How a CEO Manages Astonishing Growth
By Scott Thurm From The Wall Street Journal Online

When John Chambers was named chief executive of Cisco Systems Inc. in January 1995, the computer-networking equipment maker had 3,000 employees and sales of approximately $2 billion a year. Today, Cisco is a telecommunications behemoth, with 30,000 employees and annual revenues nearing $20 billion. Cisco has grown into the third most-valuable company in the world, at one point reaching a market capitalization of $541 billion.

As it diversifies into fiber-optic communications gear and other new fields, Cisco continues to grow at an astonishing rate, exceeding 50% a year. It adds 1,000 employees a month and devours, on average, a high-tech start-up every two weeks.

In recent weeks, amid concerns about its lofty valuation and investors' retreat from tech stocks, Cisco's high-flying stock price has lost some of its altitude, declining by more than one-fourth since late March and erasing more than $100 billion in market capitalization. Although the share price remains more than double the level of a year ago and roughly on pace with the company's 10-year trajectory, the recent decline raises questions about Cisco's ability to keep its employees and potential acquisition targets happy.

How do you run a company growing that fast, with a stock that volatile? In recent interviews, the 50-year-old Mr. Chambers offered some tips.

WSJ: How has the recent decline in Cisco's stock affected your ability to recruit employees and complete acquisitions?

Chambers: The market's ups and downs in large don't affect our decision-making here at Cisco. . . . We've always made decisions based on what we think is best for our employees and shareholders and the company in the long run and not on the short-run gyrations in the stock market.
We've been very open with employees in particular that we want them to view the opportunity for the long run. That's why we extended [the vesting period of our] options from four years to five years and why we pass out options ever year. It's why we wouldn't reprice options.
While it may sound callous, it's easier for us to operate in a tough market than it is in an up market. [Our stock doesn't fluctuate as much as others.] So companies that weren't interested in being acquired as recently as a month ago are now interested in being acquired. . . . The last couple of months [the gyrating market] hasn't had any impact other than making it easier to acquire. It's the same thing with employees. There are a lot of employees at start-ups who have seen their net worth erode very quickly or their options under water, so it makes it easier for us to recruit them.

WSJ: At a time when Microsoft is on the verge of being broken up, how has Cisco avoided antitrust scrutiny?

Chambers: I'd be shocked and extremely disappointed if this were to be an issue for Cisco. . . . [We operate on] open standards and [there is a] lack of barriers of entry into the marketplace. . . . Four hundred to 500 start-ups have entered the market against us in last 18 months. Then there's our position in the market. For data, voice and video combined, we have less than a 10% market share. There is only going to be one network in the future [combining these elements], and we still have a relatively small piece.
I learned the hard way at IBM and Wang [Laboratories] that competition is good for you. Competition is what forces you to move faster. . . You don't view competitors as the bad guy. They are actually the good guys in terms of what they are doing to customer life that forces us to act quicker. We will have more market share three to five years from now because we have good competitors.
We have a culture that accepts competition in a very positive way, that doesn't try to stifle or kill competition. [My rule is], you never do something to someone else that you would have a problem with if they did to you.

WSJ: How do you manage differently today than when you took over?

Chambers: Part of the answer may surprise you. A lot of the basics haven't changed. The approach that we started in '93 was one of segmenting the market, being No. 1 and No. 2 in each segment and each product area. . . . , and [devising] our strategy to make that happen. . . . [We were] very much focused on how we used systems to gain competitive advantage and allow the scaling of the company to cookie-cut ideas. . . .We're now to the point where we actually can scale pretty rapidly. . . . It might surprise you, but there isn't a lot of difference . . . if you manage -- let me use the term `lead' as opposed to `manage' -- if you lead that way, whether you're 2,000 people, 20,000 or 100,000 people.

WSJ: How do you "cookie-cut" ideas?

Chambers: We don't do something that, if it works well, we wouldn't replicate. So we try to set it up in a way that, if it's really successful, it's replicable across the whole company. Without that attention to discipline, you can't scale with the speed that is needed. . . .

WSJ: Are there things a CEO can't do in a company this large?

Chambers: My goal hasn't changed in terms of having responsibility for setting the strategy at Cisco . . . that's one of the top three things I do. The second thing that I do is recruit and develop and retain the leadership team that is going to be able to implement that strategy.
The third thing that I do is really focus on what culture we want here at Cisco. . . . And it hasn't changed. The leader must walk his or her talk. So if you say customer success is most important, I still listen to every critical account in the world every night. Now, we have a process that works like clockwork behind that, but it's one of the areas I haven't changed.

WSJ: How does it work?

Chambers: When a network is unstable, that's a critical A. When a network has the potential of becoming unstable and we've got to watch it, that's a B. So I get a report on all critical A accounts in the world. Now the fact that we focus on it so heavily helps us to resolve it quicker but also helps us to prevent it. So I get a report each evening on anywhere from zero to 15 [accounts]. If there are only a few, then probably we haven't made enough new boxes out there. If it begins to get up to double digits, then we've got a customer-satisfaction issue coming our way. . . .
Then we pay every manager on customer satisfaction. It's amazing how that works. Once you say it's going to be part of their compensation, people say, `This must really be important,' and secondly, `John's going to ask me about it all the time.' And for either reason, they respond very well.
In our most recent survey, [customer-satisfaction scores] went up tremendously around the world. [There is a] one-to-one correlation between customer satisfaction and future revenues and profits.
The problem is that it lags 12 to 24 months, which is why most American companies don't pay as much attention to it as I believe that they should. Case in point: When I saw Dell's customer satisfaction go up dramatically . . . I knew that they would be a good stock five years ago.

WSJ: You mentioned recruiting top talent. What do you look for in your managers?

Chambers: People talk about vision or instinct. . . . Your ability to lead is based upon your life's experience. Part of it is education. Part of that is the values you grew up with. . . . The largest part is the experience you've had in multiple stages of leadership over your career. . . .
I believe you've got to articulate to your team what you expect of them and what you're going to hold them accountable for.

So at the heart of that is getting the results. . . .

The [second] key element of a leader is how good is your team. If you ask, "What's going to get the result?" it actually is the quality of the team that is the key determining factor -- the ability to attract, retain and develop, and you've got to develop at the speed that we're growing.
The mathematics of this are interesting. If you grow at 50% per [year] for 18 months . . . it requires you to double your leadership team every 18 months, just mathematically to stay where you were before.

The third element is trust and integrity. . . .

The fourth element is industry knowledge. . . .

The fifth element is teamwork, and I'm a nut on teamwork. . . .

The sixth element is communication skills . . . and this is becoming more and more a requirement, particularly for leadership higher in the organization. . . . It isn't [just] one-on-one communications any more; it's how do you get your message across? My average presentation today, probably half of them are in front of 500 people or more. . . . And a large part of communication skills, which people forget, is [listening]. . . . Your ability to listen as the company gets bigger also becomes more of a challenge, because you can't walk around and touch like you used to. You've got to learn how to do that in groups. . . .

[The seventh is] customer focus. . . . You've got to say, Does each one of our leaders, regardless of what function they're in, really think `Customer First'? It's amazing when you go to other companies and you sit in on their meetings, how sometimes the word "customer" never comes up. It's actually scary. . . .

[Eighth is] balancing planning and reacting. . . . We are probably world-class at reacting, and when you're really good at the diving catches, if you're not careful, you can dive and catch too often. . . . The next element is people skills. . . . And then finally, can you drive Cisco's culture?
WSJ: With 30,000 employees, how do you stay in touch with the front lines?

Chambers: Well, probably if you add time together with the customers and with our own employees, that's probably 70% of my time. And sometimes they overlap. When you call on your customers, you're often with your local team. . . . I rank [each VP and senior VP] each quarter, top to bottom, about how many [customer] visits did they participate in and what their evaluation [was] from the customers.

WSJ: Do you still meet with groups of front-line employees every month?

Chambers: The birthday breakfasts are probably the most valuable sessions I do with employees. Once a month, anybody who has a birthday in that month can come and quiz [me] for about an hour and a half, and anything is fair game. We deliberately asked directors and VPs not to participate so that people who I don't get a chance normally to listen to can participate. And every single time I learn two or three things that either I need to do differently, or things that I thought were working one way weren't.
But again, it's building the culture. You want to lead by example. If you do that as a CEO, that will filter down through the leadership style of your team, where they'll do meetings with their employees and listen to their team.

WSJ: How do you keep track of Cisco's diverse products and customers?

Chambers: This is where the Web-based architecture is so key, because I can see an automatic roll-up [summary] of customer satisfaction very quickly any time I want. I can see an automatic roll-up of every order around the world and explode that down, not just by key geographies, and I look at every geography every day. So I look at my four key theaters, then I can explode it down to if I want to see by country or by city or by key customer, even down to an individual sales rep. . . . And then we, I, listen to constructive criticism probably more, not probably, definitely a lot more than you do compliments. Compliments are nice and I always need them, but I really listen to what we need to do better very, very carefully.

[The key is] how do you put a lot of the day-to-day activities down one layer, and then over time down two, and then over time down three. And now the decisions that [once] would have come to the CEO might be made by the first line manager.

So for example . . . margins. Very often at the end of a quarter I might have realized that we had a problem in one of our product lines, that we didn't meet our margin expectations on it. Well, today the first line manager can see who has responsibility for that product, either in engineering or in manufacturing [and] that the second week into the quarter our margins aren't in line with what we expected. They can explode that information down because of our use of
Web-based architecture to understand exactly [what happened]: Are we discounting too heavily again? Is it because we're seeing more competition on a global basis, therefore we had to adjust, price-wise? . . . You can explode out your orders that are in the process so you can see: Will it correct itself or is it something that's going to get worse?

Well, those decisions used to come to the CFO and CEO two to three weeks after every quarter was closed. That now is done by the first line manager any time they want to look into it. That's what empowerment is all about. That's what the Internet is about. It's about empowerment.

WSJ: You run this company without a defined No. 2. Why?

Chambers: I think if you signal who's going to be your replacement too early, you put that person into a no-win situation. [And] you put other people into career decisions that may not be in the best interest of the company. So my own view is that probably within the last year before I leave I will signal, very vividly and very directly, who my replacement will be -- and that assumes that I don't mess up along the way and the board [replaces] me or my employees lose confidence or shareholders lose confidence in me. . . .
I think companies like GE have shown how important [waiting to designate a successor] is, in terms of both keeping the talent together, but also giving people a chance. Because the person who's most likely to be that person today may very well not be [that person] three or four years from now.

I will over time, however, have to empower a COO type of position in the company or one to two key leaders that I'll load more onto. You've got to have that responsibility in order to scale. So at some time in the future you will see me probably move with a COO just to pull part of the load. That's not an indication they are my successor, but it does mean that I've got to have one or two people who I give more responsibility to for the company.

WSJ: That's very different from your own experience. You came in, several years before you became CEO, as a clear No. 2, and with a promise of being No. 1. Wasn't that a good idea, or was that just a different time?

Chambers: Well, it was different time, different place, different age and a leader. [Chairman and former Chief Executive] John Morgridge made a decision for personal reasons that he didn't want to stay as the CEO and president of the company, and he would want to move on to chairman, and that he wanted a different skill set, somebody who was going to be in it for, potentially if things went well, the next 10-plus years. . . . And we didn't miss a beat.

By the time I was announced as CEO, I already had everybody reporting to me and John went off and rode a bike in Vietnam for four months. So the transition had been one of the smoothest ever. But it was very clear that John didn't want to stay in the leadership role and that he needed to be able to answer that question to the shareholders, to the board and to our employees.

WSJ: As fast as you've grown, you've got ambitious plans to grow even more, including the campus you're planning for another 20,000 people. Isn't there a little bit of hubris in planning for that many more people?

Chambers: Today, we still do most of our [planning] in the two-year scenario, but for product development we can go out to three-plus years and oddly enough, the area that we plan most for is campuses. To get a campus selected, to acquire it, to work it through the appropriate government and other entities that have an influence over that, and to get your building started and up, almost requires three to five years now.
If we're fortunate enough to become a $50 billion company in the next four to five years, and that depends on how well we execute -- but the market will support it, with or without Cisco, if it isn't us it will be somebody else -- we would need probably 100,000 employees.

Having said that, I also have the healthy paranoia. Every single building here and in [the new campus] will be built all with a separate entrance, a separate utility pattern. So if we ever had to, we could sell each one individually or lease each one individually. I learned that the hard way at Wang Laboratories.


Five Lessons From John Chambers On Managing Growth

1. Make your customers the center of your culture. Cisco ties employee compensation programs directly to customer satisfaction results.

2. Empower every employee: You will increase productivity and improve retention.

3. Thrive on change.

4. Teamwork requires open, two-way communication and trust.

5. Build strong partnerships. Leading companies this decade will focus on internal development, effective acquisitions and also forming an ecosystem of partnerships in a horizontal business model.