Cisco System Inc

Economic Analysis By Group#3:-

Amarjit Singh- #05

Amber Kumar Jain- #06
Deepak Verma- #19
Isha Bajaj- #25
Nitin Mehta- #35
Sakshi Virmani- #47
Date: December 26, 2012 Udit Mangal- #58
 Company Overview

Cisco, derived from SAN FRANSCISCO was founded

in early 1984 by Leonard Bosack & Sandy Lerner and
went public in year 1990

Cisco Systems, Inc. is the worldwide leader in networking

for the Internet .
 Company History

1983-84 1996-97 2000-01 2011-12

Start of 30%,45% From 70% Building up stock

Operations increase growth High future
Company in Cisco to 30% in 45 expectations
Creation stock prices days Increase in Data
centers and Cloud
Computing
 Mission
From a technology standpoint, Cisco continue to prioritize
its actions and investments around our five foundational
priorities, which consist of leadership in the Core business
(routing, switching, and services); data center
(virtualization/cloud); collaboration; video; and architectures
for business transformation. By catching market transitions
and listening to our customers, we continue to execute on
our goal of driving innovation and sustainable differentiation
,which is the lifeblood of cisco
 Vision
To become our customers' most strategic business partner
by delivering intelligent networks and technology and
business architectures built on integrated products,
services, and software platforms to enable customers'
success, as well as Ciscos own

Ciscos vision is to be the leading enabler of integrated,

innovative, scalable, high value managed services
offerings; whether you are a regional managed services
provider or a global one, our vision is to enable your
success
 Management
John T. Chambers Naresh B Wadhwa Rakesh Goyal Sanjay Rohatgi
Chairman and Chief President and Country Senior Vice President, Senior Vice President, Service
Executive Officer John T. ChambersAdvanced Services
Manager Provider Sales
Cisco Systems, Inc. Cisco India & Cisco India & Cisco India &
Chairman and Chief
SAARC Executive Officer
SAARC SAARC
Cisco Systems, Inc.
Edzard Overbeek Amit Malik Avinash Purwar Janesh Moorjani
President, Asia Pacific and Vice President, East Senior Vice President - President- Enterprise and Public
Japan Theaters Cisco Cisco India & SAARC Financial Services Sector
Systems, Inc. Industry Cisco India
Cisco India & SAARC

Wim Elfrink Pramodh Menon Srivalsan Ponnachath Puneet Gupta

Executive Vice President, President - Partner Business Senior Vice President Sr. Vice President, Public
Emerging Solutions & Chief Group Cisco Services India & SAARC Sector
Globalization Officer Cisco India & SAARC Cisco India & SAARC
Cisco Systems, Inc.

Joydeep Bose B. Raghavendran Nand Kishore Badami Rajesh Rege

Senior Director for Corporate Head, Partner Organization Senior Vice President, Senior Vice President, Data
Development Cisco India & SAARC Marketing Center, Virtualization and Cloud
Investments and Cisco India and Cisco India & SAARC
Acquisitions Cisco SAARC
 Company Offerings

Networking Solutions
Switches
Routers
IP Based Voice Solutions
Networking Services
Security
Wireless
Data Centers
Company Offerings cont.
 Financial Ratios
Description 2012 2011 2010
Debt equity ratio 0.32 0.34 0.27
Interest coverage ratio 18.04 13.46 16.11
Return on total equity 19.63 16.25 20.70
Change in Fixed asset(%) -13.1 -0.6 -2.5
FA turnover ratio 13.53 11.03 10.10
Return on total asset 10.97 8.81 11.30
Dividend/Share ( $) 0.28 0.12 -
Price to Book value 1.92 2.14 3.11
Change in FA(%) -13.1 -0.6 -2.5
Inventory turnover
ratio 10.73 11.23 10.85
Inventory holding period 34.00 32.51 33.64
Creditor turnover ratio 4.39 4.01 3.50
Average payable period 83.07 91.00 104.30
Debtor turnover ratio 4.46 4.23 4.28
Average receivable period 81.81 86.31 85.31
Economic Analysis
 Economic Analysis cont..

Contribution margin has increased by 21.8% from the last year.

 Break-Even Analysis

As per the analysis the break even value is much lesser than
the total sales thus can be achieved easily by Cisco and the
remaining part of revenue will add to the bottom-line of the
company and can be used to make further acquisition in
future
 Boom, Decline & Recovery
Ciscos growth was based on two main strategies.
1. First, the company outsources much of its production.
2. Second, a significant portion of its growth has been through
a) Strategic acquisitions; and
b) Investments in other companies, amounting to $20 billion to $30 billion
between 1993 and 2000.

Ciscos strategic acquisitions and investments were

carefully selected as a means of building internal
competencies in areas where the market was evolving.
In September 2000, six months after the stock market
decline began.
 Reasons of Decline
It received an outpouring of orders, so many in fact that it
lacked many parts, causing massive delays in fulfilling
orders. Many customers waited as long as 15 weeks for
delivery. Cisco launched a two-fold strategy to resume
filling orders quickly.
Cisco sales forecasts were way too high because the
company suffered from overconfidence after years of
remarkable sales growth. It had relied on past rosy sales
and never considered the possibility that sales might
actually decline.
Cisco is suffering because of the sudden and
unexpected economic deterioration.
 Changes Made To Overcome Dip in
Sales
In late August 2001, Cisco underwent a major
reorganization, abandoning its line of business
organization that had been in place since 1997.
Cisco implement centralized engineering and marketing
organization with 11 technology groups, focusing on
access; core routing; Internet switching and services;
network management services; and optical, voice, and
wireless technologies
Cisco found through this reorganization, that its service
provider business was its poorest performer and that
wireless networking technology promises rapid sales
growth
 Cisco Restructuring
Shift from decentralized operation focused on specific
customer to a centralized one focused on technologies,
marketing and engineering
Engineering was organized around eleven technology
groups
Three sales group were retained
New structure to promote rapid technical innovation by
eliminating overlap in R&D
Products designed with more common parts
Bought larger quantities of fewer parts
Used interchangeable circuit boards resulting into saving
of $23 million
Cisco gained market share due to restructuring
 Reasons of Economies of Scale

Innovation
Outsourcing
Growing internet market during /internet BOOM
 Reasons of Dis-Economies of Scale

Cisco was adding customers ten times the rate it was

hiring engineers
Growth rendered one to one contact between customers
and engineers impractical
Sustainability of customer advocacy when cisco gets
bigger
Ciscos three decentralized product lines had product
overlap and redundancy
Sliding market share
 Economies of Scope
Cisco Systems offers a New Economy example of a
strategy based on economies of scope.
Originally a focused producer of Internet routers, Cisco
launched what ultimately became a massive expansion
of scope with its acquisition of Crescendo
Communications in September 1993.
Cisco made 39 additional acquisitions through 1999 and
now boasts a full line of network equipment as varied as
modems, wireless local area network equipment, and
optical switches. Cisco thereby captured economies of
scope by putting more products through the same
organization.
 Economies of Scope cont.
These economies of scope helped Cisco build its
dominant position as a supplier of the infrastructure of
the Internet.
Such product line expansion does not necessarily lead to
economies of scope.
If Cisco had not consolidated the manufacturing activities
of its acquisitions and enabled its sales forces to offer
complete solutions, it would have captured little
advantage from the broader product line.
 Competition Analysis
Direct Competitor Comparison
JNPR ALU CSCO PVT1 Industry
Market Cap: 9.22B 2.50B 101.04B N/A 276.52M
Employees: 9,129 76,002 66,639 1,400,001 643
Qtrly Rev Growth (yoy): 0.01 -0.03 0.06 N/A 0.39
Revenue (ttm): 4.35B 18.77B 46.68B 32.04B1 255.14M
Gross Margin (ttm): 0.63 0.31 0.61 N/A 0.49
EBITDA (ttm): 594.96M 907.58M 13.23B N/A 19.95M
Operating Margin (ttm): 0.1 0 0.23 N/A 0.01
-
Net Income (ttm):
186.97M 192.91M 8.36B 1.83B1 N/A
EPS (ttm): 0.36 0.49 1.55 N/A N/A
P/E (ttm): 50.22 2.23 12.28 N/A 18.74
PEG (5 yr expected): 1.69 0.2 1.15 N/A 0.96
P/S (ttm): 2.13 0.13 2.15 N/A 1.35

ALU = ALCATEL-LUCENT,S.A.
CSCO = CISCO SYSTEMS ,INC.
PVT 1= HUAWEI TECHNOLOGIES CO. LTD.
 Competitive Edge Of Cisco

Cisco was very proud of its use of the Internet to drive its
business and has actively promoted itself as a model for
other companies. Cisco claims it has seen a 25 percent
increase in customer satisfaction since it established
these portals in 1995.
Although the employee turnover rate is very high in most
technology companies, at Cisco it is very low. One
reason may be Ciscos use of its employee intranet,
called the Cisco Employee Connection.
 SWOT Analysis - Strengths
Geographically diverse business and revenue should
help shield the business from shocks in any one part of
their business. Different countries or locations around
the world have different characteristics. Those
characteristics do not always match; therefore, a
company can lower their risk by investing in part of the
world with low correlations. The lower the risk, the better.
This lowers risk and increases the value of the business
over the long-term.This statements will have a short-term
positive impact on this entity, which adds to its value.
This statement will lead to an increase in profits for this
entity. "Geographically Diverse Business" is a difficult
qualitative factor to defend, so competing institutions will
have an easy time overcoming it.
SWOT Analysis Strengths contd..
Market leading position brings many benefits to those
companies. Generally, they possess good brand names,
economies of scale, higher margins, revenues and other
significant benefits, such as the ability to raise debt at
lower cost. They generally have a more stable business
than their competitors and are more likely to acquire
other businesses as opportunities come about.
Economies of scale lower cost and increase services to
customers. These advantages help shield competition in
the industry and increase services with less additional
investment. Economies of scale are barriers to entry
against other firms competing against the current
entrants.
SWOT Analysis Strengths contd..
Large countries also have economies of scale. More
people can produce more goods and seek synergies
between other industries within a single country. Scale
can also benefit brain power, because more people can
combine to produce better ideas.

Strong brand name helps to increase margins by

charging premium prices for goods, because customers
perceive a higher standard of quality from companies
with strong brands. A strong brand name may also help
to support the stock price, because people will
associate a strong brand with a strong stock.
SWOT Analysis Strengths contd..
Diverse products and revenue should help shield the
business from shocks in any one part of their business.
Different products have different characteristics. Those
characteristics do not always match, therefore, a
company can lower their risk by investing in a business
with low correlations with other products. This lowers risk
and increases the value of the business over the long-
term.
Data storage will benefit from the increasing demands of
media applications online and on computers. Videos,
spreadsheets, games and the likes will encourage more
information online. The adverse economic conditions will
also encourage online work to cut down on material and
transportation costs.
 SWOT Analysis - Weakness
Higher Product Cost
Weak presence in contact center technologies and
declining storage networking market share
Relatively week presence in China External
Opportunities
 SWOT Analysis - Opportunities

Data Mining
Cloud Computing
Video Conferencing
Smart Grid Infrastructure
Wireless Hotspot
Mobile Broadband Communication
Digital Storage Infrastructure
 SWOT Analysis - Threats

High Competitive Rivalry

Cloud Server are hurting Ciscos Core Business
Open Source Competition
Consolidation in the US telecommunication industry
Dependence on suppliers
 Recommendation
Inventory holding time should be decreased
Average payable period should be increased
Average receivable period should be decreased
Expansion should be continued to increase net sales
and higher profitability
Acquisition to be made in new areas to operate in
economies of scale
Variable cost to be reduced further to increase
contribution margin
New product can be introduced e.g. cloud computing
 Recommendation cont.

Since growth rate is higher in Asia pacific so more

investment in that region
( Growth in APAC :13%)
( Growth in Europe : 4%)
( Growth in U.S. : 4%)