Cisco, EMC, Once Allies Now Frenemies, Have Similar Strategy To Maintain Dominance

Commodification promised to kill old tech stalwarts like Cisco, EMC and Oracle as standardized, mass produced hardware paired with open source software undermined their high-margin businesses. However the road to irrelevance was detoured by an instinctive response: adapt or die. Each company's resulting metamorphosis from peddling boxes to building full stack IT systems has been both predictable and impressive. Predictable in that the old tech response to ankle biting commodity products follows the classic Clayton Christensen disruptive technology playbook: move up the performance and feature axis. But today's old tech response deviates from the economic model by introducing a third axis: services. Cisco and EMC realize that they can't win the price/performance game. Instead, each has concluded that businesses, even tech savvy firms, don't obsess over about speeds and feeds, but business outcomes and competitive advantage. Old tech vendors can't win a price war, but they can win a results war.

As IT bluebloods like Cisco, EMC, Dell , HP and Oracle have morphed from product segment leaders into full stack IT providers it's turned former allies into adversaries. Companies that once saw collaborative opportunities by combining strengths in different product silos to deliver complete IT packages have gradually expanded into each other's turf, each trying to be the one-stop IT shop. Although colliding worlds among IT vendors has turned collaboration into competition, the big firms still have much in common. Indeed, Cisco and EMC, former allies now frenemies, face a common threat from commodity hardware and open source software. Juxtaposing recent comments by their respective executives makes clear they are responding to comparable threats with similar strategies. Firms that grew by selling products with demonstrably superior performance now stress broad portfolios they've stitched into end-to-end technology platforms. According to Cisco's legendary CEO John Chambers customers want "outcomes."

Cisco's Focus: Outcomes, Not Boxes

During Cisco's recent earnings call Chambers drove home the focus on customers and their business results, saying that Cisco's "sustainable differentiation" stems from its ability "to deliver integrated architectures and solutions with scale, speed and security." Chambers continued:

"Competitors selling low-cost technology building blocks can't compete with our total cost advantage, operational efficiency, security, and speed to results that Cisco provides. … When companies and countries go digital, IT becomes a board-level concern; and reliability, security, trust matter more than ever. The Cisco brand behind every one of our architectures matters more now than ever. We are seeing our moves from selling boxes to selling outcomes translate into strong execution in a tough global market."

Chambers concluded:

"To summarize my comments, our customer conversations today are not about standalone products. They are simply about digitization, growth, new revenue streams for them, innovation, and business outcomes. We believe we are pulling away from our competition using the same formula that we've always used, integrating our industry-leading products in every category into architectures and solutions that deliver real outcomes. We've created this opportunity and it is ours to execute."

Although switching and routing comprise almost half of Cisco's revenue, Chambers said that its most strategic customers, i.e. those digitizing their business, need for traditional networking products aren't the reason they turn to Cisco. Instead, Cisco stresses business transformations, where it has over 1,200 projects and a $3.7 billion order pipeline.

EMC Capitalizing on IT Transformation

If listening to Chambers provided a distinct deja vu, that's probably because EMC's execs voiced very similar words when outlining their strategy and opportunities just a few weeks earlier. Here's CFO Zane Rowe: "As the IT market is transforming, customers are becoming increasingly focused on successful outcomes versus buying individual products. We've anticipated this, and have transformed our business to better address changing customer needs." Speaking of the firm's cross-organizational systems integrator, Federation Solutions group, Rowe said [italics added]:

"An important factor in the success of our strategy is the progress we're making with these integrated solutions and in our six key growth opportunities. .... As these products are integrated into our unique solutions, they grow quickly and become an increasingly significant portion of the overall business."

Rowe concludes that delivering high-value, integrated "solutions" makes EMC a "strategic partner" not just a vendor. CEO Joe Tucci reiterated that EMC's strategy is to address high-level business needs, not just push technology, "The point we tried to make, get across is there is a huge inextricably linked business and IT transformation taking place right now. A transformation like this will have winners and losers, as this transformation plays out. We have and are making the right investments, and we have the strategy, the technology, the people, and the customer permission to be a winner."

[for background on the Federation, see my earlier columns]

Not surprisingly, the theme at EMC World, "Redefine Next ", tried to capture the company's horizontally integrated, "better together" strategy of knitting storage, converged servers, cloud software, development platforms data analytics and security into digital business suites. But in a Q&A, EMC II President David Goulden claimed that businesses don't want a DIY hodgepodge of hardware and software from different vendors, but want to run mission critical services on "curated technology" from a trusted partner like EMC.

As Cisco and EMC have grown into horizontal IT suppliers, two companies that were once complementary find themselves increasingly competing for the same business, however they face common threats from commodity hardware and open software that they are fighting by exploiting strengths of size, customer trust, broad technology portfolios, depth of technical talent and a focus on insulating customers from complex technology integrations.

It's an Apple -like approach to enterprise IT by  emphasizing higher-margin packaged "solutions" of pre-integrated hardware and software bundles that just work that appeals to beleaguered IT departments that don't have the time or expertise to learn, test and integrate white-box hardware and open source software. Much like the business person that's too busy or tired to mow the yard or clean the house on weekends, these companies would rather trade money for time, gladly paying for results.

Of course even the most time- and talent-constrained organization has limits to its largess meaning Cisco and EMC still face pricing pressure from lower cost system integrators using commodity components. However it's easier to justify high margins for high value services than than the data center plumbing each firm was built upon. By delivering products and services with easily demonstrated improvements to business profitability, Cisco and EMC can delay, perhaps indefinitely, the commodifying decay that has afflicted so many tech Titans before them.