We Have To Be Like Start-Up Companies

In many ways, Seagate, the $8 billion market leader in disk drives business, is an eminent representative of the industry. From a $200 million turnover little more than a decade back, it has emerged as one of the dominant players in the IT world.Fortune recently included it in the Most Admired Corporations list.

So when the corporation's vice-president and managing director for its sales and marketing operations in the Asia-Pacific region, Joel Stead, came visiting India, it provided an ideal opportunity to understand how this IT giant maintains its position of eminence.

Excerpts from the interview:

Q. What are the key rules that companies like Seagate have to keep in mind to defend their dominant positions in the industry?

 

A. A few reasons that we have been successful would be: Be humble. Even though we are big, we have to be like start-up companies. Listen to our customers, not be arrogant. The first day we are arrogant and don't listen to our customers, we won't be around for long.

The second thing is what we call "time to market". Be the company to be first with the product in the market. If you are third, fourth or fifth, and you let somebody else establish his product in the market, you are too late.

The third thing is vertical integration. Seagate has demonstrated this very effectively though many people had questioned this approach. Vertical integration for Seagate works like this. A company always has to make this decision "Make internal or buy external?". But most of the times we, at Seagate, design and manufacture our products. We are not dependent on any company to manufacture our products.

And I guess the last one would be the quality of management. Some of the senior people in our company have been in the disk drive business for 30-35 years. But I would really emphasise on the first point. You cannot afford to not listen to your customers.

Q. One would have thought that hard disks is primarily a commodity business. Prices keep coming down 40 per cent every year. Wouldn't price competitiveness be a critical issue?

A. There are two things. Some of the products are commodities, and the way to sell commodities is very simple. How do you differentiate yourself ? How do you outservice your competitors? How do you service the market better - in terms of pre-sale, advertising, promotion and then after-sales service? How do we do upgrades? How do you do promotions differently and more effectively?

On the other hand, we do have products that are not commodities. With Internet and World Wide Web, we have a big market for servers. We have products for file servers - for banking networks, military applications etc. Price is not important in such cases. We have a 22GB disk drive. Nobody else has it. In fact, more than 50 per cent of our revenue comes from value-added, non-commodity products.

Q. Is the company moving towards a one-stop shop model for its business? And is this a success formula that is emerging in the IT business? Companies in the routers business, for instance, are also working towards this model...

A. Seagate really started expanding in 1990 - through mergers and acquisitions. In order to expand our product portfolio, we needed technology, and to develop that you need engineers who don't come easy in this business. The mergers and acquisitions allowed us to get more technology and engineers, which allowed us to further expand our product

portfolio.

And I don't think any of our competitors have close to the number of products that we have. It makes it easier for

customers to have a one-stop shop. You don't have to buy from everybody.

In IT, and specifically disk drive business, I believe there will be continued consolidation. The bigger will get bigger. To be successful, you will have to offer a lot of things. You cannot just offer one or two differentiated products. You got to have strong financial capabilities. Without finances, you cannot invest in technology.

Look at the IT companies that have strong financial capabilities and a broad product portfolio. Intel does, and it is acquiring a lot of smaller businesses. Microsoft clearly does; so do Compaq, IBM...And in the last few years, we have seen the pace quicken. Small companies have either gone bankrupt or have been acquired by other companies.

Q. But there is a counter-argument: that with the pace of innovation also increasing, even small start-ups stand a chance today...

A. I will speak more from the disk drive side. In this business, no start-up companies have been successful. I can go through a whole list of companies. The barriers to entry and the ability to get into disk drive business is very expensive today. Seagate invested $1 billion in facilities, plants, robotics... Not many companies can do that. Start-up companies clearly cannot do that.

The other thing is about volumes. We shipped 8 million units from our plants last year. How is a company selling 100,000 products going to compete with us?

Q. But should the same principle apply in high-end, niche markets too?

A. Yes. Particularly, in the high-end business. The hard disk is not the key component. It is the

software. And the companies who are buying the high-end drives want reliability and quality. So basically what I am saying is that in the disk drive business acquiring technological capability is so much more expensive that it

will not allow start-ups to be

successful.

The other thing is that Seagate is very open about its technology. We cross-licence our technology with other people, and if new technology comes up, we either try to acquire that company or try to do engineering work jointly with them.

Q. So this industry is also an example of the theory of increasing returns? Those that are ahead will continue to get ahead...

A. Oh yes. Very clearly. There are two big companies in disk drives - Seagate followed by Quantum. The others are very small. And just last year, we consolidated further by acquiring Conner Peripherals, a $ 2 billion company.

Q. In the IT industry, mergers and acquisitions is also a key strategic weapon...

A. Yes. At Seagate we continue to look at joint ventures, acquisitions or joint engineering work, especially in some of the software companies that we have invested in or acquired. These small companies can do only so much with their revenue base. With Seagate, they can leverage our source channels, our distributors, our technology.

Q. Yes, but such processes of mergers and acquisitions lead to many problems as well...

A. There are always problems in combining companies; in combining ways of doing business but you get through that. We acquired Conner Peripherals - a case of a $6 billion company acquiring a $2 billion company - both companies are pretty big in size, and that means a lot of people. When we combine companies, and are able to create an environment where one respects the other, then things are on track.

To do that, the issues that really need to be tackled are: Who is in charge? Where are we going? What is the big vision? That vision comes from our chairman. Where we are going, what we want to be, today, tomorrow, five years from now. Once you get that vision established, everybody should understand that vision and realise that we have to work as a team. If we say "We" and "They", then there are problems.

The other very important factor why we have been more successful with mergers and acquisitions is focus: staying close to what business you are in. We are in disk drives, we are not a software company, we are not a PC manufacturer. In acquisitions and mergers, we stay in areas that we are good at. If you look at some of the big acquisitions that have not worked, Quaker Oats acquired a beverage company called Snapples. It struggled through that - different cultures, different products, different markets.

We don't venture out of disk drives, related components and software. When we acquired Conner Peripherals, they had a computer division manufacturing file servers. We sold that company. You cannot try to be good at everything to everybody.

Q. What has been the primary reason for Seagate's impressive performance in Asian markets in recent times?

A. Our success in Asia has primarily come from being flexible, understanding that just because we are an American company, we cannot do business any way we want. Each country is different, their requirements are different. Doing business in India would be very different from doing it in China or Japan. One particular strategy, one particular approach may not necessarily be successful. Even though the product may be the same - we sell the same product in India, China, Japan or even the United States - but the way to go to the market, to successfully market the product will be totally different.

We have to be adaptable. And one of things that we do differently in Asia is the way we distribute our products. More than 50 per cent of our revenues in this region come from our distributors versus the United States where more than 80 per cent of our sales are to OEMs. In Asia, we use the distributor who knows the local market, the culture, the language.

We try to understand how we can add more value to our customers, what do customers really want, what more do they need from us. Price is not the only issue. That is not a correct perception. Customers are looking for a lot more than that - service, quality, better products. So we look at distributors as an extension of Seagate. If they are not healthy, we are not healthy.

Q. But going through distributors instead of going directly to the customer adds to the cost. Why has Seagate opted for this approach when other IT companies like Compaq are looking at direct selling, and Dell has been quite successful doing that?

A. In some instances, yes it would add to costs. But Seagate has no intention of copying the direct selling model. It doesn't make sense. Our distributors and dealers are much more efficient than we could have ever hoped - in terms of moving the product, in terms of satisfying the local needs.

And if you look at Dell's model in Asia, they are not going direct. They are selling through distributors. So their model in US works but they needed something different here. In fact, when they went to Europe and used the US model, it proved to be a mistake. Europe is not one country, one language, one culture like the US.

So again, you have to adapt. No one model is going to work everywhere.n

Our success in Asia has come from being flexible, understanding that we cannot do

business any way we want to.