Question 2: Stretching Cisco During the Dotcom boom, Cisco was a leader of the new economy because it produced most of the equipment that made the internet work. For a short time it was valued at $550 billion and was the worlds most valuable company. It swiftly lost 80% of its market value and for the next decade was regarded as a rather dull network plumber. But by 2009 it was pursuing several new initiatives: Increased presence in the server market Consumer electronics A smart grid to rival the Internet itself There was news of other possibilities, such as virtual health care, cloud computing and safety and security; in fact, in its company language, Cisco was pursuing about 30 market adjacencies (this is Ciscos term). The CEO, John Chambers, intended to add even more adjacencies and estimated that half would be successful and would account for 25% of Ciscos revenues within ten years. Mr Chambers had been CEO since 1996 and had seen Cisco through both good and bad times; he now had the vision that not only would Cisco become the main supplier of the elements essential for an increasingly connected economy but it would also be an example of how to use these tools. Where Cisco came from Cisco is usually seen as a hardware company, but it has always provided services for the maintenance of networks and software for corporate networks. This mixture has contributed to its dominance in the networking market: customers buy Cisco gear because it works best with its IOS software and there is an efficient maintenance operation. In 2008 Cisco reported margins of about 60%. Cisco has always been flexible, for example It was one of the first to outsource manufacturing whereby products were built, tested and shipped by a contract manufacturer. It was early in outsourcing R&D. It acquired literally dozens of small networking companies and became adept at integrating them. The Dotcom collapse of Ciscos share price was symptomatic of the fact that by the early 2000s the market for routing and switching gear had matured and was no longer growing at 50% per annum. In addition, the gear itself was becoming standardised so there was little scope for differentiation. To counter this, Cisco Graduate School of Business Examinations 6 entered a series of new fields, including optical networks, wireless equipment and internet telephony which by 2009 accounted for 25% of Ciscos revenues. Mr Chambers idea was to institutionalise this branching, hence the adjacencies. Mr Chambers claimed that this approach was entirely different to GEs, where there is little connection between a light bulb and a jet engine; instead, all the adjacencies are tied to the network. Where Cisco is going Cisco has a structured approach to new ventures using a series of filters. 1. Is this something Ciscos customers want? 2. Is the opportunity big enough and does it create demand for Cisco hardware? 3. Is it really different and can Cisco become first or second in this market? Ciscos vision of the network is as a platform for all types of applications; one observer commented that their long term strategy is to become the Microsoft of the Internet. A major development area is video, which Cisco estimated would increase ten times between 2009 and 2013. This volume of traffic can only be handled by huge routers, such as those made by Cisco. Cisco developed TelePresence which combines big HD screens and special microphones; the real selling feature is that setting up is as easy as making a telephone call and facilitators are not required. The intention is to adapt TelePresence for domestic use to be combined with sports and entertainment. This integration will be made possible because of the common Cisco platform Medianet. Other developments are in consumer electronics, virtualisation and the smart grids for electrical power grids. Lets get organised In order to achieve all this Cisco has changed its institutional structure. Cisco had been organised in three businesses: gear for telecom operations, large businesses and small businesses. This had become wasteful because there was a lot of duplication, for example by developing similar routers for different functions. The functions of each business were centralised into engineering, manufacturing, marketing, etc. It is recognised that the functional structure is more efficient in some ways but it does have drawbacks, for example, there is a tendency to create standardised products which ignore the differences among customers while cooperation among functions can be difficult. To deal with these drawbacks Cisco has developed a complex system of committees made up of managers from different functions. A council is in charge of markets that could reach $10 billion and a board deals with markets up to $1 billion. These are supported by working groups which are created as required. By 2009 there Graduate School of Business Examinations 7 were about 50 councils and boards with over 700 members. Matrix type organisations typically fail because managers have conflicts of interest but Cisco attempted to deal with this problem as follows. Mr Chambers cultivated a cooperative management style whereby councils often do not have a nominated leader and performance in teams determines 30% of managers bonuses. This has led to a shakeout of managers who cannot be team players and it is estimated that about one-fifth of Cisco managers left the company. A constitution has been drawn up. These are replicable processes that determine how groups are set up, how they operate and take decisions. There is a common language to describe the work of groups: a statement of a five-year vision, a two-year strategy and a ten point execution plan. Ciscos own digital tools are used for communication: for example, there were over 5000 TelePresence meetings per week. This alone has enabled Cisco to cut its annual travel expenditure by about half. Some opinions on Cisco Mr Chambers was asked whether he felt that Cisco was now spreading itself too thinly. He replied My feeling is that Im not spreading us thin enough. If people have aggressive stretch goals they will think more broadly. Some observers feel that this novel approach has been too costly the loss of many talented people and the pressure on senior managers who are members of several groups and have TelePresence meetings at all times of the day and night. Mr Chambers feels that the unorthodox institutional design was essential. The need now is to develop entire solutions rather than standalone products, while enabling Cisco to become a properly integrated global company where managers from all over the world can contribute. According to Rosabeth Moss Kanter of Harvard University, author of Supercorp, Cisco stands a chance of avoiding the fate of other large companies of becoming a lumbering and bloated giant. So now Ciscos management philosophy is coordinate and cultivate rather than the GE model of command and control, according to Tom Malone of MIT. Required:

1. Assess how the coordinate and cultivate approach fits into the strategic process under Mr Chambers. 20 Marks

2. Do you think Cisco will avoid the fate of other large companies described by Professor Kanter? 10 Marks