Drivers of Successful Innovation at Cisco A Wharton … · Drivers of Successful Innovation at...

© 2009 Cisco Systems, Inc. Cisco Confidential/Proprietary

Drivers of Successful Innovation at Cisco

A Wharton Case Study Professor Saikat Chaudhuri

The Wharton School

Greg Mayfield Cisco Systems, Inc.

April, 2009

For further information, questions and comments please contact Cisco Corporate Positioning.

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© 2009 Cisco Systems, Inc. Cisco Confidential/Proprietary of 19

Contents

Introduction ..................................................................................................................................... 3 The Key Elements of Innovation.................................................................................................... 3 Product and Technology Innovation ............................................................................................. 4

Acquisitions and Partnerships (“Buy” and “Partner”) .................................................................... 5 Internal Product and Technology Development (“Build”) .............................................................. 5 Collaborative Development .......................................................................................................... 6

Distinct Characteristics of Innovation Processes........................................................................ 7 Boards and Councils for Effective Management........................................................................... 7 Common Vocabulary for Consistent and Cohesive Action ........................................................... 8 Collaborative Tools and Applications ........................................................................................... 8 Partner and Customer Collaboration Methods ............................................................................. 9

Management of People and Culture for Innovation.................................................................... 10 Employee Education and Development ..................................................................................... 10 Performance Metrics .................................................................................................................. 14

The Emerging Technologies Group: An Example of Blended and Balanced Innovation ....... 14 Implementing New Business Models and Practices ................................................................... 15 Cisco TelePresence: A Flagship Solution................................................................................... 17

Ongoing Challenges: A Wharton Perspective ............................................................................ 17 Summary and Conclusion ............................................................................................................ 18

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Introduction

The Wharton School of Business engaged in a multiphased case study examining the practice and

acceptance of innovation at Cisco. As part of the initiative, this breakout study, sponsored by the

Cisco® Corporate Positioning team, focuses on innovation strategies and practices at Cisco on

multiple levels. It’s based upon multiple interviews with 21 senior company executives conducted

from October 2007 to December 2008.

The objective of this qualitative, internal-facing case study is to uncover the unique attributes of

Cisco’s approach to innovation, and to refute the perception that Cisco innovates primarily through

acquisition of high-tech companies and their solutions. In addition, this paper communicates the

results for consistent messaging across the corporation.

The results of the study reflect both Cisco’s historic success and leadership in the information and

communications technology industries, as well as its long-standing belief that it must “innovate to

innovate.” In other words, the innovation process itself must be dynamic, constantly evaluated, and

refined. Lastly, The Wharton School provides comments on Cisco's innovation efforts from its

perspective at the end of this document.

The Key Elements of Innovation

Cisco has a proud history as an innovation leader in the networking and communications

equipment market. This success is largely attributable to Cisco’s embrace of all three of the critical

innovation elements, as identified by long-standing research on innovation, new product

development, entrepreneurship, and organizational change. In short, these elements are:

People and Culture. The final element refers to those individuals tasked with carrying out the

innovation and the environment in which they do so. Current studies provide evidence that the

selection and motivation of these individuals and teams can substantially impact the innovation

performance of organizations.

Process and Organization. This element includes ensuring that a structure is in place to facilitate

innovation, as well as a defining a methodology by which innovation is achieved. Current research

finds that rigid, sequential approaches are effective in conditions involving low uncertainty as they

bring efficiency. Loosely structured, iterative approaches, in contrast, are effective in highly

unpredictable environments that require flexibility. Over time, many incumbents struggle with the

onset of inertia, a force that actually impedes adaptation.

Products and Technology. This element refers to the tangible results of innovation — for

example, a new router or a new technology that could eventually lead to new product innovation. At

this level, scholars distinguish between incremental and radical forms of innovation. The latter can

stem from disruptive, architectural, or competence-destroying revolutionary changes.

Leadership in all three of these individual areas is essential for organizations wanting to develop

and maintain a competitive advantage in dynamic markets, such as the ones in which Cisco

operates. More importantly, all three elements must be balanced and aligned to meet challenges at

any given time.

The executive interviews conducted for this study indicate that Cisco achieves this balance. Nearly

each of the 21 executives interviewed noted Cisco’s “product and technology” innovation as a

factor differentiating the company from its competitors. Approximately half the executives

mentioned “process and organization” and/or “people and culture” as key contributors. (Most

executives cited more than one factor.)

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At least one executive, however, expressed concern that despite recent efforts, Cisco’s focus on

acquisitions has led it to be less internally innovative than it was in the past. Cisco is aware of these

challenges and is actively addressing them by evolving its priorities over time to match its

organizational growth. The formative 1980s and 1990s witnessed an emphasis on product and

technology innovation. The high-tech boom of the late 1990s and early 2000s saw an additional

focus on process innovation. The period since then has seen a proactive push to develop people

and culture to foster productive innovation amidst increased competition and globalization. Today,

the company maintains a healthy balance among all three elements, resulting in alignment of

initiatives in technology, process, and people.

This “blended and balanced” approach has helped Cisco pursue additional opportunities beyond

the scope of its competitors, garner an overwhelming market share in the networking sector, and

better align internal resources to accelerate its growing leadership. These opportunities within

market transitions have included, but are not limited to:

● Investments to grow Cisco capital and assets, such as through finance and real estate

● Making acquisitions based on intellectual property for long-term success

● Further creating and driving industry standards

● Extending partnerships with strategic customers to better establish long-term trust,

particularly during financial downturns.

Product and Technology Innovation

Cisco’s vision within its Corporate Development Organization (CDO) is to create and capture

market transitions that drive sustainable growth and industry leadership. The company’s leadership

in technological innovation stems from a systematic approach that takes advantage of both internal

and external approaches. Additionally, Cisco’s culture embraces openness to all technologies,

thus, enabling faster delivery of solutions and services to customers.

Cisco targets a long-term growth rate of 12 – 17% annually, and in a company of its size, cannot

achieve that amount of growth from its core business alone. Therefore, its overall strategy is to

drive long-term growth through an integrated approach to market entry, expansion and acceleration

lifecycle. Furthermore, the execution of this strategy is based on the type of innovation that is being

pursued and based on a technology-market map (Figure 1).

Figure 1. Cisco Growth Strategy Model

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Acquisitions and Partnerships (“Buy” and “Partner”)

Although Cisco is often recognized for externally sourcing technologies, products, and capabilities

through acquisitions and partnerships (including alliances, outsourcing, and minority investments),

these approaches complement very active and evolving internal technology innovation efforts.

Indeed, Cisco invests more than many of its peers — 13 percent of its annual revenue1 — on

internal research and development. Products and solutions acquired from over 130 deals to date

have spawned further innovation of product lines, such as the extension and integration of the

Unified Communications product portfolio with Cisco WebEx™ products.

Cisco believes its strength in acquisition and integration is equal to its ability to innovate – which is

a key competitive differentiator. Cisco's Merger and Acquisitions (M&A) strategy for acquisition

integration is well recognized in the industry, as many business and IT leaders often seek Cisco’s

advice on best practices for acquisitions and integration. Established and evolved over the past 15

years, Cisco’s M&A strategy can be summarized in three words: consistent, repeatable and

adaptable. Cisco uses acquisitions to expand its leadership in its existing markets (as it did, for

example, with Metreo and Audium) or to enter new markets (as with Scientific Atlanta and SyPixx.).

Cisco proactively seeks partnerships with complementary organizations from across the globe. The

target companies might bring different types of assets to Cisco, including great talent and

technology, mature products and solutions or new go-to-market and business models.

Besides a strong business case, every potential acquisition must meet several criteria in order to

be seriously considered:

1. A shared business and technological vision;

2. A similar set of core values and culture;

3. A complementary solution(s) that supports existing or new, growth markets; and

4. A location within close proximity of a current Cisco office.

Cisco’s normal practice is to integrate an acquired technology with an existing product line by

engaging in substantial development work in-house. The result is a product or solution that is much

more comprehensive, and hence valuable, than the initially acquired technology. Often,

acquisitions fill a specific technology void in a larger Cisco product innovation model. The

subsequent “make or buy” decision is based on many factors when considering new businesses,

just as it is might be when deciding to build a custom ASIC or to use merchant silicon.

Additionally, the talent and people obtained in an acquisition are just as important as the

technology itself. Cisco holds in extremely high esteem the culture and business potential of its

human resources, both internally and through acquisitions. As mentioned earlier, a cultural match is

a precondition for any acquisition.

One of Cisco’s most innovative acquisition approaches has been to “spin in” investments. This

begins by taking an investment stake in small companies that are chartered with developing new

technologies and founded by former Cisco employees. Cisco agrees to purchase them wholesale if

they meet certain targets. Cisco used this technique to acquire Andiamo for its intelligent storage

switching products.

Internal Product and Technology Development (“Build”)

A focused, proactive, and diligent approach to internal development has also led to multiple

innovations, including faster, scalable chip sets, patents, and industry standards. As of the end

1 Based on FY08 numbers.

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January 2009, Cisco has over 9,000 pending applications worldwide and has received over 6,000

patents worldwide. So far in FY09, Cisco has been granted over 500 patents worldwide and filed

almost 500 applications worldwide.

The large number of patents might lead one to believe that Cisco innovates for innovation’s sake.

In fact, its approach is highly practical, focusing on marketable products and solutions rather than

on creating new technologies and letting other companies turn them into viable products—and

profits.

Custom semiconductors are one example of Cisco’s dedication to marketable innovation. The

evolution from the initial packet processing engine (PPE) chip to the quantum flow processor (QFP)

chip resulted in dramatic improvements in the feature size and number of layers, as well as the

number of transistors and chip size. The current generation of Cisco’s chips rivals — and in some

cases surpasses — chips from industry leaders like Intel, AMD, and Sun.

Figure 2. Technology Innovation at Cisco (Silicon)

Cisco has pursued internal innovation projects with a number of established technology groups and

business unit engineering teams dealing with advanced and foundational technologies. The

company has more recently driven innovation with its Emerging Technologies Group (ETG), which

identifies and develops early-stage technologies before transitioning them to a business unit. (ETG

is examined in more detail in a subsequent section.)

Collaborative Development

At times, the work done by the different technology innovation groups and business units within

Cisco may appear in conflict. However, Cisco also recognizes that innovation does not always

require creating something new. In fact, new paradigms can result from constructing bridges

between two existing paradigms that, on the surface, might otherwise appear to work against each

other. Embracing the disruption rather than working around it can lead to market-changing results.

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A decade ago, for example, voice and Internet operated over two distinct networks. Cisco

engineers — many of them world-recognized leaders in IP — managed to combine the two

technologies into voice over IP (VoIP), which currently generates more than a $1 billion in business

for Cisco annually. A similar situation occurred when Cisco created the Cisco IP Interoperability

and Collaboration System (IPICS). The system improves emergency responsiveness by integrating

disparate communication tools and frequencies so that emergency and first-responder teams

across various agencies, companies, departments, jurisdictions, and municipalities can easily

communicate with each other.

Such collaborations across seemingly disparate technology group occur because of Cisco’s

fundamental belief in open systems, along with an open culture focused on marketable

technologies. Cisco’s approach also exemplifies the company’s desire to extend product innovation

beyond core networking areas to new and adjacent communication technologies.

Distinct Characteristics of Innovation Processes

Boards and Councils for Effective Management

To identify and address its corporate priorities (30 were identified as of this writing), Cisco has

established a number of formal councils and boards at multiple levels across functions and

business units. The councils and boards are the de facto managers of operations and are

accountable to the Operating Committee (OC), comprised of executive and senior vice presidents.

The Operating Committee, which in turn is accountable to the CEO, sets long-term corporate

strategy and allocates corporate resources.

Councils address cross-functional issues that materially affect Cisco, such as segment strategies,

$10 billion bets, and company productivity. They champion investments and/or go-to-market

priorities and help ensure alignment of cross-functional resources. To reflect Cisco’s growing

globalization, membership is balanced among members from Cisco headquarters in San Jose and

leaders in the rest of the world, including India, Europe, Asia, and Latin America.

Councils are aided by supporting working groups and informal networks of employees designed to

help boards and councils better scale, exchange knowledge, balance competing interests, and

allocate resources. This integrated approach helps Cisco effectively manage its top priorities and

innovate by moving from siloed “processes” to more comprehensive “business architectures” that

encompass collaboration but do so without increasing headcount and resources.

Senior and executive vice presidents lead eight corporate councils:

1. Service Provider segment

2. Enterprise segment

3. Commercial segment

4. Small Business segment

5. Corporate Development

6. Emerging Countries

7. Consumer segment

8. Connected Business Operations Council or CBOC

Boards, meanwhile, address issues affecting the councils or functions. They aid in the alignment of

cross-functional teams and are accountable to councils and/or business functions. Boards are

sponsored by a senior vice president or executive vice president and managed by VPs and

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directors. Executives typically participate in multiple boards, and today there are more than 40

boards that are evolving to meet the organization’s changing needs.

The current structure started with a focus on products, then evolved to a process orientation, and

has now evolved to encompass both. The enterprise is effectively loosely structured in matrix form,

with overarching functional processes supported by underlying common technology tools. This

unique hybrid approach fosters interaction among various groups working on internal and external

strategies for both early- and later-stage technologies and solutions. This collaboration also

promotes the benefits of scale, quality, speed, and efficiency, all of which are characteristic of

incumbent players, while simultaneously fostering an empowered, decentralized startup

environment at the project level.

The Cisco Development Council (CDC), which is made up of the senior vice presidents from each

technology group within Cisco, emphasizes this collaborative approach by ensuring a strong tie

between each development organization and the Chief Technology Officer’s organization.

Common Vocabulary for Consistent and Cohesive Action

Diverse frames of reference can cause confusion. For disparate groups in any organization to

achieve meaningful results, they must communicate effectively, both with each other and across

the entire organization. To facilitate effective communication, Cisco has developed a common

vocabulary that is easily understood throughout the organization.

Cisco promotes a defined method for communicating, called Vision, Strategy, and Execution (VSE),

to create a high-level, shared view of the work a group is chartered to do. This helps to create a

common vocabulary so that all of the members of a team are speaking the same language.

Additionally, Cisco uses prescribed formats to establish and direct meetings, ensuring that the

expectations and outcomes are understood and shared by all participants. Typically, all council and

board executive-level discussions — including those with the Board of Directors — follow an

”inform, engage, and exchange” format designed to keep all members in sync.

Collaborative Tools and Applications

With an overall philosophy of “collaborate with anyone, everywhere,” Cisco welcomes and

encourages input from inside and outside the company, including partners and customers. With

collaboration in mind, Cisco utilizes various tools to promote and accelerate innovation processes,

including Web.2.0 utilities such as wikis, forums, and instant messaging, as well as meeting-based

tools like WebEx shared workspaces, WebEx conferencing, and Cisco TelePresence™. All these

tools accelerate communications and problem solving and help track progress in real time.

The company has developed these tools to facilitate the collection and exchange of ideas. For

example, the Software Group launched its 'Innovation Quest' program, while the Emerging

Technologies Group (ETG) has successfully created the internal I-Zone wiki to solicit new product

and service ideas from inside the company. In its first 10 weeks, Innovation Zone (I-Zone) received

1200 ideas from 104 countries. The I-Prize wiki is an analogous exercise that attracts external

ideas and talent. Winners of these competitions receive recognition and lucrative opportunities at

Cisco to bring their ideas to fruition. Some whose ideas are not chosen receive feedback and

coaching, often from a member of the firm’s patent committee, enabling applicants to think resulting

new ways and submit more ideas in the future.

Moreover, TelePresence at Cisco encourages and supports face-to-face collaboration across in

123 cities spanning 37 countries, with an average utilization of six hours a day per location.

Moreover, TelePresence at Cisco encourages and supports face-to-face collaboration across 146

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cities spanning 42 countries, with an average utilization of 5 hours a day per location.TelePresence

technology delivers realistic, face-to-face communication experiences in an immersive

environment. It accomplishes this through high-definition video processing, surround-sound audio,

high-bandwidth networks, and carefully controlled physical environments. Furthermore,

approximately 20 percent of all TelePresence sessions at Cisco were with customers.

The 2008 I-Prize winners, a team comprised of German students and a Russian engineer, known

as 'Team AKS', actually used TelePresence, as well as other Cisco collaborative tools, to facilitate

development of their initial idea, which grew into a business plan that improves energy efficiency

through the use of Cisco technology.

Partner and Customer Collaboration Methods

Cisco also looks outside to accelerate innovation through its new Cisco Developer Contest, which

invites developers to compete for $100,000 by building Linux-based applications on the Cisco

Application Extension Program.

Cisco’s deep engagement with customers, meanwhile, has steered the company toward certain

acquisitions. Customer input is systematically incorporated to drive both internal and external

development, resulting in substantial user-based innovation. Employees at all levels, from

executives to engineers, are in constant contact with key customers through formal forums

designed to seek input on their needs and feedback on potential solutions. These ongoing forums,

enabling customers to assist in creating new product lines or developing existing ones occur via

Technology Advisory Boards (TABs), Customer and/or Channel Advisor Boards (CABs), Executive

Briefings (EBCs), and regular customer visits. Additionally, Cisco hosts tens of thousands of

customer discussions each year at its well-attended Cisco Live/Networkers user conferences.

Many lower-tier conferences are going virtual at Cisco, and the interaction during these online

seminars and tours is logged and recorded for later analysis. In addition, after the first shipment of

a new product to a customer (FCS), Cisco actively solicits feedback and holds debriefing meetings

to discuss what was received well or what was received poorly and might be changed in the future.

Standards Body Leadership

Cisco also helps drive industrywide innovation through its involvement with a number of technical

standards boards within the networking, telecommunications and applications industries, such as

the Institute of Electrical and Electronics Engineers (IEEE), the Internet Engineering Task Force

(IETF), the International Telecommunication Union (ITU), and the Distributed Management Task

Force (DMTF).

Working with Governments Globally

Additionally, Cisco strives to establish a “trusted advisor” status with governments worldwide by

engaging with or participating in government agencies and committees. These agencies and

councils include, but are not limited to, the Information Technology Industry Council (ITIC), the

World Economic Forum (WEF), the U.S.-Russia Business Council, the European Information and

Communications Technology Industry Association (EICTA), and various regulatory boards across

the globe.

In particular, Cisco’s unique interactions with social and government organizations in Lebanon,

Jordan, India, China, and Russia emphasize its leadership in evolving its business strategy through

socio-political relationships and actions.

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Cisco’s commitment to global communication and networking extends beyond the boardroom into

the classroom through its novel Cisco Networking Academy program. The Cisco Networking

Academy is a comprehensive, e-learning program that enables students to develop valuable

information and communication technology skills for increased access to opportunities in the global

economy. Since 1997, the Networking Academy has grown to reach a diverse population of

approximately 600,000 students each year in more than 160 countries. All students receive the

same high-quality education, supported by online content and assessments, performance tracking,

hands-on labs, and interactive learning tools.

Finally, Cisco is replicating all these efforts around the globe by creating comprehensive research

and development centers in key innovation clusters worldwide. These centers enable the evolution

of expertise and market-based innovation that capitalize on local resources and enable round-the-

clock development cycles. They support the expected shift in Cisco’s revenue from a current 22

percent in emerging countries to an expected 45 percent by 2017.

Cisco’s Globalization Center East campus in Bangalore is one example of a locale created to foster

regional and global innovation. Viewed as a “second headquarters” for Cisco, the Bangalore

campus accommodates staff from research and development (R&D), information technology (IT),

sales, and customer support. The number of employees more than doubled between January 2007

and April 2008. Notably, these employees focus on more than mere cost-saving activities, such as

writing code or staffing call centers; they are expected to play important roles in the development of

products for export around the world. This approach helps Cisco market itself as an employer of

choice in the region, attracting the best and brightest talent.

The Bangalore facility also houses an advanced Global Briefing Center to showcase Cisco's latest

technology solutions and provide an environment for closer collaboration with partners in emerging

markets in the Middle East, Africa, and throughout Asia. The campus also houses Cisco’s largest

data center outside the United States and provides a focal point for demonstrating next-generation

virtualization technologies and service-oriented network architectures. Further underscoring its

present and future importance, the Center hosts visits from significant C-level customers and

serves as the site for key meetings and events.

The Center reflects an emerging Cisco strategy of supporting innovation and technology at a

regional rather than country-by-country approach. This parallels Cisco’s belief that innovation can

be scaled to meet the needs of customers in emerging markets. Meeting this challenge requires

process as well as product innovation.

Management of People and Culture for Innovation

The third and final element of corporate innovation is the culture or people within an organization.

Cisco’s culture, human resource management, resource allocation, training, and incentive system

have been realigned to support the ambidexterity of Cisco’s incumbent/startup model. Cisco’s

culture encourages appropriate risk-taking and empowers teams. It is designed so that innovation

ideally can come from anyone and anywhere. While Cisco creates and utilizes technology in its

drive for industry leadership, the corporate culture flows organically out of this technology usage, as

well as through the flow of process.

Employee Education and Development

Cisco employees are asked to adhere to the philosophy of risk taking and enjoyment at work. Yet,

as John Chambers often says, “never confuse hard work with results.”

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The philosophy is evident in the company’s C-LEAD program for top-level leaders. Cisco’s

expectations for C-LEAD are embedded in the acronym for the program:

Collaborate: Cisco faces a significant increase in the complexity and volume of its challenges and

priorities, making collaboration a requirement, not just a buzzword. To succeed in this environment,

leaders are asked to collaborate across teams, functions and geographies, enabled by Web 2.0

technologies and founded on trust and integrity.

Learn: Because Cisco's success is built on catching market transitions in a quickly evolving

marketplace, the company encourages every employee, including top-level executives, to

constantly develop their technical and leadership abilities. Similarly, leaders are responsible for

making their team's development a top priority.

Execute: To reach its goal of being the number one technology company in the world, Cisco

demands that priorities and execution are tightly aligned to the company’s vision and strategy. It

does so by empowering teams to make critical decisions, and then constantly evaluating and

adjusting those efforts.

Accelerate: Catching market transitions requires a strong appreciation of the global trends and

interdependencies impacting business, along with a solid pipeline of talent and capabilities needed

to address these trends.

Disrupt: Cisco's history of catching market transitions is founded in its ability to understand and

drive market disruptions. The company’s continued success will require it to continue promoting

innovation as well as constructively challenging legacy practices.

Nominated directors and senior directors at Cisco are invited to participate in an intensive, three-

phase program, known as the Action Learning Forum (ALF):

Phase 1: Self-Directed Learning. Self-directed learning consists of various readings, e-

learning modules, online assessments and preparation assignments.

Phase 2: Residential and Onsite Sessions. Leaders engage in foundational learning in

teams over a 10-week period, culminating in a reporting session to a governance board.

Phase 3: Applied Learning. Three to four months after the governance board review, leaders

participate in an impact study to assess their progress.

The Action Learning Forum, established in 2006, is designed to enhance the capacity of Cisco’s

high-potential leaders to create a sustained competitive advantage for Cisco. The forums bring

leaders together to address real-time opportunities facing Cisco with a focus on anticipating and

shaping market transitions, creating the conditions for success in executing Cisco’s strategies, and

role-modeling the values and behaviors of a company built to lead. To date, over 150 employees

drawn from across Cisco’s market regions, including Asia Pacific, Canada, Emerging Markets,

Europe, Japan, and the United States, have participated in ALF. One important outcome of the

program has been the launch of a new Global Emerging Technologies business unit in Bangalore,

India.

Likewise, the Executive Action Learning Forum (EAF) is specifically designed for vice presidents

and senior vice presidents and is used to both develop executive talent and accelerate strategic

business opportunities. In the forum, groups of executives are brought together from across the

company (usually in groups of 15 to 20) for a four-month period and are given a strategic business

challenge to solve. A recent forum produced two potentially significant market opportunities that

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Cisco is now actively evaluating. This is evidence of the program’s ability to impact business

strategy, while simultaneously developing executive talent in a realistic and meaningful manner.

Cisco was recognized for its innovation in leadership education through ALF and EAF in April 2008

by winning the TAMBIC award for “The Most Innovative Talent Management Program Initiative” by

the prestigious International Quality and Productivity Center (IQPC). The TAMBIC awards have

been established to honor, recognize, and promote organizations whose talent-management

practices result in a productive, engaged, and loyal workforce, from frontline workers to top-line

succession planning.

Global Reach and Rotations

With the advent of globalization centers in Bangalore and Shanghai, the collection of talent to

accelerate growth in select, emerging regions worldwide, as well as in established markets, is

growing immensely. As this pool grows, so does the complexity of managing it. To maximize the

benefits from exposure and interaction, Cisco has implemented global rotation programs, including

programs supporting research and development departments as well as sales, marketing,

manufacturing and other support functions. Highly visible examples of employee rotations include

the relocation of senior executives Wim Elfrink (Executive VP of Services) to Bangalore, India and

Jim Sherriff (Sr. VP of Operations) to Shanghai, China in support of accelerating operations in

these emerging markets. To further empower these geographically diverse teams, Cisco also

emphasizes global adoption of internally developed tools. Cisco TelePresence, for example, is

used extensively by the 8000 people in the global supply chain management team, recently

renamed the Customer Value Chain Management (CVCM) organization, for effective

communications and planning with Contract Manufacturers (CMs) to expedite decision making,

reduce costs, and enhance innovation efforts. This program, called the “Cisco Supply Chain Inter-

company TelePresence Exchange”, has provided significant benefits to date with an annual

estimated reduction in manufacturing costs of US$40M.

CIO Leadership

Cisco has defined IT as an innovation value center rather than a cost-cutting department. By

aligning technology architecture with business strategy and leading the way for collaboration

technologies, IT can further promote innovation by synchronizing technology roadmaps and the

strategies they enable.

Cisco’s Chief Information Officer, Rebecca Jacoby, has identified three CIO-based strategies that

provide a framework for innovation at Cisco:

● Lead with — don’t resist — new collaboration tools and processes that promote innovation

within the company and with trusted partners.

● Create a flexible, secure, and scalable IT architecture that continuously improves “time to

capability” for the business.

● Position IT to provide measurable value (beyond efficiency) at all levels: productivity,

experience, and growth.

CIOs are uniquely positioned to lead, rather than control, the strategic implementation of emerging

Web 2.0 collaboration technologies in the enterprise. This transformation requires changing more

than technology; it also requires change in cultures and leadership approaches. At Cisco, IT leads

by inviting broad participation in solving these challenges while providing the structure required for

scale and focus.

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Giving Back

The Cisco culture increasingly places an emphasis on “giving back” as evident in informal

employee-led charity drives for various causes, as well as the corporate-led efforts for charity and

crisis support. The Cisco Corporate Affairs organization, created several years ago, develops

results-oriented, strategic initiatives and partnerships to provide opportunities for innovation and

leadership development, increase employee satisfaction, and deliver long-term value to our

shareholders while improving people’s lives.

Cisco collaborates with a variety of public, private, and nongovernmental organization (NGO)

partners in a broad range of social responsibility initiatives, all of them enhanced by the power of

networking. In support of this, Cisco focuses on education, which is a major catalyst that makes

sustainable prosperity possible in communities around the world. Cisco is working in partnership

with public and academic institutions to help transform education through the Cisco Networking

Academy, the 21st Century Schools Initiative, and other global initiatives based on a holistic

blueprint for educational reform.

The Worldwide Leadership Fellows Program gives high-potential and high-performing senior-level

employees the opportunity to share their skills with nonprofit organizations while building valuable

leadership experience. The program is a central component of Cisco’s Community Leadership

initiative.

As Leadership Fellows, Cisco’s senior level employees, directors, and VPs take on strategic

projects critical to nonprofit partners’ sustainability and long-term success. Leadership Fellows use

their experience and resourcefulness to create solutions that do more than just improve the

competitive advantage of a particular nonprofit. By demonstrating the value of technology adoption

and business innovation, they also help to increase the productivity of the entire nonprofit sector.

The aforementioned Cisco Networking Academy is a noteworthy educational initiative that has

provided instruction for over 2.6 million students in more than 160 countries to date, with course

offerings in all six United Nations languages and five other languages as of the end of August 2008.

Cisco and its partners in the Least Developed Countries Initiative has helped more than 70,000

students in over 40 countries in the developing world obtain an IT education.

Cisco’s 21st Century Schools Initiative is a three-year, multiphase education initiative designed to

create a sustainable, scalable, and replicable model for education reform through the

implementation of transformative technology, tools, and training.

Conceived in 2005 as a result of Hurricane Katrina, 21st Century Schools Program (or 21S for

short) is transforming dozens of schools in Louisiana and Mississippi and more recently, California

and New York, into education models that will produce more successful students, and, ultimately,

build stronger, more prosperous communities.

In Louisiana, for example, Cisco is focused on the Jefferson Parish Public School System. The 21S

team is working with 16 of their schools and has provided US$64 million in Connected Schools 21S

Century Technology grants to support broadband and wireless school network equipment

donations, a video security solution, IP telephony in every classroom, upgraded cable plants, and a

fully equipped district data center. The value of the Cisco products donated to date is over $15.5

million.

To meet basic human needs, Cisco and its employees are involved in a wealth of programs in

partnership with public sector organizations and NGOs dedicated to improving life in impoverished

and underserved communities. The company invests in and supports programs that deliver

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immediate benefits and have the potential to grow to serve additional populations. And because the

company naturally believes in the power of the network to improve people’s lives, it focuses on

programs that take advantage of the Internet and Web 2.0 technologies.

Performance Metrics

Ongoing education is a regular objective and benefit for current and aspiring leaders of the

company, as is the transparent formulation of expectations for promotion. Through a well-

established Employee Performance Management (ePM) process, resources and talent are

regularly assessed and aligned at all levels, and rewards and recognition are provided accordingly.

Of late, the ability to collaborate effectively has taken a prominent place in performance evaluation.

Cisco has developed a number of performance metrics and provides guidelines and salary

incentives based on achieving results in this area.

Cisco’s customer satisfaction (CSAT)-based bonus program began in the early 1990s and was the

first of its kind in the industry to measure the satisfaction of both primary and secondary contacts at

client firms. To ensure fairness, employee compensation plans are adjusted to compensate for the

risk inherent in the nature of their work.

Beyond monetary rewards, Cisco has found that recognition is an important tool to motivate

engineers and other innovators, and has thus focused its incentives on these efforts. Titles are

awarded to recognize talented innovators, including designations as a Distinguished Engineer,

Cisco Fellow, and a Pioneer Award. Compensation is offered commensurately using bonuses and

equity.

The Emerging Technologies Group: An Example of Blended and Balanced Innovation

As part of its growth strategy, Cisco looks to expand its core markets and grow its advanced

technology (AT) markets while creating new opportunities. With an eye to jumpstarting AT, Cisco

created the Emerging Technologies Group (ETG) in 2004, under the leadership of Marthin De

Beer, senior vice president. De Beer is also a member of the Cisco Development Council. The ETG

focuses on creating solutions in new and adjacent markets.

At present, ETG has built technologies in and around advanced video, voice, and data

communications, including Cisco TelePresence, interoperability systems, physical security, and

digital media management, targeting all customer segments. ETG’s mission is to establish new

revenue sources that amplify growth through external acquisitions and internal innovation at Cisco

by cultivating a steady stream of new and integrated businesses with billion-dollar potential. This

group is a powerful example of how technologies and products, processes and organizations, and

people and culture combine, align, and balance to yield internal-based innovation at Cisco.

The idea behind the ETG organization is to “invent like a startup, and scale like Cisco,” producing a

cycle of technological innovation (Figure 3). The new group also uses a standard practice to

introduce emerging technologies to other functional groups in the company, including sales,

marketing, and customer advocacy.

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Figure 3. The Cisco Cycle of Innovation

The process has accordingly been crafted as a hybrid of entrepreneurial and incumbent initiatives

designed to achieve $1 billion in revenues within five to seven years, the level necessary for a

technology to become “material” in a $40 billion company. When it reaches this level, the

technology becomes an advanced technology within its own business unit.

Implementing New Business Models and Practices

This entails generating ideas, screening them, and developing business models to grow and

eventually sustain them (Figures 4 and 5).

Figure 4. Cisco ETG Internal Venture Framework

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Figure 5. The ETG Collaborate-to-Innovate Process

With the development of a repeatable process, Cisco has found a way to engineer innovation and

at times even develop new markets, such as Cisco TelePresence and Unified Communications.

The process provides the new technology group with a safe environment for talented development

staff to take risks. Allowing employees to incubate in an isolated environment insulates them from

the battle for funding between established groups and emerging technology teams, a conflict that

often adversely affects corporate environments. By providing a structured transition from emerging

to established (i.e. advanced or core) technology, the ETG also keeps the ideas from entering the

market too soon.

Putting into place the right management team is critical if these emerging technologies are to

graduate into their own business units. Rather than looking for “startup specialists” who might build

the business and then leave, Cisco seeks out seasoned executives with experience building

businesses. These executives ideally combine the ability to be change agents for a startup with the

ability to collaborate across Cisco, which is critical to the unit’s success. ETG employees often

reach across the company to solicit input, borrowing key sections of code, hardware, and software,

for its projects. Recognizing both the reciprocal value of collaboration as well as the potential for

improving the company’s financial results (and therefore to increase the value of stock-based

compensation), most are more than happy to cooperate.

ETG also continues the Cisco theme of customer engagement in the innovation process. Early in

the product development lifecycle, ETG executives “hunt for bad news” by visiting customers for

mock sales calls. The development of an emerging technology in the collaboration space, for

instance, included visits to more than 30 potential customers to solicit feedback on the project.

Sometimes feedback is instant. The newly formed Cisco Customer Value Chain Management

(CVCM) team, which includes Global Supply Chain Management, recently established a new

Global Supplier Portal, which extends key information to Cisco suppliers, creates a central location

for supplier-related policies and specifications, and most importantly opens lines of communication

and collaboration with the more than 1000 contract manufacturers and logistics companies that

comprise Cisco’s global supply chain. The results have been extremely beneficial to all

organizations to date.

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Cisco TelePresence: A Flagship Solution

One of the most prominent and successful innovations resulting from the ETG’s early efforts is the

Cisco TelePresence solution, which is quickly growing into a highly-visible and valuable advanced

technology. It has the potential to impact all areas of Cisco’s current business (Figure 6).

Figure 6. Cisco TelePresence

Incubated in the ETG, TelePresence became the fastest-growing technology in Cisco’s history.

Although it still falls under the ETG umbrella, 600 employees are dedicated to the endeavor of

creating and nurturing this next-generation solution and $1 billion + opportunity. Once it reaches $1

billion, it will “graduate” from the ETG into an official advanced technology within the corporation.

Although the current model strives for 75 percent of Cisco incumbent projects to succeed, a 50

percent “hit rate” is more likely, meaning that approximately half of incubated products or services

might not achieve the required revenue level to graduate to a standalone solution. Cisco, therefore,

tries to maintain the flexibility to re-purpose each technology as necessary. The IP Interoperability

and Collaboration System (IPICS) solution is just one example of a solution whose time in the ETG

can end differently. When Cisco staff realized IPICS would not reach the required $1 billion in

sales, it was moved out of the ETG and into the Physical Security business unit. This resolution

does not imply failure; in fact, it is performing extremely well as part of that group. The recognition

that each technology might achieve a different end stage of development keeps the ETG flexible

enough assess innovation at many different levels.

Ongoing Challenges: A Wharton Perspective

Although Cisco’s multipronged approach to innovation has been successful thus far, the company

faces certain challenges that must be addressed if it is to preserve its industry-leading status as an

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innovator. From Wharton’s perspective, some of the more pressing challenges include the

following:

● Balancing innovation purchased from others with innovation developed from within

● Prioritizing new product development projects, given multiple sources and development

units amidst limited resources

● Coordinating more effectively across technology groups and functional areas

● Adapting to Web 2.0 employee mind-sets and approaches, emphasizing experimentation,

virtualization, and collaboration

● Making sure that Cisco’s disciplined market entry and growth approach practiced, although

successful to date, does not eventually lead to missed opportunities

● Making continuous and consistent adjustments for the alignment of products/technology,

process/organization, and people/culture innovation as conditions evolve

A critical mechanism for navigating all these challenges is the ongoing functionality of Cisco’s

operating structure for managing innovation, currently based around boards and councils. This

relatively complex arrangement has worked well to date, but Cisco will need to ensure that as its

innovation efforts expand in both scope and complexity, the boards and councils continue to evolve

as well. Although established as formal structures, the boards and councils rely on informal

networks and personal relationships to recruit members and accomplish their objectives. As the

number of innovation efforts grows and participation becomes more global, the informal networks

will be more difficult to develop and to unify around a single effort. In addition, operating outside

Cisco’s established reporting hierarchy could cause additional challenges. The sheer number of

projects facing the boards and councils will become more difficult to manage, and with leaders

required to draw on more distant connections, enforcement of and incentives for participation could

be difficult.

Summary and Conclusion

This study has found that Cisco has laid a strong foundation for innovation by organizing its efforts

around three elements critical to innovation success:

1. People and Culture

2. Process and Organization

3. Products and Technology

Other findings include the following:

● Cisco’s alignment and balance of these areas has been critical to its continuous innovation

and sustained competitive advantage, supporting a “whole is greater than the sum of the

parts” mantra. In particular, operational excellence, through effective, replicable processes

and a flexible organizational structure, has been a crucial component of Cisco’s market

leadership. Most importantly, innovation on its own, however, does not have as great an

impact without operational excellence.

● Cisco does not exclusively establish innovation through acquisition but fosters and

encourages innovative thinking, development, collaboration, and entrepreneurship

throughout its organization.

● Cisco has extended its traditional “Build, Buy, Partner” innovation model with the addition of

a fourth element, “Collaborate.” Collaboration engages more people and organizations

inside and outside the company. Cisco’s strategic partners, as well as industry thought

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leaders, play a major role in enabling this new model. As stated throughout this document,

Cisco offers distinct innovation in its People and Culture (e.g. ALF executive education &

21S programs); Processes and Structure (e.g. Boards and Council management and ETG's

unique 'Find-Filter and Go-to-Market' model); and Products and Technologies (e.g.

TelePresence and Nexus 7000 solutions).

Figure 7. People and Culture innovation at Cisco

Despite its current industry leadership, Cisco will have to meet and overcome a number of

challenges as highlighted earlier in this document, in order to maintain its position. The company

can continue to succeed if it keeps evolving with emerging needs.

Printed in USA C11-523647-00 04/09

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