Cisco, the venerable IT company, is going through a total redesign in its business.  The networking unit has seen its revenue decline for seven straight quarters. Not a good trajectory.

Revenue from Cisco’s switching business, easily its largest, also missed Wall Street’s estimates, resulting in the company’s total revenue falling for the seventh straight quarter.

 With its traditional business of making switches and routers struggling, Cisco, like other legacy technology firms, is focusing on high-growth areas such as security, the Internet of Things and cloud computing.

The reality is that Cisco is entering the IBM Moment where revenue in its core business will see continuous decline. This happens because their core products are increasingly being substituted by customers.

Networking is seeing some components move into software. And with that transition, the hardware has many competitors to deal with. Also, the big companies that used to spend easily on Cisco gears are buying non-premium products from Asia that get the job done, despite not being made by Cisco. So, Cisco is experiencing a double whammy: product substitution and competition from cheaper rivals. What Cisco sells at premium are available at lower prices by Chinese firms. As that happens, its business will drop further.

Most things are now outside the control of Cisco. It cannot stop Huawei from growing in Africa and around the world. It cannot do much to stop software being used to replace the gears it used to sell at premium.

HP went through that transformation and ended up breaking itself into two, with the legacy printing business as a separate firm. Cisco, if it finds success in the extremely new areas it is pursuing, will possible in future spin-off the networking business. At the moment, it is lagging in those new areas like cybersecurity. And networking business, at the hardware level, is a commoditized business.

Cisco demonstrates why it is hard running a hardware business: software indeed can eat it. Software is eating printing (with mobile, we print lesser), networking and other legacy hardware sectors.

Lesson for Hardware Entrepreneurs

No  matter what you do, as a hardware entrepreneur, always think how a platform can save that hardware business. A platform will provide the ecosystem to protect revenue and ensure you have your customers. But it requires an entirely new business model that is totally different from the way we run hardware business today.

Increasingly, it is evident that there is little competitive capability for hardware business with no element of software-driven platform. Everyone knows that sooner or later, someone will make any hardware cheaper, through commoditization of its core function. What will protect an innovator or a pioneer is the platform.

You cannot be running a solar lantern business  in Africa without thinking how you can build a lending business or something that will engage your customers around it. You cannot be installing solar panels for customers without thinking how they could be paying through subscription to give you room to innovate without worrying about risks of someone displacing you. In the electronics business, prices drop largely every two years. If you keep the present model of electronics business, you will experience the IBM, Dell and Cisco moments. Choose the Apple model which is organic with evolutionary features for whatever the markets bring.

There is no hardware business that will survive by itself in this age of Internet without an element of customer post-purchase relationship. You have to find a way to keep customers in your ecosystem. The old model of carry and go will be challenged by cheaper rivals.

Cisco is learning a lesson, and very soon, its remaining pricing power on networking gears, will decline as competitors continue to program them out from hardware into software. In software, the price drops and margins collapse. That was not the Cisco business model of old. The reality is here. You must learn from this as you build your business.

Further Insights via LinkedIn comments

I am posting these insights on this piece from LinkedIn users.

• A good insight to those who rely so much on ‘experience’ and old ways of doing things. There’s one sub-topic in Chemistry, which every science student must come across, it’s called Displacement Reaction; there’s also another version of it in Physics. I want to believe that the ‘Displacement Reaction’ is now more pronounced and louder in hardware business than the mixture of acid/base and water as the case maybe. The central maxim must now be ‘rethink your strategy from time to time’, else you wait for your ‘moment’; not a good moment anyway.
• “Cisco is learning a lesson” – ndubuisi ekekwe in a VUCA world you can’t be playing catch up especially when you are a brand like CISCO. One of the tenets of a solid strategy is ‘innovation that wins customer advantage’ – specifically staying relevant to the customer via value adding products and services that touch lives. Our lives are no longer stagnant like 20 years ago – businesses sleeping need to wake up. As I will share in an article soon, people fear change and that is essentially what strategy is; consequently the likes of CISCO have copied and pasted old strategies rather than proactively reinventing themselves. Despite the foregoing a company’s core purpose shouldn’t change e.g. Motorola’s purpose is “applying technology to the benefit of the public”, hence they and their products have evolved over time contributing to people’s lives (from TVs to microprocessors and more). What we are seeing in many businesses in CISCO’s situation is symptomatic of the absence of a core purpose and poor strategic foresight. ndubuisi as you have rightly said, they have to revamp their business models. But note that depth of #clarity of their business is required – that’s why I freely prescribe a diagnostic for such #clarity.
• Great insight Sir! Businesses are expected to continously assess their competitive business environment. The Michael Porter’s Five Forces model provides a good framework in which this can be done. With this type of analysis, the likes of Cisco should have seen, before hand, the potential lowering of entry barriers, increasing power of substitutes and those of buyers. What other entrepreneurs would do is to also create high switching costs for their customers or simply evolve with the tide. Facebook has expanded the scope of the interactivity of its platform over the years by copying or acquiring potential competitors. This has made them look ever young. (edited)

I own a Yahoo email account. Yahoo Mail is a very terrible product which is unusually slow. Yahoo used to work very well, but over the years, they made it extremely worse. They padded the product and at the end, Yahoo frustrates users. The most damaging aspect is the feature that keeps refreshing, annoying and frustrating the users.

If you live in a place where Internet is metered, Yahoo may not be optimal. It will not just take your time to get basic things done, it will also cost you more money.

Unfortunately, the new Yahoo Mail was introduced as an innovative (improved) product expected to serve customers better. The people that made it, perhaps created it in California, where internet speed might have been very fast. They had the perfect world and everything looked good for them. They saw no problem.

Yahoo does not have a global team spread as Google. Sure, it is now under the control of AOL, but that company also does not have local teams, across the world, as Google does. For Google, it has staff in practically most parts of the world.  Their people use their products in the most natural and practical modes. That helps Google to understand the realities on ground, helping it to make products that meet the needs of customers from many regions.

Yahoo and AOL do not have that luxury, because in their minds, the world must be like America, Japan and Western Europe and anyone that cannot conform  to those could be forgotten. That is a big problem.

Lesson for Founders

There is a lesson I am trying to draw here with this preamble. According to Fortune Newsletter, Google continues to optimize its search to ensure it works in different environments, saving people, in the emerging world, money on data.

Google tests “light” search app. The search giant is testing a data-friendly version of its search app in Indonesia, where connectivity and mobile data allocations are limited. The pilot is one example of how Google is attempting to cater its products to emerging markets, where it sees the next wave of Internet consumers.

That is it: Google has simply understood that even though the product may work very well in New York, it may not be optimal in Indonesia. This is the way it has innovated around the world, putting local realities in its products. When you try to use Gmail in slow internet, it quickly suggests using the HTML version to help improve the experience. Google is also investing in local languages thereby making sure that no opportunity exists for any competitor to sneak in.

Google sees product vision from the lens of the customers, focusing not on the supremacy of the product from Google’s point of view, but rather from the customer who is using the product. This makes Google to deliver a lesser aesthetic and ergonomic design to a customer in Accra who is more interested in saving money on metered Internet than how great the site looks.

Your product vision does not matter if what you have in mind is not what customers are getting. Internet business is not really about making the best graphics or websites, but rather, serving customers at the best possible way.

I see sites designed for African markets with so much graphics and video contents that play automatically on visits. Personally, if I am in Lagos, I do not visit sites that play videos automatically on arrival. I used to read ThisDay Nigeria but when they started the auto-video, I avoided them. I hate to be in a client’s office and then without my control, my laptop will start making noise.

Only customers can score product vision and the most complicated is not really what determines success. “Product is what customers say it is”, says Francis Oguaju (a LinkedIn user), and the way you deliver it to them matters for a digital product. You have that product you are testing which will be used across West Africa. Instead of doing real live test, you run it in your test server (in your above Internet speed Lagos HQ)  and everything comes back 100% fine. Then product is launched and users are complaining from all parts of the region.

Why? Under slow internet, your product fails. I have dealt with this in a bank client’s headquarters. We quickly updated the going live strategy requiring that the bank tests across more than 13 states in Nigeria, making sure the tests happen away from the bank branches where Internet was typically faster than the ones used by customers. Now, when new products are launched, the customer experiences have improved.

Add SSL to Your Site

Yesterday, Google sent this email below and it does mean that sites without SSL will be heavily penalized by Google ranking system. Not just that, Google will be sending security warming on your site if you do not have SSL when users want to complete simple Contact-Us forms.

To owner of [Site Name]

A few decades ago, firms ruled supreme in getting the best profit margins out of their customers. It was an era of optimizing for the maximum possible profit. Market was very opaque because information was very expensive and untimely. Customers could not track price changes in real time. Even when they get the comparative prices, the distance to the other shop was a huge barrier. So in most cases, customers would knowingly pay high prices because of the need to save time.

This was the era when airlines maximized prices on tickets. When you leave your house to a travel agent, you have made up your mind to come back with a paper ticket. The travel agent was serving the airlines and the higher you pay, the better is the business. Though the agent may offer some choices among the competing airlines, there was no major price pressure, since at the end you would be forced to buy from the agent.

Why? You may need to drive another twenty minutes for another travel agent. Under this model where you either buy from the airline offices or travel agents, your choices are very narrow and the airlines were in control.

Then came the Internet era; from Wakanow to Jumia Travels, Expedia to Priceline, the customer for the first time had the power to make decisions based on price without even leaving the house. Go online; describe the trip and airline choices will roll down; usually, the cheapest one comes first. This market is a commodity business, especially for an average traveler. Who cares for the airline you flew from Boston to Baltimore? Without that brand loyalty, the cheapest ticket always wins. The travel agents have lost the power to control the price. The airlines suddenly must compete on price resulting to lower profit margins.

The internet has commoditized the airline pricing sector. Without the Internet which  destroyed the pricing model, through commoditization, most airlines will still be commanding huge prices based on the mismatches owing to information asymmetry. The Internet has allowed the low-cost carriers to have direct access to customers. It has abstracted out the brand. The Internet was the most important factor that enabled these low-cost carriers to get into the industry. It provided a platform through which they connected to customers directly and competed on price effectively. You can now search, compare, and book in a few clicks without stepping outside. Many businesses that depend on stable digital channels build the stack to Own IP address blocks that keep traffic reliable and measurable. Control at this layer tightens feedback loops and sharpens pricing decisions.

We will continue to see major transformations and disruptions arising from the Internet.

Your Business on Internet

Starting and operating an internet business is not as easy as anyone could tell you. As I have noted on Tekedia, Internet has three main core features when you look at it from the business angle

• Aggregation Capability: Internet has this feature that those that create contents and value may not be the core recipients of the value delivered. Those that aggregate become the people that earn most of the values. Wakanow will always be in a better position than most airlines in Nigeria because it is asset-light, aggregating ticket pricing with minimal risk. When you expand that to Facebook and Google, which offer services completely free, the entities that create the values like media firms are totally lost. If you can build scale on the Internet, a business that depends on this aggregation construct is always good. Airbnb, Uber and most modern digital firms are good on this. Narialand is also one, aggregating contents, legally or otherwise, under one man and earning big profits all the way.
• Diminishing Abundance: Internet offers unconstrained distribution channel. This makes it so hard for anyone to control pricing because you do not just compete with your local peers; you compete globally. Yet, in some industries, the fact that Internet gives you global scale does not mean you can make money. ThisDay Nigeria newspaper may be accessible to any reader in the world, having thousands of readers daily, yet, it may not be making as much money as when it had very fewer readers, before the dawn of Internet. That is a diminishing return: internet is very notorious for that.
• Commoditization: Any content that is online is simply commoditized because they all have the same level of access. And when the contents are linked on Facebook, they compete for the same positions. Unlike in the past, before Internet, where New York Times print would be seen as a more prestigious material than most competing papers, the fact is that within this Internet era, everyone is competing for positions with Google search algorithm. Mastering this commoditization is very critical in understanding how to find success on the web. Building a fintech must be designed on the construct that a great product can be chosen over a big bank product because for the internet user, say for remittance, provided the money gets safely to the destination, no one cares how nice the branch of the bank looks. So a fintech can compete on price against a bank, if its services are great. The bank heritage has been commoditized. To win and succeed on the web, one has to differentiate by efficiency, pricing and or elements of value.

All Together

The future of commerce resides on the web. You should go for it. But understand the biggest vulnerability of Internet business: lack of defense, because on Internet you compete globally, with limited defined boundaries. Your mistakes cannot be masked. Your pricing can easily be compared with peers, and you cannot be guessing while on the web because information asymmetry, typical in the meatspace, is gone. Internet demands the best from you because Internet is a huge “continent” that herds, working on the wisdom of the crowd, the network effects. You cannot trick the crowd and that is why succeeding on the web is harder. If you ask a typical web hosting company in Lagos, Nairobi and Accra, you will be surprised on the number of people that abandon renewing their domains after just a year. Why? The promise of a huge global market was met with the inability to find a space in a big sea, mimicking the seaman that shouted “water everywhere, but not a single drop to drink”.

Zinox Technologies, makers or distributors of laptops, PCs, UPS and tablets, has had its moments. Founded by legendary ICT businessman,  Leo-Stan Ekeh, Zinox was a pioneer across many sectors in the Nigerian ICT industry. Along with Omatek, Zinox put Nigeria on an effervescence on a path to indigenous ICT capability. Unfortunately, that did not happen: the Nigerian problem was too much for Zinox and Omatek to overcome.

Zinox Technologies Limited manufactures and distributes computers and computer hardware in Africa and internationally. It offers ICT, telecoms, and after sales support solutions. The company sells its products through resellers. Zinox Technologies Limited was founded in 2001 and is based in Lagos, Nigeria. The company has additional offices in West Africa.

During Olusegun Obasanjo’s administration, a government policy was put in place to support local ICT companies. The former president had a vision – support the companies and a virtuoso system of local ICT ecosystem could be stimulated. From that framework, Nigeria could have a new industry, from the lens of creativity, over mere consumerism of technology.

That plan did not work. Zinox’s products did not meet key metrics to government customers that patronized them. Over time, that policy was relaxed. Yet, Zinox still won because the Zinox subsidiaries and sister companies remain one  of the largest distributors of computer systems in the West African markets for global brands like HP, Dell and Lenovo. So, technically, even if governments did not buy PCs with Zinox logo, they did buy products supplied from the Zinox empire.

Of course, making more money was not the only thing Zinox founder was after. Mr Ekeh actually wanted to redesign the ICT sector in his country by making things locally and bringing local innovation, In a speech many years ago in the Harvard Business School, which I listened, he was genuinely focused on building that local capability. His vision was solid as he explained how millions of jobs and economic growth could happen if all kids in Nigeria are provided with laptops and other ICT equipment. He tried, but quickly met the inevitable problems in hardware business: it takes focused and sustained government intervention to build such an industry. There is no single company that can stimulate a hardware ecosystem. It requires the rise of many, at the same time.

With that I mean, you cannot make computers if you have to import all the pieces and then assemble them in Nigeria. Zinox would have done better if there were local companies making RAM, PCBs, components and other units used in its computers. That will save costs and time, and also stimulate many elements in the industry. It remains far cheaper to import one computer than import hundreds of the units, package them, and then resell them in Nigeria. The economics and the numbers are not there. Yet, people do just that because patriotism sometimes goes ahead of sound business strategy.

But it could have worked, if government had supported it more, especially by nurturing local supplier pipelines to Zinox. But that would have been hard, with some of the ICT equipment having quality issues. I cannot blame the government and you cannot say that Zinox did not try.

The Natural Trajectory

What Zinox went through is largely the same way many companies, under government supports, in different countries, emerge to become local technology champions. There is a government patronage to provide assured customer base. It is like the Nigerian government putting an order with say “ABC Group” to buy 1000 trailers of bags of cement, just to assure the firm that it supports its efforts to build a local cement factory. Using that order, the company will not worry if there will be customers to sell to. This is usually necessary in some specific sectors where government wants to stimulate.

Zinox had that opportunity. But it missed it: the products were not optimal. The users complained and largely revolted that government could not impose on them non-optimal products. But the problem is not just Zinox: no company gets it right just as fast. Iconic companies in Japan took years to perfect their products. They had quality issues, but over time, they fixed them. The country stood by them, as they marched through the evolutionary process of improving quality. Samsung experience with its kitchenware is globally celebrated. But the company struggled with quality for years. But using its chaebol, it was able to keep making progress, until it cracked the code.

But for Omatek and Zinox, Nigeria did not waste efforts. It left immediately. Just like that, the natural trajectory was cut-off. Zinox machines were supremely better than most Chinese products we import daily in Nigeria. The government of China continues to support those firms through massive subsidies, cheap loans, and export support assistance. Of course, I am not suggesting that Nigeria could have continued to keep the policy. Yet, the reality is that if it wants to build a local hardware business, it must do so in the future. There is no way around it; unlike software, hardware business is dangerously risky. You do not fix a hardware product (the hardware part) with a software patch which can happen in minutes. In hardware, you recall the product, and that is money. It takes efforts and money to operate in that sector.

Nigeria cannot really build a hardware sector without everyone open to go through that phase of pain where we could all sacrifice small things to support the local industry. But that is not just a hardware sector issue; we barely support local rice producers.

The Talent Problem

Most tablets and smartphones in the world are made by largely four companies: Apple, MediaTek, Flex and Samsung/Huawei. By that I mean the chipset that powers them. Apple makes its own which is largely exclusive to it. Samsung does its own also. Then more than 90% of the Android devices, excluding Samsung and other big brands like Huawei, are powered by MediaTek and Flex technologies. You buy the chipset and you assemble them in your box. For the low quality devices, MediaTek is very popular. If you go to China, in the Shenzhen area, people buy these chipsets and in their garages produce smartphones. The ecosystem is matured, with guys experienced in firmware porting offering services, just like a carpenter going around villages helping people fix broken windows.

In the PC world, Intel rules the world. AMD though promising these days, is not really a factor, especially in products sold in Nigeria. Most cores are powered by Intel.  Zinox worked with Intel and Microsoft in its products. To make this type of product, Zinox will actually need to have a ready pipeline of talent, mainly from the Nigerian universities. The model of sending staff abroad for training or bringing expatriates to train staff in Nigeria will be limited for a sustained production system at this level. There is no way Zinox will sustain a top-grade production system with that type of model. This is the weakest link in Zinox strategy. The local support ecosystem is not there, thereby pushing labour cost high and exposing the business to risks. When you know that replacing departed staff could mean sending another engineer to U.S. for months, you will see the challenges of building a hardware business in Nigeria.

Indeed, Zinox’s challenges are largely issues it cannot individually deal with. Nigeria does not have the talent pipeline for what it plans to do. I have explained that Nigeria needs a national policy to stimulate the microelectronics industry.

Microelectronics is an engineering field that focuses on the design and manufacturing of electronics related products. Largely, every industrial sector depends on microelectronics as microchip, its bye-product, is the engine that powers the knowledge economy through provision of efficient computational systems. What we call ICT is an application-product of microelectronics as without the latter; the former can neither be possible nor advance. A creative ICT based economy requires a microelectronics strategy to help nurture sustainable innovation.

The Support Base

Who will like to run an electronics production system with generators? Only brave men like Mr Ekeh. The fundamentals do not make sense considering that it costs nothing to ship things from China, and Nigeria has an open import policy where any electronics can be imported. From electricity to water, the person making in China has a huge cost advantage. That means, Zinox products will naturally be costlier. But in this age of Internet with prices in our fingertips, it does not have the pricing power to recover those costs. So, at the end, it has to price to compete which means it will have lower margins.

Also, the market it serves is limited. Unlike the global brands like HP and Dell which can produce devices in millions, Zinox production capacity, I expect, is in the low thousands of units. In electronics, cost drops on volume. That means, Zinox systems are naturally going to be more expensive.

Combine that with the banking lending rates, you will see that Zinox must be magical to actually survive in producing its products in Nigeria. I do not see any specific advantage it enjoys for making in Nigeria, except that the factory could have a Nigerian flag on top of it with the keyboard having the Naira sign. I am not sure that is what Mr Ekeh cares about.

Yet, The Zinox Opportunity

Interestingly, Zinox has a promising future. Zinox has since changed its business. It has gone beyond making PCs to include services like educational contents and digital logistics in its business. Those services will be the future of the firm. Making PC is not really a great business: using the smiling curve, it is at the center which gets the lowest value. Zinox is moving to the edges with the services like Yudala, a hybrid ecommerce firm (i.e. both physical and internet based). It needs to move into ICT integration services at scale because those command more value than making PCs. That will help the firm build resilience from the low margin PC making business.

Zinox has accumulated capabilities and is certainly positioned to lead in unlocking more values in the broad ICT sector. It has to take its business to the upstream, but this time, not in building production systems in Nigeria where it will nearly not work. You do not produce computers with generators. There are fundamental things government must deliver before electronics manufacturing can happen locally. The process is so advanced that you cannot even afford electricity failure during production.

Aliko Dangote, Africa’s richest citizen, is a genius in mastering what it takes to move from a sectoral downtime to the upstream. He enters a sector, he begins the Accumulation of Capability, and systematically moves away from everyone. As soon as he does that, he takes industry leadership, making entry barriers harder, with economies of scale. Over time, he perfects that system, delivering higher productivity and economies of speed. His margin skyrockets, every other person struggles – most exit. He has won. In this videocast, I explain the Dangote strategy and what you can learn from it. A former trader, he now controls the largest conglomerate in West Africa, generating excess of $3 billion and employing about 30,000 people; he shows how wealth is built.

Zinox can replicate what Dangote Group does in the industries it operates in the ICT sector.

All Together

Zinox is rediscovering its vision: “To be the leading and preferred source of world-class Information Communication Technology products and solutions in Africa”. That vision will not have happened with making PCs in Nigeria. Today, it has transmuted itself, moving into services, away from the center of the smiling curve. But even as it adapts, Zinox brings the experience of the accumulated capabilities over the lost voyage in the hardware production business. Only the Nigerian government will decide when electronics production can happen in Nigeria, profitably and competitively. Until that electricity comes, Zinox  should not bother. There is no shame to that. Software, they say, will eat the world, Zinox can rediscover its vision by being a good integrator, ICT support firm and distributor of hardware, leaving the hardware production out of the business model.

In this videocast, I explain how ICT accelerated productivity in Nigeria’s financial sector, and how Internet will change many things in both the banking and the insurance sectors. The texts are here and here.