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Cisco: Restructuring global operations in 2011

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Dominant IP edge router manufacturer worldwide:

Cisco is the largest IP edge router manufacturer and distributor globally with market share of 32% (2010: 45%) in 2011. The company produces routing and switching along with advanced networking & communication technologies across 90 countries worldwide. Switches constitute the core market for Cisco accounting for 33.6% (2008: 34.1%) of group revenues in 2010. United States is the flagship market space accounting for 54% (2008: 53.6%) of total. It was publicly listed on NASDAQ stock exchange in February 1990 with market capitalization worth US$220 million. It has market capitalization of US$84.6 billion in September 2011, and is highly dependent on third party contract manufacturing with standalone in-house production unit in Mexico. In 2011, the company witnessed moderate revenue of US$43.2 billion (2010: US$40 billion).

Global communications equipment market to reach US$89 billion by 2014:

United States communication equipment value sales stood at US$71 billion, with year-on-year growth of 6% in 2010. The market is stipulated to reach US$89 billion, with annual growth of 5.8% in next 3-4 years (2010-2014). Asia-Pacific is the biggest communication equipment market worldwide accounting for 52% of total value sales in 2010. Americas is the second leading market constituting 32% of total global spend on communication equipment. Electrical & electronics retailers are the core distribution network contributing 65% of total (2009-2010). The market is highly fragmented with strong penetration of regional and local niche manufacturers across North America and Europe.

Cloud based solution, inorganic expansion and operational restructuring core business outlook:

IP edge router is one of the core markets for Cisco which is currently staving off steep competitive pressures from Alcatel-Lucent, Huawei, Juniper and ZTE on long-term basis. Cisco is focusing on expanding cloud based solution portfolio to improve competitive advantage and regional operating margins in core markets such as United States and Europe. In 2011, the company signed strategic alliance agreement with EMC establishing virtual computing environment for public and private customer base to enhance long-term value proposition and retention rates. The inorganic expansion (Pari Networks, Inlet Technologies, new Scale Inc etc) is estimated to improve horizontal integration of solution portfolio enhancing segmental margins of core and non core business segments. Finally, Cisco laid off approximately 6,500 workers and will reduce the workforce by 10,000 to enhance operating margins on short-term basis.

Can Cisco retain its market positioning and brand equity over the next 2-3 years?

Cisco has been offering low return on investment reducing the investor confidence attributed to share price trading at US$25 (close to dot com burst in 2000). Although the new product development and service portfolio has witnessed strong growth of 15%, its core business segment of switches declined by 9% in Q3 2011. On the other hand, historical core acquisition such as Flip contributes 1% of group revenues (purchased for US$590 million in 2009). Although inorganic expansion is enhancing short-term competitive advantage, can Cisco regain its lost market share of Juniper and Alcatel-Lucent worldwide?

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