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Cisco's Chambers Cuts and Cuts, but That Isn't Going to Fix the Company

Cisco (CSCO) plans to cut as many as 10,000 jobs in an attempt to resuscitate its profitability. The company would eliminate 7,000 jobs by the end of August and is providing early retirement to 3,000. If this plan is realized, that would wipe out more than half of all U.S. jobs created in June.

There should be no surprise at the layoffs. They were written in stone as soon as CEO John Chambers officially non-apologized in April for the historically poor performance of the company. While layoffs may goose the stock price and improve short-term profitability, though, they won't really fix what's wrong with the company.

Not that Cisco can avoid eliminating positions. Its costs are clearly out of control, as the most recent earnings reports shows. In May, Cisco reported a year-over-year 4.8 percent increase in net sales accompanied by a 17.6 percent decrease in net income. According to Brian Marshall, a Gleacher & Co. analyst, Cisco has too many employees.

Strategic confusion
That said, cost cutting alone is not the solution. In April, Chambers wrote that the company fundamental strategy was sound, and that the problem was in "operational execution."

With excessive staffing, clearly execution is off. But is strategy really correct? Cisco killed the Flip consumer video camera not long after acquiring the maker, Pure Digital Technologies. HP (HPQ) and Chinese vendors like Huawei have taken market share in the key Ethernet switching business. Cisco lost router share to Juniper Networks (JNPR).

Product directions, market share, and acquisitions are more than issues of execution. They are clear expressions of strategy. Maybe segmenting field operations into geographic regions will speed decision making, as the company claims. More likely, this is just the corporate penchant for reorganization as the first tool to hand when solving problems. Moving from line-of-business to geographic orientation and back again is one of those fads that swings back and forth every few years.

Cisco has clearly made not just operational mistakes, but serious strategic errors. Chambers would be better off revisiting his overarching strategy and determining whether the issue is really with employees who aren't executing that plan correctly -- or with the plan itself.


Image: Flickr user bpbailey, CC 2.0.
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