As a company that started from humble beginnings, Cisco has evolved and grown into the multinational networking and communications giant of today. In 1984, Leonard Bosack and Sandy Lerner, a couple working as computer staff members at Stanford University, created the startup known as Cisco Systems (Cisco systems). The company's first product was a multi-protocol router, which would set the tone for the coming years and helped outline its direction. Although Cisco has indulged in branching of products and dabbled in various market segments, networking - primarily routers and switches - have remained at its core.
Cisco went public on February 16, 1990 and spent the remainder of the 90s ramping up for the Internet age (Cisco systems). It acquired numerous Ethernet and switching companies. By the time the dot-com boom rolled around, Cisco had implanted itself as a world leader: in order for the Internet to grow, many of Cisco's products were crucial to its infrastructure. This foundation-laying ideal positioned the company at the apex of the wave. In the spring of 2000, Cisco became the world's most valuable company with a market capitalization of over $500 billion.
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In a move to increase the breadth of the brand and target consumers, Cisco rebranded itself in 2006 (and inclusively shortened its name from Cisco Systems). While primarily a business and enterprise oriented company, Cisco began its new initiative by acquiring home user minded names like Linksys and Flip Video.
While the company has achieved phenomenal growth and successes, it is of course not without moments of decline. For example, the aforementioned Flip Video acquisition resulted in a flop, and was subsequently shutdown and dissolved in 2011 ("Cisco discontinues flip," 2011). With this, Cisco announced that it would "exit aspects of its consumer business" which suggests a shift in focus. Once the dot-com boom was over and the bubble burst, Cisco experienced a major downturn and was forced to lay off almost 8000 employees and write down $2 billion in inventory (Fryer, 2008). This demonstrates the volatility of the technology industry and how important it is to forecast new trends.
At the helm of the company, CEO John Chambers emphasizes on market transitions, quoting "A market transition occurs when there is a subtle but clear disruptive shiftâ€¦ A market transition gives you a glimpse of a new opportunity to take market share or move into new market adjacencies" (Fryer, 2008). In the past, most businesses in the industry like Cisco followed market transitions directed by business - now the industry has changed to follow consumers. Subtle discrepancies like this can spark differentiation of varying magnitude in order to capture new trends.
By utilizing the VRIO framework, we can analyze Cisco's resource endowments and provide further insight on its background and competencies. While the company is differentiated in its products and services, not everyone of its resources is ranked highly on VRIO. Taking the Flip Video example, Cisco only received a temporary competitive advantage from it, and not a sustained one. The reason being, Flip cameras no longer became valuable nor rare. Smartphones were on the rise and contained built-in features that rendered Flip cameras redundant - users could share videos and also capture them directly from their cellphones ("Cisco discontinues flip," 2011). In comparison, Flip cameras were not perceived to be as valuable versus the time period before smartphones. Given this, these cameras were also not costly to imitate, since competitor manufacturers (market segment-wise) were implementing similar technologies already. By acquiring Flip Video in 2009, Cisco leveraged its business know-how and infrastructure to demonstrate its capability to capture value. Flip cameras were at one point a popular commodity, but it soon tapered off once the previous 3 criterions of VRIO began to diminish. Once it came to this, Cisco was no longer able to capture its value and thus shutdown Flip.
On the other hand, Cisco's router and switch resources provide the company a sustained competitive advantage and maintains high rankings in the VRIO analysis. Taking the Catalyst 6500 switch as an example, which was a key player during the dot-com boom (Cisco systems). Cisco strategically positioned itself with this switch and its other router technologies at this time, because Internet Service Providers necessitated an answer to the growing infrastructure demands. Resources like the 6500 provide Cisco with value. Over the years, Cisco has maintained a high-quality image and people equate its products as such. This increases its perceived value by consumers. For the most part, many of Cisco's resources are considered rare because although there are similar products from different competitors, the numbers are not great.
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Tying into the aforementioned rarity, due to the complex and continuously evolving nature of these "high" technologies, they are very costly to imitate. As a firm in general, Cisco has been organized to capture value on many of its products. Juniper Networks is one of Cisco's main competitors, and came out with products that siphoned away 30% of the switching and routing market share. In the end, Cisco was able to edge itself back into the leader seat by innovating and releasing upgrades to existing lines.
To expand on Cisco's differentiation strategy and its diverse portfolio of product ranges, 3 market segments are targeted. The primary market for the firm is the corporate market, or large businesses. Cisco sells a multitude of products and services for this segment, ranging from borderless network solutions to collaboration suites like the IP phones and TelePresence video conferencing units ("Collaboration products and,"). Many of these products are sold to large enterprises like Bank of America, AT&T, and General Electric. The contracts Cisco holds with these types of companies create a large bulk of its focus. Referring back to the dot-com boom case, Cisco sold its network solutions to many ISPs and ultimately catalyzed its market capitalization and proliferation to being the world's most valuable company at the time.
Aside from the corporate market, Cisco also offers less intensive and lighter scale solutions for small businesses - in order to encompass a more diverse group of consumers. The company offers a variant of its routers and switches that are reduced in size and capabilities, but work for smaller networks. The WebEx web conferencing service is a popular offering (its technology was garnered through an acquisition), which allows users to seamlessly collaborate and share.
Although Cisco made an effort to enter the home user market in 2006, with its "The Human Network" campaign, it is reassessing the scope of this venture (Cisco systems). As shown by Flip, the margins that Cisco requires to operate at a desired efficiency are not as great in the home user segment. Many of the company's pursuits in this area proved to be short-lived. While the TelePresence video conferencing suites originated as a corporate-oriented product, Cisco tried adopting it to the home users by offering Umi ("Collaboration products and,"). Unfortunately, this effort was not successful as the competition was too great and the offering was not valuable enough to consumers. At its heart, Cisco maintains its competitive advantages primarily through its business and corporate solutions.
Macroeconomic Analysis - PESTEL
"A firm's macro environment consists of a wide range of political, economic, sociocultural, technological, ecological, and legal (PESTEL) factors that can affect industry and firm performance. These external forces have both domestic and global aspects." (Strategic Management Concept Textbook) Pestel stands for political, economic, sociocultural, technological, environmental and legal issues that the government can act on the Company's decisions or performances. Usually most of the articles from Wall Street Journal can be applied by Pestel Analysis.
"Political consideration that affect service provider and government spending patterns"( Annual Report, pg.37) is one of the reason why Cisco believes that their company can be harmed by the economic and political reasons.
Cisco System explained how the fluctuation in the future with their stock price could happen due to uncertain global economic environment in their Annual report. They believe there are lots of risks on uncertainty of the global economic environment. As we see in their stock chart that they have had hard time during economic crisis of 2008. Stock analysis is provided under financial analysis section in detail of this report.
The explanation about the fluctuations on currency exchange rates which are making negative impact on their financial reports is an example of how the economic changes can affect the company's financial well-being. Despite the fact that reason for this fluctuation is due to big portion of global expanding. However for this problem they found a solution by entering into the foreign exchange forward contracts and by reducing the short term impact on certain foreign currency receivables, payables and investments. (Annual Report, pg.38)
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Cisco System, the Cisco Foundation, UNIFEM (United Nations Development Fund for Women) and the Government of the Jordan helped women in the Jordan to get into technology study and work as IT or ICT- Information Community Technology. In 2001 and 2002 they had a program to let the women in Jordan to be trained and work as much as men. In this sociocultural issue Cisco System had a great job involving in this program. "Geographic, social, economic and racial boundaries are eliminated as the program extends to 149 countries with more than 10,000 Academies across the globe." (The Women in Jordan, 2001) So the company extended that program and it affected their social, economic and racial boundaries.
Continuity innovation in technology of network industry and uncertainties of the legal issues Cisco depends on the innovation more than the protection needed for their products and services by patents, trademarks, copyrights and trade secret marks. Innovation is the key to be successful in the networking industry and Cisco has to rapidly innovate not to get in to the market, but also able to sustain competitive advantage.
"Cisco proudly partners with industry-leading companies to provide our customers with highly secure, interoperable smart grid solutions and services. We understand that modernizing the electric utility infrastructure around the world-from generation at a power plant to consumption in a home or business-is a huge undertaking. It requires the skills and expertise of many people to deliver on the promise of a 'smart grid." (Cisco website)
Most of the Cisco's products has software or licensed by the third party. Legally they have been sued several times regarding violation of the federal securities law, waste of corporate asset, unjust enrichment, breach of fiduciary duties, and violation of the California Corporation Code. In addition they also had litigations of ordinary course of business, and intellectual property. They did not able to see any effect financially in their annual report, but it might affect their mission already. That can affect their stocks as well as their financial situations. (Annual Report 126,127)
Stock Performance Graph Analysis
(Annual Report page 46)
The comparison with Cisco System, S&P and S&P Information Technology shows us that Cisco has a return of stockholders much lower than compare to S&P and S&P Information Technology.
This Yahoo Finance Chart also shows that Cisco Stock Price had a problem right after 2008 just like other companies due to economic crisis on 2008, and got better later on. All the competitors recovered faster than Cisco after 2009 and continue to get well except HP. As of January 15, 2013 Cisco had a price of $20.98 while Hewlett Packard $16.53, Juniper Network 21.01.
Compare to 2011, 2012 Revenue is increased about 7%. Cisco had 46.1 billion net sales and 12% increase on service revenue. Most of the revenue they received last year was from switching market and NGN Routing. They believe they can increase their revenue since they are into changing their strategies and innovating.
Current Asset/ Current Liability Ratio Analysis
Cisco has a quick ratio of 2012 3.49%. (61,933 / 17,731 = 3.49) Since it is more than one that means they can pay their current debt easily with their current assets. Since they have good amount of cash equivalency they need to invest more to increase and expand their company.