Market Entry Moves by Cisco Warrant Review

For every successful market entry, another 4 fail. I learned that in grad school. One of the few facts that made practical sense, and thus stuck.
That metric included every type of company: automotive, pharmaceuticals, financial markets, etc. I can’t find a relevant statistic for high-tech firms, but it has to be one out of a 20 succeed. And this statistic applies to the stronger, mature old guys (Microsoft, Oracle) doing market expansion, and the up and comers creating a new category. 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.
Cisco has enjoyed success in most new markets it has entered, so if any company can do a bigger-than-big set of plays, I’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. As I dig through their financials posted for this week’s analyst call, I find a couple points of interest that are likely spurring their new approach:

(1) Small and mid-size businesses are their fastest growing area, with ~20% year over year (y/y) growth. (2) Their traditional base of Fortune 500 sales has slowed to anemic levels of growth. (3) They’ve lost share in storage, which has typically been their most profitable business. (4) 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.

One thing my company, Rubicon, has done for years is define and design market expansion strategies. We’ve done it for HP, Symantec, Anystream, Logitech, and more. We’ve helped companies figure out how to take its core technology to a second (new) market, or set out to create new vertical flavors of a core technology base, and it has included developing a geographic plan…such as, how to address the China market. We have arrived at a list of key criteria to shape acquisition targets, what to consider in a market expansion decision process, and certainly know what to avoid. And that’s what piqued my attention when I read the WSJ article this week Cisco’s Scientific Atlanta acquisition. Unlike any other acquisition they’ve done, this has me concerned.
Cisco appears to be doing two vastly different strategies, at the same time:
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. These days the WSJ ads I see has Cisco the router / network company as “Security…powered by Cisco”. Does that mean they just jumped into the Security space? Likely so. No change in graphics, no change in font, just a simple word addition. I don’t quite know how a networking company becomes a security company. Seems like a fox becoming a chicken. I suppose it is possible but it could also be some glue and feathers. Yet I can see a convergence of networking technology with security needs, so it seems a natural 2-3 year strategy. A market expansion strategy like this would certainly leverage their existing sales and marketing strength. I’m guessing they can continue their acquisition frenzy to add the specific vertical talent on the team and vertical solution in their portfolio.
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 their move from selling the ‘vanilla’ AutoCad to adding ‘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 adjacent 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 GIS, Mechanical Engineering, etc. In the case of Cisco, I think the problems and challenges to figure out what is need to solve specific solutions (i.e. Security) are way too complex and a vendor like Cisco can pair together best in breed technologies and serve a growing need.
Consumer Play . What I find more suprising is this: Cisco appears to also target a brand new, never before touched customer set. With the acquisition of Scientific Atlanta, they are entering the low-end consumer market. I would estimate they’re trying to take advantage of the macro convergence of consumer technology as it links to the internet which could mean that television calls, television programming and the Internet are all linked to one pipe feeding the home. And since Cisco has typically played a key role in managing information in and out to the Internet, it’s a related space. So in that way, I get it. What I don’t get it why this fits in Cisco’s model. They’ve never done lower-end products before. Their sales model has largely been big scale B2B efforts, and their management team knows very little about consumers. It’s the bolder move for these reasons and more.
Market Expansion Strategies Require Some Deep Consideration . 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 setting, greenfield and growth companies are on very different trajectories and measures. The biggest myth in the late 90’s was the ‘early mover advantage’ and I’m glad to see most people have earned their perspective to know better. 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 and 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 move of buying 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 ’99, you’ll notice they let go of a series of the ‘old guard’, and hired the guy from Sony, Allen Moyer. And, also then Gap’s CEO (later JCrew’s CEO), ‘Mickey’ Drexler, joined Apple’s board. Having deep bench strength within the company matters. I did a scan of the executive management at Cisco. And besides being surprised they have 30+ vice presidents and executives, I 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.
So what do I think of Cisco’s latest moves? I’m game with the vertical strategy. It’ll put them in the same place as several other good vendors but competition amongst this class of firms will only lead to goodness in the market. On the consumer play, I have concerns but if I suddenly see some good consumer folks joining the Cisco team, or some way of running their new acquisition as a stand alone company, I’ll gain more confidence.