In explaining its enviable success, Cisco likes to boast of its ability to spot market transitions three to five years before they occur. Ever wonder how it does that?
The company's 18-month-old Emerging Technologies Group is charged with incubating potential opportunities and germinating them into Cisco's next $US1 billion business. Of Cisco's $US6.3 billion R&D budget, $US4 billion - essentially the group's asset base - is used to fund, staff and develop four emerging market opportunities per year.
Cisco seeded these efforts using what the company calls an internal venture framework, senior vice-president of the Emerging Technologies Group, Marthin De Beer, said.
"We see an opportunity and develop it internally in a start-up model," De Beer said.
They were like start-ups but they weren't spin-ins, or separate companies started up by Cisco and then acquired once they reached certain accomplishments or performance goals (There have been exceptions to this rule, though, such as Andiamo Systems, a maker of storage switches, and Nuova Systems, a maker of FibreChannel over Ethernet product for datacentres. Both are led by Mario Mazzola, Cisco's former chief development officer and the former head of LAN switch start-up Crescendo, the first company Cisco acquired.).
"The internal venture framework was an inexpensive way to get the same result as a spin-in, De Beer said.
Harvard Business Review recently lauded Cisco's strategy as a model for established companies looking to harvest new markets to augment core business. HBR cited Cisco's ability to keep its internal start-up resources isolated from its core routing and switching businesses in order to keep those resources focused on mid- and long-term growth opportunities -- and not to bail out the core business in order to meet quarterly targets.
But Cisco is certainly not unique in this effort. IBM three years ago created a new internal unit -- called Strategic Growth Initiatives -- to target emerging markets. That unit combines IBM's Linux, grid computing and virtualisation initiatives, among others.
Alcatel Lucent has Bell Labs, and Red Hat and Network Appliance also have internal emerging technology initiatives.
Cisco's may be unique, however, given the company's penchant for going outside to obtain and staff its emerging technologies efforts. Cisco has bought about 114 companies since the Crescendo acquisition in 1993.
Cisco weighs making vs. buying
"The make versus buy decision is something that probably comes up more often in Cisco than an IBM," research director at The Burton Group, Dave Passmore, said. "An IBM would tend to pursue more internal developments whereas Cisco might always be thinking, 'How much of this should we do ourselves?'"
Passmore said there were benefits and drawbacks to each approach. Companies can readily drain resources from internal efforts to meet a short-term goal. Conversely, a heavy reliance on acquiring outside technology and talent can create a culture clash, leading to an exodus of skilled personnel.
"There's the control issue, and the fact that you can lose a bid for an outside company. The technology can land in 'the wrong hands'," Passmore said. "When you've got a lot of entrepreneurs that you hire through acquisition those are the kinds of people who tend to want to go off and do what they want to do. They're not exactly company men." Passmore noted Cisco has been adept at retaining top talent after acquiring a company.
Cisco's first such emerging market internal start-up was its IP Telephony effort -- phones and PBXs -- back in the late 1990s. Since then, several such internal start-up activities have stocked Cisco's Advanced Technologies operations, a conglomerate of $US1 billion markets and product lines that include unified communications, storage, security, wireless, home networking, application services and video.
The latest such emerging market technology to be productised is Cisco's video-based TelePresence virtual meeting system. Since its launch Cisco has shipped 110 TelePresence systems to date to 50 customers, and expects it to be another $US1 billion opportunity within the next five years.
Other recent market entrants from the Emerging Technologies Group include the Cisco IP Interoperability and Communications System (IPICS) for emergency first responders; physical security; and digital media systems for enterprises. De Beer said there were at least four more emerging technologies in the pipeline and even more in the pre-pipeline stage. He declined to identify them.
The 400 staffers in the Emerging Technologies Group field ideas for new market entries submitted by Cisco employees through the company's intranet. The group's goal was to fund 15 new $US1 billion market initiatives over five years, De Beer said, or roughly a 2 per cent hit rate on all of the ideas submitted.