Demystifying Cisco’s Five Pillar Innovation Strategy

Large companies that are the leaders in their industry generally have a hard time maintaining the entrepreneurial spirit that got them to their leading position in the first place. On one hand you have relatively “new” companies like Facebook who keep growing and on the other, you have companies like Yahoo who are struggling in the new age of mobility, social and the emerging IoT wave. For a company with a market cap of over $130 billion, it is hard for a company like Cisco Systems and its peers to continue to innovate as they did when they first started.

Cisco Systems CEO Chuck Robbins responds to questions at 2015 WSJD Live on October 20, 2015 in Laguna Beach, California. FREDERIC J. BROWN/AFP/Getty Images

While innovation isn’t necessarily about structure, when it comes to large companies, you have to have some order around it or it just looks like executives and employees wasting time and having fun. Bean bag chairs, open offices, Starbucks and fine dining at work has to be balanced out with clear goals and accountability. That is why Cisco has developed a multi-faceted and structured innovation strategy to ensure that the innovative spirit is kept alive while having accountability.

Cisco’s strategy is structured into 5 pillars. Those five pillars are what you would expect if you’ve been engaged in any part of product or corporate strategy- build, buy, partner, invest and co-develop. While these pillars may not be unique, I believe the manner and comprehensiveness that Cisco Systems has executed on them is. I’ve spent some time drilling down into Cisco’s innovation engine and want to share some of my findings.

Build
To foster the culture of innovation, Cisco first and foremost has to build products and create their own IP (intellectual property). Cisco has over 70,000 employees and of them, 25,000 are engineers which ends up requiring $6.3 billion in R&D. While innovation success isn’t only determined by how much you spend, but rather by what you spend it on and what you do with it, the $6.3B dwarfs their networking rivals Juniper Networks, Brocade Communications Systems, Palo Alto Networks and Arista Networks. This amount of R&D spend indicates the seriousness that Cisco puts on maintaining market leadership and creating new and innovative products.

Cisco has 35% of their engineers working in an agile development environment

The company strives to breed a culture of innovation by implementing certain practices that foster innovation. Some of those practices include having 35% of their engineers working in an agile development environment and generally working on smaller, more agile teams. They also do this by supporting what are called “Alpha” projects that facilitate disruptive new technologies that drive innovation. As a result of these efforts, the company has been able to generate 19,000 patents globally, with 12,000 of those coming in the US.

Cisco also operates a technology investment fund which has already funded 18 projects. Such efforts are common among large tech companies as a way to influence smaller startups that could be potential acquisition targets as well as drivers of demand for their existing products.

Buy
That leads into the next part of Cisco’s innovation strategy, acquisitions and direct investments. Since 1993, Cisco has made 180 acquisitions which the company says has provided 1 to 2% of the growth to the company’s net profit margin. Cisco has acquired countless companies including WebEx, the well-known collaboration platform for webinars and teleconferences that runs on commodity hardware, as well as Meraki, considered one of the leading innovators in cloud-based wired and wireless networking hardware.

Since 1993, Cisco has made 180 acquisitions

These acquisitions are what allow Cisco to not only gain innovation in relevant verticals, but they also allow Cisco to acquire key talent that can allow them to innovate and continue to grow. The wide spectrum of acquisitions also means that Cisco already offers a diverse set of products to their customers and partners to enable them to create entire solutions that solve real business problems. The enablement of key strategic partners is actually an extremely important aspect of Cisco’s acquisitions and actually leads in to the next pillar of the company’s innovation strategy, and possibly the most important one.

Partner
As a part of Cisco’s innovation strategy, the company relies heavily upon creating solutions with technology and services partners. This comes directly from Cisco’s leadership in networking. These partnerships are vast and cover a broad spectrum of companies, which in 2014 amounted to $43 billion of Cisco’s annual revenues, or just under 90% of the company’s revenue.

$43 billion (90%) of Cisco’s annual revenues come from partnering

Some of these partners include some of the biggest enterprise solutions providers in the world like Accenture, CA Technologies, Citrix, EMC, Fujitsu, Hitachi Data Systems, IBM, Intel, Microsoft, NetApp, Oracle, Samsung, SAP, VMWare and many others. With these titans of the IT industry as partners, Cisco has over 700,000 channel resellers and engineers as partners. Some of these partnerships grow into closer relationships that eventually mold the companies together into joint development relationships.
The next two elements of Cisco’s innovation structure are, to me, the most exciting.

Invest
Sometimes Cisco doesn’t quite have a partnership with a company yet, but finds their technologies potentially beneficial for the industry’s or their own growth. Sometimes they want to hedge their bets in case the market or technology goes in a certain direction. In these cases, Cisco has created a $2 billion fund for investing into companies both large and small across the world.

Cisco invested in over 100 companies and funded 44 investments in 25 countries

To date, Cisco has invested in over 100 companies around the world and has funded 44 different investments in 25 countries. This aspect of Cisco’s innovation strategy perhaps may be the most overlooked, but in many cases these investments can allow companies to grow into partners that utilize Cisco technologies and solutions or facilitate the demand for them.

Co-develop
As a part of Cisco’s innovation culture, the company also participates in a lot of co-development with over 300,000 developers. The company’s goal is to reach a million developers by 2020 and 6,000 applications in one year. These co-development practices include Cisco’s Entrepreneurs in Residence Program, or EIR for short. The EIR program is a startup incubator that usually lasts for 6 months and is focused on helping startups to create disruptive technologies that help Cisco and the industry to innovate and grow. Some of these startups, 27 in total, get acquired by Cisco or others in the industry and help develop long-term relationships that facilitate Cisco’s strategy for innovation.

Cisco’s goal is to reach a million developers by 2020 and 6,000 applications

In addition to their EIR program, which has a footprint in 5 cities in 2 regions, Cisco has 9 IoE (Internet of Everything) Innovation Centers. These IoE centers are in tech hubs like London, Rio De Janeiro, Korea, Barcelona, Sydney, Tokyo and Toronto. One of the most mature IoE centers is the Innovation Digital Enterprise Alliance (IDEA) national incubator in London, which is designed to drive UK entrepreneurship and innovation in the areas of sensors, M2M, energy, transportation and IoE startups. I recently visited the IDEA incubator center on one of my most recent trips to London, which has a healthy 16 to 18 startups on-site at any given time and are driving business for Cisco.

Wrapping Up
I attribute all of this detail and information on their innovation program to Cisco’s new-found openness about how they innovate as a company and their desire show the industry how broadly connected the company is and how much better they play well with others. Cisco deserves some credit for the transparency, structure and breadth of their innovation strategy. Overall in the last six months, I have noticed a dramatic shift, an improvement, in how the company communicates and interacts with the outside world.

From my vantage point, the company now understands the opportunities and threats that await them in the future. The biggest opportunities are the software-defined data center and IoT, and the biggest threats are open networking. I have to give some credit to the new Cisco CEO Chuck Robbins. I have followed Cisco for decades and the biggest changes I noticed were when he came into power. And that’s a really good thing for Cisco.

To give a deeper look into how Cisco innovates and facilitates innovation with startups, I will be giving a deeper dive into London’s IDEA incubator and how Cisco is working with IoE startups to help change the industry and add to Cisco’s business growth. I spent hours with the center’s directors and the employees of startups housed at London IDEA.

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