INTEGRATIVE CASE 10.0 Cisco Systems: Evolution of Structure The evolution of Cisco from a university campus computer

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INTEGRATIVE CASE 10.0
Cisco Systems: Evolution of Structure

The evolution of Cisco from a university campus
computer networking solution devised by the husband/
wife Stanford team of Len Bosack and Sandy Lerner
to a global technology leader has been a dynamic
process. The speed of technological innovation means
that managers are already talking about the “next new
thing” during the launch of each new product or service.
Parallel with the rapid technological evolution at Cisco
have been the changes in organizational structure
necessary to meet the management and decision-making
needs of the corporate giant.
Growth
Faced with the challenge of devising a system allowing
Stanford computer networks to talk to each other,
Bosack and Lerner created a multiprotocol router
to break through the communication barriers. The
perceived need by many organizations for increasingly
sophisticated routers and related products led to the
founding of the Silicon Valley hi-tech powerhouse Cisco
in 1984. As a start-up company, Cisco had a vision, eight
employees, and a host of financial challenges. The early
days were financed by credit cards, home mortgages, and
periods when payrolls were delayed, but in 1986, Cisco
shipped its first router. The company turned to a venture
capitalist, Sequoia Capital, which moved Cisco toward
financial stability, but founders Bosack and Lerner were
forced out and replaced with new management. Cisco
quickly became established as a viable business and,
armed with a growing reputation in the industry, went
public in 1990.
A leader in the development of routers, Cisco faced
new challenges with the emergence of competitors for
rapid, less-expensive technology. Facing the threat of
losing high-profile customers and industry leadership,
Cisco management took a bold move in its innovation
strategy through the acquisition of small innovative
companies such as Crescendo Communication, a
company that had attracted the attention of major
customers including Boeing.
Cisco was selective in its acquisitions, focusing on
small start-up companies that were working on a great
product that could be moved from development into
production within 6 to 12 months. The company’s goal
was to purchase the future by acquiring the engineers
who were working on the next generation of products
and services. Therefore, the retention of employees was
critical to a successful acquisition. For its part of the
deal, Cisco could offer the start-up the power of Cisco’s
financial resources, manufacturing, and distribution
channels. Cisco’s reputation for finding and bringing
into the fold the best of the smaller companies reminded
admirers and critics alike of the Borg, the notorious
alien being from Star Trek fame that absorbed species
as it expanded across the universe.
As Cisco expanded into wireless devices for home
(Linksys) and business, data center switching systems,
networking equipment, communications gear, and
network security apparatus, visionary John Chambers
was brought in as CEO. One of a generation of gurus
who championed the power and practical solutions
of technology, Chambers expanded the company into
advanced technologies including digital voice and data,
web-conferencing, and more diverse security products.
By 2000, Cisco had attained a brief designation as the
world’s most valuable company.
Cisco 1
During the early period that would later become
designated as Cisco 1, the organization had created
a three-division organization structure. The three
self-contained product divisions were each focused
on a distinct customer segment: Service Products
(such as AT&T), Enterprises (usually multinational
corporations), and Small to Mid-Size Commercial
Companies. Each of the three divisions had its own
engineering, manufacturing, and marketing functions.
Goals were established by each division’s managers to
develop products and services customized to address
the specific and changing needs within that customer
group.
With corporate headquarters in San Jose and a
dominance of U.S. sales, Cisco found that it could
minimize costs with a move toward outsourcing
manufacturing to contract manufacturers from within
each of the divisions. Cisco had, in effect, a structure
wherein managers were rewarded for the performance
of their own division. Flexibility and coordination
occurred across the functional departments within each
division, but there was little collaboration across the
three divisions. This decentralized structure seemed to
work fine in a prosperous and rapidly growing company.

What a difference a year can make. In 2001, one year
after a brief designation as the world’s most valuable
company, a sharp economic downturn hit Cisco and other
companies in the high-tech industry. The techno bubble
of the 1990s had burst. Across Silicon Valley, tech stocks
tumbled, layoffs proliferated, and companies struggled to
adjust and survive. At the same time, increasing product
complexity and technical advancement within the field
pushed management at Cisco to reconsider whether the
existing divisional organizational structure was sufficient
to carry the company into the future.
Cisco 2
Reviewing the three-division structure, Chambers and his
management team detected serious overlap in the work of
functional departments across the product divisions. One
glaring example was the overlap of engineering groups in
each of the three divisions who were all working on similar
products without knowing it. This was a huge excess of
engineering talent focused on relatively straightforward new
products. The lack of communication across the three divisions
created a lack of awareness and cooperation necessary for
finding shared solutions, avoiding repetition, and speeding the
process time required to introduce a new product. Likewise,
the complete independence and separation of each division
resulted in a glut of separate vendors and suppliers for the
divisions in addition to the duplication of employees working
on similar projects—all of which added to company costs.
In order to address the need for efficient use of resources
while trying to meet the need for new products and geographic
expansion, the company moved toward a functional
structure. Changes came swiftly in the move to streamline
operations and bring costs down. Between 2001 and 2006,
the company moved through the reorganization, designated
Cisco 2, cutting the work force by 8,000 employees,
reducing the number of vendors (1,500 to 200) and suppliers
(600 to 95), and trimming outsourced manufacturing from
13 major plants to 4. The company’s costs as well as overlap
were further cut as the major functions of sales, accounting,
and engineering were combined into single large centralized
groups that reported to headquarters. The three separate and
autonomous divisions were gone. The huge engineering staff
was broken down into 11 functional groups that reflected
the core technologies on which they worked, resulting in
added efficiency and reduced overlap.
Cisco 2 provided senior management of each function
much vertical control over the work of their engineers,
sales people, etc. Top managers could set goals and expect
to achieve those goals, along with performance bonuses,
because of direct control over their functional departments
and the projects on which employees worked. Cisco became
much more efficient with fewer people needed within each
function, but it was also becoming more hierarchical and

encountered new coordination problems because each
functional department became more like a separate silo,
with people focused on their own function’s goals and
projects with little concern for the needs of other groups.
Cisco 3
By 2006, expanded globalization and product lines and
the continued need and movement toward horizontal
collaboration brought further structural evolution, called
Cisco 3. The new structure added 12 business councils at
the senior level, one for each key customer segment. Each
council was composed of approximately 14 executive VPs
and senior VPs—roughly one from each major function.
The intention of the new structure was to instill a culture
of collaboration that would provide better horizontal
coordination across functions. The business councils
worked at the policy level, involving representatives from
each function to select and coordinate new programs and
speed products to market in their segment.
Beneath the business council level, 47 boards were
created, to align cross-functional teams below the vice
president level. Each board consisted of about 14 people
and included one VP or senior VP. Board members would
collaborate across functions to implement the new product
decisions from the councils.
Beneath the boards, temporary working groups were
created of up to 10 people each as needed to execute the
details of new product and project implementation in the
short term. Having three levels of matrix-type horizontal
relationships built into Cisco’s structure was viewed as a
better way to address a complex environment characterized
by uncertainty and rapid change by providing the internal
teamwork, coordination, and information-sharing needed
for continuous innovation.
The 21st century tech giant’s structural evolution
brought difficult cultural adjustments. While growth and
performance targets remained, emphasis was now placed
on collaboration to find solutions for customer needs
by involving people from other functions. Executive
compensation changed from achieving one’s own
department’s goals to achieving cooperation with other
departments, and bonuses for some senior executives,
as Chambers admits, “went poof.” With managers no
longer dependent solely on hitting targets within a
tightly controlled function, the organization experienced
initial executive resistance to giving up control, to
sharing information and resources, and to joint decision
making. The new focus for performance evaluation was
on peer review ratings based on successful teamwork.
Chambers estimated a loss of approximately 20 percent
of top management who “couldn’t make the transition” to
collaborative work, including the development chief, the
senior VP for routers and service provider networks, and

the mergers and acquisitions chief. But the new structure
eventually fell into place as its benefits became apparent,
and Cisco successfully rode out the loss of key managers.
The structure continued to evolve and streamline as
Cisco evolved. Five years later, in 2011, the number of
business councils had been reduced to 3 and the number
of boards to 15. This was sufficient to make collaborative
decisions on key new products for customer segments.
Over time Cisco’s top management saw the need to reduce
the number of business councils from 12 to 9 and then to 3.
Cisco also slashed the number of internal boards and
working groups because managers grumbled about the
staggering number of boards and council meetings taking
up their time.
Simultaneously, Cisco planned to further strengthen
the coordination across functions and departments by
tapping into social media. Since 2006, the company execs
have utilized TelePresence, a system of lifelike videoconferencing
to connect customers and colleagues around
the globe. Today, with the introduction of Ciscopedia, the
organization is allowing a greater level of information
sharing and consultation between employees and among
members of the remaining business councils and boards.
Employees use social media, blogs, video, and bookmarking
to post ideas, coordinate teams, share information, and
avoid duplication across departments, product lines, and
geographic areas.
Further Developments
Despite the constant structural evolution, by early 2011,
Cisco was suffering through a fourth consecutive quarter
of shrinking profits, with its stock price down 35 percent
over a four-year period. Nervous investors watched Hewlett
Packard’s rapid rise to number 2 in global shared networking
and grumbled as they also watched a three-year drop in
Cisco’s core areas (10 percent in routers and 11 percent in
edge connecting markets). They pointed consistently to what
they saw as Cisco’s “reckless ventures” and complained
that the boards were proving to be little more than “rubber
stamps” for the CEO’s wishes.
In April 2011, Chambers released an internal memo,
admitting mistakes resulting in “employee confusion,
disappointment among investors, and the loss of credibility
in the market place.” He called for a refocus on the
core networking business, insisting Cisco’s strategy was
“sound.” The problems, he said, were with “operational
execution,” with lack of accountability, slow decision
making, and the inability to react to surprises. “We know
we have to change,” Chambers said.
With yet another structural change, five board
committees covering Acquisitions, Audits, Compensation
and Management Development, Finances, and
Nominations/Governance were created. The problem of
accountability was also addressed by a Code of Conduct,
monitored by the ethics office. The goal was to
become the customers’ most trusted business and technology
advisor. But flexibility and the need for speed
in anticipating and capturing market transitions was
equally important. The implementation of 29 performance
measures was seen as a way to clarify department
and team goals and keep teams focused and on track.
With vision and strategy clarified, functional leaders
were empowered to implement additional changes.
In October 2012, Cisco was expanding the roles and
responsibilities of a number of key executives including
Gary B. Moore, who was promoted to president and COO
and heralded Cisco’s latest moves as proof that the changes
made were successfully advancing both accountability and
operational discipline.
But with rapid, looming changes in networking
software, by May 2014, Chambers was warning of a
“brutal, brutal consolidation of the IT industry,” predicting
that when the smoke cleared, only two or three of the
major players would remain standing.” With all of its
structural changes, will Cisco be one of those? Does Cisco
have it right this time?