Value Chain Analysis
EMC is noted for being recognized as the time-to market leader in delivering advanced storage and retrieval technology and information management and protection software to companies whose success depends on information. Using Porter s value chain EMC can be broken down into specific activities which contribute to a companies success or malfunction. Within the value chain analysis specific activities can be recognized as distinctive competencies. For EMC the distinctive competencies include inbound logistics and technology, research & development. These activities create strength relative to key competition.
Primary Activities
The first primary activity is purchasing supplies and inbound logistics. This is EMC s distinct competency for primary activities. EMC is dedicated to providing the best product possible, but they must be able to create an excellent product at a competitive price. Due to EMC s recent success, other companies have joined the industry to try and cash in. Two major competitors are IBM and Hitachi Data Systems Corp. These are two giant companies have extremely deep pockets, a big presence among mainframe users, and guaranteed supplies of drives from in-house manufacturing operations. In order to remain competitive with these companies EMC has come up with a cost effective strategy for buying supplies.
Instead of paying for custom made parts, or building them in-house, EMC has found a way to integrate regular PC components into their systems. Every system that they build contains dozens of commercial DRAM memory chips and off-the-shelf disk drives made by Seagate Technology Inc. Along with this strategy, EMC is also able to make partnerships with supplying companies in order to better control the product that they are receiving.
An example of this is at Teradyne, which is a worldwide know component producer. EMC actually sets up a department in the Teradyne manufacturing plant which allows EMC and Teradyne to communicate to each other better. EMC can quickly provide Teradyne with any new information pertaining to the product that they need, and help implement and new procedures. This also gives EMC more control over the quality of their supplies because they can watch them being produced, and oversee the transportation of the products to EMC. This strategy along with using regular PC parts allows EMC to ride the always improving PC industry price-performing curve, while adding value via software. This is a distinct competency.
It was apparent to some of there customers that using these parts would create a poorer product than their competitors. They convinced Visa International in 1995 under the claims that their product could retrieve massive amounts of data without stopping, day in and day out, at speeds approaching 3,000 transactions per minute to try their new systems. Visa claims that EMC s product has cut by one third the time it takes to process $3 billion dollars worth of credit card transactions each night. EMC s approach to cost cutting is an innovative and strategic way to cut down on the cost of supplies while still guaranteeing the quality.
The second primary activity is the operations of EMC. EMC has major manufacturing plants in both Massachusetts and Ireland. In these plants are the reason why EMC is ranked fourth on what Barron s calls a unique ranking of America s best companies for investors. EMC holds the most stringent quality management certification from the International Organization for Standardization. Not only are they commended for their quality management, but also for its manufacturing operations, which holds an MRP II Class A certification.
Moving down the chain, the next primary activity is outbound logistics. EMC produces computer products for some of the most illustrious institutions in the world. These customers include the world s largest banks and financial service forms, telecommunications and internet service providers, airlines, retailers, and manufacturers as well as governments, universities, and scientific institutions. In order to successfully distribute their product, which is vital to these very important companies and institutions, EMC has set up a large system. This system includes over one hundred sales offices with distribution partners in over fifty countries. The product that they are delivering to their customers can sometimes be very complicated, they therefore offer a customer training catalog. EMC believes that their product becomes a strategic part of their customers IT infrastructure, and therefore they need information that will allow them to optimize its power and capabilities immediately.
The next primary activity is Sales and marketing. Why the boom in an old tech sector? Storage is exploding as companies build vast electronic warehouses to stash reams of sales, financial, and operations data from every corner of their businesses. The internet is also fueling demand for more storage. EMC is dedicated to providing its customers with the highest levels of product quality backed up by unparalleled worldwide customer service. We are committed to delivering enterprise storage solutions that cope with today s business challenges while building information strategies for the future. (Michael C. Ruettgers, President and Chief Executive Officer) In order to further improve their sales and marketing as well as their outbound logistics, they have also formed alliances with the world s leading software, application and database companies, including Microsoft, SAP, Oracle, Baan, and PeopleSoft. Revenue from EMC s software in 1998 was $445 million, making EMC one of the world s largest, and fastest growing companies. Their annual revenue has also surged from $190 million in 1990 to $3.97 billion in 1998. EMC is the information storage and management solution of choice for every major computing platform in today s business enterprise.
The final primary activity is service. When a company provides a software product to such important companies and institutions it is extremely important to be able to back it up with impeccable customer service. EMC supports and services its customers by combining the industries most advanced remote service technology with the global reach, hands-on expertise and everyday commitment to highly skilled service teams. They also have a built-in-service approach which is designed to detect errors before a situation reaches an extreme point and data unavailability occurs by using the latest diagnostic technology and telecommunications links that continuously monitor and report on the environmental status of each installed system. EMC s customer support also includes customer support centers in Massachusetts, Japan, Ireland, and Australia.
Support Activities
The first support activity is human resources. We are a rapidly growing, dynamic company where employees at every level can make a measurable impact on our business. This motivates us to do the best job possible and creates real opportunities to move ahead. (Kira, Project Manager) EMC employs over 11,200 people worldwide, including about 4,600 in Massachusetts. Characteristics that they look for include; integrity, sense of urgency, quality, communication, time-to-market, and focus. They offer their employees a wide array of benefits including; health plans, pre-tax spending accounts, disability plans, life insurance, investment plans, and other programs. EMC is the world s finest, financially successful, leading edge Enterprise Storage company – with\ a reputation for superior customer understanding, total quality, and highly talented people.
The second support activity includes Technology, Research & Development. This is EMC s distinct competency for support activities. This is one of the most important aspects of the company and one of their strongest competencies, because EMC has to stay on the cutting edge of technology to keep their software competitive. They have Research and Development facilities in Massachusetts, Colorado, Israel, and France. More than 70% of their engineers focus strictly on the development of software. EMC expects to invest over $1 billion dollars in Research and Development over the next three years. Analysts say EMC s technology gives it a two-year lead over competitors. Most of their rivals are still putting their products into one type of computer, but EMC s work equally with mainframe and PCs. That gives them a large edge in a market expected to grow from $10 billion in 1997 to $25 billion in 2002. They have also come up with a simple solution to the year 2000 problem. They will simply have all their customers back up the storage before the millennium. With all this technology, research, and development, some analysts believe that EMC could join Intel, Microsoft, Cisco, and Oracle as the next franchise company in technology.
The last support activity is general administration. General Administration is another strong aspect of this company. EMC is one of the World s 100 Best Managed Companies.
Lead by their founder/chairman Richard J. Egan and their President/CEO Michael C. Reuttgers, EMC is dedicated to providing its customers with the highest levels of product quality backed up by unparalleled worldwide customer service.
EMC: Financial Analysis
The ability to put information to work to achieve the most aggressive goals is what EMC refers to as The EMC Effect. The financial performance of EMC in 1998 is proof of THE EMC Effect. In 1998 EMC s revenues rose 35 percent over 1997 to $3.97 billion. Their software sales grew 152 percent to $445 million, making EMC the world s fastest-growing major software company and contributing to the rise in their gross margin to 51.5 percent. EMC s net income increased 47 percent to $793 million. On a diluted basis, earnings per share were $1.49, a 43 percent rise from 1997.
EMC s rise to the top didn t go unnoticed. Throughout 1998, investors, analysts, and journalists took note of EMC s rising revenue and profit growth rates, market and technology leadership, and remarkable customer loyalty. EMC s stock price rose 210 percent during 1998, lifting their market value by 29 billion, to a year end market capitalization of $42.8 billion. Their outstanding stock growth landed EMC on top of the New York Stock Exchange, outperforming all other S&P 500 companies in 1998.
This foundation of excellence explains why EMC s customer satisfaction is above 98 percent and why their customer retention rate is above 99 percent. This also explains why EMC is now viewed as a technology franchise company on the same level as Intel and Microsoft and a builder of the information infrastructure for the digital economy.
EMC currently leads the storage system market that they are in. Their competition is very difficult to observe because they are a very focused business where as their competitors are a lot more diverse. For instance, IBM and Sun corporations are both in the storage system business, but they are also in many other technological based markets. Therefore it is difficult to compare the two. EMC s business can be better compared to some company s that are in the computer peripheral industry. Those competitors are Quantum, Lexmark, Storage Technology, and Imation.
First of all, Quantum is one of their competitors and they are one of the highest volume global suppliers of hard disk drives for personal computers, Quantum is also a leading supplier of high capacity hard drives and the worldwide revenue leader among all classes of tape drives.
Storage Technology is also a competitor and they are the top provider of network computing storage. Storage Technology products and services store, transport, and secure more than 100 petabytes of the world s information, ranging from mainframe data to client/server applications to video, audio and still images
Lexmark is considered a competitor of EMC, but they are more focused in the printing system business. They are a fast-growing, global developer, manufacturer and supplier of printing solutions and products, including laser, inkjet and dot matrix printers and associated consumable supplies for the office and home markets. They are recognized in the industry for its user-perspective approach, and they are currently moving aggressively to meet the changing needs of today s business customers and other consumers.
Their final competitor is Imation Corporation which is a global technology company that creates system, product and service solutions for the handling, storage, transmission and use of images and information. In 1998, the company reported revenues of approximately $1.3 billion on continuing operations, and they also had a market presence in more than 60 countries. Approximately 45 percent of Imation’s sales are generated outside the United States.
A comparative analysis of 5 of the leaders in the computer peripheral industry, EMC, Quantum, Lexmark, Storage Tech., and Imation, will show us who has the competitive advantage in the market. Financial ratios are an excellent way to evaluate a company s financial statement. Ratio analysis is important for three main groups. Managers are the first group. Managers employ ratios to help analyze, control, and thus improve their firms operations. The second group is credit analysts, this group is composed of mainly bank loan officers or bond rating analysts. They analyze ratios to help ascertain a company s ability to pay their debts. The last group is stock analysts. This group is interested in a company s efficiency, risk, and growth prospects.
The first set of ratio s we will be analyzing are the Liquidity ratios, the current ratio and the quick ratio. The first ratio we are going to look at is the current ratio. The current ratio is calculated by dividing current assets by current liabilities. Calculating this ratio allows you to see a company s ability to meet short-term obligations. The current ratio provides the best single indicator of the extent to which the claims of short-term creditors are covered by liquid assets and because of this the current ratio is the most commonly used measure of short-term solvency. EMC is the front runner in this category. They have a current ratio of 3.92. Quantum is second with 2.83, Imation is third with a 2.1 current ratio, Lexmark is next with 1.57, and Storage Tech has the worst current ratio of the 5 companies at 1.47. The industry average is relatively high at 3.75. A high current ratio is a positive sign for EMC. Creditors like to see a high current ratio. It indicates that they have the ability to pay creditors if they start experiencing any financial difficulties. A high current ratio could be negative from the perspective of a shareholder. A high current ratio could mean that the company has a lot of money tied up in non-productive assets, such as excess cash or marketable securities. However, this is not the case when dealing with EMC. Their shareholders couldn t be happier.
The quick ratio is the next ratio we will be analyzing. The quick ratio is calculated by deducting inventories from current assets and then dividing the remainder by current liabilities. Inventories usually are the least liquid of a firm s current assets, hence those on which losses are most likely to occur in the event of liquidation. Due to this a measure of the firm s ability to pay off short-term obligations without relying on the sale of inventories is important. EMC is the leader of the 5 companies with a quick ratio of 3.08. Quantum is second at 2.12, then Imation at 1.15, next is Storage Tech. At 1, and Lexmark is last in this group with a quick ratio of .87. The industry average is 2.95. This exemplifies EMC s domination over their top competitors in this area. Having a high quick ratio is very appealing to creditors and investors and is just another reason why EMC s stock price is so high.
The next ratio we will by analyzing is the inventory turnover ratio. The inventory turnover ratio is calculated by dividing sales by inventories. This ratio allows us to see how many times a year the companies inventory is sold out and restocked, or turned over . Quantum is the front runner in this category with an inventory turnover ratio of 13.81. This is remarkable when comparing it against the 5 top competitors. Lexmark is second at 5.81, Storage Tech. is next at 4.53, EMC is fourth at 4.29, and Imation is last with an inventory turnover ratio of 4.17. This means EMC turns their inventory over 4.29 times a year. This number is just below the industry average of 5.49. A possible explanation for EMC s sub-par inventory turnover ratio is the fact that they lease a lot of their inventory instead of outright selling it. This could have a negative effect on their ratio.
Another important ratio to analyze is a company s Return on Assets. This is calculated by dividing net income available to stockholders by total assets. EMC is the leader in this category with an ROA of 21.85. Lexmark is second with an ROA of 20.31. The other three companies don t even compete in this analysis. Imation is at 5.07, Storage Tech. is at 0.21, and Quantum is a -1.06. The industry average is 18.06. EMC s high ROA reflects the company s high-basic earning power. The high ROA is a positive aspect of the company.
The last ratio we are going to look at is the return on common equity. This is a very important aspect of a company. This ratio is calculated by dividing net income available to common stockholders by common equity. This ratio is especially important to stockholders because this ratio is basically the rate of return on a stockholders investment. Lexmark s performance in this area is remarkable, they have an ROE of 52.98. The next nearest competitor is EMC at 29.71 which is a wide margin between first and second. Imation is third at 8.94, Storage Tech. is next at .42, and Quantum is struggling at -1.93 in last place. The industry average is 26.19. Both EMC and Lexmark are extremely attractive in this area. Anytime a stockholder is getting that kind of return on their investment they are going to be extremely happy.