“Does Cisco Have a John Chambers Problem?”

Presented by Maximum Overdrive:

Ricky Av, KC Chugh, Rachel Nichols, Evan Rand and Laura Winger

• Founded in 1984By Stanford computer scientists Len Bosack and Sandy Lerner

Massbus-Ethernet Interface Subsystem (MEIS) - 1985

AGS multi-protocol router - 1986

• CEOs: Bill Graves 1987-88

John Morgridge 1988-95

John Chambers 1995-present

• IPO on Feb 16, 1990

Cisco was named for the city San Francisco, reflected also in its

logos, although it is now headquartered in San Jose, CA

HISTORY

• Core competencies are in networking technology:

•Routers

•Switches

•Wireless security

• Three tests: 1. Provides potential access to a lot of different

markets

2. Make significant contribution to the perceived customer products

3. It is difficult to imitate

CORE COMPETENCY

•Physical security•Network management•Software•Interfaces•Modules

Sep 93 Crescendo Communications LAN switching $95

Jul 94 Newport Systems Solutions Routers $95Oct 94 Kalpana LAN switching $204Dec 94 LightStream $120Aug 95 Combinet Remote desktop software $114Sep 95 Internet Junction Gateway $6Oct 95 Network Translation Firewalls $30Nov 95 Grand Junction Networks

LAN switching

Apr 96 StrataCom $4,000Aug 96 Nashoba Networks $100Jan 96 TGV Software Web applications $115Jul 96 Telebit Modems $200

Sep 96 Granite Systems Computer networking $220Oct 96 Netsys Technologies Network simulation $79

Mar 97 Telesend Broadband Internet access Jun 97 Skystone Systems Synchronous optical networking $89Jun 97 Global Internet Software Group Firewall $40Jun 97 Ardent Communications Broadband Internet access $156Sep 97 Integrated Network Digital subscriber line Dec 97 LightSpeed International Voice over Internet Protocol $160Feb 98 WheelGroup Computer security $124Mar 98 NetSpeed Broadband Internet access $236Mar 98 Precept Software Internet television $84

Metaplex Computer networking May 98 CLASS Data Systems $50

Jul 98 Summa Four LAN switching $116Aug 98 American Internet Computer networking $56Sep 98 Clarity Wireless Wireless networking $157Oct 98 Selsius Systems Voice over Internet Protocol $145Dec 98 Pipelinks Synchronous optical networking $126Apr 99 Fibex Systems Digital loop carrier $250Apr 99 Sentient Networks

Voice over Internet Protocol$195

Apr 99 GeoTel Communications $2,000Apr 99 Amteva Technologies $170Jun 99 TransMedia Communications Gateways $407Jun 99 StratumOne Communications Synchronous optical networking $435Aug 99 Calista Private branch exchange $55Aug 99 MaxComm Technologies Voice over Internet Protocol $143Aug 99 Monterey Networks Synchronous optical networking $500Aug 99 Cerent $6,900Aug 99 IBM Networking Hardware Division Computer networking $2,000Sep 99 COCOM A/S Cable modems $66Sep 99 Webline Communications Contact management $325Oct 99 Tasmania Network Systems Web cache $25Nov 99 Aironet Wireless Communications Wireless LAN $799Nov 99 V-Bits Digital video $128Dec 99 Worldwide Data Systems Information technology consulting $26Dec 99 Internet Engineering Group Synchronous optical networking $25Dec 99 Pirelli Optical Systems Fiber-optic communication $2,150Jan 00 Compatible Systems Virtual private networking $317Jan 00 Altiga Networks $250Feb 00 Growth Networks Chipsets $355Mar 00 Atlantech Technologies Network management $180Mar 00 JetCell Mobile telephones $200Mar 00 infoGear Technology Information management $301Mar 00 SightPath Content delivery $800Apr 00 PentaCom LAN switching $118Apr 00 Seagull Semiconductor Computer networking $19Aug 02 AuroraNetics $150May 00 Arrowpoint Communications LAN switching $5,700May 00 Qeyton Systems Wavelength-division multiplexing $800Jun 00 HyNEX Internet access $127Jul 00 Netiverse LAN switching $210Jul 00 Komodo Technology Voice over Internet Protocol $175Jul 00 NuSpeed Internet Systems iSCSI $450

Aug 00 IPmobile Mobile software $425Aug 00 PixStream Media player (application software) $369Sep 00 IPCell Technologies Voice over Internet Protocol $200Sep 00 Vovida Networks $169Oct 00 CAIS Software Integrated development environment $170Nov 00 Active Voice Communication software $266Nov 00 Radiata Wireless networking $295Dec 00 ExiO Communications $155

Jul 01 Allegro Systems Virtual private networks $181May 02 Hammerhead Networking Computer networking $100May 02 Navarro Networks $73

Jul 02 AYR Networks $113Aug 02 Andiamo Systems Data storage $2,500Oct 02 Psionic Software Intrusion detection $12Jan 03 Okena $154

Mar 03 SignalWorks Echo cancellation $14Mar 03 Linksys Computer networking $500Nov 03 Latitude Communications Web conferencing $80Mar 04 Twingo Systems Computer security $5Mar 04 Riverhead Networks $39Jun 04 Actona Technologies Data storage $82Jun 04 Procket Networks Routers $89Jul 04 Parc Technologies $9

Aug 04 P-Cube Service Delivery Platform $200Sep 04 NetSolve Information technology $129Sep 04 dynamicsoft Communication software $55Oct 04 Perfigo Computer networking $74Nov 04 Jahi Networks Network management $16Dec 04 BCN Systems Routers $34Dec 04 Protego Networks Network security $65Jan 05 Airespace Wireless LAN $450Apr 05 Topspin Communications LAN switching $250Apr 05 Sipura Technology Voice over Internet Protocol $68

May 05 Vihana Semiconductors $30May 05 FineGround Networks Network security $70Jun 05 M.I. Secure Corporation Virtual private networks $13Jun 05 Netsift Computer networking $30Jul 05 KISS Technology Entertainment technology $61Jul 05 Sheer Networks Service management $97

Sep 05 Nemo Systems Computer networking $13

Nov 05 Scientific-Atlanta Digital cable $6,900Nov 05 Cybertrust Information gathering $14Mar 06 SyPixx Networks Surveillance $51Jun 06 Metreos Voice over Internet Protocol $28Jun 06 Audium $20Jul 06 Meetinghouse Computer security $44

Aug 06 Arroyo Video Solutions Video on demand $92Oct 06 Ashley Laurent Gateways Oct 06 Orative Mobile software $31Nov 06 Greenfield Networks Semiconductors Dec 06 Tivella Digital signage / IPTV Jan 07 IronPort Computer security $830Feb 07 Five Across Social networking service Feb 07 Reactivity Web services $135Mar 07 Utah Street Networks Social networking service Mar 07 NeoPath Data storage Mar 07 WebEx Web conferencing $3,200Mar 07 SpansLogic Computer networking May 07 BroadWare Technologies Surveillance Sep 07 Cognio Mobile software Sep 07 Latigent Business performance management Oct 07 Navini Networks WiMAX $330Nov 07 Securent Digital rights management $100Apr 08 Nuova Systems, Inc. Computer networking $678Jun 08 DiviTech A/S Digital service management Jul 08 Pure Networks, Inc. Computer software $120

Aug 08 PostPath Email $215Sep 08 Jabber, Inc. Presence Jan 09 Richards-Zeta Building Intelligence Building management systems Oct 09 ScanSafe SaaS Web Security Provider $183Nov 09 Set-top box business of DVN Cable Dec 09 Starent Networks System Architecture Evolution $2,900Mar 10 Grid Net Smart Grid Apr 10 Tandberg Videoconferencing $3,300

May 10 MOTO Development Group Product design May 10 CoreOptics Digital signal processing Mar 09 Pure Digital Technologies Digital video $590Aug 10 ExtendMedia Sep 10 Arch Rock Corporation Smart Grid Dec 10 LineSider Technologies Network Management Software Jan 11 Pari Networks Network Configuration and Change Management (NCCM) Feb 11 Inlet Technologies Adaptive Bit Rate (ABR) digital media processing platforms $95

Acquisition Date Company Business Value ($M USD)

ACQUISITIONS

Cisco’s Troubles Begin

2001

1 company acquisition in 2001 and showed its first

loss

• Revenue: $22.3B

• Headcount: 38,402

• Net Income: ($1B)

2000

• Revenue: $18,928M

• Headcount: 34,613

• Net Income: $2.7M

• % of Sales: .0014%

Cisco's Troubles Continue…Expenses Increase over Prior Year

• $1B R&D increase

• $1.3B Marketing increase

• $0.75B Goodwill write downOne acquired company alone took a 60% hit on what they paid for it.

• $2.25B Inventory reduction

Evidence of Trouble

1990

1990

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2009

2010

2011

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CSCO Stock Performance

Ad

j C

lose

Recent years

2009• Revenue: $36.1B• (9%) decrease from PY• Headcount: 65,550• Net Income: $6.1B• Margin: 17%

2010• Revenue: $40B• 11% increase from PY• Headcount: 70,700• Net Income: $7.8B• Margin: 20%

Qtr ended January 2011vs Prior Quarter

Revenue• 6% Revenue increase

over PQ (primarily due to Tandberg, a data center acquisition)• Product 3%• Service 18%

• 22% increase in emerging markets

Gross Margin• (3.4%) GM decrease

• (4.3)% Product• 0.1% Service

Product decrease:• Higher sales discounts• Lower prices• Mix• Intangibles amortization

Strategy Issues…• Diversified beyond its Core Competency

Didn’t spend the cash on hand wisely

Acquired businesses not related to core

Distracted focus from the core business

Competitors used opportunity to take market share

Strategy Issues…• Trying to sell very expensive consumer products

Brand not considered “cool”

Products were not integrated and convenient – Flip!

Linksys losing market share

Margins in consumer products are much lower

Strategy Issues…• Competitors cutting into margins

Cisco spends >$5 Billion in R&D

Juniper selling superior products for less

Competitors like HP and IBM used to low margin

Cisco Switch$4,987

HP Switch$361

Strategy Issues…• Partners became competitors

Cisco moved into Data Center businessNow competing with HP and IBM

HP acquired 3ComNow competing in switch/route market

Customers don’t want to get locked into Cisco

“Does Cisco Have a John Chambers Problem?”

Slowed Growth

Shrinking Margins

“Video is the future of our business!”

“Our innovation engine is on FIRE!”

Cisco misread shift in business technology towards consumerization; gadgetry must be pleasurable, affordable, and easy to use –Quentin Hardy

What Would Michael Porter Say?

Identify interrelationships among existing business units

Select core business that will be the foundation of corporate strategy

Pursue diversification for transfer of skills and sharing of activities

Create horizontal structure to facilitate interrelationships among businesses

WWMP

Ser

vice

sH

ardw

are • Stratacom (1996) $4B

(Switching)

• Arrowpoint Communications (2000) $5.7B (Switching)

• Andiamo Systems (2002) $2.5B (Data Storage)

• Scientific Atlanta (2005) $6.9B (Digital Cable)

• Linksys (2003) $500M (Computer Networking)

• Tandberg (2010) $3.3B (Video Conferencing)

Cisco's Markets

Business Consumer

Ser

vice

sH

ardw

are • Stratacom (1996) $4B

(Switching)

• Arrowpoint Communications (2000) $5.7B (Switching)

• Andiamo Systems (2002) $2.5B (Data Storage)

• Scientific Atlanta (2005) $6.9B (Digital Cable)

• Linksys (2003) $500M (Computer Networking)

• Tandberg (2010) $3.3B (Video Conferencing)

ûü ûCisco's Markets

Business Consumer

ENTERPRISE DATA CENTER MARKET (for the cloud)

Server

Switch/ Router/Firewall

Internet

Intel (hardware)

Microsoft (OS)

Cisco (software)

Cisco (hardware)

Cisco (OS)

Customers

Dat

a C

ente

r

FIVE FORCES ANALYSIS:ENTERPRISE DATA CENTER MARKET

Bargaining Power of Suppliers: Low

Raw materials, inexpensive components,software/programmers(Intel, Microsoft)

High saturation of suppliers

Low switching costs Low threat of forward integration

Customers: Large Businesses, CIOs, public sector

Very price sensitiveNeed stable supportSignificant cost to customer

Very sophisticated buyers

High switching costs

Bargaining Power of Buyers: High

Supply-side economies of scaleHigh startup costsDistribution channelsBrand reputation is importantProduct obsolescence

Threat of New Entrants: High

Threat of Substitutes: Low

Substitutes: Modular equipment/services

Low Value/Price ratio Switching costsCloseness of substitute

Main competitors: IBM, Juniper, HP, AMD, Oracle, Microsoft, Alctel-Lucent

Number of competitorsMature rivalsDifficult to read rivalsLow concentration of power

Intensity of Rivalry Among Competitors: High

Overall Conclusion: Industry is Attractive for incumbentsü

Recommendations• Divest from distracting businesses

Get out of most consumer products

Intrinsically low margins

• Product and services to leverage business relationships

• Sales force and R&D oriented towards business not consumers

• Sitting on tons of cash – use it to acquire companies in business services segment or distribute to shareholders as dividends Business Consumer

Se

rvic

esH

ard

wa

re

üü

ûû

Recommendations• Get More Involved in the Enterprise Data Center Market

• Several Data Center Acquisitions in the Past

Andiamo Systems (2002)

Actona Technologies (2004)

NeoPath (2007)

• Possibly Acquire EMC

Certainly Costly (Probably at least $35B)

Would Give Them Clear Market Leadership in the Industry

Cisco already in a business relationship with EMC in this market

Works CitedHardy, Quentin. "Does Cisco Systems Have a John Chambers Problem?" Forbes.com (2011). Web. 5 May 2011. <http://www.forbes.com/global/2011/0314/technology-cisco-systems-juniper-john-chambers-challenged.html>.

McGirt, Ellen. "How Cisco's CEO John Chambers Is Turning the Tech Giant Socialist." Fast Company 1 Dec. 2008. Web. 5 May 2011. <http://www.fastcompany.com/magazine/131/revolution-in-san-jose.html>.

Tuna, Cari. "Cisco's Clients Weigh Options." The Wall Street Journal (2011). Web. 5 May 2011. <http://online.wsj.com/article/SB10001424052748703561604576150933560766062.html>.

"Cisco Systems." Wikipedia The Free Encyclopedia. Web. 4 April 2011. <http://en.wikipedia.org/wiki/Cisco>.

"Corporate Overview." News@Cisco. Web. 4 April 2011. <http://newsroom.cisco.com/dlls/corpinfo/corporate_overview.html>.

"Cisco Systems Corporate Timeline." News@Cisco. Web. 11 April 2011. < http://newsroom.cisco.com/dlls/corpinfo/milestones.html>.

"List of acquisitions by Cisco Systems" Wikipedia The Free Encyclopedia. Web. 4 April 2011. < http://en.wikipedia.org/wiki/List_of_acquisitions_by_Cisco_Systems>.

"CSCO Historical Stock Price". Yahoo! Finance. Web. 28 April 2011. < http://finance.yahoo.com/q/hp?s=CSCO+Historical+Prices>.

Year End September 2000 10K SEC Filing, http://investor.cisco.com/secfiling.cfm?filingID=1095811-00-3692

Year End September 2001 10K SEC Filing, http://investor.cisco.com/secfiling.cfm?filingID=1095811-01-505065

Year End September 2009 10K SEC Filing, http://investor.cisco.com/secfiling.cfm?filingID=1193125-09-190326

Year End September 2010 10K SEC Filing, http://investor.cisco.com/secfiling.cfm?filingID=1193125-10-213400

Quarter End January 2011 10Q SEC Filing, http://investor.cisco.com/secfiling.cfm?filingID=1193125-11-42813

Questions? Thank You!

from Maximum Overdrive