But how did it get to this point? How did things get this bad?
There are three key factors, three big weaknesses in Cisco’s operations: over-ambition, distraction and mismanagement.
Cisco has always boasted about how it has left its traditional competitors behind, how it is the industry’s visionary, and how it can spot market transitions three to five years before they become obvious to everyone else. And in an effort to maintain its 12 to 17 per cent annual growth targets while its core routing and switching markets matured and slowed, Cisco pursued 30 or so markets adjacent to those core businesses.
Analysts and pundits have long suggested these market adjacencies would distract the company; Cisco always scoffed at the notion, but alas, it’s come to pass.
The first and second quarters of Cisco’s fiscal 2011 proved that Cisco obviously bit off more than it could chew. Its core switching and routing businesses slumped, but so too did its consumer business. In the second fiscal quarter, switching revenue was down 7 per cent from the previous year and the consumer business was down 15 per cent — an indication that Cisco may not be as adept at spotting or capitalizing on market transitions as it claims.
Chambers admitted as much at the Cisco Partner Summit conference in March, promised to refocus the company on its core businesses in an April memo, and then lopped off its Flip videocam business a week later.
Cisco also realigned other consumer businesses, eliminated 550 jobs in those businesses, gutted its EoS media and entertainment operating system, and leaned more on its Linksys home networking operations to contribute to the core business.
Analysts are still calling for Cisco to do more, perhaps divesting itself of its Scientific-Atlanta cable set-top box business, which it acquired for close to US$7 billion in 2005. That acquisition was preceded by Linksys, maker of home routers, for US$500 million in 2003; and followed up by Pure Digital, maker of the Flip videocam, in 2009 for US$590 million. That’s US$8 billion invested in acquiring consumer businesses since 2003, not counting how much R&D was spent on these product and markets since then.
Cisco’s ambition in moving into these and the other markets caused it to forsake its bread-and-butter business. In the end, the company killed off a big chunk of its ambition. How many more of those 30 market adjacencies will end up the same way?
Chambers said the product transition that caused a plunge in switching revenue and profits in the second fiscal quarter took the company by surprise. In a subsequent memo, Chambers said the company lost focus, and was slow to make decisions and execute. He said Cisco needed to better align operations with innovation (i.e., product development).
Chalk these shortcomings up to distraction. For whatever reason, Cisco took its eye off the product transition ball, injecting the market with lower-margin/higher-performance gear that killed demand for more lucrative platforms. It upset the balance.
Perhaps Cisco was preoccupied with the performance of all of its newer businesses? Perhaps distracted by the disappointing results in its consumer business? Perhaps plotting the eventual closure of the Flip videocam business?
Whatever the reason, Cisco bungled a major product transition in its core, bedrock business, which is a no-no in any company, much less a public Fortune 100 titan. The effects took the company by surprise, which confirms that it was not paying close enough attention to the logistics of the transition.
Cisco is now attempting to rededicate itself to core routing and switching, lopping off Flip and winnowing down its consumer operations. Expect this renewed focus to be an ongoing trait as Cisco bulks up its core business and perhaps looks to exit more adjacent markets.
Loss of focus, slow decision-making, lack of execution, distraction, even the ambition (or overconfidence?) to try to enter 30 adjacent markets — these are symptoms of mismanagement.
Before this week, Cisco management was comprised of nine boards and councils. These boards and councils were instituted by Chambers in 2007 to instill a more horizontal, less siloed decision-making process, which was intended to improve the company’s coordination and efficiency in developing integrated products and systems. They are staffed by the heads of Cisco’s product development and marketing groups, and the CTO.
There are a lot of ideas and agendas — and egos — to manage along with the operations of a $40 billion company attempting to broaden its presence in so many non-core markets. It’s now apparent — via this week’s reorganization that reduced those councils from nine to three, and Chambers’ memo that Cisco lost focus, was slow to make decisions and failed to execute — that the structure contributed to the company’s misfiring in the last two or so quarters.
Analysts are generally positive on Cisco’s effort to streamline the board/council structure. Some would like Cisco to pare down more of its businesses — especially more of the consumer operations — but whether it will is unclear.
