Category Archives: strategy

Federation – A new business model for disruptive innovation

[Even if it has been stated elsewhere, for this particular post, it is even more important to state that these are my views. My interest in this topic is to help organize my thoughts on the implications of the Federation structure created at EMC. Equally importantly, I am an EMC employee and an EMC shareholder, so I have my biases. Consider yourself warned!].

What is the Federation?

For the past six months or so, EMC has organized itself as a Federation. For the official announcement and details behind it, please look here. In case you see it on slides, here is the logo that is being used for the federation.

EMC Federation Logo

In a nutshell, the concept of the Federation is the coexistence of independent companies with a shared vision and at the end of the day, to a large extent a common P&L.

Why organize in this way?

Usually, when looking at business organizations, there are two common ways of organizing. Obviously, no one mechanism of organizing is superior to the other. The correct answer for any given organization depends on a bunch of factors – the desired end goal, market dynamics, level of overlap between the businesses and finally, which bets does the organization want to place. In other words, there is no right answer.
The two common ways of organizing are

  1. Monolith
  2. Conglomerate

Monolith

While the word monolith creates all sorts of mental images, this is by far the most common way of organizing. The organization is built around a singular vision. Different businesses within that organization are organized as business units. Typically, such organizations are able to benefit from shared services – HR, IT, Sales etc. The goal of this mode of organization is clarity of purpose, driving more alignment and efficiency in terms of common capabilities that can be optimized. This doesn’t stop these companies from being diverse – just that the degrees of separation between the individual businesses is relatively small and usually, focused on the same or very adjacent markets. The selling motion is usually similar – the end customer tends to be similar. In other words, the channels are more or less consistent. Naturally, as with most things in life, there are shades of gray – the degree of freedom afforded each business unit is a variable, what shared services operate is a variable etc.
So, whats the downside of such an organization? The greatest strength of such organizations is also their weakness. These organizations tend to be pretty set in terms of their mode of business, what channels and markets they can go after. So, in some ways, for such companies, it is difficult to change their core fabric. Not impossible but definitely herculean. Purely from a business perspective, optimization for a particular market implies that you are completely subject to the vagaries of that market. So, any macro or micro economic trends that impact that particular market leave such a company vulnerable.

Conglomerate

To counter some of the issues seen in the monolith, the conglomerate emerged as a way to get diverse selling motions, diverse companies under the same organizational umbrella. The businesses are not required to be related to each other. The conglomerate functions as independent businesses pooling their P&Ls together. Berkshire Hathaway, General Electric and the Tata Group are some of the prominent examples of this structure. This organizational structure gives up on the efficiency of a common set of services in order to be able to diversify what they sell to their customers. Each business may have its own discrete vision, strategy and market. The common binding item across the conglomerate is the set of shared values across the teams. To illustrate this point, transactions across businesses within the conglomerate are identical to transactions with companies that are not within the conglomerate. The businesses are free to optimize to meet their objectives.

Why Federation?

With this perspective, let’s now look at the Federation.

In some ways, EMC has been on this journey since the VMware acquisition in 2003 (yeah – it was that long ago!). Right from the get go, the interactions between EMC and VMware have been independent. I will not say that this was easy at first. My first interaction with VMware was as a developer dealing with a customer escalation where the customer expected that we would behave as one company. There were a few moments of awkward phone silence as we explained to the customer that we were independent entities. As we all grew comfortable operating in this model, folks on both sides understood why this “together but independent” state was important. At EMC, we realized that we had to win VMware’s business on our merits and that VMware had to interface with EMC’s competition in the same way that they interact with EMC. As that message was understood across both companies, EMC mobilized to have the best possible integration with VMware not because of our inherent affinity but because we recognized the business value that VMware brought.

With VMware as a separate entity, this allowed two additional benefits:

  • VMware was able to maintain and develop its go-to-market independent of EMC. This gave it access to different markets and different levers to enable.
  • VMware was free to innovate independent of the impact to EMC. They were not beholden to EMC’s inherent interests and were able to take a different stance than a business internal to EMC might have been able to.

Clayton Christensen has talked about the innovator’s dilemma where disruptive new technology suffers from the hegemony of the current dominant technology. It is far more deeply entrenched than just technology. For a big successful company like EMC, the entire company has been tuned to make the current technology successful. GTMs, incentives, selling motions, profitability structures, purchase cycles, relationships – the list is endless – are all geared to the current technology. Now imagine changing all that after recognizing a market shift while maintaining your current revenues and while people are changing what they do. Despite best intentions, this transformation is a perilous journey that few dare undertake and even fewer complete successfully. To say nothing about going to individuals who care passionately about the products they work on and tell them that the next big thing is going to surpass their pride and joy.

With this backdrop, fast forward to today. The world of IT has been changing dramatically. You can see that there is a shift in how data is generated, how it is consumed and utilized. Data is the new frontier. The implications of this have not been fully realized. However, it is clear that the magnitude of this shift is enormous. So, the same conditions that led to VMware being kept as an independent entity are now in effect for attacking this new market. That independent entity is Pivotal.

So, you have three independent companies (shades of a conglomerate) all working in adjacent markets (shades of a monolith) working with a shared vision (shades of a monolith) with the independence to optimize what they need for their business (shades of a conglomerate). That’s the Federation – not a monolith, not a conglomerate but an amalgamation of both.

It is typical of what I have seen within EMC – we have a big challenge in front of us, we tackle it head on with a very creative solution. I have this mental image of whoever came up with this as waking up one morning with this solution in their heads and feeling like they have solved world hunger – this is brilliant stuff!

Does this mean that everything is perfect? It never is and there are tradeoffs that are needed to make this successful. For one, this strategy does mean that the individual businesses will have to work that much harder to maintain alignment. The businesses have to be judicious about where it is okay to overlap in technology (since they are in adjacent markets) and what to do when that inevitable overlap arises.

If this strategy does work, this may be an interesting way to address the innovator’s dilemma and guide future companies trying to innovate disruptively while continuing to execute on existing businesses. To me, the beauty of this approach is that it takes that challenge out if the realm of organizational discipline (which is frail) and canonizes it within the corporate structure. I, for one, am rooting for its success (and beyond just the ‘I am an EMC employee’ reason). We will see how the story unfolds. As Churchill aptly said, ‘However beautiful the strategy, you should occasionally look at the results.’