The Strength of EMC’s Federation

Monday Jan 26th 2015 by David Hill

It’s true that EMC is made up of many disparate parts, yet these many elements create a valuable synergy.

Those who consider EMC only casually or from a distance often find the company hard to understand from a business model and strategic direction perspective. EMC considers itself to be a federation and that is not a very familiar concept to most business observers.

The base federation consists of EMC Information Infrastructure (EMC II – the company’s core storage hardware and software offerings), RSA, VMware, Pivotal and the recently added VCE. Overall, EMC owns majority stakes in VMware, Pivotal and VCE.

Revisiting Synergy Where 1 + 1 = 3

The question recently raised by activist shareholders is why EMC shouldn’t simply divest itself of say VMware and Pivotal, as well as organizations, such as Documentum and RSA, which have been subsumed within EMC II. One reason is synergy in the sense of the whole organization being greater than the sum of the parts.

Now, when HP split printers from its enterprise business of servers and storage there was little synergy between the two businesses. Sales on one side did not drag sales from the other side. Moreover, product development, manufacturing and innovation were separate and distinct between each of the product groups. Similarly, Symantec is planning to split off its information management (data protection and storage hardware) and security businesses where hoped-for synergies never materialized.

In EMC’s case, let’s consider VMware. Could it be a standalone company, especially since it once was a successful company on its own and since much of its sales does not depend upon EMC? The answer is yes, but first recall that VMware’s growth really stabilized and took off under EMC leadership. Now, think of a Venn diagram of VMware and EMC II. There is an overlapping section where the two come together. Yes, this is a common source of business for both, but there is also a deep and enduring research and development effort from which both benefit.

EMC does not have to reinvent the wheel when taking into account VMware product capabilities in conjunction with such things as software-defined storage (its ViPR initiative) or its Hybrid Cloud initiative. VMware benefits from EMC’s advanced thinking in many use cases and can adjust its product development strategy and roadmap appropriately. The overlapping space can be seen as the synergy that benefits both. Note also that customers of VMware may also benefit from at least some of its technological developments that were inspired by EMC, but EMC accepts this as the necessary price of doing business. Moreover, the ownership model provides both companies a lead time in adopting and adapting to one another’s new technologies.

A similar synergies/Venn diagram exercise can also be applied to Pivotal, RSA, VCE, etc. not only between EMC II and some other organization, but also between two or more pairings, such as VMware, Pivotal, and EMC II or just VMware and VCE. The number of combinations can be mind boggling (especially since EMC II can be partitioned into many different individual components), but the key is that the synergies in the overlapping parts of the diagram lead not only to current business, but also to innovation that generates future growth that would not have been possible otherwise. The overall EMC Federation and its interactions would then look a lot like the Sunday New York Times crossword puzzle. No tight integration or coupling is possible across everything, but it is much better than the total separateness of business entities that make up a conglomerate model.

Freeing Up Cash to Invest in Future Growth

But synergy is not the only reason for EMC’s Federation. Another is to ensure the company’s future  market leadership position. All large IT vendors face the challenge of how they will not only survive, but thrive over time. The federation model provides a foundation for growth in revenues and profits over the upcoming years. Let’s take an example. Joe Tucci, Chairman and CEO, freely admitted at an EMC Global Analyst Summit that high-end storage is not a growth business (and he also noted the struggles of competitors in this space). Does that mean that high-end storage is no longer a good business for EMC? The answer is no. The business will continue to generate substantial revenues and good margins as many of the use cases and requirements for that storage are simply not going away (as a point of reference, IBM’s mainframe continues to do well after all these years). Moreover, EMC will continue to invest in this business as appropriate so enterprise customers will never fear being abandoned.

Still, what was not said was that this business will continue to be a cash cow for EMC. Many years ago the Boston Consulting Group (BCG) came up with a famous two-by-two matrix to rank products (or business units) by relative market shares and growth rates. A “cash cow” has high market share, but slow growth. The cash generated from a cash cow exceeds the amount of money that needs to be invested in development, which frees up cash to be invested elsewhere (if so desired).

Now, one would certainly like to invest in “stars” which have a high market share and margins in fast growing industries. Great if you can find them, but that is not easy. Rather one has to invest in what BCG called “question marks” with high market growth, but low market share.

However, the BCG model was invented in a simplistic time where startups and innovative concepts did not rule the day. The term “question marks” is therefore pejorative and should be replaced by something like “apple-of-one’s-eye prospects.” Yes, there is a risk associated with these investments but in times of great change, these are the innovative activities (along with external acquisitions and internal organic development) that that can lead to great transformation and growth. Not all will succeed, but it is like playing venture capitalist internally; you just need enough to win enough bets.

Mesabi Musings

EMC has been a large and leading vendor in the information technology space for many years and has every intention of continuing that leadership role. To do so, it has to continue to maintain a strong presence in the so-called 1st and 2nd platform markets (notably, legacy mainframe and client-server systems) world that is by no means going away. Then it has to add capabilities in the 3rd platform (including cloud, mobile, social media, and big data). The federation model is EMC’s preferred organizational strategy to meet those challenges.

The federation model provides the synergy that enables components to work together in numerous combinations. Those synergies also benefits research and development that leads to greater innovation. In addition, EMC can manage its free cash better to allocate capital resources to those areas which will benefit the most. Overall, the Federation model works well and EMC plans to keep it intact now and in the future.

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