Five steps to recover from disruptive innovation

17 July 2020

By Sotirios Paroutis and Luciano Oviedo

Cisco Systems had a problem on their hands. In 2009, cloud computing technologies had been around for a while and companies like Cisco were quite happy to supply providers of hardware and some of the software needed to run it – but this was a world of private clouds – one company hosting and running their own data centre.

Amazon had been cultivating Amazon Web Services (AWS) since the early 2000s and then seemingly out of nowhere, AWS disrupted these comfortable relationships with a simple, compelling proposition: a public cloud where many companies can use the same data centre.

AWS would take on the risk and cost of building the huge – and expensive – server farms for delivering scalable cloud computing capabilities and, in return, charge individuals, companies and governments to host and run their own services on them.

Demand for AWS, and other similar platforms, went through the roof. Cisco was selling more hardware and software overall, but although Cisco’s revenues were increasing its gross margin was declining because it was under pressure from fast-growing customers like AWS, which accepted lower margins in exchange for higher transaction volume.

Cisco's own version of the cloud Intercloud failed to bring in the necessary customers and was abandoned in 2016. Without a strong presence in the space, Cisco was losing ground in the technology architectures race and now they were losing control of the pricing. It was in danger of not only missing the boat but the next one as well.

Rather than taking on the new cloud data centres led by AWS Cisco responded by creating a new platform called 'fog' that would work as a compliment to the cloud. It had been disrupted and overtaken by AWS new technology and business model, but it fought back not by building an alternative version to take on AWS in a 'winner takes all' battle, but designing a mutually beneficial fog system that could work in tandem with fog services. It was a 'rising tide lifts all boats' strategy.

Together with Saeed Khanagha, of Vrije Universiteit Amsterdam, and Shaz Ansari, of the University of Cambridge, we studied Cisco and the emergence of technology ecosystems. Over nine years we were able to go behind the scenes at Cisco and see this strategy develop, attending meetings and holding 41 interviews with senior management. Here are five steps that business leaders can take from Cisco's approach to avoid being left behind when technology suddenly moves on.

 

1 Change your mindset

We are so used to thinking that competition and competitive forces will determine the fate of companies faced by disruption that we don’t notice that this is merely a mindset. And it’s a destructive one at that – a competitive mindset that leads companies to mistakenly adopt one of three risky strategies in the erroneous belief that it is a zero-sum game and they need to go head-to-head with their rival.

The first strategy is surrender. Cisco could have simply kept supplying the hardware and software for others to use and not taken the risk of developing its own cloud service – a decision that would lead to the further loss of control of its technology and impeded the Silicon Valley tech conglomerate's ability to respond in the future.

The second strategy is copying. Cisco could have created its own platform that was simply a copy of what AWS was doing. Still, even launching a 'copy' is a risk because it takes resources and time to develop and for customers – hopefully – to start using it. Time, which in this case, would have allowed AWS to continue to exploit its first-mover advantage to build its audience.

Then there is the third strategy, which offers high rewards if it works, but is very costly if it doesn’t. Cisco could have decided to use the same technology as its competitor but in a totally new way, in order to leapfrog them. This approach would also involve Cisco rethinking the platform in a way that suddenly created a great deal of interest among consumers and suppliers, who then competed to be the first in the space.

Again, this strategy would have required the expenditure of a huge amount of resources and for Cisco to have a big innovation in place to make this giant leap forward. It would also still allow AWS to use its first-mover advantage.

What interested us was that in January 2014 Cisco introduced fog that followed none of these three strategies. Fog was designed to complement the cloud providers and piggy-back on their increasing importance as organisations moved to the cloud.

2 Establish symbiotic relationships

Business leaders love the concept of the ecosystem, in which animals compete with each other for dominance. Yet in ecosystems there is also commensalism, that is, relationships based on mutual co-existence; and symbiotic relationships, which benefit all parties involved.

Our research shows that business leaders when faced by technological disruption can follow an alternative, mutually beneficial strategy. This is the 'rising tide lifts all boats' strategy, rather than the zero-sum 'winner takes all' approach.

The success of these mutually beneficial strategies depends on the adaptability of traditional corporate cultures to the demands of symbiotic relationships. Their typical insistence on maintaining control over technology and a reluctance to share information are incompatible with these kinds of reciprocal relationships.

Fog was initially positioned to co-exist with platforms like AWS rather than compete, by sitting between the edge device and the cloud. It was intended to be the layer that enhanced the cloud’s efficiency by, for example, helping the edge devices, such as Internet of Things devices, make complex calculations for mission critical needs without the need to eat up bandwidth by sending the data to the cloud and back.

When Cisco didn’t have as much traction as it had expected when set against the runaway growth of the cloud it decided to position fog differently.

Rather than a strategy of co-existence, it decided to pursue a challenging strategy based on establishing mutually beneficial relations. Fog would become less a product that Cisco was selling and more a service that people would want to be associated with and look to for solutions.

What began as a closed platform was opened up. Cisco brought other companies into the platform and, in time, developed it into a fully-fledged consortium consisting of partners who wanted to assert their interpretation of what the platform was and how it should be implemented. Partners who would also provide a handy defence mechanism for Cisco if they were faced by a rival who wanted to go head-to-head with them over fog.

 

3 Now become distinctive

Our research then shows that leaders have to perform the trickiest, most counterintuitive strategic play of all: to make their platform more distinctive while strengthening their symbiotic relationships.

With symbiotic relationships established and the platform building up a head of steam, Cisco needed to make its platform more distinctive by competing a little more with the disruptor without reverting to the winner-takes-all mindset. If it didn’t, then users may simply ask, why is its service necessary?

To achieve this, Cisco began to emphasise that customers didn’t need to go all the way to the cloud any more. Fog could provide certain benefits, or would introduce certain innovations, that would be impossible in the cloud.

 

4 The symbolic and material is important

We found it is important for businesses to deploy a dynamic mix of symbolic and material actions in these early stages to reconcile – and even distract attention from  the strategic tensions involved in complementing the dominant platform to gain a footing and then the switch to partial competition when the platform starts to become popular.

To begin with, Cisco’s executives did play a key role at conferences and the brand was very visible, but they learnt quickly. More and more time was given to academics and representatives from the other companies developing solutions in order to convey the idea that fog was a group of companies interested in finding solutions to new problems.

In November 2015, Cisco founded the OpenFog Consortium with academics from Princeton University and enticed significant industry players, ARM Holdings, Dell, Intel, and Microsoft to join it to promote interests and development in fog computing.

 

5 Legitimacy is crucial

For the establishment of symbiotic relationships to be successful the service has to be seen as legitimate. To earn legitimacy is a confirmatory process for a product. It means that people recognise that your service plays a meaningful part in the reality of the space they occupy.

For Cisco this meant people saw that fog could be brought into the mix of solutions to the problems they were facing, not as a hypothetical solution, but as a service that would deliver what it said it was going to deliver.

Indeed, OpenFog architecture became an industry standard, which was a major milestone in the fog computing initiative and established its position.

 

Undoubtedly, there are a number of factors that may determine whether the 'rising tide lifts all boats' strategy is suitable for any business facing disruption, such as whether there are unmet consumer needs and the need to enlist support of powerful actors who use the rival platform.

But our research showed that the emergence of a new law of the jungle can help businesses bounce back from disruption and avoid being left behind.

Further reading:

Khanagha, S., Ansari, S., Paroutis, S. and Oviedo, L. (2020) "Mutualism and the dynamics of new platform creation: a study of Cisco and Fog computing", Strategic Management Journal.

Knight, E. and Paroutis, S. (2017) "Becoming salient: the TMT leader’s role in shaping the interpretive context of paradoxical tensions", Organization Studies.

Appio, F. P., Lima, M. and Paroutis, S. (2018) "Understanding smart cities : innovation ecosystems, technological advancements, and societal challenges", Technological Forecasting and Social Change.

Paroutis, S., Bennett, M. and Heracleous, L. T. (2014) "A strategic view on smart city technology : the case of IBM smarter cities during a recession", Technological Forecasting and Social Change.

 

Sotirios Paroutis is Professor of Strategic Management and teaches Strategy & Practice on the Distance Learning MBAExecutive MBA and MSc Marketing & Strategy. He also lectures on Strategic Advantage on the Executive MBA (London).

Luciano Oviedo is Founder and CEO of tech start-up Tempugo WAITX after 12 years in new product development and corporate strategy at Intel. He is studying a Doctor of Business Administration in computational strategy.

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