Robert Wuebker, Ziv Navoth, Bharat Rao, Mel Horwitch and Nina Ziv

Institute for Technology & Enterprise

Version 2.0 May 1, 1998

Institute for Technology and Enterprise

55 Broad Street, New York, NY 10004

Cisco's Acquisition Approach

    Cisco's "Acquisition & Development" Strategy

    Zeroing in On Intangibles

Moving into new markets

The Move to End-to-End Internetworking Solutions

Reorganizing for the New Strategy

The Increased Importance of Strategic Alliances

Cisco's "Networked Commerce" Initiative

    Cisco Connection Online

    Networked Commerce in Action: Cisco Connection Online

    Overview, Architecture and Infrastructure

    Electronic Commerce Services

    Web-Based Technical Support

    Cisco's Approach to the Extended Enterprise

    Results of Networked Commerce Initiative

    Networked Commerce Plans in 1998

Future Directions

Cisco Systems is one of the most successful companies in the global internetworking space. From its humble beginnings at Stanford University, it has risen to play the leading role in shaping the infrastructure which underlies the vast network known as the Internet. It has outstripped the competition in a number of markets. Since shipping its first product in 1986, the company has grown into a global market leader that holds No. 1 or No. 2 market share in virtually every market segment in which it participates. Since becoming a public company in 1990, Cisco's annual revenues have increased from $69 million in that year to $6.44 billion in fiscal 1997 – nearly one hundred-fold in seven years. Investors who bought $10,000 worth of stock when it went public (in February 1990) now own shares worth over $3,000,000.

Reflecting the general mood of informed press and industry analysts, David Joachim states in a 1997 TechWeb feature, "Cisco has sped so far out in front with its electronic commerce efforts that the competition can’t even see its dust anymore. And it’s still pushing the pedal firmly to the floor."

Cisco was founded not in a garage but in a living room. Wife-and-husband team Sandy Lerner and Len Bosack worked in two different departments at Stanford University. They wanted to send e-mail to each other; however, the departments were on two different operating systems which did not "talk" to each other. To remedy the situation, they built a router, a "translator" that acted like a mailroom, opening packets and distributing the data. The software allowed the data to be read by any kind of computer on the network, even across different operating systems.

The year was 1984 and the Internet had 1,000 computers connected to it. In 1986 the company attended its first trade show and shipped its first product – the AGS Router. In 1987 the company received its first, and only, venture capital funding from Sequoia and issued its first coffee mug. John Morgridge was named as the company’s CEO in 1988 marking Cisco’s first move to professional management.

On February 20, 1990 Cisco makes its first IPO. The World Wide Web is launched and Cisco, with over 200 employees, finishes the year with over a million dollars in profits. Nihon Cisco, the company’s first subsidiary, was opened in 1992. The company hires Pete Solvik, an Apple Computers veteran to be its Chief Information Officer. In his Live Keynote Address at Comdex/Fall '97 CEO John Chambers noted: " If you take a look at the point in which Cisco broke away from its competitors in the networking market, you can see that it was in 1992. In that year Cisco stopped treating its IS department as an expense center and started treating it as a strategic advantage."

In 1993, along with Edward Kozel, Cisco's Chief Technical Officer, Morgridge and Chambers launched Cisco on its present strategic course of rapidly acquiring and assimilating small local companies with market-proven technologies that complemented Cisco's own ever-broadening line. It makes it first acquisition in a series of 24, buying Crescendo Communications Inc., a privately held networking company that provides high-performance workgroup solutions.

Fueled by revenue generated by router sales Cisco diversified into other sectors of the networking equipment market. In 1994, with revenues over $1billion Cisco begins offering online product description and bug alert, launching its Cisco Connection Online (CCO) web site. In 1995 the company appoints John Chambers as president and CEO and moves into the telecommuting solutions, acquiring 4 companies that offer remote access to networks.

Cisco ships its 1,000,000 product in 1996, and surprises the networking industry with its purchase of WAN (wide area network) switch leader, StrataCom, for $4.5 billion.

In 1997 Cisco hires its 10,000 employee, tops the $1 billion in profits mark and begins supplementing it’s A&D (acquisition and development) strategy signing multi-tiered partnerships with Alcatel, GTE, HP, Intel and Microsoft.

Today, Cisco considers itself to be in the "anything that builds a network" business. Cisco products encompass a broad range of networking solutions, including routers, LAN and wan switches, dialup and other access devices, SNA-LAN integration solutions, Web site management tools, Internet appliances and network management software. The thread that ties these products together is the Cisco IOS™ software platform, which delivers network services and enables networked applications. Cisco's core products - routers, LAN and ATM switches, dialup access servers and network management software - are integrated through Cisco's Internetworking Operating System software. With a market share of 85%, routers still account for almost half of Cisco's revenue, yet local area network and wide area network switches are moving up.

Circa 1970 – the Precambrian Age of internetworking technology – most corporate networks were installed by IBM, usually using a proprietary networking technology dubbed SNA. In the mid-1980s a new internetworking technology was developed called IP (Internet Protocol) which was widely adopted at universities and research centers around the world in large part because the technology was included free with the Unix operating system. The Cisco IP router became the instant darling of networking staff in all major universities in the United States, and by 1990, Cisco routers were installed in the networks of most major academic institutions. Interestingly, the spread of routers was by word of mouth only, with engineers recommending Cisco routers to other engineers in other universities.

The explosion of Internet use in the early 1990s, fueled by the World Wide Web, gave IP networking a big boost and most importantly, the protocol became an integral part of the backbone of the public Internet. Companies quickly realized it made little sense to use IP to connect to the external world via the Internet while continuing to use proprietary such as SNA to connect users inside the company. The switch to internal networks built on the IP standard gave rise to Intranets; internal networks based on this protocol. As corporate Intranets and the global Internet took off, Cisco’s profits soared.

In 1993 Cisco was in negotiations with Boeing for a substantial order covering routers, access devices and switches. Boeing found Cisco's offer interesting, but not compelling; in fact, Boeing was considering a solution composed of technology pieces, cobbled together by their internal IT department or a third-party systems integrator. If Boeing chose to assemble the components, Cisco routers -- expensive and feature-rich -- would be rejected in favor of Crescendo's low-cost, less functional products. Chambers stated that in the midst of negotiations, Boeing indicated that Cisco would not get the contract unless they worked with Crescendo products -- either through partnership or purchase.

For Chambers -- and Cisco -- this turned out to be a defining moment. The day before, Ford Motor Company had told Cisco that it was going to choose a new fast Ethernet LAN technology over Cisco routers -- a technology in which Crescendo specialized. At that time, Cisco's management was pondering a move into low-end LAN equipment through the acquisition of established hub makers Synoptics or Cabletron. Chambers, Morgridge and Kozel decided then that they not only had to listen to their customers, but that a strategy based on the purchase of smaller, more innovative software companies made more sense than buying bigger, more established ones. In this way, Cisco's so-called acquisition and development process was born. Cisco purchased Crescendo for $10 million and began to transform itself from a router company into a full line network supplier.

Cisco has turned A&D into a business process, a means of providing it with expertise and technology without having to carry on expensive -- and unproductive -- internal research.

Cisco identifies ideal acquisition targets as engineering-rich firms, which are number one or number two in their market. Post-acquisition, Cisco incorporates the technology of the new company into its own and supplements it with its extensive and sophisticated marketing and support network. The results thus far have been quite positive; in several instances, Cisco has stopped developing its internal products when the acquired company has created a superior alternative. The strategic acquisitions have allowed Cisco to grow into several markets, and to instantly become an important player in each of those niches. At the same time, the acquisition of several companies in a very short time poses a challenge when the business processes and operations of the acquired companies have to be brought in line.

Cisco's company-buying operation is thorough, systematized, and above all extremely efficient. Previous acquisitions have moved through talks, closure and contracts in less than three weeks -- less time than it takes the average Fortune 500 organization to re-order its supply of ballpoint pens. Cisco's effectiveness lies in identifying the right candidates for acquisition and systematically weaving together critical pieces of a comprehensive collection of products from Ethernet switches to asynchronous transfer mode and wide-area devices. Testament to Chambers’ tactics is how well the diverse acquisitions fit under Cisco's corporate umbrella. Chambers is quick to credit Cisco’s success to not marrying equal-sized competitors (as rival 3Com and Bay Networks are each attempting to accomplish) but it is clear that Cisco considers – and finds a way to measure and monitor – a number of intangible issues associated with acquisitions.

Issues like shared culture and geographic proximity play important roles in acquisition choices.

                                                                                                                            - John Chambers

Engineering-rich firms are sought out as much for future products as existing offerings; as a result, it's especially important that Cisco retain the engineering talent that it co-opts with each acquisition:

"If you want to know whether [an acquisition] has been successful or not, ask how many of their engineers are with the company two years later. Whether you pay $500,000 or $2 million per employee, you'll find that with most of the acquisitions in the industry, 30% to 50% of the people are gone two years later. Ours is single digit. So we've shown an ability to do it successfully."

Chambers expects to know within six to twelve months whether an acquisition will take; he does the due diligence himself, checking with key accounts to determine how they feel about the changes.

In addition, Chambers looks at overall revenue, and market share; interestingly, he focuses on the employee retention rate by department, by position, by level of management.

Cisco targets companies with similar visions and cultures; a critical benchmark for Chambers is the distribution of employee stock options. A full 40% of all Cisco stock options are in the hands of individual employees without managerial rank; Chambers feels that this is a critical factor in understanding how management feels about the value of employees, and the relationship between employees and management. In 1997, Cisco had only a 6% voluntary attrition rate among employees, despite the rate of growth and spate of acquisitions.

For the last several years, Cisco has followed a strategy of acquiring several smaller networking companies to move into new markets and new technology areas. Its most spectacular acquisition to date (circa early 1998) was that of StrataCom, a manufacturer of ATM switches. Cisco has also made other acquisitions in the area of Ethernet hubs (Kalpana) token rings (Noshiba), modems (Telebit) Internet software (TGV Software), security software and firewalls (Network Translation Inc.) and in critical new areas of networking technologies such as Gigabit Ethernet (Granite Systems) and ATM (StrataCom). Other larger networking companies have pursued a similar strategy, forming alliances with or acquiring other companies in an attempt to match Cisco’s pace of growth and depth of products. For example, the acquisition of US Robotics by 3Com made it the second largest networking company after Cisco.

Cisco plans as many as 10 more acquisitions in 1998, mainly in the network management arena. Chambers has stated publicly that as many as half of Cisco acquisitions next year will be in the area of data, voice, and video integration.

In the internetworking field it is extremely difficult to predict with any degree of certainty which innovations will succeed, and which ones are just a passing fad. If a technology shows the promise of business success, Cisco is quick to buy into the technology by acquiring a smaller company; however there are several areas where the chances of success may not be that clear. In such environments Cisco has embarked on a policy of minority equity investment, acquiring a small share of the company and waiting for market forces to determine the outcome. If a market area appears to be promising, Cisco may eventually move to acquire the firm.

The minority investment strategy allows Cisco to hedge its bets in a field of uncertain futures, rapid innovations and market turbulence. It's also extremely cost-effective; in most cases, the companies tend to be startups, with equity investment in the form of stock and seats on the Board of Directors.

The company seems oriented outward, toward other companies, competitors, and partners. With its pattern of acquisitions and alliances Cisco clearly has little tolerance for NIH syndrome, the taboo in many companies against technology that was ‘Not Invented Here’. This also seems to apply to it technology infrastructure as well. Almost half of Cisco’s internal information needs are outsourced, along with 70 to 80 percent of its manufacturing needs. Cisco claims to retain control over the entire process by tying into the subcontractor’s computer system and providing the diagnostic and testing tools for each stage of manufacture.

There are challenges ahead, of course. By April 1998, Cisco had acquired 25 companies for a total price tag of more than $6 billion. For starters, thanks to all these acquisitions, Cisco is now large enough to offer competitive solutions to the same problem. Competition between internal groups can be a good thing, but  it can also backfire if a company spends too much time on redundant products or internal political infighting. A prescient example: When Cisco acquired ATM maker StrataCom in 1996, it posed a direct threat to its own high-end router division. It is certainly possible that Cisco could carry the diversified product strategy too far, sending a mixed message to the market.

In January 1995, Chambers began to hear from Cisco’s largest accounts that they wanted single-vendor servicing in the networking arena. They felt that an end-to-end networking solution would allow them to reduce the total cost of ownership of an entire network by including calculations for installation, maintenance and support, not just the cost of the individual components.

Chambers was skeptical, arguing that end-to-end solutions resembled the monolithic approach of ‘old guard’ information technology firms from two decades ago. He thought that only 10% of his customers would want such a solution.

Cisco customers disagreed, arguing insistently for a more comprehensive solution across multiple components. Because of the newness of the technology, these firms argued, companies need the same kind of help understanding it, deploying it, managing it, as they did in the early days of the computer revolution.

Chambers’s’ skepticism in 1994 about his customers’ needs was clearly wrong. In early 1998, surveys conducted by Cisco have shown that 50% of the Fortune 500 is actively considering going this route.

Today, Chambers is sanguine. "Of course, when I thought about it, for a short period of time in any emerging technology marketplace, there is a huge advantage to being close to your vendor." Eventually, customers will acquire enough internal knowledge and expertise to feel comfortable loosening the vendor ties. Chambers is quite aware of this, although he believes this won't happen for three or four years in the networking arena.

Managing Cisco’s rapid growth requires rapid – perhaps continuous – restructuring. In late 1997 Cisco re-organized its six business units; today, the Cisco Executive Team directs the activities three lines of business. Chambers reorganized Cisco into a line-of-business structure in order to focus more strongly on a customer-oriented rather than a product-oriented strategy and to deliver on his Seven Strategic Initiatives:

1. Become a leader in providing end-to-end networking solutions.
2. Succeed in each individual line-of-business segment targeted (service provider, enterprise, small/medium businesses).
3. Forge strategic partnerships.
4. Spearhead data/voice/video integration efforts.
5. Recruit, retain and develop the top 10% of technology employees.
6. Become number one in sales of high-end networking products.
7. Promote Cisco's IOS as the leading network services architecture

The tight, clean and ordered approach of the new organization belies the challenge of attempting to corral the massive growth Cisco has experienced as a result of attempting to keep up with demand while engaging in a spate of acquisitions. "The structure of Cisco," says Don Listwin, "is directed chaos. It's kind of like the Internet - people are gluing stuff on all over the place."

"The networking segment of the industry is enjoying the biggest growth rate in the history of high technology," said Selby Wellman, Senior VP of Cisco Business Units "We can't get the products out fast enough, so we had to partner." Wellman’s pronouncement reflects another major aspect of Cisco’s strategy – forming alliances. Indeed, alliances are also a critical part of all the firms in this sector. For example, alliances have been formed between IBM and Bay Networks to counter the growing influence and size of Cisco after its string of recent acquisitions.

CEO John Chambers has recently stated that developing successful strategic alliances is a top priority for Cisco in 1998:

These partnerships, insists Chambers, are not just alliances, but marriages that will tie the companies together over the long term, to their mutual benefit.

Analysts agree, indicating that they believe that partnering is indeed the next theater of operations for Cisco. The reasons are numerous; with the technology maturing and service, support and branding increasing in importance, Cisco is seeking to leverage the channels, technologies and branding of their partners.

Cisco has chosen to take an inclusive approach to the idea of "electronic commerce". Chambers sees e-commerce as an oft-used but extremely limiting term. "Electronic commerce is too narrow because it implies point-to-point transactions, and fails to address the rich fabric of relationships enabled by networking."

Cisco believes that being connected is not enough, nor is electronic commerce enough; businesses must be networked to all their important constituencies. Cisco's preferred term is Networked Commerce. Cisco’s role in a networked commerce environment is to provide its customers and partners with end-to-end solutions to conduct sales transactions with customers, suppliers and key partners.

Cisco’s own Cisco Connection Online web site is their Networked Commerce showcase. Cisco has designed a comprehensive, powerful, Internet-based Networked commerce ordering application that enables its direct customers and partners to place and track orders for Cisco equipment and services. In addition, Cisco’s suite of supporting applications help customers and partners manage the entire ordering process.

In 1991, Cisco’s support center was getting 3000 calls a month, projected to reach 12,000 by 1992.

The number of employees needed to take support calls from 3000 to 12,000 in 1992 would have taken the whole head count approved for the entire company. It was clear that this couldn’t be done, and that customers would have to pay the price. Cisco opted for another solution, building a customer support system and putting it online. Instead of going from 3,000 to 12,000 customer interactions, they went from 3,000 to 700,000, saving the need to hire 1,000 engineers. Cisco found that in over 50% of the cases, customer could find an answer to their problem by using the online database. Interestingly enough customer satisfaction actually rose and was rated higher for the online system than the voice response.

In 1994 a group of Cisco employees was looking for a bulletin board application that could be accessed through the Internet. They chose a free software called Mosaic, which ended up being the precursor for Netscape. Later that year, Cisco launched its online initiative, dubbed "Cisco Connection Online".

Integrating "networked commerce" into an existing sales and marketing mix goes well beyond simply selling products or providing an efficient way to offer service and support. Cisco believes that its approach to networked commerce also broadens available markets. The result is better business interactions that establish heightened connections between companies and their constituencies. "We're using our Intranet and the global Internet to link customers and partners to our internal business systems via familiar Web technologies," says Chris Sinton, Cisco's Director of Cisco Connection. "Our objective is straightforward: to streamline business processes and speed up access to critical information and services."

Cisco argues that networked commerce extends well beyond the Internet. CD-ROMs, for example, have become an extremely popular way of presenting tremendous amounts of information, especially to reach people who may not have easy access to online services. Like the Internet, CD-based information can be accessed interactively in a way that allows users to quickly find the specific data they need from among the encyclopedia of information that can be contained on a single compact disk. According to Cisco representatives, networked commerce takes much of the complexity out of everyday business interactions. It reduces lead times, saves money, and enhances productivity, giving new meaning to the "faster, better, cheaper" model that forms the underlying principle at the foundation of today's global business arena.

Cisco's own web site is a powerful proof of concept for networked commerce. After three years of development Cisco has built an electronic commerce web site that allows its 45,000 customers around the world to gain real-time information on price, availability, configuration requirements, ordering, invoice status and validation, and finally shipments of complex internetworking products. Cisco Connection Online was designed to serve the needs of prospects, customers, partners, suppliers and employees.

CCO has 10 staffers dedicated to the Web effort, along with 90 departmental employees who spend a portion of their working week on the project. The site runs mainly on two Sun Enterprise Server 5000 systems, each with eight CPUs, 10 gigabytes of storage, and running Sun Solaris and Netscape Enterprise Server 2.01. There also is a dedicated fail-over server configured the same way, along with an Oracle database configured to provide three layers of redundancy.

On the back end, the servers are linked via custom-developed software to an Oracle enterprise resource management system. Mirror sites, positioned to improve performance for users overseas, run only the site's static HTML content. They are set up in Australia, China, France, Japan, and Korea, along with one-hop worldwide service hosted by ISPs in Amsterdam and Hawaii.

In its first six months of operation, the Internetworking Product Center – the online component of Cisco Connection Online -- processed more than $100 million in orders. Cisco continues to see dramatic increases in the percentage of orders received through the application. The company also estimates that the combined Cisco Connection Online applications will save $270 million a year in business expenses. The Internetworking Product Center assists in configuring equipment leading to shorter delivery intervals and more accurate orders than those typically received through traditional sales methods.

Ordering from the Internetworking Product Center requires a complex registration and validation process, including identifying the individuals in the firm authorized to purchase Cisco products direct from the web (see the complete Networked Commerce Agreement for detailed information). Cisco's on-line ordering software -- a 'commerce agent' called MarketPlace -- links to its network of suppliers and manufacturers. Once an order has been placed through MarketPlace, it's automatically routed to the proper suppliers and manufacturers who order the right parts and automatically update the shared manufacturing schedule. Members of Cisco Connection Online can also check current prices, lead times and status of current orders, request software upgrades and extract reports to integrate with billing or purchasing systems.

Cisco officials estimate that it now takes 15 minutes to 60 minutes for a buyer to enter a clean order through Cisco Connection Online and for Cisco to complete the process by funneling it into its back-end system for production. The same paper-driven process took days or weeks when its own sales force and support staff as well as the purchasing managers of its customers were mired in paperwork seeking to process an invoice.

In contrast, Cisco's Configuration Agent is an open section of the Cisco Connection Online web site, allowing guests and members of the Cisco purchasing community to configure selected Cisco products.

The Cisco Configuration agent provides customers with a step-by-step process for selecting a router, setting and reviewing configuration options and retaining the configuration information for later purchase (as mentioned previously only Cisco Connection Online members are permitted to order directly from the web). The Configuration Agent is extremely easy to use; an online interactive demo and context-sensitive help are available at any point to help guide first-time users through the configuration process. Users can select a particular configuration setting from a myriad of options and validate it without having to perform a check on all settings across the entire product; this enables users to get rapid feedback and streamlines the configuration process.

If a particular configuration is invalid the Configuration Agent will display an error message, describe the error and recommend a potential solution.

Once a product has been selected and configured, customers can automatically forward the configuration information to an e-mail address (in many cases, the person completing the configuration must provide the information to the in-house purchasing officer in order to generate a purchase order). Users can also download the information in HTML or text format for use at a later date.

In addition to commerce and configuration functionality, Cisco also provides technical assistance to its customers online. Cisco argues that the support sections of Cisco Connection Online dramatically improves the support process, speeding resolution of problems and providing immediate global access to Cisco’s support systems and engineers. Over 20,000 support cases are opened or queried each month; almost half of all customer queries in the United States -- including those by core customers like GE and Sprint -- are handled through the Cisco Web site. This helps the company avoid backlog of telephone-based support calls.

According to Cisco, 60 to 70 per cent of all inquiries that come into Cisco Connection Online result in users finding an answer. Registered customers can log on anytime to access various tools from the company's databases -- from intricate details about a particular product or networked environment to bug fixes and software updates. A key feature of Cisco Connection Online is its tight integration with the Cisco Intranet, which spans 150 locations worldwide. Through Cisco Connection Online, Cisco customers and partners download more than 70,000 pieces of software each month, which comprises 90% of all software sold by the company. Users also receive interactive guidance in selecting software, simple interfaces for downloading, extensive documentation, proactive defect alerts, as well as access to updates and new releases.

Cisco customers can also forward procurement information to their own employees for modification and approval via the site's e-mail features. In addition, these customers can access product specs, join discussion forums, receive bug alerts, and download software patches and tools.

Cisco's support staff constantly updates the site, so that they remain free to focus on the questions for which they do not yet have an answer. ``Without CCO, my staff would have to be about three times larger to handle the same workload,'' Mr. Jim Abrams, Vice President of Customer Support states in a white paper available at the site. By obviating the need to print and mail documentation, the company expects the online service to save it as much as $180 million in production and distribution costs each year. Cisco's approach to delivering support services on-line has been a critical component of its ability to manage its rapid growth.

Cisco argues that suppliers connected to its site have a competitive edge over other firms, potentially leading to increased sales. Cisco believes that participating firms are better able to manage manufacturing schedules, improve cash management and respond faster to changes in demand for Cisco products. As of January 1997, over $80 million in purchases were processed electronically per month. Of course, the benefits of streamlined communication with suppliers benefit Cisco as well. As a customer, Cisco has gained real-time access to supplier information, experienced lower business costs in processing orders (an estimated $46 per order), improved the productivity of its employees involved in purchasing (78% increase), and substantially reduced the cycle time for orders.

Deploying web-based applications, such as EDI over the web, enable Cisco suppliers to become partners in the ordering, manufacturing and fulfillment process. These issues are especially critical for Cisco; almost half of Cisco’s internal information needs are outsourced, along with 70 to 80 percent of its manufacturing needs. Pervasive links to suppliers and partners enable Cisco to retain control over the entire process by tying into the subcontractor’s computer system and providing the diagnostic and testing tools for each stage of manufacture.

Internet-based applications increase Cisco's flexibility with its suppliers and manufacturers, decreasing the cost of linking together Cisco, its manufacturers, and distributors. At present Cisco sets up subcontractors as an extension of the Cisco factory. For example, Cisco Connection Online allows distributor Avnet Inc., (Great Neck, NY) and contract manufacturer Jabil Circuit Inc., (St. Petersburg, FL) to view Cisco's demand forecasts through a direct link to its manufacturing resource planning systems. These firms have the ability see orders almost as soon as Cisco's customers place them.

According to analysts at Forester Research, Cisco's real contribution to electronic commerce is not its web site per se but the firm's ability (and willingness) to manage the flow of demand information through to its suppliers. The enterprise program essentially treats Jabil and Avnet as Cisco employees though it is not directly linked to the online order system. Inside the Jabil plant, Jabil takes parts from Avnet and its own stockrooms as needed to make the Cisco boards. On a weekly basis, Jabil gets an updated 12-month demand forecast, which gives it a window on how to allocate its own production capacity. Once assembly is completed, the computer system prompts Cisco to pay for the parts used.

Cisco wanted to combine the expertise of distribution and contract manufacturing; in addition, Cisco wanted to have direct relationships with suppliers yet didn't want to manage those relationships. Cisco's approach to the Internet is an example of how one firm has used internetworking to not only conduct business with its customers but also to recast its relationship to its suppliers, partners and distributors.

In his keynote address at Comdex in November 1997, John Chambers said Cisco would yield annualized savings of $250 million by capitalizing on Cisco Connection Online as well as other Internet and intranet technologies the company uses. This figure has been updated recently to reflect new data, and Cisco now claims that they expect to save an estimated $270 million. All told, Cisco Connection Online now claims 80,000 registered users, 35 million hits a day, and it handles about 52 percent of Cisco's sales, which could translate into $4 billion worth of orders for 1998. The site itself is constantly updated based on end-user feedback by Cisco constituents.

Beginning in fall 1996, Cisco attempted to link its own Internet commerce efforts to the emerging market for web-based goods and services. In its March ‘97 issue, Fast Company interviewed Pete Solvik, Cisco’s Chief Information Officer:

"We're now booking $10 million of business per month on the Web. Our goal is to surpass $150 million per month--25% to 30% of the company's total sales. We have a business plan to get there within the next year."

In the 14 months that followed, the networking industry’s dominant equipment supplier shifted 52% of its sales to the World Wide Web. In early 1998, Cisco’s Internet commerce efforts generated over $10 million in business per day, or a run rate of nearly $4 billion.

In 1998, Cisco aims to expand its web-based business transactions on two fronts. First, Cisco has targeted its existing customers who have not purchased Cisco products online. These customers have shied away from online ordering due to the lack of back-end integration with their own procurement and accounting systems. Cisco plans to develop and deploy software that operates at the customer site -- independent of Cisco’s own web site – which would provide baseline order tracking and routing functionality. Cisco believes that successfully meeting the specific needs of these customers will enable web sales to account for nearly 60 percent of company revenue by the end of second quarter 1998. This strategy – a top goal for Cisco – is taking hold just as the staggering success of Cisco Connection Online is beginning to be understood.

The second targeted group Cisco has targeted for 1998 is the small and medium business owner. Cisco has acquired essential internetworking technology for this market; Cisco's March 1998 acquisition of NetSpeed, an Austin-based company specializing in end-to-end solutions for small businesses and consumers, serves as an example and a key indicator as to Cisco's overall commitment to this strategic direction. Cisco can now provide a high-speed home connection to anyone running Windows 95 or Windows NT -- an important component of both small office and small business internetworking. Cisco's March 12, 1998 acquisition of Precept Software allows Cisco to begin to effectively deliver broadcast-quality voice and data traffic over an Internet connection using NetSpeed hardware. Cisco's approach to end-to-end networking for small businesses and consumers is beginning to take shape.

Where will all of this lead Cisco, its customers and its investors? Informed press, analysts and industry watchers certainly expect Cisco to continue to grow extremely fast -- at the very least, matching the pace of the exploding internetworking market for the next three years. While it may lag in some areas, it will attempt to maintain a complete portfolio of networking equipment.

In the same way that Cisco will be catapulted forward by the continued demand for networking products, it may also be challenged by the drop in prices that the increased volume and competition engenders. Analysts argue that Cisco the company -- and the internetworking industry as a whole -- is likely to become less profitable as it develops the characteristics of the PC market. Perhaps the biggest challenge that Cisco faces, as networking becomes a commodity, is how to continue to enjoy the margins that it has had in recent years…or re-invent itself yet again to better cope with the changing market environment.

A second critical issue stems from Cisco's strategic decision to re-invent itself as a marketing-oriented company, rather than an engineering company. As with all companies, Cisco owes its extraordinary growth largely to sound business judgement, but also in part to luck. That cannot be guaranteed in the future -- nor can the sudden technological shifts that have provided waves of growth.

For Cisco, this means that gains in market share are more likely to be due to its ability to leverage its channels, its brains and manufacturing efficiency. The same applies if it wishes to keep its margins. Cisco has traditionally been a sharp engineering company, filled with bright engineering minds. But will it be good at this kind of blue chip marketing - where, for example, it may need to use its domination in some sectors to keep up sales or to fend off rivals? Chambers seems to think so. "We want to do in the [network] industry what IBM did in mainframes and Microsoft did in PCs."