On October 12, Dell announced its plans to acquire EMC Corporation for $67 billion, the largest technology industry deal to date, a deal clearly intended to bolster Dell’s ability to compete in the increasingly lucrative corporate data center market. This move follows HP’s split into two organizations which itself was engineered to free HP’s enterprise business from the low-margin shackles of its consumer PC and printer business. While the Dell-EMC deal will accelerate the transition of corporate data assets to the cloud, the new entity could face significant challenges that hamper its ability to make it rain.
Our experience conducting war games for Global Fortune 100 companies and analyzing competition in enterprise IT has made it clear that the market is undergoing a dramatic transformation. Our analysis, conducted over an extensive period of time and involving a variety of players, demonstrates that this transformation is characterized by several confluent factors that the combined EMC-Dell will have to navigate to achieve success:
- Move to the cloud. As corporate CIOs become increasingly comfortable with the security and capacity of cloud-based IT solutions, they are increasingly looking to major IT players, especially HP and Cisco, to manage their entire corporate IT infrastructure. Doing so is more cost-efficient and less cumbersome, and transfers the risk of managing IT assets from the corporate buyer to the IT service provider.
- Market segmentation. As the data center becomes an increasingly important IT operation and undergoes its process of convergence among server, networking, and data storage components, distinct market segments are forming among small, medium, and large businesses, each with different IT needs and price points.
- Revenue growth challenges. As with most things relating to the cloud, price competition is placing revenue and margin growth challenges on service providers, forcing them to seek ways to reduce costs and consolidate industry influence to sustain revenue growth.
The EMC-Dell merger will no doubt accelerate the shift of corporate IT assets to the cloud, and create an end-to-end competitor positioned to compete against the other large, full-service enterprise IT providers – mainly HP and IBM. In many ways, the deal is necessary as EMC and Dell could not separately compete in the evolving enterprise IT market. Providers increasingly need an end-to-end solution to grab the big, multi-year IT services contracts offered by corporate customers; as independent capabilities, Dell’s servers and EMC’s storage would increasingly have been isolated from these opportunities.
Big merger brings big questions
But, is that enough? Today’s full-service competitors are seeking new ways to grow revenues and profits with data analytics, IT services, and the like. And, while bigger is theoretically better, EMC and Dell will almost certainly face challenges. Can such a large organization properly segment its offerings to address the needs of the small and medium sized businesses?
If not, how will it successfully compete in the large business market, already saturated with providers such as Amazon Web Services, Microsoft, and IBM? Will EMC-Dell be able to displace existing relationships, offering additional value to channel partners that enjoy long relationships with incumbent providers? As a privately held company, will it be challenged to raise capital to invest in upgrading its cloud, networking, and security assets? And, won’t competitors act quickly to strike their own deals, tie up customers on long term contracts, and find other ways to restrict EMC-Dell’s ability to maneuver?
Don't wait to reassess your strategy
Participants – corporate buyers and service providers – in the enterprise IT services market should rightfully be concerned about this merger. Dell occupies top-five positions in most server markets while EMC similarly enjoys comparable leadership positions in storage, from SMB to large enterprise segments. Noted challenges aside, the combined company almost immediately becomes the incumbent to beat.
What to do in response should be the question for those currently engaged in this market. In simple terms, other players should be reexamining their competitive strategy: testing new revenue models and different ways to service existing and new accounts, and identifying and evaluating the impact of future technology trends around storage capacity, data transfer speeds, and other potential disruptors. How to do this is the crux of the matter. Strategic data gathering and analysis that provides decision makers with relevant insight on specific decisions is necessary. War games, or analytic competitive response workshops, professionally crafted and conducted, are one method of illuminating decisions. Intelligence-driven research and analysis on the capabilities, strategies, and likely direction of EMC-Dell is another method of clarifying one’s competitive strategy. Other analytic methodologies can also be applied. The primary imperative is to take action to better understand what your company needs to do in response.