CASE STUDY: CISCO

Cisco Systems is a good example of a renowned Western multinational with a premium brand that has gone global in a significant and concerted way. And not only did Cisco go global, but it made EMs a big part of its strategy starting in the mid-2000s.

Competition

At around the same time emerging competitors from China were presenting more challenges for Cisco, and the need for a focused initiative was amplified. The CEO, John Chambers, sponsored a dedicated competitive sales-support program to assist the global sales force in competing more effectively and winning more deals.

Before we get into specifics about the 5Ps, let's discuss and emphasize the importance and impact of having strong leadership qualities in executives who embody and transmit their vision for the future of a company. Cisco had a long-term view and wanted to ensure the long-term viability of the global initiative, not just secure short-term profits. It knew that globalization would be at least a 10-year journey and wanted to create the conditions necessary for long-term sustainability.

Elfrink was known to encourage his team to think differently, and wanted the company to be more strategic in how it developed business models, partnerships, ecosystems, and solutions to address new kinds of markets and customers worldwide.¹ The goal of going to India was to help transform Cisco from a multinational corporation to a global innovator.²

Product => Solution and Innovation

Cisco has long had a unique model to foster innovation and to retain top talent. They create small internal development teams called alpha projects that are about encouraging innovation in different ways. The teams are empowered to operate differently and are also incented differently.

Cisco is a classic example of the challenges a premium brand faces when going global into markets that require less robust features and a lower price threshold. The company recognized the importance of selling to EMs—next was determining how to position and price the offer to avoid compromising its margins and the brand.

Salespeople were often asked by customers for what Western companies might call legacy products and regional sales teams frequently requested that product development create more EM-focused products.

One of the original intentions of the Bangalore GCE was to establish a product development and innovation center for the creation of solutions specifically meant to meet the needs of EM customers. Thus, the Smart Grid energy initiative was created. It got off the ground with a few deployments until the financial crisis of 2008 hit. This caused Cisco to turn towards a more conservative investment approach that embraced more controlled risk. However, as economic conditions ameliorated in recent years, Cisco reignited their long term strategy and established a number of Innovation Centers worldwide (Brazil, Korea, Germany, Canada, Spain, the UK). Smart Cities as well as other collaboration and transformation initiatives continue to flourish. The original goal of creating a local presence through the GCE to foster innovation for local EMs continues to be an ongoing endeavor and an evolving process.

Price => Value-Add

As discussed in prior chapters, the discounting game is one of the biggest challenges when competing with emerging entrants in EMs, where price sensitivity is paramount. It proved to be a delicate balance between preserving average margin expectations and protecting its premium brand equity while addressing regional price-break requirements in order to make the sale.

Regions escalated requests for corporate to offer discounts comparable to those of emerging competitors in order to win business. That was not the way the company wanted to go. Because deep discounts were not an option, nor a sustainable competitive strategy, Cisco focused more on value-selling—that is, selling a total solution based on what the customer needed and highlighting Cisco's competitive differentiators. Thus a cross-regional value-selling approach was initiated and incorporated into sales training. The organization became more adept at positioning Cisco's holistic and comprehensive value, and better at explaining what the customer was receiving as part of the premium pricing, even after a reasonable discount was applied.

Another challenge in selling to EM customers is constraints on their ability to pay. Emerging competitors like Huawei were good at offering attractive financing options through government loans and subsidies, in addition to other vehicles, in order to help customers finance the purchase of their equipment.

Cisco became proactive and adopted a comparable financing strategy for EM customers, which was a significant shift in practice for the risk-conservative company. The Cisco Capital Group (the company's financing arm) grew to be an extension of the support team for escalated, high-priority sales challenges. Cisco also introduced a special capital fund for EM strategic accounts, as well as an exclusive, designated fund to be used for more partnership opportunities with specific key customers. This approach demonstrated to prospective accounts that Cisco cared about their business and wanted to do all it could to acquire them as customers, while at the same time not compromising or jeopardizing the premium brand and positioning that the customer appreciated in the first place.

Place => Partnerships

Cisco understands the value of partnerships well—and forms them in many different capacities. In the fall of 2015, Cisco and Ericsson announced an alliance as a strategy to quell the heightened competition from Huawei and Nokia by sharing market footprint, combining solutions and developing new products. When Cisco was looking to do business in EMs, it also recognized the importance of presence and collaboration. Cisco had a strong philosophy of giving, which they exhibited by investing in countries that needed assistance with socioeconomic development goals and by lending support when natural disasters hit.

As stated earlier, Cisco recognized the importance of public-private partnerships in fostering a successful and long-lasting global expansion. These partnerships were established in different areas and for various reasons with government officials, nongovernmental organizations (NGOs), and suppliers, as well as with both business partners and competitors.

Cisco made significant investments in both India and China in early days. It understood the blurred lines between competitor and partner, the value of coopetition, and the importance of playing in each other's sandboxes (or each other's markets) in this new global economy.

Examples of Cisco's Public-Private Initiatives from previous years:

• The Softbank Asia Infrastructure Fund (SAIF), whose mandate is funding emerging innovation and direct investment.
• The establishment of a fund of up to US$400 million to finance a multiyear innovation and sustainability initiative in China.
• The Songdo public-private partnership in South Korea, in which Cisco established local relationships with government officials, NGOs, suppliers, and competitors, to create a Smart City.

Coopetition Outcomes: Playing in Each Other's Sandboxes

Cisco made a resource commitment for the GCE, and the intention was to send top talent from the United States to promote knowledge transfer and growth. The number of employees more than doubled over a five-year span and reached 10,000 at one point—almost all local hires.

It became difficult to convince a number of U.S. employees to go to India. It was perceived as a left turn in their career path as there was no next step for expats upon the completion of their terms. This sometimes resulted in leaders leaving for other companies. At the time of writing Cisco still had to make progress in integrating the global experience gained by expats into corporate culture and into development for EMs.

Cisco leadership continues to be concerned about margin erosion and may not fully buy into a new product-development strategy exclusively for EMs. Such a move would compromise its current margin structure, which is valued and anticipated by Wall Street. Having said that, margin erosion is already being experienced in markets like Latin America, as Cisco continues to manage around the competitive price points of emerging competitors, who have also started producing better quality products.

Promotion => Customer Relationships and Culture

When Cisco decided to be in Emerging Markets in a focused way, they demonstrated their commitment by carving out EM as a distinct region and assigning numerous employees locally and in support functions. While Cisco did a good job of hiring within and transplanting employees into the expanded EMs, there still was a gap between cultures. Cisco's corporate culture included the expectation that revenue was to be brought in on a weekly basis, while the culture of EM customers emphasized long-term relationships and a longer sales cycle.

Naturally, there was also a learning curve for corporate to better understand and address the differing selling and business needs of their EM counterparts. The other element that is always difficult to reconcile in any revenue driven business, is the allocation of resources and support relative to revenue potential, or return on investment.

Politics

Cisco executives, particularly former CEO John Chambers, were and still are very proactive in fostering political relationships at high levels, either for the long term or for specific initiatives.

Realizing how important and effective government influence was for the Chinese, and how successful they were in engaging from the top down, it was clear that Cisco needed to do more of the same. Thus, the Government Affairs group extended its expertise in higher-government policy activities to assist with sales priorities. Sales teams were trained on US Government Commercial services and resources available to them. At the other end of the spectrum, visits were made to the USDOC in Washington, DC, where competitive challenges were escalated.

CASE STUDY: XIAOMI

Xiaomi is a company that is moving beyond the Chinese copycat stereotype by building a solution that combines the best of many different worlds—technology innovation, social media, e-commerce—and by creating a new business model. It is a great example of innovation cross-pollination, and is indicative of the direction this new global marketplace is going and how the competition is evolving. It depicts the increasingly blurred lines between the sources of innovation and commerce.

Product => Solution and Innovation

We are an Internet and a software company much more than…a hardware company.

—Hugo Barra, Xiaomi Global

Xiaomi is one of the top five smartphone vendors globally, ranking among giants like Apple, Samsung, Huawei, and Lenovo. Xiaomi's meteoric rise in the Chinese market is a key contributor to its global success.

Xiaomi is primarily known for its Android mobile phone, but its portfolio of products also includes MIUI (Mi user interface), customizable Android-based firmware, the Mi Pad (a tablet priced to undercut the iPad mini), Mi Talk (a messaging application), and Mi Box, a smart set-top box. The company has created software that is customizable and is updated weekly. This is a competitive differentiator that other Android phone makers do not have.

As mentioned, Mi series phones are built on Android, which is a Google-backed operating system (OS), with Xiaomi's proprietary OS (MIUI) layered on top of that. The company offers high-quality phones at prices affordable for the Chinese masses, most of whom earn less than $2000 per year. Xiaomi's solution is an entire ecosystem taking advantage of a mobile Internet revolution.

Its R&D approach is based on customer focus, and this methodology is a key to their success. The MIUI is primarily based on user feedback, and it pushes out software updates on a weekly basis to keep its phones current.

Xiaomi is still in search of other revenue models and its strategy is to make money on services. Its plans include building an Internet platform that is delivered through its devices, and it will be partnering with many companies to build layers of services into the operating system.⁴

Xiaomi used a penetration pricing strategy, as well as a unique business model, in order to acquire significant market share in China. Phones were offered at very low margins and sold directly to avoid retail and overhead costs. And it worked! It is the first company ever to achieve $1 billion in revenues in its second year.

Price => Value-Add

Xiaomi made a conscious decision to have a different business model from other smartphone manufacturers and priced its phones barely above cost. Some speculate that the margins on its phone are very low in order to encourage adoption. Further motivating adoption is that Apple products are expensive in China—the iPhone 5c is $700 to $800—which makes it easy for Xiaomi to underprice iPhones.

However, Xiaomi says that the hardware is simply a delivery vehicle for the software.⁵ The company has its own e-commerce platform, the third largest in China.

The phone has a yearlong life cycle, at the end of which the company is making roughly a 15-percent margin, which is very low by industry standards. Being a private company enables it to have low margins; a publicly traded Western company might be penalized for having such low margins. By delaying plans to go public for five years, it can focus on product and service development in its own unique way.

As mentioned previously, Xiaomi spends next to nothing on marketing. The money it saves on marketing goes to the purchase of high-end components. It sells its phones directly and online and sells in small batches of around 100,000 phones. Its phones sell out quickly, and so it has no inventory costs. During a flash sale in India in 2014 the company sold 100,000 phones in just 4.2 seconds.⁶

Place => Partnerships

To further reduce costs, Xiaomi has shunned traditional ways of selling phones, such as using physical stores and commercial ads. Instead, the company mainly sells its phones online, and has cultivated a growing fan base to help promote its products.⁷

By selling direct to customers online and cutting out resellers, Xiaomi saves not only the 25-percent margin that the retailer would be earning but also reseller training costs.

Promotion => Customer Relationships and Culture

Strong customer orientation is a key success factor for Xiaomi, along with good R&D methodology.

Politics

While politics are not in play from the perspectives of what we've discussed throughout the book, Xiaomi has been accused of being a copycat; however, it refutes this allegation, saying that everyone in the mobile industry is inspired by others. In that vein, Barra remarked that Apple has been taking a lot of cues from Android recently. He acknowledges that Xiaomi gets ideas from other companies and is inspired by great products and great design, but also says, “Show me a completely new design. I bet you can't find one.”

Cross-Pollination Innovation

Innovation comes in different forms. Xiaomi builds on the creativity and success of others' innovations to create new offers and unique business models. For example, it adopted the Amazon B2C (business to consumer) style of doing business, in which the cost of selling is very low. It also implemented Google's style of software development; that is, work quickly in small scrappy teams and move as fast as you can. And, it adopted the Apple style of supply chain management—the best there is—with tight control from end to end.

As the MIUI is a variant of Android, it needs to be harmonious with the rest of the Android ecosystem and Xiaomi needs to be on good terms with Google. Although some aspects of the phone design have been copied, Xiaomi has come up with its own flavor—for example, evolving the platform and building its product on a live operating system so that it can take cues from users. That is a fundamental design-system difference.

Global Expansion

Chinese companies are coming to the rest of the world.

—Lei Jun, Xiaomi CEO

Xiaomi has expanded into Singapore, Malaysia, and the Philippines. Two other particularly successful market expansions have taken place in Indonesia and India, where quite a buzz was created because of the product and price point of between US$120 and US$130—which is a very good value for a high quality device. It is 50 to 80 percent cheaper than comparable options. Xiaomi did not intentionally price lower than the competition; it just offered a price closer to the price point in China.

In each country, Xiaomi learned about local social-media preferences. For example, Facebook was primarily used as the marketing tool in Malaysia, whereas outreach on Twitter was more effective in the Philippines than in other markets. In Indonesia, language is very important—Indonesians prefer the local language and asking questions and exchanging information through the Kaskus Forum, which is their most popular online community.

Also on the expansion list are Russia, Turkey, Brazil, and Mexico. The goal is to triple shipments, from 19 million to 60 million phones.

The U.S. market is on the horizon but not in the immediate future, given how competitive it is. Says Hugo Barra, “Getting there requires that you are ready. We will work up to that.…I don't see a place for the Xiaomi model now, but we will evolve that.” However, Steve Wozniak, Apple cofounder, thinks that Xiaomi has excellent products and is good enough to break the U.S. market.¹¹

Disruptive Innovation Approach

The creative economy here continues to rise, entrepreneurship is surging and our innovation abilities are growing.

—Lei Jun, Xiaomi CEO

Xiaomi's business model is very different and could be very disruptive to companies such as Apple or Samsung if it becomes a global power. It has done things that other Android phone makers have not been able to do, such as creating software that is updated frequently. It provides phones that are more affordable than its competitors and sells its products only online. It has customer support, but without the full retail experience. It has optimized the use of social media as a market-penetration strategy and incurred almost no marketing costs, in addition to using social media as an effective R&D tool. Finally and perhaps most importantly, Xiaomi is extremely user focused and has a high customer-satisfaction mechanism.

“We are taking a very different approach in designing, manufacturing and selling, which I think can have an impact,” said Barra. “But we are just getting started.”¹³

CASE STUDY: Pinnacle Engines

Pinnacle Engines has developed a unique, ultra-efficient engine architecture that provides 30- to 50-percent improvements in fuel economy without the typical cost penalty that comes with the production of most fuel-efficient vehicles. Its technology enables immediate and dramatic reductions in fuel consumption and greenhouse gas emissions at an affordable price point, making it accessible by the masses.

The Pinnacle Engines solution was innovation by happenchance, as it reinvented the internal combustion engine with low-cost features for emerging economies. The original intention of inventor Monty Cleeves in creating a cost-effective, low-emitting engine (almost 30 years ago) was to create this solution for high-end automotive cars—a high-end niche play. However, as global market demands evolved over time, so too did the opportunity for this innovation.

Pinnacle Engines has a very unique strategy, using an approach that is both cost-driven and innovation-driven in targeting EMs. It is not selling products but licensing technology. As such, it is enabling further innovation as an OEM (original equipment manufacturer), as well as through knowledge transfer. In other words, it is aiding EM customers to innovate on their own. And if that wasn't enough, the solution is also good for the environment, not just for people's pocketbooks.

Product => Solution and Innovation

By 2016 there will be two hundred million motorcycles, cars, and trucks sold annually. Everyone wants them to be more efficient. Governments in developed markets are demanding it, and consumers in EMs are clamoring for improved energy efficiency. However, traditional fuel-economy improvements add significant cost, and that cost has slowed the adoption of high-efficiency vehicle technologies. Pinnacle Engines changes the game by offering substantial improvements in fuel economy and lower greenhouse gas emissions—without the cost penalty.

Pinnacle Engines is a disruptive technology, entering the very established and conservative transportation industry. Many automotive companies outside of China and India keep specifics about their technology private, hindering the knowledge transfer necessary to enable further innovation. Pinnacle Engines provides the perfect solution to this problem, because it is not selling actual engines but engine technology. It sells licenses for the technology (intellectual property) in addition to sharing or transferring knowledge. This disruptive model will provoke a significant change in the automotive industry of the future.

Automotive companies make their own engines and therefore seek to license Pinnacle Engines' technology. The technology is customized for two-, three-, or four-wheel platforms that can be used for multiple OEMs, versus customizing for a particular customer.

Other products offered from Pinnacle include control-system electronics used with two- or three-wheel vehicles in unique ways, as well as joint venture–related iterations of the technology for nonautomotive engines, such as ag pumps, tractors, and construction equipment.

Price => Value-Add

Pinnacle Engines acquires revenue through royalty and licensing fees, for which it charges a premium price. Its offer is deemed a premium product because it provides a premium benefit—part of which is the savings for the customer, a cost savings that only grows over time. Despite the higher price, the licensee still receives a significant advantage due to the uniqueness of the solution that can be offered to customers, as well as the cost savings that can be passed on.

Place => Partnerships

Pinnacle Engines has partnered with a top controls organization in the auto industry (controls are the brains for managing engine performance) to develop unique control solutions for its new engine technology. Partnering with an established, well-known player in a tough niche industry lends credibility and will help Pinnacle gain early traction in the market.

They have also partnered with a two-wheeler manufacturer in Asia who wants to license its technology. Pinnacle was excited to become affiliated with this manufacturer because it has a senior engineer at the company with over 25 years of experience with engines who genuinely understands the Pinnacle Engines solution.

The challenge, however, is satisfying the potential opportunity and demand for this solution and managing the trade-offs of partner exclusivity agreements. Not only does Pinnacle Engines need to ensure that its partner is willing to pay enough in licensing fees, but volume and reach capabilities must also be considered.

Promotion => Customer Relationships and Culture

Pinnacle has found that the China customer base is more risk averse. In the engine space, it wants a solution to be proven, and the Pinnacle Engines technology is still nascent. It does not yet have a 5- to 10-year track record. Even though the Chinese generally love innovation, they want it to be proven—an oxymoron of sorts. They struggle with anything that may involve risk from an innovation perspective. There is also a concern with respect to the Chinese government, given its unique standards on IP protection.

India is more apt to go forward with new innovation. It is about 20 years ahead of China in the automotive industry, having started in the 1980s and learned from the Japanese, Europeans, and Americans. Around the year 2000 these technology-transfer relationships ended, because India started building out its own capabilities at that time.

Because China only started its automotive industry in the mid-1990s, it is still dependent on the West for imports or for joint ventures. The Chinese also do not have their own established, independent automotive industry, in part because they haven't been able to convince local consumers to buy national brands.

Pinnacle Engines has found that the Indians are bureaucratic because of their British history and believes that as a culture Indians are not very direct. They never say no, and it can be a challenge to confirm whether they truly understand what they are supposed to do. The engineers will simply nod yes, but they will not necessarily execute. They are generally too agreeable, according to Pinnacle. In relation to negotiations, Ron Hoge says that for Americans, availability of time is limited—time is money—whereas Indians have all the time in the world (as well as many human resources) but money is limited, so they prefer to use people's time, which is less expensive. The result is that they may be too slow, thereby frustrating Americans.

For the Chinese, time is more important than money; they are more like Americans in this respect. They love negotiating for the sake of negotiating and one tactic is that they enjoy using is throwing in a monkey wrench here and there. For the Chinese, changing terms and deals as they go is part of the game. They seem to operate with an “anything goes if you can get away with it” philosophy. While Pinnacle found Indians to be harder to read, they tended to be more dependable.

In comparison, the United States is a more open society and its engineers reflect that. They want to share knowledge, but it is tough to do this when their counterparts do not cooperate in the same vein.

Part of Pinnacle's strategy to better understand the culture and psyche of its primary target markets is to hire employees from the local market. For example, one third of Pinnacle Engines' employees are Indian and most of them reside in India (a few come back and forth between the United States and India).

Politics

In China, the government plays a big role in the decision-making process, as it is interested in creating local jobs and matching a vendor with a local OEM. Such decisions are made at the federal level in Beijing, but this is less the case in India.

Because of the risk-averse nature of the Chinese, having the government involved in the approvals process takes some risk and concern out of an OEM agreement with a foreigner. If an OEM fails, Chinese partners fear losing their livelihoods, but if China's Department of Science and Technology is involved, the pressure is decreased.

Thus, Pinnacle Engines expends much effort in acquiring government agency support for specific projects and collaborating with approved testing agencies in order to alleviate risk. This includes having two consultants and a full-time employee in China, working through the appropriate government departments. Some level of government agency support is required in order to make things happen…and this all takes time.

The U.S. Commercial Service in China was of assistance in opening doors with partners and OEMs, and Pinnacle Engines also joined the councils in the automotive space.

In India the government is more established and not as much lobbying is required; however, Pinnacle Engines still meets with the Ministry of Transport to explain its product, despite the fact that ministry officials are not influencers in the decision-making process.

Pinnacle Engines gives us a model to look forward to, as it has not only created a disruptive technology and is changing an industry, but it is also enabling EMs with technology that is specific to their local needs while also generously educating and transferring this knowledge. This can only result in more creativity and innovation in the future.