Rip a Page From Cisco's Playbook

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Each company is facing the financial crisis of 2008 in its own way. Some are cutting costs, others are cutting high-ranking heads, and still others are cutting opportunistic deals. Many management teams have never seen a meltdown like this before, and a few don't really know how to handle it at all. Cisco Systems (Nasdaq: CSCO) is here to help those unfortunate souls.

Blue 42! Ten-hut!
Last night's solid first-quarter report was no surprise -- 8% year-over-year sales growth to $10.3 billion was a solid but unexciting figure, but $0.42 of earnings per share beat Wall Street's expectations by a few cents. But CEO John Chambers rocked the boat by sharing his four-part "playbook" for responding to any market downturn:

• Determine if the problem lies with macroeconomics or with your own strategy. "If your strategy was working well, stay focused on its implementation."
• Estimate the magnitude and length of this slowdown to the best of your ability, then "adjust and realign your asset utilization appropriately."
• "Prepare for the upturn." Plan for better times during the lean years, so you can take market share and grow profitably when they're over.
• Last but certainly not least, get closer to your customers. "Use the slowdown to take advantage of building even stronger relationships and differentiation with your customers," Chambers said.

This crisis is clearly not Cisco's own fault, so the company is planning for the return to good times by snuggling up closer to its customers. In the short term, Cisco sees slower sales but an eventual rebound. Market opportunities like virtualization of the data center and digital video transmission should lead to closer relationships with the likes of VMware (NYSE: VMW) and Google (Nasdaq: GOOG) and their respective rivals.

And Chambers is happy to share his view of the length and depth of this downturn. We'll get to that in a second.

Chambers has gone through this process at least four times in two decades, and has built "a culture and track record of using economic challenges to gain market share and profit share." The stated long-term goal of growing sales by 12% to 17% annually still stands.

The skinny on the global crisis
Over the next few quarters, Cisco will invest heavily in the U.S. market and a few hand-picked emerging markets worldwide. "In our opinion, the U.S. will be the first major country to recover," Chambers said. To him, China and India look like the best bets among the high-growth nations. If the rest of the world goes into a protracted slide while North America comes roaring back, that's obviously great for businesses with a heavily American customer base, like Verizon (NYSE: VZ) or Dell (NYSE: DELL). It's bad news for IBM (NYSE: IBM) and Hewlett-Packard (NYSE: HPQ), on the other hand, as their global reach starts to work against them.

When John Chambers speaks, I tend to listen. His gaze is fixed on the far horizon, as always, and Cisco should come out of this downturn smelling like roses. The company's customer-centric business model gives it greater visibility into the future of its markets than anyone else I can think of, and other giants of business and technology would do well to copy a few of Cisco's plays.

The Foolish two-minute drill
That said, Chambers concedes that he's less comfortable about the current forecast than usual. He's assuming that slow October orders will persist through the entire second quarter, but a fluctuation to either the upside or the downside from that assumption would not surprise him. Neither would it shock me, and you should be prepared for either outcome as well. Just remember that it's a decidedly short-term issue that will eventually evaporate when Cisco's long-term vision materializes. In the meantime, you might see the stock get even cheaper for a while. Buying in thirds sounds about right, right about now.

Further Foolishness:

• These Tech Stocks Will Make Tim Beyers Rich
• Is the U.S. an Emerging Market?
• The Greatest Companies You Can Own