A Do-It-Yourself Plan at Cisco

Over the past eight years, Cisco Systems made a fortune for itself and its

shareholders by perfecting the art of innovation-through-acquisition. The giant

maker of Internet networking gear has used its turbo-charged stock to gobble up

more than 70 companies since 1993, integrating technology startups into a

massive Silicon Valley powerhouse. Today, about half of its $22 billion in 2001

sales can be traced to an acquired company or technology.

That strategy is about to change radically. With its shares off 79%, to just

$17, since its March, 2000, high, Cisco’s acquisition engine has slowed from

23 purchases in 2000 to just five this year. As a result, it has to find a new

way to stoke revenues and fix its tarnished image on Wall Street. So now CEO

John Chambers wants to concentrate on developing products and technologies

inhouse through Cisco’s own engineers.

That will be a tough task for a company that has always been far better known

for its financial acumen and sales machine than as a developer of dazzling new

stuff. It "is not going to be an easy process," says Martin Pyykkonen,

senior analyst at investment bank CE Unterberg, Towbin. "Cisco has a

world-class sales and marketing organization, but it doesn’t have the R&D

you would expect from a company its size."

The shift comes as part of a broad reorganization Chambers announced on in

late August. Key executive roles are also in flux. Mario Mazzola, who flirted

with retirement last year after running Cisco’s corporate products division,

will now oversee all product development, in effect making him No 2 in the

company. And Chamber’s former big picture guy? Michelangelo Volpi, who oversaw

much of Cisco’s acquisition binge as chief strategy officer, will now run the

Internet switching and services unit and report to Mazzola.

Less overlap

Cisco will also carve its product-development unit into 11

technology-specific groups and eliminate three customer-oriented units. Chambers

is counting on the moves, in part, to stomp out redundant engineering efforts

and boost accountability. Earlier this year, for instance, several divisions

were working on similar router projects all geared toward the same customers.

"This will help us get a lot more wood behind each arrow," says

Mazzola.

But can Mazzola quickly morph Cisco from a savvy buyer of technology to a

full-fledged innovator? After all, creating products on your own is entirely

different from buying technology and improving on it or integrating it with

other products. Furthermore, considering Cisco’s entrenched product lines and

formula for success, it won’t be easy getting executives to suddenly chase new

ideas. "The bigger a company is and the more legacy it has, the harder it

becomes to innovate," says one former Cisco executive. "People are

less likely to think about something in a totally new way."

Success may also require a bigger budget. Sure, Cisco spent about 22% of

sales this summer on research and development, on par with rivals like Nortel

Networks and Juniper Networks. But quickly squeezing winning products out of

R&D without dramatically hiking its budget will be a stretch. "That’s

going to be a big question," says Merrill Lynch analyst Sam Wilson.

To be sure, Cisco has had homegrown hits. Its recently released The 12000

Internet Router helped it win back about 5% of the high end of that market from

Juniper Networks in the second quarter, according to Infonetics Research.

But Mazzola, a top-flight operations man, will have to build on that success

if he hopes to pull Cisco from its Internet slump. After joining Cisco in 1993

through its acquisition of Crescendo Communications, he built the company’s

switching business from scratch to more than 40% of its $22.3 billion in 2001

sales. He’s considered to be a remarkable technologist with a good feel for

product trends and fits. And that Mazzols had better be. Otherwise, he



might start regretting that he didn’t opt for retirement.

By Ben Elgin in San Mateo in BusinessWeek. Copyright 2001 by The McGraw-Hill Companies, Inc