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BY
BRUCE EGSIEKER
Working for
Cisco is like being strapped to a rocket.
Competitors who have not backed the Cisco culture have lost, investors
who have bet against that stock have lost.
The beauty of Cisco routers is that they are agnostic, they connect to
any kind of computer: Dell, Apple, I.B.M., etc. Cisco’s ability to integrate acquired companies is
legendary. They are so good that
General Electric is sending their managers to Cisco to study their
management. Now more than 75% of all
net traffic is over Cisco products.
This is their story and strategy.
The company
was actually started in 1984 in San Jose, California, by a husband and wife
team who at the time were Stanford University students. Today, the Internet has become the critical
backbone for all communications and business transactions around the
globe. Today Cisco sells 80% of it gear
over the Internet, speeding up the processing and wiping out costly needless
steps. What Bill Gates was to
P.C.’s John Chambers is to the
Net. Their 1999 sales were $16.6
billion dollars. I.B.M. has now said
that it will resell Cisco Systems gear which should add another $6-7 billion by
2002. Don Valentine of Sequoia Capital was the initial venture capitalist who
invested in the new startup Cisco.
Their primary
competitors are Cabletron Systems, 3Com and Nortel Networks. Cisco has 33% of the I.S.P. (Internet
service provider like AOL, Earthlink,) market…data switches to zippier routers.
They also have 18% of small to mid cap businesses data networking market. Cisco has now moved into the $225 billion
dollar market for telephones (buying Selsius in 1998 IP telephones, PSNT
gateways}. Their rivals here are Nortel
(of Canada) and Lucent Technologies (an arm of A.T.& T.). Phones will help them converge the
future.
John Chambers,
C.E.O. was born in Cleveland and went to Duke and Indiana Universities. He started in sales with I.B.M. then went to
Wang and caught in cutbacks and was laid off.
He joined Cisco in 1991 when they were doing $70 million in sales. The C.I.O. (Chief Information Officer) at
the time was Peter Solvik who came from Apple Computer. John Morgridge was C.E.O. (Chief Executive
Officer). In 1990 the company had just
gone public by selling common stock, as it needed funds for its Web research
and development. They spent $100
million dollars in early Internet research.
John Chambers was made C.E.O. in 1995.
John Chambers
states that “the big will not defeat the small, the fast will defeat the
slow”. Cisco now dominates the
exploding “Internetworking” market. By
1997 it was listed as a Fortune 500 company and ranked in the top five
companies in return on revenue and return on assets. Only two other companies have matched this feat in such a short
period of time…Intel and Microsoft. All
three have shaped the digital revolution.
The core
technology of Cisco is routers, the end-to-end plumbing of the Internet. They act as multilingual translators tying
the disparate computer networks of the world together on the Internet in much
the same way that telephone networks in different countries pass calls to each
other. There are three independent
proprietary networks: 1) phone
networks, 2) local area (LAN and wide area (WAN) networks for data, and 3)
broadcast networks for video.
Digitization is enabling the convergence of the three networks.
The Internet,
as a global network of networks, makes it possible to transmit voice, data, and
video over one network over one network in a more efficient and economical
manner than transmitting signals over the three independent and proprietary
networks. Some of the big three telecom
players are A.T.& T., GTE, British Telecom, and Deutsche Telecom. Already in the U.S. data network traffic
exceed voice network traffic. Lucent
(spun off from A.T.& T. 1996) is the current leader in telecom gear. The new IP-based technology providers such
as Cisco are better equipped to address performance and security issues due to
their constant influx of venture capital and talent.
Cisco’s
business strategy consists of: 1) assemble a broad product line so Cisco can
serve as one-stop shopping for business networks. 2) systematic acquisitions as
an efficient business process…this is a core competency of theirs. They have acquired dozens of companies which
“fit” into their technology mapping of the future, 3) set industry wide
software standard for networking…they have issued I.O.S. (Inter-network
Operating System) licenses to Ericcson, Northern Telecom, Hewlett-Packard,
Microsoft, Intel, 3Com, and twelve Japanese companies, 4) pick the right
partners…here we mean Cisco is working with Micro soft to create an industry
standard fro security over the Internet, working with M.C.I. WorldCom to
deliver premium Internet Services, working with Hewlett Packard to sell
Internet based corporate computing systems built with each others
products. Again, so Cisco is providing
the network plumbing end to end.
Peter Solvik
setup the I.T. budget pertaining to functions and a $15 million enterprise
resource planning (ERP) system project to completely replace order entry,
manufacturing, and financial systems, worldwide in just nine months…it was a
success for Cisco. He literally replaced
every piece of technology in the company which was not “net” based Intranet, no
mainframes, no mini computer, no legacy technology, Today Cisco can close its
year end books (Balance Sheet, Income Statement, Sources and Uses Statement) in
one day!
The I.T.
platform architecture is standardized throughout Cisco: 1) 100% Unix at the
server level 2) 100% Windows N.T. at the LAN level, 3) 100% Windows Toshiba and
H-P P.C.’s at the client level, 4) 100% Oracle at the database level 5) 100%
TCP/IP (transmission control protocol/Internet protocol) for the worldwide
network. Cisco has built its business
processes on its own global Internet, with links to strategic vendors and
customers to allow Cisco to collaborate more efficiently with those outside the
company.
Almost all
functions that sales people perform on the computer are done using a web
browser. For example, within their
company the file over their internal Intranet automated expenses for travel and
travel reservations. Every application
in the company uses a web browser as its only user interface. Also, distance learning is available to
Cisco employees and can be activated at the employee’s desktop. If John Chambers gave a speech in Berlin the
night before they can come in the next morning to the office, click on an icon
and watch his speech and what he said.
In the spring of 1997, Solvik initiated an arrangement with Yahoo (the
search engine company) to make available a Cisco-tailored version of “my Yahoo”
which has a title page to customize your interests. My Yahoo is a type of “push” technology application whereby
certain information are specified by the user, and agents search the Internet
for the information and then “push” it out to the users desktop. It’s a powerful communications tool..
Please note
that over 70% of Cisco’s technical support for customers and reseller is
delivered electronically, saving Cisco over $150 million annually and improving
customer satisfaction. In addition,
over 90% of Cisco’s software upgrades are now delivered via the Internet at a
lower cost and much shorter time than traditional distribution methods.
Cisco
automated its supply chain to: 1) a single enterprise approach, Cisco uses
networked applications to integrate suppliers into its production systems,
creating in effect a “single enterprise”, this enabled key suppliers to manage
and operate major portions of its supply chain. The electronic links across the single enterprise allow Cisco and
these suppliers to respond to customer demand in real time, 2) Cisco automated
the process for gathering product data information thereby reducing the amount
of time required from one day to less than 15 minutes, 3) auto-test…in 1992
Cisco began to build test cells that performed tests automatically with minimal
labor and standardized product tests. Once testing had be an automated and
standardized it was outsourced entirely to the suppliers allowing quality
issues to be detected at the source, 4) until recently orders where shipped to
customers from Cisco or (from a configured leg) from a partner to Cisco and
then Cisco shipped to customer…this took 3 days which was not acceptable. Now, they use global direct fulfillment
which transitioned the partner to ship product direct to customers rather than
through Cisco. Now 50% of all their
orders are filled this way saving time and cost.
Cisco did a
survey and found a $250 million dollar savings by combining on the Intranet
(their internal company net) and Internet, marketing, employee information,
customer support and commerce applications.
For the last few year’s investment in I.T. has grown faster than Cisco
revenues. Acquisitions have been and
will continue to be for the foreseeable future an important part of Cisco’s strategy. They have mastered the art of
acquisition. They acquire companies for
their products and technology.
So what have
we said thus far. Cisco’s corporate
I.T. architectures are transitioning from standalone transaction systems that
operated on mainframe computers (using expensive private wide area networks
(WANs) plus loosely coupled local area networking (LANs) of personal computers
(p.c.’s) to vastly more efficient integrated shared networks that operate over
the Internet. Their first wave change
is taking place in the form of Intranets.
This sea change has occurred faster than most managers realize due to
much improved economies of IP-Based
networks and web-enabled I.T. capabilities.
Cisco is the exemplar I.T. user in the network era. Students, think about the role of I.T. in
business strategy in the network era.
Conceptualize how to think about the network era applications…what are
the business benefits. Is I.T.
leadership important?
We can say
that we have passed through three era’s.
In each of the era’s, there is a dominant I.T. design, and a dominant
paradigm for the application of I.T.
1) in the DP (data processing) era the dominant design was the
mainframes, and the dominant I.T. application paradigm was “automation”, that
is development of applications that automated transaction processing such as
payroll, accounts receivable, and order processing, 2) in the Micro era, the
dominant design was the personal computer and the dominant I.T. application was
“informating” that is “do it yourself” software such as Word, Excel spreadsheet
and graphics…during the Micro era the DP applications portfolio coexisted with
the pc use, 3) the Network era, the PC was reconceptualized into a “client” and
the mainframe was reconceptualized into the server. As the concept of the integration has evolved, the emerging
dominant design of the network era is the network of computers, or the “network
is the computer” a phrase used by Sun Microsystems.
While the
dominant design was still emerging for the network era, the Internet exploded
on the scene and crystallized the notion of the network as millions for
computers hooked together in an accessible format. Now in the Network era, we have gone even further by using graphic
oriented point-and-click browser-based applications to allow users to
accomplish complex tasks such as updating system software directly over a
network of computers. Strategic
Intranets using I.P.-based standards are being developed in companies as
exemplified by Cisco and are being connected to the Internet to make company
applications accessible throughout the world.
Cisco describes these network applications as “self-service
applications”.
The Internet
provides a globally accessible, shared infrastructure. The I.P. based standards provide “market
externalities”. Sustainable strategy is
associated with a mutually reinforcing system of capabilities that is
structured by the firm. Various uses of
I.T. can be effectively incorporated into the system of capabilities that
makeup a firms sustainable strategy.
This is a New Renaissance, which lives in the New Economics of cheap
clients, declining cost, digital video, ubiquitous computer connections.
Cisco is
helping customers with end-to-end solutions.
But also searching through acquisitions pinpoint products which
complement their R&D (research and development of new products). They are only acquiring the new company and
its current products but buying the next generation of products. With an acquisition they cannot afford a
high attrition rate with the newly acquired company. They are buying the talent in the company and pay their people
well to obtain “best in class” products.
They are currently number one or number two in every product they have
focused on and they always stay close to their customers. The slowest areas to
move to E-commerce have been the health insurance industry and government. The Internet infrastructure is about
competition and survival. Nothing
causes change in behavior like these two.
Each new company they acquire they look as a plug in to their technology
mapping strategy. Plug in’s for a
powerful network provider.
The
convergence of data, video, and voice have given us a networked system…this
integration to a multi-service network so customers have advantage. Telephony, the combination of p.c., fax,
messaging e-mail, and virtual call centers yields new capabilities. A new open new world architecture with
common channeling. Good backbone
access, good gateway capability (http), good mediation access yields a fully
integrated end-to-end system.
Cisco
practices event pacing. This is an
introduction of new products every six months (like Intel). A relentless sense of urgency, and always
setting the right rhythm for change within the company is vital. Never go into the Net flatfooted, hire savvy
people who work hard. Success will go
to the businesses that get closest to people (consumers). Your site must have reach (access
connection), richness (depth), and affiliation (whose interest the business represents). The New Economy is stronger than you
think. The web is based on a business
model that works. It is frictionless
e-commerce or spontaneous commerce. It
is built on America’s exuberance for entrepreneurs.
The Internet
has become a keyword as to business strategy in this 21th Century. Internet business plans are becoming
common. The vision is one billion
connected computers by 2010. Internet
e-commerce is happening far faster than anyone thought. This exponential growth is a strategic inflection
point. The fact that now the Internet
is driving the computer industry is another inflection point. So a company’s competitiveness depends on
the Internet…similar to early in the 20th century the need for
telephones in business. Right now the B2B
(business to business) e-commerce is 80% with 20% being retail businesses
(Amazon, E-Bay, etc.). The dollar
growth of the B2B e-commerce is another inflection point as it moves toward a
one trillion per dollar per year and beyond.
Amazing growth.
Most
forecasters of e-commerce growth are obsolete by the end of the year in which
the e-commerce growth forecast was given.
The term Internet Company is beginning to go away now as eventually all
companies will be Internet companies.
Content is getting larger, content is getting richer, and connected
users are growing rapidly.
In Japan, they
are behind us in Internet development but the government is now supporting
Internet growth. The Japanese have high
on-line Internet costs but that is because the phone companies are government
owned. So Japan has been slower on the uptake to Internet commerce. One reason e-commerce has moved so fast and
efficiently in the United States is that e-commerce needs a vibrant venture
capital market which the U.S. market certainly has.
What is takes
to implement an e-business for a company.
Well in Intel’s case they planned very carefully and moved with
precision. They used a dual approach as
to 1) vendor centric web base and 2) customer centric web base (where business
goes to the customer). They started
planning to got Web in 1994 and automated their back office operations
first. This move to the web takes a
client-server base, not a legacy base to start your e-business. A client-server architecture with e-commerce
layer on top of the back office layer.
By July of 1998 Intel, after careful planning and set-up of electronic
infrastructure, launched its web business.
They launched it with 200 servers with 200 megabyte per second bandwidth
(some third world countries do not have 200 megabyte bandwidth). In their very fist 12 months of business on
the web they did $15 billion in sales!
They gave the customer a unique personalized presence with customized
solutions for each customer. Again this
is web centric.
The Internet
is a road map of future products. It is customer-centric, it has intelligent
target messaging, with important customer feedback loops (customer
feedback). If you scale the number of
users to the server it indicates 20 times more server capacity is required
within the next five years. When you
open your business to the outside world you no longer have a simple
business. If you have slow speed you
plug in more processors (servers)…that’s scalability. So you need good characterization between software and hardware
that is critical.
Processing
Power is important for Internet Power.
Cisco Systems certainly is providing this worldwide.
So the U.S.
economy is one in which information technology is leading to ever-higher
productivity growth. We have seen a
boom in U.S. productivity since 1996 so something structural is going on with
this I.T. improvement. Improvements in
Banking Services, ATM access, on-line banking, debit cards, smart cards,
substantially improve productivity. So
this new productivity growth is not a cyclical phenomenon. So potential productivity has risen
too. This comes from capital deepening
in to computer/I.T. infrastructure across business. So the economic ramifications of
this cyber revolution are immense.
JUMP ON THE TECHNOLOGY WAVE.