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2/14/2011
07:29 PM
Bob Evans
Bob Evans
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Global CIO: Cisco Zapped By Destructive Power Of Innovation

While John Chambers's company has branched far beyond its networking roots, that core business has stumbled—and competitors are pouncing.

A funny thing's happened to Cisco on its way to creating the consumer-driven "human network": its core enterprise business has begun to buckle under the weight of massive costs, relentless competition from rivals large and small, and prices that have dropped faster than volume sales can rise.

Broad and sweeping ambition can be a wonderful thing in the business world but it usually leads to trouble or even disaster unless that ambition is matched with equal measures of superb market focus, operational execution, and cost management.

Over the last 12 months, Cisco hasn't scored so well in those vital areas even as it has attempted to transcend its traditional networking business and become a leading or event dominant player in everything from high-end video conferencing to consumer electronics to consumer branding to servers storage that could lead to end-to-end Cisco stacks.

Again, I find nothing wrong with that aggressive approach—but, if you're going to play that way at that scale, the margin of error is perilously slight.

Cisco's discovered that in each of its last three quarters as investors have hammered John Chambers' company for failing to match the strong double-digit revenue growth expectations he predicted and for also failing to manage costs as effectively as Cisco has traditionally done.

As the San Jose Mercury News reported last week: "But despite better than expected revenue and earnings numbers, lingering questions about the company's gross margins—and what they portend for Cisco's future profitability—helped drive the stock down nearly 9 percent in after-hours trading. . . .

Chambers in November stunned Wall Street by predicting 3 percent to 5 percent growth for the first quarter and 9 percent to 12 percent for fiscal year 2011; both were significantly less than the 13 percent analysts had expected for both periods, sparking fears the company could be losing market share to competitors.

It was his second cautionary forecast in as many quarters and sent Cisco shares plunging by 16 percent, though the stock had regained some ground in recent weeks. (End of excerpt.)

Meanwhile, networking sales among Cisco rivals such as Hewlett-Packard and Juniper Networks have been booming—so what's the core problem confronting Cisco?

Investment analyst Jon D. Markman, writing on moneymorning.com, has completed a thorough examination of the patient and says that Cisco is suffering from a very serious case of "the destructive force of innovation":

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