IP: Cisco's gamble

[David Farber <dave () farber net>]

> > From: "Janos Gereben" <janos451 () earthlink net>
> > Subject: Cisco's gamble
> > Date: Tue, 28 Aug 2001 18:43:04 -0700
> > MIME-Version: 1.0
> >
> > Cisco's restructuring: a dangerous experiment
> > Steve Wallage - www.the451.com
> >
> > In its first such move since April 1997, Cisco has restructured again,
> > moving from three customer-centric areas to 11 product areas. The move
> > was documented in the451 news analysis - 'Cisco shuffles execs in
> > major reorganization.' The company played down the significance of the
> > move, suggesting it is part of its "six-point plan," which was
> > unveiled at the start of the year.
> >
> > Although most of the financial analysts share the view that the
> > change, made on August 23, is fairly minor, and the impact probably
> > positive, the move is a very strange one. It came completely out of
> > the blue, goes against the trend of other restructurings, and is
> > somewhat counterintuitive in its aims. But on closer inspection, the
> > rationale is easier to see, particularly if one takes a more cynical
> > view of Cisco's reasoning. However, it is still fraught with potential
> > pitfalls.
> >
> > Cisco is a highly impressive company (see previous insight, 'Breakaway
> > or judgment day for Cisco'), and one that does not tend to make
> > changes to the business without careful consideration. It is often far
> > more innovative in dealing with challenges than its competitors -
> > note, for example, some of its creative ways of avoiding redundancy by
> > offering employees out-placements to charities. At the start of 2001,
> > Cisco was positively relishing the thought of a downturn in the IT
> > industry, believing that this would enable it to leapfrog over
> > competitors, and that it could maintain its aggressive growth, leading
> > it to be far better positioned for a future upturn.
> >
> > The reality is that Cisco has been hit hard by the downturn,
> > particularly in its service provider and carrier business, but it's
> > also showing frailties in some of its other business practices, such
> > as inventory management. Hence, a restructuring to revitalize the
> > business makes sense.
> >
> > Financial analysts have generally accepted the Cisco rationale for the
> > move. Kintisheff Research believes Cisco's spin that the restructuring
> > will allow it "to offer universal solutions [centralized marketing
> > effort], which will be good only if all incorporated products feature
> > the latest and the best in technology [new technology groups]."
> >
> > UBS Warburg said, "We view these developments as mildly positive,"
> > while ABN Amro stated, "We do not believe the actions change our
> > financial forecasts, nor do they shift management's target. But the
> > actions should help Cisco execute on the plan."
> >
> > Perhaps the move is cosmetic - after all, last year even Cisco
> > admitted its marketing could have been better. The company's previous
> > R&D spending was relatively low at 8% of revenues, and even with the
> > new structure, there will be separate enterprise and carrier sales
> > teams.
> >
> > However, the restructuring is highly surprising in a number of ways.
> > It increases the complexity of the structure, moves the company from
> > being customer focused to being product and technology focused, and
> > the new focus is on hardware rather than software or value-added
> > areas.
> >
> > Most of Cisco's competitors have been looking to simplify their
> > structures, as - at least in theory - it will cuts costs and allow
> > companies to better create bundled solutions. For example, Nortel has
> > five main product categories: optical long haul, optical metro,
> > wireless Internet, intelligent Internet and VOIP. By having so many
> > divisions, Cisco also runs the risk of lack of synergy and corporate
> > focus. For example, last year the previous Lucent CEO described Lucent
> > as being "11 hot business units" with no central coordination.
> >
> > Customer focus has also been a key driver of recent reorganizations.
> > Alcatel did this several years ago to good effect, by assigning key
> > accounts to senior management. Lucent has recently announced a
> > restructuring that will prioritize its R&D and sales effort to the top
> > 30 customers and top 20 country markets. Lucent's next priority is
> > 'hubbed' countries, which are served by one of the top 20 countries,
> > and lowest priority is 'transit ion countries,' which will be served
> > by channel partners or be exited by Lucent. It will have a separate
> > wireline and mobility segments supported by global services, supply
> > chain, R&D and global partners.
> >
> > Cisco's 11 new technology groups are also unusual in that they focus
> > on hardware and legacy areas - for example, Ethernet access and core
> > routing. Recent presentations by Cisco have shown a strong desire to
> > go further up the value chain - for example, the company has claimed
> > market leadership in such areas as virtual private networks and
> > firewalls. The largest of the new groups, Internet switching and
> > services, covers many of these areas and is headed by the ex-chief of
> > strategy, Mike Volpi. But this still suggests that Cisco has reduced
> > its expectation on revenues from new value-added areas.
> >
> > So why has Cisco gone against most of its peers. There are five main
> > reasons.
> >
> > First, there is a sense that the company is going to 'stick to the
> > knitting' and focus more on its core competencies rather than
> > diversify into new areas. Cisco is still on the acquisition trail (as
> > shown by its recent purchase of Allegro), but this new structure
> > suggests that acquisitions may be more about filling in gaps in its
> > existing portfolio.
> >
> > Second, the new structure is designed to promote internal competition
> > and allow the sales force to choose the best solutions from the 11
> > technology groups. Cisco has always benefited from its flexibility in
> > offering solutions, and this new structure further facilitates this.
> >
> > Third, the new structure will allow it to focus more on R&D and
> > marketing - two areas in which the company has been relatively weak.
> >
> > Fourth, it will allow Cisco to make some further reductions in its
> > workforce as overlaps in the business become more evident.
> >
> > Fifth, the restructuring will detract financial analysts' attention
> > away from Cisco's problematic carrier and service provider segment.
> >
> > Overall, the restructuring makes more sense than on initial
> > inspection, and gives Cisco the opportunity to further reduce its
> > costs and hide the poorly performing parts of its business.
> > Nevertheless, the move is counterintuitive in many ways and goes
> > against wider industry trends. Cisco's track record shows that its
> > ability to execute should never be underestimated, but this
> > restructuring looks to be a dangerous experiment.



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