Cerent’s management team also demonstrated a mindset that did not require, or desire, its own in-house manufacturing (Cerent had already adopted the outsourced factory model), and it was a company that had the technology to evolve well into the next decade [1] so future internal development costs would be low.
One rationale for Cisco’s rapid move to acquire Cerent could have been presaged by economist Ronald Coase, who wrote, “The Nature of the Firm,” an article [2] penned in 1937. Even though vertical integration was all the rage [3] during the interval between the two world wars, Coase sought to define those factors that either favored greater vertical integration or those that constrained it.
Coase quotes Mr. Maurice Dobbs in his seminal 1937 piece, “. . . The undertaker busies himself with the division of labor inside each firm and he plans and organises consciously [but] he is related to the much larger economic specialisation, of which he himself is merely one specialised unit.”
Cisco, focused on its core competencies and, although it acted as but one cog in the larger telecom machine, it was, just like the undertaker, conscious of the larger eco-system in which it operated. During the 1990s, Cisco and many other companies – such as Dell and the upstart startup Cerent – leveraged late 20th-century technologies that pre-World War II companies did not have.
Migrating from Frenzied to Focused
After it abandoned its frenzied acquisition spree of the late 1990s and early 2000s, Cisco opted to focus on innovation (with internal product development), brand and market management (leveraging its industry power), and advancing its IT resource strength.
How did Cisco do what companies in a bygone era could not?
Cisco exploited three key areas (that had since become available) in which to advance its minimalist headcount environment:
- Adopt a new management technique,
- Utilize global transportation networks, and
- Take advantage of advanced communication technologies, many of which it acquired or developed.
Modern transportation systems with their accompanying logistical support services brought manufacturing resources as far away as Asia to within a day of Cisco’s California home base. Consequently, Cisco contracted out as much of its manufacturing as it could.
And, the rise of the Internet, which Cisco advocated, along with the collapse of telecommunications costs (by simply cannibalizing old telco networks in favor of modern IP–based networks) made it practical to more tightly organize a global workforce.
It’s no wonder that Cisco acquired startups such as Cerent as fast as it could in the late 1990s.
[1] On December 9, 2010, Carrier Ethernet News reported, “XO Communications CTO Randy Nicklas declared that XO is not planning to buy anymore SONET moving forward as it rolls out a big network upgrade over the next three years. XO isn’t dumping existing SONET equipment in its network, mind you, but it is not continuing to purchase and embed it into its operations.” The story continued, “Most carriers really, really want to kick the SONET habit. Everyone, [including SBC-AT&T’s Chris Rice who tried to stop SONET purchases, in 2006], has vowed to stop buying the technology, but like any addictive drug, it’s hard to go cold turkey overnight.”
[2] The Nature of the Firm, R.H. Coase, Economica, November 1937, pp.386–405.
[3] “Given the existence of a robust base of suppliers and small innovators,” in the 1990s, “Cisco decided to cut loose from the parts of its business that were most difficult to expand organically – namely manufacturing and R&D.” Cisco opted to forego vertical integration, while at the same time, adds Barry Lynn, adopting “a strategy of acquiring a closely related set of products, much like General Motors in the 1910s or General Foods in the 1920s. The result was that managers, over the course of five years and on a global scale, were able to capture for their company the de facto title of General Internet.” It turns out that Cerent fit both of these criteria – no in-house manufacturing nor internal R&D – and so it became a no-brainer to acquire this upstart startup, solely for these reasons.
Source: End of the Line: The Rise and Coming Fall of the Global Corporation, Barry C. Lynn, 2005, Doubleday, New York, chapter 5.