STRATEGIC ANALYSIS AND
RECOMMENDATION:
CISCO’S SMART CITIES INITIATIVE
SAID BUSINESS SCHOOL: MBA 2014-2015
STRATEGY: HILARY TERM
KATHRYN LEININGER
1 APRIL 2015
Table of Contents
INTRO DUCTIO N TO SM ART CITIES .......................................................... 3
SM ART CITY M ARKET CH ARACTERISTICS ................................................ 5
CISCO COM PANY CHARACTERISTICS ...................................................... 6
CISCO’S “SM ART+CONNECTED COM M UNITIES” IN ITIATIVE ................... 7
COM PETITIVE LANDSCAPE ...................................................................... 8
CURRENT POSITIONING AND STRATEGY ............................................... 10
PORTER’S 5 FORCES ANALYSIS ...............................................................................................10
COMPETITIVE POSITIONING ....................................................................................................14
CRITICAL CHALLENGES AND RECO M M ENDATIO NS .............................. 17
CISCO | 2
INTRO DUCTIO N TO SM ART CITIES
Over half of the global population currently lives in urban areas. This number is
expected to grow to two-thirds, with an additional 2.5 billion people living in cities by
2050. 1 Municipalities are already struggling to provide adequate support to their
crowded cities and will need to implement new, holistic solutions in order to sustain the
anticipated growth. Though cities contribute over 70% of the world’s GDP, they also
account for roughly 70% of global greenhouse gas (GHG) emissions.2 This suggests that
cities can and should play a key role in the effort to reduce global GHG emissions.
In order to support the rapid urbanization that is taking place, cities must find ways to
become more sustainable, efficient, responsive and liveable. Governments, businesses
and social sector leaders have identified this need and are beginning to work together
to implement innovative solutions.
One popular solution for our global urban challenges is the smart city. There is no single
agreed upon definition of a smart city, but the term broadly refers to an “integrated
approach to improving the efficiency of city operations, the quality of life for its citizens,
and the growing of the local economy.”3 These smart city goals are achieved in large
part through the use of innovative technologies, sensors and networks.
Urban strategist and smart city expert, Boyd Cohen, developed the “Smart Cities
Wheel” as a holistic framework that outlines the core components that make a city
“smart.” Components include: Smart People, Smart Economy, Smart Environment,
Smart Government, Smart Living, Smart Mobility. As the wheel (shown on the following
page) demonstrates, the smart city is a truly integrated approach to promoting urban
development.
http://esa.un.org/unpd/wup/Highlights/WUP2014-Highlights.pdf
http://www.wri.org/sites/default/files/uploads/4pager_WRI_Ross_Center_for_Sustainable_Cities_-_PDF_for_web_-_26-Nov-2014.pdf
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http://www.fastcoexist.com/1680538/what-exactly-is-a-smart-city 1
2
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SOURCE: CO.EXIST
The interest in smart cities has grown rapidly in recent years. A Google Trends search
shows a massive uptick in the number of Google searches for the term “smart cities” just
in the last year.
Source: Google Trends
CISCO | 4
Companies have recognized the massive opportunity to serve the broad and growing
smart city market. Established suppliers across the technology, transportation, building
management and energy sectors have established Smart City divisions and startups are
launching with related offerings. Cisco, along with IBM and Schneider Electric, has
become one of the leaders in this space.
SM ART CITY M ARKET CHARACTERISTICS
Research firm Frost & Sullivan projected in a 2012 report that the smart city market will
reach a cumulative $1.565 trillion by the year 2020, with an estimated 26 smart cities
established across the globe by 2025. 4 This $1.565 trillion cumulative market would
equate to a nearly $200 billion annual market. Roughly one quarter of the market will be
comprised of the smart governance and smart education segments. The smart energy
segment will represent 16% of the market, realizing the highest segment growth up to
2020, with a CAGR of 25%.5 The Frost & Sullivan report anticipates that all players in the
smart city market will take on one or more of the following primary roles:
1. Integrators (end-to-end service provider) – E.g. IBM, Oracle, Accenture
2. Network Operators (M2M and connectivity providers) – E.g. Cisco, AT&T, Verizon
3. Product Vendors (hardware and asset providers) – E.g. Honeywell, Siemens,
Schneider Electric, ABB
4. Managed Service Providers (third-party providers overseeing management and
operation of smart city solutions) – E.g. IBM, Infosys, SAIC
According to Navigant Research, the smart city technology market is estimated to be
worth over $27.5 billion per annum by 2023.6 This would represent a 213% increase from
the 2014 smart city technology market of $8.8 billion. While this is substantially smaller
than the Frost & Sullivan estimate, the division between the overall smart city market
from Frost & Sullivan and the “smart city technology market” from Navigant is unclear.
Most successful smart city initiatives are governed by joint ventures and public private
partnerships (PPPs) between private companies and municipal governments. This means
that, in order to realize success in this new market, companies must understand, develop
strong relationships with and work with government partners.
4
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CISCO | 5
CISCO COM PANY CHARACTERISTICS
Cisco is a United States-based multinational corporation that designs, manufactures and
sells Internet Protocol (IP) based networking products and services related to the IT and
communications industries. Cisco was established in 1984 by two Stanford University
employees and went public 6 years later, with a listing on the NASDAQ stock exchange.
The company initially focused on routers, then expanded into Ethernet switching and
security offerings, and more recently added a focus on cloud computing and services.
During the Internet bubble in 2000, Cisco surpassed Microsoft as most valuable
company in the world, reaching a market cap of $579 billion.7 Today, Cisco has a market
cap of $140.5 billion.8 Cisco organizes its business into 3 geographic segments: 1) The
Americas, 2) Europe, Middle East and Africa (EMEA), and 3) Asia Pacific, Japan and
China (APJC).9 In 2014, Cisco generated revenues of $47 billion10 and captured 34% of
the telecommunication networking equipment manufacturing market and nearly 15% of
the communication equipment manufacturing market (its core markets).11 At the end of
fiscal 2013, Cisco employed 24,938 people and had field sales offices in 94 countries.12
In the last year, Cisco outperformed both the S&P 500 (GSPC), a generally accepted
measure of the overall market, and the NASDAQ (IXIC), the technology companydominated exchange on which Cisco is listed.
Source: Yahoo Finance
7
http://www.marketwatch.com/story/cisco-pushes-past-microsoft-in-market-value
http://finance.yahoo.com/q?s=CSCO
9
Cisco Annual Report 2014: https://materials.proxyvote.com/Approved/17275R/20140922/AR_220964/INDEX.HTML
10
Cisco Annual Report 2014: https://materials.proxyvote.com/Approved/17275R/20140922/AR_220964/INDEX.HTML
11
IBIS World Report 33421: Telecommunication Networking Equipment Manufacturing in the US Industry Report
12
IBIS World Report 33422: Communication Equipment Manufacturing in the US Industry Report 8
CISCO | 6
As of March 26th, 2015, Cisco’s 5-year revenue growth was just under 5% and 5-year
earnings per share (EPS) growth was nearly 8%.13 After a strong quarterly earnings report
in February, many analysts are indicating that Cisco is a “strong buy.”
Source: The Motley Fool, March 26th, 2015
Cisco’s broader corporate strategy is currently focused on taking advantage of the
growing trend in what Cisco refers to as the Internet of Everything (IoE). IoE
encompasses the increasing connectedness and virtualization of products and services,
including internet-connected physical objects, commonly known as the Internet of
Things (IoT). Cisco believes that in this increasingly connected world, the networking
products and services that Cisco provides will become even more crucial and, as such,
Cisco is investing heavily in developing this sector. A component of this broader IoE
strategy is Cisco’s “Smart+Connected Communities” initiative, which is focused on
leveraging the IoE to improve our cities.
CISCO’S “SM ART+CONNECTED COM M UNITIES” INITIATIVE
Cisco first entered the smart city space in 2006 when it launched the “Connected Urban
Development” program in partnership with city leaders. This program was focused on
demonstrating how to reduce carbon emissions by driving urban infrastructure efficiency
through ICT.14 Cisco’s pioneering move into this space helped the company to establish
itself as a thought leader and, later on, as a leading provider for smart city technology
solutions.
Cisco established their Smart+Connected Communities (S+CC) initiative to champion
the company’s smart city engagement. This initiative operates under the Cisco Industry
Solutions group and works in close collaboration with the Internet of Things Group and
the Services Platform Group.15 Cisco’s smart city solutions are centered upon Cisco’s
13
14
15
Motleyfool.com
Cisco Smart City Framework: https://www.cisco.com/web/about/ac79/docs/ps/motm/Smart-City-Framework.pdf http://www.cisco.com/web/strategy/docs/smart-cities-expo-barcelona.pdf
CISCO | 7
networking and cloud computing capabilities and Cisco’s vision is to create an
integrated urban ICT infrastructure that can support the delivery of connected city
services. These solutions are designed to be implemented in conjunction with other cityoriented offerings from partner organizations. As such, Cisco has developed a strong
partner network across smart city domains (from public safety to traffic management to
e-government services) in order to integrate Cisco network products and services into
these offerings and provide cities with more holistic solutions.
To date, Cisco has deployed roughly 120 smart city solutions of varying sizes across the
globe. Exemplary cities include Barcelona, Chicago, Dallas, Copenhagen, Hamburg,
Dubai and others. Some of the solutions deployed in these cities include: City Wi-Fi, city
parking, city traffic, city lighting, city operations center and city safety and security. For
example, Cisco has partnered with the city of Hamburg, Germany to deliver various
smart city pilot projects, from traffic management to smart street lighting to remote
citizen services.16
Cisco’s S+CC offerings can be segmented as follows:
•
•
•
Sm art+Connected
City:
Includes
Smart+Connected
City
Wi-Fi,
Smart+Connected City Safety and Security, City Infrastructure Management
Solutions, and Remote Expert Smart Solution for Government Services
The Future of Traffic: Includes Smart+Connected City Traffic and City
Parking
Sm art+Connected Real Estate: Smart+Connected Meeting Spaces,
Personalized Spaces, and Residential
These solutions are often implemented as a customized basket offering to suit individual
city needs and work seamlessly with partner solutions. Most of these solutions are driven
by some combination of the following technologies: Wi-Fi infrastructure and routers,
sensors, cameras, video communication, data collection and analysis, and smartphone
apps.
COM PETITIVE LANDSCAPE
Given the integrated nature of smart cities, with solutions in the energy, transportation,
data analytics, public safety and other sectors, the competitive landscape involves a
wide range of players. The largest players in the smart city technology provider market,
along with their respective capabilities across core smart city segments, are outlined in
the chart below. As noted in the chart, Cisco excels in offerings across the Smart
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Healthcare, Smart Infrastructure, Smart Governance and Education, and Smart Security
spaces.
Source: Frost & Sullivan17
Cisco faces the strongest direct competition from smart city leaders IBM and Schneider
Electric.
IBM : “Sm arter Cities”
IBM established is Smarter Cities program in 2009, under its Smarter Planet initiative,
and is widely recognized as the market leader. Its city services include, among others, an
Intelligent Operations Center, energy optimization tools and predictive analytics for
transportation management. IBM focuses on integrating smart city systems through its
cloud services, data analytics, and mobile and social capabilities. The company operates
an annual Smart Cities Challenge, where by municipal governments compete for an
opportunity to receive an assessment and recommendations to develop a smart city
strategy and plan. IBM expects that $7 billion of the company’s projected $20 billion in
growth in 2015 will be contributed by its Smarter Planet initiative.18
17
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http://www.ibm.com/smarterplanet/global/files/us__en_us__cities__FS_IBM_Award_Report.pdf CISCO | 9
Schneider Electric: “Sm art Cities”
Schneider Electric’s smart city offerings span 6 domains: energy, mobility, water,
buildings, public services, and integration solutions. The company had strong expertise
in these domains prior to launching its Smart Cities initiative, and is leveraging this
expertise to gain traction in the smart city market. A key component of the Schneider
Electric smart city offering is the company’s City Operating System (OS), a layer that
“integrates different operational areas to meet the needs of city leaders, citizens, and
third parties to access cross-functional data.”19 The company has recently begun to
invest in developing consulting services to support cities in developing their smart city
plans.
CURRENT POSITIONING AND STRATEGY
Porter’s 5 Forces Analysis
An evaluation of the 5 competitive forces within an industry can help us understand the
positioning, industry profitability and strategic options of a company. These forces
include: 1) the threat of new entrants, 2) the power of suppliers, 3) the power of buyers,
4) the threat of substitutes and 5) rivalry among existing competitors.20 This external
based view of strategy suggests that by understanding a firm’s competition and industry
structure, one can develop the appropriate strategy in this context.
Source: Harvard Business Review 2008 19
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Porter, Michael. The Five Competitive Forces that Shape Strategy. Harvard Business Review. January 2008.
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An analysis of the 5 forces of competition for Cisco’s smart city initiative, S+CC, is
detailed below.
Threat of New Entrants: M edium/High
Given the diverse components of a smart city and the wide range of actors required, the
threat of new entrants in the smart city space is medium to high. The core segments of a
smart city—Smart People, Smart Economy, Smart Environment, Smart Government,
Smart Living and Smart Mobility—cannot be fulfilled by one player. These segments
provide existing companies and startups with a wide range of entry points into the
space. An energy company could easily leverage smart grid expertise into broader smart
energy and smart city offerings. A data analytics company could extend its offerings to
municipal governments for smart city solutions. That said, the highly integrated nature of
the smart city means that there is much room for partnership and collaboration among
existing suppliers and new entrants to serve cities with more holistic platforms.
Key barriers to entry in the smart city space include the vast and diverse stakeholders
that must be coordinated, a lack of awareness of smart city benefits, demand-side
benefits of scale, incumbency advantages and government funding and policy
restrictions.
First, given the integrated nature of a smart city, the successful engagement of all
stakeholders is crucial. This often includes multiple agencies within the city government,
partner providers, the citizens who will benefit from the services, and relevant industry
associations and advocates (for example for clean energy or transportation). The
engagement of citizens is a core component of this and was cited by municipal officials
as the 2nd most important external barrier to smart city initiatives in a 2013 survey
conducted by Cisco. Cisco’s government relationships, having served government
clients for years, serve as an important advantage here.
Next, the lack of awareness and clarity of the benefits of a smart city, among
government clients and community beneficiaries, is challenge for those looking to enter
the market and attract new customers. Cisco’s thought leadership and sponsorship of
events and research in the space help to reduce this barrier—for all competitors in the
space. This barrier also extends into the broader barriers of demand-side benefits of
scale and incumbency advantages. In a new market where government customers lack
awareness of smart cities and the core technology solutions, customers are more likely
to choose a trusted and well-known provider, such as Cisco. This creates strong demand
side barriers for smaller and less known new entrants. The lack of smart city clarity and
the emerging nature of the space also help to preserve incumbency advantages for firstmovers in the space, such as IBM and Cisco, that have established a smart city brand
identify.
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Top External Barriers Hindering Sm art City Initiative Progress
Source: Cisco and the Smart Cities Council 2014
Lastly, funding and policy constraints of city governments, who are most often the
customer for smart city solutions, are crucial barriers. In the same 2013 Cisco survey of
key municipal executives, officials indicated that a lack of funding was their top internal
barrier to progressing with smart city initiatives.21 Larger corporations, such as Cisco,
may be able to offer governments innovative financing solutions through their investing
arm or by offering better terms. In this scenario, this financing barrier would be greatest
for startups and smaller new entrants. Policy constraints, such as data sharing
restrictions, are a barrier for all players.
Top Internal Government Barriers Hindering Smart City Initiative Progress
Source: Cisco and the Smart Cities Council 2014
21
Cisco 2014. Internet of Things World Forum. Uncover Barriers and Opportunities for Developing Smart Cities.
CISCO | 12
Supplier Power: W eak
Suppliers in the smart city space include primarily a range of technology suppliers, for
example: internet infrastructure, sensors, cameras, smart grids, etc. These products are
not particularly unique on their own and can be easily substituted, thus limiting supplier
power. That said, the smart city market remains small and suppliers do not depend on it
for revenue, thus slightly enhancing supplier power. Overall, supplier power is generally
weak, making the smart city industry more attractive.
Buyer Power: Strong
Buyer power in the smart city industry is strong. The primary customer base for smart city
solutions is city governments. Given government funding constraints, buyers are
especially price sensitive and likely to place significant pressure on providers for price
reductions. Since governments are often intermediate customers (usually purchasing
products for which the end consumer will be its citizens), they exercise additional power
in their ability to influence end customer access. While these products and services are
often provided for free and thus end customer use will not likely impact revenues, the
widespread adoption of smart city technology is crucial for success. If a provider’s
solution is not widely used by a city’s residents, it may be perceived as an inadequate
solution, regardless of whether the low adoption resulted from poor distribution of the
offering from the government.
Threat of Substitutes: Low
The smart city industry is focused on quite narrow solutions that have few comparable,
technology driven substitutes. The status quo in cities, however, could be considered a
threatening substitute. For example, a substitute for smart grid technology could be
existing grid infrastructure. However, since smart city products were designed
specifically to address the shortcomings and improve efficiency of these existing
offerings, the threat of substitution is low. While a city may resist upgrading to smart city
technology, it is unlikely it would revert back to less efficient, low-tech offerings.
Rivalry Am ong Existing Com petitors: M edium
The level of rivalry amongst existing competitors in the smart city space is medium.
Rivalry is limited by the fact that smart city solutions are highly integrated, require a
number of players, and thus leave room for a range of competitors in the space with
different strengths. As companies develop established partnerships for implementing
their solutions and look to expand their offerings to support a more complete smart city
solution, however, this rivalry will begin to intensify. The strongest rivalry at the moment
is in the effort to earn brand recognition with smart city solutions, regardless of whether
CISCO | 13
they provide directly competing services or not. IBM, Cisco, and Schneider Electric have
all been relatively successful in establishing this brand awareness in the space.
Com petitive Positioning
As mentioned previously, Cisco faces the strongest direct competition from smart city
leaders IBM and Schneider Electric. A 2014 analysis of the smart city industry from
Navigant Research indicated that IBM is the clear market leader in the space, followed
by Cisco as the next leader and Schneider Electric as a contender. Companies were
evaluated on both their strategy and their execution of smart city solutions for this
ranking.
Sm art City Solutions Supplier Leaderboard: Navigant Research 2014 22
22
http://www.navigantresearch.com/research/navigant-research-leaderboard-report-smart-city-suppliers
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IBM and Cisco, both early players in the market, have maintained leadership positions in
the smart city market over the years. IBM’s wide range of products and innovative
engagement through initiatives like its Smart Cities Challenge have helped the company
to establish and preserve its leadership position. Cisco, on the other hand, derives a
significant advantage from its strong partner network, allowing the company to diversify
its offerings and adapt to local city needs.
The gap between these two leaders and other providers is beginning to narrow as new
entrants enter the space and develop more offerings. Schneider Electric has emerged as
the top contender in the space as a result of its evolving product and service portfolio,
along with its acquisition of engineering and IT firm, Invensys.23
The breakdown of Cisco’s score from the Navigant research report, which earned it the
number two spot on Navigant’s Smart City leaderboard, is outlined below.
Cisco Sm art City Strategy & Execution Scores – Navigant Research 2014
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Despite IBM’s leadership in the smart cities category, as indicated below, Cisco’s stock
growth has far outperformed both IBM (Ticker: IBM) and Schneider Electric (Ticker:
SBGSY) stocks over the last year.
Source: Yahoo Finance
In terms of brand recognition in the city solutions space, Cisco does not enjoy the same
level of brand recognition as IBM. A Google Trends analysis indicates that searches for
“cities + IBM” made up a larger proportion of Google searches than those for “cities +
Cisco.” The proportion of searches for “cities + Schneider Electric” was insignificant.
Source: Google Trends
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CRITICAL CHALLENGES AND RECO M M ENDATIO NS
Cisco has benefited from its early entry into the smart city market and has successfully
leveraged its partnership network to develop strong, integrated smart city solutions.
With new entrants into the market, primarily from large existing technology and energy
companies, Cisco may struggle to maintain its leadership position. It faces a few critical
challenges that it should actively address as the company attempts to grow its S+CC
initiative and increase the value that this initiative generates for the company.
Lack of Awareness of Sm art City Benefits
The lack of awareness of the benefits of smart city technology inhibits city investment in
these solutions and slows citizen adoption. Cisco should continue its investment in
thought leadership and research to drive awareness in the space. It should also carefully
monitor and publish the impact of its existing smart city projects to demonstrate the
benefits that cities can realize from implementing similar solutions.
Funding Constraints
As explained earlier, a key barrier to smart city progress is government funding
constraints. Smart city initiatives are primarily funded via municipal and federal funding
sources. As governments face increased scrutiny on spending, budgets for smart city
initiatives will remain limited. Cisco can help to address this by 1) providing improved
terms, 2) establishing a public-private partnership with cities whereby Cisco invests in the
project (in addition to providing products and services) and shares in the returns, or 3)
bringing in new funding partners via its network.
Growing Anti-Sm art City Sentim ent
With the growth of the smart city trend, there has been increasing backlash and concern
surrounding the solutions that smart cities propose. Paradoxically, much of this backlash
has been as a result of the strong leadership role that technology companies, namely
IBM and Cisco, have played in the development of the smart city market.24 This has led
to a growing criticism that technology vendors are gaining too much influence on our
urban systems and that solutions are being developed primarily with vendor profit, not
sustainable urban development, in mind.
Cisco should strengthen and promote its partnerships with non-technology urban
experts to ensure that its solutions are appropriately developed to promote urban
development and integrate into wider city systems. Cisco should also consider hiring a
respected urban development expert to its S+CC team to better integrate input into the
development and management of smart city solutions. This would serve as a strong
signal to the market of Cisco’s long-term commitment to cities.
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