Between January 1, 1990, and December 31, 1999, EMC’s stock appreciated by 83,000 percent — the best performance in the history of the New York Stock Exchange. The Massachusetts-based company was the market leader in information storage. Its flagship product, a high-end storage platform called Symmetrix, sold for twice the price of competing products. In 2000, the company had revenues of $8.9 billion and net profits of $1.8 billion, and its market capitalization reached a high of $225 billion.
Joe Tucci joined EMC in January 2000 and became president and CEO in January 2001. Having recently overseen a major restructuring at Wang Global, he was looking forward to leading a company that was on a solid growth track. EMC’s biggest challenge was hiring and training enough qualified people to sustain its rapid growth rate.
But by the end of 2001, as the economy lurched toward a recession following the dot-com bust and September 11 terrorist attacks, the demand for EMC’s products plummeted. The company posted a loss of $508 million for 2001. A lot of people within EMC viewed the downturn as a temporary aberration. Tucci saw it as a sea change. Companies were no longer making major investments in information technology with little regard for cost.
During the dot-com bubble, the amount of information stored on disk arrays was virtually doubling each year. Even during the recession, the market had growth rates of about 40 percent. “We were fundamentally in a great market,” Tucci says. “And we had $4 billion in the bank and no debt, so we were not going to fall off the face of the Earth if we kept our cool and marched forward. That being said, we had to change fast because we were bleeding money.”
Companies were not only spending less money on information technology but were also consolidating their purchases and doing business with a smaller number of vendors. Dave Donatelli, an executive vice president who oversees EMC’s storage platforms, worried that some customers might switch to buying storage products from larger technology companies that offered one-stop shopping.
“The real challenge was deciding, is this just a blip, or is it really a fundamental change to the business?” Donatelli says. “Once we decided that it was a fundamental change, we had to reexamine things that we had done for a decade and get everybody to be willing to think differently. We weren’t going to go out of business, but in our industry there’s something almost as bad as going out of business, and that’s becoming irrelevant. And in 2002, when we shrank to $5.4 billion in revenue, that was my biggest fear.”
EMC’s culture was technology-driven, not cost-driven. But after the downturn, many customers were no longer willing to pay premium prices for the highest-quality information storage products. Most of the market’s growth was in the midrange segment. The high end, EMC’s stronghold, was growing at a rate of just 3 percent.
Tucci and his senior management team decided that in order to stay relevant, EMC would have to dramatically change its business model. High-end hardware accounted for three quarters of the company’s revenues. Tucci felt it was crucial that EMC move into the middle and lower tiers and enhance its software and service offerings. He also wanted to develop a network of channel partners to supplement the company’s direct sales force.
“If we stayed just as a storage platform company, we’d be increasingly commoditized,” says David Goulden, executive vice president of customer operations. “So while we could continue to add value to those storage platforms, we had to have a value proposition that went above where we were at that point in time.”
EMC software was getting great reviews from customers, but its revenue potential was limited because it ran only on EMC storage arrays. With the open-source movement gaining momentum, Tucci thought it was time to move beyond proprietary software and develop applications that would manage information on competitors’ platforms. And while EMC would continue to define itself as a product company, he wanted to expand its service offerings to help customers get the maximum value out of EMC products.
Tucci distilled the new business model into a rough formula: 50 percent hardware, 30 percent software, 20 percent services. EMC’s gross margins for hardware had dropped from 60 percent to about 20 percent. By contrast, the software business had 85 percent margins, and the services business had margins in the low 30s. Tucci calculated that the 50-30-20 model would raise the company’s overall margins to around 48 percent.
Then, in a series of strategy meetings, Tucci and his senior team fleshed out a new value proposition: EMC would be the first company to totally dedicate itself to information life cycle management (ILM). Recognizing that not all information is of equal importance — and that the value of a particular piece of data changes over time — the company would offer integrated solutions to store, protect and manage information from its creation through the end of its useful life.
“Something that you’re using for a stock trade at that second is very, very valuable data,” says Donatelli. “A month after that trade or three years after that trade, that data is not as valuable to you.” ILM allows customers to save money by migrating data from a high-end storage array to less expensive platforms at different points in the information life cycle. “During the bubble years, people had virtually all their storage on the high end,” Donatelli says. “The idea of ILM was to start to move people down the chain.”
When Tucci took the helm at Wang, he had a strong platform for change because the company was in bankruptcy. But at EMC, many employees viewed the abrupt downturn in 2001–02 as an anomaly, not a fundamental change requiring a new strategy. “The populace didn’t want to change, because they were fearless,” says Tucci. “This was just a momentary problem, and let’s keep hiring and let’s keep going.” Tucci had to convince a skeptical workforce that while EMC had benefited from Y2K, the euro and the e-business boom, there was no more low-hanging fruit on the horizon.
Before the restructuring, EMC’s least expensive product sold for $250,000. Suddenly the company was offering products priced as low as $4,000. “If you have a culture that has always been a premium price culture, to learn how to sell things at $4,000 is a tremendous cultural change that impacts your entire company,” says Donatelli. “The biggest challenge we faced internally was getting our workforce to understand that in almost a blink of an eye the world had changed, and what they had been used to over the last 10 years is no longer the way things will be in the future.”
Despite the new emphasis on controlling costs, Tucci refused to scale back research and development, since product development is what separates EMC from competitors that are more focused on services. As the company’s revenues declined, R&D spending went from 9 percent to 15 percent of sales. EMC now invests almost 11 percent of its revenues in R&D; by contrast, IBM puts only 6 or 7 percent of its revenues into R&D.
In 2003, EMC introduced a new high-end storage platform, the DMX, as well as several midtier hardware products. Tucci had pushed to bring the DMX to market quickly instead of releasing an incremental upgrade of the existing high-end platform. Maintaining dominance in the high-end segment was critical to EMC’s positioning in the industry. “The midrange has been important,” says Bill Teuber, executive vice president and CFO, “but technology leadership in this business is decided in the high end.”
In addition to developing new hardware and software products, the company embarked on an acquisition program to fill in some gaps in its information life cycle management capabilities. It bought three software companies — Legato, Documentum and VMware — over an eight-month period in 2003 and 2004. All three were on the West Coast, where EMC had never had a presence. “We probably were all surprised at the complexity and the multiple dimensions associated with three simultaneous integrations,” says Goulden.
To build credibility, EMC went the extra mile in communicating its new strategy to analysts and investors. “We opened up our fixed versus variable costs so investors could understand our cost-saving efforts,” Teuber says. During the stabilization phase, the focus was on break-even and leverage — how much of every dollar over the break-even point was dropping to the bottom line. Once the company reached the growth phase, the relevant metrics changed to revenue growth and operating margins.
Throughout the restructuring process, Tucci set aggressive quarterly financial targets. The company has consistently met or exceeded its targets since the fourth quarter of 2002. “You’ll be much more successful in life if you have a mediocre idea but excellent execution than if you have the best idea in the world and terrible execution,” Tucci says. “We did Babe Ruth every quarter. We pointed at the center field fence and said, ‘OK, we’re going to grow twice as fast as the market.’ And quarter after quarter after quarter we delivered. That’s what builds credibility and wins over the skeptics.”
Last year EMC had record sales of $9.7 billion, with year-on-year growth of 17 percent. Its stock has a market value of $28 billion and a healthy price-to-earnings ratio of 25. While the company’s high-end storage business is growing by only a few percentage points per year, midtier storage is growing at a rate of about 35 percent, and software and services have growth rates in the mid-20s.
EMC’s current revenue breakdown — 46 percent hardware, 37 percent software, 17 percent services — is pretty close to the model Tucci sketched out in 2002. “Having a balance makes it tougher for a competitor to attack,” he says. “Before, if you could find a way to attack high-end storage, you were going to hurt EMC. Now you can attack high-end storage, but I’ve still got all the other weapons in the arsenal.”
Summary of Financial Results
|Revenues ($)||Net Income ($)|
|2000||8.9 B||1.8 B|
|2001||7.1 B||(507 M)|
|2002||5.4 B||(119 M)|
|2003||6.2 B||496 M|
|2004||8.2 B||871 M|
|2005||9.7 B||1.1 B|
During the downturn, when EMC’s market value fell from $225 billion to $10 billion, some investors and analysts blamed the new CEO for the company’s decline. “You’ve got to have ownership whether you caused it or not,” Tucci says. “If you’re in the lead chair, you just take the responsibility and get on with life.”
Tucci is similarly unaffected by the praise he has received in the past two years as a result of EMC’s spectacular comeback. “If you read the articles about me in 2001 and in 2004, it would not appear that this was even the same person,” he says. “In 2004, I’m brilliant. In 2001, I was dumb as a stone. So that’s one of the things you learn in life. When things are going good, don’t get too pleased with yourself; when things are going bad, don’t get too down. You’ve got to ride the middle.”
Kathryn Harrigan, Henry R. Kravis Professor of Business Leadership:
The EMC story told by Tucci reminds us that organizations are slow to acknowledge when they are in trouble because nobody tells them that their performance is no longer adequate. There is a creeping incrementalism to this turnaround story reminiscent of the ability to boil a frog to death as long as you increase the size of the flame under the kettle by a little bit at a time.
Laura Resnikoff, Associate Professor of Management:
Whenever executives or MBA students ask for a set of early warning signs — how to identify a company heading for trouble or how to assess a company’s efforts to get out of trouble — I always speak about the challenges of reorganizing a large-scale sales force. Too often it is a life-altering event for a corporation. Few companies succeed in their first attempt, most exceed the projected business disruptions and time frames and few recover to prior glories.
With Tucci’s mature and commanding leadership, EMC did. What distinguishes this management team?
1) Their willingness to candidly acknowledge the influences of the past and lead change among a group of people who were proud of and comfortable with the benefits of EMC’s very prosperous growth history
2) Tucci’s insightfulness and openness about people and business opportunities
3) The melding of long-tenured EMC people with managers that Tucci brought with him, most with prior restructuring experience
4) Luck — an indispensable element of any successful turnaround:
• breathing room due to a most favorable capital structure as deteriorating performance accelerated
• some significant competitors who too had lost traction, from a combination
of individual and industry-wide causes
• regulatory and legal mandates and precedents worldwide that exponentially increased the need for information storage solutions.
This team stands out for another rare accomplishment: the group that now leads EMC’s successful growth strategy is similar to the group that led the turnaround. Few individual managers command the talents needed for these very different sets of managerial challenges; when corporate performance improves, few groups of managers, after all of the turnaround’s hard work, are still acceptable. Tucci and his team are worth learning more about and emulating.