netapp case study 2009 stanford

8/10/2019 NetApp Case Study 2009 Stanford

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CASE: IB-89DATE:10/28/2009

Sara Gaviser Leslie prepared this case with Professor William Barnett as the basis for class discussion rather than toillustrate either effective or ineffective handling of an administrative situation.

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NETAPP AND THE CHALLENGE OF GLOBAL LEADERSHIP

When we hire a new top manager for a country, we say to them, Heres the technology, heres the

budget. You go make it happen. Find out the partners, determine the target customers, sort out

all the rest ofthe pieces, and make it work. When you have the right person in a position, they

figure it out.1

Dan Warmenhoven, Executive Chairman, NetApp

I

NTRODUCTION

By 2009, NetApp, a fast growing innovator in the storage and data management market, hadbecome successful both in the U.S. and around the world, with revenue of over $3.5 billion.Company management and industry analysts attributed this success to a combination of greatproducts and a culture that deemphasized hierarchy and put responsibility in the hands of itsemployees. Fortunenamed NetApp the Best Company to Work For in 2009, as the companysleadership saw its approach to business succeeding worldwide. As one employee explained, theworkers were motivated to ask questions, share ideas, meet company leadership, and test newconcepts:

I have been given lots of freedom to implement my ideas to make things better

and also am able to make decisions in order to get the job done. [The] mostimpressive thing I find about the company is the open door culture. This companyis unique, in my experience, for avoiding the politics and empire building typicalin growing companies this size,and fostering an environment where cooperationis the expected and actual norm.2

NetApps entrepreneurial management style was particularly evident outside the U.S. Leaders indifferent geographies (GEOs) were given the autonomy to determine how NetApp wouldfunction in their respective markets. In many cases, individual leaders were able to translate

1

All quotations are from the authors interviews, except where noted.2 A Great Place to Work Institute, Inc., http://www.greatplacetowork.com/best/100best-2009/100best2009-

netapp.php,(August 5, 2009).
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NetApp and the Challenge of Global Leadership IB-89 p. 2

successes in their markets into product and design changes throughout NetApp. One could pointto success in several markets, Germany and Australia in particular, as evidence of suchinnovation.

Japan, however, was an enigma for NetApp. The company entered Japan in 1996, just as it was

becoming a force in several markets worldwide. Yet by 2009, NetApp still did not have a directrelationship with its customers in Japan, and so had to work through partners that, in turn,controlled the relationship with end users.

Although Japan was a difficult market to enter for most firms in the storage and datamanagement space, NetApps lack of success there perplexed its corporate leadership. DanWarmenhoven, NetApps long-serving CEO in 2009, knew from experience that NetAppsproducts could measurably improve the efficiency of Japanese companiesat a time wheneconomic conditions were driving firms there to look for just such efficiencies. After severalyears of lackluster performance in Japan, Warmenhoven and his team decided it was time for achange.

BACKGROUND ON NETAPP

3

NetApp was founded in 1991 when Mike Malcolm, a professor of computer science, formed ateam with two former coworkers, engineers James Lau and Dave Hitz. The three set out todesign and sell dedicated file servers, devices that manage the movement of data within andamong computer systems. Malcolm served as CEO until October 1994, when the board hiredTom Mendoza to build a direct sales force and Dan Warmenhoven as CEO to take the companyto the next level.

Primarily, Warmenhoven and the companys executive team focused on the strategy of sellinghigh-performance, multi-protocol file servers through a direct sales force to data-intensivecustomers.4

The product

sometimes affectionately referred to by customers as a toasterbecause of its simplicity and specializationwas designed to require far less on-site service andfewer support personnel than most competing products. This quality allowed NetApp to growexceptionally fast, once the direct sales strategy was in place. NetApp went public in June 1995,offering 2.7 million shares on the NASDAQ. In the wake of these decisions, the company grewrapidly and profitably throughout the last half of the 1990s and the early 2000s as datarequirements exploded worldwide.

Becoming an Enterprise Focused Company

While NetApps initial customers were technical buyers, as early as 1995, Warmenhoven

foresaw the need to move the company into the so-called enterprise space where very largecorporate customers required that IT providers turn technological products and services intocomprehensive business solutions. This made it necessary for the companys product

3Much of the background information on NetApp is taken from a series of Stanford GSB case studies on the

creation and growth of the firm in the U.S. (case number E55 A through D).4Multi-protocol in this instance refers to the file servers ability to operate in both a UNIX and a Windows NT

environment.


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development and manufacturing efforts to become more focused on the enterprisewithemphases on flexibility, working with large-scale company-wide computer systems, rapiddeployment, and ease of use.

Meanwhile, EMC Corporation, the companys largest competitor by the late 1990s, had already

been focusing on the enterprise and was able to sell multi-million dollar contracts to senior-levelexecutives at Fortune 500 corporations worldwide. NetApps management believed thecompany had what it took to compete at that level.

In order to successfully shift towards selling to enterprise customers, in the late 1990s, NetAppattempted to expand beyond technology customers into a small number of high-potential marketssuch as financial services. NetApp packaged and sold its products and services in a manner thatwas more tailored to the enterprises within each such vertical. The technology market crash of2000 then accelerated NetApps expansion into other verticals, particularly in the U.S. Movingto the enterprise space also positioned NetApp for bigger revenue possibilities. The performanceof the company reflected both the growth in the storage market as well as the greater

opportunities that existed in the enterprise space worldwide. (See Exhibit 1 for NetApps marketshare growth.)

MANAGING THE GLOBAL ENTERPRISE:THE NETAPP APPROACH

Though NetApp was headquartered in the U.S. (Sunnyvale, California), its corporate leadershipfelt that international sales would be critical to its success. In 1998, North America accountedfor 60 percent of sales, while the remainder was split between Europe/Middle East/Africa(EMEA) with 30 percent and Asia Pacific (APAC) with 10 percent.

The NetApp culture of collaboration, recognition of individual contributions, openness, andrespect for creativity was the glue that bound the GEOS to headquarters. One manager

commented that regardless of where you are in the world, you can tell when you enter a NetAppoffice. The company had taken seriously the advice of Don Valentine, the chairman of the boardof directors, when he told management, You should have a different strategy in each country,but you need to have the same culture globally. You need to have NetApp in Japan and NetAppin France, not a Japanese or a French NetApp. Headquarters strongly influenced the U.S. salesteams but allowed the GEOs to have an outpost mentality. Tom Mendoza, who craftedNetApps international expansion as company president, explained:

We develop our corporate goals together with our leadership worldwide.However, the GEOs dictate their strategies because they live and die by the salesgoals they set. They own the numberI critique it but they own it. I cant go to

them and say, Run my strategy because its their number to make and theirstrategy that will get them there.

International Sales Strategies

NetApps worldwide competitors were identical to those it faced in the U.S.: EMC, IBM,Hewlett Packard and, to a lesser extent, Fujitsu and Hitachi. The technological computingenvironments of NetApp customers were also the same, regardless of a customers location. As


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Warmenhoven explained, In the IT world, everythings absolutely uniform. Everybodysrunning Intel architectures and Microsoft, Oracle, SAP and Exchange. Theres nothing uniqueabout these markets in the sense of the framework were selling into.

Despite these technological similarities, business practices, key product offerings, and channel

partners varied by market; NetApp could not simply extend its selling model internationally.The leadership of two of the most successful global markets, Australia and Germany, wereintegral to NetApps becoming a leader with local storage software buyers. However, theydiverged from the U.S.s sales leadership in two important ways: they focused on enterprisesales earlier than did the U.S., and they pursued channel-based sales strategies rather than purelydirect selling. Additionally, they allowed customer needs to drive product development andsales rather than simply selling the existing NetApp products.

Determining Market Entry

To determine whether or not to enter a specific geographic market, management looked to themarkets anticipated return on investment (ROI). Warmenhoven stressed that a market needed to

have all the fundamental prerequisites in place to be able to reach an ROI at the corporateaverage or better, over a foreseeable period of time.

Once management determined that a country was worth entering, it developed a business plan.These plans varied by country. The initial investment was usually small and, if successful, led toa greater investment. This pace of investment allowed the company to explore new geographies,and gave country leadership the ability to discover what worked in a given part of the world priorto scaling the business. As one manager put it, the company would throw a few seeds out andsee what grew.

Leadership in a new geography was especially important because of the companys exploratory

approach to new market entry. Since corporate leadership in Sunnyvale was not familiar with theintricacies of many of the worlds markets, they looked for a leader who had both the marketexperience and entrepreneurial drive to head up the venture. Warmenhovens people-centricmodel put new hires in control from the beginning:

When we hire a new top manager for a country, we say to them, Heres thetechnology, heres the budget. You go make it happen. Find out the partners,determine the target customers, sort out all the rest of the pieces, and make itwork. When you have the right person in a position, they figure it out.

Country executives shared a drive to succeed in their respective geographies and the conviction

to pursue what was right for their particular environment

despite the inevitable objections fromcorporate. International sales managers felt they had the support of NetApp corporate, withoutreceiving specific directions from Sunnyvale. As Warmenhoven remarked, We gave a lot ofautonomy to the heads of the various GEOs around the globe to figure out how to optimize thebusiness in their zones. The companys experiences in Germany and Australia are notableexamples of this process.


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NETAPP IN GERMANY

Andreas Koenig, also known as Andy the King, typified the kind of person NetApp needed tolead its German organization. Warmenhoven singled out Andreas Koenig as the mostinnovative in assessing his market and our portfolio and making them work together. Koenigjoined NetApp in 1996 to run Germany, Austria, Switzerland, Eastern Europe, the Balkans, andthe Middle East. At that time, the company had only five people in Europe and the sales strategywas 100 percent indirectas was typical in European technology markets.

During the mid to late-1990s, NetApp in the U.S. was selling largely into the high-tech marketand Internet providers; those markets were inaccessible to NetApp in Europe due to the lack ofactivity and customer relationships. Accelerating growth under these conditions was a challenge.As Koenig explained, Getting people involved was a nightmare. There was no infrastructure Icould rely on, even from the States. No e-mail, no telephone, and no international pricing lists.

Europes Early Focus on the Enterprise

Koenig and his team turned to the enterprise customers he had known previously while he was afield sales representative at Silicon Graphics. However, Koenig did not have access to servicessupport from NetApp. Fortunately, NetApp lived and died by its mantra, fast, simple, andreliable; once installed, NetApp products did not require much technical support.

Koenig responded to customers needs for perfection. One product designed to meet these needswas MetroCluster, a disaster recovery solution that combined high availability and disasterrecovery within a campus or metro area. For instance, if a customers CAD/CAM (computeraided design/computer aided manufacturing) system crashed, NetApps product made itunnecessary to do a file system check and a data save and restoration over the weekend. WhenKoenig pitched MetroClusters data recovery and backup attributes to the Swiss stock exchange,

he hit a nerve. The representative turned to him and said, Youre just explaining to me lastweekend. This conversation led to a $1 million deal and an important early reference sale inEurope.

Since Koenig and his team were focused on the enterprise market from the beginning, theypenetrated the database management systems market earlier than did NetApp North America.5

Corporate headquarters, because of its business in the high tech and internet service providermarkets at the time, had yet to release new features that Koenigs enterprise customers needed.Nevertheless, Koenig needed to hire additional personnel with expertise in SAP and database aswell as specialists from HP cluster companies. He initiated several engineering projects, such asMetroCluster, to make NetApps products more suitable to the needs of enterprise customers. As

a result, by 2008 Germany became the largest geography where NetApp could claim number onemarket shareeven ahead of EMC. MetroCluster enabled NetApp in Germany to compete withEMC in one of the worlds most competitive environments.

5 The database management systems market included customers such as SAP or Oracle that provided their

customers with sophisticated data management capabilities. These firms integrated various technologies in theprocess of providing systems, services, and support to their customers. These systems typically involved a great dealof storage technology, provided by companies such as NetApp and EMC.


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Koenigs success in the enterprise space did not go unnoticed. Tom Georgens, who would takeover as NetApp CEO in 2009, heard great things about MetroCluster from European customersupport and concluded that it was the most important product NetApp had in Europe. Thoughthe corporate engineering department had initially pushed back on European requests to developthe product, it supported Koenigs employees by training them on products and, eventually,

embraced MetroCluster.

Developing European Services and Channel Partners

As Koenig continued to develop the enterprise business, he found customers there to be moredemanding of service. Fast, simple and reliable did not meet the needs of the less technicalenterprise customers. As Nick Thurlow, NetApps vice president of EMEA sales explained,enterprise customers did not want to trouble-shoot problems. Their instructions to NetApp were,Make it work and keep it working. Dont let it stop, just tell us how much to pay. Koenigwent so far as to put two of his systems engineers on standby as professional service engineers inorder to win business.

European customers also were more insistent on using value added resellers (VARs) in the salesand distribution process than were customers in the U.S. VARs were especially valuable sincethey typically were seen as trusted partners and brands by customers. NetApp had weak brandrecognition in Europe and had made minimal investments in Germany; it needed channelpartners to meet its sales goals.

Developing the ChannelEuropean operations relationship with the channel was different from that in the U.S., both interms of working arrangements and compensation. Koenig explained, Every sales rep could usethe channel without penalty. We believed that using the channel only worked if you allowedyour sales team to use it as an extended sales force. Koenigs reps goals varied based on the

customer and market, and included using the channel. In the U.S., by contrast, reps were paid acertain percentage on every dollar sold and the channel was excluded from compensation. Whileincluding the channel would seem to make it more expensive to pay commissions, Koenig set uptargets in such a way that they included the channel from the beginning. As a result, the channelbecame neutral to the commission.

Koenig was prepared to take drastic steps to make the economics of the channel work inNetApps favor, no matter what the market demanded. For instance, in 1996 and 1997, hecreated a Germany-specific price list, with list prices 60 percent or higher than those on the U.S.NetApp price list. This enabled him to offer discounts to customers in the 50 percent range, aswas the norm in the German market, while still adhering to company policy of not offering more

than a 20 percent discount (below the official NetApp price list). As Warmenhoven explained,Koenig did whatever he thought necessary to gain share.

Since the indirect channel in Europe was growing two-and-a-half times faster than the directbusiness, Koenigs strategy accelerated NetApps sales in Europe. He explained, The channelgave us a revenue stream we could count on. The longer you worked with the channel partner,the more enabled he was, the more he knew how to sell, and the more people you had on thestreet selling your product.


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Koenig found that the channel worked best when coordinated with the direct sales team. In2001, he was initiated a high touch model for working with the channel. This model involvedNetApp taking responsibility for creating brand preference with the end user rather than turningthe entire relationship over to the partner. NetApp introduced the customer to the company, theproducts and technology, and the value of the solutions. Despite the fact that deals involved

partners, NetApp maintained a relationship with the customers around requirements and futureexpectations.

FujitsuNetApps most successful partner relationship was with Fujitsu. Their partnership was involvedin approximately 25 percent of NetApps deals in Germany, representing approximately 50percent of the areas revenue. NetApp was involved in the Fujitsu deals that had the most salespotential, but let Fujitsu take the lead on the less potentially lucrative transactions.

Koenig managed the partnership with Fujitsu carefully. He brought in Tom Mendoza fromNetApp corporate to participate in meetings with Fujitsu in order to signal the partnershipsimportance. He also invited Fujitsu chief information officer to speak in front of the NetAppteam and made sure that NetApp corporate understood the importance of the partnership toGermany.

In the first year of the relationship, NetApp set a target of $10 million in sales with Fujitsu.NetApp sold the deals, the largest being Deutsche Telecom, while Fujitsu provided technicalsupport. After Fujitsu grossed $20 million the second year, Koenig put them together with SAPand they created a solution called FlexFrame, which was the genesis of a much biggerrelationship. By 2008, sales through this partnership reached approximately $180 millionannually.

In addition to promoting faster growth, this channel gave NetApp access to markets andcustomers that were otherwise out of reach, as well as connections to executive-levelmanagement among customers. While NetApp sold part of a solution, partners consulted oneverything from servers to software to storage to switches, and also provided technical support.This strengthened the combined sales effort raised NetApps profile in the market and, in turn,allowed it to compete head-on with arch-rival EMC.

To win in competition against EMC required that NetApp continue to build both its channelpartners and its own professional service organization in Europe. The company looked for thebiggest EMC customers like Siemens, Deutsche Telecom, BMW and others. By partnering withFujitsu, they were able to win over such customers from their rival.

Koenig credited NetApps willingness to let European-based sales professionals drive thebusiness with influencing his own success. While corporate did offer a plan on headcount andrevenue goals, the lack of oversight gave Koenig and his team immense flexibility. Heconcluded, If I were to ask someone to start up a company, I would really advise them to do thesame thing. Give them as much authority as you can so they can determine what is needed forthe market.


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NETAPP IN AUSTRALIA

A maverick individual also drove success for NetApp in Australia. Simon Green began workingwith NetApp in 1997 while working at an Australian VAR, and became a full- time employee in2000 when NetApp bought the company.

NetCache, a product NetApp obtained through an acquisition, greatly aided NetAppspenetration in Australia. Since telecommunications companies in the country were trying tobuild out their Internet services rapidly against a backdrop of expensive bandwidth, theNetCache product had tremendous potential value because it dramatically reduced bandwidthrequirements. Green explained how companies that implemented NetCache saw a return on theirinvestment in only 29 days:

NetCache took off in Asia, and it took off in Europe to some degree. ButAustralia really opened up the market. The telcos were literally dying without it.The costs of bandwidth were crippling them. NetCache made it possible to storesignificant information without having to traverse international lines.

Although small in absolute terms, with sales growing to $8 million from 1997 to 1999, theNetCache business amounted to 80 percent of NetApps business in Australia and helped thebusiness get off the ground.

Similar to NetApps experience in Germany, once NetApp Australia dug deeper into theenterprise, clients began demanding professional services. In 2001, Green explained, NetAppAustralia started to ramp up its services business:

We had to survive by talking to enterprise customerstelcos, financial servicescompanies, oil and gas companies, and others. They needed people to help themwith implementation so we started providing service by building it off our ownbacks. We would carve money out of transactions and go hire people to deliverservice. We were doing that independent of the guidance from headquarters.

Despite the investments that Green and his team were making in service, they were still able tomaintain gross margins in the mid to high 60 percent level. As NetApp moved from the low endof the market into the enterprise space, its competition with EMC intensified.

Telstra and the Shared Storage Model

The turning point for NetApp in Australia occurred in 2002 when Jeff Smith arrived at Telstra,

the countrys largest telecommunications firm. Smith had worked with Simon Greenscolleague, Peter Mulloy, when Mulloy was at Computer Associates. Though he was interestedin NetApps technology, Smiths main reason for choosing NetApp was his admiration for thecompany. In Smiths words, he wanted to build and rebuild Telstra based on companies weaspire to be like, and NetApp is one of those companies. Smith took the risk of putting NetAppinto an Australian billing application where NetApp had no track record.


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Smith was impressed by NetApps product deployment and asked NetApp to build a new-generation storage model for Telstra. Eventually named the Shared Storage Framework, thisproduct provided a way for Telstra to act as an outsource provider of storage to all of its businessunits. (This kind of technology was known more generally as a utility storage model.)According to Mulloy, the main impetus in developing the Shared Storage Framework was to

reduce costs and to prevent Telstras internal technology groups from building a storage solutionfor every department. NetApp increased storage utilization from 30 percent to 65 percent, andactivation time how long it takes a client to get access to additional storage decreased fromweeks to hours. Founder Dave Hitz explains the logic at work:

In the old model, a user says what they need, and then you put in a purchase orderfor the new equipment and look for a place in your data center to put it. Thatwhole process could take weeks or months. In the new world, you always runwith a bit of excess capacity, and when someone wants some, you just configure itfor them and point them at it. And if your utilization gets unconfortably high, youorder some storage, but that happens in the background -- user doesn't have to

wait.

So it was that Warmenhoven called Smith a visionary CIO five years ahead of his timein building a utility storage model.

Bringing the Shared Storage Model Back to CorporateTelstras shared storage model won the 2005 Global Innovation Award in the enterprisecategory. Convincing headquarters that it made sense to productize the solution, however, wasstill necessary. Though NetApps worldwide product development and product managementwere relatively centralized, the GEOs could request that centralized development create a featurespecifically for a market other than the U.S. However, most customers in the U.S. market werespending their storage budgets on other storage architectures: Australias Green had to convincethe corporate team that Internet protocol storage area networks (IP-SAN), the architecture behindthe shared storage model, would be the next big thing for NetApp:

So all of a sudden, theres a market there (for IP-SAN) but you havent gotcustomers asking to purchase it. Corporate management kept telling me, Youknow, customers arent asking for it. I said, Well, gee whiz. Thats why werein sales. When we went to market in 94 and 95, there wasnt a market callednetwork attached storage (NAS) and customers certainly werent asking for it.We had to go out and sell it.

Not only was Green pushing the envelope on product evolution but he was also attacking a

market that had a greater potential growth rate than the alternative architecture, FC-SAN, (fiberchannel SAN). IP-SAN was also more profitable than fiber channel; gross margins in the IPSAN space were 60 percent, while fiber channel storage reached only the 10-20 percent range.6

6Telstra grew from about $4.5 million in revenue in 2002 to approximately $60 million in 2008. In 2008, Telstrawas a top-three account for NetApp.


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For all its success in the U.S., Europe, and Australia, NetApp found it much more difficult tosuccessfully penetrate the Japanese market. In this, NetApp was not alone. Most firms in thestorage and data management space, including arch-rival EMC, found Japan to be a difficultmarket to crack. Yet it was a huge market with great potential just the kind of market that anentrepreneurial company might see as a worthy challenge.

CHALLENGES OF THE JAPANESE MARKET

According to the U.S. Commercial Service, Japanese society is complex, structured,hierarchical and group-oriented.7

The Japanese typically have a commitment to maintainingharmony and avoiding direct confrontation whenever possible. This is in stark contrast toNetApps culture, where participation is encouraged from all levels of the organization andengaging in open dialogue is customary.

Rather than using the direct sales model that dominated business in Australia, much of thebusiness in Asia was done through partners and focused on engineering applications, notenterprise solutions. Additionally, customers were wedded to specific partners. Green, as

NetApps Asia-Pacific vice president, found that the only way to close sales in Japan was towork with these partners:

The complexity of the partner community in Asia creates a crazy and challengingway to do business. Taking a model of success (from Australia)wherecustomers rely upon heavy services and heavy solution-based sellingand tryingto build that model into Asia has been a very slow ride. We're starting to get somecustomer take-up, but nothing to the extent that we would've expected.

Consequently, while NetApp had an above-average market share in Germany versus its othermarkets, its share was well below average in Japan. Yet Japanese companies were under

increasing pressure to improve the cost efficiency of their IT infrastructures

a a selling point ofNetApps products that had always propelled the company in its other markets. The potential forthe Japanese market was great, if somehow the company could break through the channel to theend customer.

Distribution Channels

NetApps struggle to touch the customer in Japan stemmed in part from its legal standing there.NetApp was not a taxpaying entity in Japan, and so it could not take a purchase order and cut aninvoice directly from customers. (See Exhibit 2 for revenue arrangements in Japan.) The onlyway NetApp could close sales was by working with one of its partners in Japan including

Fujitsu, CTC, Hitachi, Marubeni, and Kanematsu. Fujitsu was NetApps top reseller. CTC,Marubeni and Kanematsu focused on engineering customers while Hitachi served enterprisecustomers. In contrast with Europe, where NetApp would call on customers with partners,Japanese partners met customers without NetApp.

7 Japanese Business Customs, U.S. Commercial Service Japan, www.buyusa.gov/jpan/en/businescustoms.html

(July 28, 2009).
http://www.buyusa.gov/jpan/en/businescustoms.htmlhttp://www.buyusa.gov/jpan/en/businescustoms.htmlhttp://www.buyusa.gov/jpan/en/businescustoms.htmlhttp://www.buyusa.gov/jpan/en/businescustoms.html


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Since sales teams could improve the effectiveness of a partner but could not communicate withthe end customer, it was difficult to gain any significant accounts. Additionally, Japanesecustomers put relationships with partners and vendors above performance. For this reason, endusers were much more likely to continue to buy from big Japanese brands such as NEC andFujitsu than NetApp, even if their products were inferior. Green explained the difficulties with

the situation:

Our team has been unwilling to have a tough conversation with a partner abouthow they should approach a particular customer or what solution they shoulddeliver to a particular customer. Theres this polite aspect to their culture thatmeans that if the partner is selling to that customer, then the partner has the rightto dictate the state of play. We dont ever stand up and say, No, thats wrong.We should go this direction. We should go another direction. In the West, if youdont like what Im doing, you tell me. You try and tell me in the nicest possibleway to not upset me, but you still tell me. They dont say anything.

In order to be effective, NetApp needed to have a direct touch relationship with its customers.As founder James Lau explained, If you dont have a customer relationship, its hard to seewhere the market is going and impossible to control your own destiny.

Market Acceptance

NetApp also struggled because the Japanese market saw its products as next-generationtechnology, not a new technology altogether. Instead of buying NetApp products, manycustomers chose to rely on the Japanese storage brands that were adequate but not revolutionary.(See Exhibit 3 for market share by brand.) Additionally, Fujitsu positioned NetApps productsas network attached storage (NAS) only rather than as a storage area network (SAN) solution.Since customers needed SAN in order to implement an enterprise solution, the business that

NetApp could touch by way of partners was very limited.

NetApp was not alone in struggling to win business in Japan. Sun, EMC, and other leadingtechnologies were also facing difficulties as they attempted to work through Japanese partners.SAP had an entirely direct model while Oracle reached customers only through resellers. IBMwas the lone company that had achieved success in the Japanese market in the storage and dataservices space. However, it took 30 years of intense work for IBM to garner sufficient supportfrom the market.

NETAPP MANAGEMENT IN J APAN

Warmenhoven concluded that most of the successes and failures around the world were due tostrengths or weaknesses of individual contributors: Everyone had to figure out their model andwhat drives market share in a particular market. Only after that can they figure out their plan ofattack. In Warmenhovens view, by 2009, NetApps struggles in Japan were evidence that theright team was not in place there.

After the Japan manager, Suzuki-san, left the company in August, 2006, NetApp brought in TyMcConney, the head of professional services in the Asia Pacific (APAC) region, to serve as the


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interim head of Japan. In January 2007, NetApp hired Kazuaki Oya (Oya-san) as thepermanent manager (See Exhibit 4 for a leadership chart.) Oya-san was Japanese and camedirectly from 30 years at Hitachi, one of Japans leading resellers. Despite Oya-sans limitedexperience in the U.S., NetApp hoped that his experience and connections would enable him tosucceed.

One of the first changes that Oya-san made was to the organizational structure. More in linewith other Japanese companies, NetApp Japan put in place management-led teams of two tothree individual contributors. But this approach was management-heavy compared to NetAppsstructure elsewhere in the world. Green reflected:

You cant run your business if you havent got all those people out visitingcustomers and partners. Managers were sitting in the office and reviewing dealsrather than getting out there and performing the work, telling the story, and sellingthe value proposition.

A leadership team that was focused on sales statistics rather than conducting salesdirectly, combined with the companys lack of direct relationship with customers, was adeadly combination. As Green recalled:

Our average deal size dropped dramatically. All of the deals were being drivenby the partner community and partners were not incented to sell solutions.Product evangelizing disappeared; we became a transaction managementorganization and were not selling solutions or finding new partners and newpathways to market.

NetApp could not succeed with this structure, in Greens view: If we look at all our successfulmarkets, NetApp is driving the agenda in each of them.

Relationship ManagementHitachi was the market share leader in external disk storage, and Oya-san attempted to build onhis relationships with that company. (See Exhibits 5 and Exhibit 6 for market share data.)Nonetheless, Hitachi continued to only resell NetApps NAS product and so sales amounted to apaltry $2 million annually, with no chance for NetApp to break into enterprise (FC-SAN)systems. One option to increase NetApps market share was to work with Fujitsu to set up anOEM agreement to rebrand NetApps FC-SAN product and sell it through the Fujitsu channel.This would enable NetApp to increase sales, share, and opportunity for expansion into theenterprise space. (See Exhibit 7 for market growth forecast.) But this option would involvegoing head-to-head against Hitachi a company where Oya-san had deep roots. Yet Oya-sans

relationship with Hitachi was particularly valuable, and so to preserve that relationship theenterprise space remained beyond NetApps reach.

National Culture, or NetApp Culture?

Like other international managers at NetApp, Oya-san had goals to meet and the freedom to meetthose goals in the way he thought best. However, as NetApp became more suited to the Japanesecontext, it drifted farther from the NetApp culture. When Warmenhoven visited Japan in early


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2008, he was alarmed by what he saw: managers sitting in offices rather than cubes, manager-only meeting rooms, and locks on internal doors. In Sunnyvale, even the CEO sat in a cube.Other parts of the Silicon Valley culture such as Friday beer bashes, office snacks, and corporatevolunteerism had also ended. The elements that made NetApp one of the Best Companies toWork For in the U.S. were not typical in Japan.

JAPAN RESTRUCTURING

Warmenhoven determined that success would depend on many things, one of them changing thecompanys legal status in Japan. He pushed Oya-san to start the process of moving towards acommissionaire arrangement and a more high-touch sales partnership model, similar to whatNetApp used in Europe. As a commissionaire in Japan, NetApp Japan would still be asubsidiary of NetApps international company (the taxpaying entity located in the Netherlands),but would be allowed to have direct service relationships with customers rather than workthrough a middleman. (See Exhibit 2 for an explanation of various revenue arrangements.) Thecompany would still need to work with a channel partner to sell products but would be able tosell services (consulting, customization, etc.) directly to customers.

The Commissionaire Agreement

In April 2008, Warmenhoven flew to Tokyo to break the news of the commissionaire agreementand the move to a high touch sales model to over 1,000 NetApp partners and customers.When he briefed Oya-san on his plan, Oya-sans response was, Im not sure this is a good idea.These guys are going to bail on us and go find some other alternative. The message implicitly isgoing to be weve decided to go to a direct sales model and leave you behind. Its just not theway we do business in Japan. While Warmenhoven agreed that the partners would not behappy with the change, he told Oya-san his mind was made up.

After NetApp became a commissionaire, its sales people gained more interaction with customers.However, the change did not solve NetApps problems in Japan. In fact, the Japanese businessdecreased 25-30 percent after NetApp transitioned to this model. While the global recessioncontributed to this downturn, it was clear that fundamental management issues remained.

Positioning the Business for Success

NetApp had to do more than just become a commissionaire in Japan if it wanted to succeed.Not only were CTC and Fujitsu starting to build business with NetApps competition butemployees were also leaving the company; in 2008, 10 employees left to join the Japanese officeof a Silicon Valley storage start-up, DataDomain. In January 2009, NetApp Japan changed

leadership in Japan, appointing Ty McConney to run the business.

McConney had been at NetApp for 10 years and had lived in Japan for five years. He had aJapanese mother and was married to a Japanese woman. Executive management hoped that hecould bridge the gap between NetApp corporate and NetApp Japan. He seemed well suited, bothculturally and from an experience perspective, to take on the job.


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CONCLUSION

While managing NetApps Asia-Pacific professional services organization, McConney hadbecome familiar with many of NetApps issues in Japan. Considering the distance that haddeveloped between NetApp in Japan and Sunnyvale, McConneys vision was to bring NetAppsstrengths to Japan while accommodating Japanese business practices. A priority on McConneysagenda was to build a more robust sales organization. One of his first hires was a top Japanesesales person who had worked at both IBM and SAP. As McConney explained, the employeegave excellent advice on turning the market around saying, My job is to sell NetApp in Japan.Ty, your job is to sell Japan to NetApp. I need you to go help them understand the potential ofJapan and use your network back there to influence and make sure they understand us. Whilehe had not worked out the details of his strategy, it was clear to him that his top priorities had toinclude flattening the management structure, resetting the offices corporate culture, and gettingcloser to the end customer.


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Exhibit 1

Networked Storage Market Share Worldwide

Source:IDC, Q209 WW DSS Quarterly Tracker

Exhibit 2

Revenue Arrangements in Japan

Date Currency TransactionsCost-Plus Inception until

2009U.S. Dollar No transactions are handled directly

with the customer. NetApp can touchand influence the customer but mustsell with multiple partners who areselling to different divisions of thecustomer.

Commissionaire 2009 U.S. Dollar Partners U.S. entity issues purchaseorders to NetApps U.S. office. Japan-based salespeople can take a servicespurchase order directly from a customerwithout channel involvement but the

channel is required to moveproducts.Buy/Sell TBD Japanese Yen Japan entity takes purchase orders from

Japanese-based partners or directly fromcustomers. Direct selling andimportation is permitted.

Source: Compiled by author with data from NetApp.


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Exhibit 3

CY 2008 Japan External Disk Storage

Revenue and Market Share in Open Systems Market

Vendor Annual2008 ($M)

Hitachi $404

Fujitsu $240

HP $179

EMC $161

IBM $150

NEC $100

NetApp $86

Dell $52

Sun Micro. $42

Other Suppliers $213

Total $1,628

Notes:

External Disk Storage Includes external DAS, NAS, FC-SAN, iSCSI-SAN and ESCON/FICON-SANOpen Systems includes UNIX, Windows, Linux and NOSMainframe, i5/OS and other OS are not included in the area

Source: IDC Worldwide Quarterly Disk Storage System Tracker Q4 2008

Exhibit 4

NetApp Japan Leadership

1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011

McConney(8/06)

McConney (to present)

Suzuki-san (2/98-8/06)

Oya-San

Source: NetApp.


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Exhibit 5

CY08 Japan NAS

Market Revenue Share

Note: IBM and Fujitsu OEM NetApps NAS product.Source: IDC Worldwide Quarterly Disk Storage System Tracker Q4 2008.


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Exhibit 6

CYO8 Japan FC-SAN Market Revenue Share

Source: IDC Worldwide Quarterly Disk Storage System Tracker Q4 2008.

Exhibit 7

Japan External Disk Storage

Market Growth Forecast*

2008 2009E 2010E 2011E 2012E 2013E

Revenue (Million Yen)

DAS (External) 89,244 70,189 57,560 50,760 44,606 38,384 -15.5%

DAS (Internal) 73,533 64,087 65,395 68,326 70,136 70,885 -0.7%

NAS 27,705 28,010 29,746 32,959 36,163 38,513 6.8%

FC-SAN 101,797 96,717 98,265 100,849 103,431 106,048 0.8%

iSCSI-SAN 2,707 7,172 11,849 15,670 19,133 22,672 53.0%

ESCON/FICON-SAN 5,473 4,943 4,607 4,307 4,027 3,746 -7.3%

Total 300,459 271,119 267,422 272,871 277,495 280,248 -1.4%

Annual Growth -3.4% -9.8% -1.4% 2.0% 1.7% 1.0%

CAGR 2008-2013

Source: IDC Japan, Japan Disk Storage Systems 2009-2013 Forecast and 2008 Analysis, May 2009, J9450104.

netapp case study 2009 stanford

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