What’s the biggest opportunity for Cisco (Nasdaq: CSCO)? What’s the biggest challenge?  I recently asked Inder Sidhu, senior vice president of strategy and planning for worldwide operations at Cisco, and the author of Doing Both: How Cisco Captures Today’s Profit and Drives Tomorrow’s Growth.

Mac Greer: What right now would you say is the biggest opportunity for Cisco and what do you see as the biggest challenge?

Inder Sidhu: The biggest opportunity would be what we are referring to as smart and connected communities. About 500 million people around the world are going to get urbanized over the next few years. Around 100 new cities are being planned, many in the emerging parts of the world. As existing cities struggle to cope with the requirements of infrastructure and new cities want to leapfrog and create systems of their own, a lot of that infrastructure benefits hugely from being connected or related to the network -- connected education and affordable health care, accessible education, and being able to sit in your home, press a few buttons and get your driver’s license renewed. What it comes down to is that technology, especially networked technology, is a big underlying component.

Another way to think about it is that in the past, technology companies fish in a pond called IT spending dollars, the CIO’s budget if you want to think of it that way. But when you think about smart connected communities, it’s like fishing in a hugely bigger pond, made up of real estate and the infrastructure spending. All of a sudden, the economics are fundamentally different because you are not trying to compete on an RFP [request for proposal] for some technology equipment, you are basically talking to a developer or a mayor who says if the value of the real estate goes up by 5%, that will cover the technology budget 10 times over. You’re playing in an entirely different pool of money if they can charge a dollar per square foot more per month in terms of rent because it is a smart and connected building, or because it is a more sustainable building in terms of lower energy consumption.

Let’s also use an analogy with a company like Google (Nasdaq: GOOG). Many technology companies compete for the CIO’s budget; Google does it totally differently, using the chief marketing officer’s advertising budget. So when you start fishing in an entirely different pond, while still leveraging your core fundamental technologies that are critical to being successful in that exercise, then you have got a big opportunity, and that is why we are so excited about smart and connected communities, as perhaps Cisco’s biggest untapped opportunity.

Greer: You focus on emerging markets, so which have the greatest untapped opportunity for those smart and connected communities?

Sidhu: You mean from a geographic perspective, which countries?

Greer: Correct.

Sidhu: I would say that China is probably the single biggest one. You can read all the statistics about how many new cities are being created with populations of more than a million people each, right? So China is perhaps the single biggest one. I do think that we are seeing these smart, connected opportunities. Just two weeks ago, I made a trip to China and to Korea. We have an opportunity in Korea we recently won in a place called Songdo, where we are working with an international developer, the mayor and the city, and the national government to help build a smart, connected city.

We are also seeing this in India and a bit in Russia as well. What is exciting is those are all new cities, Mac, but from a retrofit perspective, there are also opportunities in Barcelona, Toronto, San Francisco -- so it’s also happening in developed countries. But in terms of a one-word answer, I would say China.

Greer: And what do you see as Cisco’s biggest challenge right now?

Sidhu: This might surprise you, but I think it’s really making sure we can adequately prioritize our resources among the opportunities our company faces. John Chambers has talked about how we have 30 different market adjacencies we’re pursuing simultaneously.  We need to make sure we can really put the right wood behind the arrow in pursuing the key ones. We ask ourselves: Is the opportunity large enough? Is it interesting enough in the sense that we can make a difference? Is there something unique Cisco can bring to the table that gives us an advantage? Is it likely to grow? If those kinds of things are true, then generally speaking, we will bet on it and drive it through.

The one thing for us also, Mac, is that what we’re good at is networking, right? Any time that the network can be leveraged as a platform for success in that market adjacency, we will go for that.

Greer: IBM (NYSE: IBM) reported lower-than-expected revenues. Their stock really took a hit, and I am curious as to what extent you think is IBM still a bellwether for technology and for the broader economy?

Sidhu: IBM is a good partner of Cisco, and so generally I tend not to say that much about other companies because we are all trying to be more Cisco-focused. That being said, I think IBM does a lot of things quite well and is still a bellwether for the industry. They made the transition to generally focusing their business on value-oriented stuff, as opposed to cost-oriented stuff, which I think is a more sustainable model in the long term.  IBM also moved from a sell-everything-every-quarter-again mindset to a more annuity-type model, which is more resilient to ups and downs in the economy.

I think they have tried to maintain a certain degree of neutrality in terms of their own offerings versus the offerings of their partners, so they do that quite well. In all of those regards, I actually look at IBM as quite a good company that I think will be successful in the long term.

Inder Sidhu isn’t the only one bullish on Cisco and IBM. Find out why both stocks may be your best investment opportunity in a decade.