Chapter 2. New & Improved and The Next Big Thing: Sustaining and Disruptive Innovation

When people think of innovation, they tend to envision life-saving medical devices or advanced solar-powered energy panels. Laundry detergent, however, isn’t something that typically leaps to mind.

But it does to the men and women of Procter & Gamble (P&G). Their new liquid laundry detergents may never win FDA approval or push the envelope of photovoltaic materials, but they are transforming the way Americans wash their clothes and could someday do the same for consumers in other countries if P&G has its way. That’s a big deal considering that the worldwide market for textile cleaning products is expected to grow to $43 billion by 2013, according to Datamonitor.¹ P&G already controls 26.1 percent of the market—the largest share of any single manufacturer—and is now poised to grab even more thanks to its new, disruptive detergent products.

The secret to P&G’s influence is “laundry detergent compaction,” a technique for compressing ever more cleaning power into ever smaller concentrations. In the early 2000s, P&G perfected a technique that could compact two to three times as much cleaning power into a liquid concentration. That was a remarkable breakthrough that has led to a change not only in consumer shopping habits, but also a revolution in industry supply-chain economics. Here’s why.

Consumers love concentrated liquids because they are easier to carry, pour, and store. Retailers, meanwhile, prefer them because they take up less floor and shelf space, which means higher sales-per-square foot—a big deal to Walmart, Target, and others. Shippers and wholesalers, meantime, value reduced-sized products because their smaller bottles translate into reduced fuel consumption and better warehouse space utilization. And environmentalists favor the products because they use less packaging and produce less waste than conventional products.

When first unveiled, company watchers wondered if consumers would be put off by the reduced-sized packages of Tide, Gain, Cheer, and similar products. Their concerns were for naught as consumers snapped them up. P&G was so pleased by the reception that it decided to replace all of its liquid laundry products with compacted versions in 2008. They helped drive sales of fabric and home care products up 6 percent in 2008—a significant jump in a mature market and a down economy that added hundreds of millions to P&G’s bottom line.

So how does P&G, a company with more than 170 years of experience behind it, continue to be innovative? The answer is that the Cincinnati-based company has a passion for innovation and a proven process, too.

“We innovate across more categories and on more leading brands than any other consumer products company,” says former P&G CEO A.G. Lafley.² P&G does that, he says, because the company has a broader range of science and technology than its competitors and invests more in innovation and marketing support than any other consumer products company. This helps P&G deliver an “unrelenting stream of innovation with systematic discipline,” he adds.³

What distinguishes P&G isn’t the mere size of its investment innovation—although it does invest a greater portion of revenue to R&D than rivals Kimberly-Clark and Unilever—but its approach. P&G is one of the few organizations with a process for pursuing both disruptive and sustaining innovation simultaneously. That gives the company ongoing momentum in the categories in which it currently competes, and lift for entering adjacent markets or transforming existing ones. That’s something few companies enjoy because they cannot do both. Because of commitments to existing customers, pressure from investors to deliver short-term results, or even wariness over disrupting existing revenue streams, companies are often reluctant to invest in innovations whose payoff horizons can’t accurately be determined.

When this happens, companies find themselves unable to pursue “the next big thing.” It’s a problem many don’t even know they have and yet is perhaps one of the biggest ones they will ever face. This chapter illustrates the differences between disruptive and sustaining innovation, makes the case for doing both, and outlines Cisco’s pursuits.

Let’s start with basic descriptions of the two distinct types of innovation and what they have contributed in various industries.

Sustaining Innovation: Prolonging Today’s Profits with Yesterday’s Bold Ideas

Sustaining innovations are the relentless improvements necessary to build on past successes. They make existing products better, faster, or cheaper in the eyes of customers by offering new features and functionality. Honey Nut Cheerios, Boeing’s stretch version of the 767, and the all-new Honda Accord are all examples of sustaining innovation.

In addition to providing new product benefits, sustaining innovation protects customer investments, builds employee morale, and helps satisfy investor demands. While sustaining innovations are often developed in response to competitive threats, many often wind up being leapfrog advancements, nonetheless. The zip-locking-style plastic sandwich bag brought to market by Dow Chemical was a sustaining innovation patterned after a pencil bag developed more than a decade earlier. The zip bag eventually overtook flip sandwich bags and now dominates the market.

Disruptive Innovation: Making New Rules for Tomorrow

In comparison to these advances, disruptive innovations and inventions enable companies to create new markets or significantly alter existing ones. They are the rule breakers and the game changers that rivals fear and laggards dread. They make kings of newcomers and paupers of hangers on. They do it by introducing capabilities and functionality never before available and by solving problems that previously went unanswered. Disruptive innovations change where or how value is created and alter the fundamentals of business. When they hit, they have a profound impact on any industry they touch.

Consider the impact of the iPod and iTunes on the entire music industry. Apple’s technology drove many consumers to stop buying CDs and instead embrace the disruptive innovation that replaced them: digitized music sold as unglamorous, often inferior-sounding, but infinitely more convenient MP3 files.

As a result of its power, disruptive innovation paves the way for new growth and provides perhaps the only reliable basis for inserting an organization into existing markets where barriers to entry are high and established leaders are entrenched.

The point is that both disruptive and sustaining innovations are vitally important. But it is difficult to pursue both at the same time. Doing so often creates tension in the form of disputes over talent, resources, and priorities. Leaders often find that the two forms of innovation require very different oversight and metrics, as well as best practices. As a result, many pursue one form of innovation over the other. But that only results in lost opportunity. For example, Polaroid, once one of America’s most storied innovators, filed for bankruptcy in 2008. The company that made instant gratification through photography possible was upended by a disruptive force itself: digital imagery. By clinging to film and outdated cameras, the company sealed its own fate and lost out as digital camera makers took over. Polaroid did unveil a line of digital cameras in 2008, but it’s unclear whether the company will ever be the innovative force it once was.

Polaroid isn’t the only company to falter because of an inability to produce both sustaining and disruptive innovations. Parallel examples can be found in an array of industries including automobiles, airlines, clothing and retail. What’s amazing is the number of instances in which corporate giants have been out-maneuvered by smaller, more nimble players, despite owning some of the same disruptive ideas that eventually upended them. Technology giant Motorola, for example, missed two critical product transitions in the mobile phone industry. In the early 1990s, the company was slow to evolve its product line from analog to digital devices, opening the door for Nokia to establish itself as the new market leader. A decade later, Motorola stumbled again when mobile phones shifted to fully upgradable, software-based smart phones, providing an opportunity for Apple, Blackberry, and others to take additional market share.

Why can’t big companies simultaneously produce disruptive and sustaining innovations? It is a vexing question that has been studied endlessly in the past decade, especially since the publication of Clayton Christensen’s 1997 best-seller, The Innovator’s Dilemma. In that book, Christensen chronicles the struggles of big, successful companies that spend their time and energy on existing products, revenue streams, and profits to the near exclusion of the next big thing. When game-changing innovation arrives on the scene from another competitor, or even from within their own organizations, big companies often struggle to form an appropriate response.⁴

Organizations have tried to overcome this challenge, albeit with mixed results. One model is to create a discrete team inside a larger organization for the nurturing of disruptive innovation. Well-known examples are Bell Labs (later known as Alcatel-Lucent Bell Labs), IBM Research, Microsoft Research, and Xerox Palo Alto Research Center (PARC). The results? Hit or miss. Many of the innovations that sprang forth from these efforts were never commercialized because the organizations that produced them were unable to routinely adopt them.

A more recent model is popular with companies like Google, 3M, and Motorola. These companies ask employees to devote a certain amount of their working hours to generating disruptive ideas. The challenge with this model is capturing the big ideas that engineers or scientists generate. Without structure, good ideas often languish in these informal arrangements. Furthermore, the approach runs counter to the creative process that produces the bulk of disruptive innovation—relentless, unfettered pursuit of an idea. Because of this, Google, for example, recently added a layer of managerial oversight to ensure that good ideas didn’t slip away.⁵

While the former model isolates disruptive innovation, the latter opens it up to the masses. As evidenced by the limited success of each, neither approach is optimized for both disruptive and sustaining innovation. Because of this, most organizations tend to fall back on the familiar refrains of sustaining innovation.

That’s what happened to one-time technology high-flyer Iomega Corp. A decade and a half ago, the Roy, Utah, company was a darling of the technology industry for its breakthrough, disruptive innovation: the Zip drive. Zip drives and their accompanying Zip disks simplified the process of backing up electronic files and transferring them between computers. One year after its 1995 launch, Iomega’s annual sales nearly quadrupled to $1.2 billion. The sleepy stock skyrocketed from $2 to more than $80 per share.

But, as often happens to disruptive innovators, Iomega found itself struggling with Christensen’s dilemma. Not eager to give up its lucrative franchise, the company devoted its energies to producing sustained enhancements to its disk storage products. But the market was moving on. Soon, Iomega’s sales sputtered, and a stock slide followed. Try as it might to revive its fortunes, Iomega’s attempts at sustained innovation were no match for disruptive technologies, including writeable CDs and Flash drives.

As late as 2001, Iomega was still hoping for Zip to soar once more: “In a world where technology is often obsolete by the time it gets to market, the Zip drive is a rare prize: technology so reliable and versatile that it’s a core ingredient in virtually every new Iomega product,” the company touted in its 2000 Annual Report.⁶ Just one year later, however, a new management team conceded that the company was “troubled” and that new efforts to revive Iomega were floundering. “Looking back over the year, we can now see that our wounds, for the most part, were self-inflicted,” the team told investors at year’s end.⁷ The problem: The company simply couldn’t produce anything as disruptively innovative as the original Zip drive nor could it produce sustaining innovation in sufficient quantity to keep customers from defecting to other products. Unable to recreate the magic for Zip technology, Iomega’s management team eventually sold the company to EMC in 2008 for $200 million, a small fraction of what Iomega was once worth.

A New Model for a New Era

Things could have turned out differently for Iomega, Polaroid, and others if only they had a process for pursuing both disruptive and sustaining innovation. P&G has such a model, and it consistently produces benefits for the company. This includes the “Corporate Innovation Fund,” an in-house venture capital arm that provides money to test high-risk, high-reward ideas to determine if they warrant additional resources. And the P&G “FutureWorks” business unit focuses exclusively on innovations that can create new businesses around the world.

Like P&G, Cisco believes the simultaneous pursuit of sustaining and disruptive innovation is one of the most important missions a company can undertake. The key is to pursue both with equal vigor and use each for the benefit of the other.

Some background: In fiscal 2008, Cisco invested $5.2 billion, or 13.2 percent of revenue, in research and development. This is in line with other technology leaders, including Intel (16.4 percent) and Microsoft (13.5 percent).

The organization at Cisco responsible for this investment is the Cisco Development Organization (CDO). CDO innovates in a number of areas including core networking, video, virtualization software, and collaboration, among others. This work involves products familiar to many Cisco followers and technologies many don’t realize Cisco pursues. That includes microprocessors, for example. Surprising as it sounds, Cisco is one of the world’s leading semiconductor design houses for high-complexity designs. In fact, its designs rival those of the world leader in microprocessors, Intel.

Consider: The two benchmarks used to routinely describe the complexity of a chip are the number of cores it contains and the number of transistors on it. At the time of this writing, Intel’s latest high-end microprocessor, the Core i7, contains up to 8 cores per chip. That’s a lot. But it’s not as many as Cisco’s Quantum Flow Processor, which boasts 40 cores on a single chip, operating at 1.2 gigahertz. What does that mean in laymen’s terms? While Intel and Cisco are solving two different problems, imagine a device that has the power to search through every book ever written in every language in a single hour. That’s the power of the Quantum Flow Processor, which is the heart of Cisco’s Aggregation Services Router (ASR).

Cisco Senior Vice Presidents Tony Bates, Kathy Hill, and Pankaj Patel are tasked with developing both disruptive and sustaining innovation. For years, their track record has been impressive. Sustaining innovations, for example, have inspired customers who used rival products to buy Cisco for the first time, improved the loyalty of existing customers, and helped the company launch into adjacent markets. Sustaining innovation is also responsible for keeping Cisco’s gross margins above 60 percent for years longer than experts ever thought the company could.

Take Ethernet switching, for example. Cisco gradually refined its Ethernet switches to the point where they became the number one choice among customers for connectivity in office environments. After achieving this market position, Cisco saw an opportunity to expand its influence to include other types of networking devices, including wireless access points. This was in addition to connecting the servers, PCs, and laptops that customers were adding to their networks by the millions. The new devices, however, often lacked a power source of their own and thus could not be added to IP networks without some enhancements, which Cisco added. This sustaining innovation opened the door to Unified Communications, a category of products that help customers save billions on communications costs while improving the usefulness of devices on which they already rely.

This effort also set the stage for a whole new class of products that manage power consumption. This feat could not have been timed better, given the current push to reduce energy costs and invest in more environmentally-friendly technologies. With Cisco EnergyWise-compliant products, customers can centrally power-on and power-off network devices on an as-needed basis. That not only includes traditional data and communications gear, but also products that previously ran over other networks, including heating and cooling devices, lighting systems, and security equipment. Cisco’s innovation made the company a more important player in markets far removed from its traditional base, enabling it to leapfrog competitors and open up new opportunities.

In addition to its success in sustaining innovation, Cisco wanted to accelerate disruptive innovation in a more predictable fashion. Some of the steps Cisco took to pursue both disruptive and sustaining innovation are detailed throughout the remainder of this chapter. These efforts required Cisco to try two new and different ideas, one for tapping the best thinking outside the company, and another for making the most of the best ideas originating inside Cisco. The first idea was an attempt to pursue external venturing in the form of “spin-ins,” while the latter was a plan to pursue internal venturing via the creation of a new business unit.

Here’s how these efforts turned out.

External Venturing: Invent Like a Startup, Scale Like a Giant

Because it is based in California’s famed Silicon Valley, home to countless innovators that changed the IT industry, Cisco can’t help but notice the wealth of creativity and energy in its own backyard. Without going too deep into the lore of Silicon Valley, it’s worth noting that the area is an ideal place to start a company. It is home to world-class engineers, moneyed venture capitalists, ambitious entrepreneurs, and seasoned professionals from the worlds of engineering, law, public relations, marketing, sales, and just about any other discipline a company needs to thrive. The area is a perfect incubator for producing disruptive innovations.

Cisco, itself, is a perfect example. Founded in 1984 by Stanford University scientists, the disruptive technologies Cisco brought to market changed the way the world communicates and collaborates.

But somewhere along the way, Cisco started acting less like a hungry startup and more like an established market leader. It was bound to happen, especially after the company blew past the $1 billion, $5 billion, and $10 billion annual sales thresholds.

As Cisco grew into a large corporation, its leaders began to worry that the company was producing more sustaining innovation than disruptive innovation. But why? After all, Cisco had world-class engineers and brilliant thinkers, just like many of the promising startups in San Jose. The more Cisco studied the issue, the more it became clear that the answer lay within its own walls. Business processes honed to a fine point were actually hindering the development of disruptive innovation. Like a force of nature, Cisco’s best practices systematically wiped out nonstandard thinking and nourished only those ideas that produced immediate returns.

In many instances, this was simply good business, leading to gains in profit and market share. But these practices didn’t foster the creativity or flexibility that breakthrough ideas often require. The more Cisco focused on improving existing products, the less bandwidth it had for disruptive innovation. That frustrated company leaders, who valued the power of revolutionary thinking. It’s a problem that happens at a lot of big companies. Even on the rare occasion when an established organization does prioritize a disruptive technology, often as result of an ephemeral infatuation by a senior executive, it fails to put into place the culture and processes required for nurturing disruptive innovations.

Much like author Christensen, Cisco’s leadership team understood this. It therefore sought out disruptive innovation in quick-moving start-ups that weren’t burdened by Wall Street expectations or legacy customer requirements. These companies could pursue ideas without fear of cannibalizing existing product lines or disappointing traditional customers. Since its early days, Cisco has always been poised to acquire the next great producer of disruptive technology.

Of course, the problem with looking to outside companies for breakthrough ideas is the uncertainty that goes along with it. When considering an acquisition, Cisco studies the quality of the incoming leadership team, the culture of the company, and the uniqueness of its technologies. Are they truly breakthrough? Are they sustainably differentiated? Can they be commercialized quickly? These are but a handful of the questions Cisco considers. Yet despite this due diligence and its well-documented success with acquisitions, Cisco takes a risk—an expensive risk—with every deal.

What if Cisco could reduce this uncertainty by getting involved with companies at an earlier stage? Wouldn’t that better position it to tap the entrepreneurial spirit of startups? Many inside the company began to wonder.

This thinking led Cisco to pursue disruptive innovation via external venturing, or spin-ins. A spin-in is similar to a traditional acquisition save for few notable differences. In a spin-in, Cisco makes an early-stage investment in a company in return for special considerations. These include the option to purchase the company if and when predetermined customer and sales milestones are met, and the right to provide management oversight, where appropriate. In some instances, Cisco will also transfer some key employees to the spin-in candidate and provide additional guidance to help nurture the company along.

Because of the unique nature of spin-ins, they provide the best of all worlds: the energy, creativity, and passion of a startup, plus the scale, management savvy, market access, and financial strength of an established powerhouse. When evaluating spin-in candidates, Cisco looks for disruptive technology that adheres to its technology standards, products that fit with its business model, and innovation that meets the specific needs of its customers. The purchase price of a spin-in is tied to the performance milestones it reaches, thus reducing the risk of an acquisition for Cisco.

For all their merit, however, spin-ins are not always the easiest way to pursue disruptive innovation. That’s especially true when there are former employees to repatriate back into the main company after a spin-in is complete. In exchange for their willingness to take some risk with their careers, Cisco will, for example, monetarily reward employees who transfer to the spin-in upon reintegration. These and other arrangements, however, can lead to morale problems if not handled appropriately.

In addition, spin-ins can take longer to complete than a traditional acquisition. Incubation could take a long time, even though integration tends to be quick. If time-to-market is an issue or a completely new business model is required, Cisco often will opt for a traditional acquisition rather than a spin-in. But if the goal is disruptive innovation around areas adjacent to Cisco’s markets and time-to-market is not the overriding factor, the spin-in model can be powerful.

Spin-ins are appealing not only to Cisco, but also to the start-up company itself. With an established company providing financial help and managerial oversight, a startup is more likely to succeed. Among other things, a large backer can help a startup to align its technology with market needs and partner capabilities. With financing, operational and go-to-market concerns minimized, spin-in candidates can doggedly pursue engineering objectives.

In 2008, CEO John Chambers summarized his thinking on why the spin-in model is ideal for helping a company bring disruptive innovation to market: “The advantage of a spin-in is that you can jointly develop well-integrated products by closely sharing your technology, expertise, and product roadmaps. The acquired technologies of a spin-in become part of Cisco’s technology architecture in a much shorter time than with traditional acquisition methods. Secondly, a spin-in allows Cisco to tie an acquisition price to product revenues and the margins associated with those revenues. This results-oriented approach avoids the typical challenges of estimating the value of an acquisition.”⁸

Because of these and other benefits, Cisco has pursued spin-ins with vigor since the mid-1990s. They have helped launch the company into adjacent markets—often with ideas that were more disruptive than what it was pursuing internally. Take storage technology, for example.

In the early 2000s, storage was becoming ever more important to enterprise customers. Every application they used, from email to ERP systems to databases, required its own dedicated storage solution. That was a problem for IT planners, who had to allocate an ever-increasing portion of their budget to islands of storage devices with each passing year. Frustrated by their inability to predict exact storage needs, they tended to over-buy to ensure capacity. Because these devices were connected to Cisco networks, Cisco could see a market opportunity in helping customers consolidate, virtualize, and manage their storage devices by sharing them across the network. When it posed this idea to customers, they overwhelmingly responded, “Yes!”

Storage area networking was exactly the kind of market Cisco loved: It was big, adjacent to the networking market, undergoing a transition and highly relevant to customers. Cisco leaders knew that profits awaited the company that could help customers solve this problem. The company just needed a disruptive innovation.

That led Cisco to Andiamo, an early developer of intelligent storage networking technology, which enabled customers to consolidate disparate devices onto a single, secure, integrated platform. This promised to save money through greater utilization of storage devices and on administration costs.

Cisco invested in Andiamo in early 2001 and finalized the deal in February 2004. By then, Andiamo was earning $130 million in annual sales—a staggering accomplishment for a company that was just three years old. The reason, says Andiamo co-founder and Cisco executive Mario Mazzola, was because Cisco’s experienced veterans were able to partner with the technologically savvy startup to ramp up sales, engineering, marketing, customer support, and manufacturing—all of the disciplines required for a company to succeed. In the five years since the acquisition, the technology originally developed by Andiamo has continued to play a critical role for Cisco beyond storage. Its software, for example, now serves as the operating system for the Cisco Nexus 7000 Series Switch. And Cisco now has more than 50% share in the high-end modular storage market.

Capitalizing on the success of Andiamo, Cisco would soon use the spin-in model again—this time, for one of its biggest gambles yet: virtualized data centers.

Data centers are essentially the hub of all business computing. They house racks of servers that manage the flow of information and communications for big organizations. These servers do everything from crunch financials to store data to provision applications. A typical large company spends a large percentage of its IT budget on maintaining its data center. In other words, Cisco customers spend billions of dollars to manage a growing, complex, and often inflexible infrastructure.

Cisco saw a better way, especially after its initial foray into the data center with storage innovations. It believed that the triad of networking, storage, and virtualization technology could blend data center requirements on a virtualized server, thereby reducing cost and complexity. Cisco knew it was just a matter of time before a competitor capitalized on this opportunity, and it didn’t have the structure to pursue such innovations internally.

But one startup did.

The company was Nuova, a San Jose startup specializing in high-performance, data center infrastructure equipment. Like Andiamo, Nuova offered a disruptive innovation that utilized the Cisco networking architecture. Its virtualization technology transformed how big pieces of networking and computing gear shared communications and information resources and offered customers another way to consolidate vendors and reduce their costs.

Cisco first invested in Nuova in August 2006 and bought it outright in April 2008. Today, the company’s technologies form the basis of the Cisco Unified Computing System, Cisco’s initial foray into the virtualized computing market. Only time will tell if the move will pay off, but early indicators are positive.

“Revolutionary. Cutting edge. State of the art. These words and phrases are bandied around for so very many products in the IT field that they become useless, bland, expected. The truth is that truly revolutionary products are few and far between. That said, Cisco’s Unified Computing System fits the bill,” said technology journal InfoWorld in November 2009.⁹

The rewards that Cisco reaps from spin-ins are undeniable. This is rooted in an unwavering focus on customer success, rather than internal metrics. Cisco, for example, measures and incents its spin-in candidates based on the delivery of solutions that meet specific customer needs and drive revenue, rather than just technical milestones. This customer-centricity guarantees market relevance and focuses the collective team on a set of shared goals.

As attractive as disruptive innovation is, it’s not an end unto itself. The real multiplier effect occurs when it is paired with sustaining innovation. Cisco looks for its disruptive and sustaining innovations to drive one another whenever possible (see Figure 2.1). The Nuova and Andiamo spin-ins, for example, facilitated this cross-leverage many times over. Innovations in Cisco’s switching products helped the company create disruptive innovation in the storage market, which in turn accelerated the next generation of switching. This enabled the company to enter the unified computing marketplace.

Figure 2.1. Doing both—sustaining and disruptive innovation

Spin-ins have dramatically accelerated Cisco’s disruptive innovation engine, gaining the company entry into key markets like voice, storage, and computing. As promising as external venturing is, however, it only forms half of Cisco’s disruptive innovation equation. The other half comes from within.

Internal Venturing: Rebels of the World, Unite

With external venturing beginning to pay dividends, Cisco looked inward to see if it could mine untapped disruptive ideas. Doing that within the confines of the engineering organization proved difficult, however, given the organization’s focus on exploiting the potential of existing products. So Cisco created the Emerging Technologies Group (ETG). Its primary mission is to pursue disruptive, new ideas that could grow into $1 billion market opportunities within 5 to 7 years of launch.

Given the amount of effort required to take an idea from zero to $1 billion, the ETG needed a unique charter within the CDO. Rather than a shadow R&D unit, Cisco ETG is an incubation center where innovative ideas are translated into business opportunities, not just patents or scientific breakthroughs. Despite its small size in comparison to the rest of the CDO, ETG is responsible for some of the company’s highest profile engineering projects, and its leader reports directly to the CEO.

Given its unique charter, Cisco thought long and hard about whom to appoint to lead the ETG. In addition to a world-class technologist, company executives believed the group needed a leader who could anticipate business trends and harness ingenuity without stifling creativity. They wanted an individual with the heart of a company loyalist and the soul of an independent entrepreneur.

One candidate in particular stood out: Marthin de Beer.

A native of South Africa, de Beer moved to the United States in 1993 to pursue a career in Silicon Valley. The founder of two successful startups in his native land, de Beer eventually found his way to Cisco in 1995.

Upon joining the company, de Beer worked in the switching organization, a large and rapidly growing part of the company in the late 1990s. While he welcomed the benefits and stability that the big company provided, he nonetheless pined for the energy and inspiration that an entrepreneurial environment offered.

When the opportunity arose to lead Cisco’s efforts in voice technology, de Beer accepted. Instead of driving a technology that had great momentum and company-wide support, de Beer found himself advocating one that had yet to generate much acceptance across the company. To create momentum, de Beer pursued a simple strategy that revolved around the following: Get along with others, find rabid fans, and develop some lighthouse customer accounts. It worked like a charm.

Opportunity knocked again in 2004. Former head of engineering Charlie Giancarlo needed a leader who could jump start Cisco TelePresence, a high-definition video collaboration solution. Despite Cisco’s engineering prowess, Giancarlo recognized that the disruptive innovation needed for this venture was fundamentally different than the sustaining innovation CDO typically produced. It required different people, different processes, and even different tools for motivating employees. That meant creating a new team.

de Beer seemed like the right leader, but he was hesitant. Giving up his 1,500-person organization to run a previously untested start-up unit inside the company was a big risk. He even wondered if he was being driven out of the company. “Come on Charlie, just tell me if I’m fired,” he said. But Giancarlo reiterated his goal: to create startups from within the company. An engineer at heart, de Beer knew that most ideas failed to turn into commercially viable ventures. What if ours don’t pan out, he wondered? After two weeks of debating the offer, he put his concerns aside. “I’ll take the job,” he told Giancarlo, “but on one condition: it’s okay for me to fail; I know I won’t always succeed.”

“It’s okay if you fail,” Giancarlo responded, “as long as you don’t fail too often or for the wrong reasons.”

Ultimately, the two agreed that up to three out of every four ideas might fail. But that was still better than the rate of failure among typical Silicon Valley startups. With a hand-picked team and support from other parts of the company, they could very well come up with some big hits, they agreed. So the Emerging Technologies Group (ETG) was born. It had the express mission of creating a pipeline of new ideas and a process for bringing them to market in a repeatable fashion.

“The entire ETG was created to develop solutions for markets that are adjacent to existing opportunities and hence more revolutionary in nature,” says de Beer.

Because ETG is chartered with developing “disruptive innovations” and not mere “products,” its approach differs from that of a typical product development team inside Cisco. In fact, the entire creation of the ETG was a major cultural evolution for Cisco. The composition of the team, the way it was measured, and even the processes they used to develop products were different than for Cisco. For example, the development of Cisco TelePresence began with cardboard boxes and foam blocks, not electronic cameras, computers, and digital screens. ETG approached video collaboration from a fresh perspective.

As a result, “Cisco TelePresence is a complete experience shift, not just a new technology,” says Phil Graham, a vice president with Cisco’s ETG and one of the principal architects behind TelePresence. “We had to think of it down to what the user would experience, down to every last detail.” That included things never before incorporated into Cisco technology, including furniture and paint color for the walls in TelePresence rooms. That’s because part of the Cisco Tele-Presence experience is a conference table with an invisible horizon that melds perfectly with another table visible on a computer screen in life-like color, size, and shape. If ETG had not thought through all of these softer aspects, the entire Cisco TelePresence value proposition—the ability to conduct a virtual meeting with multiple people located in different places around the globe as though they were all assembled in the same room—would have been lost. Consider: Prior to releasing the product, a debate was waged inside the company. Should TelePresence cameras include the ability to zoom, Cisco leaders wondered? Ultimately, the company decided against a zoom feature because, as one engineer put it, “humans can’t zoom in person.”

What else did Cisco ETG do differently? It assembled a team in a very un-Cisco-like way. To create ETG, Cisco looked inside for proven leaders who were known to have a rebellious streak. Company executives wanted loyalists, but also independent, free thinkers. And they didn’t necessarily want engineers to run the organization. Take ETG’s chief technology officer Guido Jouret, for example. His background is in IT systems management, not product development. The same is true of Charles Stucki, who joined ETG as the VP of emerging technologies incubation and eventually became the general manager of the TelePresence Systems Business Unit (TSBU). His background is in business consulting, not start-up development. He was hired to provide customer and industry perspective that helps Cisco develop more exacting solutions for specific challenges. Later, he developed the framework that helped ETG replicate its successes and systematize its approach to developing ideas.

Worth noting are some of the would-be leaders that ETG rejected. Some big thinkers volunteered to join ETG but were passed over due to their perceived inability to put ideas through a process that would result in disruptive business opportunities. Cisco also wanted to seed ETG with a diverse mix of “white hats”—chosen for their ability to see potential in ideas—and “black hats,” who are good at identifying shortcomings and potential stumbling blocks.

Then there was the question of how much money to give to ETG. Jouret jokes that the company’s management team starved it on purpose. Senior executives decided that a hungry team short on time and short on funds would work to accomplish things faster. So ETG was forced to subsist on the leanest of budgetary diets. Its fiscal year 2008 budget was just 2.8 percent of the total Cisco R&D expenditure. Nevertheless, it is more than what many Silicon Valley venture capitalists spend in a given year, Jouret notes, and enough to get things done if the money is well spent. The key is focus. And that’s why new business processes are critical.

As with all processes at Cisco, ETG starts with the customer in mind. Engineers are required to meet with no less than 30 customers before they pursue a new idea.

“We do not ask customers what they want. That too often leads to incremental improvements over what they have experienced. Instead we focus on the customer’s role and what they seek to accomplish. We also meet with non-customers—that is, organizations that are not currently buyers of products and services in the category that we are targeting. This helps us produce truly disruptive innovations,” says de Beer.

From the beginning, ETG was consumed by chasing new ideas. Its engineers were encouraged to focus maniacally on their projects at hand. That meant disregarding noncritical conference calls, refusing extraneous assignments, and declining outside speaking requests. That was a radical cultural break inside Cisco, where responsiveness and professional courtesy are deeply ingrained in the company’s culture.

Though ETG represented a cultural shift for Cisco, the group did adopt elements of Cisco’s culture and make them their own. From the start, ETG embraced Cisco’s collaborative mentality, for example. Knowing that Cisco’s own engineers were likely sitting on a mountain of great ideas buried under a pile of day-to-day obligations, ETG created I-Zone, an internal, online community where any employee could share, discuss, and hone new product ideas. This framework would enable ETG to transcend organizational, geographical, and even functional boundaries to mine for new ideas. Since its launch in August 2006, employees have submitted in excess of 1,500 ideas to I-Zone.

To tap the creativity that lay beyond its borders, Cisco created a competition called “I-Prize,” which provided company outsiders a means to share their ideas with Cisco. Thanks to heavy promotion on YouTube, Facebook, and other social networking sites, the I-Prize competition attracted more than 2,500 people from 104 countries. During a three-month period, they submitted more than 1,100 ideas, 10 percent of which were deemed worthy of serious consideration. After an initial review, the field was narrowed to 12 finalists representing 10 countries and five continents. Finalists were given an opportunity to pitch their ideas directly to a panel of Cisco executives. In October 2008, Cisco named a team from Germany and Russia as the winners of the competition. They were given a $250,000 prize and offered an opportunity to work at Cisco to pursue their breakthrough idea, which, not surprisingly, revolved around a business plan for using IP technology to improve energy efficiency.

To help vet ideas generated from I-Prize and I-Zone, Cisco turned to some of its highest-performing company directors for additional support. Through the Cisco Action Learning Forum (ALF), these directors helped vet proposals and stress-test them for their potential in a rather unique way. Directors were assigned to teams and challenged to translate compelling ideas into a business plan in just three month’s time. Chosen for the level of commitment and passion they demonstrated on previous assignments, the directors worked night and day to identify a target market for new ideas, assess the competitive landscape, and come up with a go-to-market strategy, among other things. Afterwards, these directors presented their business plans to senior executives in much the same way start-up companies present their ideas to venture capitalists in Silicon Valley. Cisco funded the best of these ideas and created businesses around them.

To ensure that homegrown and outside ideas were properly evaluated, ETG developed a unique process for identifying, evaluating, incubating, and then launching or rejecting them. The systematic process eliminated a lot of guesswork and made it easier for Cisco to evaluate ideas not on the passions of their creators, but on their potential for producing commercially viable disruptive innovation. There are specific actions that Cisco will take to nurture an idea from one phase of development to the next (see Figure 2.2).

Figure 2.2. Internal venture framework

Unlike the approach taken by other incubation teams in the industry, Cisco ETG keeps new businesses in incubation until they reach $100–$200 million in sales. (Other companies typically hand their new, “big things” over to traditional sales departments much earlier, in some cases when new opportunities reach $10 million in revenue.) But Cisco, which believes its ETG innovations should meet a much broader set of criteria than a simple sales figure, has established a dedicated ETG sales force, which consists of new product and category experts. Though it coordinates with the traditional sales and channels organizations, the ETG sales force remains independent and reports to de Beer, rather than to the Cisco sales leaders. Just like a startup, this ensures that ETG salespeople remain fully dedicated to driving Emerging Technologies. And eventually this approach ensures a smoother transition and integration into the mainstream Cisco organization.

“We track progress against key stage gates and milestones across the entire incubation process. Such progress is an important consideration in evaluating and adjusting our strategy, and in determining whether to proceed to the next phase,” says de Beer.¹⁰

Surprisingly, Cisco will not sell ETG products to just any customer before they graduate. Customers must be prequalified, based on their understanding of the limitations of early-stage products. The reason is simple: New products won’t have all features to satisfy all customers. Cisco therefore selects the customers for whom the initial set of features will meet or exceed their requirements. Rather than tire kickers, Cisco looks for lighthouse accounts that can embrace and then showcase disruptive Cisco innovation, serving as a lighthouse for others to see. In short, ETG looks for customers that demonstrate a similar, pioneering mindset—early adopters, if you will. To help identify these customers, Cisco pushes customers to look inward and ask how they would justify such a purchase and how much they would pay for disruptive innovations.

The approach seems to be working.

ETG sales increased nearly nine-fold between 2007 and 2009. The team has created or identified nine disruptive opportunities. Three are already in the market today and achieving significant success. Each represents a $1 billion-plus opportunity within seven years. Four more are staffed and in the early stages of incubation (gathering customer feedback, refining the market focus, and developing the appropriate solutions), while another has been terminated.

And whatever happened to those cardboard boxes and blocks of foam?

In early 2010, ETG graduated TelePresence and integrated it back into Cisco’s mainstream operations. Today, the technology is one of the company’s fastest-growing products.

One reason ETG works as a business unit is because the ETG team understood what trust, incentives, and structure could do to help propel them. It established trust by creating a culture that allowed for failures. It also created incentives that worked for startups—think realistic profit expectations for units operating in “investment” mode—and developed a structure that invited participation and discouraged complacency.

Innovation Syncopation

Clearly, the decision to pursue spin-ins and incubation simultaneously helped Cisco establish a leadership position in disruptive innovation. Clayton Christensen even picked Cisco as the Disrupter of the Decade in January 2010. “Everything that is done over the Internet is enabled by [Cisco], and they are not done yet,” he says.¹¹

Disruptive innovation through spin-ins launched the company into the voice, storage, and computing markets with Ardent, Andiamo, and Nuova, respectively. And incubation through ETG helped Cisco take a commanding position in enterprise video. But these are just two of Cisco’s approaches to generating sustaining and disruptive innovation through internal and external venturing (see Figure 2.3).

Figure 2.3. Internal versus external venturing

But what is the best approach? The answer depends on what your organization is trying to accomplish.

Cisco, for example, has gained from each. But it chooses between them based on specific conditions. When a new idea has significant synergy with existing products or go-to-market strategies, Cisco will incubate the idea internally. Alternatively, the company often looks outside its walls when it wants to pursue something that is very different or unfamiliar.

Difficult as it is, Cisco resists the temptation that pulls down many companies of its size—the notion that they have to develop everything internally. Likewise, it rejects the idea that a small startup is the only way to produce something ingenious. Freed from the gravitational pull that tends to draw mature companies in one direction and newcomers in another, Cisco is able to pick the best from inside and outside to create a compelling and complementary portfolio of products and services.

With this, Cisco can bring to market both disruptive and sustaining innovations to produce transformative value. To ensure that its breakthrough TelePresence solution gained market acceptance, for example, Cisco had to make it easy to use. So the company turned to Call Manager—a sustaining innovation that it developed to run phone calls over the Internet. With this, a sales director in New York can host a live meeting with a customer in Shanghai with just the touch of a button.

The marriage of a disruptive solution with a sustaining technology didn’t just fuel sales. It is changing the way people communicate.

Doing both never looked or sounded so good.