Special Report -- The 21st Century Economy -- How It Will Work
THE CORPORATION OF THE FUTURE
Cisco is a good model. It reads the market well, responds quickly. And it knows how to harness high tech
The once unthinkable decline of many of the world's largest corporations has become all too common in recent years. Strategic blunders and oversights by management have pulled down such powerful and mighty giants as AT&T, Eastman Kodak, and General Motors.
Yet there is a less visible but even more critical danger: the inability to adapt to the speed and turbulence of technological change. After massive high-tech investments, management is only beginning to make the organizational changes needed to transform information technology into the potent competitive weapon that it will need to be in the 21st century.
Few companies have grasped the far-reaching importance of the new technology for management better than Cisco Systems Inc. The San Jose (Calif.) company has become the global leader in networking for the Internet, with annual revenues of more than $8 billion. It's also a Wall Street darling, with a market cap approaching $100 billion.
Cisco could well provide one of the best road maps to a new model of management. Partly because it makes the tools to build the powerful networks that link businesses to their customers and suppliers, Cisco itself has been at the forefront of using technology to transform management practices.NEAR-RELIGIOUS. But it's not only the company's innovative use of technology that wins favorable reviews. It's also the company's mind-set and culture, its willingness to team up with outsiders to acquire and retain intellectual assets, its near-religious focus on the customer, and its progressive human resource policies. "Cisco is the quintessential outside-in company" says James F. Moore, chairman of consultants GeoPartners Research Inc. "They have mastered how to source talent, products, and momentum from outside their own walls. That's a powerful advantage."
This corporate adolescent--founded in 1984 by a group of computer scientists from Stanford University--is headed by a leader, John T. Chambers, who cut his teeth at successful companies that stumbled. At both IBM and Wang Laboratories Inc., the soft-spoken West Virginian got a firsthand glimpse of how arrogance and reluctance to change caused severe pain and dislocation.
Those experiences, including a traumatic time when he survived five layoffs in 15 months at Wang--before resigning in 1990--colored his view of what a healthy organization should be. "It taught me how a company should be built in the first place and how to do things dramatically different the next time," says Chambers, 48, who joined Cisco in 1991 and became CEO in 1995. "Laying off people was the toughest thing I ever did. I'll move heaven and earth to avoid doing that again."
To hear Chambers tell it, his people and his organization are "in the sweet spot"---where technology and the future meet to transform not only business but all of life. His vision is simple: "We can change the way people live and work, play and learn." It is an idealistic phrase that falls out of his mouth repeatedly and unabashedly. It is also an inspiring and motivating declaration for each of Cisco's 13,000-plus employees.
Chambers aims to be the Jack Welch of the new millennium. Like General Electric Co.'s Chairman Welch, he has decided he wants to be No.1 or No.2 in every market, a condition that already exists in 14 of the 15 markets in which Cisco competes. Beyond that strategic goal, Chambers believes that the new rules of competition demand organizations built on change, not stability; organized around networks, not a rigid hierarchy; based on interdependencies of partners, not self-sufficiency; and constructed on technological advantage, not old-fashioned bricks and mortar.
The network structure has vast implications for managing in the next century. GM's Saturn Div. and Dell Computer Corp. have shown how the network can eliminate inventory, by connecting with partners that deliver goods only when they are needed. In the new model that Chambers is creating at Cisco, however, the network is pervasive, central to nearly everything.
It seamlessly links Cisco to its customers, prospects, business partners, suppliers, and employees. This year, Cisco will sell more than $5 billion worth of goods--more than half its total--over the Internet, nearly three times the Internet sales booked by pioneer Dell. So successful has Cisco been in selling complex, expensive equipment over the Net that last year Cisco alone accounted for one-third of all electronic commerce.
Seven out of 10 customer requests for technical support are filled electronically--at satisfaction rates that eclipse those involving human interaction. Using the network for tech support allows Cisco to save more money than its nearest competitor spends on research and development. "It has saved me 1,000 engineers," gushes Chambers. "I take those 1,000 engineers, and instead of putting them into support, I put them into building new products. That gives you a gigantic competitive advantage."
The network also is the glue for the internal workings of the company. It swiftly connects Cisco with its web of partners, making the constellation of suppliers, contract manufacturers, and assemblers look like one company--Cisco--to the outside world. Via the company's intranet, outside contractors directly monitor orders from Cisco customers and ship the assembled hardware to buyers later in the day--often without Cisco even touching the box. By outsourcing production of 70% of its products, Cisco has quadrupled output without building new plants and has cut the time it takes to get a new product to market by two-thirds, to just six months."PERSONAL TOUCH." The network also is Cisco's primary tool for recruiting talent, with half of all applications for jobs coming over the Net. When an employee wants information about a company event or health benefits, or needs to track an expense report, the network is the place to go at Cisco. The upshot: More than 1.7 million pages of information are accessible by employees who use the Cisco network thousands of times every day. "We are," says Chambers, "the best example of how the Internet is going to change everything."
Technology aids and abets this business model, but it does not completely displace human interaction. "The network works better when you've already had a personal touch," insists Chambers. That's why he does quarterly meetings with employees at a nearby convention center, why all employees in the month of their birth are invited to one of his 1 1/2-hour "birthday breakfasts," and why he works harder than most to encourage open and direct communication with all of Cisco's leaders.
Chambers also believes in partnering with other businesses. Plenty of companies forge links with others, but Cisco has a track record of making them work. "Partnerships are key to the new world strategies of the 21st century," says Donald J. Listwin, a Cisco senior vice-president. "Partners collapse time because they allow you to take on more things and bring them together quicker."
A good example is Cisco's partnership with Microsoft Corp., which last year resulted in a new technology to make networks more intelligent. The software lets networks know immediately a user's identity and location and to respond differently to each one. The partnership allows both companies to expand this market together more rapidly. "From initial discussion to technology, it took 18 months to get the product out," says Listwin. "It would have taken us four years to get to where we are [without such a partnership], and it's not clear we had the competence to get there alone."
Another theme--often heard but seldom exercised by corporate leaders--is the central importance of the customer. Nothing causes Chambers more restless nights than worry over how to serve customers better. That's why he spends as much as 55% of his time with customers and why he receives every night, 365 nights a year, voice mail updates on as many as 15 key clients."ARROGANT." In this new model, strategic direction is not formed by an insular group of top executives, but by the company's leading customers. It's an outside-in approach, as opposed to an inside-out. The customer is the strategy. "There is nothing more arrogant than telling a customer: `Here is what you need to know,"' says Chambers. "Most of the time, you are not going to be right." Rather, Cisco's leading-edge customers are seen as partners in forming the company strategy. Example: After Boeing Co. and Ford Motor Co. informed Chambers that their future network needs were unlikely to be satisfied by Cisco, Chambers went out to make his first acquisition to solve the problem. That deal, to acquire local-area-network switchmaker Crescendo Communications in 1993, put the company into a sector of the industry that now accounts for $2.8 billion in annual revenue.
Even such tactical moves as acquisitions and mergers are seen differently by a new-world company. Rather than acquire merely to speed growth or swell market share, Cisco routinely employs acquisitions to capture intellectual assets and next-generation products. "Most people forget that in a high-tech acquisition, you really are acquiring only people," says Chambers. "That's why so many of them fail. At what we pay, at $500,000 to $2 million an employee, we are not acquiring current market share. We are acquiring futures."
While most companies immediately cut costs and people from newly acquired outfits, Cisco adheres to what it calls the "Mario rule"--named after Senior Vice-President Mario Mazzola, who had been CEO of Crescendo when it was bought by Cisco. Before any employee in a newly acquired company can be terminated, both Chambers and the former CEO must give their consent. "It tells new employees that Cisco wants them, that Cisco cares about them, and that we're not just another big company," says Daniel Scheinman, vice-president for legal and government affairs. "It buys the trust of the people...and their passion is worth a lot more than any of the downside legal protection."
In talent-hungry Silicon Valley, Cisco measures the success of every acquisition first by employee retention, then by new product development, and finally return on investment. The company has been phenomenally successful at holding on to the intellectual assets it buys: Overall turnover among acquired employees is just 6% a year, two percentage points lower than Cisco's overall employee churn. The company works hard to embrace employees acquired in deals, often giving top talent key jobs in the new organization. Three of Cisco's main businesses are led by former CEOs of acquired companies.GOOD FIT. Every acquisition, moreover, must meet Cisco guidelines. For years, Chambers watched IBM and other high-tech outfits acquire and then slowly smother any number of entrepreneurial companies. What he learned was that you never buy a company whose values and culture are much different from your own. Nor do you buy a company that is too far away from your central base of operations. The latter makes a cultural fit less likely and severely limits the speed a company needs to compete in the new economy.
Chambers also believes that each deal must boast both short-term and long-term wins for customers, shareholders, and employees. "If there are no results in three to six months, people begin to question the acquisition," says Charles H. Giancarlo, vice-president for global alliances. "If you have good short-term wins, it's a virtuous cycle."
Through it all, the emphasis is on doing it faster, cheaper, and better--an integral part of success in the new economy. At Cisco, wages are less important than ownership. Some 40% of the stock options at the company are held by "individual contributors" who on average boast more than $150,000 in option gains. Egalitarianism is critical to successful teamwork and to morale. "You never ask your team to do something you wouldn't do yourself," says Chambers, who flies coach and has no reserved parking space at headquarters.
There are other leaders, of course, besides Chambers, who hope to create an organization that may very well revolutionize the fundamental business models of major global companies. But he's surely in the "sweet spot," helping to write the new rules for managing.By John A. Byrne in San Jose, Calif.Return to top