The World According to Chambers

Aug 27th 2009 | SAN JOSE, CALIFORNIA | from the print edition

JOHN CHAMBERS no longer travels much. That is not for want of energy, of which the boss of Cisco Systems has plenty. It is because he is a proud and enthusiastic user of his own company's technology. Since 2006 Cisco has been selling a system called TelePresence (pictured above, with Mr Chambers holding forth), which turns awkward videoconferences into pretty lifelike encounters. He pulls all-nighters to talk to customers and colleagues in Europe and Asia.

Meet Mr Chambers in the flesh, and the small talk lasts for about five seconds, until he asks: "What do you expect from this conversation?" If he seems to have no time to waste, no wonder. He does not only have a huge company to run, but he is also reshaping it.

During the dotcom boom Cisco was hailed as the leading light of the "new economy", being the supplier of most of the gear guiding data through the internet. In early 2000, when its market capitalisation peaked at nearly $550 billion, it was briefly the world's most valuable company. But a year later, like other technology giants, it was hit by what Mr Chambers calls the "hundred-year flood". Cisco did not drown, but much of its stockmarket value was swept away (see chart 1). Since then it has been regarded for the most part as a lowly network plumber: necessary, but dull.

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The company has not been immune from the world's latest bout of economic troubles. In the quarter that ended in July its profit, $1.1 billion, was 45% lower than a year before. But Cisco, which had revenues of $36 billion in its latest financial year and employs more than 66,000 people, has been making headlines again for different reasons as well. "Cisco plans big push into server market," read one in January. Another, in March, declared: "Cisco pushes further into consumer territory." More recently a third said: "Cisco: smart grid will eclipse the size of internet."

In other words, the plumber is branching out. As well as making these unexpected forays away from selling network gear, Cisco is exploring other sidelines. From "virtual health care" to "cloud computing" and "safety and security" to "routers in space", the company is tackling more than 30 "market adjacencies", as new areas of growth are called in the corporate argot. Mr Chambers expects to keep adding more. He hopes that at least half will be successful and generate 25% of Cisco's revenues within five to ten years.

Some on Wall Street worry that Mr Chambers, who has been Cisco's boss for 14 years, is stretching his company so thinly that it could be ripped apart. Mr Chambers, not surprisingly, sees the expansion, seemingly in all directions at once, differently: as a bold attempt to achieve two things. He wants Cisco to become the main supplier of the essential elements of an increasingly connected economy, and to be a shining corporate example of how to use them. It should provide not only the tools of the company of the future, but also its organisational model.

Even at the height of the dotcom boom, people had only the vaguest grasp of Cisco's business. Its physical incarnation was easy to picture: hardware such as routers and switches, which direct traffic through a network. But Cisco also made a lot of money from services, for instance by helping customers to maintain those networks. It was always a software firm as well, providing the dominating operating system for internet-type corporate networks. This mixture goes a long way towards Cisco's dominance in the networking market and its high gross margins (64% in the most recent quarter): firms have continued buying Cisco gear not least because it works best with IOS (originally Internetwork Operating System), as the software is called.

Cisco also has a record of being willing to reorganise itself. It was an early outsourcer of manufacturing, for instance. Many of its products are never touched by a Cisco employee, but built by a contract manufacturer, tested remotely and then shipped directly to the customer. Cisco was also one of the first big IT companies to let others do much of its R&D. To plug holes in its product portfolio or react to market demand, it bought dozens of other networking firms and perfected the difficult process of integrating them.

The once-a-century flood, however, did not just wash away nearly a third of Cisco's revenues in a single quarter. It also laid bare the limits of the firm's business model. Its core markets, routing and switching, had matured: they would never again boast the annual average growth rates of more than 50% that drove Cisco's revenues from $1.2 billion in 1994 to $18.9 billion in 2002. The firm was also running up against the law of large numbers, which makes it more difficult for big companies to grow rapidly. And however efficient the supply chain, networking gear is bound to become a commodity eventually.

The obvious remedy was to move quickly into new businesses promising more value. Some companies would have begun gently, with one or two; Cisco went for half a dozen, including optical networks, wireless equipment and internet telephony. Today these "advanced technologies", as they are called internally, bring in 25% of Cisco's revenues (see chart 2). This branching out has been institutionalised and expanded. Hence the 30 market adjacencies.

These are best seen as a portfolio of business bets, much like those of diversified companies such as 3M and General Electric (GE). Yet Mr Chambers is keen to point out how Cisco's collection is different. "GE's is comprised of individual pieces. The light-bulb group doesn't tie into the jet-engine group," he explains. "Our pieces are all tied to the network."

This gives Cisco a huge and growing field to play on. The world is getting more and more connected. Sensors and chips, for