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Cisco Systems remains in a strong position to weather the economic storm

Routers and switches still represent more than half of Cisco’s sales, but with $22 billion in net cash on its balance sheet, the company remains in a strong position to weather the economic storm.
Cisco Systems remains in a strong position to weather the economic storm
Routers and switches still represent more than half of Cisco’s sales, but with $22 billion in net cash on its balance sheet, the company remains in a strong position to weather the economic storm.

Indeed, CEO John Chambers is so confident of Cisco’s vision that he believes now is the time to broaden into what he describes as ‘market adjacencies’. We interpret that to mean Mr Chambers is about to step on the toes of some of his customers, and they are very big toes. As a group, IBM, Dell, and Hewlett-Packard deliver more than 80% of his company’s sales.

So why would the boss of the world’s dominant supplier of routers and switches, the nuts and bolts of the internet, want to diversify into areas that his main customers occupy – potentially creating a friction that could undo his business?

“There’s an inflection point happening”, Mr Chambers told BusinessWeek magazine recently. Cisco is increasingly being asked by its end customers not just to sell them networking gear, but to sell them business models that solve particular problems for them.

These solutions might include Cisco’s TelePresence videoconferencing systems, for example, which enable large corporations to save huge amounts of time and expense communicating with their own people and their customers across the world. This is a far cry from simply updating the hardware in a customer’s network system.

It also signals that Cisco believes it has reached a point of maturity that it feels it can explore such possibilities, even if it risks alienating its largest customers.

If Mr Chambers can pull this off, it may become a text book study that Harvard’s Professor Michael Porter might uphold as an example of his ‘five forces’ theory. In particular, he might focus on the part that studies the relationship a company has with those of its customers and tries to determine who has the power in that relationship.

In Cisco’s case, clearly the support of IBM, H-P and others has been central to creating a global business that in FY08 sold $39.5 billion of equipment and generated just over $8 billion in net income for shareholders. The market currently values that business at over $111 billion representing a PE ratio of 13.9x historic earnings.

But in the future, Mr Chambers may well be looking to get closer to his real end customers who are the large telecommunications companies, public institutions and corporations who are gradually awakening to the real power of internet’s ability to deliver real time information around the world.

The point of inflection

In the company’s recent third quarter result, Cisco repeated the mantra that the network is the platform. That means that intelligent networks are becoming the platform for productivity and global competitiveness.

Cisco believes that networking, computing, storage and software technologies are beginning to converge in new ways. It will mean that the traditional data center will have to integrate technologies that have thus far been separated, to create more unified architectures.

Cisco recognises that in changing the way it does business, it will begin to compete with its partners more, and even encounter new competitors. Most importantly, it sees the need to develop new strategic alliances.

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