John Chambers learned his first lesson in navigating currents when he was just six years old. While on a fishing trip with his father, he fell into a rushing river and was sucked below the surface. Tossed about in the water, he heard his father yell, “Hang on to that pole!” The boy kept calm and did as he was told. His father raced down the bank, jumped into the water, and fished young John out. Then the boy received the standard lecture about surrendering to the tide, picking a point of land, and riding the current to it. “I gained a lot of respect for what a strong current can do,” Chambers says, “but I also learned to have no fear of it.” Founded in 1984, Cisco Systems, the world’s largest provider of internet networking and communications equipment, underwent its own near-drowning experience. Following the burst of the internet bubble in 2000, Chambers was forced to lay off nearly 8,000 full-time employees, contractors, and vendors and write down some $2 billion in inventory. The experience was bruising, but Chambers was able to pick his point of land and right the company very quickly. He learned from that lesson, too. Since then, Chambers—who will begin his 14th year at Cisco’s helm in January 2009—has demonstrated a nearly uncanny ability to survive downturns, see long-term trends, and identify market transitions, which he defines as an undercurrent propelling the technology market in a generally unforeseen way. Since the late 1990s, Chambers and his leadership team have sensed developments in emerging markets and networked-based technology well before Cisco’s closest competitors, helping the company navigate the currents even during periods of economic contraction. But just how does Cisco see the future? What are the combinations of conversations and processes that allow Cisco to foresee trends and rapidly capitalize on them? The following is an edited presentation of Chambers’ thoughts, which he offered in two interview sessions with HBR senior editor Bronwyn Fryer and former editor Thomas A. Stewart. One of the meetings was held via TelePresence, Cisco’s real-time, high-definition video communication system; the other took place at Cisco’s headquarters in San Jose, California. In speeches, you talk about the importance of identifying and managing “market transitions,” but it’s not entirely clear what you mean by that. What are some examples? A market transition occurs when there is a subtle but clear disruptive shift. It could be social, economic, or technological, and it begins many years before the market actually grasps its significance and adapts to it. A market transition gives you a glimpse of a new opportunity to take market share or move into new market adjacencies, and it can take many forms. For instance, it could be a process shift, like the shift to open source software. Instead of being wedded to one company’s development platform, like Windows, UNIX, or the Mac operating system, people began experimenting with a new process for developing software in which many individuals contribute their skills for free. This way of doing things took many, including Microsoft, by surprise. Idea in Brief How can companies with products that have long development lead times know what to produce years in advance of the market? Cisco is able to predict trends six to eight years ahead even in the highly volatile technology market by recognizing early-warning signals its customers unwittingly give off. To capitalize on these “market shifts,” Chambers gave up his command-and-control style and made decision making highly collaborative. Now an organization that used to carry out one or two cross-company initiatives a year can successfully handle dozens at a time. A market transition could also be a business-model shift. There was a time when phone-based customer support was the best way to address customer issues. But in the early 1990s, our customers began telling us they wanted to find answers to their questions more easily. So we decided to put technical problems and their solutions on our website. That became standard practice in our industry many years later, but back in the early ’90s it was risky and radical. By the late ’90s, well over 85% of our customer troubleshooting was handled directly on the web. How are market transitions different from market disruptions? Which is the chicken and which is the egg? I’d say that market transitions are the precursors to market disruptions, and in many cases, transitions cause the disruptions. Transitions can be driven by the customer, by the industry, or by economic factors, and they usually occur well before the rest of the world realizes what’s happening. Disruption occurs as the market responds to a transition with a game-changing innovation. Idea in Practice Market transitions occur several years before Cisco can develop the offerings that will capitalize on them. To identify an impending market transition, CEO John Chambers listens closely to hints dropped by customers about new technologies on the horizon, shifts in the demographic or economic picture, and other trends. Examples: In the early 1990s, a few customers began to shift away from proprietary networking technology toward IP networks. Applying Moore’s Law, Cisco saw that routers would one day be able to handle not just data but also voice traffic over those networks. Predicting the demise of telecommunication firms’ traditional business model, Cisco developed routers for voice over IP. Today, a market transition toward consumer-driven technology is spurring Cisco to focus on developing seamless IP support for data, voice, and video across the 14 billion devices Cisco expects will connect to the internet by 2010. To take advantage of market transitions, Cisco organizes for “collaborative management.” Specifically, this means: Eliminating hierarchy. Chambers surrendered his top-down management style in favor of a collaborative one. All but a handful of senior leaders were able to make the transition to the new model. Using collaborative teams: Cisco manages opportunities by cross-functional, collaborative teams called “councils” and “boards,” which are the equivalent of social-networking groups that work together in real time. Taking advantage of videoconferencing technology. Cisco relies heavily on TelePresence, a next-generation conferencing system installed in its offices (and its customers’ offices), as well as in executives’ homes. Meetings can be called spontaneously and team decisions made quickly without the need to travel. I look for transitions that are way ahead of the current—or even impending—technology cycle. It takes us three to five years to reach $1 billion in revenue after a new product idea is launched. If you add to that a two-to-three-year development cycle, plus the six to nine months it takes for the organization to grasp the transition opportunity before committing to the development cycle, you get an idea of how far out we must recognize a transition to really capitalize on it. Back in the mid-1990s, you predicted that voice would become free. Your service-provider customers must not have been very happy to hear that. Of course, that comment put us in somewhat of a penalty box with the telephone companies for a while. I went to talk to the leaders of two major telcos and said, “Your primary revenue stream could almost completely disappear. You need to move to other services and other capabilities to replace the disruption enabled by voice over IP.” Our non-telco customers were giving us clues we just couldn’t ignore. We saw customers across the board beginning to shift away from proprietary networks, like IBM’s Systems Network Architecture (SNA), toward Internet Protocol–based networks. They were voting with their dollars, even though bandwidth was pretty limited then. We applied Moore’s law to networking to predict what IP networks could be capable of five years from that point. We saw that if a router could support a kilobyte today, it could support a megabyte tomorrow. And when that happened, we believed, everything—not just data, but things that had never gone over IP networks, like voice and video—would be connected to the internet. So, in 1997, we announced that our equipment would support voice capability. We understood then that there was a real opportunity in the market—companies would build voice over IP (VoIP) networks and eventually would extend these kinds of services into the home. The telcos probably thought you were trying to destroy their business model. Were you? From my perspective, it looked like 80% or 90% of their revenue was about to vanish. And, frankly, I didn’t want to see our customers put into that situation. We learned early on from companies like General Electric, Boeing, and General Motors not to compete with our customers but rather to collaborate with them. We reached out to our service-provider customers and proposed that we partner together to help build the business model of the future for delivering all kinds of services over an IP network. Instead of what could have been a competitive situation, today we have a very strong partnership with telecommunications carriers. You say you were listening to clues from non-telco customers, but every company says it listens to customers. What do you do that other companies don’t? Customers always have more frontline knowledge about the technology in action. So while many companies set their strategy based on competition or their own so-called “technology religion,” ours is set solely on two things—listening to our customers, who tell us what the market transitions are, and then capturing those market transitions. Sometimes, the customer can be pretty blunt. I met once with one who said, “John, here’s a $10 million order you’re not going to get unless you buy this [other] company.” I left that meeting with a $10 million check in my pocket and a commitment in my mind to acquire Crescendo, which we did. We paid $92 million for a company with less than $10 million in revenue in 1993, and a lot of analysts thought we were crazy. But that turned into a $7 billion a year business for our switching unit. The same kind of thing happened when we acquired Scientific Atlanta in 2006. Our internet service provider (ISP) customers told us they needed network support for video, so it made sense to buy one of the only companies that had mastered the art and science of delivering video. What else did you see back in the 1990s? Since we thought everything would converge to the internet, we felt we needed to move beyond just corporate computing. So in 1993, I said we were going to change the way the world works, lives, plays, and learns. At the time that sounded like a nice tagline, but what I meant was that the network was capable of changing everything—all of life’s experiences beyond just work—everything from health care to education to how you connect with your friends and family while watching a sports event, even if you’re hundreds of miles apart. We saw that we could tie disparate networks together architecturally. Today, you have the option to connect by wire or wirelessly, from work, home, the office, or the road. Although you seem to be connecting to one network, you’re actually rolling seamlessly from one network to the next. What’s currently driving market transitions? Ten years ago, most IT and network-enabled market transitions were driven by businesses. Today, most IT market transitions are being driven by consumers. As more and more young people in places like China and India embrace technology, we’re seeing consumers drive social-networking technologies and collaborative behaviors beyond their personal lives into their work lives. In response, global businesses are adding collaborative structures and processes to social-networking technologies and are beginning to reap large productivity benefits. For example, from a business-model and leadership perspective, we’re seeing a massive shift from management by command and control to management by collaboration and teamwork. You could almost say this shift is as revolutionary as the assembly line. Business processes are being turned upside down to better compete in a global environment. This shift has changed the way we approach innovation. In the past, new product ideas were developed by just a handful of Cisco’s engineering leaders. This year, we opened it up to literally anyone with access to the internet through a global competition called “i-Prize.” The idea behind i-Prize was to allow engineers from around the world to submit ideas for an emerging technology. The winning team would be given $250,000 and jobs at Cisco to help us develop this technology. The results were incredible. We received over 1,100 submissions that poured in from 104 countries on six continents. We filtered these ideas through a combination of Cisco collaborative technologies before selecting a winner in August 2008. These new collaborative behaviors and technologies are changing the way we approach every aspect of our business—acquisitions, sales, engineering, legal, communication, marketing, and other business functions—significantly accelerating innovation, productivity, and growth. How do current economic conditions figure in with long-term transitions? How do you react to economic downturns, for instance? We’ve become pretty good at tapping opportunities from economic down cycles. In the face of every one—in 1993, 1997, 2001, 2003, and now in the current one—we became even more aggressive in our investments in existing and new market opportunities. At the same time, our peers often became very conservative. We’ve become pretty good at tapping opportunities from downturns. Remember the Asian financial crisis in 1997? Most of the economies in the area were contracting. I knew that Cisco’s peers were making a potentially major mistake by dramatically cutting back their resources there, so we did the reverse. Straight into the economic downturn, we decided to increase our resources and send a number of senior executives to expand our presence in the region. Within a year, we gained the number-one market position in almost all the Asian countries, and we never gave it up. Back then, this appeared to be a risky move; today, with the rise of countries like India and China, it is clearly paying off. What else are you seeing right now? In terms of what’s happening right now, I think the biggest market transition is the shift to a more collaborative world, which is only made possible by what we call an “intelligent, network-centric” world. This network-centric world encompasses the whole range of communication experiences and seamlessly delivers information. Consumers will access voice, the web, e-mail, and video by any of the 14 billion devices that we think will be connected to the internet by 2010, all loaded onto the network. In the very near future, for example, you won’t need to hang up your cell phone if you want to switch to a landline; you’ll stay connected as you change devices, as long as they’re all connected to a network. We’re also seeing that everything will follow a service model. Software is already being offered as a service instead of a product, but we are now seeing IT support as a service, publishing as a service, and—especially interesting for Cisco—hybrid models of devices and service. With more than 150 million sold worldwide, the iPod/iTunes package is a great example of a network-based service platform driving massive device adoption. Because of this networked world, we are also seeing a shift from a device-centric to a virtualized model—so we think content will find you, because it will be delivered to any device via the network. When I go to a sporting event, for instance, the content provider will know which team I’m rooting for and who my favorite players are, and even what my favorite snack is to eat at the game—which means they can meet consumers’ needs more precisely and generate more revenue for themselves. It must be hard to manage a lot of market transitions at once. It is difficult and is becoming increasingly more so—but it can, and must, be done. The truth is that each time a market is in transition, you can either gain or lose market share. If there was a time that we lost market share, it was because we moved too slowly; we weren’t moving at the “speed of thought,” to borrow a phrase from Bill Gates. So we’ve had to build speed and scale into all of our processes, particularly within our sales force. Spotting a market transition only counts if you can capture it and execute on it. That’s where our sales team comes in. They have developed a meticulous bottom-up forecasting approach, which consists of weekly commit calls that roll up from account managers worldwide to me. The unique aspect about it is that the salespeople make verbal commitments in front of their peers on a weekly basis. We think this has given us an edge in executing on market transitions. So there’s a process for capitalizing on market transitions? Yes—first, listening to customers to identify what transitions are coming and then having the processes, technology, and culture in place to capture the transitions. I believe that only those companies that build collaboration into their DNA by tapping into the collective expertise of all employees—instead of just a few select leaders at the top—will succeed, as more and more market transitions occur at once. This sounds easy, but it is incredibly complex. At Cisco, our major priorities are managed not by our top five to 10 executives but instead by cross-functional, collaborative councils and boards. And, in fact, our engineering organization—which is a third of our total employee base—is not run by a single leader but instead by what we call our Development Council, which is made up of the nine senior vice presidents who lead our engineering divisions. This companywide, council-based leadership model has allowed us to move from taking on only one or two cross-functional priorities a year in the past to addressing 22 this year. We think this is what organizations of the future will look like and that this 21st century leadership style will be a major competitive advantage for us over the next decade. How do the boards and councils work? Boards and councils are the business equivalent of social-networking groups, where groups of people with relevant expertise work together to make and execute key decisions supported by networked Web 2.0 technologies. Councils are established where we believe we have a $10 billion opportunity, boards are created for $1 billion opportunities, and working groups are formed for more tactical initiatives related to a board or council. Working groups are accountable to boards, boards to councils, and councils to the Operating Committee, which consists of two dozen or so senior leaders at Cisco. Each person on a board, council, or working group has the authority to speak on behalf of their entire organization, allowing decisions to be made in real time, with all who may be affected by the decision sitting in one room. The councils and boards propose possible initiatives to the Operating Committee through highly detailed business plans that have to answer three questions: What’s the vision? What’s our strategy for sustainable differentiation? And how are we going to execute the plan over the next 12 to 18 months? Each plan has an owner who makes a commitment to his or her peers and is held to that commitment and measured on the results. In fact, compensation for many of our top executives is based more on their success within the councils they belong to than on their individual performance. In this way, management can consider many, many opportunities spanning the capabilities of the company, instead of just viewing them by silo or by function. This allows us to have constructive discussions, get buy-in, and then execute rapidly. Twenty-two initiatives is a tremendously large number to manage simultaneously. How do you make them work, operationally? The power of collaboration is not in adding more people to the process but in getting immediate input from smart people and thinking through a problem as a group. I don’t let boards or councils start an initiative unless they can show me the strategy to become number one or two in a market segment—and a plan to sustain and grow that position. Let’s use the Sports and Entertainment Board as an example. One opportunity the team came up with was to stream video in big stadiums. Right now, all stadiums are equipped with TV screens where you can watch the game while you’re waiting to buy a beer and a hot dog. Turning all these TVs on and off is labor intensive and expensive. So the Sports and Entertainment Board detailed a proposition for the stadium franchises: “What if we networked the TVs so you could turn them on and off through a central location and also push advertising during game breaks?” Once we approved the initiative, the leaders of the board collaborated with other internal organizations, assigned some experts and sports enthusiasts to a short-term project to help, and moved quickly to offer the franchises the solution. In the end, the board achieved what could become a huge opportunity for us—all without asking for any additional people or dollars. Another example is the EcoBoard, which was formed in 2007 by senior leaders to build out Cisco’s green vision and strategy. This is an issue that touches so many different areas of the company, where we can have the biggest impact only if we work across functions to address it. Since establishing this board, we’ve been able to design products, campaigns, and employee programs to help drive “green” into our products, culture, and operations. We couldn’t do that with a single function working in isolation. It must be a challenge for you, as a longtime CEO, to let go enough to allow this level of independence. Make no mistake about it—in the past, I was always a command-and-control type. If I said, “Turn right,” all 65,000 employees turned right. But it’s not possible for an organization to scale and take on more when only one person is driving all the strategy. When you’re a command-and-control CEO, individuals impacted by your decisions can choose not to buy in and either slow, or even stop, the process. That is especially dangerous in an industry that moves as fast as this one. In my view, the days of being vertically integrated and having everything within your control will never return. The entire leadership team, including me, had to invent a different way to operate. It was hard for me at first to learn to be collaborative. The minute I’d get into a meeting, I’d listen for about 10 minutes while the team discussed a problem. I knew what the answer was, and eventually I’d say, “All right, here’s what we’re going to do.” But when I learned to let go and give the team the time to come to the right conclusion, I found they made just as good decisions, or even better—and, just as important, they were even more invested in the decision and thus executed with greater speed and commitment. I had to develop the patience to let the group think. What systems did Cisco develop to foster collaboration? We couldn’t possibly deal with one or two big priorities—let alone 22—unless we figured out a way to work together quickly, without having to get everyone on a plane. One thing we did was develop a technology called TelePresence, which is a lifelike, ultra-high-definition videoconferencing system that enables meetings so realistic that they truly feel like everyone is in the same room together even if they’re thousands of miles away. Past videoconferencing solutions didn’t provide this level of in-person experience, so they were not heavily used. In contrast, we have already had well over 100,000 TelePresence meetings at Cisco, which has saved us significant time and carbon emissions by reducing travel, and taken 20% off our annual travel budget. The so-called intangibles are just as important—the ability to read someone’s expression and body language while you’re trying to make tough decisions or make a tough sale. With TelePresence, you can literally see a customer’s pupils dilate, or watch them cross their arms, and change your discussion based on these important nonverbal cues. For example, right after we launched TelePresence, I was looking at a report regarding some global ISP trends, at a time when we were loading their networks with audio and video capabilities very rapidly. I saw a slight downturn in demand that I didn’t understand, and I needed to get my arms around it really fast. So I called a TelePresence meeting that afternoon with the team, who were in their home offices or in conference rooms in Beijing, Frankfurt, New Delhi, Kuwait, and San Jose. We could see everyone life-size and hear each other clearly, without delay, as if we were all sitting around a table in the same room. The call lasted about 15 minutes; we talked as a team about possible installation delays in some parts of the world and came to a conclusion. What might have taken days before took us just 15 minutes, and we were able to make decisions out of this single short session. Seems wonderful, but collaborative management must be more than just videoconferencing. It sounds like it requires a deeper organizational change. Absolutely. The process changes are as significant and as important to the success of this collaborative model as the technology. To me, collaborative management means putting a lot of people who speak a common language to work toward a common goal. It also means you lead the team through a collaborative process—but then, when the group has come to a consensus, the leader drives the team through execution. It’s important not to collaborate all the way through the execution phase or the entire engine could grind to a halt. For the first two years after we started using the collaborative model, everyone would have opted out if given the option. Without exception, nobody liked it. But I didn’t give them a choice in the matter—I forced people to work with others they didn’t get along with, and I stretched people in a lot of ways. And we based compensation on their collaborative abilities, as opposed to their individual performance. The first year we did that two of my top leaders got zero bonus. You can bet they learned very quickly how to collaborate. And, in fact, 20% of our top management team wasn’t able to make this transition to the new model and had to move on. It’s not that they weren’t successful working on their own or that they weren’t good people; they just couldn’t collaborate effectively. Twenty percent of our top management team wasn’t able to make the transition to the new model and had to move on. This environment is not about being the smartest in the room or about winning all the arguments. This is about working together as a team for the success of the entire organization, and it’s something that needs to be driven into the culture. How did you get everyone else on board? Clear and consistent communication was and is very, very important to making this whole thing work. It’s all fine and good if these councils and boards are driving these great plans, but if the frontline sales teams, and the teams down in the organization who support them, don’t get the same message, then the whole system can break down. So we’ve developed what we call a taxonomy, which is a clear and consistent vocabulary to ensure that everyone—in every country in which we do business—is speaking the same language. A simple example of this is our VSE process—which stands for “vision, strategy, and execution.” Everyone in the company understands how we define these three terms, and all the councils and boards are expected to develop a VSE framework for the objective or problem they’re trying to solve. You must need to realign resources quickly, given the speed at which you have to jump into new initiatives. How does that happen? Teaching people how to do a lot with a little is very difficult, especially during a downturn. Over the next year we may increase head count only nominally, and yet we have these 22 cross-company priorities that will, in theory, require a doubling of resources. So the first thing you need to do is build a culture that will take risks but then accept failures. People have to be able to identify a problem fast, work with the teams to course correct, and then, if necessary, change direction altogether. Second, people have to be extremely flexible when it comes to support and money—they have to learn to prioritize as a team, help one another, and then move on together. This is not about perfection or always asking for permission; both can really slow you down. We recently hired a brilliant chief technology officer. She has almost zero resources. The only way she can work effectively is to collaborate with the extended leadership team across the company, since she simply can’t deliver results by herself. Fortunately, we’re finding that our collaborative management is really working; it’s becoming viral. In the end, the teams are able to appropriately align resources to solve the problems, and the model allows them to move faster than ever before. One last question. You’ve been a CEO now for close to 14 years. How do you stay on top of your game, particularly in the technology world? My team says I’m like the Energizer Bunny: I just don’t slow down. When we said almost 16 years ago that we could change the way the world works, lives, learns, and plays, people thought it was a marketing statement. But it’s exactly what we’ve attempted to do since the beginning at Cisco, and it’s what drives me and many others to come to work every day and give it all our energy. The truth is that no one who is motivated and competitive like I am can stay on top of their game for that long unless the game changes and provides new challenges. The game has changed dozens of times since I started and now is played at a global level. That’s exciting to me. I love what I do. It’s fun, and it keeps my mind challenged.
