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


Growth by Acquisition: The Case of Cisco Systems

If you really look at it, mergers of two equal cultures, where you divide the management team -- one from company A, one from company B -- all the way through, do not seem to work. You try to blend cultures in order to make a single, strong culture. But, in fact, you've got to have one culture that really survives and there has got to be a clear leader, in terms of who is going to lead the combined companies and which culture is going to be the one you stick with.

In the end, when we went back and looked at our strengths and looked at how they fit into a potential merger between equals, we saw it didn't match up.

S&B: How did you persuade your board to follow an acquisition strategy, whereby you buy smaller companies? That strategy has its pitfalls as well.

JOHN CHAMBERS: Our recommendation to the board went like this. Let's go back and build upon our strengths. Let's segment the market much like H.P. did. Let's break the market into four segments. Let's draw a matrix and adopt a G.E. mentality and target a 50 percent market share in each area you go into or you don't compete.

Then, we said, let's determine the product, services and distribution needs for each segment and combine the way of getting these products developed and sold -- whether internally, through joint development or through acquisition. In essence, we drew a matrix for the board of directors and said, here are the market segments we are going into.

We said that 70 percent of our products would continue to come from our internal development but 30 percent would come from other segments. Our chairman asked us to put the concept in graphical form, so we drew the matrix. The only thing we filled in was Crescendo, which was our first acquisition. Then, we said, during the course of the next several years, we would fill in all of the matrix. After that, we filled in the matrix with our overlying objectives: to be No. 1, No. 2 or don't compete; to have a 50 percent share in every market, as an objective; and never to enter a market where we can't get at least a 20 percent share right off the bat. As basic as that sounds, that is what we put in place.

S&B: The Crescendo acquisition set the tone for the rest of your strategy. At the time, however, you did not have a battle-tested acquisition plan or the structures in place to create one. How did you develop your plan?

JOHN CHAMBERS: What we set out to do at the time of that acquisition was to change our organizational structure. But we did not even tell our internal people what we were doing. In essence, we made the conscious decision to break our company into business units and follow the H.P. model. We chose not to announce that, though. All we did was to make Crescendo a separate business unit when it came in and to keep our central engineering capabilities on the side. The Crescendo acquisition was successful for a simple reason. This industry had been dominated by small companies. The reason for its fragmentation was time-to-market -- having the fastest time-to-market is such an overriding factor.

When I came to Cisco six years ago, I thought that I.B.M. would be our toughest competitor. But I.B.M. has never really been able to challenge us. The reason is that it just cannot move fast enough. The I.B.M. culture doesn't allow it to. It can't make decisions fast enough. And without realizing it, we were becoming a big company.

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