End-To-End Communication



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Routing the Path

to

End-To-End Communication



An Analysis of Cisco Systems and how the use of Information Technology gave them a Competitive Advantage

Mira Vissell


ISM 158 Business Analysis Paper
March 4th, 2004

Table of Contents

Objective



Section I: Industry Summary: An Analysis of Network Equipment Industry

  1. Industry Profile

  2. Competitive Strategies within the Industry

  3. Porter Model Evaluation of Industry Forces

  4. Globalization of the Industry

  5. Importance of Information Technology in the Industry


Section II: Company Perspective: An Analysis of Cisco Systems

  1. Cisco Systems profile

  2. Market and Financial Performance

  3. Competitive Strategy Statement

  4. Significance of Information and Information Systems

  5. Strengths and Weaknesses of Cisco


Section III: Structured Analysis of Information System Use

  1. Strategic Option Generator

  2. Roles, Roles and Relationships

  3. Redefine/define

  4. Significance of Telecommunications

  5. Success Factor Profile



Section IV: A Final Analysis of the Success of Cisco Systems

  1. The Success of Business Strategy and IT used to Date

  2. The Effective Position of the Company for Future Performance



Bibliography

Objective

The objective of this paper is to analyze how Cisco Systems gained competitive advantage in the networking industry through the use of information systems and key business strategies.

This paper has four sections that help in this analysis. The first section looks at the network equipment industry profile and examines the different competitive strategies within this industry. The porter model can be a way of examining the industry forces. It also looks at how companies in the industry are often forced to go global and how information systems have a huge impact of the competitive advantage of companies in the industry.

Section two deals with the company, Cisco, and takes a look at the profile of the company as well as key business leaders. The market and financial analysis shows how Cisco is doing relative to previous years and the importance of information technology shows how Cisco has gained a competitive advantage over competitors. The strengths and weaknesses of Cisco are also examined to help understand Cisco’s standing.

The third section takes a deeper look into how information technology has helped Cisco and the fourth section is a final analysis of the success of Cisco and how IT has helped them gain a competitive advantage.

The fourth section is a final summary of how Cisco is positioned.


Section I: Industry Summary: An Analysis of Network Equipment Industry

A. Industry Profile


The network equipment industry is made up of companies providing networking equipment to ISP servers, large corporations and other businesses or small offices. Companies that compete in this industry are companies that focus on network equipment parts such as routers and switches as their main source of revenue. Cisco is the primary company for routers and has a large market share in such services as switches, cables and network software. Other products they offer are remote access servers, Internet Protocol telephony equipment for transmitting data and voice over the same network, optical networking components, and network service and security systems. They are trying to enter into the telecommunications market, however they are still struggling for recognition. It is still safe to say they are of the network equipment industry. The main competitors in the networking equipment market are Cisco, Nortel, Lucent and Juniper.

Net Income ($ million)



Company

1998

1999

2000

2001

2002

2003

Cisco1


1,350.10

2,096.00

2,668.00

-1,014.00

1,893.00

3578

Nortel2

-593

-257

-2,995.00

-24,307.00

-3,585.00

N/a

Lucent3

970

4,766.00

1,219.00

-16,198.00

-11,753.00

-770

Juniper4


-30.9

-9

147.9

-13.4

-119.7

N/a

Figure 1.1
Nortel Networks is a huge competitive force in the network equipment industry. With its acquisition of Bay Network Nortel in 1998 they now have expertise in both voice and data network arena. Nortel competes because they are able to provide their customers with a one-stop shop for data networks.5
Lucent is also a big part of the network equipment industry. Lucent is the current leader in fiber-optic technology, which is quickly becoming a crucial part of the network. Lucent was made in Bell Labs, which alone gives it a great advantage over its rivals.6
Juniper competes on a more specific area of network equipment. It sells Internet Protocol routers for private and public access networks. Juniper also designs the application-specific chips that control its routers. This chip allows them to have high quality networks that can compete against the giants. In this way they are able to compete in the network equipment industry.7
Other competitors that compete in this market are smaller start-up companies with key niche products. These companies are often only around a little bit before the bigger giants acquire them. There are an increasing number of global companies that are now entering into the network equipment market. An analysis of this will be presented later on under the porter competitive model.

The increasing growth of the Internet in the nineties has increased the demand for network equipment and greatly expanded the market. However many of the customers went bankrupt or over estimated the needs of their IT capacities as the Internet hype died down. Thus competition has gotten even fiercer and companies must look to new technology as a way of drawing in customers.


B. Competitive Strategies within the Industry


There are many factors that influence the strategy in the network equipment industry that can be described using the business strategy model. The business strategy model breaks down some of the strategies and business processes the companies within the Industry. The six strategies in the model are product, customer, market, manufacturing, sales, company, and information systems.
The following business strategy model shows what factors are under each strategy category for each component for the network equipment industry.


Business Strategy Model
Network Equipment Industry

Product Strategy

Router


Switches

Network Software

Cable Product

Services

Customer Strategy


Large Corporations



Public Institutions

Small/med Businesses

Personal

Market Strategy


North America



Asia

Europe

South America

Manufacturing Strategy

Vertically Integrated

Vendor Emphasis

Outsource

Sales Strategy


Distributors



Internet

Sales Representatives

Company Strategy


Independent



Alliance

Joint Vendors

Information Systems Strategy


Engineering System



Manufacturing System

Business System

Sales System

Customer Service

Marketing

Figure 1.2


Differentiation


The network equipment industry follows the strategies of differentiation to deal with competition. Companies such as Cisco and Lucent compete within the industry by offering the most advanced and reliable network equipment to its customers. Cost of the equipment is often not as important to the customers of this industry because businesses need this network equipment to run their business. Companies therefore offer a wide range of products and different product packages as a way of competing.
Companies such as Cisco rely heavily on brand recognition to compete in the network industry. Cisco is very aggressive in their “Are you Ready?” advertising campaign to make the public aware that most of the Internet and many of devices are build on products from Cisco. This helps companies be able to compete and stay strong in the industry.

Innovation


Differentiation strategies can only be successful if they have convenience, cost saving, and reliability. Companies have to be able to spot the newest trends and desires and create the products. Therefore innovation is very important for companies in the industry. They have to be able to stay on top of new technology and thus stay on top of their competitors. In 1996 Cisco launched Cisco Connection Online Website to help customers in learning about new Cisco products, ask and answer questions and provide a forum to provide customers with easier technical support. Customers were satisfied and this boosted Cisco’s sales by 70 percent.8

Growth

Growth in the industry is another important factor for competitive advantage. Companies have to be ready to expand and grow in order to compete. One of the ways the companies such as Cisco have been able to grow is through acquiring new companies that have the new technology that is needed. Instead of developing technologies in house most companies find that it is often faster to just buy the technology. Acquisitions and the ability to quickly integrate the newly acquired companies is key.


Alliance


Forming alliances with other companies has always been important for the industry. These alliances can allow that technologies be combined to use as one. Lucent has formed alliance with Sun Microsystems, Yahoo, and Strategy.com to allow network operators to offer mobile Internet applications on such things as personal digital assistants and cell phones. Cisco also formed alliances to provide better products and services. They formed an alliance with IBM to offer customers open storage networking solutions for data intensive computing. Much of their alliances are done in the form of outsourcing as well. They gain competitive advantage by outsourcing.

Summary of Business Strategy Model


The business strategy model looks at the categories of strategies for the network equipment industry. The products and customers are defined to show who and what they are competing for. The market is the where portion, or what places they will focus mostly in. Manufacturing and sales evaluates how they are going to maintain competitiveness. The company strategy explores what exact industry they are in. Information systems strategy talks about each service or system that the company will focus on.


C. Porter Model Evaluation of Industry Forces




Porter Competitive Model

Network Equipment Industry (US Market)


Global Competition

Changing domestic Companies

Start-ups




Potential New Entrants




Intra-Industry Rivalry

SBU: Cisco

Rivals: Nortel, Juniper, Lucent, Enterasys, Avici, 3Com, Extreme other small start-up Companies





Bargaining Power of Suppliers

Bargaining Power or Buyers





ISP service providers

Large Corporations

Small Medium business

Education

Home office (personal)


Component Manufactures

Outsource Manufactures

IT vendors


Substitute Products and Services

Wireless, Voice over IP, Outsourcing, Used Equipment, Telephone and snail mail




Figure 1.3

Intra-Industry Rivalry

The intra-industry rivalry consists of all the companies and organizations that provide network equipment and software to businesses. The companies can range from smaller to giant companies. Smaller companies provide one form of network equipment that may be top of the line but they usually lack the capital to expand their line. Therefore the bigger companies easily acquire them. The bigger companies such as Cisco, Nortel, and Lucent compete with each other by selling whole packages to their customers.

Bargaining Power of Buyers

The bargaining power of buyers consists of the buyers with the most volume. Such companies like large ISP companies such as AOL, Earthlink, AT&T, and Qwest, have a huge power over the industry. They can decide what vendor to use and can single-handedly make or break a company. Large corporations, government and education institutions also buy large volumes of products and services. Businesses have to be ready to compete and have the best strategies for getting the buyers of the most volume.

Bargaining Power of Suppliers

Companies that are the most unique in the market control the bargaining power of suppliers. Such companies like IT vendors and component manufactures make up the majority of this section. Cisco focuses on its core abilities, such as marketing, design, strategy, and customer service, and hires other companies to build their equipment.9 Cisco buys most of its parts from specialized manufacturers and so they hold a great deal of power over them. They can choose which manufacturer for each element of their hardware parts. Cisco and other companies often outsource their products to manufacturers such as Solectron and Flextronics to cut cost and since they represent a large percentage of the manufacturers’ business Cisco and other companies have a great deal of power.


New Entrants

The new entrants to the network equipment industry include global competition as well as local companies. The global competition comes from companies oversees entering into the market as start-ups or even gaining power and then entering market. Global competitors such as Huawei from China may pose a serious threat to Cisco in the future when they cut into Cisco's profit margins for such things as switches and routers. Huawei’s strategy is to undercut Cisco's prices by as much as 50 percent. Currently switches and routers account for 80 percent of Cisco's sales and profits.

New entrants can also include domestic companies that already have a large market value to change their business strategies and cut into networking. Companies such as IBM already have the money and talent to enter the industry and they can decide that funding startups are more cost effective. Start-ups can have an advantage too because unlike their large established competitors they do no have to worry about dealing with old products. They can set all their capabilities and resources to accomplish one goal.

Substitute Products and Services

Substitute products and services include anything or any company that could be an alternative to networking products. Such things like wireless access that would bypass the need to have a network. Cisco itself has touched a little bit into the voice over IP market, but hasn’t particularly received recognition. This feature to the Internet could be a major substitute to routers and switches that Cisco and other networking companies mainly deal with.


Used equipment can also be a major competitor. When the dot-com bust happened many network providers who were left with billions of dollars in debt started to sell off some of their gear to pay back creditors. A lot of the gear was networking equipment and was still in its original packaging. The companies were so eager to sell that they would sell their brand new equipment 20 to 25 cents on the dollar.
Such things as the telephone and snail mail hold a small amount of competition simply because it is a way that people can communicate without the use of networks. They can be seen as drawing away customers.


Conclusions for Porter Model

Through analysis of the porter competitive model it is clear that many factors influence businesses in the network equipment industry. The model shows the main competitors in the industry and the power that the buyers and suppliers hold. The buyers with the most volume hold the biggest amount of power while the suppliers that are the most unique in what they sell are able to be the most successful.

The model also shows how competitors and new entrants can be a challenge for existing businesses. New entrants such as global competition and domestic companies changing their business plans can greatly compete with existing companies. Foreign competitors are always ready to undercut the current leaders and offer new products. Start-ups can pose problems for the larger corporations because they can focus on one product line and often get better results than existing companies. These companies are considered new entrants to the industry. By using the porter competitive model businesses can see what challenges they face in the industry.


D. Globalization of the Industry


We live in a global economy. This is especially becoming true in the case of networking and becoming connected to people all over the world. The network equipment industry has had to deal with this need for globalization and has had to be able to go overseas. There is a huge demand overseas that is pulling the network equipment industry to expand. Luckily not too much money needs to be spent on creating new products to compete globally. Network equipment has the advantage of being able to easily adapt to fit the new languages.
Some of the benefits of going global include increased revenues, profits, and market share. For many large multinational companies, more than a third of their revenues are derived from outside their home country. 40% of Cisco’s sales come from areas outside of America. Cisco Systems has sales and support offices in more than 60 countries.

Also Lucent has offices and distributors in more than 65 countries and derives 34% of their total sale from areas outside of America.


With this growing need to go global, companies in the network equipment industry have had to deal with these adoptions and make it a goal to branch out and provide equipment overseas.

E. Importance of Information Technology in the Industry

Information Technology is very important for the network equipment industry. Being able to compete globally and in different regions all rely heavily on the use of being able to be accessible to the general public. Businesses must be on the Internet and have a good use of information technology in order to succeed. Cisco has benefited from the use of information technology in the form of Cisco Connection Online (CCO). CCO uses IT to offer online customer services such as product support and sales.

Companies must also deal with keeping their employees as connected and up to date within the company. Cisco has an ERP system that is extremely efficient. They are able to keep their employees involved through use of extensive networks and the best technology. IT has speed up the way businesses communicate and helped with the globalization of this network equipment industry.

Section II: Company Perspective: An Analysis of Cisco Systems


A. Cisco Systems profile




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