Software Eats Cisco’s Networking Gears, Lesson for Entrepreneurs

Cisco, the venerable IT company, is going through a total redesign in its business.  The networking unit has seen its revenue decline for seven straight quarters. Not a good trajectory.

Revenue from Cisco’s switching business, easily its largest, also missed Wall Street’s estimates, resulting in the company’s total revenue falling for the seventh straight quarter.

 With its traditional business of making switches and routers struggling, Cisco, like other legacy technology firms, is focusing on high-growth areas such as security, the Internet of Things and cloud computing.

The reality is that Cisco is entering the IBM Moment where revenue in its core business will see continuous decline. This happens because their core products are increasingly being substituted by customers.

Networking is seeing some components move into software. And with that transition, the hardware has many competitors to deal with. Also, the big companies that used to spend easily on Cisco gears are buying non-premium products from Asia that get the job done, despite not being made by Cisco. So, Cisco is experiencing a double whammy: product substitution and competition from cheaper rivals. What Cisco sells at premium are available at lower prices by Chinese firms. As that happens, its business will drop further.

Most things are now outside the control of Cisco. It cannot stop Huawei from growing in Africa and around the world. It cannot do much to stop software being used to replace the gears it used to sell at premium.

HP went through that transformation and ended up breaking itself into two, with the legacy printing business as a separate firm. Cisco, if it finds success in the extremely new areas it is pursuing, will possible in future spin-off the networking business. At the moment, it is lagging in those new areas like cybersecurity. And networking business, at the hardware level, is a commoditized business.

Cisco demonstrates why it is hard running a hardware business: software indeed can eat it. Software is eating printing (with mobile, we print lesser), networking and other legacy hardware sectors.

Lesson for Hardware Entrepreneurs

No  matter what you do, as a hardware entrepreneur, always think how a platform can save that hardware business. A platform will provide the ecosystem to protect revenue and ensure you have your customers. But it requires an entirely new business model that is totally different from the way we run hardware business today.

Increasingly, it is evident that there is little competitive capability for hardware business with no element of software-driven platform. Everyone knows that sooner or later, someone will make any hardware cheaper, through commoditization of its core function. What will protect an innovator or a pioneer is the platform.

You cannot be running a solar lantern business  in Africa without thinking how you can build a lending business or something that will engage your customers around it. You cannot be installing solar panels for customers without thinking how they could be paying through subscription to give you room to innovate without worrying about risks of someone displacing you. In the electronics business, prices drop largely every two years. If you keep the present model of electronics business, you will experience the IBM, Dell and Cisco moments. Choose the Apple model which is organic with evolutionary features for whatever the markets bring.

There is no hardware business that will survive by itself in this age of Internet without an element of customer post-purchase relationship. You have to find a way to keep customers in your ecosystem. The old model of carry and go will be challenged by cheaper rivals.

Cisco is learning a lesson, and very soon, its remaining pricing power on networking gears, will decline as competitors continue to program them out from hardware into software. In software, the price drops and margins collapse. That was not the Cisco business model of old. The reality is here. You must learn from this as you build your business.

Further Insights via LinkedIn comments

I am posting these insights on this piece from LinkedIn users.

• A good insight to those who rely so much on ‘experience’ and old ways of doing things. There’s one sub-topic in Chemistry, which every science student must come across, it’s called Displacement Reaction; there’s also another version of it in Physics. I want to believe that the ‘Displacement Reaction’ is now more pronounced and louder in hardware business than the mixture of acid/base and water as the case maybe. The central maxim must now be ‘rethink your strategy from time to time’, else you wait for your ‘moment’; not a good moment anyway.
• “Cisco is learning a lesson” – ndubuisi ekekwe in a VUCA world you can’t be playing catch up especially when you are a brand like CISCO. One of the tenets of a solid strategy is ‘innovation that wins customer advantage’ – specifically staying relevant to the customer via value adding products and services that touch lives. Our lives are no longer stagnant like 20 years ago – businesses sleeping need to wake up. As I will share in an article soon, people fear change and that is essentially what strategy is; consequently the likes of CISCO have copied and pasted old strategies rather than proactively reinventing themselves. Despite the foregoing a company’s core purpose shouldn’t change e.g. Motorola’s purpose is “applying technology to the benefit of the public”, hence they and their products have evolved over time contributing to people’s lives (from TVs to microprocessors and more). What we are seeing in many businesses in CISCO’s situation is symptomatic of the absence of a core purpose and poor strategic foresight. ndubuisi as you have rightly said, they have to revamp their business models. But note that depth of #clarity of their business is required – that’s why I freely prescribe a diagnostic for such #clarity.
• Great insight Sir! Businesses are expected to continously assess their competitive business environment. The Michael Porter’s Five Forces model provides a good framework in which this can be done. With this type of analysis, the likes of Cisco should have seen, before hand, the potential lowering of entry barriers, increasing power of substitutes and those of buyers. What other entrepreneurs would do is to also create high switching costs for their customers or simply evolve with the tide. Facebook has expanded the scope of the interactivity of its platform over the years by copying or acquiring potential competitors. This has made them look ever young. (edited)

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