Abstract: Cisco Systems and the Virtues and Cices of the New Economy Business Model

William Lazonick


A leading supplier of networking equipment since 1986, Cisco Systems is emblematic of the form of business organization that develops new innovative capabilities largely through acquisition and development (A&D) rather than R&D. As the company seeks to transform itself from being a hardware to a software vendor, however, organic revenue growth has proven elusive, suggesting that over-reliance on the A&D framework is not without long-term risks for firms whose long-term prosperity depends on their ability to develop innovative capabilities. Addressing the hypothetical question of whether a company would have been more successful if it had followed a different strategic path requires detailed analysis of the technologies, customers, and competitors in the segments where the company sought new business in order to compare those where it succeeded and those where it failed. A three-decade-long study of Cisco's development allows us to evaluate key sectors where potential success proved elusive—notably, optical networking and mobile backhaul—as well as those sectors such as data centers where the company continues to build its presence, albeit from a very low base. As part of our forensic research into Cisco's strategic decisions, we examine in parallel top management's focus on the company's share price, a central component of this new economy business model. Since 2002 and the bursting of the dot com and telecom bubbles, Cisco has engaged in massive stock repurchase programs and sequestered billions of unpaid taxes outside of the United States while calling on the government to increase education spending in the areas of science and technology. In both 2011 and 2013, Cisco announced significant lay-off programs at the same time as it returned huge amounts of cash to shareholders and granted millions in stock options to top executives. In addition to the potential harm that such financialization by high-tech firms may inflict on U.S. employment and the corporate tax base, we argue that by over-focusing on its stock price, Cisco has failed to build on its accumulated capabilities to establish itself as a leader in the most sophisticated segments of communication technology.