Cisco's Other Expansion Strategy

Cisco Systems Inc. http://www.cisco.com has garnered quite a reputation for acquiring startups and integrating them into its organization – so much so, in fact, that its other way of fueling expansion often goes unnoticed.

The other way? Setting up facilities close to major competitors such as Lucent Technologies Inc. http://www.lucent.com and Nortel Networks http://www.nortelnetworks.com, and luring away their top staff with promises of higher salaries and stock options.

The strategy strengthens Cisco while weakening its opponents. It can also be a lot more cost effective than buying optical networking startups, whose valuations sometimes exceed $10 million per member of staff.

The latest example of Cisco’s strategy was unveiled last month (June), when the vendor announced plans for a big facility in the “Telecom Corridor” just outside Dallas, Texas. It will house 5,000 staff – a five fold increase of its current workforce in the area.

Cisco’s plans for the Telecom Corridor are probably viewed with trepidation by Alcatel SA http://www.alcatel.com, Ericsson Inc.http://www.ericsson.com, Fujitsu Ltd. http://www.fujitsu.com and Nortel, all of whom have optical networking HQs in the area.

And they’ve good reason to feel worried. Cisco has a record of invading new territory using guerilla recruitment tactics.

The best example of this occurred in the mid 1990s when Cisco successfully undermined the dominance of IBM Corp. http://www.ibm.com in the market for large corporate data networks based on mainframe computers. Cisco set up shop across the street from IBM in Raleigh, NC, and starting recruiting IBM ‘s key staff. The tactic gave Cisco a big leg up on the technology front at the same time as giving it access to IBM’s customers.

Since then, Cisco has sometimes used the acquisition of a startup in a new area to launch furher guerilla recruiting initiatives. After buying Skystone Systems Corp. in 1997, for instance, the Ottawa, Canada based startup became the launch pad for campaigns targeting Newbridge Networks (now part of Alcatel) and Nortel, which were less than quarter of a mile away.

Similarly, Cisco's plans for the Telecom Corridor near Dallas started with its acquisition of three startups – Selsius Systems (IP PBXs), Monterey Networks (optical switches) and Cerent Corp. (next generation Sonet equipment).

Vendors have reacted in different ways to Cisco’s tactics. In Ottawa, for instance, Nortel fought back by having people with sandwich boards march up and down outside Cisco’s recruitment center, advertising Nortel. Lucent, on the other hand, took matters to court when Cisco lured away a team of its experts after expanding its offices in suburban Boston, MA, (see Vendor Lawsuits Get Personal ). "They pretty much came right out and said they were going to steal people from us," said one person close to the lawsuit.

From the individual’s point of view, however, Cisco’s tactics have proved highly successful, in that they’ve driven up salaries and stock options enormously. "Competition for employees has already changed a lot in terms of compensation and vacation packages. The last five years have been great for the workforce,”says Gary Sanders, director of optical networks in the U.S. for Ericsson, which is based in Richardson, Texas.

"Having a company like Cisco enter the area is good for the community," adds Sanders – a sentiment also expressed by John Jacobs, vice president of Richardson's Chamber of Commerce. "A lot of our companies may experience a loss of some employees in the short term," says Jacobs. "But in the long term, Cisco's presence makes the whole area more attractive."

by Marguerite Reardon, senior editor, Light Reading http://www.lightreading.com

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