Cisco's Extreme Ambitions

CEO John Chambers is now chasing market share in 30 different categories—and making powerful enemies

Despite Cisco's size, CEO Chambers says it will now be far more nimble Eric Millette

By Peter Burrows

During Cisco Systems' (CSCO) annual meeting on Nov. 12, John T. Chambers, chairman and chief executive, strode confidently around the auditorium at Silicon Valley's Santa Clara Convention Center. But he faced a barrage of tough questions about the company and its prospects. At one point, looking a tad dazed by the onslaught, he sat down on the steps of the stage. "At what size does Cisco become so big and diverse that its growth and profitability will plateau?" one investor asked. Chambers considered the question for a few seconds. "Hopefully, well after the CEO retires," he said with a laugh.

It's no joke for investors. Chambers is struggling to show how his $36 billion behemoth can remain a growth company and improve its stock market performance. The challenge has the 60-year-old CEO trying to pull off one of the most ambitious feats in business. He's racing into 30 different markets at the same time, while implementing a council-based management approach that's controversial among top managers. Now Chambers' ambition is fueling a risky fight with some of the mightiest companies in tech, including Dell (DELL), Hewlett-Packard (HPQ), and IBM (IBM). "It's a clash of the titans, and investors are nervous," says analyst Brent Bracelin of Pacific Crest Securities.

SETTING A TORRID PACE

Chambers may have more to lose than his rivals. As he moves into the computer server market led by HP, Chambers has provoked a counterattack on his core business of routers and switches, which direct traffic around the Internet. HP said on Nov. 12 it would buy networking equipment provider 3Com (COMS) to step up its assault. The trouble for Chambers is that gross margins in the server business are around 20%, compared with 65% for routers. As Cisco gets more revenue from servers, its overall margins will likely fall, while HP will probably see margins rise as it sells networking gear. "I'd rather be HP than Cisco right now," says Steve Deplessie, founder of the research firm Enterprise Strategy Group.

Chambers declined to comment for this story, but he has explained his strategy publicly. He sees the challenging times in the tech industry as an opportunity for the strong to get stronger. He believes Cisco can keep growth high by charging into markets for everything from $149 Flip video cameras to multimillion-dollar data center projects. He established the new councils—48 in all—so managers can make decisions without waiting for approval from him or anyone else. He says the councils are the primary reason Cisco can pull off a greater variety of acquisitions than ever before. "We're going to set a pace, and we'll challenge anyone to keep up with us," Chambers said at the annual meeting.

Cisco is having some success in new markets. The company has become a leader in computer security and office phones. Where it can't beat the competition, it buys them. It's offering $3 billion for Tandberg, a Norwegian company that makes videoconferencing systems that have proven more popular than Cisco's high-end products. "They've done a good job so far," says David Eiswert, portfolio manager at T. Rowe Price's Global Technology Fund, which holds Cisco shares.

Chambers may have few options other than taking on tougher fights. He has pledged that Cisco will boost revenues 12% to 17% yearly, but investors are skeptical. Cisco's stock is off about 20% over the past two years while shares in IBM and HP are up. "I think he has no choice, if he really wants Cisco to be a growth company," says analyst Erik Suppiger of Signal Hill Capital. "But does it raise considerable execution risk? It sure does."

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