Wednesday, January 7, 2015

Cisco and the Liliputians

One of the most famous stories of all time is one called "Gulliver's Travels".  Although quite lengthy and complicated, a normal man by the name of Gulliver one day begins traveling the high seas in search of adventure.  During a heavy storm, Gulliver's ship sinks and he is washed ashore, unconscious, on the beaches of the land of Lilliput.  When he awakens, he discovers that his body has been restrained by dozens of tiny ropes put in place by the natives of Lilliput, called "Lilliputians".  Although each is only six inches tall, they managed to secure enough ropes to safely subdue the MUCH larger Gulliver.

For an understanding of how that might have appeared, here is a picture from a recent movie starring Jack Black as Gulliver:

Now imagine that Cisco, a company with a market capitalization of over $130 billion and annual revenues of $47 billion is in the position of Gulliver.  Cisco is a company that is constantly surrounded by much smaller network hardware and services companies, each of them chipping tiny business of business away.  Cisco should be able to easily crush all of the competitive Lilliputians around it, yet it cannot.  Have you heard of some of them?:

  • F5 Networks
  • Riverbed
  • Silver Peak
  • Virtela (etc)
How can that be?  What is stopping Cisco from successfully freezing out smaller competitors in the way that Microsoft has done?  After all, Microsoft's Office suite has been out for over 20 years and no product is a viable competitor.  What is the difference?

The answer lies in the constant, continual, perpetual, never-ending (you get the point) issues with Cisco's supply chain.  People want their products yet Cisco cannot reliably deliver on time or sometimes even at all.  The products are solid, but they can't do a company much good if they are unattainable, at least in a reasonable amount of time.

It is a testament to the size of Cisco's business and their product usefulness that they have been able to grow, even though their supply chain problems go back at least 15 years.  Here are just a few examples that you can read in chronological order:

  • 2001 - outsourcing leads to poor supply chain management at Cisco ($2 billion write-off)
  • 2005 - almost all returned Cisco equipment was scrapped, cutting into the refurbished supply
  • 2007 - struggling to find an identity in creating adaptive practices
  • 2009 & 2010 - Cisco struggles to fulfill orders in a timely manner
  • 2010 - "Cisco response to supply chain woes lacking..."
  • 2010 - "Cisco product delays opening doors for rivals"
  • 2010 & 2011 - "There seems to be no end to the string of backorders..."
  • 2014 -  In Q4, orders placed are delayed by as much as 60 days due to backorders
As I've mentioned in the past, I don't believe that Cisco is under any existential threat.  Their stock moves quite a bit, but currently seems to be trending upward in a conservative fashion.  The problem that I see for Cisco is that they continually leave the door open for competition.  Even though the supply chain issues vary from year to year, they still leave customers suspicious that a "promise" date on an order is actually a "swag" date.  That's not a good impression for a customer to have because it makes them continually look for a "Plan B" when they need gear NOW and can't get it until LATER.

How many 100 year old companies, banks, and institutions have we seen decline or go out of business?  Cisco may or may not be in trouble, but history says that if they keep the door open long enough, sooner or later a giant will walk through it.  That giant might just be one speaking Chinese.

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