Re-Aligning of Cisco

Market Analysts are describing Cisco Systems as ‘in a slump’. That’s hard to paste on a global darling that hasn’t lost money in an 11 year run, except for last quarter (a big $2.9B loss). But there’s no denying that rivals are outpacing the company, in their dominant markets, while Cisco ponders their next move.Unfortunately for Mr. Chambers, a turnaround could take time. Even their Q3 profit announced last week did little for their stock price. In after hours trading after their announcement, Mr. Chambers acknowledged he’s seeing a weak Q4 and global layoffs are planned in June.

The ‘slump’ began last year when Cisco’s sales started to show weakness which Mr. Chambers initially attributed to the sour economy. When profits continued to wither quarter after quarter, Mr. Chambers alternately blamed a decline in government spending and a “transition” after the introduction of new switches for computer networks. But some customers and analysts said Cisco's problems can be traced directly to an arrogant and even lazy sales force, which is too used to taking orders rather than aggressively selling and serving customers. "They got fat and happy and got into just taking orders," said Aaron Goldberg, industry analyst and vice president of Ziff Davis Media Inc. "Turning this around is going to be hard, and if they trip, this is where it will happen." Others flat out question the innovation-by-acquisition strategy that has been the hallmark of Chambers' regime.

Analysts said Cisco stumbled because Mr. Chambers distracted the company by trying to push into new businesses like videoconferencing, smart meters for monitoring electricity use, television set-top boxes, video screens for stadiums and even a tablet computer for businesses. These initiatives, called “adjacencies” within the company, were supposed to be the foundation of future growth.

Despite Cisco’s troubles, the company remains a powerful force with $40 billion in annual revenue and nearly 73,000 employees. But Cisco’s traditional command-and-control management structure has left many talented executives feeling incredibly frustrated, resulting not only in a veritable valuation nosedive for the company, but the mass exodus of key staff as well (early May, Cisco’s Telepresence Vice President Phil Graham left for Avaya). In an effort to quell the discontent, however, Cisco promised to overhaul its entire management structure, reorganizing sales, services, and engineering operations in an effort to make Cisco more productive again. But with all Cisco's problems, few observers are going so far as to write off the company. "They are going to carry a lot of the Internet traffic in the future," Goldberg said. "But they're not going to grow at 30 percent anymore."

One worrisome comment from Mr. Chambers alarms me. He said "the speed with which this New Economy moves, and the associated peaks and valleys, will be much higher and lower than anyone anticipated. One of the lessons learned is that we must prepare for the speed and depth of these changes." This is kind of scary because his ability in reading ‘the market’ had been so successful for him in the past. They’re not in free fall for sure, but as the ‘darling of the Internet’ of years past, it’s a difficult place to be in right now.