CISCO INDIA (A): INNOVATION IN EMERGING MARKETS€¦ · · 2017-04-21CISCO INDIA (A): INNOVATION IN EMERGING MARKETS ... partnering with Indian companies and with the government

IMD��v. 21.11.2016

CISCO INDIA (A): INNOVATION IN EMERGING MARKETS

Professor Srivardhini K. Jha (IIM Bangalore), Professor Rishikesha T. Krishnan (IIM Indore), Professor Charles Dhanaraj (IMD) and Research Associate Ivy Buche (IMD) prepared this case as a basis for class discussion rather than to illustrate either effective or ineffective handling of a business situation.

Dr Ishwardutt Parulkar, principal architect at Cisco’s Indian subsidiary at Bangalore, was on his way to the office one early morning in July 2010. His team had held weeks of detailed discussions with major Indian telecom operators such as Airtel, Reliance and Vodafone on business needs and technology requirements for building their next generation networks. The broad contour of a product – a router developed in India for India – addressing the specific needs of telecom networks in emerging markets was taking shape in Parulkar’s mind.1After working for Apple, Sun Microsystems and Cisco for 15 years in the US, he had recently moved to India for such an opportunity.

Given the value consciousness of emerging market customers, the lack of significant revenue in the short term and little precedence for such products in emerging markets, the business case for such a router was far from compelling. Parulkar realized that selling the idea internally would be an uphill task:

Basically, we know that our product idea fills a gap in our emerging market offering, and the feedback from customers is also encouraging. But, in the absence of a strong business case – in the traditional sense of a high, predictable ROI in the short-term – it will be difficult to get approval and funding to develop the product through the established processes and criteria in the company. Further, the Indian ecosystem is not fully mature in terms of partners and skills required to develop such a product, such as tier-1 chip vendors, senior engineering talent in specific areas, labs that can test and certify telecom-grade equipment to global standards, manufacturing capability for complex hardware and so on.

Parulkar and his team were scheduled to meet Wim Elfrink, chief globalization officer, and Pankaj Patel, senior vice president and general manager, service provider business unit, to table their new product development proposal for his approval. They had to put forward a strong rationale!

Copyright © 2015 by IMD - International Institute for Management Development, Lausanne, Switzerland (www.imd.org). No part of this publication may be reproduced, stored in a retrieval system or transmitted in any form or by any means without the permission of IMD.

This document is authorized for use only in Alfredo Mart?nez's Desarrollo de habilidades directivas course at Universidad Panamericana, from February 2017 to May 2017.

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Cisco Systems, Inc.

Cisco was founded in 1984 by Stanford University computer scientists Len Bosack and Sandy Lemer who named it after the city of San Francisco. Cisco pioneered the development of Internet Protocol (IP)-based networking technologies with the invention of the first multi-protocol router. Over the next 25 years, the tradition for innovation continued with the development of routing, switching and other network-based technologies such as application networking services, collaboration, home networking, security, storage area networking, TelePresence systems, unified communications, unified computing, video systems and wireless. Cisco’s strategy centered on leveraging the network as a platform, to expand its share of customers’ information technology spending. In fiscal year ending 31 July 2010, Cisco employed over 70,000 people in more than 150 countries and recorded annual revenues of $40 billion with a net income of $7.8 billion.2 Despite the ongoing economic downturn, the company achieved revenue growth from both product and service segments across all geographic regions (refer to Exhibit 1 for a revenue breakdown by product and geography).

Cisco focused on its core networking capabilities while continuing to expand and transition into adjacent products and markets. The company sought to take advantage of virtualization and cloud-driven transitions (brought about by the convergence of networking, computing, storage and software technologies) in the enterprise data center market through its Unified Computing System platform and Nexus product families, which were designed to integrate the previously siloed technologies in the enterprise data center with a unified architecture.3 In addition, Cisco aimed to apply this architectural approach to market adjacencies such as mobility, the consumer and electrical services infrastructure. With regard to mobility, the growth of IP traffic on handheld devices was driving the need for more robust architectures, equipment and services in order to accommodate not only an increasing number of worldwide mobile device users but also increased user demand for broadband-quality business network and consumer web applications to be seamlessly delivered on such devices.

Globally, Cisco employed over 20,000 engineers and invested more than $5 billion or 13% of its annual revenues in R&D. Some of Cisco's prominent R&D units were located in San Jose, Boston, Raleigh, Shanghai, Durham and Tel Aviv. The company held a portfolio of over 15,000 patents. In 2009 it won 913 patents, a 30% increase over the previous year, securing 18th position among the top 50 patent winners in the US.4

Cisco in India

Cisco commenced its India operations in 1995 with a sales presence, followed by an R&D center in 1998 in Bangalore with 10 engineers working for a couple of business units in “extension” mode, i.e. they worked as an offshore team of Cisco, San Jose, executing specific tasks. The primary drivers for setting up the R&D center were availability of a large pool of English-speaking engineering talent and lower R&D costs. In the initial years, the charter of the India team included engineering functions such as testing support and sustenance that supported the core development activities undertaken in the US.

Over the next decade, the India center enhanced its capability by continuously learning from its interaction with headquarters. The ability of the India team to meet delivery and quality targets created good momentum, and several benefits accrued for the India center. First, it created an environment for more business units to set up teams in India. Second, the size of the India teams rapidly increased, not only because of cost efficiencies but also because of the capabilities at the center. Third, the India teams took on more responsibility and moved toward


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a model of greater ownership, taking complete responsibility for future development, support and services of certain protocols/components for Cisco’s worldwide market. This shift to owning pockets of technology moved the center toward engineering leadership driven from India. In 2005 Cisco headquarters supported the growth of the India center by announcing a $1 billion direct investment in R&D, leasing and finance, sales and support and venture capital.5 At this point, Cisco India typically focused on developing products for developed countries and then customized them for sale in emerging markets.

India’s Growing Importance within Cisco

In December 2006 Cisco CEO and chairman John Chambers articulated that his strategic focus for India was to target emerging market businesses and customers. He announced the selection of India as the site for its globalization center, setting the stage of the company’s globalization policy for talent, innovation and growth. He stated:

I don’t make my decisions based on a quarter or a year. You are going to see us increase our investments in India, partnering with Indian companies and with the government. We invested in India looking at where we want to be in five, 10, 20 years. I am an optimist on India from a market perspective.6

In tandem, Cisco sought to decentralize 20% of the company’s top executives over the following three to five years. To begin with, Elfrink, executive vice president, Cisco Services, was given additional responsibility as Cisco’s first chief globalization officer. He relocated to India in January 2007 and became the first direct report of Chambers to live outside of California. Elfrink also brought 20 executives with him to kick-start the new globalization center. In October 2007, the Globalisation Centre East (GCE) was launched in Bangalore as Cisco’s second largest R&D center aimed at developing products from concept to completion in India (refer to Exhibit 2 for Cisco India R&D evolution). The company also announced an additional $100 million venture capital funding to expand investments in early-stage Indian companies. Elfrink stated:

This [GCE] has been set up as our second headquarters throughout this region and for the world as a whole… you can think about it as “Cisco East.” The GCE is much more than a sales center or an R&D center. Every function at Cisco is represented here [sales, business development and manufacturing], at every level, from individual contributor to executive vice president. Working in the developing world first hand, I am able to understand and shape our strategy, so that we do not approach globalization by “selling what we have” but rather by “creating what we need” – or rather, what our customers need. 7

Chambers had set a target of growing the headcount from 1,700 in 2007 to 10,000 over the following five years. In line with these manpower targets, Cisco recruited engineers on a large scale and by 2010 had about 4,700 people in its R&D center in Bangalore. Cisco India also opened 170 academies across the country, training about 8,600 students to overcome the talent crunch.8

Furthermore, the company set about expanding its innovation network by systematically developing an ecosystem of about 2,500 partners beyond firm boundaries. R&D work was almost equally divided between its captive R&D center and the partners, which included Infosys, TCS and Wipro.9 By 2010 GCE had incubated and piloted several initiatives such as smart connected communities and smart connected healthcare10 and education from India. According to Cisco, Smart+Connected Communities was perhaps the most significant new


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global initiative that GCE launched to help cities use the network as the next utility for integrated city management, better quality of life for citizens and economic development. Although just about 2% of the company’s global revenues came from India in 2014, Cisco remained confident that this share would grow to 5% in the next five years.11

Seeding Innovation in India

India saw a major transformation in the telecommunication sector, beginning with the National Telecom Policy of 1994 and followed by the National Telecom Policy of 1999. These policy initiatives opened up all segments of the telecom sector for participation from the private sector and cleared the path for foreign direct investment (FDI). As a result of the deregulation, a number of domestic and foreign telecom service providers entered the Indian market. Consequently, telecom equipment manufacturers, who supplied equipment to the service providers, followed suit. The Indian telecom industry grew over 20 times in just 10 years, from 28.5 million subscribers in 2000 to over 621 million in 2010 (refer to Exhibit 3 for Indian telecom industry growth).12 The mobile subscriber base stood at 584 million, registering an annual growth rate of 49%, and India was primed to become the world’s second-largest mobile phone user base by 2012. To keep pace with this growth, telecom service provider investments in network infrastructure also grew sharply in India, increasing from $60.8 billion in 2007 to $89.6 billion in 2010, at a time when capital investments stayed flat in developed markets.13

Within this context, Elfrink’s mandate was two-pronged: (1) to develop innovative products with strong local appeal and (2) to grow the leadership bench strength in India. He achieved some success in growing the India site talent pool as the number of vice presidents increased from 1 in 2007 to 14 in 2010, while the number of directors increased from 8 to 80 over the same period. Elfrink highlighted:

We have been able to attract over 60 families to India from around the world, and at all levels of the organization and all functions across the company. The type of employee who comes here is an entrepreneurial one, people who are motivated by the opportunity to create, pioneer, innovate.14

The increasing capability of Cisco India had sufficiently increased the credibility of the site in the eyes of the headquarters for the latter to raise the initial funding to set up a new business unit called “Emerging Country Solutions and Services” (ECSS). Cisco leadership, led by Patel based at San Jose and supported by Elfrink and Aravind Sitaraman, the India R&D site leader, set up a seed fund for building the new product development team. To jump start the innovation process, they recruited Ishwardutt Parulkar, a senior technology architect, and Mahesh Raghava, as a product manager, thereby filling two critical skill gaps for product development at the India R&D center.

Parulkar had 15 years of industry experience in the US at Apple, Sun Microsystems and Cisco. He returned to India in early 2010 with the goal of connecting emerging markets with the developed ones using innovative and cost-effective products. According to him, India could offer a whole new range of products at different price points. Raghava, a Cisco India veteran who was extremely familiar with the Indian telecom ecosystem, took on the product management role. Parulkar and Raghava were the only members of ECSS and they directly reported to Sitaraman. The broad charter of ECSS was to assess the needs of emerging market customers and build products and solutions to address those needs. Parulkar explained that creating a separate business unit was beneficial in several ways:


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First, it gave the team a separate identity and a sense of purpose. Second, it ensured that the team was not burdened by the procedural overheads normally associated with being affiliated to a larger business unit. It helped the team work in a startup mode within a large company. Third, the team had easy access to the site leadership, which was helpful in getting quick resolutions on issues and challenges.

When Parulkar joined, he realized that the India center had evolved from a predominantly engineering organization to incorporate other strong functions such as Cisco services (comprising both technical and advanced services), sales, marketing and IT. Such growth on multiple functional dimensions improved dialogue between R&D and customer-facing teams. The R&D center started receiving feedback on the lack of certain products for the local market and the high price points of existing products, allowing them to gain a better understanding of unmet needs as well as the opportunities and challenges in the local market. This created the business case to innovate – a product conceptualized and executed from India for India and India-like markets. Defining the right product that would find traction with customers was going to be critical!

Product Conceptualization

The explosion in the number of mobile subscribers in India was fueling the rapid capacity expansion of service providers, and the number of cell sites was growing fast (refer to Exhibit4 for typical telecom network structure). ABI research predicted that by 2014, 39% of all cell towers would be located in the Asia-Pacific region. In 2009 India was adding about 15 million new mobile subscribers a month. Parulkar and his team realized that building telecom products out of India made sense as capital expenditure on telecom was increasing at the rate of 15% per year in the developing world – i.e. double the growth rate in the developed world. According to industry sources, the enterprise and service providers’ routing market in India was estimated to be approximately $300 million in 2012. India was one of the fastest-growing telecom markets in the world, and some of the largest Indian telecom companies such as Airtel, Vodafone and Reliance had more than 100 million subscribers each. The team embarked on a six-month journey to meet these major mobile operators. Raghava explained:

We had to basically go and meet the customers and their CTOs, understand the products and come up with common definitions in terms of what is required for this region. Meetings were open-ended and often lasted all day as we tried to understand customers’ current and anticipated challenges, and identify a common set of requirements that would guide a new product offering.

As they brainstormed, the team posed five basic questions for each innovative idea that they came up with:1. Does it address a real pain point? 2. Will it appeal to a big enough market? 3. Is the timing right? 4. If we pursue the idea, will we be good at it? Can we convince the headquarters to invest

in developing the product? 5. Can we exploit the opportunity for the long term, or will this market commoditize so

quickly that we would not be able to stay profitable?


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Ultimately, Parulkar’s team identified a mobile backhaul cell site router for mobile network operators (MNOs) as a suitable product/product category to develop in India, because it was not only relevant for the local market but also a segment that Cisco could do better in.

Challenges

As Parulkar and Raghava proceeded to the prototype development phase, several challenges came to the fore.

Funding

There was lack of visibility on funding for the next stage. It was not clear whether the next level of funding would come through to fund a larger team. According to Parulkar, it was similar to a start-up running out of seed funding while uncertainty loomed in terms of getting round-A funding.

Talent Gaps

Availability of the right type and level of talent was critical as prototype development involved working across the entire stack of technologies: silicon chips, platform hardware, platform software, network operating system and network management. This required adequate staffing across technology layers along with close interaction between experts from various technologies. First, the engineering team had to be strengthened with senior engineers who could implement the complex technical pieces and provide technical direction to the rest of the engineering team. Second, there was a serious shortage of domain experts, especially in some of the advanced networking protocols and Cisco’s proprietary operating system IOS, which made it difficult to hire from outside. However, with minimal seed funding, increasing the staff was not possible.

Lack of a Mature Local Ecosystem

The complex nature of the product required physical proximity and the involvement of silicon vendors and third-party laboratories. For this, Parulkar’s team had to bank on the local ecosystem. However, they found that the local ecosystem was not mature enough and lacking in several areas. The Cisco team decided to leverage their long-standing relationships with various partners and support them via co-development. They also had to persuade vendors to enhance their local capabilities as well as transfer knowledge and best practices to them in areas like global certifications. Parulkar elaborated:

To be more specific, the pieces in the ecosystem of silicon vendors, the companies that develop silicon chips, service engineering partners, manufacturing partners… not all of these have the same level of maturity. Most of these tend to be MNCs with a presence in India. Not all of them have invested enough and developed the same level of expertise. There are some who are leading edge. For instance, Texas Instruments has been around for a long time, but if I pick some of the other companies, they just have a handful of application engineers, without a lot of depth in terms of products. When you are working on an “end-to-end” solution, you require a lot of capabilities, which the ecosystem limits.15


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Design Tradeoffs

The router had to be reasonably complex but possible to develop within a relatively short period of time. A product of low complexity would not make a substantial technical and business contribution and would be regarded as trivial. But a very complex product would take too long and test the patience of the headquarters. The team might run out of steam before it had established its development capability. Therefore, the right balance of product complexity and time taken for development was important in defining the product features.

Price Sensitivity and Power Requirements

The new router had to straddle seemingly irreconcilable requirements by being simultaneously low cost and feature rich. It had to meet the critical requirements of telecom companies in developing countries in terms of low up-front capital costs and operating expenses while protecting their existing investments in earlier technologies. This translated into three primary requirements: (1) very low power consumption to reduce the cost of operating the network; (2) high reliability in harsh operating environments; and (3) ease of manageability to save installation, configuration, repair and upgrade costs to build next generation service networks. These features would help operators reduce backhaul operating costs, simplify and converge their radio-access networks (RAN) and Ethernet access networks, and enhance operators profit opportunities with mobile and premium Ethernet services.

Bridging Legacy and Advanced 4G Systems

India was witnessing the advent and rapid adoption of mobile devices like smartphones and tablets at the user end and rich content at the content creation end. To meet these demands, the next generation internet had to be: (1) more mobile; (2) more visual; (3) more virtual; and (4) simpler. Therefore, cellular backhaul in India was moving from the previously prevalent TDM technology16 to packet-based technology, driven by the rollout of 3G/4G. However, despite the deployment of 3G/4G, legacy 2G systems persisted. Therefore, the new router had to be versatile to handle rapid scalability in bandwidth, ranging from legacy 2G standards to the next generation 4G/LTE17 cell mobile backhaul and Carrier Ethernet technology with advanced features to support the exponential growth of mobile internet traffic over the coming years.

The Next Phase

Parulkar and his team were excited as they prepared their business case for review by Elfrink and Patel. Patel’s directive was clear:

We had decided to design products in India for footprint, energy consumption and scalability.18

Approval would hinge primarily on convincing them about the long-term market opportunity and capability of the team19 (refer to Exhibit 5 for Cisco’s R&D project approval process).Looking ahead, Parulkar knew that within the next 18 months they would have to launch the first Cisco product developed end-to-end at the India site, from conception, architecture, development of the hardware and software, testing and qualification to manufacturing and marketing. The success of the new router would mark a milestone in Cisco’s journey of evolution of engineering capability in emerging countries into the next phase of innovation and thought leadership.


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Exhibit 1 Cisco Revenue Breakdown by Product and Geography

Revenue by product

Year 2010 2009 2008 Net Sales 40,040 36,117 39,540

Product % of Net sales

RoutersSwitches

AdvancedTechnologies

Others

32,420 81.0%

6,574 13,568

9,639 2,639

29,131 80.7%

6,311 12,119

9,093 1,608

33,099 83.7%

7,940 13,538

9,446 2,175

Service% of net sales

7,620 19.0%

6,986 19.3%

6,441 16.3%

Net income 7,767 6,134 8,052

Revenue by geography

Year 2010 2009 2008 Net Sales 40,040 36,117 39,540

United States and Canada % of net sales

European markets % of net sales

Emerging markets % of net sales

Asia Pacific % of net sales

Japan% of net sales

21,740 54.3%8,048

20.1%4,367

10.9%4,359

10.9%1,526 3.8%

19,345 53.5%7,683

21.3%3,999

10.3%3,718

10.3%1,372 3.8%

21,242 53.7%8,123

20.5%4,530

11.5%4,276

10.8% 2,175 3.5%

Source: Cisco Systems, Inc. Annual report 2010


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Exhibit 2 Cisco India R&D Evolution

Source: Author

Exhibit 3 Indian Telecom Industry

Growth in subscriber base (in millions)

Subscriber base of wireless operators

Note: Financial year ending in March.

Source: Telecom Regulatory Authority of India. Annual report 2009/10.


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Endnotes

1 These events have been dramatized for the purpose of the case. 2 Cisco Systems Inc., Annual Report 2010. 3 Ibid. 4 U.S. patents awarded in 2009: IBM (4,914), Samsung Electronics (3,611) and Microsoft (2,906) occupied the top three spots. 5 “Cisco to invest over US$1 billion in India over next three years.” Cisco Press Release, 19 October 2005. 6 “Our growth is way above the industry average.” Business Today, 29 April 2012. 7 “Cisco’s Wim Elfrink: ‘Today, we are seeing what I call the globalization of the corporate brain.’” Knowledge@Wharton, Wharton University of Pennsylvania, 16 July 2009. 8 Sharma, M. “Cisco bullish over R&D growth in India.” CXOtoday.com, 28 May 2009. http://www.cxotoday.com/story/cisco-bullish-over-rd-growth-in-india/ (retrieved 5 March 2015). 9 Kedia B.L and S.C. Jain. Restoring America’s Global Competitiveness through Innovation.Cheltenham, UK and Northampton, MA: Edward Elgar Publishing, 2013. 10 The smart connected healthcare initiative being piloted with Apollo Hospitals aims to drive down healthcare costs to one dollar a month and increase reach in rural areas through use of tele-medicine. 11 “India to contribute 5% of Cisco’s global revenue: CEO.” The Times of India, 26 March 2014. 12 Telecom Regulatory Authority of India, Annual Report 2009-10. 13 Joint report by Department of Telecommunication (DoT), KPMG and FICCI titled “m-Powering India,” 2011. 14 “Cisco’s Wim Elfrink: ‘Today, we are seeing what I call the globalization of the corporate brain.’” Knowledge@Wharton, Wharton University of Pennsylvania, 16 July 2009. 15 “All pieces of the ecosystem are not mature enough.” Business and Economy, 30 May 2012. 16 Time Division Multiplexing (TDM) is used in traditional circuit switched networks where a dedicated channel is established between two communicating nodes. 17 4G/LTE: 4G refers to the fourth generation of data technology for cellular networks following 3G, the third generation. 4G technologies are designed to provide IP-based voice, data and multimedia streaming at speeds of at least 100 Mbps and up to as fast as 1 Gbps. LTE, an acronym for Long Term Evolution, is a 4G wireless communications standard designed to provide up to 10x the speeds of 3G networks for mobile devices. 18 “Bangalore R&D unit key to us; has filed 800-plus patents: Cisco.” Economic Times. 8 February 2015. 19 This was different from the usual approval process.


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CISCO INDIA (A): INNOVATION IN EMERGING MARKETS€¦ · · 2017-04-21CISCO INDIA (A): INNOVATION IN EMERGING MARKETS ... partnering with Indian companies and with the government