Cisco Systems
The dogfood danger
S A N F R A N C I S C O
If IBM was the technology company of the 1980s and Microsoft its successor in the 1990s, Cisco Systems looks like the tech firm of this decade. It practises constant revolution. Even so, technological change, rather than antitrust action, may prove Cisco?s undoing
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IMAGINE pitching the following business plan to a bunch of venture capitalists. For the next 15 years, your new firm will more than double in size every year. At the end of that time, it will have 29,000 employees, revenues of $12 billion and profits of $3 billion over the past four quarters. And, by the way, this turbo-charged start-up will be on the verge of becoming the world?s biggest company by market capitalisation.
Even by today?s wacky financial standards, your interlocutors would probably chuckle and show you the door. But this is, in a nutshell, the history of Cisco Systems. This week, even though its shares fell along with those of other technology companies, this maker of networking equipment, based in Silicon Valley?s San Jose, firmly displaced Microsoft, and was neck and neck with General Electric for the title of the most valuable company in the world.
This battle for supremacy is not, however, what motivates Cisco?s chief executive, John Chambers. He has set himself an even more ambitious goal: to generate revenues of $50 billion by 2004 and to become the first company worth a trillion dollars. Along the way, he would like Cisco to become ?one of the most influential companies in history??in company with such ground-breaking firms as Standard Oil, GE and IBM.
There is every chance that he will succeed, and not just because Cisco makes some vital equipment for global communications. More significant than what Cisco does is the way that it does it. The company is in a state of perpetual revolution?because, as Mr Chambers puts it, in an increasingly networked economy, ?it?s not the big that beat the small, but the fast that beat the slow.?
Such slogans were certainly not on the minds of Sandra Lerner and Len Bosack, two Stanford University employees, when they founded Cisco in 1984. Their goal was much less ambitious: selling devices that can ?route? data traffic from one computer network to another. At that time, this was not straightforward, because networks of different computers could not talk to each other.
Today, these ?routers?, in essence souped-up computers, are the traffic police of the Internet and of corporate intranets. On them, data such as e-mail or web pages are sent around in small packages with an address label. Routers look at the label, calculate, among other things, the best path for a package to take, and pass it to the next router. They are thus the essential plumbing of what Cisco calls the ?new world network?: the global system that connects everything with high-speed pipes?not just computers and telephones, but also mobile devices, home appliances and even cars.
Although routers are still Cisco?s main business (it supplies about 80% of the Internet?s routers), the company has diversified into other networking hardware?from expensive switches for telephone networks to devices that link homes to the Internet, and from equipment for high-speed optical fibre to wireless communications. Much of this hardware depends on Cisco?s software. Half of its engineers develop programs that run on all this networking equipment. Its crown jewel is the Internet-working Operating System (IOS) that lets, for example, Cisco routers talk to one another and helps to manage corporate data networks.
Chambers?s dictionary
It was Mr Chambers, after joining Cisco in 1991, who led the drive for diversification. Since he became chief executive in January 1995, he has turned the firm from a technically oriented company into a marketing machine. To understand how Cisco ticks today, you have to understand Mr Chambers.
The key to this 50-year-old West Virginian is that he is a perfectionist. When he gives a speech?which he does up to a dozen times a week?he thinks the presentation through to the smallest detail: the way he holds his left hand behind his back, the way he strides through the audience, the way he phrases his sentences. At the end of a talk he often asks listeners: ?What could I do better?? This obsession with perfection has unusual roots. He recently told an audience that, in his youth, he suffered from learning disabilities that almost stopped him from going to college. Even today, he admits, he does not enjoy reading and dislikes written memos. But like many dyslexics, he has compensated for this with relentless work (and a remarkable memory).
Equally formative were the experiences Mr Chambers had at the two companies he worked for before joining Cisco. Both IBM and Wang Laboratories, a former maker of proprietary word processors, lost touch with their customers. At Wang, which failed to recognise the importance of cheap standard PCs, he had to oversee layoffs of almost 5,000 employees?something, he says, he never wants to do again.
That is why Mr Chambers preaches customer focus more fervently than any other high-tech boss. He was late for his first board meeting as chief executive, because a customer needed help. Every evening he listens to taped telephone conversations with big clients. At least once he acquired a company simply because a large customer wanted Cisco to sell the technology it produced.
More recently, Mr Chambers has become an evangelist of change. With the Internet, he argues, new products or procedures quickly become commodities. To survive, a company must continually reinvent itself. And the only way to achieve this permanent revolution, he argues, is by using Internet technology. Cisco is thus a company in constant flux. It is always adding new technology by buying start-ups: since 1993, it has acquired 55 firms at a total cost of more than $24 billion. Last August, for example, it paid a whopping $6.9 billion for Cerent, a telecoms-equipment maker that produces switches for high-speed optical networks.
This buying spree is innovative in several ways. In one sense, Cisco is outsourcing a large part of its research and development: the firm even helped to start many of the companies it has bought. It also systematically uses its shares as a currency to acquire new technology. And, perhaps most importantly, Cisco has turned acquisitions?notoriously hard to pull off in the high-tech world?into a ?business process?. A group 60-strong concentrates on making acquisitions work. Target firms are screened to see if they are culturally compatible and can offer a quick return. Cisco then works hard to retain staff in the firms it buys, seeing them as the most significant assets it has acquired. They are rapidly integrated, given new opportunities and a lot of freedom.
But Cisco could not have grown as fast as it has without ?eating lots of its own dogfood?, to use the popular Silicon Valley expression. It makes 84% of its sales over the web. And more than 80% of customer queries are answered online. The firm decided years ago to put as much of its technical-support information as possible on the Internet, so that customers could solve most problems on their own, leaving its engineers to focus only on the difficult cases.
A virtual business
Internally, too, Cisco runs on the Internet more than any other large firm does. Information about potential recruits is passed around online. Expense reports, benefit information and registration for training classes are all available to employees on the corporate intranet. All told, Cisco?s internal web pages get about 28m hits per month. And thanks to the Internet, information flows nearly in real time within the company. From his PC, Larry Carter, the chief financial officer, can analyse the net revenue effect of every customer order. Soon he will be able to do a ?virtual close??closing Cisco?s accounts within a day at any time. This is a task that takes other large companies more than a week. And most do it only once a quarter, so they are vulnerable to unpleasant surprises.
The virtualisation of Cisco?s business extends beyond administration. The firm operates only three factories, in which it assembles its most sophisticated gear. The rest of its equipment is built in three dozen plants around the world run by contract manufacturers. Data connections guarantee that these manufacturers do exactly what Cisco wants, allowing it to send them test-software, design-files and order information.
In such a formidable company, what could go wrong? Mr Chambers worries that Cisco could lose its agility as it grows. The company will certainly need plenty of resilience to build its position in the core telecoms market: equipment for networks run by carriers. Its main competitors there are such veterans as Lucent Technologies and Nortel Networks, both with a decades-long record of building reliable networks. These firms have also taken a article out of Cisco?s book and spent billions to acquire Internet technology. Nortel merged with Bay Networks, one of Cisco?s competitors. Lucent took over Ascend Communications and Nexabit Networks, both makers of high-speed networking equipment.
For the moment, Cisco seems still to be making headway. This is partly because of the growth of packet-switching, a market that Cisco understands well. In the not-too-distant future, telecoms networks will use Internet technology to carry lots of services, including voice calls. Many new telecoms carriers do not have established relationships with the traditional suppliers.
A greater challenge to Cisco?s growth may come from the host of start-ups that are building equipment for the ?next-generation network?, says Paul Johnson, an analyst with BancBoston Robertson Stephens, an investment bank. For him, this new network is to Cisco what the Internet was to Microsoft: a significant discontinuity that creates opportunities for newcomers. Today, most Internet traffic flows through networks that were built to carry voice. But that causes growing pains: the increase in demand for telephone calls may be fairly steady, but that for data traffic is rapid and erratic.
To cope with this, telecoms carriers must rejig their networks so that providing new bandwidth does not take months, but rather days, or even hours. In recent months, several networking start-ups have announced new products to make this possible. Many use optical technology. Sycamore Networks?s equipment, for instance, lets carriers easily switch wavelengths of light, each carrying huge amounts of data. Corvis has developed a system that shoots photons all the way across North America without any electronic regeneration.
And then there is the risk that Cisco could be the next target of antitrust investigators. It is no secret that the Department of Justice?s heavy investment into the trial against Microsoft has built an infrastructure for scrutinising other dominant companies in the high-tech industry that might abuse their market power. Cisco caught the eye of the Federal Trade Commission, the other American antitrust agency, in autumn 1998, after it held partnership discussions with Lucent and Nortel?though the FTC ended its investigation last June. It seems an obvious target for further scrutiny. Like Microsoft, it does not dominate its main markets simply through the quality of its products. Its IOS program is proprietary, making it costly for customers to defect to other suppliers.
But that is where the parallels end. Even though Cisco is known as a robust competitor, not even its rivals claim that the company is abusing its dominant position. Such behaviour would hardly fit the culture Mr Chambers is trying to build. ?You don?t have to kill your competitors,? he keeps telling his employees. Anyway, networking-equipment markets are not particularly easy to monopolise: they are often based on open standards, and no carrier would willingly depend on a single supplier.
Even if Cisco were to dominate the network as Microsoft controls the PC, it would not enjoy that position for long. If, as Mr Chambers says, the networked economy is all about speed and continuous change, any firm?s dominance will also fade speedily. Cisco could be consumed by the very revolution its own technology has fostered. It may be time to look out for the next start-up that will become the biggest company in the world?faster even than Cisco did.
LINKS
Click here for corporate information about Cisco Systems, and here for details of its networking products.
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