Table of content

I. Introduction

II. Literature review

1. Cisco’s background information

2. Environmental scanning

2.1 Cisco’s PEST analysis

2.2 Cisco’s SWOT analysis

2.3 Porter’s 5 forces of Cisco

III. References
1. Introduction

Today’s IT industry environment is known to be as highly competitive and bringing an impact on several
economies. By the 2009, it increased its share to 64% of world GDP (Sivathasan, 2010). And as soon as
worldwide infrastructure will be developing it will directly affect on the growth of IT industry. But the
main question whether company can remain successful in the IT business depends on not simply how
huge is it or what market position it occupies, but rather on its intellectual property, brand recognition and
reputation. Operating globally it is important to keep in mind that together with opportunities and
challenges that bring globalization, company’s stable prosperity is affected rather by intangible factors,
such as scarcity or image. Moreover, the developments in the technology in this fast-changing
environment require that organizations to be flexible and highly reactive if they are to remain ahead of the
competition. Kourdi states that, this fast-moving era drives big organizations ‘to organize themselves into
smaller, more responsive, focused units’ (2003:p.18). For such giants as Microsoft, Cisco systems, IBM,
Intel, Dell, HP which size make them more difficult to manage, Kourdi believes that it is important how
these companies ‘integrate structures, processes, behaviours and values in order to set the strategic route
and follow through’(2003:p.23). In order to be consistent with the defined corporate mission, objectives,
developing strategies and policies, company should undertake environmental scanning. According to the
research, there is a positive relationship between evaluation of the environmental scanning and profits. As
was noticed by Wheelen et al, survey made by McKinsey & Company in 2008 confirmed that ‘global
social, environmental and business trends are increasingly important to corporate strategy’(2010:p.146).
With these considerations there is a need for careful examining managerial techniques and analytical
processes for one of the biggest hardware sector company Cisco Systems Inc. Thus, the purpose of this
paper is to investigate the contribution of strategic management to the Cisco Systems Inc.

II. Literature review

1. Cisco’s background information

Cisco Systems, Inc. was incorporated in California in December 1984. Its primary business was computer
hardware, mainly the “router” that controlled the flow of data between the complex networks that made
up the Internet and corporate Intranets. Cisco’s products were highly popular especially after the 1990
when the use of Internet began to rise sharply. Since offering its first product in 1986, the company
occupied almost every time number-one or at least number-two position in every market segment where it
participated in. Nowadays Cisco is known as provider and seller of the networking and communication
products. The range of the company’s product line is very wide and it is literally touches everything in the
network industry. Generally Cisco products and services are categorized into five parts. There are
routers, switches, known as networking tools used in local-area networks (LANs) and wide-area networks
(WANs), access solutions, allowing users simple levels of connectivity, IOS (Internet Operation System)
and CA(Customer advocacy)which provides customers with support service (Bourgeois, 2010). ‘Cisco’s
networking technology provides the platform that allows users to collaborate quickly, safely, and
effectively across devices, operating systems, wired and wireless networks, and business applications’
(Cisco, 2010).Under the Cisco’s CEO John Chamber direction it managed to establish its presence in five
major world parts (Asia Pacific, Europe, South America, North America, Japan) and operate in 75
countries. According to the Morningstar analytic research, Cisco’s share in switch market hold about 70%
during 5 years, whereas its closest competitor Hewlett-Packard only 5%. At the present times, the
company successfully moving to the new markets, embracing network security, video conferencing and
home networking. Cisco enters new markets through acquisitions, and many of its acquired products are
capable to interact with one another. (Morningstar, 2010). Besides, one of the keystones of Cisco’s
philosophy is to satisfy all of the customer needs within their unique needs and aspirations. Therefore,
according today’s rapid technological changes and common trend in virtualized environment, Cisco
strives for delivering innovation in every environments or in “all the ways we work, live, play and learn”
as they state by themselves. Year after year Cisco spends a lot on innovation in order to keep and extend
their leadership in ability to innovate (Cisco, 2010)

2. Environmental scanning

2.1 Cisco’s PEST analysis

The number of valuable strategic factors that can be found in societal environment is very important.
Therefore large organizations differentiate the societal environment in one geographical area into four
categories. Scanning the environment through Political, Economic, Socio-cultural, Technological forces
is called PEST analysis.

Political factors:

There might be some challenges for Cisco business that relate in public sector which depends on
government spending, since it has been known that the U.S., Europe and Japan governments are going to
reduce their budgets. The figures already show that the state government orders fell 48% in the last
quarter from the previous period (Galante, 2010).

According to the export regulation controlled by the U.S. government Cisco’s mass market solutions have
undergone a one time review by the government. For delivering the restricted encryption solutions (those,
with a symmetric key of more than 64bits) to end-users, Cisco has an authority without having to apply
for individual export licenses, except territories including Cuba, Iran, North Korea, Sudan and Syria
(Cisco, 2006)

Economical factors:

According to U.S. communication workers studies, an increase of $5bln on broadband infrastructure will
directly create 97, 500 new jobs in IT industry. Another studies made in Sacramento Regional Research
Institute show that only a 3.8% increase of internet users in California would bring 1.8 million job places
by 2017. Such surveys together with stimulus programs serve as weighty factor for Cisco to think about
further strategic partnerships or to offer certain projects for investments.

U.S. Congress recognized State Broadband Data and Development (SBDD) grant program which was
funded in 2009 by the American Recovery and Reinvestment Act. The Recovery Act provided $350
million for grant purposes in order to assist and facilitate the integration of broadband and information
technology into state and local economies, community institutions (NTIA, 2010). This activity is playing
a key role in obtaining Cisco’s goal directed towards its designed e-learning and e-government platforms.

Under the Obama administration plan there is an expectation of raise taxes on profits made outside the
U.S. Thus, companies that have operations outside the state would not be able to deduct expenses until
the taxes on profits will not be paid (Informationweek, 2009). Due to this anticipated tax policy Cisco can
reduce jobs in U.S., and hiring more overseas.

Socio-cultural factors:

Because of the limited budgets nonprofit organizations and charities can’t afford the latest technology and
therefore may not be able to improve services, respond to natural disasters. These nonprofit organizations
are constantly seeking volunteers that could help them in fund raising or in technological provision. Cisco
gives grants and product donations to support the activities of nonprofit organizations. Such actions add
to Cisco’s image great value in terms of social awareness and strengthen its reputation (Cisco, 2010).

‘Leading governmental agencies and environmental groups such as the U.S. Environmental Protection
Agency (EPA), the Clinton Global Initiative, and the Environmental Defense Fund’ offer the assistance
for free to major corporations that recognize the needs to reduce their companies’ effects to environment
(Cisco, 2010). In such way, Cisco has signed on Green Power Partnership program that help it obtaining
“green” power to stimulate demand for non-polluting energy sources (wind, solar, etc)

Technological factors:

Global needs for continuing learning brought out education to a competitive market. The society
nowadays strive to obtain knowledge and be competitive is spite of economic and social restrictions.
Communication and computer technology advancement, conversion from the data to an information
society pushes to the changes in the present educational system. Sloan survey on distance and online
learning revealed that online enrollment increased from 4.6 million in 2009 to 5.6 million only in U.S.
(Sloanconsortium, 2010). This information directly affects Cisco’s management on realization of
company’s long-term educational projects.

Networking development and the increasing involvement of number of people using Internet
automatically raise the concern about information security and protection of the information assets.
Information security issue draw networking companies’ attention, particularly Cisco’s, to think about new
potential products lines securing IP in order to meet corresponding demand.

2.2 Cisco’s SWOT Analysis

Many analytics consider the SWOT analysis as the most persistent analytical tool in strategic
management. For example, the survey held among executives, which was conducted by McKinsey &
Company in 2007, showed that evaluating company’s strengths and weaknesses were helpful in strategy
formulation for the company and had an effect to the business performance over next 5 years.(Wheelen,
2010) Mainly, as Wheelen et al claim, SWOT analysis is used to identify company’s core competences
together with its opportunities ‘that the firm is not currently able to take advantage of due to a lack of
appropriate resources’ (2010:p.224). This frequently used technique can help managers of the
organization to answer the important questions: whether the management should invest more in their
strengths in order to make them stronger or to invest in their weaknesses to transform them to competitive
level.

Cisco’s Strengths

1) According to the financial indicators Cisco’s net sales increasing from year to year. Its return in net
sales in fiscal 2010 raised by 11% compared with the previous year. Moreover, this trend is observed
across all geographic theatres and increase in net sales is maintained in all Cisco’s products. From the
profitability perspective the generated cash flow from operations in 2010 is $10.2bln, compared with $
9.9bln in 2009 year. The ROE also increased from 16.8% to 18.7% by the fiscal 2010. This increase was
resulted in the growth of cash and cash equivalent. Such strong position of the company’s liquidity allows
using cash sources for strategic investments (Cisco, 2010).
2) Cisco managed to build centralized organizational structure that directed to a four major focus groups.
This line of business is subdivided to Enterprise, Service provider, Small and Medium businesses and
Consumers sectors. Each of the sectors has two from nine separate business units reporting to them. In
such way, Cisco is able to meet all the expectations and needs required by various customers from
national organizations to individuals.

3) Constant product development and retention of the smart, highly valued employees through an active
acquisition strategy. Through acquiring companies that have complementary technology or that can
‘leverage Cisco’s existing infrastructure and resource base’, Cisco widens its core competences and
increase its overall value (Stanford graduate school of business, 2004).

4) Establishment of the IOS (Internet Operating System) standard which became an industry standard.
‘The majority of Cisco’s products run the IOS Software. And as was viewed by Bourgeouis, this system
limits the ability of anyone else to write enhancements to the core products without Cisco’s express
authorization’ (2008: p.2).

5) “Build” talent strategy of Cisco was designed for employee development. Cisco contributes a lot in
human capital and in establishing distinctive corporate culture. It spends impressive forces for educating
its staff to make them able to understand customer needs and deliver brilliant services, and to adapt to
changes quickly. Cisco constantly facilitates the labour conditions understanding that the company’s
employees are the major assets.

6) Cisco uses collaborative commerce that help to use digital technologies enabling companies to plan,
design, develop research products and services and different innovations (Keneth et al, 2010). This model
helps to transform company’s value chain, reduce overhead and enhance margins. Using collaborative
technique, as Keneth et al state, ‘Cisco has integrated its order process with back-end process (the
activities that support online order fulfillment, inventory management, purchasing from suppliers,
payment processing, packaging and delivery), implemented purchase order automation, and enabled
collaborative product development’(2010: p.301).

Cisco’s Weaknesses

1) Cisco’s inventory level is still in the high level in comparison to its peers, that can be explained by its
over reliance on technology.

2) Cisco is a mainly vendor of the routers, but tries to dominate the switching market primarily through
acquisitions.

3) The speed growth of Internet nowadays is exposing the limitations of the router networks. Despite the
fact that Cisco is being in transition market, meaning that it is trying to outrun and respond the expected
market needs, sometimes the developments delay from the Internet requirements.
4) Cisco’s end-to-end data networking products are tied together by the Cisco brand which serves as a
barrier for some customers to choose the company’s products (Bourgeouis, 2008).

Cisco’s Opportunities

1) There is a growing tendency in virtualized networking that includes service ‘beyond just the network,
containing server and storage assets’ (Bittman, 2008). The concept of virtualized services undermines the
delivery of services through collaboration software and telepresence. The opportunity for Cisco is to turn
their vision from “the network provider” into “the network is the service provider”.

2) Cisco’s cloud computing strategy designed for federal accessing government entities to infrastructure
how and when they choose. Bittman argues that

‘this project disintermediates the traditional solution platform providers such as Microsoft from
customers. Windows isn’t going away, but more and more services will be offered from the cloud, rather
than installed and managed on specific on-premises platforms. This seems to be a huge opportunity for
Cisco to move into market adjacencies, especially software that enables the networking of people or
companies’ (Bittman, 2008).

3) During Asian crises in 1997 many international companies were pulled from this region. However,
Cisco managed to develop strategic partnership with many of local organizations, having businesses in
Singapore and Malaysia. Hence, Cisco could create strong reputation of loyalty among these countries
and take a chance to become top networking Multinational Corporation on the Asian arena.

Cisco’s Threats

1) From the World’s Most Innovative Companies survey it was found that Chinese telecom equipment
manufacturer Huawei left behind Cisco Systems on 12 positions. Huawei has been increasing its
expansion of routers internationally, but initially it wasn’t a prime competitor to Cisco company. Huawei
can bring a significant threat due to its growing market share in the router business because of its low
price and quality equipment (Trefis team, 2010).

2) The growing rivalry between Cisco and HP is bringing a tension to Cisco due to HP intention to
concentrate on virtualization services. Moreover, Walsh states, as a part of the competitive strategy HP ‘is
launching training programs to get partners that hold Cisco engineering certifications quickly converted
to HP certifications’ (Walsh, 2010).

3) Cisco's switches business is not showing the strong growth in comparison with its other products. The
threat to switches is associated with the competition from lower-cost producers such as Dell and other
Asian companies. In other words, there is a real risk of losing any sufficient position in switches market
share.

2.3 Cisco’s Porter’s 5 forces analysis

The success of the corporation can be assessed by the five basic forces. There are threat of new entrants,
rivalry among existing firms, threat of substitutes products and services, bargaining power of suppliers,
and bargaining power of buyers (Wheelen et al, 2010).

Threat of new entrants:

For effective operations the network industry itself requires intense and high capital injections. This
assumes that entry barriers in this field are high. Cisco has already set certain informational system
standards in the industry, and for this reasons potentially new entrants can duplicate and use Cisco’s
approach to present themselves in the market (what was actually done by Chinese Huawei company in
router market).

The rivalry among existing firms:

There are 3 main rivals of Cisco: Juniper Networks, Alcatel-Lucent and HP. The competition with these
companies in the core and adjacent products is very tough. Juniper Networks is implementing
collaboration strategy at the same time as Cisco, besides, Juniper remains Cisco’s single rival in core
internet routing with a 30% share of the market (Duffy, 2010). After the Juniper, the 2-d position in edge
routing belongs to Alcatel-Lucent. ‘Both companies are targeting Cisco's aged 7600 series and new ASR
9000 routers as their key competitive targets. Cisco's advantage is its vast installed base — 43% of the
$1.34 billion market in the second quarter of 2010’ (Duffy, 2010). Regarding the Ethernet switching
market Cisco dominates over the HP, vendor no.2 in this market. Yet HP has 10% of the market share,
but it takes the strength thanks to acquisition of 3Com.

Threat of Substitute Product or Service:

Nowadays it is unlikely that Cisco’s services could be substituted by other services, however there is
already uncertainty whether Cisco’s products can be irreplaceable. Chinese Huawei and Nortel are hardly
trying to adapt to customers’ needs and even touch some of the Cisco’s target group, attracting mainly by
cheaper solutions.

Bargaining Power of Buyers:

It is well-known that majority of customers are price sensitive and therefore would look for the best
acceptable price in the market. Keeping this in mind, Cisco has to encounter buyer bargain power and if
to be particular, to lessen prices of end-products for home switches, WAN and LAN products.
Differentiating the product and services will allow Cisco to stay on a leading position, in spite of the
threat of new entrants and competitors’ activities.

Bargaining Power of Suppliers:

Cisco’s relationships with suppliers are playing an important role. One of the goals of Cisco is to be a
partner with the best suppliers. Cisco recognizes that their suppliers contribute to company’s position and
help to meet customer requirements. Generally, Cisco’s supply activity could be defined as in-house.
Cisco also strives to develop its own network of diverse suppliers. The company established Supply
Diversity Business Development Program (SDBD) that called to identify potential suppliers and facilitate
relationships between them. ‘The SDBD team conducts supplier diversity training throughout Cisco's
business units on an ongoing basis’ and quarterly hold "How To Do Business with Cisco" seminars.
(Cisco, 2010)
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