Will Cisco's Latest Move Bring in Big Bucks?

For every successful market entry, another four fail. We learned that in grad school. One of the few facts that made practical sense, and thus stuck. So it’s a brave company that tries to do market expansion, and Cisco is doing it in a new way that’s worth learning from.
When even your smallest movement makes waves in the market, how do you find the lever that moves you to growth?

Growth Shifts Away From Fortune 500

Cisco has enjoyed success in most new markets it has entered, so if any company can do a bigger-than-big set of plays, we’d bet on Cisco. They continue to pursue an acquisition strategy but differently than before. In the past, they bought 100+ technology teams who had little sales and marketing capabilities. The situation is a bit different now:

  • Small and mid-size businesses are their fastest growing area, with ~20% year over year growth.
  • Their traditional base of Fortune 500 sales has slowed to anemic levels of growth.
  • They’ve lost share in storage, which has typically been their most profitable business.
  • 10-15% growth is necessary to hold steady stock value. While this number seems modest, that means at $24.8B annual revenue company needs to find another $3B even to keep up with the market. The economics surely mean this is not organic growth. It’s got to be a big enough pocket of business or individuals at high enough price points.

Cisco appears to be doing two vastly different strategies, at the same time:

First: Going Vertical

They appear to be moving to vertical solutions within the Enterprise. Cisco’s core market has been to churn out routers and switches that form the backbone of corporate technology. Their customer base started as Fortune 1000 and has expanded to include medium sized enterprises. Cisco has modified their tag line recently. Cisco’s tag used to be “powered by” Cisco Systems. Now it’s “Security… powered by Cisco.” As networking technology converges with security needs, it seems a natural 2-3 year strategy. A market expansion strategy like this would leverage their existing sales and marketing strength.

Cisco’s Vertical Strategy Similar to AutoDesk

I’ve seen a similar vertical strategy design by Carol Bartz of AutoDesk fame. Carol now sits on Cisco’s board so maybe she’s lending a hand. While working at AutoDesk, I saw the company make its move from selling the “vanilla” AutoCad to offering “flavors” for different verticals. It was a risk because it could have left the core business unprotected, but it makes sense for the market leader to pursue growth in this way. Customers get more value because they have a vendor leveraging their core asset of best-in-class design tools to understand the requirements and workflows in their vertical. In the case of Cisco, the problems and challenges are often very complex and a vendor like Cisco can pair together best in breed technologies and serve a growing need.

Second: Winning the Consumer Space

While Cisco has been a known quantity in the Enterprise for years, consumer recognition is limited. The Linksys acquisition made for initial B2C brand exposure, and the company is making noise around video products and voice-based offerings to extend it. With the acquisition of set-top box manufacturer Scientific-Atlanta, Cisco may be moving further in the direction of your living room. Sony, Samsung and Philips are formidable competitors with strong consumer experience. We’re waiting for more of the story to unfold.

Is Your Expansion Strategy on the Mark?

Here’s a preliminary checklist for technology companies to decide if a strategy makes sense for them:

  • Make sure to enter before the space gets hot
    Entering too early means the customers aren’t there yet. Entering too late means there’s no more business left. Make sure you’re not the first. While first movers have the advantage over the old guys in some settings, green field and growth companies are on very different trajectories and measures. The biggest myth in the late 90’s was the “first mover advantage.” Remember, early entrants are typically the heroic martyrs that sow seeds and then lose out to the proficient players who come later.
  • Check the economics
    Make sure your overall business model can survive the change. In the case of Cisco, pursuing the Consumer market is a fundamental shift of economics. Cisco’s margins continue to be in the high 20s-low 30s. That’s 3x what Apple or Phillips or Nokia get. Apple’s business, while fabulous, has a 9% profit margin.
  • Have it be related to markets you know
    The closer it is to the core business, the more likelihood that you can leverage your insights, your products, your customers, your brand.
  • Make sure the go-to-market model has some leverage
    Cisco’s ideal acquisition target has been 100+ employees, with strong core competencies and a company that is just starting to generate revenues. With the recent move to buy Scientific Atlanta, they’ve purchased a 6,000 person firm that has a longer, older history than Cisco.
  • Find money to market what you bought
    Shifting a category takes marketing power. Be ready to spend money to let people know you’re there, and what you can offer. History is littered with vendors who spent all their money on the build or the technology buy, but didn’t leave enough to tell folks what they offered.
  • Make sure you have the team in place to talk to the customers
    When Apple moved into the “digital lifestyle” space back in 1999, you’ll notice they let go of a bunch of the “old guard,” and hired Allen Moyer from Sony. There is experience on the Board with “lifestyle” products via Mickey Drexler, CEO of J. Crew. Having a deep bench strength within the company matters. I did a scan of the executive management at Cisco, and found their VP of marketing has done zero consumer marketing. Her last job before being appointed CMO was to run the most non-consumer space there is, the government market.

Here’s the Bottom Line

So what do we think of Cisco’s latest moves? We’re game with the vertical strategy. It’ll put them in the same place as several other good vendors and competition amongst this class of firms will only lead to goodness in the market. On the consumer play, we have concerns but if we suddenly see some good consumer folks joining the Cisco team, or some way of running their new acquisition as a stand alone company, we’ll have more confidence.
A longer version of this article appears on Nilofer Merchant’s new blog, WinMarkets.com.

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