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Does Cisco have a John Chambers problem?

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Capstone project of ASU's MBA program.

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Does Cisco have a John Chambers problem?

  1. 1. “Does CiscoHave a JohnChambersProblem?”Presented by Maximum Overdrive:Ricky Av, KC Chugh, Rachel Nichols, Evan Rand and Laura Winger
  2. 2. • Founded in 1984By Stanford computerscientists Len Bosack andSandy LernerMassbus-Ethernet InterfaceSubsystem (MEIS) - 1985AGS multi-protocol router - 1986• CEOs:Bill Graves 1987-88John Morgridge 1988-95John Chambers 1995-present• IPO on Feb 16, 1990Cisco was named for the city SanFrancisco, reflected also in itslogos, although it is nowheadquartered in San Jose, CAHISTORY
  3. 3. • Core competencies are in networkingtechnology:• Routers• Switches• Wireless security• Three tests:1. Provides potential access to a lot of differentmarkets2. Make significant contribution to the perceivedcustomer products3. It is difficult to imitateCORE COMPETENCY• Physical security• Network management• Software• Interfaces• Modules
  4. 4. Sep 93 Crescendo Communications LAN switching $95Jul 94 Newport Systems Solutions Routers $95Oct 94 KalpanaLAN switching$204Dec 94 LightStream $120Aug 95 Combinet Remote desktop software $114Sep 95 Internet Junction Gateway $6Oct 95 Network Translation Firewalls $30Nov 95 Grand Junction NetworksLAN switchingApr 96 StrataCom $4,000Aug 96 Nashoba Networks $100Jan 96 TGV Software Web applications $115Jul 96 Telebit Modems $200Sep 96 Granite Systems Computer networking $220Oct 96 Netsys Technologies Network simulation $79Mar 97 Telesend Broadband Internet accessJun 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 lineDec 97 LightSpeed International Voice over Internet Protocol $160Feb 98 WheelGroup Computer security $124Mar 98 NetSpeed Broadband Internet access $236Mar 98 Precept Software Internet television $84MetaplexComputer networkingMay 98 CLASS Data Systems $50Jul 98 Summa Four LAN switching $116AcquisitionDate Company Business Value ($M USD)ACQUISITIONS
  5. 5. Cisco’s Troubles Begin20011 company acquisition in2001 and showed its firstloss• Revenue: $22.3B• Headcount: 38,402• Net Income: ($1B)2000• Revenue: $18,928M• Headcount: 34,613• Net Income: $2.7M• % of Sales: .0014%
  6. 6. Ciscos 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
  7. 7. Evidence of Trouble0102030405060708090AdjCloseCSCO Stock Performance
  8. 8. Recent years2009• 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%
  9. 9. Qtr ended January 2011vs Prior QuarterRevenue• 6% Revenue increaseover PQ (primarily dueto Tandberg, a datacenter acquisition)• Product 3%• Service 18%• 22% increase inemerging marketsGross Margin• (3.4%) GM decrease• (4.3)% Product• 0.1% ServiceProduct decrease:• Higher sales discounts• Lower prices• Mix• Intangibles amortization
  10. 10. 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
  11. 11. 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
  12. 12. 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 marginCisco Switch$4,987HP Switch$361
  13. 13. Strategy Issues…• Partners became competitorsCisco moved into Data Center businessNow competing with HP and IBMHP acquired 3ComNow competing in switch/route marketCustomers don’t want to get locked into Cisco
  14. 14. “Does Cisco Have a John Chambers Problem?”Slowed GrowthShrinking Margins“Video is thefuture of ourbusiness!”“Our innovationengine is onFIRE!”Cisco misread shift in business technology towardsconsumerization; gadgetry must be pleasurable, affordable, andeasy to use –Quentin Hardy
  15. 15. What Would Michael Porter Say?Identify interrelationships amongexisting business unitsSelect core business that will be thefoundation of corporate strategyPursue diversification for transfer ofskills and sharing of activitiesCreate horizontal structure to facilitateinterrelationships among businessesWWMP
  16. 16. ServicesHardware•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 (VideoConferencing)Ciscos MarketsBusiness Consumer
  17. 17. ServicesHardware•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 (VideoConferencing)Ciscos MarketsBusiness Consumer
  18. 18. ENTERPRISE DATA CENTERMARKET (for the cloud)ServerSwitch/Router/FirewallInternetIntel (hardware)Microsoft (OS)Cisco (software)Cisco (hardware)Cisco (OS)CustomersDataCenter
  19. 19. FIVEFORCESANALYSIS:ENTERPRISE DATA CENTER MARKETBargaining Power ofSuppliers: Low Raw materials,inexpensive components,software/programmers(Intel, Microsoft) High saturation ofsuppliers Low switching costs Low threat of forwardintegration Customers: LargeBusinesses, CIOs,public sector Very price sensitive Need stable support Significant cost tocustomer Very sophisticatedbuyers High switching costsBargaining Power ofBuyers: High Supply-side economies of scale High startup costs Distribution channels Brand reputation is important Product obsolescenceThreat of NewEntrants: HighThreat ofSubstitutes: Low Substitutes: Modularequipment/services Low Value/Price ratio Switching costs Closeness of substitute Main competitors: IBM,Juniper, HP, AMD, Oracle,Microsoft, Alctel-Lucent Number of competitors Mature rivals Difficult to read rivals Low concentration of powerIntensity of Rivalry AmongCompetitors: High
  20. 20. Recommendations• Divest from distracting businessesGet out of most consumer productsIntrinsically low margins• Product and services to leveragebusiness relationships• Sales force and R&D orientedtowards business not consumers• Sitting on tons of cash – use it toacquire companies in businessservices segment or distribute toshareholders as dividends Business ConsumerServicesHardware
  21. 21. Recommendations• Get More Involved in the Enterprise Data Center Market• Several Data Center Acquisitions in the PastAndiamo Systems (2002)Actona Technologies (2004)NeoPath (2007)• Possibly Acquire EMCCertainly Costly (Probably at least $35B)Would Give Them Clear Market Leadership in the IndustryCisco already in a business relationship with EMC in this market
  22. 22. 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 Ciscos 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. "Ciscos 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=1095811-00-3692Year End September 2001 10K SEC Filing, http://investor.cisco.com/secfiling.cfm?filingID=1095811-01-505065Year End September 2009 10K SEC Filing, http://investor.cisco.com/secfiling.cfm?filingID=1193125-09-190326Year End September 2010 10K SEC Filing, http://investor.cisco.com/secfiling.cfm?filingID=1193125-10-213400Quarter End January 2011 10Q SEC Filing, http://investor.cisco.com/secfiling.cfm?filingID=1193125-11-42813Questions? Thank You!from Maximum Overdrive

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