EMC Corporation - Company Profile, Information, Business Description, History, Background Information on EMC Corporation

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Hopkinton, Massachusetts 01748-9103

History of EMC Corporation

EMC Corporation is a leading supplier of data storage systems for mainframe computers. The company markets devices that use multiple inexpensive storage disks, linked together by special software, to allow large volumes of information to be retained and manipulated. EMC was started in the late 1970s, and grew rapidly through aggressive sales practices. In the mid-1980s, the company experienced some trouble with its technology, but regained a leading place in its industry in the 1990s through the early introduction of a new generation of computer memory technology. In 1994, EMC founder Richard J. Egan was named the "National, Master Entrepreneur of the Year," an award sponsored by Ernst & Young, Inc. magazine, and Merrill Lynch, for his lifetime achievement as an entrepreneur.

Egan began his career as an electrical engineering student at the Massachusetts Institute of Technology (MIT). While there, he worked on a team that helped to develop a guidance system for the Apollo lunar mission. The device designed by Egan's team helped the space capsule to return safely to earth after landing on the moon. After graduation from MIT, Egan founded a company called Cambridge Memories, later known as Cambex, which manufactured storage devices for computers. Under Egan's leadership, this company's revenues grew into the multi-millions.

After leaving Cambex, Egan worked as a technical consultant to other big computer firms, such as Honeywell. In 1979, he founded EMC. Like Cambex, EMC's main product was devices that allowed computers to store information. Egan created circuit boards that could be installed in popular computer models, in order to dramatically increase a pre-existing computer's memory. In this way, EMC's products were able to extend the life of mini-computers, allowing users to upgrade and keep on using old equipment, rather than having to buy a new machine.

Rather than put EMC's main emphasis on research and development, or engineering expertise, however, Egan focused the company's energy on sales. To fill out his staff, he recruited bright young college graduates who had played competitively on sports teams in school. In addition, to foster team spirit and competitiveness in his salesmen, Egan set up EMC's sales offices in a bullpen configuration. Different sales regions were designated by pennants, which indicated the relative standing of the regions. In the center of the room, a brass bell was hung. Anyone who gained an order of $10,000 or more got to ring the bell. In contrast, EMC also strove to keep costs down in its engineering and technical support divisions.

In the early 1980s, such decisions brought EMC rapid growth, and the company became the subject of a case study used by students at the Harvard Business School. The company's sales and profits continued to grow through the middle of the decade. By June 1985, however, EMC's continued success had attracted the unfavorable notice of a competitor, and the company was sued for patent infringement by the Digital Equipment Corporation (DEC) which also made memory boards. This suit was eventually settled in October 1987, when EMC was granted a license for the DEC technology in question, and in January 1989, EMC paid DEC $100,000 to settle the legal action.

Shortly after this suit was filed, EMC added to its product line again, as the company introduced new four- and eight-byte memory cards in July 1985. In August of that year, the company also augmented its offerings for the Hewlett-Packard 3000 computer.

In May 1986, EMC announced that it would offer stock to the public for the first time. The company planned to raise capital by selling 2.2 million shares. Five months later, the company announced that it had formed a new unit, Network Intelligence, Ltd., to develop software that would seek out and remove defects in local area network programs. At the end of the year, EMC reported record profits of $18.63 million.

EMC then expanded the market for its products, when Marubeni Electronics began to sell EMC memory boards for upgrading existing computers in Japan. In addition, EMC continued to introduce new products, announcing that it expected the bulk of its future growth to come from products designed to enhance the memory of large-scale and mid-range computers.

Toward this end, EMC introduced a new class of products, disk drives, in mid-1987. The company rolled out a disk drive and controller for use in IBM 9335-compatible machines in June of that year, and, two months later, introduced an optical disk subsystem for use in DEC VAX computers, which boosted the storage capacity of these machines, as well as a similar system for use with machines built by the Prime Computer company. Next, EMC augmented its line of disk drives for computers made by other companies yet again, when it rolled out a product designed to be used in Hewlett-Packard RISC-based Spectrum computers.

Pushed by these new products, EMC's sales took a giant leap in 1987, as sales gained 90 percent over the previous year, to reach $127 million. Profits had grown to $24 million, and EMC was named the seventh hottest growing company in America by Business Week magazine. Over the course of early 1987, the company's stock hit a high of $29 a share.

By September 1987, however, EMC had hit a snag, as its new line of disk drives, which contained a small, inexpensive circuit board made by NEC Corporation, proved to be defective. When problems with the drives arose, EMC's response was to ship out new disk drives to customers through overnight mail. Because the replacement drives, which were much more expensive, were bulky and delicate instruments, they had to be delivered and installed by an EMC employee. In order to make this possible, the company was compelled to maintain inventories of the replacement drives at all of its 23 regional sales offices. In addition, its small staff of service representatives was severely taxed by the glut of problems.

As a result of these conditions, EMC's cost of doing business rose dramatically. The company's low-overhead philosophy, which had kept its investment in technical and service areas low, meant that the company was not well prepared to cope effectively with the crisis of its defective disk drives. By the end of April 1988, EMC's results had started to show the impact of this situation, as earnings over the previous three months dropped from $5.8 million to $1 million, despite the fact that sales rose by 57 percent. This reflected the fact that EMC felt compelled to keep shipping the problem drives, even after difficulties with the product had been identified, in order to keep up with sales targets.

EMC, which had experienced smooth sailing up until this point, came in for criticism as a result of these problems. The company's investors claimed that they had been kept in the dark and not notified early enough by EMC management about problems with the disk drives. "The company is in the doghouse," one financial analyst told Business Week, as the price of EMC's stock plummeted to $7 per share, half the level it had been in the wake of the stock market crash of 1987. "Their engineering and technical support is something they always skimped on," a competitor observed in Business Week.

In response to the difficulty with its disk drives, EMC's management made a number of changes. The company located two additional suppliers for the defective part made by NEC, and it also tried to beef up its engineering division. Responding to criticism that the company had focused on sales to the detriment of quality, Egan admitted that EMC should have tested the drives more thoroughly before shipping them out. In June 1988, EMC announced that it would raise the price of its products by five to 15 percent, due to the cost of the computer chips they housed. In addition, EMC brought in a new president and chief executive officer, Michael Ruettgers. "We had some serious quality and service problems," this executive later told the New York Times, adding "We were overwhelmed."

As EMC attempted to respond to the problems its rapid growth had engendered, the company continued to augment its product line. In October 1988, EMC brought out a new magnetic disk subsystem for use in DEC VAX machines. One month later, the company also introduced a solid state disk drive for use in IBM 3080 and 3090 model computers.

Despite the contribution of these new products, EMC's disk drive problems continued to plague the company, causing EMC to report a net loss for 1988 of $7.82 million. In January 1989, EMC responded to its falling financial returns by cutting costs, as the company reduced its staff by one-third, letting 60 people go. This move was part of a larger shake-up directed by EMC management in the company's sales and engineering operations.

Two months later, EMC introduced another new product, in an effort to shore up its sales. The company's latest disk drive offering was designed to be used with computers manufactured by the Wang company. Four months later, the company made a large sale, signing an agreement with Storage Technology to supply $100 million worth of EMC's solid state memory storage subsystems for resale. These products were designed to be used with IBM-compatible machines.

In October 1989, EMC also announced plans to market a new generation of memory boards that relied on a larger chip. This effort was part of the company's overall strategy of moving into new markets, with a new class of products. By the end of 1991, EMC was able to report improved financial results, as the company returned to profitability, with earnings of $2.7 million.

During this time, EMC's efforts to roll out new products started to bear fruit, as it announced the introduction of a new IBM-compatible disk system based on a 24-gigabyte computer chip, that used RAID technology. RAID, which stood for "redundant arrays of inexpensive disks," used a large number of small, commonly manufactured disk drives, such as the hard drive found in many personal computers. These separate memory cells were linked by special software to provide fast, reliable storage of very large quantities of data. This type of storage system contrasted with the product of EMC's main competitor, IBM, which relied on a single, complex, expensive disk drive for computer memory. With its RAID technology, EMC entered the field that would provide the bulk of its growth in the first half of the 1990s.

As EMC began to roll out its new line of products, the company's financial fortunes continued their improvement. At the end of 1990, EMC reported sales up 30 percent from the previous year, to $171 million, yielding earnings of $18.2 million. "EMC was on a roller coaster in the 1980s," one analyst told the New York Times, noting that "They're a more mature company today."

With that maturity, however, came further legal troubles. In November 1990, EMC lost a court battle with Cambex, Egan's first firm, over trade secrets involving add-in computer memory upgrade boards for use in the IBM 3080 model line. The company was ordered to pay Cambex $2 million. One month later, in December 1990, EMC announced that it would appeal this verdict.

In addition, in March 1991, EMC and two other computer companies were sued by the IBM Credit Corporation, the branch of IBM that leased large computers. IBM charged that EMC had misappropriated IBM Credit property by removing original parts and replacing them with others when it upgraded computers rented by IBM leasing customers. When customers returned the computers they had rented from IBM, they did not contain the same parts they had when IBM sent them out. EMC maintained that the suit was simple harassment over a practice that had long been permitted.

EMC continued to roll out new products for use with IBM computers. In March 1991, the company announced that it would incorporate software made by the Midrange Performance Group that performed minicomputer analysis. One month later, EMC also began shipping a new subsystem based on the IBM 9336 midrange disk drive.

EMC then completed an agreement with Sun Data that allowed this company to resell EMC memory products to its IBM AS/400 clients. EMC also launched a tape storage unit with a plug that made it compatible with IBM computers. By the end of 1991, these efforts had succeeded in pushing EMC's revenues even higher, as the company notched sales of $232 million, a rise of 35 percent. From these sales, EMC earned $11 million. This also represented a significant jump in net income of 47 percent. In response to these results, the price of the company's stock began to rise as well.

These gains continued in 1992, as EMC completed a $44 million two-year contract with Unisys to sell its new disk drives. The company also completed an alliance with Cambex, its former rival, to license technology for enhancing mainframe computer memory.

Overall, EMC enjoyed a strong lead in the race to implement RAID technology. Although one other competitor had announced an intention to enter the field, glitches in its technology had held up the marketing of its product, and EMC was able to enjoy a virtual monopoly. This circumstance allowed the company to make significant progress in stealing market share from IBM, which dominated the mainframe data storage market. "We've been unplugging IBM mainframe storage and installing EMC, and the choice is almost a no-brainer," one EMC customer told the New York Times.

In May 1992, EMC became embroiled in another legal dispute, after IBM released a statement to the press attacking EMC. The company sued IBM and IBM Credit for libel in the press release. At the time, EMC also announced that it was seeking an advertising agency to launch a $1.5 million campaign promoting its products.

One of EMC's primary advantages in competing with IBM was the small size of its products. In some cases, EMC storage devices took up one-seventh of the space of an IBM machine of equivalent capacity. In addition, EMC's practice of designing its own software linking together the parts of its storage devices, while relying on easily purchased parts from other manufacturers for its hardware, gave the company great flexibility. As advances in technology took place, it was easy for EMC to incorporate new products into its offerings. "We're riding a performance curve that is moving exponentially," an EMC software designer explained to the New York Times.

In the fall of 1992, EMC announced a new generation of disk storage products, predicting that this advance would power a dramatic increase in its revenues. The company's Symmetrix 5500 model, like earlier models, relied on RAID technology to store information quickly and reliably, backing up all data on more than one disk. EMC's new technology offered a 60 percent greater capacity than previous systems. The Symmetrix unit was designed to cost from $865,000 to $2.8 million. EMC completed 1992 with another big gain in sales, as revenues rose to $385 million, and profits more than doubled to reach $29 million.

Two months after rolling out its new Symmetrix line, EMC announced that it had clinched a $10 million contract with Delta Air Lines to install a Symmetrix system. By June 1993, EMC had sold more than 2,000 units of the Symmetrix system. Although EMC's memory system was more expensive than an equally large system produced by IBM, it could enable mainframe computers to perform some functions twice as fast. "We have a two-year lead over IBM today," EMC's chief executive, Michael Ruettgers told Business Week.

In August 1993, EMC, flush with the revenues generated by enormous sales of its Symmetrix system, began to purchase other computer companies. EMC bought Epoch Systems, Inc., as well as the Magna Computer Corporation, for about $118 million. At the end of that year, EMC reported that its revenue had reached $782 million, as income more than tripled to $127 million. On the basis of these results, EMC entered the Fortune 500 rankings for the first time.

Early in 1994, EMC acquired another company, purchasing the assets of Array Technology from Tandem Computers. As revenues and earnings continued to grow at a breakneck speed, EMC predicted that its sales would top $1 billion by the end of the year. Despite its somewhat rocky past, EMC appeared to be well-situated to thrive in its highly competitive industry in the coming years of the 1990s.

Principal Subsidiaries: Copernique, S.A. (France); EMC Asset Acquisition Corporation; EMC Computer Storage Systems France; EMC Computer Storage Systems Ltd., (Hong Kong); EMC Computer Systems K.K. (Japan); EMC Computer Systems Ltd. (United Kingdom); EMC Computer-Systems Deutschland GmbH (Germany); EMC International Holdings, Inc.; EMC Securities Corporation; EMC System Peripherals Canada, Inc.; Epoch Systems, Inc.; Magna Computer Corporation.

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Further Reference

Helm, Leslie, "How a Hot Company Overheated," Business Week, May 23, 1988, p. 126.Verity, John W., "The Midgets, the Mammoth, and the Mainframes," Business Week, June 7, 1993, p. 31.Wilke, John R., "Little EMC Challenges Leader IBM in Data-Storage," Wall Street Journal, July 9, 1992.

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