In the 15 years, John Chambers has been CEO of Internet equipment maker Cisco, he has taken the firm from a $1.2-billion provider of Internet plumbing — routers and switches that direct traffic on the web — to a diversified $36.1-billion networking company. He achieved this through dozens of acquisitions, 70 per cent of which delivered more value than anticipated—an astounding statistic considering that, typically, just one in five buyouts adds value to the acquiring company.
After a planned meeting with BT during his recent India visit to attend the India Today Conclave was squeezed out to a cramped schedule (and a suddenly confirmed meeting with Prime Minister Manmohan Singh), Chambers made up with a videoconference interaction arriving at his San Jose office at 7 a.m. to talk with Rahul Sachitanand in Bangalore and Josey Puliyenthuruthel in New Delhi. The conversation ranged from what goes into making Cisco's secret sauce, how disruptive emerging markets can be, what to expect next in the Internet era, and other broad technology trends. Edited excerpts:
There's a lot of talk on how emerging markets will throw up new thrifty business models. How do corporations such as Cisco ensure that you don't kill your core products in the process?
I have been through the mainframe days with IBM, minicomputer days with Wang and I have watched the PC industry... If a market transition is going to occur you have to be able to read it. We have announced low-end routers with three times the performance at the same price. That's a nice way of saying in our industry that Moore's Law (which says that computing power doubles every two years at the same price) is a way of life. Taking an analogy of the auto industry, different parts of the world want to drive mid-range cars, luxury cars, SUVs and sub-compacts. We will similarly design different products and functionality based on a customer's requirements. It's a nice way of saying that market transitions wait for no one.
Where do you see Cisco positioned as a company today?
From an ambition point of view, we want to make Cisco synonymous with the Internet. There is an opportunity to change every aspect of our lives. This is not just about how you work, learn and play but also the opportunity to increase productivity around the world by 3-5 per cent...bring health care, education and job creation to around three billion people. So, at the vision level, we want to be the best company in the world and the best company for the world. From a high-tech industry perspective, we're moving from network plumbing to becoming the top company in communication and IP (Internet Protocol). We think that communication and IP will not just enable your strategy, but they will be deeply embedded into strategy with video and collaboration. We're good at getting market transitions right; our core capability is to lead.
We do internal start-ups such as Telepresence and Smart Grid and we've acquired 137 companies and we expanded our technology architecture with six new products recently. What's different about Cisco's mergers and acquisitions (M&A) strategy? We set the pace of using M&A to enter market adjacencies; we don't acquire competitors. We look for markets where we have a realistic chance of becoming No. 1 and a minimum of 40 per cent market share. We like to enter a market 3-5 years before it takes off so that we can do thorough development ourselves. This trend will continue if leaders drive it. If someone can offer one-two best products in each segment, whether you're a consumer or the company in the world, it would be too good an opportunity to pass up.
We've also changed our organisation structure from command and control—something I was very comfortable with—and we've had 57,000 people move to a model built around councils and boards. This is basically social networking with a lot of processes and discipline around it.
Is it true that 40 per cent of your top management came through buyouts?
That is correct; much like the Internet, we don't care what age you are, what religion you are and what gender you are. Many companies reject outsiders. We accept cold outsiders, because we are a company of outsiders.
You've transitioned Cisco's leadership to dispersed boards and councils. What were the challenges executing this change?
We started our journey back in 2001, so this transition is now almost a decade old. It was more difficult than I anticipated. However, it was also much more efficient than I anticipated. The first couple of years were painful, because we had to change the management style, there was no roadmap to follow and we made most of our learnings as we went. In terms of the group, 19 of the top 20 leaders did not like it initially. (Today, the vote would be 20 of 20 in favour!) We designed products such as Telepresence and Webex to allow this organisational change to occur.
Look at the results: it allows productivity to grow 5-10 per cent per year...we've set a target of 10 per cent and our current run rate is off the charts. For the last two quarters, we've increased 8-9 per cent and that makes it 34 per cent for the whole of the year. This model gives us speed, scale and flexibility.
How would you compare this management structure with a command-and-control one?
Command and control works fine when you have one or two products or your industry is growing relatively slowly. If you're a market leader or working across a dozen markets or your business involves a combination of capabilities, then it doesn't work. I had the vision to move to multiple market adjacencies well before I had the vision to move away from a command and control structure. My leadership style—command and control— would not allow us to tackle multiple opportunities.
The Globalisation Centre you opened in Bangalore in 2007 was part of that transition. Where did this idea come from?
Like most good ideas, this one too was from either customers or identification of a market transition. About 10 years ago, watching the work force in Silicon Valley, we noticed that those from India or of Indian-origin were not only superb, their ability to fit into our culture was superb. Forty per cent of our employees have a heritage of India. As companies started to go to India for labour arbitrage, I looked at it more from a talent addition perspective.
I thought I would have to force someone to go to India, but lo and behold my No. 2 Wim (Elfrink, Cisco's Chief Globalisation Officer and Head of Cisco's Services unit) said he would do it! He took it forward much more than I would have gone.
Do you see the model being replicated by other corporations as well, not just in the tech industry?
People have tried to make new management styles and have mostly failed. As our model has worked, we have become a role model for different companies—Procter & Gamble and GE, for example. I think this model will work not just for businesses, but for government, health care and education.
What happens when Cisco's benevolent dictator no longer runs it? What is Cisco without John Chambers?
First of all, it is inevitable. To me, the challenge is to make sure the transition is seamless. It may be more a council that runs Cisco. Already, my operating committee of 11 people meet most of the time without me. Our functioning structure is not dependent on one person. Every one of my leaders is turned over at least three times under my leadership. I have people who could lead 3-5 years from now and 10-15 more later on. Nothing's for sure, but I would like to be here for 3-5 years more.
Tell us about the impact of emerging markets on Cisco.
Emerging markets are a good source of revenue growth and innovation to bring back to mature markets. The next step is to bring these solutions to the US and Europe. That's exactly what we're doing in health care and education. We tried to push education changes in the US for 20 years and that we made incremental improvements would be putting it kindly. In developing nations, technology can transform the cost and quality of education and make it 30-40 per cent less expensive. That's something hard to argue with.
There will be a couple of emerging markets that will play way beyond their own internal markets. China, India and Brazil come to mind most. Specifically, India is a partnering nation; you bring an attitude to partnering that's the best in the world. I am not in India for labour arbitrage. If the cost in India was the same as the West, I would still be here with the same volume, which is quite different from my competition.
On to a broader context, has the world juiced out all it can from the Internet? How do you see it evolving as more countries get connected?
Phase 1 of the Internet for the developed world has been tapped pretty hard—the ability to do e-mail and file transfer— more of the transactional Internet. Now, we're starting to see phase 2 with the video play, new business models and you will see an instant replay around video and collaboration. What is so exciting is this market moves so fast. Everything is built around speed, scale, flexibility and replication. So if you fast-forward even just 10 years, I think it (the Internet) will change business and government models. It will decide which companies survive and grow. It will literally be embedded in entertainment and businesses.