FORTUNE:

Cisco's display of strength

By Rik Kirkland, Fortune Magazine

The best proof that all this team building can pay off comes from Marthin De Beer's emerging-technologies group. Charged three years ago with cooking up $1 billion businesses from scratch, his team's first project was to develop the telepresence system. But that had been Chambers' baby. In search of second acts, De Beer a year ago set up an internal wiki called I-Zone that has so far generated 400 business ideas. "Better still," he says, "another 10,000 people have added to those ideas." His team measures which notions draw the most activity and cherry-picks a handful to unveil at Cisco's quarterly leadership-development program. Normally at such gatherings, promising up-and-comers from across a company hear lectures, bond, and ponder case studies. But De Beer decided to use these sessions to take the most promising I-Zone ideas and pound them into real-world business plans. Three of the nine notions so tested are now in active development.

This whole process has been an eye opener even for Chambers. He used to tell his staff, "I do strategy; you do execution." "He was amazed," says Ron Ricci, a former consultant who since 2000 has served as Cisco's internal culture keeper. "He said, 'We just did three billion-dollar market opportunities without my knowing about it.'"

The human embodiment of Cisco 3.0 may be Wim Elfrink, head of the company's new Globalization Center East in Bangalore, India, which officially opened at the end of October. Though he occupies a typical Cisco cubicle, the nerve center of his working life lies a few miles away, in a spacious second-floor office overlooking the pool at his California-style home. There he travels around the world on a 65-inch Cisco telepresence screen. "Without this, I don't know if I would have taken this job," he says.

That job, like most things Cisco, isn't easy to explain. Elfrink is one of 13 executives who make up the company's operating committee. (This is the group that sits right below Chambers and into which all the councils report.) He also runs Cisco's service business, which last year generated more than $5.5 billion in revenue. Since moving to India a year ago, he's taken on responsibility for expanding Cisco's business in the region, for turning the new Globalization Center into a worldwide "intelligent back office," and for ensuring that by 2010 the Indian operation employs 10,000 people and is a base for roughly 20% of the company's "top talent." Though Elfrink has recruited 20 senior executives within Cisco to come east and join his mission, only four people in Bangalore report to him directly. (Remember, most work for functional heads back in San Jose.)

So if your job is to manage 8,000 people scattered around the world, help lead a $35 billion company based in California, supervise a now 3,200-person, $1 billion investment in India, build new businesses across a dozen times zones -and the only way you can get it done is by networking like crazy with external partners and internal allies - well, you can see why the guy likes being able to telecommute.

"I'm learning to work in batches," he says. On a typical day in Bangalore, Elfrink starts at 6 A.M. with a couple of hours of home telepresence back in the United States, where the workday is ending. At his other office he spends the day with customers or visiting delegations from abroad before getting home for dinner and some family time with his wife and two boys. And then it's back onto telepresence to spend a few more hours with his fellow San Jose brass or perhaps partake in a virtual breakfast with a key partner. "And then I have a beer," he says with a laugh.

Beyond the size and rising wealth of the potential market in Asia and the rest of the developing world - "70% of the world's population and 70% of our future growth are within a four-hour flight from Bangalore," Elfrink points out - what's exciting for Cisco is the chance to innovate here on a scale that the West can't match.

With Saudi Arabia building six cities the size of Manhattan in the desert over the next decade and skyscrapers rising like mushrooms in places like Dubai, real estate developers out here have the opportunity to erect "connected" buildings that use the Internet to control security, lighting, and elevators, as well as offer digital entertainment and services that have yet to be invented. "The reason God was able to create the world in seven days," says Elfrink, "is because there was no installed base."

Whatever comes next, Cisco has a hard act to follow - itself. So far no company in history has ever achieved what it did in the 1990s: going from IPO to a $500 billion market cap in one decade. Consider this: The one candidate with a shot is Google, which went public three years ago and then zoomed to a market cap around $200 billion (right above where Cisco stands today). But for GOOG to match CSCO and break the $500 billion mark - and this is not even adjusting for inflation - its share price still has to rise from today's roughly $650 level to over $1,600.

Anything can happen, but that's a steep hill for any company to climb - or reclimb. Looking ahead, it's easy to list threats, though most come with countermeasures. What about the rise of a hungry, low-cost new competitor, like China's Huawei? Its sales have grown from $2.5 billion to $15 billion in five years, a pace more akin to the Cisco of the 1990s. But as Paul Mountford, senior VP for emerging markets, points out, "While they're the only competitor we see everywhere, we never really go head-to-head with them" because Cisco is selling high-value applications and not just boxes. Anyway, he notes, whatever Huawei is doing in emerging markets hasn't kept Cisco from growing 2 1/2 times faster there than in the U.S. - while maintaining the same plump margins.

What about open source? Google is reportedly using Linux-like routers and switches to stitch together its networks. If that trend spreads, it could reduce demand for Cisco's high-priced wares. Still, most big companies seem to prefer the security that comes with buying Cisco. "Remember, we service 170 million customers a week," says Wal-Mart (Charts, Fortune 500) CIO and big Cisco customer Ford (Charts, Fortune 500). "And I never want to be accused of not being able to take people's money."

Chambers even ticks off a couple more threats: The broadband build-out in the United States stagnates at its current world-lagging pace and the tech industry as a whole "fails to solve some of the security problems." Still, he'd prefer to dwell on the upside. If Cisco is right about the payoff from the new video and Web 2.0 technologies, he says - and if it succeeds in its own transformation - then "this will transform every government and company in the world." In which case, he goes on to note, "any of our peers who don't do it won't survive." (You gotta admit: Nobody mixes aw-shucks humility with barely contained cockiness quite like John Chambers.)

Will they pull it off? All we'll hazard is that if anybody has a shot, these guys do. What may be most impressive about Cisco is its capacity to display what F. Scott Fitzgerald defined as a first-rate intelligence: "The ability to hold two opposed ideas in the mind at the same time and still retain the ability to function."

You see that flexibility in Chambers, a control freak trying to spur a bottom-up reinvention. You see it in how his managers practice teamwork while retaining a measure-everything mentality. ("To this day the way you manage at Cisco is through targets called weekly commits," says consultant Moore. "So John can push all this collaboration stuff while knowing his people are still going to have those weekly commit meetings.") Most of all, you see it in how Cisco is absorbing different business models - companies with lower margins, mass customer bases, and distinct organizational structures, such as Linksys and Scientific Atlanta.

Don Proctor, head of the company's new collaboration software group, describes Cisco's evolution as a three-stage process. "We have been focusing for our whole history on product innovation," he says. "Over the past five years we've put a lot of focus on process innovation. Now we're entering a new phase focused on business model innovation. That's a necessary step for us because as we go forward we're going to be in businesses that are even further from our roots than the businesses we are in today."

Well said. To restate that in Star Trek terms: Captain's log, Stardate 11.2007. Bad news. The Borg lives! Worse news. It's teaching itself new tricks.

Reporter associate Doris Burke contributed to this article. Top of page

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Market indexes are shown in real time, except for the DJIA, which is delayed by two minutes. All times are ET. Disclaimer LIBOR Warning: Neither BBA Enterprises Limited, nor the BBA LIBOR Contributor Banks, nor Reuters, can be held liable for any irregularity or inaccuracy of BBA LIBOR. Disclaimer. Morningstar: © 2014 Morningstar, Inc. All Rights Reserved. Disclaimer The Dow Jones IndexesSM are proprietary to and distributed by Dow Jones & Company, Inc. and have been licensed for use. All content of the Dow Jones IndexesSM © 2014 is proprietary to Dow Jones & Company, Inc. Chicago Mercantile Association. The market data is the property of Chicago Mercantile Exchange Inc. and its licensors. All rights reserved. FactSet Research Systems Inc. 2014. All rights reserved. Most stock quote data provided by BATS.