Cisco: 5 Secrets of John Chambers’ Success

If you’re looking for a big-name CEO who has delivered monster returns to shareholders, you can’t do much better than Cisco Systems’ (NASDAQ:CSCO) John Chambers. Since Chambers took the helm of the networking-equipment giant 17 years ago last month, he’s grown a company with $1.2 billion in annual revenue into a $43 billion colossus.

He’s also taken good care of his shareholders: CSCO has risen an incredible 1,037% since January 1995. True, we’re talking about a very, very long tenure over which to ride out the peaks and valleys, but during that same period, the Dow rose only 238%.

It was hard to gauge the scope of Cisco’s dramatic growth potential when the company went public back in 1990. Sure, it got a bounce of 25% on the first day of its IPO, but the company also lost both of its founders within six months (Sandra Lerner was fired by CEO John Morgridge; husband Leonard Borsack quit in protest).

But Morgridge took Cisco to the next level. Within five years, he’d grown the company from $5 million to $1 billion and from 34 employees to nearly 2,300. One of those early hires was Chambers, a former IBM (NYSE:IBM) salesman and Wang executive who came in as senior VP of worldwide sales and operations — and ended up being Morgridge’s heir-in-waiting. Morgridge groomed Chambers well so that when Morgridge was ready to retire in 1995, Chambers was ready to step in.

But Chambers was no Morgridge clone. Inspired by Hewlett-Packard (NYSE:HPQ), he reorganized the company’s products and employees into six teams. He also adopted the philosophy Jack Welch made famous at General Electric (NYSE:GE): Compete only in markets where you can become No. 1 or No. 2.

Innovative and aggressive, Chambers would lead Cisco through multiple strategic acquisitions — including switching provider StrataCom. But when the dot-com boom went bust at the end of 2000, it took more than $450 billion of Cisco’s market value with it.

In a strange, new world without dot-com darling and Cisco channel partner WorldCom (which wound up dumping the company’s networking gear at below-cost prices) Chambers wasn’t afraid to change things up. He axed nearly one-fifth of the company’s payroll while investing heavily in the Next Big Thing: wireless Internet equipment and consumer-oriented technologies.

Although wireless Internet was a great play, consumer products from Cisco’s 2005 acquisition of TV set-top box manufacturer Scientific Atlanta and 2009’s buy of Flip video camera maker Pure Digital by last year had gone bust. And this time last year, when the company reported an 18% drop in profits — and the fourth quarter in a row of shrinking margins and sluggish public-sector sales — shares fell 15%, and many shareholders wanted Chambers’ head on a plate.

Why the rapid fall from grace? Because Cisco suddenly was in a whole new game. IBM and HP were going after the networking market (HP had bought its way in by acquiring 3Com), and agile competitors such as Juniper Networks (NASDAQ:JNPR) were producing faster, cheaper networking gear.

Chambers shook things up again. He tapped Gary Moore, head of the company’s consulting and technical-services group, to become Cisco’s first chief operating officer. Moore was tasked with prioritizing the company’s investments and boosting operational efficiency.

Chambers then cut costs by some $1 billion, reducing the company’s global workforce by more than 10,000 jobs while dumping distractions like the Flip video unit. (CSCO stopped manufacturing TV set-top boxes last year, even though it’s slapping down rumors this week that it wants to unload the business.)

Earlier this month, a more focused Cisco let investors see its latest report card: a 27% rise in second-quarter earnings and an 11% boost in revenue, to $11.5 billion. Margins are improving, and with $46.7 billion in cash, the company is in the market for acquisitions again. Cisco shares have gained 53% since their 52-week low of $13.30 last August, and the current dividend yield of 1.6% looks secure.

Now that he’s reinvented Cisco twice, what are the secrets of Chambers’ success?

1. Be Customer-Centric

For a tech CEO, Chambers spends a lot of time talking about the needs of his customers. While all companies boast of a customer focus, the business applications of leading-edge technology are as important — if not more so — than the technology. Chambers drives his workforce to learn what’s important to customers and then deliver it.

2. Stay Ahead of the Curve

Chambers is committed to innovation in every part of Cisco’s operations — not just in technology. He believes Cisco needs to stay ahead of the curve in everything from product and service differentiation to the customer-delivery model — even in talent recruiting. He refers to this as “breadth of innovation.”

3. Focus on the Core Business

Cisco lost its way when new consumer-oriented investments pulled attention away from its core networking-infrastructure business. Chambers is getting Cisco back to keeping the Main Thing the main thing. That means playing to its strengths as a global provider of network-centric enterprise platforms that help business customers become more competitive.

4. Be Bold, Yet Willing to Change

Chambers is not afraid to make the tough choices — cutting personnel, eliminating products or admitting when change is needed. More notably, he’s “ruthlessly” self-critical and willing to admit when he’s the thing that needs changing. He took the blame for the company’s recent “stumbles” and slow decision making.

“We have disappointed our investors, and we have confused our employees,” he wrote in a memo to employees last year. “Bottom line, we have lost some of the credibility that is foundational to Cisco’s success — and we must earn it back.” He once remarked that he used to be a “command-and-control” sort of leader until he realized that letting go and being more collaborative got better results. This is an uncommon quality in the business world — and even rarer in the C-suite.

5. Invest in the Next Big Thing

Chambers is always looking for the next opportunity, and right now, that means he has his head in the cloud. If companies are going to stay competitive and cash in on new opportunities, they need to be able to manage far more complex information-technology challenges. Cloud computing is seen as a way for companies to do more with less, and Cisco increasingly is staking a claim in that space.

Last quarter, the company launched CloudVerse, a framework to link public, private and hybrid clouds. Chambers likely will surround the launch with synergistic acquisitions.

The bottom line: Chambers latest revival of Cisco already is yielding results, but the CEO who has delivered such stunning returns to CSCO investors for the past 17 years will need even deeper magic for the road ahead.

The cloud-computing revolution, more aggressive — and in some cases, lower-cost — competitors and the changing needs of public- and private-sector customers will force Cisco to make a lot of perceptive bets today to avoid potential pitfalls tomorrow. But Chambers believes he’s a product of his challenges more than his successes — he overcame dyslexia back in the 1950s, before anyone knew what it was –so  he can be counted on not to waste his setbacks.

As of this writing, Susan J. Aluise did not hold a position in any of the stocks named here.

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