New 3Com President: A Lot More Than NICs

It's been about seven months since IBM Corp. and Digital Equipment Corp. veteran Bruce Claflin took the reins of president and chief operating officer at 3Com Corp. Claflin reflected on his first seven months and shared some of his goals for the company with Network World Senior Editor Jim Duffy.

It's been about seven months since IBM Corp. and Digital Equipment Corp. veteran Bruce Claflin took the reins of president and chief operating officer at 3Com Corp. 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 (network interface cards) 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 percent to 15 percent. 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 percent of our business. So that says that there's another 65 percent 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 percent to 50 percent 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 (Voice-over-Internet-Protocol) 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 percent 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 -- handheld 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 organisation. Supply chain is also going to have a lot to do with our financial success. We today buy about US$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 opportunity is well over $100 million a year in profit opportunity, if we master it. So we're going to build the (supply chain) organisation, 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.

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