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Cabletron's Management Dilemma: To Lead or Follow?
REPORT ID: 180330-0004-01.NV
REPORT DATE: April 01, 1998
ANALYST: F. McClimans
VENDOR IMPORTANCE RATING: Very High
INDUSTRY IMPORTANCE RATING: Very High
CURRENT PERSPECTIVE RATING: Positive/Neutral
EVENT SYNOPSIS (From the vendor press release):
"March 30, 1998 - Cabletron Systems, Inc. announced that the Board of
Directors has accepted the resignation of Donald B. Reed, President and
Chief Executive Officer, effective immediately. He will remain as a
consultant and member of the Board of Directors. Craig R. Benson, Chairman
of the Board and a co-founder of the company, will assume Mr. Reed's
responsibilities. In addition, John d'Auguste, Executive Vice President of
Cabletron's Enterprise Business Unit, has been promoted to President of
Operations while David J. Kirkpatrick, Senior Vice President of Finance
and Chief Financial Officer, has been promoted to Corporate Executive Vice
President of Finance."
ANALYTICAL SUMMARY:
We are neutral on this announcement by Cabletron, although we believe that
Don Reed has done an excellent job in the short time he has been at
Cabletron in changing the fundamental focus of this firm:
ú We do not understand all of the underlying dynamics of this change, but
are pleased by the swiftness of Mr. Benson's move (and the avoidance of
"Steve Jobs Syndrome" that has paralyzed Apple in the wake of Mr. Jobs
on-again, off-again status as CEO).
ú Craig Benson is a very effective implementer who should be able to take
Mr. Reed's plan and put it into action more effectively than Mr. Reed
could - a point that we think Mr. Benson and Mr. Levine should have picked
up on during Mr. Reed's selection process late last year. However, we are
concerned by recent staff changes that indicate that Mr. Reeds plans may
not be followed all that close in the near future.
ú Don Reed is staying on for six months as an advisor, although it is
unclear whether this will be an "exit strategy" or the real thing. We are
a little concerned about Cabletron's long-term future, however, due to
Craig Benson's self-confessed shortcoming in strategic planning and the
lack of long-term commitment (other than his seat on Cabletron's board)
from Mr. Reed.
ú This announcement should have a significant impact on the market as it
signals a change in a top tier company and offers a tremendous marketing
opportunity (i.e., attack opportunity) for Cabletron's customers.
ANALYSIS:
VENDOR IMPORTANCE RATING: Very High.
This is of very high importance to Cabletron and should be felt from the
lowest level to the highest in this organization.
ú Did Cabletron need to make this type of move? According to Mr. Reed it
did. In a rare admission that he was not the "one" to lead the firm, he
asked to swap places with Mr. Benson. Swap, however, is not quite the
correct word since Mr. Benson retains his position as the chairman of the
board while Mr. Reed retains his own position on the board (with just
under 3 years on his term), giving up his position as CEO.
ú According to Mr. Benson, his own skills and knowledge of the "skeletons"
in the closets will enable him to better drive (or perhaps control) the
operations of Cabletron. This would confirm recent speculation that
"internal" Cabletron was reluctant to follow Mr. Reed's lead, perhaps
given the difference in management style from the previous strict control
imposed by Mr. Benson and Mr. Levine.
ú From a broader perspective, there were many Cabletron observers who were
concerned with Cabletron's recent financial loss. For whatever reason, Mr.
Reed felt that he was not capable of implementing his business strategy in
the present situation as effectively as Mr. Benson. If that was in fact
the case, the firm's actions were justified.
INDUSTRY IMPORTANCE RATING: Very High.
This announcement is of very high importance to the industry at large:
ú Cabletron, although they are the smallest of the top tier networking
firms, is still considered an impact player and is most definitely on the
competitive radar screens of Cisco, Bay and 3Com.
ú This announcement will most likely serve as competitive marketing
ammunition for Cabletron's competitors and could signal a renewed attack
on Cabletron's core user base.
ú From an outside perspective, this move serves as a confirmation of the
volatility within the networking segment and the significance of a strong
hand at the helm in an industry that is still considered to be maturing,
rather than mature.
CURRENT PERSPECTIVE RATING: Positive/Neutral.
We are taking a slightly (and we must emphasize the slight part) positive
approach to this announcement, which was certainly unexpected. Cabletron
has lost a great deal of market share in the past two years, from 70% of
the shared network market to 20% now. Further, the company has just
released its annual financial results that show a loss of $6.3 million
(compared to a profit of $72.6 million the year before). However, none of
these shortfalls can be blamed on Don Reed, who was only appointed seven
months ago. Since he started, Mr. Reed has been making all the right
moves, such as restructured sales channels that allow Cabletron to
concentrate on its biggest customers (the top 600, responsible for 80% of
revenue) while passing the smaller customers out to the channels. Reed also
pushed for the acquisition of Digital's networking business unit (to bring
in channels, international support and both low and high-end product), as
well as the acquisition of Yago, a emerging provider of high performance
switching/routing products. This has allowed Cabletron to begin moving
away from its old, vertical market focus, although this has only just begun.
Don Reed's tenure as President and CEO of Cabletron has little more than
half a year, and his plan to return the company to its previous fortunes
has only just begun. However, although Mr. Reed's ability to develope the
strategy for Cabletron's future was never in doubt, his ability to
implement this plan was more questionable. Mr. Reed has effectively spent
his entire career within Nynex (and New England Telephone before that) and
the monolithic Baby Bell environment is a far cry from the
rapidly-changing networking industry. Mr. Reed's assertions that he could
easily adapt to this new, fast moving culture always looked a little
unconvincing.
Craig Benson (co-founder and the new CEO), on the other hand, understands
the networking culture. Although the first to admit that he is not a good
planner, he is a very efficient implementer. This should, therefore, be a
beneficial move for Cabletron, at least in the short term. However, our
concern with Craig Benson is that, by his own admission, he is not an
effective planner. Don reed's vision for Cabletron's future obviously has a
sell-by date attached to it and a year or two from now the shape of the
networking industry may have very little relevance to his plan.
The important, and unanswered, question is how much input Don Reed will
have as a consultant to Cabletron. He has been given a six month contract
to advise Mr. Benson, but we suspect that, in reality, there will be
little or no input given or accepted. Further, we are concerned about Mr.
Benson implementing somebody else's ideas in areas that Cabletron has not
proven themselves capable in the past (parts of the plan, such as a
new-found emphasis on distribution channels for customer support, have
been attempted by Cabletron before but with less than impressive results).
Further, we are concerned about the longevity of Mr. Reed's plans. While
one of Mr. Reed's own hand-picked managers, John d'Auguste (former
executive vice president of Cabletron's enterprise business unit), has
been promoted to president of operations, as part of this management play,
Stephan Gray, director of marketing and communications, and Mark Truhlar,
senior director of software development, have both resigned citing
incompatibilities with the firm's new strategies in their respective
areas. These actions at least give some credit to the possibility that
there is more behind this management movement than has been detailed
publicly.
If in fact this action was a result of a lack of control over Cabletron's
operations, and perhaps a bit of a reaction to Cabletron's recent
financial mis-step, the question now is what type of involvement might we
see from Mr. Levine.
However, despite all the recent turmoil at Cabletron, the unanswered
questions, and the shift in management, we are still long-term positive
about Cabletron and optimistic on their prospects in the networking market
over the next few years.
TOP COMPETITIVE POSITIVES:
There are several positives to this announcement:
ú Mr. Benson is clearly capable of driving Cabletron in whatever direction
he (or the board) sees fit. With this in mind, we are pleased by Mr.
Benson's comments supporting Mr. Reed's strategies and plans.
ú Mr. Reed retains his seat on the board of directors, as well as several
hand-picked ally's in Cabletron's management team.
ú Mr. Benson's swift movement has prevented any paralysis similar to what
Apple is experiencing with Mr. Jobs' status as a "part-time" CEO.
TOP COMPETITIVE CONCERNS:
We have several strong concerns with this announcement:
ú We are unsure how much input Mr. Reed will actually have over the
long-term (an important point as we feel his "outsider" viewpoints have
been beneficial to Cabletron's strategy over the last six months).
ú We are concerned about recent staff departures (immediately after Mr.
Reed's resignation) which may signal a return to the previous strategies
of Cabletron.
ú We are concerned about the impact of this move on Cabletron's internal
organization that has just begun to adapt to Mr. Reed's management style
and strategy plans.
ú We are concerned that this move is a reaction to Cabletron's recent
financial loss, a move that we feel would be premature given the overall
slowdown in the networking sector and the statements by Mr. Benson
supporting Mr. Reed's strategies and objectives.
TOP VENDOR SUPPORT ACTIONS:
We suggest the following actions for Cabletron to bolster their recent
management moves:
ú Mr. Reed and Mr. Benson need to be very visible in the industry together
as a team. Mr. Reed did not participate at all in the press conference
announcing his resignation. That act alone was counter to the assertion
that this was a "Reed-sponsored" move.
ú Cabletron needs to stick with Mr. Benson for the long-term as they
cannot afford another management change in the next 12-24 months.
ú Cabletron needs to quickly answer any concerns by their internal staff
to prevent any wave of staff defections (although there are not too many
places to defect to in New Hampshire). We are particularly concerned by
defections in the sales and support team, a unit that needs to perform
aggressively to maintain Cabletron's base of installed accounts.
ú Cabletron needs to detail out its plans for continuing the
implementation of Mr. Reed's more "open" Cabletron, including the
continuation of the partnership/acquisition strategy that has brought new
technology and ideas to the Cabletron team.
ú Cabletron should aggressively explore opportunities to expand their
relationship with Compaq through its Digital distribution partnership.
ú Cabletron needs to move quickly to reassure their distribution partners
and potential channel partners that this move will not lessen Cabletron's
commitment to the "indirect" model of sales that Mr. Reed had begun to
implement.
TOP COMPETITOR ACTIONS:
We anticipate the following competitive actions:
ú Cisco, Bay and 3Com can all be expected to use this management change
aggressively in their day-to-day sales actions. We anticipate, perhaps
unfairly, that they will charge that Cabletron is "out of control" - a
move that would be extremely inaccurate given Mr. Benson's strong
management skills.
ú We anticipate that all Cabletron competitors will use this recent move
to try and keep their distribution channels loyal and prevent Cabletron
from moving into the channel space.
TARGET MARKETS: Enterprise users, workgroup users, Carriers, ISPs
TOP USER ACTIONS:
ú Existing Cabletron users should not be overly concerned with this
changing of the guard at this time. Instead, concentrate on Cabletron's
ability to provide the products that you want at a reasonable price.
ú Question Cabletron over its longer term strategy. What is the company
going to do when it needs to adapt Mr. Reed's plan? Does the company have
any intention of maintaining contact with Mr. Reed in the longer term?
ú Non-Cabletron users who are presently considering a purchase from
Cabletron may want to watch Cabletron for the next week or so to determine
the magnitude of Cabletron's management changes and to determine how
Cabletron's internal staff will react (we do not expect any significant
"push back" from Cabletron's staff and believe that any short-term
defections will be limited).
BACKGROUND INFORMATION:
REPORT ID: 180330-0004-01.NV
EVENT: Statement from Craig Benson, Cabletron Systems
REPORT TYPE: Competitive Intelligence
TYPE OF EVENT: Corporate Announcement
VENDORS: Cabletron Systems
COMPETITORS: Cisco, 3Com, Bay Networks
MARKET SEGMENT: Intranet Switching,
TECHNOLOGY: HUBs, LAN, Network Management, Routers, Switching (LAN),
Switching (WAN),
TARGET MARKETS: Enterprise users, workgroup users, Carriers, ISPs
DATE OF EVENT: March 30, 1998
DATE OF ANALYSIS: April 01, 1998
All Materials Copyright 1997, 1998 CURRENT ANALYSIS, INC. |
