Latest plans for Imation make sense strategically

A week after announcing dismal sales and plans to lay off 20 percent of the employees, Imation Corp. CEO Mark Lucas clearly has no doubts about the direction he has pointed the company.

That course was set in early 2011, about nine months after Lucas assumed the CEO role. Imation would focus its energies on new digital data storage and security products that would capitalize on a market position earned by selling products such as magnetic computer backup tape and recordable compact discs.

It was also a plan to make what money it could in traditional storage products, the better to fund new growth initiatives, while at the same time making smart investments to protect those product franchises.

Seems pretty simple, but the company has been shifting strategies since it spun out of 3M Co. in the mid-1990s. This time, the CEO seems to be leading in the right direction. He just needs to move quickly.

"He is trying to make over a company, and in a very difficult time," said Mark Miller, an analyst with Noble Financial Capital Markets. "The big guys are having trouble, too. NetApp, Hewlett-Packard, Seagate, Western Digital, everybody is struggling right now."

Lucas would agree that stronger end markets would make the turnaround easier, but he put the big moves he just announced in the context of a much longer journey than a single quarter.

Imation will reorganize into two business units focused by the customer base, one for commercial and the other for consumer. Lucas said this has been in the works for a year, as he has wanted to speed up decisionmaking from the day he became CEO.

As Lucas tells the story, he then got up on a stool and reminded 400 employees in Imation's Oakdale headquarters of what he said at the start of 2011. Imation's transformation would be like a road trip from the Twin Cities to the West Coast, with no roadmap or GPS device. What they had was a compass, and they were headed west.

"I said I did not know what obstacles we will encounter, what detours we're going to find, and what hardships we're going to have to endure," he said. "We have just had a bit of hardship, because this [workforce reduction] affects families and people.

"But we're still on our road trip west. We're still moving."

Imation, Lucas said, is moving with initiatives such as rolling its secure mobility products group into one business and selling under the IronKey brand. And Lucas is excited also about its new "PC on a stick" product, a Microsoft Windows 8 desktop embedded in a secure USB flash drive that allows users to work on any PC.

"They only had about $45 million in sales from the emerging area," out of consolidated third-quarter sales of $248 million, said Mark Miller, the analyst. "The margins are higher in the emerging storage area. That's the baby, and everything else has to be looked at. Should we sell it, should we reduce it, or whatever."

In a groundbreaking article that is now nearly 30 years old, business professors Kathryn Rudie Harrigan and Michael Porter wrote that there had been just one widely acceptable smart strategy in declining businesses -- "harvest," which meant to chop investment, maximize cash flow, and get out at the earliest opportunity.

Not wise, they wrote, at least not in every case. They discussed vacuum tubes, a dying business in the 1950s, and pointed out that the savviest producers were generating good returns well into the 1980s.

That called that simply a "leadership" strategy, of maintaining product leadership to capture what profitable business there was while investing in better markets. And Imation is doing that, with in excess of 30 percent of the magnetic backup tape market.

Lucas said it is difficult to predict from one quarter to the next how quickly demand for a product like tape will decline, adding that the third quarter was particularly tough for magnetic tape sales in Europe.

And, he said, "I am not as overall pessimistic about tape as I am about optical storage," meaning Imation's CD and DVD products.

The task is to invest wisely, and that has not always been the case. It was only a few years back that Imation endured some pain selling TVs. Talk about nonstrategic.

Lucas is reviewing other non-storage consumer products, such as headphones and cases for Apple gadgets. He did not say exit, but these products seem clearly on their way out of Imation's portfolio.

For a year and a half Lucas had been pointing to the end of 2012 as the goal for when sales from new initiatives should be able to offset the decline of traditional products. With a 19.6 percent step down in third-quarter revenue compared to the prior-year period, that goal is now off the table.

Lucas said top-line growth is not a question of if, but only of when. But he is reluctant to offer a new target date.

"Rest assured," he said, "my board also asked me. So the pressure is on here."