3Com Corp.

Competing with giants and serving numerous markets challenge networking-device maker.

Times change for all manufacturers, but for those in high-tech industries, things change a lot faster. That's certainly the case for 3Com Corp., a leading maker of products for a networked world. Six years ago 3Com, based in Santa Clara, Calif., was larger than network-device competitor Cisco Systems Inc. Today Cisco's sales are about double those of 3Com, whose market capitalization is less than one-tenth the larger firm's. Once one of the darlings of Wall Street, 3Com stumbled this year. In the first three months of 1999 its market capitalization was halved as a result of a single quarter of lower-than-expected financial results. 3Com isn't exactly puny, with annual sales last fiscal year of $5.4 billion. However, because it competes with the giants of the networking age -- Microsoft Corp., Intel Corp., and Cisco -- analysts say the networking-products firm may have more tough going ahead. Although most businesspeople know 3Com through its Palm Computing division's hot-selling PalmPilot personal digital assistant, the company's chief business is networking products. The second largest maker of computer network devices behind Cisco, 3Com manufactures network hubs, routers, switches, notebook-PC cards, modems, network-interface cards, and terminal servers. And there's the rub for 3Com's strategy. The company has so many sales channels because it serves so many markets -- consumers purchasing modems, large corporations buying network switches, and business travelers using Palm Computing devices. Hence, some analysts have suggested it shed one or more units to improve profitability. 3Com enjoys a leading position in three markets: Palm Computing devices, network adapter boards, and modems. Since the introduction of the product in 1996, 3Com has shipped more than 3 million PalmPilot handheld computers. Despite rampant competition in the handheld computing market, 3Com's Palm Computing unit continues to have close to 70% of the business. Helping sales is the fact that more than 3,000 independent software developers create software applications that run on the Palm machines, which are a little wider than a cigarette package but not as thick. Despite the runaway sales of these units, which typically retail for about $300 to $500, handheld devices make up less than 10% of the company's revenues. In other business lines, 3Com may be more vulnerable. For one thing, modem sales are expected to fall this year as people find other, faster technologies for connecting to the Internet and getting e-mail. In the corporate-networking-device area, 3Com faces continued stiff competition, not only from Cisco, but also from Northern Telecom Ltd. and Lucent Technologies Inc. Finally, in the cable-modem business, which is expected to grow rapidly in the coming years, 3Com ranks sixth, according to one research firm. To meet these challenges, 3Com senior management has stepped up efforts to streamline the company's supply chain while embarking on an ambitious plan to increase the company's online business. 3Com management demonstrated a commitment to improving the firm's supply chain with the mid-March hiring of computer-industry operations expert John F. McClelland for the new position of senior vice president for supply-chain operations. McClelland, who has held top operations-management positions at IBM Corp. and Digital Equipment Corp., most recently was global chief industrial officer at Philips Consumer Electronics. His role will be to focus on customer fulfillment from order to delivery, including procurement, manufacturing, logistics, and delivery. One area the company will be looking to improve is the sharing of information to enable 3Com suppliers to automatically replenish inventory. On the electronic-commerce front, 3Com recently announced a plan to boost its online sales from the current 30% of total sales to 80%. Besides sales and marketing, the e-commerce effort will focus on order management, customer support, supply-chain improvements, and employee communications. One goal is to provide real-time information on product availability, customer orders, shipping schedules, distribution, and logistics.

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