Cisco Systems Inc - Conducting Business Via The Internet

The 1997 purchases of Ardent Communications Corp. and Global Internet Software Group elevated Cisco to the number one spot among worldwide networking equipment makers, with an 80-percent share of the Internet router market. That year, the firm sold nearly $1 billion worth of networking equipment via its Web site, one of the earliest business-to-business sites to prove successful. By 1998, Internet sales accounted for more than 40 percent of Cisco's $3.6 billion in annual revenues, which grew 44 percent from the previous year (earnings jumped 55 percent over the same time period). According to a March 1998 article in InternetWeek, Cisco's Web site went well beyond simply allowing clients to place orders and make payments. It explained: "The site provides online documentation, order updates, design tools and help-desk support. Cisco delivers the tools to cut the time required for negotiating contracts, determining pricing, calculating lead times, checking on status and verifying shipment dates." In December, the firm established its Internet Business Solutions Group after clients began asking Cisco for helping with setting up their own Internet-based business ventures.

Also in 1998, Cisco attained a market capitalization of $100 billion, setting a record for reaching that milestone less than nine years after completing an IPO. Microsoft Corp., which had set the previous record, took 11 years to reach the $100 billion mark. Acquisitions that year included American Internet Corp., Pipelinks Inc., Clarity Wireless Corp., and NetSpeed Inc., a converter of traditional phone lines into digital subscriber lines (DSL). Qwest Communications International Inc. joined forces with Cisco in 1999 to create one of the largest Internet-based networks in the United States. In doing so, roughly 80 percent of Quest's transmissions began using Cisco lines.

With a 50-percent share of the $21 billion networking devices industry, Cisco boasted sales and earnings far above those of competitors 3Com Corp., Bay Networks, and Cabletron. Looking for new growth areas, the firm decided to diversify into the $250 billion telephone equipment industry and compete with the likes of Lucent Technologies Inc. and Nortel Networks. The first step in this strategy called for the acquisition of three fiber-optics developers. In August of 1999, Cisco bought Monterey Networks Inc. for $500 million in stock, gaining access to the high-speed optical internetworking technology Monterey used to process traffic at a network hub. Three months later, Cisco superceded its $4 billion Stratacom purchase with the $7 billion acquisition of Cerent Corp., a manufacturer of fiber-optic network equipment serving metropolitan areas. In December, Cisco paid $2 billion for the optical systems unit of Italy's Pirelli SpA. Cisco hoped to use Pirelli's dense wave division multiplexing (DWDM) technology to transmit data between network hubs and end users in metropolitan areas.

Since its acquisition spree began in 1993, Cisco had spent nearly $19 billion on 42 companies by the beginning of 2000. Spending continued that year, when Cisco paid $5.7 billion in stock for ArrowPoint Communications Inc., a maker of network switches, and completed 19 additional purchases. By then, Internet sales accounted for roughly 80 percent of Cisco's total revenues. The firm's continued success selling its technology via the Web fueled the growth of its Internet Business Solutions Group, whose clients included Lands' End, The Gap, and WalMart. According to the unit's managing director, Mohsen Moazami, as quoted in Chain Store Age Executive, "We're not only selling a lot online. We're profitable. We have a networked supply chain where forecasting accuracy has increased, and inventories have decreased. Cisco has very credible business practices—not only when it comes to selling online, but deep into the back end of fulfillment, manufacturing and materials sourcing. A lot of retailers want to see how we do it. They're looking for the secret sauce." Cisco served as a model of e-business efficiency. Its accounting practices were so automated that the firm was able to operate with several hundred less accountants than other firms its size. Merely four auditors handled Cisco's travel and expense reports, compared to the roughly 40 auditors employed by comparable firms. Also, more than 90 percent of customer service requests were taken care of on the firm's Web site. Productivity gains in 1999 allowed Cisco to save $825 million, and savings the following year reached $1.35 billion. In April of 2000, Cisco achieved a market capitalization of $550 billion, usurping both Microsoft and General Electric as the world's most highly valued company.

Despite its continued success, Cisco also found itself vulnerable to competition from smaller, more nimble rivals. The firm saw its market share for Internet-only traffic routers, known as "core" routers, fall from 80 percent in 2000 to 69 percent in 2001, due mainly to competition from Juniper Network, which developed an Internet traffic router in 1996 that was faster than any of Cisco's offerings. Hoping to speed its diversification efforts, in 2000 Cisco funneled considerable resources into developing its recently acquired telecommunications equipment operations. To sell its innovative IP-based telecommunications products, the firm tended to rely on the upstarts that had emerged in the telecommunications industry since 1996. According to a May 2001 article in Fortune, "deregulation in the U.S. telecommunications industry, enacted in 1996, coupled with a robust stock market and the boom of the Internet, prompted the creation of hundreds of new companies, all eager to build new networks and swipe business from established players like the Bell telephone companies, AT&T and WorldCom." As a result, the telecommunications market began growing at nearly twice its average rate. By mid-2000, startups accounted for half of Cisco's telecommunications revenues.

When the U.S. economy buckled later in the year, many of these young businesses began to slow spending, and in several cases they simply declared bankruptcy. Consequently, Cisco saw a large portion of its orders dissolve virtually overnight. To make matters worse, the firm had spent the last several months beefing up its inventory in an effort to fill customer orders more quickly. As a result, Cisco announced its intent to take a one-time $2.5 billion charge to write off its inventory glut. The company also cut roughly 8,000 jobs in March 2001, which amounted to nearly 17 percent of its workforce. Acquisitions ground to a near halt as Cisco executives pondered how to best prepare the firm for an anticipated economic rebound. Looking to the future, several analysts believed the firm would make a major strategic shift by paring down non-core operations and increasing internal research and development efforts.