Uncommon Wisdom

Jul 19 2011   6:26PM GMT

Cisco and IBM: A comparative tale of two companies

Tom Nolle Tom Nolle Profile: Tom Nolle

A tale of two companies, and possibly an example of unfortunate timing as well. Cisco yesterday announced it was laying off 6,500 workers, and IBM announced it was raising its guidance after having beat the revenue numbers expected by the Street. Both companies ended the session yesterday off slightly, but the contrast here is interesting.

IBM, as I’ve often noted, has been a master of the twists and turns of the IT marketplace. It’s been in and out of pretty much every sector of the market in response to the changes in opportunity. IBM has managed to sustain its strategic engagement with its customers throughout all of this, and in our surveys since the early 1980s, its strategic credibility has never varied by more than a couple of percentage points.

Cisco, interestingly, has gained as much on IBM’s decision to leave networking as it did on “the Internet”, maybe even more. IBM’s networking equipment, supporting its new version of its venerable System Network Architecture (SNA) called Advanced Peer-to-Peer Networking, wasn’t price-competitive with IP and routing. IBM knew it, and over time even sold its networking business to Cisco. That’s what gave Cisco a big boost with the enterprise. It’s the boost that Cisco needed to become what it was at its peak.

I’ve focused in the past on Cisco’s carrier moves, and in particular on the fact that the company failed to realize that traffic alone wasn’t going to drive carrier spending—they need revenue as much as Cisco does. But in the enterprise space as well, Cisco didn’t read the tea leaves. Enterprises came out of the SNA era of networking with a network infrastructure that needed more connectivity and more capacity, in part because SNA networking was expensive. When they transitioned to Ethernet and IP, they boosted both these things based on the lower pricing, and as a result there was a boom in spending. The addition of devices and applications through the peaking IT spending cycle of the ‘90s kept up the pace of growth. It seemed that networking was on a roll.

It wasn’t, of course; it was on a cyclical upturn just like IT was in general. We ended that upturn in 2001/2002, and for the first time in IT history the cycle didn’t turn up again. The issue? Lack of incremental productivity justification. Service providers needed a business case to build out more capacity.  nterprises did too. The tea leaves were clearly readable by 2005, but Cisco missed the signs. When it did realize providers needed more justification for more spending, Cisco hit on high-end telepresence. Does that sound like the service-provider-space story that video is going to double (or more) network demand by such-and-such a time?

To be fair to Cisco, every one of its competitors has made the same mistake Cisco did. The problem is that while those competitors can still hope to gain market share (particularly by taking share from Cisco), the market leader needed organic growth or greater market breadth—the “adjacencies” strategy. Chambers was right to grab onto the latter because there was no quick way to drive the former. But Cisco didn’t have the instant credibility in servers and other product areas, and it didn’t develop an effective strategy to develop those adjacent markets. As a result, it has hit a soft patch in growth. A big staff reduction will make the Street happy, but it might well make the long-term problem worse. The most mobile employees, the ones with the most experience and most marketable skills, may well have been among those who took the severance packages.

This should be a wake-up call for Cisco, of course, but even more so for its competitors. Yes, they could be insulated from their own version of the revenue shortfall problem through gains in market share, but only if Cisco doesn’t reinvent itself successfully first, and if no other competitor does a more effective job second.  Remember that I’ve already noted that EVERY Cisco competitor (enterprise and service provider space) made the same mistakes.

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