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Published: February 22, 2011
 / Spring 2011 / Issue 62

 
 

Cisco’s Virtual Management Lab

How one of the world’s most innovative companies discovered the value of focusing its R&D attention on its own business practices.

John Chambers, the CEO of Cisco Systems Inc., first realized his company had a problem reaching the consumer market in 2002, when his son installed a wireless network in the family’s home. “I assume you used Cisco products,” said Chambers. But his son hadn’t — because he couldn’t find any appropriate devices made by Cisco at the consumer electronics store where he shopped. Nor could he find them at a suitable price online. Cisco’s gear was too expensive and technically advanced for his needs.

That didn’t sit well with the CEO. At the time, there was a US$20 billion global market for home and small-office network connectivity products, which was projected to grow into a $74 billion gold rush within a few short years. There was simply no way Cisco, the world leader in networking equipment, could ignore that market. If consumers by the millions were networking their living spaces with inexpensive, easy-to-use routers, Cisco ought to be at the center of this communications revolution, Chambers believed.

But how? Cisco, founded in 1984 by a group of Stanford University scientists, had become the world’s most successful manufacturer of computer networking equipment, a distinction that this company (for which I serve as senior vice president of strategy and planning) still maintains. We provide the bulk of the infrastructure that powers the Internet and other networks, both public and private. When you send an e-mail, visit a Web page, connect to a secured corporate network, or, increasingly, make a simple phone call, chances are Cisco equipment and software make it happen. The company does business in more than 140 countries and has a market capitalization of roughly $140 billion.

But we are also keenly aware that when a company is large and successful, it can grow complacent. Somewhere along the way, Cisco had started acting less like a hungry startup with everything to gain and more like an established market leader with too much to lose. By the early 2000s, we began to wonder whether our company was losing its edge. The more we studied the issue, the more concerned we became, especially about our innovation decision-making processes. We were green-lighting only those ideas that produced immediate returns. In many instances, this yielded gains in profit and market share. But it also meant that our company was missing opportunities — the consumer networking market and many others.

Since then, we have made deliberate efforts to pioneer innovative management practices at Cisco: designing and implementing new, unconventional approaches for taking advantage of market transitions and preparing for competitive threats. Our efforts are not limited to a specific program or team; they represent a commitment by decision makers from across the company to consider alternative ways of doing business. It’s as if we set up a virtual management laboratory, part culture initiative and part best practices, to make use of every asset Cisco has. We have relied on this “lab” to help overcome a variety of challenges over the years. Three of the most powerful examples of its work have been embracing complementary business models, developing disruptive innovations (the kinds of game-changing products and services that open up new businesses), and overcoming go-to-market obstacles.

Beyond the Business Model

Consider our foray into the consumer market — where at first, even the CEO’s son wouldn’t buy our products. That was because our business model didn’t match our customers’ needs. For most of its existence, Cisco had generated the bulk of its profits by producing high-value, high-margin networking products sold to corporate customers through high-touch sales engagements. In return for reliable, secure technology provided with generous support, customers rewarded Cisco handsomely. Gross margins on most products topped 60 percent, leaving the company with the returns needed to continue developing and refining the large-scale products that were sold in relatively low quantities.

 
 
 
 
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