In August of 2001, just months after Cisco System reported its first loss a a public company ($ 2. 7 billion), John Chambers, president and CEO, announced a major restructuring that would transform Cisco from a decentralized operation organized around customer groups to a centralized one focused on technologies. This restructuring not only risked destabilizing the large, complex organization during an economic downturn, but more importantly, threatened Cisco’s ability to remain customer-focused, a hallmark of the company’s culture and success since its first product was created in 1986.
In order to maintain communication and stimulate ongoing collaboration among the newly independent functional areas, Cisco introduced coordination mechanisms that enable the companies to remain customer-focused. Introduction John Chambers became president and CEO of Cisco Systems in 1995. Over the course of the next several years, the decisions he made and the changes he implemented challenged traditional business practices, and resulted in incredible growth for the company. When Chambers first started, Cisco was generating annual revenues of $2. 2 billion; just six years later, the company was generating annual revenues of $22.3 billion.
All of those results, however, were threatened in the 2001 market downturn. Earlier in the year, the explosive growth in the sales of hardware supporting the Internet began to show serious signs of slowing down, and Cisco Systems, like the rest of the technology industry, was facing the repercussions of the demise of the Internet boom and the first economic downturn in more than a decade. Start-ups, which had enjoyed the benefits of a buoyant stock market, and telecommunications companies began cutting back their overextended IT and network budgets.
As a result of the falling demand, Cisco announced its first loss as a public company ($2. 69 billion) in the fiscal quarter ended April 28, 2001 and cut 18% of its workforce. In August, Chambers announced a major organizational restructuring that would transform Cisco from a decentralized operation focused on specific customer groups to a centralized one focused on technologies. While recognizing that a centralized, functional structure was necessary to avoid product and resource redundancies, Chambers also realized that it risked making the company less customer-focused.
At the time of the announcement, Chambers asserted that Cisco’s customer-centric culture would offset this drawback, but he knew that more needed to be done to ensure that an organization as large as Cisco would remain customer-focused—technology companies simply could not afford to lose 1 sight of the customer. Chambers knew then that he needed to implement a formal, crossfunctional structure that would keep the company in touch with its customers. Chambers found himself considering an ambitious idea that, if executed, could transform both his company and conventional organizational strategy.
He asserted that if Cisco implemented a crossfunctional system of executive-level committees, or councils, that fostered a culture of teamwork and collaboration that the company could scale beyond what anyone else thought possible. The benefits were clear—the cross-functional councils would bring the leaders of different functions together to collaborate and focus on the needs and issues of specific customer groups. Cisco could enjoy the benefits of being a functional organization while retaining its customer-centricity. Still, implementing such a system would be difficult.
Many other companies had previously failed at facilitating collaboration across functions, especially large organizations such as Cisco. Chambers began asking himself questions. Would Cisco’s employees, many of whom were accustomed to a command-and-control system, accept a more collaborative model? Could they function in such a system, even with training? Would a cross-functional system work in such a large functional organization? Furthermore, if Cisco moved forward with this idea, how many councils should be formed? How large should they be? Who would sit on and chair them?
Where would the decision making power reside? And finally, how could a system be implemented without creating a matrix organization that would impede decision making and generate conflict? These were all important questions, many of which for Chambers did not yet have answers. They were also questions that would discourage most executives from taking the chance. Still, Chambers understood Cisco’s employees and knew what they were capable of. He also knew that if they could succeed, the company would become even stronger financially and organizationally.
With 2002 approaching, and the organizational restructuring already being implemented now was the time to act. Market Transformation Despite the challenges presented by the 2001 market downturn, Cisco overcame the sudden drop in product demand. In fact, the company became even stronger after the downturn. By the end of July 2007, Cisco was generating more than $30 billion in revenue and employing 61,535 employees worldwide. Cisco’s total revenue for FY 2007 ($34. 9 billion) was an increase of approximately 23% over FY 2006 revenue’s of $28. 5 billion.
Net Income was $7. 3 billion GAAP and $8.4 billion non- GAAP, while Earnings per Share was $1. 17 GAAP (increase of 31% year over year) and $1. 34 non-GAAP (increase of 22% year over year). Part of Cisco’s post-downturn resiliency and success was the result of a transformation in its market focus and product offerings. Signs of this transformation were evident shortly before the downturn, when Cisco invested in its first comprehensive advertising campaign, including television and print, that asked the question, “Are You Ready? ” with the goal of raising consumer awareness of its networking-equipment business and its plans to connect Internet users with its routers and switches.
Because Cisco realized that it could not solely rely upon existing demand, the company began diversifying the products it offered and who it was selling those products to. By 2007, Cisco had successfully expanded into advanced technologies such as unified communications, wireless local area networking, home networking, application networking services, network security, storage 2 area networking, and video systems. These advanced technologies resulted in the growth of Cisco’s enterprise (large business) and service provider segments.
For instance, by 2007, more than 8 million unified IP phones had been installed worldwide (Cisco was the market share leader in the enterprise voice marketplace); Cisco’s Catalyst 6500, a highperformance modular switch that converges data center, campus, and wide-area network in a single system, surpassed $20 billion in sales; and Cisco’s enterprise customer installed base recently surpassed the 3 million wireless access points milestone. 3 Cisco was also able to successfully integrate the aforementioned advanced technologies with its core routing and switching technologies in products such as its Integrated Services Routers.
Additionally, Cisco announced in June 2007 that it had shipped 900 of its Carrier Routing System (CRS-1), which provided continuous system operation to telecommunications service providers and research organizations, since its introduction in 2004. Cisco claimed that customers understood the leadership, total cost of ownership, flexibility, and investment protection advantages they would receive when they installed a Cisco product, which was designed to allow customers to easily and cost-effectively add marketleading voice, data, security, wireless, and other capabilities to their existing Cisco networks.
This strategy differentiated Cisco from many of its competitors, which are usually present in only one or two product categories or customer segments, and often do not integrate their products from an architectural perspective. In a conference call discussing Q4 and FY 2007 financial results, Chambers commented on the importance of this balance and integration: “We believe that there are a number of factors that are unique to Cisco’s ability to grow.
First is our unique balance across over two dozen product areas, four customer segments, and across major developed and emerging countries…From a product perspective, we approach the market with an end-to-end architecture where the products are first loosely then tightly integrated together, rather than focusing on individual routers, switches, security, wireless, storage, unified communications, or other standalone products. In addition to diversifying its product and service offerings, Cisco transformed its market focus by finding new growth opportunities in developing economies.
Because Chambers knew these opportunities would not get the attention they needed from standard geographic sales coverage, he created a new sales “theater” called Emerging Markets, which included 138 countries around the world, regardless of location. Instead of every theater having several emerging markets in their portfolio viewed as low priorities, all the emerging markets were unified into one theater with the same resources and expectations of the other theaters. While several sales leaders functioned throughout the emerging markets, one sales senior vice president (SVP) was ultimately responsible for each theater.
Members of the Emerging Markets sales team met with government and business leaders in various countries to discuss “how Cisco could help their countries develop a stronger economy through Internet access to education, healthcare, and business opportunities”. These and other efforts throughout the theater paid off—growth for FY 2007 in Cisco’s Emerging Markets theater was 40%, the highest growth rate of all five theaters (e. g. North America; Europe; Asia Pacific; Japan; and Emerging Markets).
This performance made Chambers even more confident about the value of emerging markets. “Our architectural strategy in emerging markets is working extremely well,” he said in the conference call. “Barring some major economic or political surprises across many of these emerging countries, I would expect this theater to have the potential to grow more than twice the average growth rate of the other four theaters, if we execute effectively. ” 3 2001 Organizational Restructuring Cisco also transformed and expanded its market focus through acquisitions.
Before the downturn (1993–2000), Cisco was known for its acquisitions; it acquired 71 start-up companies that specialized in both its core and advanced areas, with 41 of those acquisitions occurring between 1999 and 2000. While emerging markets and acquisitions were key in helping Cisco survive the downturn, the company’s 2001 organizational restructuring played an even more important role. In its early days as a start-up, Cisco Systems was organized as a centralized engineering organization. As the company grew rapidly after going public in 1990, it adopted a business unit structure that was organized around primary product groups.
This structure lasted until 1997, when the company reorganized itself around three semi-autonomous lines of business, each focusing on a distinct customer type: service providers, large enterprises, and small and medium-sized businesses, which Cisco characterizes as the “commercial” segment. Within this structure, each of the three lines of business developed and marketed its own products to its specific customer groups. This decentralized organization was created to meet the differing requirements of service providers and SMBs, two groups of customers that were growing rapidly at that time.
By creating separate business units, Cisco attempted to meet the needs of each without compromise. However, as the market downturn brought about slowing demand and falling revenues, the negative aspects of the segment-centric grouping became clear. Organized behind lines of business focused on the different segments, redundancies in technological development were certainly not surprising—coordination across all technologies relevant to a customer group came at the expense of replicating technology development across customer groups.
Still, redundancies became more noticeable at Cisco in the harsh economic environment faced by the company. Each business unit designed and sold its own products to customers in a particular industry, even though each business line produced some similar, if not interchangeable, products. Moreover, differences between customer segments had begun to blur: some enterprise business products suited service provider needs, but the service provider business lacked knowledge of, and access to, them. In some cases, each line of business had a different technology or solution for the same problem.
By summer 2001, for example, Cisco had eight different teams developing technology to transmit telephone calls over Internet protocol (IP) networks. As one manager stated, “Before, we had a service provider customer, enterprise customer, and SMB customer, and we built a complete product line for that customer set. What that did cause was a great deal [of] redundancy of engineering and innovation…we had to build the same thing three times over and make things that are 80% the same three times over to satisfy the three requirements. ” Facing the realities of the market downturn, Cisco made a change.
On August 23, 2001, the company announced a major restructuring that, CEO John Chambers enthused, would bring Cisco closer to its customers, encourage teamwork, and eliminate product and resource overlaps. Cisco shifted from a decentralized operation focused on specific customer groups to a centralized one focused on technologies. Engineering was reorganized around eleven technology groups: Access, Aggregation, Cisco IOS Technologies, Internet Switching and Services, Ethernet Access, Network Management Services, Core Routing, Optical, Storage, Voice, and Wireless.
Although the product groups were divided based on 11 technologies, Cisco retained three sales groups based on customer type. Between the technology and sales groups, a central marketing organization was installed to integrate products and technologies into solutions for the customer. A cross-functional “solutions engineering team” was charged with bringing the 4 different technologies together in a lab, testing them to ensure integration, and then creating blueprints that the customer would use to implement the solution.
Marketing and engineering—previously segmented by customer type—were centralized under the chief marketing officer and the chief development officer, respectively. Cisco also expected the new structure to promote more rapid technical innovation by eliminating overlap in R&D. The old structure inhibited the exchange of ideas because engineers worked in separate silos—a solution in one area might have suggested a solution in another, but, claimed one executive, “You might not hear about it for six months if you are in another business unit.”
Implementing the Reorganization While a centralized, functional structure would help Cisco avoid product and resource redundancies, it also carried the risk of making the company less customer-focused because the company was organized around product, and not customer, groups. Whereas before each of the three lines of business developed and marketed its own products to its specific customer groups, each functional unit was now committed to a specific technology, which entailed the risk of dismissing the customer.
Despite this risk, however, Cisco moved forward, trusting that its customer-centric approach would offset the effects of a functional structure. Customer advocacy had been imprinted on the company during its founding, when Cisco engineers were building customized products for end users with fairly idiosyncratic needs: “When we started, we made routers, which were basically software devices, and the sales people would literally go out, talk to the customer, the customer would say ‘I need this protocol,’ and they’d say, ‘We’ve got that.
We’ll get the code to you in a week. ’ They would go back, tell the engineering guys that they had to develop it, and the engineers would do it,” said a senior manager. “That kind of stuff really sets the culture of the company; your job is to figure out what problem you are solving for the customer. And what you do everyday, setting up your activities, your tasks, your programs, your projects, your priorities, is in alignment with that notion of solving the customer’s problem.”
The goal was to try and preserve this customer-focused culture that had been engrained in Cisco ever since its founding. However, managers realized even at the time of the 2001 reorganization that maintaining the same level of customer focus would become increasingly difficult as Cisco grew larger in size. Because the reorganization threatened to push the company away from the customer and towards a more functional structure, Chambers knew that Cisco could not lose its customer-centricity.
When asked in 2007 how Cisco was able to maintain its customer focus through the reorganization, he said, “[Customer focus] has been deeply embedded in our DNA since I came here almost seventeen years ago, and while I’m a very collaborative leader, there are certain aspects of our culture, our vision, our strategy, which are non-negotiable, and customer focus is one of them. ” To ensure that this culture would not change, Cisco responded in various ways during the reorganization.