What Would You Do?
Cisco Systems, Palo Alto, California.
Your board of directors wants to know: How should Cisco grow? Your response was, “Well, the way we’ve grown in the past is. . . .” “No. That’s not the question. Looking backward is easy. How should we grow in the future? Should we build or buy?” And with the next board meeting in only 3 months, you don’t have much time to come up with the answer. Cisco started in 1984 as the plumbers of the Internet by making the switches and routers that direct data traffic over corporate networks and then later, the Internet. Its products weren’t sexy, but every company with an expanding network needed them. So Cisco became the fastest-growing and most valuable company in the world (on the basis of its stock price and total market capitalization). That is, until the technology crash of 2001, which resulted in a $2.5 billion charge for unsold inventory and a stock price that dropped by 83 percent. However, by laying off 10,000 employees, redesigning routers and switches to have fewer and more interchangeable parts, and reducing its fifty product lines to forty, Cisco cut expenses 17 percent and became profitable again. Nearly a decade later, things are much different. Cisco’s revenues are six times larger than the combined revenues of its top eleven competitors. Cisco has nearly 60,000 employees who work in 450 offices in 96 countries. And, the company pulls in $40 billion a year in revenue, three-quarters of which comes from routers and switches (i.e., “plumbing”) with 65 percent gross profit margins. But as you and your board know from experience, there’s no guarantee that this success will last, especially in high-tech, where competitors catch up with and replace the leading firms in their industries on a regular basis. How should Cisco grow? Build or buy? Well, 75 percent of our revenues already come from routers and switches, and it’s unlikely that we could...