Porter’s Five Forces Analysis of Cisco
Key Facts
| Name | Cisco Systems |
| Industry | IT, Internet, Software & Services |
| Founded | 1984 |
| Headquarters | San Jose, California, USA |
| CEOs | Chuck Robbins |
| Revenues | USD 51.6 billion (CY22) |
| Profit | USD 11.8 billion (CY22) |
| Competitors | Juniper Networks, HPE/Aruba, Ubiquiti, MikroTik, TP-Link |
Company Overview
Cisco is an American-based multinational company that manufactures one of the finest network hardware, software, and telecommunication equipment. The company ranks 92nd on the Forbes Global 2000 (2022) and 274th on Fortune Global 500 (2022) lists.
The company reported revenues of USD 51.6 billion, up 3% YoY compared to the same period last year on the back of full-yearorders and backlogs. Also, the Net profit clocked in at USD 11.8 billion (EPS 2.82/sh) a striking increase of 12% YoY.
Cisco prides itself on its formula for continuous product improvements through innovation.The segment wise detail is presented below
Secure, Agile Networks –The segment involves wireless, corporate routing lineups also include software licenses.
Internet for the Future –networking optics, 5G internet, silicon chips, and optical solutions.
Collaboration –Meetings, Communication Devices, Contact Center, andCPaaS offerings.
End-to-End Security –Network Security, Cloud Security, Security Endpoints, UnifiedThreat Management, and Zero Trust offerings.
Optimized Application Experiences –full-stack observability and cloud-native platformofferings.
Services –software updates and other services.
Porter’s Five Forces Analysis of Cisco
Cisco Rivalry among Existing Competitors
- Aggressive Competition
The telecommunication industry is highly decentralized with a large number of players offering similar products with slightly different features and there is everything so someone in varied price range. Also, with the rapid rate of technological advancement, more and more players are coming up with innovative products. Although Cisco is of the leading players in the industry, it has faced extreme competition in recent years post Covid-19.
- Juniper Networks
Juniper is another American multinational that operates in the telecom hardware industry. The company produces routers, switches, network management, and other technology. Juniper posted net revenues of USD 5.30 billion, up 12%YoY and a profit of USD 471 million, a whopping 86% YoY increase in CY22. The company was able to achieve such exceptional result on the back of higher volumetric sales, one-time debt extinguishment costs in 2021, tax efficiencies and higher margins.
Cisco Threat of New Entrants
- Extraordinary Working Capital Requirements
There is a lot of money required for the developmentof amenities that can actually manufacture communications hardware, network equipment, and other accessories. Moreover, extremely highly skilled workers are required to develop software that run with the prevailing hardware while also having room for performance improvement and bug fixes. Software development is one of highly rewarding careers these days. Such skillful people are very difficult to employeeand then keep retain them due to this high technicality condition this also further reduce the threat from new entrant.According to Kelly Jones, Chief Peoples Officer at Cisco, Cisco is focusing on its existing 84k employees to be talent acquisition specialists as it is extremely difficult to find the right people in the tech industry.
- Research and Development Costs
Cisco focuses on Research and innovation to improve its product line up and to better cater needs of the day. The company allocates separate research budgets for different divisions. The technology industry is ever changing with technological advancements, and changing consumer preferences and a major portion of Cisco and other competitors’ success comes from coping with such challenges in a cost effective manner. Coping with all types of technology requires ongoing research and development costs which are mostly high for tech companies.
- Excessively Regulated
The IT business is highly regulated with many certifications required from different agencies. A typical product that a company manufacturers have to cope with not just international standards but also local standards. Moreover, issues such as privacy, data protection, personal information and encryption have to be kept in mind while developing such products or services.These constant changes in the external environment have to be incorporated and hence demotivate startups from venturing into this business.
Cisco Bargaining Power of Suppliers
- Low Supplier Dependence
There is abundance of suppliers who create parts for Cisco while reducing dependence on a single supplier. Moreover, switching cost is low when the company shifts from one supplier to another which provides additional flexibility. Some of Cisco’s suppliers are Delta, Samsung Semiconductors, and NVidia among others.
- Risk of Supply Chain disruptions
The supply chain is facing extreme issued after the Russia-Ukraine war especially commodity prices became highly volatile especially energy prices which affected almost all industries across the globe. Overall all the countries are facing very tight inflationary pressures which further resulting monetary tightening polices even this phenomena faced by the major powers including US and UK. This is further resulting in the high cost of production for IT and Telecommunication industries which are impacting the supplier’s margin negatively. InMarch 2022 results, Cisco announced company faced a costs of USD 300 million (2.5% of Revenue) because of China’s shutdown and supply shortages.
Cisco Bargaining Power of Buyers
- Natural Competition
The bargaining power of buyers is low to none in the IT business and consumers are mostly price takers. However, due to large availability of alternate products in different price ranges, Cisco has a natural pressure to remain competitive so it doesn’t lose its market share as the switching cost for consumers is low.
- Ability to pass on Cost-push inflation
The last year has been extremely painful for tech buyers and sellers alike as the supply chain disruption caused by the shortage of silicon chips and other parts has caused havoc. As the world is moving towards remote work, there is exceptional demand from businesses and individuals for Cisco’s products which makes it easier to pass on prices.
- Recurring Revenue
40% of revenues comes from subscriptions which bring recurring revenues for the company which helps in retaining clients for a longer period as compared to single product purchase. The company generated USD 15 billion on software revenue in FY22 out of which 81% is subscription-based.
Cisco Threat of Substitute Products or Services
- Low Switching Cost
The switching cost is low for routers, links and other products that Cisco manufacturers. Due to this, Cisco feels pressure to remain competitive to hold its market share and industry leading position. The major threat is from Chinese and Indian products that penetrates the industry and provides low cost alternative to Cisco consumers. In order to gear up, Cisco has made strategic acquisitions like WebEx and LinkSys by improving the quality of service to attract price conscious customers.
- Vast resale market
There is always an option to sell your old tech to get a new one with the rapid pace of advancement in technology. Many brands selling premium products now have to factor in that a single product will be used by various users and re-used in markets for many years. The low cost of re-used routers and other products poses a direct threat of substitutes to these companies who spend millions of dollars in research developing cutting-edge new technology.
References
- Annual Financial Statements, Investor Relations , Company Website [Online], Available at: Cisco
- Fortune, (2023), Topic: Cisco [Online], Available at: Fortune
- Forbes, (2022), Cisco [online], Available at: Forbes
- The Wall Street Journal, Topic: Cisco [online], Available at: Wall Street Journal
- Jacob Carpenter, (2022), China’s COVID lockdowns will cost Big Tech billions. Cisco’s $300 million hit is just the beginning [Online], Available at: Fortune
- Forbes Advisor, (2022), Tech Layoffs: Cisco Announces Mass Layoffs – 4,100 Employees Cut [Online], Available at: Forbes
- Amber Burton and Paolo Confino, (2022), Why Cisco is training its 84,000 employees to be LinkedIn influencers [Online], Available at: Fortune
- Carolina Milanesi, (2022), Cisco’s Latest Purpose Report Brings To Life Its “People, Profit And Planet” Focus [Online], Available at: Forbes
- Will Daniel, (2023), Cisco’s CEO at Davos says most executives are ‘very optimistic’ about the economy’s future—despite Americans’ recession fears [Online], Available at: Fortune
- Simply Wall st, (2023), We Think Cisco Systems (NASDAQ:CSCO) Might Have The DNA Of A Multi-Bagger [Online], Available at: Yahoo Finance
- Dividend Chanel, (2022), Why Cisco Systems Is A Top 25 Dividend Giant [Online], Available at: Forbes