OB PRESENTATION

Cisco’s Acquisition Strategy

- GROUP 6ANKIT UTTAM

MADHURIMA GANDRETTINAYANA UNNI

PRIYA NSSURAJ GARG

Cisco in a nutshell

• Started in 1984 by two Stanford graduates: Sandra Lerner(StanfordBusiness School)and Leonard Bosack (CS Department).

• Designed an operating system software called IOS which was loaded intoa box containing microprocessors. This was known as router.

• March 1986-First router was delivered.

• November 1986-Cisco was earning revenues of US $250000 per month.Started first round of venture capital funding.

• 1987- Appointed Bill Graves as CEO and Lloyd Embry as CFO.

• 1987- Received funding of US $2.5 million from Sequoia Capital,a venturecapital firm.

• 1988- Appointed John Morgridge as CEO.

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Cisco in a nutshell

▪ 1988- Revenues reached 5.45 million US dollars. Had 35 employees,12 ofthem being engineers.

▪ 1989- Cisco’s 174 workforce comprised 35 software engineers.

▪ Early 1990s- Cisco experienced spectacular growth. Shift in focus fromtechnologically driven to customer driven.

▪ June 1994- Chambers was appointed as executive Vice President.

▪ January 1995-Chambers was appointed as Cisco’s president and CEO.

▪ Large customers : Enterprise & Service providers

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Products

▪ Routing

▪ Switching

▪ Home networking

▪ IP Telephony

▪ Optical Networking

▪ Security

▪ Storage area networking

▪ Wireless technology

▪ Access

▪ Network management

▪ Service

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Elements of Cisco’s Culture

Culture is the process by which a person becomes allthat they were created capable of being.

Thomas Carlyle

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Empowerment

Sharing varying degrees of power with lower-level employees to tap their full potential.

The organizational structure of Cisco fostered a spirit of employee involvement.

Cisco’s management believed in offering maximum autonomy to executives.

Several decisions, including the ones relating to investments in new products and technologies, were decentralized.

Decentralization gives more autonomy to the employees leading to higher job satisfaction which in turn results in greater job performance.

For e.g. if a Cisco employee wanted the top management support for an innovative idea, he had to discuss the idea with an employee decision-making team and get its assent. If the decision-making team accepted the idea, the top management gave the green signal.

Thus the decision-making teams were empowered to make the decision because the management put the authority, the responsibility, and the accountability at the same layer.

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Drive Change

All employees were encouraged to be vigilant towards changes in market environment, such as customer attitudes, competitors move, etc.

State-of-the-art IT systems to observe even minor changes in the external environment.

Encouraged R&D department to come out with new products.

More proactive sales personnel

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Teamwork

Employees were encouraged to be team players.

Efforts made to promote better relationships between executives and thus improve the company’s prospects.

Attractive rewards.

Conducted team building events to facilitate high level of interaction.

Chambers has replaced Cisco’s top-down decision making with committees of executives from across the company. Some teams provide strategic advice and evaluate the progress of these projects. In total, Cisco now has 59 internal standing committees.

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Customer Success

▪ Customers First- ‘worship of customers’

▪ Pay attention to customers and anticipate what they wanted.

▪ Grievances to be addressed properly.

▪ Getting regular customer feedback, which helped Cisco employees to be proactive in identifying problem areas, rather than waiting for the annual customer satisfaction survey.

▪ Employee compensation decided on the basis of the extent to which their customers were satisfied.

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Quality Team

▪ To maintain its top position in the market and to achieve customer success, top priority was given to recruiting and retaining talented people.

▪ For recruiting candidates who fit into the culture of Cisco, a selection criterion was developed which targeted candidates who were frugal, enthusiastic about the future of the Internet, and were not obsessed with status - all hallmarks of the Cisco culture.

▪ Took steps to ensure employee satisfaction like awarding stock options for employees in the managerial cadre, as well as for non-management employees.

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Cisco’s Business Strategy

Latest Business Strategy-- “The light at the end of the tunnel has been turned off due to budget cuts”

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Business Strategy

▪ Assemble a broad line in order to provide customers one-stop shopping for networking solutions.

▪ Systematize the acquisition process.

▪ Define industry-wide software standards for networking equipment.

▪ Pick the right strategic partners.

Strategy Innovation & Outsourcing

Keeping the core and outsourcing almost everything else to alliance partners

▪ Networking standards

▪ Designs and Algorithms

▪ Manufacturing

▪ Selling

▪ Logistics

▪ Training

Merger and Acquisition

A Perspective

The Approach

Cisco’s three step process for acquisitions

i. Evaluating target company

ii. Determining Compatibility

iii. Integration

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Evaluating Target Company

▪ Similar business vision– Company should be developing new product that can be exploited commercially.

▪ Size– Smaller companies are preferred.

– Easy to integrate

▪ Benefits of Stakeholders in long term– Cisco believes that all stakeholders should be benefitted in the long term due to acquisition

▪ Proximity to Cisco headquarters– Close monitoring

– Minimal travelling expense

▪ Mutual agreement acquisition

▪ Value and Culture fit with Cisco– Adventurous and Risk takers are preferred

– Judged by Past decisions. Should have one or two mistakes in the past due to risk taking appetite.16

Determining Compatibility

▪ An acquisition team assess the extent to which the employees at thetop and lower level can be integrated into Cisco

▪ The team also do the assessment of following aspects:– Technological aspects

– Financial aspects.

– Employee’s calibre

– Management functioning

– Company’s culture

▪ The team spend a fortnight in the company to achieve the abovemetrics

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Integration- The big problem

▪ Since 1993, Cisco has acquired more than 120 companies, from small start-ups to large, well-established firms such as Linksys, Scientific Atlanta, andWebEx.

▪ With multiple acquisitions occurring each year, it became clear that Ciscocould not approach the integration effort in an improvised manner, withdifferent personnel and activities engaged each time.

▪ Acquisition integration needs to become a standard way of doing businessfor Cisco employees.

▪ The Problem: Cisco needed an integration approach that would beconsistent across the company, repeatable for each new acquisition, andadaptable as Cisco began to acquire large companies with differentoperational parameters.

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The Solution

Cisco has developed-and continues to evolve-a well-defined approach tointegrating acquired companies. This approach encompasses the followingelements

▪ Formalized and centralized integration management through a designatedteam in the Cisco Business Development group.

▪ Cross-functional teams for each acquisition that plan, manage, and monitorintegration activities across Cisco.

▪ Standard principles, metrics, tools, methods, and processes that can berepeatedly applied to new integration efforts, yet are adaptable to the uniqueissues and parameters of each deal.

▪ Extensibility of the acquisition integration model to other major changeevents, such as divisional consolidations, divestitures, or acquisitions by Ciscodivisions.

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A Companywide Approach to Integration

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Integration Principles

The following principles guide Cisco acquisition integration activities:

▪ Alignment. Set common standards so that all internal organizations and integration activities are aligned to achieve the business goals of the acquisition.

▪ Communication. Enhance cross-functional communication to highlight interdependencies, overlaps, and gaps in activities and schedules, and to encourage cooperation on integration tasks.

▪ Operational effectiveness. Continually improve integration capabilities across Cisco by:

– Promoting consistent, repeatable processes that can reduce integration project setup time and assist with resource and capacity planning

– Adapting integration standards to accommodate different business models as Cisco acquires large companies and those offering different types of products and services

– Incorporating the lessons learned from each acquisition

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Integration Metrics

Cisco uses a variety of qualitative and quantitative metrics to measure thesuccess of each acquisition integration effort. Typical metrics include thefollowing:

▪ Retain 100 percent of the employees who transition from the acquiredcompany

▪ Sustain the acquired company's current product and service revenues (aswell as current levels of service and support) during and after the transitionto Cisco

▪ Launch new Cisco products based on the acquired products andtechnologies

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HR Centric Approach

▪ Retaining 100 percent of employees: The Cisco HR team works withexecutives from the acquired company to help map employees toCisco's employment structure for salary, stock options, and benefits.

▪ Cisco HR works with internal resources to handle routine transitiontasks such as employee setup in HR and payroll systems.

▪ To reduce the disruption and anxiety of the transition process for newemployees, HR staff are among the first Cisco representatives onsite atthe acquired company when a deal is announced.

▪ The Cisco HR acquisition team provides employee transition lettersand hiring documents online to improve the efficiency of employeeprocessing and create electronic personnel files that are easier toupdate and manage.

▪ The Cisco HR team hosts a new-hire orientation for all new employeesat the time the acquisition deal closes.

Benefits for Cisco As a Company

▪ Ability to realize the value expected from each acquisition:

– The integration tasks can be completed quickly, the transition of acompany to ownership by Cisco creates less disruption in sales andproductivity levels.

– Metrics that track the value gained by Cisco from its acquisitions aremonitored over time.

▪ Faster, smoother integration of acquired companies: With decision-making and execution capabilities centralized in one team for eachacquisition, the integration activity can proceed with greater speed andease than would be the case for decentralized efforts.

▪ Easier cultural integration: The internally developed processes reflectCisco corporate culture, which facilitates clearer communications andeasier collaboration among the integration teams.

▪ High levels of employee retention: In the first two years after anacquisition closes, Cisco retains nearly 100 percent of the new employees.

▪ Optimized operational infrastructure: Acquired companies migrate to theCisco corporate network, standard IT infrastructure, and applicationarchitecture, which reduces operating costs as well as management andsupport requirements.

▪ Maximized sales structures and channels: By consolidating sales forces andchannels, Cisco can expand its customer base and sales opportunities whileavoiding overlap in sales activities.

▪ Solid foundation for acquisitions:

– The foundation of standards and a well-defined integration process supporta strong, active Cisco acquisitions team that can pursue more deals, morequickly and at lower risk.

– This foundation also gives Cisco the confidence to enter new markets andacquire companies with diverse operating models.

Benefits for Cisco As a Company

Benefits for Cisco As a Company

▪ Continuous development of integration expertise: The same Ciscoemployees typically serve on multiple acquisition integration teams,hence this expertise can be developed, sustained, and deepenedthroughout the company.

▪ Efficient integration throughout the company: Defined processesand standards allow all teams to work efficiently and effectively andsustain focus on high-priority activities.

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Loopholes

I'm not saying my mother didn't like me, but she kept looking for loopholes in my birth certificate.

Les Dawson 27

Loopholes In Strategy

Risky strategy –

▪Cisco mostly acquired startups with unproven product.

▪This means revenue generation was uncertain.

▪Though there were no competitors in emerging markets, when cisco entered market segments with established competitors this advantage disappeared.

Overloaded Acquisition drive-

▪Cisco had undergone aggressive Acquisition expansion.

▪Acquisitions are difficult to implement on any scale and cisco was implementing it non-stop.

▪This accelerated pace of acquisition overloaded cisco’s ability to undertake adequate due diligence.

Loopholes In Strategy

Organizational structure-

▪ Product centric organization:

▪ Facilitates coordination among specialties

▪ Major disadvantage is duplication of activities and costs.

▪There was duplication of development efforts across different segments in Cisco.

▪Chambers described this period as “ 100 year flood scenario” .

Financial irregularities–

▪ No authenticity of financial reporting.

▪ Paying premiums for acquisition targets results in destruction of value for the acquirer's shareholders.

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Internal competition & failure in cultural integration-

▪Competition on same customer accounts between different cisco teams.

▪Cisco’s inability to integrate cultures of acquired companies compounded the problem.

▪ Formation of small internal groups were reported & employees were referred by the name of the acquired company they came from

▪Conflicts between groups were reported.

Decentralization-

▪The duplications stemmed from customer segments and not by technology.

▪This was a direct result of decentralization.

▪ Managers were empowered to take decisions on acquiring companies.

Loopholes In Strategy

Problems in IT integration-

▪ Interface compatibility problems

▪ Software mismatches

▪ Problems in integrating various IT businesses

Expensive- Growth by acquisition strategy is quite expensive.

Burst of internet bubble in 2000-

▪This resulted in the slowdown of telecommunications industry

▪ Led to mass layoffs , pay cuts and revenue dropped by 30% for the third quarter.

Loopholes In Strategy

Shift from their culture-

▪Cisco had a highly innovation driven culture.

▪As a result of Aggressive acquisition the task of R&D employees became integrating acquired technology and not developing new products.

▪This eventually led to employee dissatisfaction.

Loopholes In Strategy

Revised Strategy

“In strategizing, you must kill all your darlings.”

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Revising Strategy

▪ Managers not allowed to decide upon acquisitions.

▪ Investment Review Board whose task was to thoroughly scrutinize all the acquisitions.

▪ Meetings between heads of various departments to assess the potential impact of a particular acquisition on Cisco and drawing up a well-defined operational plan.

▪ Revised strategy increased the accountability of the managers.

▪ Number of acquisitions reduced from 23 in 2000 to 2 in 2001 and 3 in 2002.

▪ Top management’s decision to place emphasis on Team Building; setting up committees all across the company to ensure close coordination of various departments.

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Revising Strategy

▪ To enhance team spirit, Cisco laid down a rule that 30% of the bonuses of Cisco’s executives would be based on how they promoted teamwork and cooperation.

▪ Cisco’s efforts payed off with improved financial results and a change in the attitude of employees.

▪ In 2001 cisco moved from its product team structure to matrix structure

▪ Matrix structure integrates the strengths of both functional structure and product team structure while eliminating the disadvantages of both.

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Copyright 2007 Prentice Hall 36

Characteristics of Structure Associated with Business-Level Differentiation and Low-Cost Strategy

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