CASE: IB-89

DATE: 10/28/2009
Sara Gaviser Leslie prepared this case with Professor William Barnett as the basis for class discussion rather than to
illustrate 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 of the 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 NTRODUCTI ON
By 2009, NetApp, a fast growing innovator in the storage and data management market, had
become 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 great
products and a culture that deemphasized hierarchy and put responsibility in the hands of its
employees. Fortune named NetApp the Best Company to Work For in 2009, as the companys
leadership saw its approach to business succeeding worldwide. As one employee explained, the
workers were motivated to ask questions, share ideas, meet company leadership, and test new
concepts:

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] most
impressive thing I find about the company is the open door culture. This company
is unique, in my experience, for avoiding the politics and empire building typical
in growing companies this size, and fostering an environment where cooperation
is the expected and actual norm.
2


NetApps entrepreneurial management style was particularly evident outside the U.S. Leaders in
different geographies (GEOs) were given the autonomy to determine how NetApp would
function 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).
NetApp and the Challenge of Global Leadership IB-89

p. 2
successes in their markets into product and design changes throughout NetApp. One could point
to success in several markets, Germany and Australia in particular, as evidence of such
innovation.

J apan, however, was an enigma for NetApp. The company entered J apan in 1996, just as it was
becoming a force in several markets worldwide. Yet by 2009, NetApp still did not have a direct
relationship with its customers in J apan, and so had to work through partners that, in turn,
controlled the relationship with end users.

Although J apan was a difficult market to enter for most firms in the storage and data
management space, NetApps lack of success there perplexed its corporate leadership. Dan
Warmenhoven, NetApps long-serving CEO in 2009, knew from experience that NetApps
products could measurably improve the efficiency of J apanese companiesat a time when
economic conditions were driving firms there to look for just such efficiencies. After several
years of lackluster performance in J apan, Warmenhoven and his team decided it was time for a
change.

BACKGROUND ON NETAPP
3
NetApp was founded in 1991 when Mike Malcolm, a professor of computer science, formed a
team with two former coworkers, engineers J ames Lau and Dave Hitz. The three set out to
design and sell dedicated file servers, devices that manage the movement of data within and
among computer systems. Malcolm served as CEO until October 1994, when the board hired
Tom Mendoza to build a direct sales force and Dan Warmenhoven as CEO to take the company
to the next level.


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

The productsometimes affectionately referred to by customers as a toaster
because of its simplicity and specializationwas designed to require far less on-site service and
fewer support personnel than most competing products. This quality allowed NetApp to grow
exceptionally fast, once the direct sales strategy was in place. NetApp went public in J une 1995,
offering 2.7 million shares on the NASDAQ. In the wake of these decisions, the company grew
rapidly and profitably throughout the last half of the 1990s and the early 2000s as data
requirements 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 large
corporate customers required that IT providers turn technological products and services into
comprehensive business solutions. This made it necessary for the companys product

3
Much 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).
4
Multi-protocol in this instance refers to the file servers ability to operate in both a UNIX and a Windows NT
environment.
NetApp and the Challenge of Global Leadership IB-89

p. 3
development and manufacturing efforts to become more focused on the enterprisewith
emphases on flexibility, working with large-scale company-wide computer systems, rapid
deployment, 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-level
executives at Fortune 500 corporations worldwide. NetApps management believed the
company had what it took to compete at that level.

In order to successfully shift towards selling to enterprise customers, in the late 1990s, NetApp
attempted to expand beyond technology customers into a small number of high-potential markets
such as financial services. NetApp packaged and sold its products and services in a manner that
was more tailored to the enterprises within each such vertical. The technology market crash of
2000 then accelerated NetApps expansion into other verticals, particularly in the U.S. Moving
to the enterprise space also positioned NetApp for bigger revenue possibilities. The performance
of 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 market
share growth.)
MANAGI NG THE GLOBAL ENTERPRI SE: THE NETAPP APPROACH
Though NetApp was headquartered in the U.S. (Sunnyvale, California), its corporate leadership
felt that international sales would be critical to its success. In 1998, North America accounted
for 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, and
respect 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 NetApp
office. The company had taken seriously the advice of Don Valentine, the chairman of the board
of 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 J apan and NetApp
in France, not a J apanese or a French NetApp. Headquarters strongly influenced the U.S. sales
teams but allowed the GEOs to have an outpost mentality. Tom Mendoza, who crafted
NetApps 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 sales
goals 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 their
strategy 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 computing
environments of NetApp customers were also the same, regardless of a customers location. As
NetApp and the Challenge of Global Leadership IB-89

p. 4
Warmenhoven explained, In the IT world, everythings absolutely uniform. Everybodys
running Intel architectures and Microsoft, Oracle, SAP and Exchange. Theres nothing unique
about 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, were
integral to NetApps becoming a leader with local storage software buyers. However, they
diverged from the U.S.s sales leadership in two important ways: they focused on enterprise
sales earlier than did the U.S., and they pursued channel-based sales strategies rather than purely
direct selling. Additionally, they allowed customer needs to drive product development and
sales 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 the
markets 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 corporate
average 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 to
a 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 prior
to scaling the business. As one manager put it, the company would throw a few seeds out and
see 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 the
intricacies of many of the worlds markets, they looked for a leader who had both the market
experience and entrepreneurial drive to head up the venture. Warmenhovens people-centric
model put new hires in control from the beginning:

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 of the pieces, and make it
work. 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 environmentdespite the inevitable objections from
corporate. International sales managers felt they had the support of NetApp corporate, without
receiving specific directions from Sunnyvale. As Warmenhoven remarked, We gave a lot of
autonomy to the heads of the various GEOs around the globe to figure out how to optimize the
business in their zones. The companys experiences in Germany and Australia are notable
examples of this process.
NetApp and the Challenge of Global Leadership IB-89

p. 5
NETAPP I N GERMANY
Andreas Koenig, also known as Andy the King, typified the kind of person NetApp needed to
lead its German organization. Warmenhoven singled out Andreas Koenig as the most
innovative in assessing his market and our portfolio and making them work together. Koenig
joined NetApp in 1996 to run Germany, Austria, Switzerland, Eastern Europe, the Balkans, and
the Middle East. At that time, the company had only five people in Europe and the sales strategy
was 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 market
and Internet providers; those markets were inaccessible to NetApp in Europe due to the lack of
activity and customer relationships. Accelerating growth under these conditions was a challenge.
As Koenig explained, Getting people involved was a nightmare. There was no infrastructure I
could 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 a
field sales representative at Silicon Graphics. However, Koenig did not have access to services
support from NetApp. Fortunately, NetApp lived and died by its mantra, fast, simple, and
reliable; once installed, NetApp products did not require much technical support.

Koenig responded to customers needs for perfection. One product designed to meet these needs
was MetroCluster, a disaster recovery solution that combined high availability and disaster
recovery within a campus or metro area. For instance, if a customers CAD/CAM (computer
aided design/computer aided manufacturing) system crashed, NetApps product made it
unnecessary to do a file system check and a data save and restoration over the weekend. When
Koenig 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 last
weekend. This conversation led to a $1 million deal and an important early reference sale in
Europe.

Since Koenig and his team were focused on the enterprise market from the beginning, they
penetrated 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 provider
markets 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 as
well as specialists from HP cluster companies. He initiated several engineering projects, such as
MetroCluster, 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 one
market shareeven ahead of EMC. MetroCluster enabled NetApp in Germany to compete with
EMC 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 the
process of providing systems, services, and support to their customers. These systems typically involved a great deal
of storage technology, provided by companies such as NetApp and EMC.
NetApp and the Challenge of Global Leadership IB-89

p. 6
Koenigs success in the enterprise space did not go unnoticed. Tom Georgens, who would take
over as NetApp CEO in 2009, heard great things about MetroCluster from European customer
support and concluded that it was the most important product NetApp had in Europe. Though
the corporate engineering department had initially pushed back on European requests to develop
the 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 more
demanding of service. Fast, simple and reliable did not meet the needs of the less technical
enterprise 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. Koenig
went so far as to put two of his systems engineers on standby as professional service engineers in
order to win business.

European customers also were more insistent on using value added resellers (VARs) in the sales
and distribution process than were customers in the U.S. VARs were especially valuable since
they typically were seen as trusted partners and brands by customers. NetApp had weak brand
recognition in Europe and had made minimal investments in Germany; it needed channel
partners to meet its sales goals.
Developing the Channel
European operations relationship with the channel was different from that in the U.S., both in
terms of working arrangements and compensation. Koenig explained, Every sales rep could use
the channel without penalty. We believed that using the channel only worked if you allowed
your 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 a
certain percentage on every dollar sold and the channel was excluded from compensation. While
including the channel would seem to make it more expensive to pay commissions, Koenig set up
targets in such a way that they included the channel from the beginning. As a result, the channel
became neutral to the commission.

Koenig was prepared to take drastic steps to make the economics of the channel work in
NetApps favor, no matter what the market demanded. For instance, in 1996 and 1997, he
created 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, as
was 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 direct
business, Koenigs strategy accelerated NetApps sales in Europe. He explained, The channel
gave 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 the
street selling your product.
NetApp and the Challenge of Global Leadership IB-89

p. 7
Koenig found that the channel worked best when coordinated with the direct sales team. In
2001, he was initiated a high touch model for working with the channel. This model involved
NetApp taking responsibility for creating brand preference with the end user rather than turning
the entire relationship over to the partner. NetApp introduced the customer to the company, the
products 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 future
expectations.
Fujitsu
NetApps most successful partner relationship was with Fujitsu. Their partnership was involved
in approximately 25 percent of NetApps deals in Germany, representing approximately 50
percent of the areas revenue. NetApp was involved in the Fujitsu deals that had the most sales
potential, but let Fujitsu take the lead on the less potentially lucrative transactions.

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

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 technical
support. After Fujitsu grossed $20 million the second year, Koenig put them together with SAP
and they created a solution called FlexFrame, which was the genesis of a much bigger
relationship. By 2008, sales through this partnership reached approximately $180 million
annually.

In addition to promoting faster growth, this channel gave NetApp access to markets and
customers that were otherwise out of reach, as well as connections to executive-level
management among customers. While NetApp sold part of a solution, partners consulted on
everything 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 channel
partners and its own professional service organization in Europe. The company looked for the
biggest EMC customers like Siemens, Deutsche Telecom, BMW and others. By partnering with
Fujitsu, they were able to win over such customers from their rival.

Koenig credited NetApps willingness to let European-based sales professionals drive the
business with influencing his own success. While corporate did offer a plan on headcount and
revenue goals, the lack of oversight gave Koenig and his team immense flexibility. He
concluded, If I were to ask someone to start up a company, I would really advise them to do the
same thing. Give them as much authority as you can so they can determine what is needed for
the market.
NetApp and the Challenge of Global Leadership IB-89

p. 8
NETAPP I N AUSTRALI A
A maverick individual also drove success for NetApp in Australia. Simon Green began working
with NetApp in 1997 while working at an Australian VAR, and became a full- time employee in
2000 when NetApp bought the company.

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

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

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

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

We had to survive by talking to enterprise customerstelcos, financial services
companies, oil and gas companies, and others. They needed people to help them
with implementation so we started providing service by building it off our own
backs. We would carve money out of transactions and go hire people to deliver
service. 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 to
maintain gross margins in the mid to high 60 percent level. As NetApp moved from the low end
of 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 J eff Smith arrived at Telstra,
the countrys largest telecommunications firm. Smith had worked with Simon Greens
colleague, Peter Mulloy, when Mulloy was at Computer Associates. Though he was interested
in NetApps technology, Smiths main reason for choosing NetApp was his admiration for the
company. In Smiths words, he wanted to build and rebuild Telstra based on companies we
aspire to be like, and NetApp is one of those companies. Smith took the risk of putting NetApp
into an Australian billing application where NetApp had no track record.

NetApp and the Challenge of Global Leadership IB-89

p. 9
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, this
product provided a way for Telstra to act as an outsource provider of storage to all of its business
units. (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 solution
for every department. NetApp increased storage utilization from 30 percent to 65 percent, and
activation time how long it takes a client to get access to additional storage decreased from
weeks 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 order
for the new equipment and look for a place in your data center to put it. That
whole process could take weeks or months. In the new world, you always run
with a bit of excess capacity, and when someone wants some, you just configure it
for them and point them at it. And if your utilization gets unconfortably high, you
order 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 time
in building a utility storage model.
Bringing the Shared Storage Model Back to Corporate
Telstras shared storage model won the 2005 Global Innovation Award in the enterprise
category. Convincing headquarters that it made sense to productize the solution, however, was
still necessary. Though NetApps worldwide product development and product management
were relatively centralized, the GEOs could request that centralized development create a feature
specifically for a market other than the U.S. However, most customers in the U.S. market were
spending their storage budgets on other storage architectures: Australias Green had to convince
the corporate team that Internet protocol storage area networks (IP-SAN), the architecture behind
the 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 got
customers asking to purchase it. Corporate management kept telling me, You
know, customers arent asking for it. I said, Well, gee whiz. Thats why were
in sales. When we went to market in 94 and 95, there wasnt a market called
network 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, (fiber
channel SAN). IP-SAN was also more profitable than fiber channel; gross margins in the IP
SAN space were 60 percent, while fiber channel storage reached only the 10-20 percent range.
6



6
Telstra grew from about $4.5 million in revenue in 2002 to approximately $60 million in 2008. In 2008, Telstra
was a top-three account for NetApp.
NetApp and the Challenge of Global Leadership IB-89

p. 10
For all its success in the U.S., Europe, and Australia, NetApp found it much more difficult to
successfully penetrate the J apanese market. In this, NetApp was not alone. Most firms in the
storage and data management space, including arch-rival EMC, found J apan to be a difficult
market to crack. Yet it was a huge market with great potential just the kind of market that an
entrepreneurial company might see as a worthy challenge.
CHALLENGES OF THE J APANESE MARKET
According to the U.S. Commercial Service, J apanese society is complex, structured,
hierarchical and group-oriented.
7

The J apanese typically have a commitment to maintaining
harmony and avoiding direct confrontation whenever possible. This is in stark contrast to
NetApps culture, where participation is encouraged from all levels of the organization and
engaging in open dialogue is customary.
Rather than using the direct sales model that dominated business in Australia, much of the
business in Asia was done through partners and focused on engineering applications, not
enterprise solutions. Additionally, customers were wedded to specific partners. Green, as
NetApps Asia-Pacific vice president, found that the only way to close sales in J apan was to
work with these partners:

The complexity of the partner community in Asia creates a crazy and challenging
way to do business. Taking a model of success (from Australia)where
customers rely upon heavy services and heavy solution-based sellingand trying
to build that model into Asia has been a very slow ride. We're starting to get some
customer 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 other
markets, its share was well below average in J apan. Yet J apanese companies were under
increasing pressure to improve the cost efficiency of their IT infrastructuresa a selling point of
NetApps products that had always propelled the company in its other markets. The potential for
the J apanese market was great, if somehow the company could break through the channel to the
end customer.
Distribution Channels
NetApps struggle to touch the customer in J apan stemmed in part from its legal standing there.
NetApp was not a taxpaying entity in J apan, and so it could not take a purchase order and cut an
invoice directly from customers. (See Exhibit 2 for revenue arrangements in J apan.) The only
way NetApp could close sales was by working with one of its partners in J apan including
Fujitsu, CTC, Hitachi, Marubeni, and Kanematsu. Fujitsu was NetApps top reseller. CTC,
Marubeni and Kanematsu focused on engineering customers while Hitachi served enterprise
customers. In contrast with Europe, where NetApp would call on customers with partners,
J apanese partners met customers without NetApp.


7
J apanese Business Customs, U.S. Commercial Service J apan, www.buyusa.gov/jpan/en/businescustoms.html
(J uly 28, 2009).
NetApp and the Challenge of Global Leadership IB-89

p. 11
Since sales teams could improve the effectiveness of a partner but could not communicate with
the end customer, it was difficult to gain any significant accounts. Additionally, J apanese
customers put relationships with partners and vendors above performance. For this reason, end
users were much more likely to continue to buy from big J apanese brands such as NEC and
Fujitsu 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 about
how they should approach a particular customer or what solution they should
deliver to a particular customer. Theres this polite aspect to their culture that
means that if the partner is selling to that customer, then the partner has the right
to 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 you
dont like what Im doing, you tell me. You try and tell me in the nicest possible
way 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 J ames Lau explained, If you dont have a customer relationship, its hard to see
where the market is going and impossible to control your own destiny.
Market Acceptance
NetApp also struggled because the J apanese market saw its products as next-generation
technology, not a new technology altogether. Instead of buying NetApp products, many
customers chose to rely on the J apanese storage brands that were adequate but not revolutionary.
(See Exhibit 3 for market share by brand.) Additionally, Fujitsu positioned NetApps products
as 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 J apan. Sun, EMC, and other leading
technologies were also facing difficulties as they attempted to work through J apanese partners.
SAP had an entirely direct model while Oracle reached customers only through resellers. IBM
was the lone company that had achieved success in the J apanese market in the storage and data
services space. However, it took 30 years of intense work for IBM to garner sufficient support
from the market.
NETAPP MANAGEMENT I N J APAN
Warmenhoven concluded that most of the successes and failures around the world were due to
strengths or weaknesses of individual contributors: Everyone had to figure out their model and
what drives market share in a particular market. Only after that can they figure out their plan of
attack. In Warmenhovens view, by 2009, NetApps struggles in J apan were evidence that the
right team was not in place there.

After the J apan manager, Suzuki-san, left the company in August, 2006, NetApp brought in Ty
McConney, the head of professional services in the Asia Pacific (APAC) region, to serve as the
NetApp and the Challenge of Global Leadership IB-89

p. 12
interim head of J apan. In J anuary 2007, NetApp hired Kazuaki Oya (Oya-san) as the
permanent manager (See Exhibit 4 for a leadership chart.) Oya-san was J apanese and came
directly from 30 years at Hitachi, one of J apans leading resellers. Despite Oya-sans limited
experience in the U.S., NetApp hoped that his experience and connections would enable him to
succeed.

One of the first changes that Oya-san made was to the organizational structure. More in line
with other J apanese companies, NetApp J apan put in place management-led teams of two to
three individual contributors. But this approach was management-heavy compared to NetApps
structure elsewhere in the world. Green reflected:

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

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

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

NetApp could not succeed with this structure, in Greens view: If we look at all our successful
markets, NetApp is driving the agenda in each of them.
Relationship Management
Hitachi was the market share leader in external disk storage, and Oya-san attempted to build on
his 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 a
paltry $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 an
OEM 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 the
enterprise space. (See Exhibit 7 for market growth forecast.) But this option would involve
going 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 the
enterprise 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 meet
those goals in the way he thought best. However, as NetApp became more suited to the J apanese
context, it drifted farther from the NetApp culture. When Warmenhoven visited J apan in early
NetApp and the Challenge of Global Leadership IB-89

p. 13
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 corporate
volunteerism had also ended. The elements that made NetApp one of the Best Companies to
Work For in the U.S. were not typical in J apan.
J APAN RESTRUCTURI NG
Warmenhoven determined that success would depend on many things, one of them changing the
companys legal status in J apan. He pushed Oya-san to start the process of moving towards a
commissionaire arrangement and a more high-touch sales partnership model, similar to what
NetApp used in Europe. As a commissionaire in J apan, NetApp J apan would still be a
subsidiary of NetApps international company (the taxpaying entity located in the Netherlands),
but would be allowed to have direct service relationships with customers rather than work
through a middleman. (See Exhibit 2 for an explanation of various revenue arrangements.) The
company would still need to work with a channel partner to sell products but would be able to
sell services (consulting, customization, etc.) directly to customers.
The Commissionaire Agreement
In April 2008, Warmenhoven flew to Tokyo to break the news of the commissionaire agreement
and 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 is
going to be weve decided to go to a direct sales model and leave you behind. Its just not the
way we do business in J apan. While Warmenhoven agreed that the partners would not be
happy 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 J apan. In fact, the J apanese business
decreased 25-30 percent after NetApp transitioned to this model. While the global recession
contributed 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 J apan if it wanted to succeed.
Not only were CTC and Fujitsu starting to build business with NetApps competition but
employees were also leaving the company; in 2008, 10 employees left to join the J apanese office
of a Silicon Valley storage start-up, DataDomain. In J anuary 2009, NetApp J apan changed
leadership in J apan, appointing Ty McConney to run the business.

McConney had been at NetApp for 10 years and had lived in J apan for five years. He had a
J apanese mother and was married to a J apanese woman. Executive management hoped that he
could bridge the gap between NetApp corporate and NetApp J apan. He seemed well suited, both
culturally and from an experience perspective, to take on the job.

NetApp and the Challenge of Global Leadership IB-89

p. 14
CONCLUSI ON
While managing NetApps Asia-Pacific professional services organization, McConney had
become familiar with many of NetApps issues in J apan. Considering the distance that had
developed between NetApp in J apan and Sunnyvale, McConneys vision was to bring NetApps
strengths to J apan while accommodating J apanese business practices. A priority on McConneys
agenda was to build a more robust sales organization. One of his first hires was a top J apanese
sales person who had worked at both IBM and SAP. As McConney explained, the employee
gave excellent advice on turning the market around saying, My job is to sell NetApp in J apan.
Ty, your job is to sell J apan to NetApp. I need you to go help them understand the potential of
J apan and use your network back there to influence and make sure they understand us. While
he had not worked out the details of his strategy, it was clear to him that his top priorities had to
include flattening the management structure, resetting the offices corporate culture, and getting
closer to the end customer.
NetApp and the Challenge of Global Leadership IB-89

p. 15

Exhibit 1
Networked Storage Market Share Worldwide


Source: IDC, Q209 WW DSS Quarterly Tracker

Exhibit 2
Revenue Arrangements in Japan
Date Currency Transactions
Cost-Plus Inception until
2009
U.S. Dollar No transactions are handled directly
with the customer. NetApp can touch
and influence the customer but must
sell with multiple partners who are
selling to different divisions of the
customer.
Commissionaire 2009 U.S. Dollar Partners U.S. entity issues purchase
orders to NetApps U.S. office. J apan-
based salespeople can take a services
purchase order directly from a customer
without channel involvement but the
channel is required to move products.
Buy/Sell TBD J apanese Yen J apan entity takes purchase orders from
J apanese-based partners or directly from
customers. Direct selling and
importation is permitted.
Source: Compiled by author with data from NetApp.


NetApp and the Challenge of Global Leadership IB-89

p. 16
Exhibit 3
CY 2008 Japan External Disk Storage
Revenue and Market Share in Open Systems Market


Vendor Annual
2008 ($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-SAN
Open Systems includes UNIX, Windows, Linux and NOS
Mainframe, 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.




NetApp and the Challenge of Global Leadership IB-89

p. 17
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.

NetApp and the Challenge of Global Leadership IB-89

p. 18
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 J apan, J apan Disk Storage Systems 2009-2013 Forecast and 2008 Analysis, May 2009, J 9450104.