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2/14/2011
07:29 PM
Bob Evans
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Global CIO: Cisco Zapped By Destructive Power Of Innovation

While John Chambers's company has branched far beyond its networking roots, that core business has stumbled—and competitors are pouncing.

The really big problem for Cisco—as is true of so many large, sclerotic companies that count on the government for a lot of their business—is that the prices that the firm can charge for its core business are dropping faster than sales, writes Markman in a piece called Cisco Systems Inc.: The Story That Wall Street Missed.

Think about that for a moment.

Revenue for switches—a huge part of Cisco's business—fell.

That was bad enough. But margins thinned—which is even worse. (End of excerpt.)

How can this be? At a time when companies are frantically expanding their use of online communications and networks for everything from collaborative design to meetings to research to blueprints and video and so much more, the demand for high-capacity and ultra-reliable networking gear has never been stronger.

Why has Cisco not been able to exploit this market demand more aggressively—and, beyond that, why have its growth projections receded to the point where Chambers is reluctant to say if his company can return to its recent 12%+ growth rates?

Ironically, it appears that Cisco, which for the past 15 years has sold products, services, and know-how that helped its customers in every industry accelerate their pace of business and be able to move at the speeds their marketplaces demand, failed to take its own medicine.

Here's how Markman describes the profit-pounding dynamic Cisco is undergoing:

Yet the elephant in the room is the fact that competitive pressures are forcing Cisco to move customers to new products more quickly than it intended, according to research analysts for Signal Hill Capital LLC. Channel checks suggest that sales of the company's largest switching platform, the Catalyst 6500, slowed at the end of 2010 as the product rapidly become uncompetitive from a price and functionality perspective.

Responding to this trouble like a SWAT team, Cisco did finally migrate customers to its hot new product lines, the Nexus switch family and the ASR routers family. Both of these are more competitive—but at much lower margin. Ouch! (End of excerpt.)

So because it was not—and perhaps still is not—keeping pace with the requirements and demands of its customers, Cisco's high-margin legacy products are being cannibalized by its new gear, which offers the performance levels customers need but can't yet deliver the profit margins investors demand. And this deep-seated problem of Cisco's, says Markman, is not going away anytime soon.

"This is not a problem that can be fixed in three months," he writes, because as Web traffic booms and enterprises buy and deploy more-powerful networks to keep up, those recession-hardened customers aren't willing to pay the premiums Cisco used to be able to command—and competitors like HP and Juniper are more than willing to ensure that pricing pressure only intensifies.

So although Cisco's been able to migrate its big customers to its new high-end products, the whipsaw effect has been that "because [Cisco] has so many employees and so much overhead this increased business is not dropping to the bottom line," writes Markman.

And as a result, "We are watching the destructive force of innovation at work."

It is ironic indeed that Cisco, which over the past couple of decades has helped thousands of customers unleash that very same "destructive force of innovation" on their competitors, is now feeling some of the blunt-force trauma of innovation's unyielding edge.

RECOMMENDED READING:

Global CIO: IBM Turns Guns On Cisco With Acquisition Of Blade Network

Global CIO: Oracle And Cisco Join Forces On a $1-Trillion Idea

Global CIO: Is Apple Or IBM The #1 Most-Respected Large Corporation?

Global CIO: HP Mobile Dump Of Microsoft Is Brilliant

Global CIO: Sam Palmisano Reveals Secret Behind IBM's Century Of Success

Global CIO: IBM's Most Disruptive Acquisition Of 2010 Is Netezza

Global CIO: An Open Letter To IBM CEO Sam Palmisano

Global CIO: IBM On Oracle Exadata: It's A Hog To Install

Global CIO: IBM Zings Oracle And HP Over Limited Vision

Global CIO: Larry Ellison Will Need A Time Machine To Catch Us, Says IBM

Global CIO: As IBM Accelerates Analytics Business, Can Anyone Keep Up?

Global CIO: Oracle Needs More Than Ellison's Talk To Beat IBM's Systems

Global CIO: IBM Claims Hardware Supremacy And Calls Out HP's Hurd

Global CIO: IBM Doubles Down On Red-Hot Optimized Systems

Global CIO: IBM's Brilliant Trojan Horse Strategy Transcends Technology

Global CIO: IBM Top Product Exec Discusses Strategy, Systems, & Oracle

Global CIO: IBM's Blazing New Mainframe Wins Raves From Citigroup

Global CIO: Is IBM Or Apple The World's #1 Tech Brand?

Global CIO: Larry Ellison And IBM Lead Surge In Optimized Systems

Global CIO: IBM Turns Guns On Cisco With Acquisition Of Blade Network

Global CIO: Tibco Surges And CIO Flips Off IBM, Oracle, And SAP

Global CIO: The Top 10 Most Influential IT Vendors (Apple And Facebook?)

Global CIO: IBM CEO Sam Palmisano Talks With Global CIO

Global CIO: Why IBM CEO Sam Palmisano Earned His $24.3 Million

GlobalCIO Bob Evans is senior VP and director of InformationWeek's Global CIO unit.

To find out more about Bob Evans, please visit his page.

For more Global CIO perspectives, check out Global CIO,
or write to Bob at bevans@techweb.com.

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