Sw 9A97E018 CISCO SYSTEMS INC.:
MANAGING CORPORATE GROWTH USING AN INTRANET Debra Rankin and Professor Michael Parent prepared this case solely to provide material for class discussion. The authors do not intend to illustrate either effective or ineffective handling of a managerial situation. The authors may have disguised certain names and other identifying information to protect confidentiality. Ivey Management Services prohibits any form of reproduction, storage or transmittal without its written permission. Reproduction of this material is not covered under authorization by any reproduction rights organization. To order copies or request permission to reproduce materials, contact Ivey Publishing, Ivey Management Services, c/o Richard Ivey School of Business, The University of Western Ontario, London, Ontario, Canada, N6A 3K7; phone (519) 661-3208; fax (519) 661-3882; e-mail [email protected]. Copyright © 1997, Ivey Management Services Version: (A) 2010-02-03 The 1997 fiscal year had closed and once again Cisco Systems Inc. had surpassed industry growth rates. Since 1993 the company had been following an aggressive growth strategy in order to expand into all data networking markets. A significant portion of that growth came through acquisitions, despite the high failure rate experienced by large-scale mergers. John Chambers, Chief Executive Officer and President of Cisco since 1995, looked at the networking market as operating: . . . in Internet years, as opposed to calendar years. Things are changing so fast with regard to the Internet that each regular business calendar year equals seven Internet business years.1 The frenzied pace of change in the networking industry required a dynamic and responsive organization. Cisco coped with organizational growth by using its technology to develop and deploy an extensive corporate intranet. The challenge remained to ensure that Information Systems (IS) and Information Technology (IT) continued to support the scaling of Cisco’s organization as it continued to expand. COMPANY OVERVIEW AND HISTORY Headquartered in San Jose, California, Cisco was the world’s largest supplier of data networking equipment and the leading global supplier of computer networking solutions. A network has been defined as: . . . a collection of individual [nodes], connected by intermediate . . . devices, that functions as a single large network.2 1As quoted in the article by G. Rifkin “Growth by Acquisition — The Case of Cisco Systems,” Strategy & Business. (Booz, Allen & Hamilton Inc. 1997) Authorized for use only in the course Department of Business Administration at Jubail University College taught by Yasmeen Aldhafiri from May 31, 2016 to May 31, 2017. Use outside these parameters is a copyright violation. Page 2 9A97E018 In the past, every department in an organization built its own network in order to facilitate communication among the department’s staff. Because these LANs (local area networks) used different protocols and media access methods, the flow of information beyond the department was impeded. Cisco was the first company to come up with a device that enabled networks to communicate. In 1997, Cisco developed, manufactured, sold and supported the hardware and software that together distributed and translated data from one network to another, and connected individuals and remote locations to those networks. Cisco’s vision was to link LANs and WANs (wide area networks) across geographically dispersed locations throughout the world via a single, seamless infrastructure. The Cisco story was the dream of every entrepreneur. Leonard Bosack and Sandy Lerner were a husband and wife team who worked in different departments at Stanford University: she in the business school and he in computer science. In order to be able to transfer information between their computer systems, they developed a device that translated the computer languages used by their respective department networks. This device was a router. It distributed the data, and had software that allowed the messages to be readable by different languages and operating systems. This was the beginning of the soon-to-be “Cisco.” Bosack and Lerner left the academic world and in 1984 together with three other colleagues set up the company from their home in California. Cisco sold its first network router in 1986. In late 1987, the company received its first, and only, venture funding, $2.5 million (all dollars in U.S.), which in fact was never spent. By 1988, Cisco started to target large corporations, not just universities and government departments. With sales growing from $1.5 million in 1987 to $28 million in 1989, Cisco went public in 1990. Later that year, the founders left. By 1991, sales reached $183 million. Increased competition from both start-ups and giants such as IBM and Digital Equipment began to confront Cisco. This competition was fuelled by the rapid growth of corporate networking. This growth was greatly attributed to the acceptance of the TCP/IP “Internet protocol” as the means by which to transmit data. This standard allowed individual networks to be linked by cheaper, faster and smarter devices. Also, there was a concurrent increase on the part of both end-users to use their PCs for communication purposes on the Internet and for businesses to develop their own networks. Cisco continued to grow through product enhancements and expansion of its product line, as well as through international sales. However, in 1993, management was convinced that although revenues were doubling and Cisco had 80 per cent of the router market, switching was becoming a compelling, complementary technology that customers were asking for. Consequently, Cisco decided to shift its business philosophy and expand into all networking technology (both switches and routers) through a highly aggressive growth strategy. This was to be accomplished through strategic alliances, minority investments and acquisitions, together with internal development. Cisco’s first acquisition was in September 1993. The company bought Crescendo Communications Inc., which had annualized revenues of $10 million, for $89 million. Within 18 months of the purchase, the product originated by Crescendo, and enhanced by Cisco, was generating over $500 million in revenues. Since then Cisco had acquired nearly 20 companies that spanned four networking technologies: LAN and WAN switches, remote dial-up access, and Internet software. Exhibit 1 illustrates and describes the rate and extent of these acquisitions. 2M. Ford, H. Kim Loo, S. Spanier & T. Stephenson, Internetworking Technologies Handbook. Authorized for use only in the course Department of Business Administration at Jubail University College taught by Yasmeen Aldhafiri from May 31, 2016 to May 31, 2017. Use outside these parameters is a copyright violation. Page 3 9A97E018 By 1997, Cisco offered end-to-end connectivity solutions and product lines covering a wide range of routers, LAN and WAN switches, dial-up access servers and network management software. Virtually all of these products incorporated Cisco IOS software, which provided the intelligence that integrated Cisco products so that disparate groups, varied devices and multiple protocols could work together. Cisco IOS software was also licensed to many vendors, including some competitors, as an integral part of their products (e.g., Hewlett-Packard and Digital Equipment computers, Time Warner and Toshiba cable modems, Alcatel and Siemens telecommunications CO switches). Cisco’s workforce had grown from 94 employees in 1989 to 11,000 in 1997, of which about 2,000 were from acquisitions. None of Cisco’s acquisitions resulted in layoffs, because the motivation behind an acquisition was product development and market expansion, not cost savings through consolidation. Compared to the industry, Cisco’s overall attrition rate was low. Cisco sold its products through 125 locations in 75 countries with international sales accounting for 47 per cent of its revenues. The company had technical support centres in California, North Carolina, Australia, Belgium and Canada. Cisco’s major equipment markets were low-end, mid-range and high-end routers; workgroup and backbone LAN switches; WAN switches and remote dial-up access. It was either number one or number two in all of these markets except remote access dial-up ports. Its revenues were made up of 49 per cent routers, 22 per cent LAN switches, 12 per cent WAN switches, six per cent remote dial-up access, 11 per cent services and other. While the industry had been growing at 30 to 50 per cent, for each of the fiscal years 1993 to 1996, Cisco’s revenues grew in excess of 80 per cent. In fiscal year 1997, Cisco’s revenues were $6.4 billion. Cisco was listed on the Fortune 500 for the first time in 1997 as one of the top five for both return on revenues and return on assets, a record matched only by Microsoft and Intel. Exhibit 2 provides financial highlights from 1994 to 1997. Cisco had no long-term debt and an unused line of credit of $100 million. Cisco stock was traded over the counter on the NASDAQ National Market. It had a market capitalization of $55 billion, third in value on NASDAQ after Microsoft and Intel. The stock had split five times in six years and had increased over 14,000 per cent since it went public. The stock’s 1997 52-week high was $831⁄4. INDUSTRY/MARKET TRENDS/COMPETITION The rapid pace of change in the networking industry was attributed to a number of factors. While the market had expanded to include small, medium and large businesses as well as consumers, networks were typically doubling in size in less than a year. The 1997 data networking market was estimated at $27 billion and was forecast to reach $93 billion by 1999. Overall, IT expenditures were forecast by the U.S. government to be more than 40 per cent of U.S. capital spending by the year 2000. Since end-users wanted to communicate with more people and send more data faster, networking technology was being driven to provide higher capacity and faster and more functional services. For example, organizations required global networks to conduct their businesses internally with the use of an Intranet. Also, businesses were transacting through commercial networks directly with their customers. Fierce competition for these markets led to a shift from complementary to converging technologies and to a blurring of the line between “computing” and “communicating.” As a result, there was increasing overlap in the businesses of the various players. Authorized for use only in the course Department of Business Administration at Jubail University College taught by Yasmeen Aldhafiri from May 31, 2016 to May 31, 2017. Use outside these parameters is a copyright violation. Page 4 9A97E018 In 1996, the world-wide networking market share3 was as follows: Cisco 21.9 per cent, 3Com 12.8 per cent, Bay Networks 11.6 per cent, IBM 8.3 per cent and Cabletron 6.0 per cent. The rest of the market was highly fragmented, with no other player having more than a 3.3 per cent share. However, the competitive field shifted frequently, and the increased number of consolidations and alliances in the industry were influencing the pace and degree of the shifts. As Chambers recently stated: Our biggest competitor two years ago was 20 per cent bigger than us. Today we are 300 per cent bigger than them. Anyone who thinks that can’t happen to them is wrong.4 ORGANIZATIONAL CHANGES IN CISCO FROM 1993 TO 1997 In 1993, Cisco started to move beyond routers as it expanded its market. It recognized that the networking industry was shifting to a more complex environment in which a number of technologies would need to co- exist. Cisco was concerned that if it became too strongly tied to any one technology it would not be in tune with market needs, and thus it would risk failure. Cisco started on the road to change by borrowing some of the best practices from other corporations. It decided to segment the market on the basis of end-users, as Hewlett-Packard had done, and to move away from being organized around products. It also chose to follow GE’s policy of being number one or two in every market it entered, or else exiting from that segment. Lastly, Cisco aimed to be THE one-stop vendor for networking solutions, much as IBM had been for mainframes. In expanding its product lines, Cisco would have preferred to develop all its technology internally as it had done in the past. However, in a business where product cycles were less than 18 months, time to market was critical. Cisco decided it would have to look outside. It entered into scores of joint ventures, joint marketing and joint development agreements. In situations where the company could not develop technology to get to market within six months, it acquired. The company was, and remained, prepared to do as many as eight to 12 such deals per year. In 1994, Cisco reorganized around decentralized business units that were responsible for product development and marketing in their respective markets, but which had different core technologies. Cisco’s three, decentralized lines of business were named for the markets they served: Enterprise, Service Providers, and Small/Medium Business. For the purposes of manufacturing, distribution and finance, Cisco maintained a centralized organization in order to take advantage of the synergy and economies of scale provided by a large company. One of the hallmarks of the organization was frequent reorganization in order to respond to rapidly changing markets. Cisco underwent a significant increase in its workforce with more than half of its 11,000 employees hired within the last four years. Its hiring rate was as high as 350 employees per month, not including employees from acquisitions. Cisco also expanded its senior management. It added 25 vice-presidents in 1996, and in 1997, had over 50 in total. In scaling up the business and the workforce, Cisco set up an extensive suite of electronic interactive services which it called the Cisco Connection for customers, partners, employees, shareholders and prospects. In 1995, John Chambers became CEO. He joined Cisco in 1991 after having worked for IBM and then Wang. He viewed one of his worst professional experiences as having to lay off 4,000 employees at Wang. 3Source: Strategic Networks Consulting, Inc. As reported in the article by S. Borthick, “Turning Point for the Router Market?” Business Communications Review (December 1996).
4J Chambers as quoted in the article by J. Cooper Ramo, “Cisco Guards the Gates,” Time (June 9, 1997). Authorized for use only in the course Department of Business Administration at Jubail University College taught by Yasmeen Aldhafiri from May 31, 2016 to May 31, 2017. Use outside these parameters is a copyright violation. Page 5 9A97E018 I learned at both companies that in high tech, if you don’t stay ahead of trends, they’ll destroy everything you work for and tragically disrupt the lives of your employees. I don’t ever want to go through that again.5 ACQUISITIONS In addition to its 15 minority investments, Cisco had acquired 19 companies since 1993 (See Exhibit 1 for a summary.) These acquisitions, which were primarily paid for with Cisco stock, cost in excess of $5.5 billion. The company estimated that about 30 per cent of its revenues came from acquired product lines, although the distinction between acquired products and internally developed products became blurred once a company had been part of Cisco for more than two years. Most of the acquired companies were privately held and ranged in size from 20 to 150 employees with the exception of StrataCom which was a public company with 1,200 employees. The acquisition of StrataCom at $4 billion was one of the largest in the industry. On average, Cisco has paid $500,000 to $2 million per employee. Cisco has retained more than half of the CEOs of the acquisitions for at least six months and many have stayed on in major roles. The attrition rate is actually lower for the acquired employees than for the new hires. THE “ART” OF ACQUISITION Cisco had a business development team of 50 to 60 employees who looked for businesses with technology in development that the market was seeking but that Cisco could not develop fast enough internally. Cisco expected its acquisitions to provide revenue equal to the purchase payment within three years. Based on its experience in joint ventures, Cisco elected to seek out similar cultures to avoid conflicts. Cisco developed a reproducible model for the acquisition process: target selection, approach, purchase and integration. The whole process took from three to six months. The target selection was key. In this type of acquisition the company was basically purchasing the employees and the technology they were developing. If the employees did not stay, then the value of the acquisition was lost. Therefore, in selecting the target company it was vital that it shared Cisco’s vision of technology. Generally, Cisco targeted small, privately held technology start-ups that were growing fast. The targets had to be culturally similar to Cisco, geographically close and entrepreneurial. The take-over had to be friendly and uncomplicated with a rapid integration. This supported two of Cisco’s goals. First, in order to be first- to-market, the deal could not be tied up in lengthy negotiations and legalities. Second, there should be minimal inconvenience to both Cisco’s and the acquired business’s customers. The integration of the employees, products and technology in development had to be virtually transparent to the customer. An internal group made up of leaders from various parts of Cisco sponsored the acquisition and took ownership of merging it into Cisco. As soon as the purchase agreement was signed, a dedicated team of Cisco IT staff worked on integrating the acquired company’s IT systems into Cisco’s, including electronic mail, Web sites, product order systems and sales automation. CISCO EMPLOYEE CONNECTION (CEC) The Cisco Connection was a combination of Internet and CD-ROMs/Intranet applications which were available to customers, partners, shareholders, prospects and employees. It provided on-line information and interactive services world-wide on a real-time basis, including software upgrades, technical assistance, 5J. Chambers as quoted in the article by B. Schlender, “Computing’s Next Superpower,” Fortune (May 12, 1997). Authorized for use only in the course Department of Business Administration at Jubail University College taught by Yasmeen Aldhafiri from May 31, 2016 to May 31, 2017. Use outside these parameters is a copyright violation. Page 6 9A97E018 order status, seminar registration, documentation and training. Cisco’s employee Intranet was known as the Cisco Employee Connection (CEC). It was designed to provide information and services to meet the needs of Cisco employees. Its access was restricted to employees only. Exhibit 3 illustrates the CEC’s first-level menu. The CEC was designed to be employee-friendly and intuitive in order to minimize training time. The benefits, from Cisco’s viewpoint, were instant global communications, enhanced productivity, consistent business systems, lower business costs, and scalability. CEC was based on a secure and transparent architecture and used firewall network security. It provided information and interactive tools for facilities, travel arrangements, technical documentation, human resources, training, sales and marketing, and financial matters. Once employees logged on to the CEC, they were presented with a main menu that allowed them to access a vast array of information through different feature selections. These selections included categorization by lines of business, business functions, company and employee-related information. There were also a number of repositories called “dashboards” which grouped links on particular topics. One dashboard was called “new hires.” It facilitated an efficient integration of new employees into Cisco by providing links to information needed by new hires. For example, its opening screen provided a list of frequently asked questions (FAQs). The other dashboards were used as job-specific tools to aid personnel in their daily operations relating to sales, engineering, managers and system engineers. For example, in the area of sales, since Cisco now offered end-to-end networking solutions and scores of products, CEC provided the employees with up-to- date information on new products and company developments. Since 1996, Cisco’s sales force had been supplied with portable computers so that every sales representative could access CEC. This included a bank of sales presentations which could be customized on customer sites within minutes. JOHN CHAMBERS’ CONCERN The challenge for John Chambers was to ensure that IS and IT continued to support Cisco during its aggressive growth strategy. By all measures, the CEC had been tremendously successful in facilitating employee acculturation. It had also proved to be a powerful showcase for Cisco’s technology. As Cisco continued down the path of eight to 12 acquisitions a year, Chambers was concerned about the limitations of the intranet for managing growth. He was well aware that the company’s growth rates provided considerable challenges that could not be overlooked. As he put it recently: We’re paranoid. A lot of companies are arrogant. They’re on top and they believe they belong there. We’ve got almost the reverse attitude. We’ve got a tremendous fear of failing. We make Andy Grove at Intel look relaxed!6 6J. Chambers as quoted in footnote 1. Authorized for use only in the course Department of Business Administration at Jubail University College taught by Yasmeen Aldhafiri from May 31, 2016 to May 31, 2017. Use outside these parameters is a copyright violation. Page 7 9A97E018 Exhibit 1 CISCO ACQUISITIONS Source: Cisco documents (used with permission). Authorized for use only in the course Department of Business Administration at Jubail University College taught by Yasmeen Aldhafiri from May 31, 2016 to May 31, 2017. Use outside these parameters is a copyright violation. Page 8 9A97E018 Exhibit 1 (continued) Acquisition Date Crescendo Communications, Inc. Newport Systems Solutions, Inc. Kalpana, Inc. LightStream Corp. Combinet, Inc.
Internet Junction, Inc. Grand Junction, Inc. Network Translation, Inc. TGV Software, Inc. Technology High-speed switching solutions for the workgroup
Software-based routers for remote network sites LAN switching products
Enterprise and workgroup ATM switching, LAN switching and routing ISDN remote-access networking products
Internet gateway software for central and remote office Internet access
LAN switching and Fast Ethernet products
Network address translation and Internet firewall hardware and software
Internet software products for connecting disparate computer systems over local area, enterprise-wide and global computing networks
ATM and Frame Relay high-speed WAN switching equipment September 1993 August 1994 October 1994 December 1994 August 1995 September 1995 September 1995 October 1995 January 1996 April 1996 July 1996 August 1996 September 1996 October 1996 March 1997 June 1997 June 1997 June 1997 July 1997 StrataCom, Inc.
Telebit Corp’s MICA Technologies High-density digital modem technology Nahoba Networks, Inc. Granite Systems, Inc. Netsys Technologies Telesend
Skystone Systems Corp. Global Internet Software Group Ardent Communications Corp Dagaz (Integrated Network Corporation) Source: Internal Cisco documents. Token Ring LAN switching
Multilayer Gigabit Ethernet switching Network infrastructure management and performance analysis software
WAN access products
High-speed Synchronous Optical Networking/Synchronous Digital Hierarchy
Windows NT network security Communications support for compressed voice, LAN, data and video traffic across public and private Frame Relay and ATM networks
High speed information transmission over existing copper phone lines Authorized for use only in the course Department of Business Administration at Jubail University College taught by Yasmeen Aldhafiri from May 31, 2016 to May 31, 2017. Use outside these parameters is a copyright violation. Page 9 9A97E018 Years Ended Net Sales
Income before income taxes
Net Income
Net Income per common share Shares used in per share calculation 7/26/97 $6,440,171 1,888,872 1,048,679 $1.52 689,319 7/28/96 $4,096,007 1,464,825 913,324 $1.37 666,586 7/30/95 $2,232,652 737,977 456,489 $0.72 630,711 7/30/95 $1,991,949 $1,562,276 7/31/94 $1,334,436 522,500 322,981 $0.54 596,639 7/31/94 $1,129,034 $904,323 Exhibit 2 FINANCIAL HIGHLIGHTS Consolidated Statement of Operations Data (in thousands, except per-share amounts) (in thousands) 7/26/97 Total assets $5,451,984 Shareholders’ equity $4,289,622 7/28/96 $3,630,232 $2,819,622 Consolidated Balance Sheet Authorized for use only in the course Department of Business Administration at Jubail University College taught by Yasmeen Aldhafiri from May 31, 2016 to May 31, 2017. Use outside these parameters is a copyright violation. Page 10 9A97E018 Exhibit 3
CEC ILLUSTRATED Source: Cisco Systems Inc.