The good folks over at Bloomberg/Business Week wrote about Cisco’s failure to make good on their big investment in LinkSys. Cisco makes big, complicated gear to manage big complicated computer networks. LinkSys makes basic, cheap wireless routers you can buy at places like Walmart. The problem, they say …
“When tech companies that have been successful supplying enterprise customers with all manner of digital gear decide to go consumer, they usually hype the potential synergies, such as using components that go into both sets of products. Trouble is, those synergies rarely materialize, or are not enough to offset other problems. You see, consumer electronics businesses operate on razor-thin margins, yet still require an investment in R&D as well as heaps of marketing dollars. You need to sell humongous volumes through retail just to make the effort pay off.”
They – B/BW and I believe it is a safe bet, Cisco – missed the point. For one, the problem has nothing to do with ‘tech companies”. History – especially recent history – is littered with the wreckage of companies of all sorts that sought to leverage their product and/or process technology by getting into a new market … companies that machine parts for aerospace trying to get into automotive. Companies fabricating parts for Ag looking to make parts for energy OEM’s. There were lots and lots of these strategies crashing and burning early in the recent recession as manufacturers looked to find other outlets for their capacity when sales dropped off in their primary market.
Mostly, though, they missed the point that a different market means a different value proposition. What is value adding and what is waste for a big company buyer of Cisco network technology is different from the definitions of value and waste for the guy who goes to Walmart to buy a wireless contraption for his house. And different value propositions mean different management infra-structures – different supply chain processes, different quality systems and thinking, different metrics, different organizational structure.
The companies that succeed – John Deere, for instance, selling big, expensive equipment into the Ag market branching out into lawn mowers for consumers – succeeded by creating an entirely different management concept. The fundamental supply chain, quality, engineering and operating management approach is different for each market. Failure, on the other hand, results from one-size-fits-all management.
I have no idea what Cisco knew or did not know, but the proof that B/BW missed the point lies in the statement “consumer electronics businesses operate on razor-thin margins.” Apple hardly operates on “razor thin margins” and they are most certainly a consumer electronics company. Now I don’t advocate anyone operating by Apple’s skewed management approach, but they are proof-positive that there is nothing inherent to the consumer electronics business that makes it less profitable than any other business.
In fact, when they say ‘razor thin margins’ they mean the gap between selling prices per unit and standard costs – an utterly meaningless ratio. There is nothing razor thin about the overall profitability of lots of companies making and selling consumer products in the United States. Those companies, however, understand what creates value in the consumer market, and what doesn’t.
The bottom line: The right management structure and processes for any company are a function of its customers, and how those customers define value. Attempting to create maximum value for two radically different sorts of customers with one, standard management infrastructure won’t work, no matter how much effort the management experts and schools put into searching for the Holy Grail of the ‘one best’ way to manage.