at that and also invest much more heavily in, first, our education system, and second, what I call pre-competitive research in our universities. When we put a man on the moon, we were spending far more of our GDP on research than we are doing today. It's important that we go back to the roots of doing fundamental research and then winning on the basis of that. 
