Cisco Systems is a large, publicly traded multi-national corporation based in San Francisco. It focuses on global networking, cloud computing, and online video applications. In fiscal year 2012, Cisco Systems reported $46.1 billion in net sales, $36.3 billion in product sales, $9.7 billion in service revenue, and $8 billion in net income. While Cisco Systems faces competition, it dominates the networking and communications devices industry in terms of market share and profits over its main competitor, Hewlett-Packard.

1. Running Head: CISCO SYSTEMS ANALYSIS
CISCO SYSTEMS ANALYSIS
Spencer Atton
MBA6008
Capella University

2. CISCO SYSTEMS ANALYSIS
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Cisco Systems Analysis
Located at the forefront of the information technology industry you will find a San
Francisco based, publicly traded, multi-national corporation named Cisco Systems, Inc.
(NSDQ:CSCO). Though it is on the Nasdaq 100, it boasts index memberships in the Dow Jones
Composite, Dow Jones Industrial as well as AMEX Internet (“Cisco Systems, Inc. – CSCO,”
2013). Specifically, they fall under the Communications and Networking Devices Industry, but
this fails to exhibit the full capabilities and disposition of this multi- faceted corporation (“Cisco
Systems, Inc. – CSCO,” 2012). This technological behemoth that has over 66,000 employees on
its payroll and concentrates primarily on global networking, cloud computing and online video
applications, but is certainly not limited to those areas of interest (“Cisco Systems, Inc. –
CSCO,” 2012). Without delving into the history of the company, its Strengths, Weaknesses,
Opportunities and Threats (SWOT) analysis or stock information, it is important to understand
the company, what they represent, what markets they conduct business in, global relationships
and which economic principles and practices can be observed within the company’s decision-making.
This helps construct a comprehensive analysis of the company and identifies its
economic attributes. This introduction gives the student the opportunity to briefly discuss its
financial standing in order to provide the reader a frame of reference of its magnitude and
influence in several industries.
This next portion will present empirical evidence of Cisco Systems’ size and influence.
Cisco Systems is a massive entity that reported net sales of $46.1 billion in fiscal year (FY)
2012, compared to $43.1 billion in 2011, a 7% increase (“Cisco Systems, Inc,” 2012). Their

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product sales came in at $36.3 billion, which was a 5% increase over FY 2011 numbers (“Cisco
Systems, Inc,” 2012). Cisco Systems’ service revenue increased by 12% ($9.7 billion) in FY
2012 while it also experienced a net income of $8 billion, up by 24% from the prior year (“Cisco
Systems, Inc,” 2012). Total assets were in the range of $98 billion, with $48.7 billion in cash
and $11.5 billion from operations (“Cisco Systems, Inc,” 2012). As for influence, Cisco Systems
conducts business and owns sites all over the globe. They have had success in the Americas (6%
increase), China, Japan and Asia Pacific (13%) as well as Africa, Europe and the Middle East
(all 4%) (“Cisco Systems, Inc,” 2012). Cisco Systems has also realized growth in countries like
Russia, India, Mexico and Brazil due to their growing economies, developing interest in
technology and large populations (“Cisco Systems, Inc,” 2012). In this economic analysis, the
student will attempt to define the economic implications of value creation, consider ethical as
well as regulatory issues and finally, describe the macroeconomic and microeconomic operations
environment Cisco Systems operates within.
Economic Implications and Value Creation
According to Yahoo! Finance, Cisco Systems, Inc., “…designs, manufactures, and sells
Internet protocol (IP) based networking and other products related to the communications and
information technology industries worldwide” (“Cisco Systems, Inc – CSCO,” 2013). The
company is large because it deals in so many sub-facets of information technology, IP
networking and communications that it has been a competitor in every market it dabbles in.
Cisco Systems makes public and private IP routers for voice, video, mobile and data platforms,
encoders, decoders, transcoders, cable modem termination systems, videoscape software
products as well as information security products like network admission control, firewalls,

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intrusion detection systems, remote access tools (RATs) and virtual private networks (“Cisco
Systems, Inc. – CSCO,” 2013). They provide a multitude of different services inherent to
households, small businesses, large corporations as well as local, state and federal governments.
As the reader can see, there aren’t too many areas of these three general IT regions that Cisco
Systems fails to explore.
Due to Cisco Systems’ presence in so many markets, one must begin to wonder whether
they possess a monopoly hold within multiple markets. McConnell, Brue and Flynn in their text
Economics: Principles, Problems, and Policies define a monopoly as:
A market structure in which there is only a single seller of a good, service, or resource. In antitrust
law, a dominant firm that accounts for a very high percentage of total sales within a particular
market (McConnell, Brue & Flynn, 2012, p. G-18).
The traits that must be present to constitute a monopoly are blocked entry, being a price maker,
having only a single seller, no close substitutes and nonprice competition (McConnell, Brue &
Flynn, 2012). Cisco Systems runs up against Hewlett-Packard primarily and several smaller
competitors like Alcatel-Lucent (ALU), Juniper Networks (JNPR), Palo Alto Networks (PANW)
and Aruba Networks (ARUN) in the Networking and Communication Devices industry. To
understand the difference between these companies (see Exhibit 1, Appendix A), Cisco’s market
capitalization stands at $110.43 billion, the next highest is Hewlett-Packard at $46.35 billion, a
massive disparity between these two leaders in this particular industry (“Cisco Systems, Inc –
CSCO,” 2013). To clarify the terminology used, market capitalization simply represents the
market versus book value of equity. By equity, this student means liabilities subtracted from
assets.
Exhibit 2 from the Appendix A displays Cisco Systems and its main competitors within
the US Computer Hardware Industry where the playing field has considerably more parity

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(“Cisco Systems, Inc. – CSCO,” 2013). Some of the major competitors in this particular
industry are Apple (market cap of $425.45 billion) International Business Machines (IBM)
Corporation ($235.75 billion), Hewlett Packard ($45.41 billion) and Dell ($25.13 billion)
(“Cisco Systems, Inc. – CSCO,” 2013). Cisco Systems reported $110.43 billion in market
capitalization, third amongst their main competitors (“Cisco Systems, Inc. – CSCO,” 2013).
In 2008, Multiven, a California-based network maintenance and consulting service,
brought an antitrust lawsuit against Cisco Systems, accusing them of anticompetitive behavior
and attempting to obtain a monopoly in their industry (Follett, 2008). Specifically, Multiven
claimed Cisco Systems forced customers to utilize their own maintenance service for their
networking and communications equipment rather than allow others to offer competitive
maintenance services for the value and price benefit of the customer (Follett, 2008). This
particular case could be construed as a monopoly on Cisco Systems product maintenance, but by
no means would it be considered as such relative to the major industries like Networking and
Communications Devices or Computer Hardware that they operate within. This fits into the
realm of anti-competitive behavior, but it lacks the other qualities inherent to monopolies. There
were also some claims of Cisco Systems employing intimidation tactics against their own
business customers when the latter opted not to purchase anything or buy a sufficient amount of
their equipment, products or services (Duffy, 2011).
What is interesting is that in FY 2012 when most of the IT industry was suffering losses,
Cisco Systems maintained exceptional profits and their net income grew by $8 billion, a 24%
increase from FY 2011 (“Cisco Systems, Inc.,” 2012). This is an incredible leap and not one
generally seen in economic downturns like the US economy has endured for several years. They
do have competitors that are bigger than them in the Computer Hardware industry, but in

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Networking and Communications Devices, they dominate the market share over the next leading
competitor, Hewlett-Packard, in terms of clientele, sales and profits (“Cisco Systems, Inc. –
CSCO,” 2013). Over the past seventeen years, Cisco Systems has completed 150 acquisitions
which has accounted for 50% of its revenue up until present day and giving a 1,000% increase on
shareholder investment returns (Ottinger, 2012). As a whole, this student would have to state
that Cisco Systems works in industries experiencing monopolistic competition, which infers,
“…(1) a large number of sellers, (2) differentiated products (often promoted by heavy
advertising), and (3) easy entry to, and exit from, the industry” (McConnell, Brue & Flynn, 2012,
p. 217).
Ethical and Regulatory Considerations
Cisco Systems works in an industry that moves at a much faster velocity than law
enforcement and the legal sector could ever hope to imagine. Due to this trait, law enforcement
as well as civil and criminal courts are trailing well behind the IP-based networking,
communications and information technology sectors. This analysis already briefly mentioned
the antitrust lawsuit brought against Cisco Systems by Multiven due to the former entity’s
anticompetitive behavior. The US government remains concerned about companies that
maintain a large market share in their respective industries like Standard Oil at the turn of the
20th century, AT&T back in the 1980s, Microsoft at the turn of this century and most recently,
the XM-Sirius satellite radio merger. The federal government tries to regulate these companies
and prevent them from bullying or buying out all of their competition where they become the
only seller, they block entry into the industry or set their own price(s) at the expense of the

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public consumer and any ambitious entrepreneur that wishes to test their mettle against the
corporate giants in a particular sector.
The government at times can be their own worst enemy when they regulate entry into
industries by mandating difficult-to-acquire licenses (e.g. - Federal Communications
Commission) and patents which have the potential to stunt a budding company’s ability to
compete without spending a large amount of cash to break through these barriers (McConnell,
Brue & Flynn, 2012). Patents, though meant to protect the inventor, equates to a twenty-year
monopoly on that particular type of product (McConnell, Brue & Flynn, 2012). Concurrently,
the US government wants to promote competition because other businesses can compete and
thrive while the consumer ends up benefiting from this arrangement. Some of the consequences
found in a monopolized market create unethical business practices that have nothing but equity
and profits in mind. The price, efficiency and output of goods and services are all affected in a
detrimental way when a monopoly is in place. When the consumer base is limited to the
companies they can choose from, x-inefficiency, which is when a good is produced at a higher
cost than what is necessary, becomes a major hindrance (McConnell, Brue & Flynn, 2012).
Price discrimination, income transfers, economies of scale and rent-seeking expenditures are
other byproducts of monopolies if there is no government regulation of the free market
(McConnell, Brue & Flynn, 2012).
There exist three types of regulations when dealing with monopolies. In many states,
certain water and utility companies have virtual regional monopolies, yet the local or federal
government regulates their prices offered to customers (McConnell, Brue & Flynn, 2012). The
reason more competition is not present in these markets is due to the principle of economies of
scale, which means, “…reductions in the average total cost of producing a product as the firm

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expands the size of its plant (its output) in the long run; the economies of mass production”
(McConnell, Brue & Flynn, 2012, p. G-7). So, the costs for up and coming businesses are too
great for them to have positive net income.
The biggest concern for the government involving Cisco Systems is their ability to
manipulate customers to buy into a higher percentage of goods or services required to run their
business. Antitrust laws first began to arrive on the American scene in the 1890s with the
introduction of the Sherman Act, which stated contracts between American corporations and
foreign entities that restricted commerce or trade within the United States were deemed illegal as
well as any person or entity that attempted to establish a monopoly within a particular industry,
who would in turn be charged with a felony (McConnell, Brue & Flynn, 2012). This offense was
later amended down to a misdemeanor. Other regulatory measures were the Clayton Act of 1914
which outlawed price discrimination when it reduced competition, tying contracts (buying
another product in order to get the actual product you need), disallowing the acquisition of
competing stocks that led to reduced competition and interlocking directorates (McConnell, Brue
& Flynn, 2012). The last noteworthy regulatory laws were the Federal Trade Commission Act of
1914 and the Cellar-Kefauver Act of 1950. Respectively, these two laws allowed the FTC to act
on its own to investigate anti-competitive behavior or at the behest of the aggrieved party and
preventing an external company from merging with a business by way of becoming the
competitor’s majority stockholder (McConnell, Brue & Flynn, 2012). Nowadays, the FTC and
the US Department of Justice (DoJ) are the government entities that file antitrust lawsuits against
perceived offenders (McConnell, Brue & Flynn, 2012).
There are some definite ethical issues that Cisco Systems has been forced to confront,
from customer intimidation to price discrimination to anticompetitive behavior. Their current

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market share in the Networking and Communications Devices industry is far greater than what
they have experienced in the Computer Hardware industry, where they are a distant third in
terms of market capitalization (“Cisco Systems, Inc. – CSCO,” 2013). The federal government
needs to consider the possibility of what would occur if Hewlett-Packard (2nd in market cap -
Networking and Communications Devices industry) were to be bought out or forced into
administration. Cisco Systems’ market share would grow by a substantial margin, potentially
eliminating the even smaller competitors.
Macroeconomic Operations Environment
When speaking of macroeconomic issues, this student feels it is necessary to reiterate the
definition of the term before a discussion begins. According to McConnell, Brue and Flynn’s
text, macroeconomics is the:
…part of economics concerned with the economy as a whole; with such major aggregates as the
household, business, and government sectors; and with measures of the total economy
(McConnell, Brue & Flynn, 2012, p. G-16).
With respect to Cisco Systems, macroeconomics does play a role in their decision-making
process and it affects their liabilities-versus-assets comparison. Cisco Systems works on a global
scale so markets in several regions can affect them directly. Dollar appreciation or depreciation
also has an effect whether they are paid by customers in Europe, the Americas, Asia Pacific or
Africa. As of FY 2012, Cisco Systems had a .30 ratio debt-to-equity ratio (“Cisco in the
Limelight,” 2012) with long-term debt at $16.29 billion and total stockholder equity at $51.29
billion (Exhibit 1, Appendix B). It was proven that Cisco Systems has performed better than its
peers in the current economic environment. When the industry was suffering losses, Cisco

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Systems experienced gains and their healthy debt-to-equity ratio implies that they do not have to
be as critically concerned with interest rates as some of their competitors do.
When one speaks of the business cycle, they are referring to the economic peaks and
troughs as well as the recessions and expansions observed on either side of them (McConnell,
Brue & Flynn, 2012). Of course, these cycles vary greatly relative to intensity, duration and
predictability (McConnell, Brue & Flynn, 2012). Regardless, these fluctuations usually affect
businesses, households and the government as a whole, so business cycles definitely correlate to
macroeconomics. There is no doubt that fluctuation catalysts like financial instability, political
events, irregular innovation, productivity changes and monetary factors (McConnell, Brue &
Flynn, 2012) would affect a multi-national corporation with over $98 billion in total assets
(“Cisco Systems, Inc.,” 2012). Cisco Systems states in their FY 2012 Financial Report that if the
economic downturn continues at the current rate and if political factors remain an obstacle to
business pursuits, they face the possibility of adverse material impacts on their financial status,
operating outcomes and the business in general (“Cisco Systems, Inc.,” 2012). Other factors for
Cisco Systems on the macro level include global market uncertainty, civil unrest, foreign
currency exchanges, health epidemics and pandemics, global customer credit risks, staffing and
managing challenges, natural disasters as well as detrimental tax laws (“Cisco Systems, Inc.,”
2012). In FY 2011, the company experienced a decrease in spending from public sector
customers from around the world and the trend has continued (“Cisco Systems, Inc.,” 2012).
With respect to Cisco Systems’ beta rating of 1.43, this implies that the company works in a
volatile market (information technology usually fluctuates greatly) and the rate of return can be
lucrative, but at the same time, risky. Generally, if the rating scores above 1.0 (which is
considered the average) it will be categorized as volatile. All of this notwithstanding, Cisco

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Systems did manage to grow profits by 25% and total revenue by 7% due to cost cutting
measures like lower restructuring charges (“Cisco Systems, Inc.,” 2012).
Microeconomic Operations Environment
The microeconomic environment has had an impact on Cisco Systems recently with
respect to factor markets, costs and pricing. When this student speaks to factor markets, he is
referring to resources or capital equipment purchased by one company from a vendor as opposed
to the actual sale of final goods and services to customers. In order to promote further
clarification for the reader, McConnell, Brue and Flynn describe microeconomics as:
The part of economics concerned with decision making by individual units such as a household,
firm, or an industry and with individual markets, specific goods and services, and product and
resource prices (McConnell, Brue & Flynn, 2012, p. G-17).
Cisco Systems has certainly made great efforts to acquire other firms in order to improve their
growth margin and competitive advantage in their relevant markets (Ramaswamy, 2010). On the
microeconomic level, Cisco Systems concentrates on two issues critical to business success:
market transitions and their customers (Davidson, 2011). These two factors lead to one of the
determinants of a successful business: product gross margins. Total gross margins decreased by
0.4% from FY 2011 to FY 2012 and this was in large part due to inappropriate product pricing,
higher sales discounts and shifts in product mixes, even though they had lower overall
manufacturing costs (“Cisco Systems, Inc.,” 2012). They determine discount and standard
pricing for customers based on vendor-specific objective evidence (VSOE), third-party evidence
(TPE) when VSOE is unavailable and estimated selling prices (ESP) when TPE is not present.
All of these metrics require a narrow pricing range for their products in order to maintain a level
of continuity and impartial conduct (“Cisco Systems, Inc.,” 2012). Cisco Systems believes that

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entry into new markets is a positive course of action, but that varying cost structures and pricing
can lead to adverse results (“Cisco Systems, Inc.,” 2012). With regards to costs, Cisco Systems
overall manufacturing costs in FY 2011 accounted for 1.7% of product gross margin (“Cisco
Systems, Inc.,” 2012). These manufacturing costs were lower in FY 2012, due in large part to
enduring operational efficiency and the yield from value engineering efforts (“Cisco Systems,
Inc.,” 2012). As was expected, higher headcount related costs and service delivery costs were
experienced in FY 2012 (“Cisco Systems, Inc,” 2012). It should be noted in the past that
because of the growing costs for labor and the economic downturn in 2008-2009, Cisco Systems
were forced to lay off 2,500 employees and conduct restructuring measures (Miskin, 2010). So,
in summary, Cisco Systems microeconomic concerns are identified as excessive costs
(production, inventory, delivery and labor), unfavorable pricing (narrow margins) and
diminishing factor markets (inaccessible resource and capital equipment acquisitions).
Conclusion
Cisco Systems remain the preeminent router and switches vendor on the planet for good
reason. In this analysis, the student explained the rational decisions this company has taken in
order to reduce average total costs and promote economic growth. They have asked themselves
these five key questions continuously like an infinitely-revolving cycle: (1) what will be
produced, (2) how will the goods and services be produced, (3) who will get the output, (4) how
will the system accommodate change and (5) how will the system promote progress (McConnell,
Brue & Flynn, 2012). The student has discussed the ethical and regulatory topics as well as
macro- and microeconomic challenges facing the company. We have demonstrated their
willingness and ability to reach out to numerous markets and effectively compete with the likes

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of Alcatel-Lucent, Dell, Hewlett Packard, Apple and IBM while experiencing growth where
many other companies have suffered losses in FY 2012. This is a testament to their product and
service innovation, decentralized management structure and market transition adaptability. Their
attempts to not only dominate commercial networking and communication but to also tap into
the residential sector (and become a household name) could further swing more of the market
share in their direction. For instance, when they first made the plunge into VoIP based telephone
products, they were sixth - now they are the market share leaders (Davidson, 2011). Cisco
Systems understands that stand-alone mainframes and servers are a subject of the past and they
have the ability to transition to networking and cloud computing faster than most competitors
(Davidson, 2011). Yet, all of this success means that the higher percentage of the market share
they attain, the closer to a monopoly they become which will cause the federal government to
take drastic measures to ensure its prevention. They also understand the opportunities outside
the United States and look to take advantage of globalization and the growing consumer interest
and requirements relative to IP networking, information technology and communications.

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Appendix A
Exhibit 1
Source: Cisco Systems, Inc. - CSCO. (2013, March 27). Yahoo! Finance (online). Retrieved from http://finance.yahoo.com/q?s
=CSCO&ql=1
Exhibit 2
Source: Cisco Systems, Inc. - CSCO. (2013, March 27). Yahoo! Finance (online). Retrieved from http://finance.yahoo.com/q?s
=CSCO&ql=1

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Appendix B
Exhibit 1 – FY 2012 Balance Sheet (in thousands)
Source: Cisco Systems, Inc. - CSCO. (2013, March 27). Yahoo! Finance (online). Retrieved from
http://finance.yahoo.com/q/bs?s=CSCO+Balance+Sheet&annual

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References
Cisco in the Limelight. (2013, March 27). Seeking Alpha (online). Retrieved from
http://seekingalpha.com/article/1303071-cisco-in-the- limelight?source=yahoo
Cisco Systems, Inc. (2012). Cisco Systems 2012 Annual Report. Cisco Systems (online).
Retrieved from http://www.cisco.com/web/about/ac49/ac20/about_cisco_annual
_reports.html
Cisco Systems, Inc. - CSCO. (2013, March 27). Yahoo! Finance (online). Retrieved from
http://finance.yahoo.com/q?s=CSCO&ql=1
Davidson, A. (2011). Innovating by “doing both”: Cisco manages contradictions that drive
growth and profit. Strategy & Leadership, 39(1), 11-15.
Duffy, J. (2011, June 2). Cisco resorting to intimidation tactics. Network World (online).
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Follett, J. H. (2008, December 2). Cisco Accused of Monopoly in Antitrust Lawsuit. CRN
(online). Retrieved from http://www.crn.com/news/networking/212201523/cisco-accused-
of-monopoly-in-antitrust- lawsuit.htm
McConnell, C., Brue, S. & Flynn, S. (2012). Economics: Principles, Problems, and Policies
(19th ed.). New York, NY: McGraw-Hill, Irwin.

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Miskin, D. (2010, November). Networking New Dimensions. Treasury & Risk. Retrieved from
http://search.proquest.com/docview/815587943?accountid=8289
Ottinger, R. (2012, December). Acquire More, Fail Less: A Growth Acceleration Strategy for a
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Ramaswamy, V. (2010). Competing through co-creation: innovation at two companies. Strategy
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