9.13 Cisco Systems, Inc.

Cisco Systems, Inc. is an American-based, multinational corporation that designs and sells consumer electronics, networking, voice, and communications technology and services. Cisco is headquartered in San Jose, California, employs more than 65,000 people, and reported a net income of $6.5 billion on sales of US$43.2 billion in the 2011 fiscal year. {7}

History

Cisco Systems was founded in 1984 by Len Bosack and Sandy Lerner, a married couple employed as computer operations staff members at Stanford University, later to be joined by Richard Troiano. Lerner moved to work full-time for Cisco in 1987 but his talents did not mesh with corporation life, and he was fired. Bosack then quit, receiving $200 million. Much of this money as given to charities, and the couple later divorced. Cisco topped the Forbes list of the 20 best-performing IPOs of the 1990s, most spectacularly from the February 1998 startup to the height of the 2000 boom, when shares had appreciated by 60,614%. {2} Cisco's first product was a multiple-protocol router, whose program had been devised some years before by William Yeager, another Stanford employee who later joined Sun Microsystems.

Cisco was not the first company to sell routers, but it was the first to be commercially successful with types supporting multiple network protocols. When those protocols declined in importance, Cisco moved into the IP router market, which it now dominates. From the first, Cisco adopted an aggressive acquisition policy to bring talent and competing products into the company, often before those products were proven in the market place. In 1995-6, the company completed 11 acquisitions, several of them the largest in the industry to date. In 1999, Cisco acquired Cerent Corporation, a start-up company located in Petaluma, California, for US$7 billion, an acquisition only later exceeded by that Scientific-Atlanta. The acquisitions paid off: several of the acquired companies have grown into $1bn plus businesses, including LAN switching, Enterprise Voice over Internet Protocol (VOIP), and home networking company Linksys.

Managers enjoyed considerable freedom to acquire companies, but were judged on those acquisitions. More than in most US companies, Cisco staff were paid by results, and performance carefully monitored. Even in its early days (1995-7), Cisco compared favorably with competitors:

Company/Measure	Ciscol	Bay/Nortel	3 Com
Annual Revenues/Employee	$647,000	$445,000	$227,000
Reinvestment for Customer Satisfaction	21.2%	29.9%	23.8%
Revenue Growth	69.8%	69.8%	50.4%

Research and development investment also grew rapidly:

Year	1995	1996	1997
R & D Investment	$399m	$698m	$955m
% of Revenues	9.7%	10.8%	11.8%

In late March 2000, at the height of the dotcom boom, Cisco was the most valuable company in the world, with a market capitalization of more than US$500 billion. That figure had shrunk by July 2009 to US$108 billion, but Cisco remains a major player in the telecommunications field. {7}

Threats

Problems that Cisco early identified and overcame set the company on a successful path after the dotcom downturn. The situation in 1998 was: {1}

New opportunities in the networking industry

Solutions:

1. Acquire market dominance by aggressively acquiring talent and networking product developers: Cisco grew at 70% year on year.
2. Decentralize, allowing regional and divisional managers considerable freedom, but judging (and paying) them by results.

Aggressive Competition

Solutions:

1. Continued investment in R & D. Cisco's annual IT spending grew by 68% in the 1996-8 period (compared to 40% in all other spending for the period.)

2. Develop various in-house systems.

    a. Cisco's intranet was used to electronically share common designs among various design centers. The system also allowed engineers to simulate products before committing to the design, thus i. improving design margins, ii. reducing the number of iterations required for new product design, iii. ensuring each sub-assembly was produced to the requisite level of quality, and iv. making data relevant to real-time situations.
    b. Decrease time to market: 20% productivity improvement. 45% of the products shipped were not handled by Cisco. New Product introduction time accelerated by 3 months due to the collaborative design tools used by Cisco and its suppliers, saving Cisco $100 million annually. Lead times for build-to-order, custom-configured products reduced from 6-8 weeks to 1-3 weeks. Engineering Change Notice reduced times from almost 3 weeks to 10 days by collaboration tools ( New Product Introduction).
    c. Eliminating POs and purchase orders, and the extra test. Engineers decreased manufacturing costs, and lowered annual operating costs by $75 million.

3. Staff training. Cisco provided Stanford engineering courses online, promoted liaison with suppliers for product development, and facilitated company-wide meetings and broadcasts.

Poor Levels of Customer Satisfaction

Solutions:

1. Track satisfaction with customer relationship management and other programs, rewarding sales staff accordingly.
2. Employ ecommerce extensively: website sales in 1997 were $5 billion

    a. Engage proactively with customers: 81% of customer inquiries were being handled online by December 1998, improving customer satisfaction by 25% and saving the company $365 million/year. (Less than 10% of software was shipped on CDs or disks, the remainder being downloaded from the site.)

    b. Eliminate 500 engineers through online self-help tools like Bug Navigator and Troubleshooting Engine. (In Bug Navigator, Cisco revealed all its bugs to customers, enabling them to take measures to identify, prevent, and repair them. CiscoWorks allowed customers to walk through a problem detection routine, and home in on the likely cause of a problem.)

    c. Eliminate paper-based documentation, saving some $40 million/year.
Pricing and Configuration suite program let over 10,000 authorized representatives of direct customers and partners configure and price Cisco products online.
Order Placement let customers 'drop' their selections into a 'shopping cart' in Cisco's virtual Marketplace.
Order Status let users check on an order using a PO or sales order number, even monitoring progress through Federal Express's tracking services.
Service Order Agent let users find information about specific service orders, including case and contact numbers, process date, ship dates, and carrier and tracking numbers.
Invoice Agent provided controllers, finance officers, and accounts payable staff with rapid, easy, online access to track their invoices with Cisco.

    d. Supply white paper and document support. Over 500 Cisco marketing documents were published per month on the web.

    e. Offer training seminars. Seminar registration alone yielded close to $100,000 in savings annually by avoiding 4000 calls per month at $2-3/call. In a typical month, Cisco saw 10,000 products registered, 24,000 seminar registrations, 2,500 press releases, 20,000 partner and customer event registrations, and 25,000 training classes searched.

    f. Adopt supply chain management. Cisco created a 'single enterprise' and enabled key suppliers to manage and operate major portions of its supply chain in 3 steps: extended ERP systems to suppliers, automated routing data transfer using EDI transactions, and cross-organizational processing that eliminated repetitive procedures.

Threatened Shareholder Value

Solution:

1. Focus on the company's core competence of product design and innovation, building products to order whenever possible. Successful: see above.

Points to Note

1. Decentralized management.
2. Staff remuneration by results.
3. Early adoption of ebusiness technologies.
4. Aggressive acquisition and merger policy.

Questions

1. How did Cisco make a success of routers when other companies failed?
2. What threats was Cisco facing in the late 90s, and what measures were adopted?
3. Where did Cisco find the money to implement its innovative measures?
4. Apply the Osterwalder and Pigneur business model to Cisco Systems, Inc. What elements stand out as important?
5. Describe the Cisco management style. What were its pros and cons?
6. Study the Cisco website. How does it equate with the Cisco story?

Sources and Further Reading

1. Gaining Competitive Advantage through Internet Solutions: The Cisco Story. OIT. 2004.
2. Pop Goes The IPO by Mark Lewis. Forbes. February 2001.
3. What Went Wrong at Cisco in 2001 by Scott Berinato. CIO. August 2001.
4. Cisco's Innovation-Through-Acquisition Strategy by Eric Bravo Eslao. Scribd. November 2009.
5. Manufacturing Innovation. Cisco. February 2010.
6. Cisco: The Too-Human Network by Rolfe Winkler. WSJ. February 2011.
7. Cisco. Yahoo Finance. April 2013.