"New 3Com president: A lot more than NICs"
By JIM DUFFY
Network World, 03/18/99
It's been about seven months
since IBM and Digital Equipment veteran Bruce Claflin
took the reins of president and chief operating officer at
3Com. Claflin reflected on his first seven months and
shared some of his goals for the company with Network
World Senior Editor Jim Duffy.
Q. After seven months, what are your impressions of
3Com?
A. What I found is what I
expected, which is good. When I
joined I knew that the industry
was exciting, it had enormous
growth and there was more
innovations going on than was
going on in the systems
business, and that was very
appealing to me. The systems
business had become somewhat
predictable, it wasn't growing as rapidly and the core
technologies were owned by a few people who seemed
to be driving the industry.
In networking, it's different. More growth, much more
innovation, no one dominates any particular technology,
there's still lots of room for innovation and for people's
relative positions to change. I found that invigorating.
3Com, within it, a company with large size, great scale,
enormous presence in the industry particularly at the
edge, which is our strength ... Good brand, particularly
with people who make networking decisions. Good
technology. I had not understood just what an innovator
the company was at technology.
And I saw when I got here in terms of the overall
products and the awards that they win and the
recognition customers have given us, but also looking at
the portfolio of patents we've been awarded is really
exceptional. We have more patents than any of our
competitors and more patents in process than all of our
competitors combined, which is an enormous strength.
It means that you are innovating, that you can
differentiate yourself. It translates to great products but it
also translates to freedom of access in the market. When
you have a patent portfolio, others can't push you
around. I found that to be very attractive about the
company, that we had this patent portfolio. That's what
brought me here and seven months later I feel just as
optimistic.
Q. You mentioned the growth potential but with NICs
and modems, 3Com seems to be in the lower-growth
space of the market...
A. Well, be careful there. I know where you're going
and I think you're partly right. We believe the overall
industry is growing at around 14% to 15%. The piece of
the business that we're in that grows less than the
industry would be principally our NICs and modem
business. The industry outlook is that they're going to
grow somewhere in the mid- to high-single digits. That
piece is less than the industry and it is true, that is where
we have large market share.
But it is also true that that is only about 35% of our
business. So that says that there's another 65% that are
other segments, and most of those are relatively high
growth, certainly higher than the industry overall.
One of the common misconceptions about our company
is that we are overwhelmingly a NIC/modem company,
and while that's true historically, the reality is it's a
minority of our business today. You mentioned
LAN/WAN and workgroup, that is a very high growth
segment right now, for the industry and for us.
It's driven by two places. We do have a very strong
small/medium enterprise play and that class of product
does well there. That segment of the enterprise market is
growing faster than any other, and we have great share.
But the other thing we find is in the large enterprise, quite
a bit of those same products get deployed out at the
edge. In fact, we estimate that about 40% to 50% of that
class of product end up going into large enterprises. So
the strength of small/medium, which is growing rapidly
and we have great strength, used at an edge or at an
establishment of a large enterprise, that's good business
for us. And then there's a whole set of emerging markets
that today are not very large but they have the potential
to grow exceptionally well and we're investing in several
of them.
There's about seven areas that we've identified as very
high growth. When you look at some of our VoIP
initiatives, some of our LAN telephony initiatives, SAN
initiatives, these are all large enterprise plays and they all
have much higher growth characteristics than the
industry as a whole.
About 10% of our total business today has exceptionally
high growth and that's in that emerging category. So our
belief is that we can grow faster than the industry overall
based on that portfolio of products that we have.
Q. Which of the seven emerging 3Com's targeting -
hand held computing, LAN telephony, voice over IP,
home networking, Storage area networks, wireless,
broadband access-will 3Com dominate? Which will be
more challenging?
A. All of them. I wouldn't invest in any of those unless I
felt we could have a very strong presence in them. My
view is, why go into an emerging market, one not set
yet, one in which the competitors are not entrenched...
Q. But dominate to the extent that you dominate the NIC
market, or PalmPilot...
A. I want to be careful of the word dominate. I believe
in every one of those markets we could be number one
or number two. If we didn't believe it we wouldn't invest
in them.
Take broadband ... it's an emerging market, it's still very
early, there's still an enormous amount of standards that
have to be set, players still have to emerge. We
absolutely are in it to win. It leverages our strength that
we already have in the modem business. We think that
we are a great partner for people who are rolling out
cable and DSL solutions because of our ability to do
simple, easy-to-install, low maintenance, intuitively
obvious end-user devices in volume, in the millions.
That's a strength that we bring to the table that our
partners like. There's an example of a market that today
is young. But we're in it to win. And I think we have
some credibility around why we think we can win this,
too.
Q. Which of those emerging markets do you feel will be
the most challenging for 3Com to end up as the number
one or number two supplier?
A. I think I'd go the other way. Which one of those
markets don't we have strength in?
Potential strength: SANs clearly is a new market but it
certainly plays to our knowledge of networking, high
availability, high performance. If you're going to be a
SAN player you've got to understand 24x7 computing,
you've got to understand scalability in a big way. You've
got to understand how an enterprise works. In a
distributed environment - storage is distributed these
days, it's not just stuck in a big room. I'd argue we know
that pretty well.
Which of these don't we have a strategic advantage, or a
competitive, comparative advantage going in? I think in
all of them we do. If we didn't, I'm not sure we would
have targeted them. One of the great challenges when
you're in a high growth industry with lots of change is
not where you're going to invest, but where are you not.
We consciously picked these seven because one of the
factors was we really think we can lead those segments.
Q. What was the rationale behind combining the carrier
and the enterprise systems groups?
A. There were a few things we wanted to do. First of
all, while there are clearly differences between the carrier
and the enterprise markets, there are a lot of things that
are also the same. For example, we believe that many of
our enterprise products can and should be sold to carrier
customers as is.
Further, we believe with some basic changes in design -
for higher levels of availability and to meet some of their
power requirements - we can adapt some of our
enterprise products to be even more competitive in the
carrier marketplace.
I think there's an opportunity to leverage what's in the
carrier marketplace more broadly in the enterprise,
particularly in our WAN activities. I think that there's an
opportunity to get commonality there. We know that our
customers want to have a cohesive policy management
program that goes across all of your high-end systems,
and by putting them in one group it makes it easier to
implement that. And there are some best practices that I
think are relevant between both sides that we can get
better sharing on if we put them all under one group.
Those are the principal objectives.
We're still going to maintain a discrete carrier group just
as we maintain a discrete small/medium business group
and a large enterprise group. But within that, I'd like to
encourage sharing of best practices, sharing of common
technology base, common code base. And driving carrier
requirements into our enterprise products, and vice
versa. By putting them together it makes it a lot easier for
out field (sales force) to deal upstream with the business.
Q. Edgar Masri came over from small/medium business
to head up large enterprise and now the carrier group. Is
there a conscious effort to leverage your success in the
small/medium business market across other market
segments?
A. We are trying to find ways to leverage pieces of our
business better. So yes, we clearly would like to leverage
our strength in Edgar's old product line wherever
possible, and one of those is the large enterprise. Edgar's
products sold a very significant percent to the large
enterprise. And we would like to find a way to leverage
that strong position we have at the edge of the enterprise
more broadly to end-to-end solutions.
We'd like to find a way to take some of our VoIP
investments that we're making in carrier and translate
them through to the enterprise. I wouldn't say we're just
trying to find a way to leverage Edgar's old unit more
broadly. I'd say we're trying to find a way to leverage all
three of them more broadly inside common customers.
(The small/medium) business unit, among all of our
others, was one of our most successful. It was most
successful in terms of revenue growth, profitability,
market share, customer satisfaction. And so there are
some lessons we can learn form the unit that are broadly
applicable for the company. I think they were very tuned
to their customer and marketplace. They had excellent
systems whereby they were continually testing the
feedback from the marketplace, continually listening and
learning what the market was saying about their
products. They're very fast on their feet to adjust.
I think that was a great practice they had, they built into
that business that I'd like to replicate more broadly
across the company. I would argue that Edgar's old
group was probably the most tuned we had to the
marketplace and the faster to respond, the most
customer sensitive, of any group we have in the
company. And that's a practice I'd like to leverage more
broadly across the organization.
Supply chain is also going to have a lot to do with our
financial success.
We today buy about $3 billion worth of components
from various suppliers which we then package into
products and sell into the marketplace. How cheaply we
buy those components, how quickly we put them in
production, how quickly we turn those in to finished
goods, how quickly we turn the finished goods into end
user shipments-as opposed to finished goods inventory in
ours and the channel's inventory - will go a long way in
determining whether we are profitable or not.
The supply chain that we have today is improving
substantially over where it was a year ago by any normal
measurement. A year ago we were four, four-and-a-half
inventory turns; we're at seven now. Our cash-to-cash
cycle was over 100 days, we're well under 70 now. We
used to have a total time from when you bought a part to
when you shipped it to an end user of over 100 days.
Today we've shrunk that down dramatically. I believe as
far as we've come we can go that much further.
To the degree we master the supply chain it allows us to
be price competitive with anybody, ensure we give a
good return to our shareholders. When you carry a long
pipeline of parts and finished goods inevitably you've got
to write something off. So that's one opportunity to save
money.
The second is purchase price implementation. If you sell
the part for $10 and, if you weren't selling any, you drop
the price on March 1 to $8 ... if my competitor carries
no inventory they get that $2 advantage day one. If I'm
carrying two months inventory it takes me two months
before my cost matches my competitor. That's a huge
opportunity for savings.
The third has to do with channel, and the repricing we
have to do of channel inventory. The aggregate of that
opporutnity is well over $100 million a year in profit
opportunity, if we master it.
So we're going to build the (supply chain) organization,
increase its importance internally, bring in outside talent
to help us lead it and go after that big opportunity. We'll
never capture all of it but we can capture a big piece of
it.
If I'm an enterprise customer and I'm buying solutions,
these require that I buy a wide variety of products. I've
got to be able to acquire them and deploy them in a
consistent and predictable way anywhere in the world,
regardless of the volume. So a major part of our supply
chain is to be able to go to the enterprise customer and
say we're going to sell you an end-to-end network
solution, hopefully driving convergence.
And when a customer buys we'll be able to then stage
our delivery completely against their needs anywhere in
the world, regardless if it's an edge product or a core.
And we think there's a set of on-time delivery metrics we
can drive for enterprise customers that are considerably
above where we are today. So when I talk about supply
chain, there's a benefit for shareholders that we go
capture that opportunity.
But there's an equal benefit for customers that I can
show them that the benefit if buying from us is
end-to-end converged solutions deployed anywhere in
the world by a predictable schedule, regardless if the
devices are in the thousands or in the tens. That's what
we're trying to do for the enterprise.
Mang
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