At Cisco, 'Downturn' Screams Long-Term Opportunity

CEO John Chambers explains how he's building network share while moving into such new markets as health care and security and surveillance

If your company had $30 billion in cash and a 50%-plus share of the computer network market, you might share John Chambers' view of the current economic challenges. The chairman of Cisco Systems (CSCO) describes these dour days as "the greatest opportunity of our careers." Chambers, who has been through four other downturns, shares with Peter Burrows, BusinessWeek senior writer, his "playbook" for dealing with this recession.

What is different about this downturn from others, and what's different about how you're trying to manage through it?In some ways, the basic playbook for how you handle downturns has not changed at all. I've been through it here at Cisco in 1993, 1997, 2001, 2003, and now in 2009. In the four preceding ones, every time we came out of it stronger, in terms of percentage of the industry's market cap and in terms of market share, but we also used it every single time to move into new [markets related to Cisco's core Internet communications business, such as videoconferencing].

How would you describe your playbook for dealing with downturns?There are four rules of thumb. The first is to take a candid look at how much of [the downturn] is due to macroeconomic issues, and how much was self-inflicted. If your strategy was working well going into it, it will work well going out. The second thing you do is determine the depth and length of the downturn—and it's usually deeper and longer than you think it will be. The third thing is to really get ready for the upturn—in terms of strategy, but also in terms of how you communicate with your employees, with your shareholders, and with your customers. And the fourth element, which we added in 1997, is to get closer to your customers.

Cisco is moving aggressively into new markets, from consumer electronics to computer servers. Why are you expanding your business when the economy is contracting?This [downturn] is different from almost every other one we've been in. In 2001, for example, we were at the end of a product life cycle, and at the end of the first phase of the Internet. So we had to be very aggressive in our response. I'd hoped I'd never have to do it again in my life, but we took our total cost down 25%—and we did it in just 51 days. It was very, very painful. And on day 52 we started gaining market share again.

This time, it's the exact opposite. Our strategy was working well going into this downturn. We were gaining market share in routers and switches, gaining thought leadership in collaboration and networked Web 2.0 technologies, and we were doing very well with our five advanced technologies (such as Telepresence videoconferencing systems)—which, by the way, are now 25% of our business, and got hatched during the 2001 and 2003 downturns. Over the past seven years, we have nurtured a [management approach based on] collaboration and teamwork using networked Web 2.0 technologies, which we feel will be the business model for 21st-century leaders. It has allowed us to enter two dozen [new] markets, that is now at 28—I just added two more yesterday.

What are the two new ones?Security and surveillance, and health care—especially remote health-care delivery capabilities.

Why did you adopt this collaborative approach?We moved from command and control, which is an environment I'm very comfortable with. When I turn right, 67,700 people turn right. That's huge power. But it's not the future. The future is about collaboration and teamwork, and making decisions with a replicable process that offers scale and speed, but also flexibility.

We build everything around a "vision" that looks 5 to 10 years out; a "differentiated strategy" that looks at the next 2 to 4 years; and "execution"—what you need to do in the next 12 to 18 months.

How has Cisco's organizational structure and practices changed?We build social communities based on this collaboration model, but social communities with a lot of process around them. We've got councils, which are [pulled together to go after] $10 billion opportunities; boards, which are for $1 billion opportunities. And there are working groups, which either support the councils and boards, or are created to address a specific topic at a certain point in time. And network-enabled Web 2.0 technologies such as Telepresence will help deliver productivity. I think we'll be able to drive Cisco's productivity at 10% a year again (as it did in the 1990s), as measured by revenue per employees. Or we can use those [productivity gains] to free up a tremendous amount of resources to move into [markets for products and services that can work on Cisco-based networks] that I would not be able to move into otherwise, because they wouldn't deliver meaningful revenues for two, three, or four years.

How does the job of the chief executive officer change in this more collaborative approach?Realize that the hardest one to change is the CEO, and yet this must start at the top. And it means realizing that change is great when it happens to other people, but that it's uncomfortable when it happens to you.

It was hard for me, because I am very comfortable with command and control. So moving away from what was working was hard. At first it was frustrating. I'd get my team together and watch them work on an issue, and I'd usually know what the answer would be within the first 10 or 15 minutes. But over time, they [began getting to] a better decision than I would have made. It's almost like a parent watching their children evolve. It really was exciting. And it took changing the reward systems as well. It took training and rewarding people who were collaborative, and who focused on what was good for the overall company rather than for a specific function or for their particular group.

You wrote an op-ed piece in The Wall Street Journal that this downturn may be the greatest opportunity this generation of business leaders is likely ever to see. Why?I do believe very strongly that while this is the most challenging time in our careers, as business leaders, customers, and as countries, it also offers potentially the most opportunity. When you face challenges of this magnitude, with the tremendous disruption it creates for businesses, for jobs, for families, you get a willingness [from people] to change with speed you do not get in normal times. So out of this tremendous pain as a country and as a world, I believe we should focus on tremendous gain.

And all of this applies to our country as well. I think we can change everything. We can change our education system. Let's not kid ourselves: Our educational system hasn't changed in 50 years. A teacher from 50 years ago could walk into a classroom today and easily teach the class. That's a sad commentary. It's probably the slowest moving industry of them all.

Isn't it difficult to focus on the "opportunities" when so many people are just trying to keep the lights on or at least minimize the economic damage?You need to have the ability to focus on the upturn without minimizing the importance of the downturn. You have to paint a picture of where you want to be 5 to 10 years out. That's exactly the mistake that most companies make. Most people fall into the trap of thinking about this quarter or this year, or are unrealistic about not dealing with the severity of the downturn. Or they say they've only got one or two products where they are the leader, and decide to try to power through [by relying on those current strengths]. That's a recipe for disaster as well…This may surprise you, but I spend almost no [time] worrying about the next quarter or even the next year. My focus is on where we want to be 2, 3, 5 years out.

Your advice to other CEOs is to be aggressive during this downturn?We're going to be extremely aggressive during this downturn. As a company, we can come out of this with a stretch goal of being the leader not just in communications, but in IT on a global basis.

How are you spending your time differently since the downturn worsened in late 2008?I'm getting closer to the automotive and financial industries than I've ever been. They may not order much from us for the next couple of quarters (laughs), but this is when you go out and build relationships. That's our culture. We focus on catching market transitions, and tend to be counterintuitive. By the time the majority agrees on something, it's probably heading the other way. That's why we don't focus on competition. Competition is just a way of keeping score.

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