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Tuesday, April 12, 2011

Cisco: The Mighty Hath Fallen

Cisco, a darling of technology companies, has officially entered its mid-life crisis. CEO John Chambers admits the company is in trouble and vows to fix it.

I'm surprised that the press has covered the story in such a shallow fashion. Cisco and Chambers have been almost universally lauded since the company's inception. Without a doubt, Cisco and Chambers were a great success story of the 1990s. But what have they accomplished lately?

A share of Cisco stock is priced today almost exactly as it was priced in April 2001. For a technology stock, that's an eternity. Because Cisco began to pay a dividend only this year, shareholders have suffered patiently for a long time. Cisco stock peaked in March 2000 during the Internet bubble. Sellers during the latter days of the bubble knew that Cisco could not possibly be worth what people were paying for its stock.

The truth is, Cisco has been living on its laurels for 10 years. The continuing profitability of its core product lines -- a stellar example of a "cash cow" in MBA-speak -- has generated a huge cash position for the company. Cisco sits on $40 billion dollars but apparently has no idea of how to use it effectively. Most of its acquisitions during the last 10 years have yielded no fruit.

One could argue, and I do, that Cisco is strategically bankrupt. It cannot increase market share in its core business because it already dominates that segment. In a vain attempt to drive top-line growth, Cisco targeted the consumer segment even though (a) product margins in the consumer segment are relatively low, (b) Cisco has no brand loyalty and not even much brand recognition in the consumer segment, (c) sales to consumers occur almost entirely through retail channels, and (d) product cycles in the consumer segment are short. In other words, Cisco entered a market that they were utterly unprepared for. The dismal outcome is not a surprise.

So, what could Cisco do now? Some possibilities:
  • (1) make a really large acquisition among the traditional network equipment vendors like Ericsson, Nokia Siemens, and Alcatel Lucent;
  • (2) unlock shareholder value by divesting acquisitions like Scientific Atlanta and Linksys that were part of the failed consumer strategy;
  • (3) increase the dividend and return the cash to shareholders over a period of time;
  • (4) make a strong move into a market segment like high-density servers that is more aligned with Cisco's core competencies than the consumer segment was; or
  • (5) timidly attempt to manage their way out of the mid-life crisis without restructuring the company.
Personally, I believe they should do (1), (2), (3) and (4). They have the resources to do all four. But what will they actually try? (5), of course. That's how incumbent senior management almost always goes forward in situations like this. Will it succeed? Possibly, but the odds are against them.

It took a non-linear approach by Lou Gerstner -- hired as CEO from outside -- to pull IBM out of its death spiral in the 1990s and redesign the company. It can be done, but it takes a very special CEO to pull it off. I'm not convinced that Chambers has the wherewithal.