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REVIEW SUMMARY
Company. Tech Data
Industry. Technology product distribution
Key. Using diversification to grow margins
When talking to Robert Dutkowsky, examples seem to always come in threes. “Let me give you an example,” he says, crossing his legs and leaning back in a chair at a modest conference room inside Tech Data's Clearwater headquarters.
Then, with the air of a college professor more than a CEO, he launches into three clearly articulated illustrations of whatever he may be explaining — whether it be the Tampa Bay Rays or the strategies he has employed as CEO of the $24 billion firm.
The fixation on threes makes sense. After all, Dutkowsky, 56, used a three-pronged approach in the turnaround effort he launched when he came to Tech Data five years ago. Back then, the company was coming off a second quarter in which it lost $130 million in operating income.
Five years and 13 acquisitions later, the company is not only back in the black, but posted $333.9 million in operating income in the fiscal year ended Jan. 31, a 29% gain over the previous year. The increase is significant compared with the $4.17 million loss in operating income it had in its 2006 fiscal year.
In addition, the firm has bought back roughly $800 million worth of its stock in the past five years. Tech Data's stock, which is traded on the Nasdaq, recently was trading for roughly $50 per share.
While working in Japan with IBM, Dutkowsky learned a bit of wisdom on thinking in threes, which he applied to Tech Data, as reflected in its company statements. “The Japanese believe the human mind can't focus on more than three ideas at once,” he says.
So when he arrived as CEO of Tech Data Oct. 1, 2006, he organized the firm's strategy into three pillars: execution, innovation and diversity.
The focus would prove key in getting Tech Data back on track toward profitability.
Out of the family, back in the black
The familial feel Dutkowsky experienced when he entered Tech Data was not surprising. Steve Raymund, whose father founded the firm, served as CEO previously.
Raymund admits the shift was bittersweet, and Dutkowsky was a little apprehensive about being the first person from outside the family — and the company — to tackle firm strategy.
But the firm had slipped in the red, and it was time for a fresh perspective, which Dutkowsky brought with him in his move from Boston to Clearwater.
For Dutkowsky, it was an opportunity to cross an item off his bucket list: being the CEO of a Fortune 100 company.
The location didn't hurt, either.
“I went home and said to my wife, 'Don't say no, but if I said Tampa, Florida, what would you do?'” Dutkowsky recalls. “She ran to the closet and got her suitcase.”
With a resume that includes 20 years at IBM and a stint as president and CEO of J.D. Edwards from 2002 to 2004, Dutkowsky knew the technology industry — he just didn't know distribution.
Tech Data hired consultants to assist Dutkowsky in improving the firm's financials because of what he refers to as his lack of “deep domain knowledge.” He had no experience with the pick, pack and ship execution of the firm.
It didn't take long though, before Dutkowsky pinpointed the problem: the company's lack of diversification in the products it distributed. “I saw HP and I thought it meant servers and storage and networking and software,” says Dutkowsky of the vendor that is responsible for about 27% of the company's sales. “No, it meant HP PCs.” His surprise about the company's narrow product offering was shared by the consultants.
Although he doesn't give them all the credit for Tech Data's recovery, Dutkowsky notes that the consultants gave some important advice: Companies should stay within three steps of their core strengths.
Tech Data's core strength lies in its expertise in distributing products efficiently. But Dutkowsky says Tech Data was stuck in “the desktop era” of selling products that confine a person to the office. He planned to take steps away from that.
One step away
Tech Data serves as the conduit between technology vendors like HP on one side and smaller firms that purchase and then directly sell or apply the products. It's a business that requires close attention to demand for technology and is characterized by low margins and high volume.
“We make about one penny on the dollar,” Dutkowsky states. With such thin profit margins, the smallest mistake can cost millions, and careful cost-watching is a must.
This was a change for Dutkowsky, for the company he worked for previously, Egenera Inc., made roughly 50% in profit, he says. “Our business cards were printed on gold,” he jokes.
One of the first strategies he laid out for the company to increase its margins was to follow the technology community out of the desktop era.
Dutkowsky says to diversify, Tech Data added some new vendors, but its customers' needs helped it make the transition toward selling more products.
For example, one of the company's customers requested Tech Data sell monitors for digital signs, like the ones hanging in public locations with advertisements.
The success of digital signage, and Tech Data's acumen in its distribution, led Sony to submit another offer: to sell its consumer TVs. “In 2006 we sold 10,000 TVs,” Dutkowsky says. “We sold 300,000 last December.”
The way Tech Data sold Sony's TVs is another example of diversification. Dutkowsky explains that as the depth of services involved in TV distribution increases, so do profit margins. In another “step,” Tech Data offers to deliver the TV to a customer's home and even install it in what he refers to as “white glove service.”
Tech Data also expanded into consumer electronics when it positioned itself as the leading mobile phone distributor in Europe.
“We saw that one more clearly,” Dutkowsky says while lifting his phone. “It was clear that this was going to replace the laptop.”
The relationship Tech Data developed with Brightstar Corp., a Miami-based mobile phone distribution company, helped the latter firm expand into Europe while skyrocketing Tech Data's presence in the mobile market. The firm will sell about $2 billion in mobile phones this year, Dutkowsky says.
“Here's what the 'old' Tech Data would have done: we would've kind of danced around each other,” Dutkowsky says of the relationship, “And what the 'new' Tech Data did is we started a joint venture.” The joint venture was the company's first in its 37-year history.
Mobile phones and TVs are two notable examples of the diversity ushered in Dutkowsky's era, but the firm also began selling IT equipment for medical offices and an expanded offering of consumer electronics.
The steps into new markets led Tech Data to experience record profits for the previous three years, and also allowed it to keep pace with competitors.
Its top competitor, Santa Ana, Calif.-based Ingram Micro Inc., posted similar operating margins in 2010 to Tech Data — around 1.4% — with an operating income of $484.43 million on roughly $34.6 billion in annual revenues.
There's a lot of overlap in the products each sells, Dutkowsky says, “Exclusivity is a fleeting thing.” But he points out that each company has its strengths. He says Tech Data leads in mobility, while Ingram leads in electronic data collection, such as capturing information from grocery store UPC scanners. Tech Data leads the European market, while Ingram leads the U.S and also operates in Asia. “If you took Asia away, we're about the same size,” he says.
Growing while shrinking
The company's next pillar, innovation, has allowed the firm to increase its revenues but reduce its size. At least considering its corporate headquarters.
Tech Data once occupied the entirety of its eponymous street in Clearwater. Now it's corporate headquarters is located in a single building.
Dutkowsky says the firm has spent millions of dollars to make the company more efficient. He says the firm does more business than eBay or Amazon over the Internet, so IT efficiency is just as important to Tech Data as it is to its customers.
The third pillar in Dutkowsky's strategy parallels the focus on efficiency targeted by innovation.
Execution is arguably the most important of his manifesto of threes, says Dutkowsky: “We're maniacally focused on execution.”
It's Tech Data's greatest focus for good reason: the firm distributes $100 million worth of goods in one day, and netted 1.22% operating margin off those sales in its second quarter ended in July.
The strategy sometimes includes turning down products that could be profitable. Tech Data refused to carry battery racks that served as energy backups for large computer systems because of their size. “They wouldn't fit in the elevator,” Dutkowsky says.
Hiring is another area that affects the firm's execution, and Dutkowsky says he is pleased with the talent pool in the region. “(Clearwater) isn't bad,” Dutkowsky says of area's tech culture, “if we get somebody here they're probably good.”
Challenges and opportunity in the Old Country
It doesn't take a skilled macroeconomist to see the rippling effects of the debt crisis in Europe. And Tech Data, which ropes in roughly 57% of its revenues from the continent, is exposed to that risk.
However, Dutkowsky is confident of Tech Data's ability to weather the inclement European economy.
He cites the healthy economies in Northern Europe, and fervor over the products Tech Data distributes as allies during the downturn.
“It doesn't matter about the Greek debt crisis — if you're in Sweden when the iPad 2 comes out, you're going to buy one,” Dutkowsky says.
But Raymund, who serves as chairman of the board, is more reticent about trouble in overseas markets. Says Raymund: “(The European economy) is our biggest short-term challenge.”
Though the European economy may have an effect on Tech Data's financial future, Dutkowsky is certain the firm is nimble enough to flow where the technology market takes it — despite its large size.
“We're like a duck on the surface of the water,” Dutkowsky says of the steady, yet massive revenues Tech Data records, “but underwater its feet are moving a million miles per hour.”
Corrections: This story has been updated to explain that Dutkowsky worked for IBM in Japan, and that Tech Data sold IT equipment for medical offices and an expanded offering of consumer electronics when he arrived at the firm as CEO.
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