Cisco's troubles may need a bigger fix

CEO John Chambers' wrong turns and befuddling council system got Cisco into this mess. Is he capable of getting it out?

By TheStreet Staff May 10, 2011 11:19AM

By Scott Moritz, TheStreet


As Cisco's (CSCO) prospects fall, questions of its leadership have risen.


After a series financial disappointments over the past six months has resulted in a 28% drop in the stock, Cisco chief John Chambers realized -- out loud -- that the company has gone adrift.


Now, analysts and investors are questioning whether Chambers is the right person to get Cisco back on course.


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Last month, Chambers admitted an inability to recognize and respond quickly to the deterioration of Cisco's business rocked the firm's credibility. To help fix the situation, he made a few obvious moves, including the shutdown of Flip, its consumer video camera business, and the collapse of Cisco's nine division councils to three last week.

Leadership coaches may applaud Chambers' ability to finally acknowledge a problem and take the responsibility to fix it.


But turnarounds are tricky. And while Chambers has opted to take the consolidation route by making the company smaller, some analysts have pushed in the other direction, calling for a major breakup of the company into separate units.


This latest turnaround attempt will be a big test for Chambers. And if the troubles turn out to be bigger -- and not fixable with Chambers' proposed solutions -- then a more dramatic move may be necessary.


The scale of the problem typically determines the size of the solution, said Bruce Kogut, professor of leadership and ethics at Columbia Business School.


"If there's a sense the company has to go through a radical change, it would make sense to look for someone else," said Kogut, referring to businesses broadly -- not specifically to Cisco. "You probably want to have a clean transition to make these changes."


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Chambers has been Cisco's CEO for 16 of the 20 years he's been employed there. He led the company through its greatest period of expansion during the Internet building boom and through two subsequent downturns. Chambers is widely liked both internally and on Wall Street. He's not only the energetic frontman for the company, but he's also routinely called upon as the deal closer when big sales are on the line.


Every heir apparent who has eyed the job -- senior VPs like Charlie Giancarlo, Mike Volpi, to name a few -- has moved on after realizing Chambers is firmly attached to his position. Chambers has said he's staying on to 2015, and the company has said it keeps a list of six to eight possible replacements as part of a succession plan.


But as it stands today, there aren't many immediate alternatives, said money manager Timm Bechter of Waddell and Reed. "He's got to be the guy right now."


Those plans could change quickly, however, if investors grow impatient.


As Cisco gets set to report fiscal third-quarter results after the bell Wednesday, some on Wall Street are eager to see some bigger changes sweep through Cisco.


Break It Up


Morgan Stanley (MS) analyst Ehud Gelblum has been calling for a breakup of the company since February. With everything under one roof, strong divisions are hindered by some of the weaker ancillary businesses, he said. One of Cisco's biggest difficulties is being a conglomerate at a time when its customers "increasingly favor product category specialists," Gelblum wrote.


Like a good networker, Cisco has extended its reach across the entire IT industry -- so much so in fact that the business has become unwieldy.

Getting all of the company's ducks to line up at the same time appears to be getting increasingly more difficult," wrote Gelblum. Managing all this "would be better achieved as separate, stand-alone, 'little Cisco' companies."


But given that Chambers was the captain who sailed Cisco onto the rocks, investors might be asking if he's the best person to pick up the pieces and steer Cisco -- in whole or in parts -- out of trouble again.


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