Can Cisco Sustain Competitive Differentiation on Operational Excellence Alone?

24 11 2010

Cisco, a quintessential Silicon Valley innovator which had its beginnings in 1984 with its internetworking multi-protocol routers, has become a global leader with its dominance in global networking products.  Since 1995, when John Chambers took the helm as the CEO, Cisco has taken the acquisition route to bring innovation and expansion with an operational excellence that is second to none [1]. However, more recently, Cisco has found itself becoming more as a commodity product company with a competitive squeeze on its margins and missing on two disruptive innovations that are changing the network services landscape namely mobile computing and cloud computing.   In order to catch up, it has tried to partner with VMWare, a pioneer in virtualization technology that is driving the cloud computing revolution.  With its operational excellence, Cisco has been able to integrate its networking products with Virtualization to get an entry into enterprise cloud market.  However, Cisco is facing competition from three fronts:

  1. Virtualization has altered the networking product landscape by moving networking hardware services into software as Vyatta is doing by offering software based virtual routers [2].  As data centers are upgraded to take advantage of new generation of multicore processors with 10X performance improvement, hardware assisted virtualization, space, power and management savings, Cisco’s current product strategies will be challenged by competing disruptive innovation in the private, public and hybrid cloud markets [3].  As data centers start deploying servers with large number of multicore processors, networking technology migrates to inside the server connecting virtual computers forcing a new product strategy for internewtworking.
  2. Chinese companies such as Huawei are bringing competition in traditional Cisco telecommunications service provider market on a large scale by acquiring American Technology by hiring many laid off Silicon Valley experts from companies such as SUN and using cheaper engineers and lower production costs in China
  3. As Cisco moves more toward consumer and small and medium business market with products such as video conferencing and commodity networking products, it faces competition from many other vendors reducing its profit margins.

Can Cisco continue its double digit growth that has been its strength depending on operational excellence alone?

The answer may lie in examining how companies sustain long term competitive differentiation.  A new theory on organizational success claims that certain combinations of leadership, strategy, culture, and organizational structure have an evolutionary advantage over others [4].  While organizations that do not develop the right organizational DNA may have short term success, they cannot sustain competitive differentiation in the long run in an open globally connected environment where communication, collaboration and commerce occur at the speed of light [5, and 6]. 

Figure 1 shows the business stakeholders and various strategies that have proven to be successful.

Organizational DNA and Strategies with evolutionary advantage

The leadership has to manage the organizational structure and develop a culture among various groups that suit the strategies as shown here; For example, in order to succeed in developing disruptive innovation, leadership must foster a culture of cultivation that is nurturing and an organizational structure that brings both business and technical organizations to work together as a matrix to exploit customer intimacy and technical leadership.  The same organization, in order to foster operational excellence must assemble a team with a culture of control with a strict hierarchical organizational structure.  The consequences of this theory to various companies and even to nations are discussed in my blogs [5 and 6].  An organization may choose to become a leader in both disruptive innovation and operational excellence by assembling different teams in its organization or focus on one strategy.  In the past, AT&T succeeded in developing both using Bell Labs and its Operating Telephone Companies.  IBM did it with its Research Labs and its services offerings.  Today, Intel and Apple seem to have mastered all four strategies successfully.

In the past Cisco has successfully depended on acquisitions to complement their lack of great R&D in-house.  Only time will tell if this strategy will prove to bring same success in the future?  Obviously, same acquisition options are available to its competitors as well, and companies such as Huawei seem to be successfully exploiting them with their big purses. 

The economics of communication, collaboration and commerce at the speed of light levels the playing field in product leadership, operational excellence and customer intimacy, and Chinese and Indian companies with their cheaper human resources and lower production costs can successfully compete with companies such as Cisco by hiring the right expertise.  They will be more Cisco’s competitors to become number One; After all, there is room at the top for only one number One.  As everyone starts to battle in establishing product leadership, operational excellence and customer intimacy using same technologies that get commoditized, only choice open for companies to be number one is to bring disruptive innovation to differentiate.  Time and again, evolution has proven that architectural simplification through disruptive innovation brings orders of magnitude productivity. Life forms survive and thrive by changing their DNA and adapting to external changes.  Will the differentiation in the future come from organizing to excel in disruptive innovation?  What will Cisco do?



[2]   Does the New “Virtual Network” Spell Sunset to the Heterogeneous Physical Network Infrastructure as We Know in Today’s Data Centers?

[3]   Is the Network-centric Computing Paradigm for Muti-core, the Next Big Thing?


[5]  Deming, Systems Thinking, Organizational DNA and Putting America First – Part II

[6]  Deming, Systems Thinking, Organizational DNA and Putting America First – Part I