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How does Cisco predict market transitions?

Company trait of seeing changes three to five years out comes from internal start-up model.

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August 09, 2007 06:03 PM ET - 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 $1 billion business. Four-billion dollars of Cisco’s $6.3 billion R&D budget is essentially the group’s asset base with which to fund, staff and develop four emerging market opportunities per year.

Cisco seeds these efforts using what the company calls an “internal venture framework,” says Marthin De Beer, senior vice president of the Emerging Technologies Group.

“We see an opportunity and develop it internally in a start-up model,” De Beer says. “They are like start-ups but they are not spin-ins,” or separate companies started up by Cisco and then “acquired” once they reach 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 data centers. 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 is an inexpensive way to get the same result” as a spin-in, De Beer says.

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 virtualization 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 vs. buy decision is something that probably comes up more often in Cisco than an IBM,” says Dave Passmore, research director at The Burton Group. “An IBM would tend to pursue more internal developments whereas Cisco might always be thinking, ‘How much of this should we do ourselves?’”

Passmore says there are 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.

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