Storage Giant EMC Is Structured for Innovation

Storage Giant EMC Is Structured for Innovation

STEVEN ROSENBUSH

March 6, 2014 5:56 p.m. ET

EMC Corp. EMC +0.04% looks the part of the incumbent technology company with everything to lose.

At the age of 35, it dominates the data-storage systems business. Its $23.2 billion in annual revenue and profit margins of 62.3% are inviting attacks by startups eager to disrupt its markets with cheaper and more powerful technology.

And its silver-haired chairman and chief executive, Joe Tucci, is 66 years old and getting ready to give up his role as CEO.

Data storage is evolving quickly, and EMC faces some awkward and potentially costly decisions as it defends itself. But EMC isn’t likely to follow the familiar script in which the dinosaur is devoured by the hungry new predator on the savannah.

But Mr. Tucci, who came to prominence by restructuring and selling computer maker Wang Global in the late 1990s, has created an unusual corporate culture and structure that’s designed to cope with change.

EMC is really four businesses with varying degrees of interlocking ownership and management. That approach promises a significant degree of autonomy and lets managers put the interests of customers first, even if that means competing with other members of the EMC family. The parts include spin-off VMware Inc.,VMW -0.85% a pioneer of software-based servers; the RSA security division; and software-development company Pivotal.

While most tech companies are defined by a set of technologies or products, the essence of EMC is more about structure, culture and process.

“It’s not a conventional structure, and that is intentional,” says Mr. Tucci, who has been EMC’s CEO since 2001. “The main reason we structured the company like this is to maintain focus and innovation.”

EMC spends about 12% of its annual revenue on R&D and an additional 10% on acquisitions. It avoids headline-grabbing, transformative deals, focusing instead on buying smaller businesses and expanding them.

It also makes frequent use of partnerships. And it steers clear of locking customers into proprietary standards, an approach that’s common in the tech world but can bind successful companies to their past, a phenomenon that Clayton M. Christensen, a Harvard Business School professor, has dubbed the Innovator’s Dilemma.

“At Wang, if it didn’t get done at Wang, it didn’t get done,” Mr. Tucci recalls. “I love EMC engineers and hug them every day, but there is no way we can expect our 15,000 engineers to produce all the innovation we need to exercise our strategy. I learned that we need to look inside and outside to find all the great ideas we need.”

Nonetheless, EMC’s unusual structure and culture now face their greatest challenges ever. Information technology is undergoing a once-in-a-generation transition as paradigms that trace their roots to the 1970s and 1980s become outmoded.

Data are growing at an unprecedented pace, and data storage and management is shifting to the cloud, where such companies as Amazon.com Inc. AMZN -0.06% promise cost savings and delivery of the latest technology faster than a company can update its data center, long EMC’s domain.

EMC is also in the cross hairs of such startups as Box Inc., a cloud-services company that has claimed 77% of the Fortune 500 use it.

“We probably compete a lot more with EMC in the long run than we do with many of the typical competitors you would put us in the running with,” Aaron Levie, the company’s 28-year-old co-founder and CEO, says. “For every $100 that is spent on managing information and content, cloud providers probably get a couple dollars of that spend, and that is where we think the massive migration is going to come from over the next five to 10 years.”

Mr. Tucci is working hard to make sure revenue doesn’t migrate anywhere. “EMC and VMware must play in both the private and public side of this immense cloud-computing opportunity,” he has told analysts.

The total capacity of the market for enterprise storage in the public cloud—measured in exabytes—will grow more than 400% for the five-year period that ends in 2016, according to Natalya Yezhkova, director of storage-systems research at IDC.

EMC’s revenue growth, by contrast, hit 17.6% in 2011. It has since dropped to 6.89% and is likely to stay in that range during the next few years, according to Toni Sacconaghi, an analyst at Sanford Bernstein & Co.

He also believes the company’s sharp rise in gross margins—which soared from the mid-50s to the mid-60s during the past six or so years—is mostly behind it.

So EMC is scrambling to prepare itself for the cloud. It has put more emphasis on selling to service providers, which it says are growing at several times the rate of its other industry groups. It made a major bet on cloud infrastructure in 2011, when it, VMware,Cisco Systems Inc. CSCO -0.23% and Intel Corp. INTC +0.53% relaunched an earlier effort as a separate company called VCE, which combines hardware and software into systems for virtualization and the cloud. The following year, it acquired Syncplicity, a startup that competes with Box in file sharing and cloud storage.

EMC made another large bet on the cloud in 2013, when it formed Pivotal with VMware andGeneral Electric Co. GE +1.12% Pivotal customers use its platform to build, test, deploy, run and scale applications on any cloud.

One customer says EMC still needs to learn to be more responsive to its customers. “As cloud evolves…I think EMC and VMware are looking to evolve and change the way they have traditionally gone to market. They are well positioned and they are smart guys, but they know they have to change,” says Steve Hughes, a principal cloud specialist at Colt Group S.A. COLT.LN -0.57% , a European telecom and technology-services company. “They have to be a service provider, rather than [just] a seller of a bunch of boxes.”

Mr. Tucci acknowledges the company’s transformation isn’t complete. “Do I have all the pieces in place? No, that would be akin to saying I am satisfied, and that would be a very, very sad day,” Mr. Tucci says. “The day you say you are done, you are done.”

 

About bambooinnovator
Kee Koon Boon (“KB”) is the co-founder and director of HERO Investment Management which provides specialized fund management and investment advisory services to the ARCHEA Asia HERO Innovators Fund (www.heroinnovator.com), the only Asian SMID-cap tech-focused fund in the industry. KB is an internationally featured investor rooted in the principles of value investing for over a decade as a fund manager and analyst in the Asian capital markets who started his career at a boutique hedge fund in Singapore where he was with the firm since 2002 and was also part of the core investment committee in significantly outperforming the index in the 10-year-plus-old flagship Asian fund. He was also the portfolio manager for Asia-Pacific equities at Korea’s largest mutual fund company. Prior to setting up the H.E.R.O. Innovators Fund, KB was the Chief Investment Officer & CEO of a Singapore Registered Fund Management Company (RFMC) where he is responsible for listed Asian equity investments. KB had taught accounting at the Singapore Management University (SMU) as a faculty member and also pioneered the 15-week course on Accounting Fraud in Asia as an official module at SMU. KB remains grateful and honored to be invited by Singapore’s financial regulator Monetary Authority of Singapore (MAS) to present to their top management team about implementing a world’s first fact-based forward-looking fraud detection framework to bring about benefits for the capital markets in Singapore and for the public and investment community. KB also served the community in sharing his insights in writing articles about value investing and corporate governance in the media that include Business Times, Straits Times, Jakarta Post, Manual of Ideas, Investopedia, TedXWallStreet. He had also presented in top investment, banking and finance conferences in America, Italy, Sydney, Cape Town, HK, China. He has trained CEOs, entrepreneurs, CFOs, management executives in business strategy & business model innovation in Singapore, HK and China.

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