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

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History of Quantum Corporation

Quantum Corporation is one of the world's largest suppliers of high-performance 2 1/2-inch and 3 1/2-inch hard disk drives for personal computers, workstations, notebook computers, fax machines, and printers. In addition to its 20 percent share of the 3 1/2-inch drive market, Quantum holds a large segment of the market for storage enhancement devices, with increasing sales of its Quantum DriveKit, Hardcard, and Passport XL. With a comprehensive and highly efficient distribution network in over 40 countries worldwide, Quantum sells its product line to original equipment manufacturers (OEMs), systems integrators, small-scale OEMs, value-added resellers, and retail stores. Through able management, Quantum has established a reputation as a growing, financially stable company in an industry that is well known for its volatility.

Quantum's first president was James L. Patterson, an experienced engineer with an astute business acumen. Making decisions based on a collegial rather than a hierarchical management model, Patterson inspired confidence and a hard work ethic. By 1984, four years after its incorporation, Quantum was leading the market in mid-capacity 5 1/4-inch disk drives, having jumped ahead of Priam Corporation, Micropolis Corporation, and Control Data. Nearly 20 percent of the 473,000 5 1/4-inch drives sold in 1985 were made by Quantum. The company's financial statement reflected its growing leadership position in the disk drive market. From 1984 to 1985, revenues increased from $106.2 million to $126.6 million, a growth of almost 20 percent, and earnings increased from $18.1 million to $21.5 million, a jump of over 18 percent. Without any long-term debt, the company was able to concentrate on developing a new line of 5 1/4-inch OEM products.

The company's revenues remained at the same level in 1986, but production delays with its new generation of 3 1/2-inch disk drives led to a loss of all but two of its customers. Displeased with what they regarded as complacent management, Quantum's board of directors replaced Patterson with Stephen M. Berkeley, the head of the company's subsidiary, Plus Development Corporation. In addition to a new chief executive officer, the board also appointed David A. Brown, a former associate of Berkeley at Plus Development, as Quantum's new president. Realizing that Quantum had fallen behind its competitors in the market for hard disk drives, Berkeley and Brown were determined that their company should take the lead in the industrywide move toward smaller computers. This decision meant that Quantum would have to phase out its production of 5 1/4-inch disk drives in order to concentrate on the 3 1/2-inch disk drive market.

The two men immediately plotted a strategy that was unusual for companies within the disk drive industry. Ordinarily a firm either buys the components it uses to build disk drives or it manufactures its own. Either road has both benefits and liabilities: if a firm buys its components it avoids high fixed costs, but it may run short of parts when demand increases; conversely, if a firm makes its own components, it can outfit production easily to meet an increase in demand, but if demand slows then high fixed costs take their financial toll. Having already established a working partnership with Matsushita Kotobuki Electronics Industries, Ltd., a Japanese firm that had grown into the largest manufacturer of videocassette recorders, Berkeley and Brown hired MKE to facilitate Quantum's entry into the 3 1/2-inch disk drive market. The two companies reached an agreement whereby Quantum took on the responsibility of designing and marketing new products while Matsushita manufactured them. Although the Japanese company had never built a disk drive before, its skills in manufacturing electromechanical equipment had already been proven.

Quantum's arrangement with Matsushita instantly led to benefits for both companies. Matsushita required Quantum to completely redesign and overhaul the manner in which it developed disk drives, which led to the implementation of design by robotic assembly. Although this redesign frustrated some of Quantum's engineers, the end result was more than the company could have hoped for. Since Matsushita spent nearly $150 million in developing automated plants, Quantum derived all the benefits of manufacturing in-house without any of the usual fixed costs. In the Fortune 500 for the first time during the same year. Quantum was Apple Computer's leading suppler of disk drives; Apple used the drives in its newly introduced Macintosh Classic and LC desktop computers. Even though the company continued to ship its disk drives to Apple at the same level through the entire year, sales to Apple actually fell as a percentage of Quantum's total sales, decreasing from 40 percent to 15 percent. Quantum's impressive revenue growth stood on a widening customer base.

Quantum's strong revenue growth was partially due to the introduction of new products and the upgrade of existing ones. The company brought out 11 new models of its 3 1/2-inch and 2 1/2-inch drives and improved its product line of Passport removable disk drives. The company also put a significant effort into reducing the amount of development time for a particular product, cutting the development process from 24 months to 15. The most important element contributing to Quantum's revenue growth, however, was the company's expansion of its distribution network. Quantum signed agreements with Rein Elektronik, a leading distributor in Germany, and Inelco Peripheriques, one of the leading distributors in France. These two distributors provided Quantum with a reliable flow of cash from the European market. The company also merged its Plus Development Corporation subsidiary into its Commercial Products Division. Plus Development, a manufacturer of hard disks on adaptor cards, otherwise known as "hard cards," was reorganized to better serve the growing demands of the distribution network that included retail outlets and computer superstores.

In 1992, Quantum brought in new leadership. Berkeley and Brown, who had directed the company to unparalleled growth and record revenues, relinquished their day-to-day control of operations to the new chief executive officer, William J. Miller, an 11-year management veteran from Control Data Corporation. The momentum that Berkeley and Brown had created continued under the new CEO. At the end of 1992, Quantum's revenues were reported at $1.54 billion, a whopping 43 percent increase over the previous year's figures. The company's increase in net income was even more impressive, from $49.6 million to $84.7 million--a leap of approximately 71 percent. Quantum appeared to be doing everything right.

Yet throughout 1992 and 1993 there were indications that Quantum's market share was eroding, and that companies such as Conner Peripherals, Seagate Technologies, and even cash-strapped Maxtor were carving out a larger piece for themselves. In late 1992, Quantum sales nearly came to an abrupt halt, as the company found itself unprepared to meet the demand for its products. Matsushita, with whom Quantum had contracted to manufacture its product lines, was unable to build the required disk drives quickly enough for the company to maintain its share of the market. Thus, in spite of its increase in revenues, Quantum spent most of the latter part of 1992 and early 1993 expanding its production base in order to meet demand. The new management quickly entered into a long-term agreement with Matsushita that gave Quantum the right to design and market its product line worldwide and gave the Japanese company the right to worldwide manufacturing. The two companies also arranged for Matsushita to build a state-of-the-art plant in Ireland at a cost of $40 million to help Quantum quicken the pace of distributing products throughout its European network.

Quantum's management had corrected the incipient problems, and the company once again achieved record revenues--$1.7 billion by the end of fiscal 1993. Net income for the first nine months of the fiscal year rose an astonishing 128 percent. Sales to original equipment manufacturers, such as Apple, accounted for more than 33 percent of Quantum's total figures. Although Quantum was still heavily dependent on its business with Apple, the company had increased sales to other OEM customers, including AST Research, Dell Computers, Compaq, and Hewlett-Packard.

The company's strategy to increase its worldwide distribution network had also paid off handsomely. Sales from the international sector accounted for over 45 percent of the company's total annual sales, and accounts with such well-known foreign firms as Fujitsu, ICL, Lucky Goldstar, NEC, Olivetti, Peacock, Philips, Sharp, and Siemens assured long-term financial stability. Quantum also decided to improve upon its burgeoning international operations by relocating its European headquarters to Neuchatel, Switzerland. With a new factory in Ireland and an expanding distribution network, Quantum had developed its operations to provide the best possible service and support to its multinational customers.

As of 1994, Quantum's continuing success depended on the development of its product line and its ability to bring these items to market in a timely manner. The company's ProDrive ELS, a low-priced disk drive targeted at entry-level systems, was doing very well, and the 240 ProDrive LPS 1-inch high-capacity disk drive was one of the best-selling products Quantum had ever introduced. Along with its Maverick 270 and 540 AT/S, a high-capacity disk drive for larger systems, and its Daytona and Go-Drive GLS drives for portable systems, primarily notebooks, Quantum was not only keeping abreast of the market in 1994, but continuing to position itself as one of the top companies in the industry. contrast with most of Quantum's competitors, over 95 percent of all the disk drives built on Matsushita assembly lines needed no reworking. This efficiency meant that Quantum had one of the highest gross margins in the entire disk drive industry--even after what was paid to Matsushita.

Quantum's leadership was correct in anticipating a quick rather than slow transition toward more compact drives. Not surprisingly, the company's efforts to create the new generation of 3 1/2-inch disk drives resulted in record sales. In 1989, Quantum increased its revenues to $394.2 million and reported a net income of $41.3 million. These figures catapulted Quantum to the top of the compact drive market. The company's contract with Apple Computer Inc. significantly helped it achieve its leadership position. At the time, approximately 40 percent of company sales were going to Apple, which used Quantum's 3 1/2-inch ProDrive in its Macintosh SE30 and Macintosh IIcx computers. Other firms that bought Quantum disk drives included Sun Microsystems Inc., Hewlett-Packard, and Next Inc.

In 1991, Quantum passed one of its most important milestones--revenues of over $1 billion. Revenues increased an amazing 50 percent over the previous year, the amount totaling $1.07 billion. With its burgeoning revenues, its focus on quality control, and its efficient distribution network, Quantum was also listed in the ranks of

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Further Reference

Catalano, Frank, "James L. Patterson: The Drive to Succeed," Electronic Business, April 1, 1986, p. 50.Hof, Robert D., "Quantum Has One Tough Hurdle to Leap," Business Week, July 8, 1991, pp. 84-86.Lindholm, Elizabeth, "'Quantum Corporation,' The Datamation 100," Datamation, June 15, 1992, p. 86.

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