Chambers: Cisco must change to regain credibility

Cisco's chief executive John Chambers has warned employees of a wave of changes coming to the networking company, meant to tighten its focus and regain lost credibility after a couple of disappointing quarters.

In a memo sent on Monday, Chambers told Cisco's rank and file that while the networking giant's basic strategy is sound, aspects of its "operational execution" have been weak. For this reason it "needs more discipline" in its business, he said.

Cisco chief John Chambers has said the company "needs more discipline". Photo credit: Sarah Tew/CNET News

"We have been slow to make decisions; we have had surprises where we should not; and we have lost the accountability that has been a hallmark of our ability to execute consistently for our customers and our shareholders. That is unacceptable," Chambers wrote in the memo, which was made public on Tuesday.

Growth strategy

Cisco has performed poorly for the last two consecutive quarters, reporting earnings that have failed to meet Wall Street analysts' expectations and seeing year-on-year declines in some of its core areas, such as switching.

"We have disappointed our investors, and we have confused our employees. Bottom line, we have lost some of the credibility that is foundational to Cisco's success — and we must earn it back," Chambers wrote.

Cisco's recent strategy for growth has been based on providing products to deal with the boom in data being processed by companies. In datacentres, for example, it has kept adding to its Unified Computing System (UCS) family of products, and it has also made a push into video-based collaboration.

However, it has expanded beyond its core areas over the past decade and has targeted consumers with its Flip video cameras and Umi home teleconferencing systems. In non-core enterprise products, it has also moved into blade servers, traditionally the domain of vendors like HP, Dell and IBM, as part of its UCS effort.

In addition, at the Cisco Live conference in London in February, Chambers said Cisco was targeting many "market adjacencies" beyond its core products, including smart grids, connected homes, desktop virtualisation, and even physical security for technology facilities.

'More discipline'

These non-core products have proved less successful than core products for Cisco. The performance of its home-teleconferencing systems dragged down its second-quarter results of 2011, and its hardware security product sales also fell in that period. The company also noted in its second-quarter report that UCS servers and other non-core products have lower margins than its core products.

Analysts have reportedly criticised the networking specialist for pursuing too much growth in too many alien areas, too quickly. Chambers acknowledges this in his memo. "Many say that, in the face of this expansion, Cisco needs more discipline. I agree," he wrote.

He went on to say that Cisco's market is in transition, and because of this, the company needs to focus and rethink its strategy to prepare for what is coming next.

 We will take bold steps, and we will make tough decisions. We will address with surgical precision what we need to fix.

– John Chambers, Cisco chief executive

"You will see Cisco make a number of targeted moves in the coming weeks and as we move into FY12 [the 2012 financial year]", Chambers said.

As part of this, Cisco will retrench around its core product lines and seek to dominate their respective sectors, the chief executive added. He identified five areas where the company is "executing incredibly well" and where the company "will not fix what's not broken".

"Our five company priorities are established: leadership in core routing, switching and services; collaboration; datacentre virtualisation and cloud; architectures; and video," he wrote. "We will accelerate our leadership across our five priorities and compete to win the core."

Company priorities

Chambers acknowledged Cisco may find it tougher to prevail in switching products, signalling in the memo that "our competitors in this area are fierce, with different business models and architectures".

Its switching rivals include Brocade, Juniper and, significantly, Chinese networking giant Huawei. In its second-quarter earnings report, Cisco said it was experiencing "price-focused competition from competitors in Asia, especially from China".

In February, the company axed its corporate cloud-email service, formerly known as WebEx, and the memo hints that it might excise other products from its line-up. "We will take bold steps and we will make tough decisions," Chambers wrote. "We will address with surgical precision what we need to fix in our portfolio."

All told, the message of the memo is that Cisco is going to restyle itself with greater focus on its high-margin core products.

"As I've said before, we will look back at this time in Cisco's history and remember it as challenging, and important to the future of our company," Chambers said. "Plain and simple — we need to roll up our sleeves and work it out, together."