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 / Second Quarter 1997 / Issue 7(originally published by Booz & Company)


Growth by Acquisition: The Case of Cisco Systems

S&B: Prior to the shift in strategy, you were growing pretty fast. Why did you feel the need to change?

JOHN CHAMBERS:Without realizing it, we actually had stifled our growth. Even though the growth rate was off the charts, we probably could have gotten another 20 percent per year by moving a little bit faster. Our conservatism was also one of our strengths -- we're more than a bit paranoid. But you always want to balance this paranoia with the confidence and ability to move forward and in 1993 we decided it was time to make some major philosophical changes.

S&B: Such as?

JOHN CHAMBERS: We got very bold. We made the conscious decision, for example, that we were going to attempt to shape the future of the entire industry. We decided to play very aggressively and truly attempt in the networking industry what Microsoft did with PC's and I.B.M. did with mainframes. If you think of networking as the fourth evolution of computers -- the first being mainframes, where I.B.M. dominated; the second, minicomputers, where there was no clear leader; and the third, personal computers and local area networks, which was the era of Intel and Microsoft -- and if you understand that each evolution is bigger than the prior generation, you begin to get an idea of what we saw in front of us.

S&B: How does one set out to achieve such world domination?

JOHN CHAMBERS: We moved out of our "religious" technology mind-set, first of all. We were router bigots. We thought routers were the future, switching was wrong. [The hardware device known as a router forwards packets of data from one computer to another. Switches are faster and more intelligent "internetworking" devices that link local area and wide area networks of computers.]

So we moved out of that into a non-religious view about the technology. We also began to think a couple of years out about what could happen. Before that, we never thought beyond a year. We began to set stretch goals that many people would have thought impossible, and we made those goals part of our culture.

Rather than trying to do the impossible just by working harder -- if that's all it took, it would have already been done -- we asked, "What are we going to do uniquely to accomplish our stretch goals?" The first thing was to really empower teams. We went through an evolution from a very tight central management group with the top four or five people making all the decisions to the empowerment of groups. Our aim was to drive our strategy down through the company.

S&B: You mentioned operating in Internet time. Even though you have internalized that new time frame, do you ever get surprised by unexpected turns in the market?

JOHN CHAMBERS: We have a philosophy that we will eat our own young before somebody else does. In Internet years, things change at a much faster pace than you realize and we get surprised periodically.

Here's an example. We acquired a company called Lightstream in 1995 for its high-end A.T.M. [asynchronous transfer mode] capability. When we acquired it, it had only about $1.5 million in hardware revenue. We paid $120 million for it. One year later, its run rate was $45 million. It was well on the path to being a success, perhaps even a home run.

But then we began to notice that wide area networking and local area networking were coming together more rapidly than we had thought. Customers were telling us they were going to make buying decisions that were going to be implemented in the next year or two based on technology that was available today. In essence, they were telling us that while they liked our direction with Lightstream and liked our next-generation product, we were not going to have the market share that they needed to feel comfortable with in the next 12 to 18 months.

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