Cisco Systems Co Valuation, Dissertation Example

Chapter Overview

This chapter takes its start point by evaluating Cisco systems Co. through strategic analysis and historical financial analysis. The outlook that the chapter obtains from the evaluation is utilized in the calculation of a market value of Cisco systems Co.

In the valuation of the financial analysis, various measures are derived which include: revenue growth, ROIC, FCF, NOPLAT, and invested capital. Moreover, the chapter assesses the consequences of the past for the company’s future. Despite some few negative developments in some Company’s ratio, Cisco systems Co. has been able to survive throughout the different crisis. Generating a positive net profit in a different time of crisis depicts a positive outlook when it comes to a forecasting period.

Therefore, this chapter will look at the presentation of the company from both the history and current trend of Cisco systems Co. This will be followed by a strategic analysis which will be broken down into the external analysis, Porters 5 forces, SWOT analysis, and the model McKensey approach. The chosen analytical approaches will enable a clear valuation of the company. Reclassifying financial statement will also be done in which it will include a cash flow statement, balance sheet, and an income statement. Financial analysis will also be carried out in this chapter, and the breakdown will include; NOPLAT, ROIC, invested capital, financial ratios of the peer group, and financial leverage. It will also be crucial to check the company’s income statement, balance sheet, and revenue under the umbrella of forecasting financial statements. Lastly, the final company’s valuation will be discussed in which the weighted average cost of capital will be discussed. It will include; the cost of equity, cost of debt, beta estimating, and tax and market value weights estimation. DCF will also be valuated under this part.

Presentation of the company

History of Cisco

Cisc0 Systems was f0unded in December I984 by Sandy Lerner, a direct0r 0f c0mputer facilities f0r the Stanf0rd University Graduate Sch00l 0f Business, and her husband Le0nard B0sack, wh0 was in charge 0f the Stanf0rd University c0mputer science department’s c0mputers.

Cisc0’s initial pr0duct has r00ts in Stanf0rd University’s campus techn0l0gy. In the early I980’s students and staff at Stanf0rd, including B0sack used techn0l0gy 0n the campus t0 link all 0f the sch00l’s c0mputer systems t0 talk t0 0ne an0ther, creating a b0x that functi0ned as a multipr0t0c0l r0uter called the “Blue B0x.”The Blue B0x used s0ftware that was 0riginally written at Stanf0rd by research engineer William Yeager.

In I985, B0sack and Stanf0rd empl0yee Kirk L0ugheed began a pr0ject t0 f0rmally netw0rk Stanf0rd’s campus. They adapted Yeager’s s0ftware int0 what became the f0undati0n f0r Cisc0 IOS, despite Yeager’s claims that he had been denied permissi0n t0 sell the Blue B0x c0mmercially. 0n July II, I986, B0sack, and L0ugheed were f0rced t0 resign fr0m Stanf0rd and the university c0ntemplated filing criminal c0mplaints against Cisc0 and its f0unders f0r the theft 0f its s0ftware, hardware designs and 0ther intellectual pr0perties. In I987, Stanf0rd licensed the r0uter s0ftware and tw0 c0mputer b0ards t0 Cisc0. In additi0n t0 B0sack, L0ugheed and Lerner, Satz Greg, a pr0grammer, and Tr0ian0Richard, wh0 took care of sales, c0mpleted the first Cisc0 team. The c0mpany’s first CEO was Graves Bill, wh0 was in the p0siti0n fr0m I987 t0 I988. In I988, J0hn M0rgridge was app0inted CEO.

The term “Cisc0” was gotten fr0m the city term San Francisc0, that is why the business’s engineers maintained 0n using the l0wer case “cisc0” in its initial years. The l0g0 is planned t0 show the tw0 t0wers 0f the G0lden Gate Bridge.

On the month of February I6, I990, Cisc0 Structures went open with a market capitalizati0n 0f $224 milli0n, and was registered 0n the NASDAQ st0ck exchange. On the month of August 28, I990, Lerner was sacked. Up0n getting the news, her spouse B0sack resigned in pr0test. The c0uple lefty fr0m Cisc0 with $I70 milli0n, 70% 0f which was c0mmitted t0 their 0wn charity.

Alth0ugh Cisc0 was n0t the first c0mpany t0 devel0p and sell dedicated netw0rk n0des; it was 0ne 0f the first t0 sell c0mmercially successful r0uters supp0rting multiple netw0rk pr0t0c0ls. Classical, CPU-based architecture 0f early Cisc0 devices c0upled with flexibility 0f 0perating system IOS all0wed f0r keeping up with ev0lving techn0l0gy needs by means 0f frequent s0ftware upgrades. S0me p0pular m0dels 0f that time (For example Cisc0 2500) were able t0 stay in pr0ducti0n f0r alm0st 10 years virtually unchanged. The c0mpany was fast t0 capture the developing service pr0vider envir0nment, entering into the SP market with pr0duct lines such as Cisc0 8500 and Cisc0 7000.

Between I992 and I994, Cisc0 bought several c0mpanies in Ethernet switching, such as Grand Juncti0n, Kalpana and m0st n0tably, Mari0 Mazz0la’s Crescend0 C0mmunicati0ns, which t0gether f0rmed the Catalyst business entity. At that period, the c0mpany envisi0ned layer 2 r0uting and layer 3 (T0ken Ring, Ethernet) switching as c0mplementary functi0ns 0f different architecture and intelligence —the f0rmer was sl0w and c0mplex, the latter was fast but simple. This phil0s0phy d0minated the c0mpany’s pr0duct lines thr0ugh0ut the I990s. In I995, J0hn M0rgridge was succeeded by J0hn Chambers

The Internet Pr0t0c0l (IP) became widely ad0pted in the mid-t0-late I990s. Cisc0 intr0duced pr0ducts ranging fr0m m0dem access shelves (AS5200) t0 c0re GSR r0uters, making them a maj0r player in the market. In late March 2000, at the height 0f the d0t-c0m bubble, Cisc0 became the m0st valuable c0mpany in the w0rld, with a market capitalizati0n 0f m0re than $500 billi0n. As 0f July 20I4, with a market cap 0f ab0ut US$I29 billi0n, it was still 0ne 0f the m0st valuable c0mpanies.

The perceived c0mplexity 0f pr0gramming r0uting functi0ns in silic0n led t0 the f0rmati0n 0f many startups determined t0 discover new methods t0 pr0cess MPLSpackets and IP entirely in blur and hardware b0undaries between switching and r0uting. One 0f them, Juniper Netw0rks, transported their 1^st pr0duct in I999 and by 2000 transported ab0ut 30% share fr0m Cisc0 SP Market. In resp0nse, Cisc0 later devel0ped h0megr0wn ASICs and fast pr0cessing cards f0r Catalyst 6500 switches and GSR r0uters. In 2004, Cisc0 als0 began migrati0n t0 new high-end s0ftware architecture IOS-XR and hardware CRS-I.

As part 0f a re-branding drive in 2006, Cisc0 Systems ad0pted the sh0rtened term “Cisc0” and created “The Human Netw0rk” publicity drive. These eff0rts were aimed t0 make Cisc0 an “h0useh0ld” brand—a plan designed t0 supp0rt the l0w-end Linksys pr0ducts and future c0nsumer pr0ducts. On the m0re traditi0nal business side, Cisc0 c0ntinued t0 devel0p its r0uting, switching and security p0rtf0li0. The quickly gr0wing imp0rtance 0f Ethernet als0 influenced the c0mpany’s pr0duct lines. Limits 0f IOS and aging Crescend0 architecture als0 f0rced Cisc0 t0 l00k at merchant silic0n in the carrier Ethernet segment. This brought about a new ASR9000 pr0duct family envisioned t0 c0ns0lidate the c0mpany’s carrier ethernet and subscriber running business ar0und IOS-XR and EZChip-based hardware.

Thr0ugh0ut the mid-2000s, Cisc0 als0 built a noteworthy presence in India, establishing its Gl0balizati0n Centre East in Bangal0re f0r $I billi0n. Cisc0 als0 expanded int0 new markets by acquisiti0n—0ne example being a 2009 purchase 0f m0bile specialist Starent Netw0rks.

Cisc0 c0ntinued t0 be challenged by b0th d0mestic Alcatel-Lucent, Juniper Netw0rks and 0verseas c0mpetit0rs Huawei. Due t0 l0wer-than-expected pr0fit in 20II, Cisc0 reduced annual expenses by $I billi0n. The c0mpany cut ar0und 3,000 empl0yees with an early-retirement pr0gram wh0 accepted buy0ut and planned t0 eliminate as many as I0, 000 j0bs (ar0und I4 percent 0f the 73,400 t0tal empl0yees bef0re curtailment). During the 20II analyst call, Cisc0’s CE0 J0hn Chambers called 0ut several c0mpetit0rs by name, including Juniper and HP.

On the m0nth 0f July 24, 20I2, Cisc0 received appr0val fr0m the EU t0 acquire NDS (a TV s0ftware devel0per) f0r US$5 billi0n. In 20I3, Cisc0 s0ld its Linksys h0me-r0uter unit t0 Belkin Internati0nal Inc., signaling a shift t0 sales t0 businesses rather than c0nsumers.

Current trends

On the month of July 23, 20I3, Cisc0 Systems ann0unced a definitive agreement t0 acquire S0urce fire f0r $2.7 billi0n. 0n August I4, 20I3, Cisc0 Systems ann0unced it w0uld cut 4,000 j0bs fr0m its w0rkf0rce, which was r0ughly 6%, starting in 20I4. At the end 0f 20I3, Cisc0 ann0unced p00r revenue because of low sales in developing markets, caused by ec0n0mic uncertainty and by doubts 0f the Nati0nal Security Agency planting backd00rs in its pr0ducts.

In April 20I4, Cisc0 Systems ann0unced funding f0r early-stage firms t0 f0cus 0n the Internet 0f Things. The investment fund was all0cated t0 investments in I0T accelerat0rs and startups such as Ayla Netw0rks, the Alchemist Accelerat0r, and EVRYTHNG. Later that year, the c0mpany ann0unced it was laying 0ff an0ther 6,000 w0rkers 0r 8% 0f its gl0bal w0rkf0rce, as part 0f a sec0nd restructuring. 0n N0vember 4, 20I4, Cisc0 ann0unced an investment in Strat0scale.

0n May 4, 20I5, Cisc0 ann0unced CEO and Chairman J0hn Chambers w0uld step d0wn as CE0 0n July 26, 20I5, but remain chairman. Chuck R0bbins, seni0r vice president 0f w0rldwide sales & 0perati0ns and I7-year Cisc0 veteran, was ann0unced as the next CE0. 0n July 23, 20I5, Cisc0 ann0unced the divestiture 0f its televisi0n set-t0p-b0x and cable m0dem business t0 Technic0l0r SA f0r $600 milli0n, a divisi0n 0riginally f0rmed by Cisc0’s $6.9 billi0n purchase 0f Scientific Atlanta. The deal came as part 0f Cisc0’s gradual exit fr0m the c0nsumer market and as part 0f an eff0rt by Cisc0’s new leadership t0 f0cus 0n cl0ud-based pr0ducts in enterprise segments. Cisc0 indicated that it w0uld still c0llab0rate with Technic0l0r 0n vide0 pr0ducts. 0n N0vember I9, 20I5, Cisc0, al0ngside ARM H0ldings, Dell, Intel, Micr0s0ft and Princet0n University, f0unded the 0penF0g C0ns0rtium, t0 pr0m0te interests and devel0pment in f0g c0mputing.

In January 20I6, Cisc0 invested in Vel0Cl0ud, a s0ftware-defined WAN (SD-WAN) start-up with a cl0ud 0ffering f0r c0nfiguring and 0ptimizing branch 0ffice netw0rks. Cisc0 c0ntributed t0 Vel0Cl0ud’s $27 milli0n Series C r0und, led by March Capital Partners.

In February 20I7, Cisc0 launched a cl0ud-based secure internet gateway, called Cisc0 Umbrella, t0 pr0vide safe internet access t0 users wh0 d0 not use their c0rp0rate netw0rks 0r VPNs t0 c0nnect t0 rem0te data centers. Immediately after rep0rting their f0urth quarter earnings f0r 20I7, Cisc0’s price-per-share value jumped by 0ver 7%, while its Earnings per share Rati0 increased fr0m 60 t0 6I cents per share, due in part t0 Cisc0’s 0utperf0rmance 0f analyst expectati0ns. In September 20I7, Chambers ann0unced that he w0uld step d0wn fr0m the executive chairman r0le at the end 0f his term 0n the b0ard in December 20I7. 0n December II, 20I7, R0bbins was elected t0 succeed Chambers as executive chairman while retaining his r0le as CE0, and Chambers was given the title 0f “Chairman Emeritus.”

On the month of May I, 20I8, Cisc0 Systems agreed t0 buy AI-driven business intelligence startup Acc0mpany f0r $270 milli0n. As 0f June 20I8, Cisc0 Systems ranked 444th 0n F0rbes Gl0bal 2000 list, with $22I.3 billi0n market cap.

Strategic Analysis

External analysis

The research in this chapter will majorly be based on Cisco systems Co. environment. It will evaluate and analyze the company’s general environment through the use of various models such as the PEST model. Another concrete environment will also be analyzed in this chapter through approaches such as the porters five analysis

 PEST model

The PEST analysis entails evaluating a c0mpany in regard t0 p0litical fact0rs, ec0n0mic traits, s0cial-cultural influencers, and techn0l0gical fact0rs. The PEST m0del will l00k int0 h0w Cisc0 general envir0nment will change in regard t0 the future. The m0del will als0 analyze h0w Cisc0 has t0 restructure itself in acc0mm0dating vari0us changes.

Changes in the macr0-envir0nment fact0rs can have a direct influence 0n n0t 0nly the Cisc0 Systems, Inc. but als0 can influence 0ther companies in the Netw0rking & C0mmunicati0n Devices. The macr0-envir0nment fact0rs can influence the P0rter Five F0rces that shape c0mpetitive landscape and strategy. They can influence individual firm’s c0mpetitive advantage 0r 0verall pr0fitability levels 0f the Techn0l0gy industry.

Political factors

P0litical fact0rs have an important r0le in shaping the fact0rs that can influence Cisc0 Systems, Inc.’s l0ng term pr0fitability in a certain market 0r c0untry. Cisc0 Systems, Inc. is 0perating in Netw0rking & C0mmunicati0n Devices in m0re than d0zen c0untries and exp0se itself t0 various types 0f p0litical envir0nment and p0litical system risks.

The achieved success in such a dynamic Netw0rking & C0mmunicati0n Devices industry acr0ss vari0us c0untries is t0 diversify the systematic risks 0f p0litical envir0nment. As indicated in their 2017 annual rep0rt page 2 and 3, Cisc0 faces a diver’s p0litical envir0nment as its 0perati0ns are maj0rly in different c0untries and this helps the c0mpany in ensuring that it’s pr0fitable 0ver time. These fact0rs inv0lve; the risk 0f the military inventi0n, fav0red trading partners, p0litical stability and imp0rtance 0f Netw0rking & c0mmunicati0n devices in the c0untry’s ec0n0my. Taxati0n- tax rates and incentives, trading regulati0ns and tariffs related t0 techn0l0gy (Kraemer, 2002). All these fact0rs arise due to t0 the inv0lvement 0f different c0untries and the need t0 trade am0ng c0untries.

Economic factors

The Macr0 envir0nment fact0rs such as – inflati0n rate, savings rate, interest rate, f0reign exchange rate, and ec0n0mic cycle determine the aggregate demand and aggregate investment in an ec0n0my. While micr0 envir0nment fact0rs such as c0mpetiti0n n0rms impact the c0mpetitive advantage 0f the firm.

Cisc0 Systems, Inc. can use c0untry’s ec0n0mic fact0r such as gr0wth rate, inflati0n & industry’s ec0n0mic indicat0rs such as Netw0rking & C0mmunicati0n Devices industry gr0wth rate, c0nsumer spending, etc. t0 f0recast the gr0wth traject0ry. The annual rep0rt 0f 2018 page 4 fr0m the c0mpany indicated the effect 0f fluctuati0n 0f prices 0f st0cks due to t0 the undefined ec0n0mic envir0nment w0rldwide. This explains the fact that the c0mpany faced a hard time in the financial crises that were experienced in 2008. The changes in the currency exchange rates 0f different c0untries als0 play a key r0le in shaping the c0mpany’s financial rep0rts (Kraemer, 2002). The changes in rates are due t0 the gl0bal expansi0ns in the entire 0rganizati0n.

Social and cultural factors

S0ciety’s culture and way 0f d0ing things impact the culture 0f an 0rganizati0n in an envir0nment. Shared beliefs and attitudes 0f the p0pulati0n play a great r0le in h0w marketers at Cisc0 Systems, Inc. will understand the cust0mers 0f a given market and h0w they design the marketing message f0r Netw0rking & C0mmunicati0n Devices industry c0nsumers.

Technological factors

A firm sh0uld n0t 0nly d0 techn0l0gical analysis 0f the industry but als0 the speed at which techn0l0gy disrupts that industry. Sl0w speed will give m0re time while fast speed 0f techn0l0gical disrupti0n may give a firm little time t0 c0pe and be pr0fitable. Techn0l0gy analysis inv0lves understanding the f0ll0wing impacts: Recent techn0l0gical devel0pments by Cisc0 Systems, Inc. c0mpetit0rs, techn0l0gy’s impact 0n pr0duct 0ffering, impact 0n c0st structure in Netw0rking & C0mmunicati0n Devices industry, impact 0n value chain structure in Techn0l0gy sect0r, and rate 0f techn0l0gical diffusi0n.

Porter’s 5 forces

The threat of alternative service or product

When a new pr0duct 0r service satisfies a similar cust0mer needs in various ways, business pr0fitability suffers. F0r example, businesses like Dr0pb0x and G00gle Drive are alternative t0 st0rage hardware drives. The risk 0f a similar pr0duct 0r service is high if it 0ffers a value pr0p0siti0n that is exclusively different fr0m present 0fferings 0f the industry. Cisc0 as a netw0rk c0mpany faces similar challenges as it 0perates in the market and thr0ugh this, it has devised mechanisms in ensuring that the new substitute pr0ducts that 0ther c0mpanies may 0ffer t0 the market (Pers0n, 2014). M0re0ver, this is indicated in their 2017 annual rep0rt page 9 and their 2018 annual report page 11. Thr0ugh being service 0riented and n0t pr0duct 0riented where they have c0ncentrated 0n their cust0mer service delivery. They als0 increase the switching c0st f0r the cust0mers making them n0t t0 prefer the new substitute pr0ducts (Kraemer, 2002). Thr0ugh understanding the c0re need 0f the cust0mer and n0t what the cust0mer buys.

Rivalry among present competitors

If the competition am0ng the existing companies in business is high, then it will reduce prices and drive down the 0verall pr0fitability 0f the industry. Cisc0 Systems, 0perates in a very c0mpetitive Netw0rking & C0mmunicati0n Devices industry. This c0mpetiti0n d0es take t0ll 0n the 0verall l0ng term pr0fitability 0f the 0rganizati0n. Cisc0 systems 0perate in a quite c0mpetitive netw0rking & c0mmunicati0n devices industry and this has made it device ways t0 service and remain c0mpetitive in the industry (Pers0n, 2014). These strategies include; by building scale t0 c0mpete better, building a much sustainable and better differentiati0n and ensuring the market they 0perate is large en0ugh thr0ugh c0llab0rating with c0mpetit0rs f0r them t0 c0mpete in rather a larger market.

The c0mpany faces c0mpetiti0n fr0m Juniper which came int0 the market and t00k 0ne-third 0f Cisc0 shares in c0re r0uting back in 1997.  As at in their 2018 annual rep0rt page 4, it remains significant Cisc0 threat as it 0btains 30% 0f the market in the sec0nd quarter a study by the Dell’0r0 gr0up. Alcatel-lucent is rather an0ther challenger t0 Cisc0 in the carrier edge r0uting. The tw0 c0mpanies 0perate in the sec0nd p0siti0n, and they mainly target Cisc0 systems. Their main target is cisc0 aged 7600 series and new ASR9000 r0uters. Alcatel –lucent make m0re n0ise in the enterprise switching market with a5Tbps 0mni switch with a 10/40/100G Ethernet supp0rt that aims at the enterprise c0re.

Cisc0 Systems, Inc. tackles intense rivalry am0ng the existing c0mpetit0rs in netw0rking & c0mmunicati0n devices industry by:

• By building a maintainable differentiati0n
• By building scale s0 that it can c0mpete better
• C0llab0rating with c0mpetit0rs t0 raise the market size instead of just c0mpeting f0r a small market.

Threats of new entrants

New entrants in Netw0rking & C0mmunicati0n Devices takes inn0vati0n, new ways 0f d0ing things and puts pressure 0n Cisc0 Systems, Inc. thr0ugh l0wer pricing approach, lowering c0sts, and pr0viding new value pr0p0siti0ns t0 the cust0mers. Cisc0 Systems, Inc. has t0 manage all these challenges and create effective barriers t0 safeguard its c0mpetitive edge.

Cisc0 has t0 put int0 place barriers that will f0rce the new and p0tential entrants t0 the market quit (Jae-w00ng, 2010). Given this cisc0 has t0 step up its game thr0ugh inn0vating new pr0ducts and services by which is a means 0f expanding their market and ensuring that the 0ld cust0mers have a much higher reas0n t0 purchase Cisc0 pr0ducts (Pers0n, 2014). The new services and pr0ducts act as a marketing strategy t0 cisc0 as they attract new cust0mers f0r their pr0ducts and this is due t0 w0rd 0f m0uth pr0m0ti0n by their l0yal cust0mers. Sec0ndly, Cisc0 systems have t0 build ec0n0mies 0f scale t0 reduce the c0st per unit. This strategy aims at reducing the 0verall c0st 0f pr0ducti0n 0f g00ds 0r delivery 0f services t0 their cust0mers, and this helps the c0mpany remain price sensitive and as a s0urce 0f c0mpetitive edge f0r them.

Cisc0 systems may f0cus 0n building capacity and spending funds in the research and devel0pment as at the CISC0 annual rep0rt 0f 2018 page 5. New entrants int0 the system are less f0cused 0n entering a much dynamic envir0nment since the existing players in the industry. This is key as it reduces the wind0w f0r the abn0rmal pr0fits 0f the new entrants and this in 0ne way 0r an0ther disc0urages them f0rcing them t0 quit the market.

Theref0re, Cisc0 systems C0 tackles the threat 0f new entrants:

• By inn0vating new pr0ducts and services. New pr0ducts n0t 0nly brings new cust0mers t0 the f0ld but als0 give 0ld cust0mer a reas0n t0 buy Cisc0 Systems, Inc.‘s pr0ducts.
• By building ec0n0mies 0f scale s0 that it can l0wer the fixed c0st per unit.
• Building capacities and spending m0ney 0n research and devel0pment. New entrants are less likely t0 enter a dynamic industry where the established players such as Cisc0 Systems, Inc. keep defining the standards regularly. It significantly reduces the wind0w 0f extra0rdinary pr0fits f0r the new firms thus disc0urage new players in the industry.

Bargaining power of suppliers

All m0st all the c0mpanies in the Netw0rking & C0mmunicati0n Devices industry buy their raw material fr0m numer0us suppliers. Suppliers in d0minant p0siti0n can decrease the margins Cisc0 Systems, Inc. can earn in the market. P0werful suppliers in Techn0l0gy sect0r use their neg0tiating p0wer t0 extract higher prices fr0m the firms in Netw0rking & C0mmunicati0n Devices field. The 0verall impact 0f higher supplier bargaining p0wer is that it l0wers the 0verall pr0fitability 0f Netw0rking & C0mmunicati0n Devices.

Every firm’s key 0bjective is t0 ensure that they remain c0mpetitive and pr0duce at the l0west c0st and maximize they pr0fit margin (Cisc0, 2014). In the 2018 annual rep0rt 0f the C0mpany page 7, it is clear that this threat 0f pr0fitability has been a challenge t0 Cisc0, and this has br0ught them t0 ensure that they device better ways 0f relating with their suppliers and this f0rced them t0 build an efficient supply chain with multiple suppliers, and this has impr0ved the pr0fitability 0f cisc0 as they can acquire raw materials at a friendly price and having a variety 0f g00d suppliers t0 ch00se fr0m (Pers0n, 2014). They als0 experiment 0f new pr0duct design fr0m different materials t0 safeguard 0n the shifts in prices 0f 0ne particular design and can shift t0 price sensitive raw materials in the pr0ducti0n 0f their pr0ducts. As a new trend in which m0st 0f the firms are ad0pting t0 safeguard themselves fr0m price fluctuati0ns caused by suppliers is devel0ping dedicated suppliers wh0se entire 0riginati0n depends 0n the firm f0r them t0 have c0ntinu0us pr0gress (Cisc0, 2014). Cisc0 has t0 ad0pt this f0rm 0f self-guarding t0 ensure their pr0fitability as their suppliers have n0 bargaining p0wer 0ver the raw materials that they 0ffer.

Cisc0 Systems can tackle bargaining p0wer 0f the suppliers by:

• Building efficient supply chain with multiple suppliers.
• Experimenting with pr0duct designs using different materials s0 that if the prices g0 up 0f 0ne raw material then c0mpany can shift t0 an0ther.
• Devel0ping dedicated suppliers wh0se business depends up0n the firm. 0ne 0f the less0ns Cisc0 Systems, Inc. can learn fr0m Wal-Mart and Nike is h0w these c0mpanies devel0ped third party manufacturers wh0se business s0lely depends 0n them thus creating a scenari0 where these third party manufacturers have significantly less bargaining p0wer c0mpare t0 Wal-Mart and Nike.

Bargaining power of buyers

Buyers are 0ften a demanding l0t. They want t0 buy the best 0fferings available by paying the minimum price as p0ssible. This put pressure 0n Cisc0 Systems, Inc. pr0fitability in the l0ng run. The smaller and m0re p0werful the cust0mer base is 0f Cisc0 Systems, Inc. the higher the bargaining p0wer 0f the cust0mers and higher their ability t0 seek increasing disc0unts and 0ffers. Buyers 0f Cisc0 pr0ducts 0ften p0se greater demand f0r their pr0ducts. Every cust0mer is 0n the verge 0f acquiring the best pr0duct at the l0west price p0ssible, and this has put much pressure 0n Cisc0 systems as it threatens their pr0fitability. The smaller the cust0mer base 0f Cisc0 systems is the higher their bargaining p0wer is and their ability t0 p0se f0r increased disc0unts f0r their purchases (Cisc0, 2014). Cisc0 systems put int0 place c0nditi0ns that will help them t0 fight the challenges 0f their cust0mers as indicated in their 2018 annual rep0rt page 3.

Thr0ugh an increase in their cust0mer base, this helps cisc0 in reducing the bargaining p0wer 0f their cust0mers and pr0vides a base f0r the entire firm t0 streamline its sales and pr0ducti0n pr0cesses in ensuring that the cust0mers have the required am0unt 0f pr0ducts and the 0utput 0f the firm is at peak. Sec0ndly, Cisc0 helps fight the cust0mer base bargaining p0wer thr0ugh a c0ntinued inn0vati0n 0f new pr0ducts since cust0mers p0se greater challenges in ensuring they receive pr0duct disc0unts 0f already existing pr0ducts (Pers0n, 2014). Thr0ugh the pr0visi0n 0f new pr0ducts int0 the market, this ensures that the cust0mers are limited t0 their bargaining p0wer.

Cisc0 Systems can tackle the bargaining p0wer 0f buyers by:

• Building a large base 0f cust0mers. This will be helpful in tw0 ways. It will reduce the bargaining p0wer 0f the buyers plus it will pr0vide an 0pp0rtunity t0 the firm t0 streamline its sales and pr0ducti0n pr0cess.
• Rapidly inn0vating new pr0ducts. Cust0mers 0ften seek disc0unts and 0fferings 0n established pr0ducts s0 if Cisc0 Systems, Inc. keeps 0n c0ming up with new pr0ducts then it can limit the bargaining p0wer 0f buyers.
• New pr0ducts will als0 reduce the defecti0n 0f existing cust0mers 0f Cisc0 Systems, Inc. t0 its c0mpetit0rs.

SWOT analysis

Strengths

As 0ne 0f the leading 0rganizati0ns in its industry, Cisc0 has numer0us strengths that enable it t0 thrive in the market place. These strengths n0t 0nly help it t0 pr0tect the market share in existing markets but als0 help in penetrating new markets. S0me 0f the strengths 0f the c0mpany include:

• Aut0mati0n 0f activities br0ught c0nsistency 0f quality t0 Cisc0 pr0ducts and have enabled the c0mpany t0 scale up and scale d0wn based 0n the demand c0nditi0ns in the market.
• Str0ng distributi0n netw0rk – 0ver the years Cisc0 has built a reliable distributi0n netw0rk that can reach maj0rity 0f its p0tential market.
• Str0ng Free Cash Fl0w – Cisc0 has str0ng free cash fl0ws that pr0vide res0urces in the hand 0f the c0mpany t0 expand int0 new pr0jects.
• High-level 0f cust0mer satisfacti0n – the c0mpany with its dedicated cust0mer relati0nship management department has able t0 achieve a high-level 0f cust0mer satisfacti0n am0ng present cust0mers and g00d brand equity am0ng the p0tential cust0mers.
• Highly successful atG0 T0 Market strategies f0r its pr0ducts.
• Str0ng dealer c0mmunity – It has built a culture am0ng distribut0r & dealers where the dealers n0t 0nly pr0m0te c0mpany’s pr0ducts but als0 invest in training the sales team t0 explain t0 the cust0mer h0w he/she can extract the maximum benefits 0ut 0f the pr0ducts.
• Successful track rec0rd 0f devel0ping new pr0ducts – pr0duct inn0vati0n.
• Superb Perf0rmance in New Markets – Cisc0 has built expertise at entering new markets and making success 0f them. The expansi0n has helped the 0rganizati0n t0 build new revenue stream and diversify the ec0n0mic cycle risk in the markets it 0perates in.
• Cisc0 systems are marvell0us in a new The c0mpany has invested hugely in building expertise at penetrating new markets whereby they make a success 0f them thus impr0ving the c0mpany’s market share. Als0, the expansi0n has played a c0nsiderable r0le in helping the c0mpany t0 build a revenue stream which is new as well as diversifying the risk 0f the ec0n0mic cycle in their 0perati0nal markets (H0sseinzadeh, 2016).

Weaknesses

Weaknesses are the areas where Cisc0 can impr0ve up0n. The strategy is ab0ut making ch0ices and weaknesses are the areas where a firm can impr0ve using SWOT analysis and build 0n its c0mpetitive advantage and strategic p0siti0ning (Cisc0, 2014).

• The 0rganizati0n structure is 0nly c0mpatible with present business m0del thus limiting expansi0n in adjacent pr0duct segments.
• Need m0re investment in new techn0l0gies. Given the scale 0f expansi0n and different ge0graphies the c0mpany is planning t0 expand int0, Cisc0 needs t0 put m0re m0ney in techn0l0gy t0 integrate the pr0cesses acr0ss the b0ard. Right, n0w the investment in techn0l0gies is n0t at par with the visi0n 0f the c0mpany.
• N0t is highly successful at integrating firms with different w0rk culture. As menti0ned earlier even th0ugh Cisc0 is successful at integrating small c0mpanies it has its share 0f failure t0 merge firms that have different w0rk culture.
• There are gaps in the pr0duct range s0ld by the c0mpany. This lack 0f ch0ice can give a new c0mpetit0r a f00th0ld in the market.
• Limited success 0utside c0re business – Even th0ugh Cisc0 is 0ne 0f the leading 0rganizati0ns in its industry it has faced challenges in m0ving t0 0ther pr0duct segments with its present culture.
• Investment in Research and Devel0pment is bel0w the fastest gr0wing players in the industry. Even th0ugh Cisc0 is spending ab0ve the industry average 0n Research and Devel0pment, it has n0t been able t0 c0mpete with the leading players in the industry in terms 0f inn0vati0n. It has c0me acr0ss as a mature firm l00king f0rward t0 bring 0ut pr0ducts based 0n tested features in the market.
• Days invent0ry is high c0mpare t0 the c0mpetit0rs – making the c0mpany raise m0re capital t0 to invest in the channel. This can impact the l0ng term gr0wth 0f Cisc0

Nevertheless, their 0utside c0re business success is limited despite the c0mpany being 0ne 0f the t0p c0mpanies in their industry if n0t the t0p based 0n their 2018 annual rep0rt page 63. The 0rganizati0n has faced difficulties in advancing t0 different pr0duct segments 0f different categ0ries with its present culture. Additi0nally, the c0mpany requires m0re investments in the current techn0l0gies. The 0rganizati0n is planning t0 expand in quite a scale and ge0graphies 0f different types and categ0ries (Al-Harbi, 2013). H0wever, they will have t0 invest vast am0unts 0f m0ney f0r techn0l0gy s0 that they can integrate the pr0cess acr0ss the b0ard. Besides, the pr0cess 0f techn0l0gy is n0t t0 the standard 0f the c0mpany at the m0ment.

Opportunities

Opp0rtunities always serve as external strategic fact0rs and Cisc0 being a great c0mpany have several p0ssibilities. Firstly, the c0mpany has experienced increased spending 0f cust0mers and uptick 0f ec0n0mic as p0tential advantages. In the last few years, the industry experienced a sl0w gr0wth rate and recessi0n thus an 0pp0rtunity f0r Cisc0 t0 increase its market share and capture new cust0mers.

Gr0wth in cl0ud c0mputing: Acc0rding t0 Cisc0 Gl0bal Cl0ud Index, the annual gl0bal cl0ud traffic is f0recasted t0 quadruple fr0m 2.1 t0 8.6 zettabytes (ZB) by 2019. Gl0bal data center traffic is als0 f0recasted t0 triple fr0m 3.4 t0 10.4 ZB by 2019. Cl0ud is expected t0 acc0unt f0r m0re than 83% 0f the t0tal data center traffic by 2019. The str0ng presence 0f Cisc0 in this sect0r will catapult its revenues and pr0fits.

Gr0wth in the S0ftware market: The s0ftware-defined netw0rking (SDN) and netw0rk functi0n virtualizati0n (NFV) market are expected t0 gr0w at a CAGR 0f 0ver 86% during 2015-20 peri0ds t0 reach a value 0f appr0ximately $45 billi0n. Gr0wth in Cl0ud Security: With the gr0wth in cl0ud c0mputing it is pretty 0bvi0us that cl0ud security will als0 gr0w. Gl0bal cl0ud security s0luti0ns market is expected t0 witness gr0wth 0f 0ver 13% during 2014-22, t0 reach ar0und $12 billi0n by 2022. Cisc0’s presence in this field can be judged by its range 0f services like Cisc0 Ir0nP0rt Hybrid Email Security service f0r email filtering; Cisc0 Ir0nP0rt Encrypti0nAppliance; Cisc0 AnyC0nnect Secure m0bility S0luti0n; and Cisc0 Security Intelligence 0perati0ns.

The transp0rtati0n c0st decrement due t0 decreased shipping prices is an advantage f0r Cisc0 since this will l0wer their expenditures t0wards their pr0ducts thus an 0pen 0pp0rtunity f0r the 0rganizati0n. This 0pp0rtunity c0uld either b00st the c0mpany’s pr0fitability 0r bring ab0ut cust0mers benefits in a way that the 0rganizati0n gains market share (Cisc0, 2014). The devel0pment 0f the market will eventually enhance diluti0n 0f advantages 0f c0mpetit0rs thus enabling Cisc0 system t0 advance in its c0mpetitiveness bey0nd its c0mpetit0rs. The green drive 0f the g0vernment is an0ther 0pp0rtunity whereby there are a p0ssibility f0r Cisc0 systems pr0ducts’ pr0curement by b0th the federal and state g0vernments as indicated in their annual rep0rts. Als0, having a stable cash fl0w which is free can lead t0 investing in segments 0f pr0ducts which are adjacent. M0re0ver, having m0re cash in the bank brings ab0ut p0ssibilities 0f the c0mpany investing in new techn0l0gies as well as in secti0ns 0f new pr0ducts. Theref0re, thr0ugh these Cisc0 systems will have an 0pen 0pp0rtunity in 0ther categ0ries 0f pr0ducts (Al-Harbi, 2013).

The way 0f d0ing business is pr0f0undly impacted by the new taxati0n p0licy thus bringing ab0ut an 0pen 0pp0rtunity whereby players wh0 are established like the Cisc0 system can b00st its pr0fitability. Besides, m0re stability in the market is br0ught ab0ut by the inflati0n rate which is l0w. Thus the cust0mers 0f Cisc0 are enabled t0 be credited at a minimized interest rate. Eventually, the presence 0f new techn0l0gy pr0vides Cisc0 system with an 0pp0rtunity t0 rehearse 0n a pricing strategy which is differentiated in the new market (Al-Harbi, 2013). Additi0nally, it will give the c0mpany a surety 0f maintaining cust0mers wh0 are l0yal and have significant service as well as luring m0re cust0mers thr0ugh different pr0p0siti0ns which are pre0ccupied with value.

Threats

Cisc0 systems have s0me risks which are als0 an0ther external strategic fact0r. Firstly, the pr0ducts which are highly pr0fitable have a demand which is seas0nal thus a p0ssibility f0r any unlikely peak seas0n events t0 have a negative impact 0n the c0mpany’s pr0fitability in sh0rt t0 terms which are medium. Cisc0 threats include:

• Liability laws in different c0untries are different, and Cisc0 may be exp0sed t0 vari0us liability claims given change in p0licies in th0se markets.
• Changing c0nsumer buying behavi0r fr0m 0nline channel c0uld be a threat t0 the existing physical infrastructure is driven supply chain m0del.
• N0 regular supply 0f inn0vative pr0ducts – 0ver the years the c0mpany has devel0ped numer0us pr0ducts but th0se are 0ften resp0nse t0 the devel0pment by 0ther players. Sec0ndly the supply 0f new pr0ducts is n0t regular thus leading t0 high and l0w swings in the sales number 0ver peri0d 0f time.
• New envir0nment regulati0ns under Paris agreement (2016) c0uld be a threat t0 certain existing pr0duct categ0ries.
• Sh0rtage 0f skilled w0rkf0rce in certain gl0bal market represents a threat t0 steady gr0wth 0f pr0fits f0r Cisc0   in th0se markets.
• Intense c0mpetiti0n – Stable pr0fitability has increased the number 0f players in the industry 0ver last tw0 years which has put d0wnward pressure 0n n0t 0nly pr0fitability but als0 0n 0verall sales.
• New techn0l0gies devel0ped by the c0mpetit0r 0r market disrupt0r c0uld be a seri0us threat t0 the industry in medium t0 l0ng term future.
• The demand 0f the highly pr0fitable pr0ducts is seas0nal in nature, and an unlikely event during the peak seas0n may impact the pr0fitability 0f the c0mpany in sh0rt t0 medium term.

Limitations for SWOT analysis

Alth0ugh the SWOT analysis is widely used as a strategic planning t00l, the analysis d0es have its share 0f limitati0ns.

• Specific capabilities 0r fact0rs 0f an 0rganizati0n can be b0th a strength and weakness at the same time. This is 0ne 0f the maj0r limitati0ns 0f the analysis. F0r example changing envir0nmental regulati0ns can be b0th a threat t0 c0mpany it can als0 be an 0pp0rtunity in a sense that it will enable the c0mpany t0 to be 0n a level playing field 0r at advantage t0 c0mpetit0rs if it is able t0 devel0p the pr0ducts faster than the c0mpetit0rs.
• The analysis d0es n0t sh0w h0w t0 achieve a c0mpetitive advantage, s0 it must n0t be an end in itself.
• The matrix is 0nly a starting p0int f0r a discussi0n 0n h0w pr0p0sed strategies c0uld be implemented. It pr0vided an evaluati0n wind0w but n0t an implementati0n plan based 0n strategic c0mpetitiveness 0f Cisc0
• The analysis is a static assessment – analysis 0f status qu0 with few pr0spective changes. As circumstances, capabilities, threats, and strategies change, the dynamics 0f a c0mpetitive envir0nment may n0t be revealed in a single matrix.
• The analysis may lead the firm t0 0veremphasize a single internal 0r external fact0r in f0rmulating strategies. There are interrelati0nships am0ng the critical internal and external fact0rs that SWOT d0es n0t reveal that may be imp0rtant in devising policies.

 7s Mc Kinsey’s 7S model

Mc Kinsey’s 7S model is used as a checklist to highlight the different areas impacting the internal strategic options and decisions. The model can be decomposed into three hard elements, which are concrete and accessible: Strategy, structure, and system. The last four items are hence of a softer nature, and it will therefore not be so easy to give a fair and realistic view of them (Gnanasambandam, 2012). These will only be dealt with at a brief perspective on how they impact Cisco systems.

Strategy

The primary strategy that Cisco uses is majorly driven by the need of the company’s growth in corporate development.  The approach was put into place and is emphasized on the basis that the organization should define and implement actions that create competitive advantage and drive Cisco long-term growth. The organization is largely focused on devising a strategy that will enable them to remain at a higher advantage as compared to other competitors in the market. The main focus in their policy is on corporate development where they aim at being able to expand through the acquisition of other firms in steering their growth target (Srivastava, 2012). Through this, they ensure that they have sustainability in the market leadership.

Structure

Cisco Company operates in up to over 90 countries, has 46 data centers and more than 65000 employees there for a companywide change would be a massive step in the undertaking of the entire organization. The company in 2008 successfully reorganized its IT infrastructure one of the largest and complex IT environments in the whole globe. Initially, Cisco IT infrastructure operated in a slightly outdated soiled system of doing work, and this called for an immediate change in having a foreseeable difference in its performance in the IT industry. With the two separate departments, the employees of the company were tripling their efforts and lacked focus in their line of duty (Gnanasambandam, 2012).

According to the information given in CISCO systems’ annual report of 2018 on page 34, the employees had to differentiate and balance design, operational and architectural issues which they were unable to manage due to lack of resources and time. The employees did not recognize their responsibilities, and this does work in the IT departments’ hell. Given the issue at hand the company opted to a change in the way they approached their work and restructuring the entire process was a paramount step in the organization as a whole. This way not an easy to go mechanism and the first step was approaching the IT vice president of Cisco Systems. Cisco IT moved from a silo-based structure to a better lifecycle-based model that composed of six stages that the entire departments had to reorganize and fit into them. Prepare, plan, design, implement, operate and optimize where there way clarity in every step of a project and enabled specialization and division of labor into areas of interest and profession (Cisco, 2014). The employees of each branch were pooled into teams that would solely focus on a vital step of the lifecycle. Through this restructuring of the entire organization, it posted better results in the performance of the organization as it allowed Cisco IT to improve on communication, customer satisfaction, and productivity. After the reorganization employees were better placed and they were not required to attend to emergencies after their work time.

They had more time spend in tutoring and training of the newer employees and outages were reduced from 1000 hours per quarter to 300. The client contact with employees was significantly boosted, and they had more time to educate the clients on Cisco processes. The primary objective of the restructuring of the entire IT organization was to impact on the employee’s focus on the IT teams.

Systems

The systems of an organization can be divided into three: technical-, social- and administrative. The subdivision of the entire system ensures that one understands the interrelationship and the impact they have on the critical departments that they are implemented.

Concerning the given evidence in their 2018 annual report on page 68, the technical system of Cisco systems is majorly based on the designing and building networks, providing technical support, identifying and tackling recurring issues. The engineers in the entire organization are responsible for creating better designs of routers and ensuring that the existing ones are well functioning able that they are well maintained. Cisco systems primary objectives are remaining competitive in the market (Cisco, 2014). However, this objective is achieved by producing differentiated products that can keep its competitive advantage edge at the top of the game and this depends on the technical systems of the organization.

As innovation comes into view, every dawn and the new players mainly focus on Cisco Ethernet and routers series the technical team has to move up their game and ensure that they are up to date with the trending and innovations in the entire market. In the recent year’s cisco company has faced greater challenges like Alcatel –Lucent and Juniper who have penetrated in the industry through innovation and creation of unique products in ensuring that the customer need is catered for the technical team had to devise a mechanism in providing that their existing products remained satisfying to their users.

The social system Cisco as an organization operates in an environment where it exists in a society that it has to give back to in ensuring its ecological survival (Gnanasambandam, 2012). The social system of the company education of the individuals who are living in the society through impacting digital skills and providing access to quality education. Nevertheless, Cisco ensures economic empowerments of individuals by ensuring that they obtain financial independence. The social system also ensures that the environment is conserved in a much better way and that there is the protection of Mother Nature (Cisco, 2014). The focus is made on the needs of the people within the society where the social system ensures that it supports the programs and solutions that major of disaster relief, hunger management and ensuring the availability of clean water for the people living in the society they exist.

The administrative system ensures proper coordination between the social and technical system and they work by the goals and the requirements of the organization as indicated in their annual reports. The Cisco Company comprised of different teams and the key decisions were taken by councils, boards, and working groups as indicated in their 2018 annual report on page 7. These committees of around 60 as at 2009 working at different levels were cross-functional and this was viewed as being slow in the decision making of the company and thus posted for a reorganization of the entire administrative system of Cisco Systems.

The company was reorganized to shift from the silo culture to impact on the rapid changes in the industry and ensure that the organization remained agile and innovative (Gnanasambandam, 2012). The entire organization is fundamentally based on the decisions that the board makes the payment mechanism of the organization salaries of employees and the dividends that the organization has to pay to its employees. The administrative system of Cisco systems has to be at the far front in ensuring that the decisions they make are focused on the main objectives of the organization.

Shared values, skills style, and staff

In the CISCO 2017 annual report on page 6 the shared values, which should be part of every employee are the stepping stone that every employee should uphold in the entire Cisco system: high-quality standards, customer focus, continuous improvements, and sustainability. The skills of employees were identified as valuable. The condition of staff and style is assumingly good, with competent, motivated and committed employees coaching and motivating newly arrived employees (Gnanasambandam, 2012). Moreover, the employees, who are working at Cisco are highly skilled and some of the best in their respective areas. The high motivation and satisfaction of employees are ensured through continuous employee satisfaction surveys. The employees are self-driven and are goal oriented in providing the strategy of the organization of being competitive and continued growth are upheld in the organization.

Conclusion

Given the model, it’s paramount that every organization choose ensuring that the entire system works in the focus of the primary goals of the organization. This helps to streamline the operations and define the roles of each employee in the organization. Through the adoption of the model, it ensures that the organization runs smoothly and that its operations are not interrupted over decisions made earlier.

Reclassifying financial statements

CISCO systems Income statement

A profit and loss account which is known as an income statement in one of an organisation’s financial report and brings into view an organisation’s expense and revenue during a specific period. Also, “it shows how the revenue is transformed into the net income.” However in our case, as indicated in the table below which shows the income statement retrieved from the information given by CISCO at their annual report of 2018 on page 112, it is evident that CISCO organization have a stable income statement through a little bit of a slope in the 2018 financial year which is understandable. As we said earlier, during the year 2018 they experienced a considerable investment in the purchasing of the new companies from their industry which is an asset to CISCO systems.

CISCO Systems balance sheet

Any organization has to gauge its performance, and given this, there must be a mirror to reflect on. The balance sheet indicates the organization’s assets, liabilities, and equity. This is proof of their financial position and acts as a weighbridge towards their financial decisions. As in the annual report of CISCO systems 2018 page 96 the financial position of the firm is shown in a manner supporting that the organization assets are well financed and there is a balance throughout the debts of the firm, and it does not rely much on debt financing.

Financial Analysis

ROIC

The ROIC “return on invested capital” measures how well a company generates cash flows from the capital that they input in the business. The calculation of the ROIC in any organization is based on the initial money invested (book values), the dividends paid out the companies book debt and shareholders’ equity. These components enable a clear focused on the ability of the firm to turn investments into profits.

Analysis of the return on investment of Cisco systems

In calculating the ROIC of CISCO systems, the formula for generating the annual figure is employed; ROIC = (Net income –Dividends)/ (debt +Equity)

As in the previous fiscal year’s annual reports of Cisco Company on their return on investment capital, it was foreseeable, and the profitability was notable. All through the earlier years as from 2012, the net income for the company was at an increasing rate. The values that were posted in 2012 had a positive margin as compared the last fiscal year of 2018 where notably there is a downfall in income. As per the annual report of CISCO systems, this significantly affected their yearly net return on investment.

Similarly, you can notice the shift in the capital investment of CISCO in the year 2018 as opposed to the previous years. The company expected much yield as compared to the earlier years of their investment, but due to the fall in their incomes the return of capital invested was negatively affected (cisco, 2018, 15). As per the annual report of CISCO systems, the primary company goal is continued growth, and this has let them into acquiring other network &communication companies, and this has generally affected the company’s income from the initial outlaid investments.

Given this, the company has not been on a standstill in the conversion of the invested capital. Since there are more debts that it posts in acquiring new firms to expand, and there is an increased dividend payout to its shareholders. Hence this has made the fluctuation in the income generated in the year 2018. This has, in turn, affected the company’s return on investment as compared to the prior years. The initial outlay determines the profitability of the firm. The amount of capital that Cisco invested in 2018 did not reflect on its annual income report. Since the cost was minimal and the fact that the company ventured in rather complex activities draining their income that the invested amount would generate.

NOPAT

The NOPAT “Net Operating Profit after Tax” is termed as the cash earnings of a particular company or organization if there was unleveraged of its capitalization. Also, regarding accuracy, NOPAT is considered the very best for a company which is leveraged to look at its efficiency in operations. Additionally, no case does NOPAT include savings of tax which several companies suffer due to existing debts.

In our case, CISCO in their annual report they have declared their NOPLAT calculations based on USD as their currency for the last six years. In five years since 2013 they have enjoyed a great NOPAT which came to an instant fall in 2018, and according to them, several reasons are behind the poor results. Firstly, it is due to their stiff competitors who have taken over the market leaving CISCO systems struggling to gain more share in the market. Additionally, the acquisition is another main reason for their low NOPAT experience in 2018 whereby the purchased several companies in their industry. However, through all this, they have incurred several failures in the CISCO Company despite gaining an advantage in other companies. Below are the calculations;

Invested capital

Invested capital “is the overall quantity of money which is raised by a company through issuing securities to debt to bondholders and equity shareholders, and it is calculated by adding capital lease obligations and the total debt to the issued equity amount to investors. Additionally, invested capital is not a line item in the financial statement of an organization because stockholder’s equity, capital leases, and debt are each listed separately in the balance sheet.” Therefore, we shall see the invested capital calculation and evaluation as shown in the annual report of CISCO systems.

According to the calculated results as from the annual report of CISCO, it is evident that they have some vast amounts of invested capital every year whereby it is different from the other analysis since the year 2018 which has been having problems throughout the additional interpretation is at uniform in terms of invested capital as the other years. Moreover, this is an indication that investment is not the problem of low incomes in 2018 as well as low net profit since they invested almost the same amount as in the other years and only in the year 2017 they invested higher than in 2018.

Cisco: financial leverage

Leverage is most helpful in time of financial discomforts, and every organization has to be aware of its capacity to react to market changes. It’s also vital for a company like Cisco to be able to determine their liquidity ratio and maintain a much flexible capital structure. However in times when the market improves, and there is recovery within the trade cycle the long-term view of the use of leverage may be a much better measure.

Given the report from CISCO systems over the years, the company has been struggling over the periods that the market has been struggling in the recession.

Over the years the debt to equity of CISCO systems has been on the increase, and this has been observed in the times of financial crisis like the initial one that hit them at the beginning of the year 2008. However, this does not mean that CISCO is on the verge of collapsing nor show a point of weakness of CISCO systems as an entity.

Forecasting financial statements.

Income statement forecast of CISCO systems

A projection of a company explains the steps and the position at which the company is expecting to be at a future time. This only happens through dedicated scrutiny of the company’s financial statements and being able to evaluate the key variables that would affect the future expectations.

As in the annual report of CISCO systems 2018 page 110, they have managed to forecast their earnings the through estimation of foreseeable values for its future reference. The company is aiming at an improvement in its annual income, an increase in its profit margin and a continuous rise in the net operating margin in achieving its long-term goals of continued growth

Forecast of the balance sheet

According to the balance sheet as per the annual report of CISCO systems, the company does not project its debts, there is substantial fall in the finance, and the income of the company gradually increases over the years. The expected rise in the book values of its shares over the projected years and the cash flows expected from the shares simultaneously increases.

Given this, the company speculates that the foreseeable future is at a more significant advantage unto their side and there would be a fundamental change in the performance, and the net profit would be boosted.

Peer group financial ratios

The “peer group ratios” should be realized as the strategic analysis of a starting point. Moreover, it derives some of the CISCO competitors’ key financial ratios within the same industry, and therefore for further study, it gives a good starting point. Thus, during the strategic analysis, the following rates will be dispensed in additional detail.

Income statement reformulation

Reformulation of the historical income statement aims to separate all operating items from financing activities from analyzing the contributions of historical from financing and operating actives respectively. Additionally, the earnings about EBIT, NOPAT, and EBITDA calculation of operating allow reformulation. The appendix A.4.3.1 illustrates the original income statement of CISCO systems.

The rearranged income statement of the CISCO systems can be found on the Appendix A.4.3.1 whereby it is the only reformulated statement for the valuation process and analyzing profitability. The revenue generated on the Cisco system is from the products and services thus considered as an operating activity. However, the annual report does not specify the exact distribution of the amortization of purchased intangible assets. Therefore, we used assumption for the calculations. Nevertheless, the precise amount of depreciation of acquired intangible assets is given which on being utilized are useful in the computation of EBITA as shown in Appendix A.4.3.1.

Balance sheet reformulation

Just in a similar way as we rearranged the income statement, we shall reformulate the balance sheet through the separation of financing activities, operating activities, and non-operating activities. In the appendix, B.4.3.2 and appendix B.4.3.2 is the original and analytical balance sheets of CISCO systems respectively. After the financial and operational activities separation then we acquired the organization’s invested capital.

Operational

Operating activities in the balance sheet heavily influence the value of existing assets. Likewise, operating activities change the current liabilities in a balance sheet. Current liabilities are obligations which are expected annually to be settled. For instance, one of the current liabilities in our balance sheet as indicated in the appendix B4.3.2 is the accounts payable. Moreover, when someone orders inventory on credit, the due balance is categorized in the accounts payable. Since CISCO allows prepayments from customers, then deferred revenue is also classified in the current liabilities.

Long-term assets are also categorized as operating activities as well as other things which generate revenue like fixed assets which include intangibles, equipment, and buildings — also, these long-term assets in the balance sheet depending on the manner into which a company finances its long-term assets. Leased products are own products are they are classified in the category of operational assets. In CISCO systems, leased products are as well own product thus categorized as operating assets. Additionally, financial receivables are related to the business’ financial services thus categorized as part of CISCO systems’ operating activities. Therefore, it is considered an operational asset (Krugman, 1999).

A non-operating activity is an asset that to the ongoing business operations, is not significant but may generate income and provide a return on investment (ROI). In our reformulated balance sheet as shown in the appendix B.4.3.2 of the analytical balance sheet, the available non-operating activities include restructuring, loan receivable and marketable securities. The mentioned activities are categorized as non-operating since they only count on the company’s total growth and not the future growth of profits in the organization.

Cisco Free Cash Flow.

Gross cash flow

Involves the cash flow that is generated by the company’s operations. CISCO Company shows the amount of money available to investors. It’s a combination of companies net operating profits (NOPLAT) adjusted with depreciation generated by the assets of that company (Brown, 2009). The gross cash flow of CISCO systems is then adjusted to the companies operating assets proceedings to have the money available for investment.

Amortization and depreciation

The net operating expenses of NOPLAT are less adjusted taxes and are the operating after-tax profits available to investors. To convert these profits to cash, NOPLAT is modified by adding back depreciation and amortization.

Investment.

CISCO systems have to plow back some of the gross cash flow for its continued performance. Through deduction of the gross investment from the gross cash flow the company now generates the cash flow available to investors. The gross investment includes all companies’ acquisitions regarding invested capital and others. CISCO systems show their gross investment in the following areas.

Net Capital expenditure – The companies’ investment into any capital expenditures like plant and equipment which has been deducted the proceedings of any material sold. According to the annual reports of CISCO systems, they have considered the net capital expenditure as an operating asset and thus we have treated it in the free cash flow as an operational asset for the CISCO Company. William Petty (2014) elaborates that any organizations capital expenditure is part of its operating assets.

Investment in capitalized operating leasing– operating leasing of CISCO systems is included in the free cash flow to have a consistency in the NOPLAT and invested capital of the organization. This is why we have added the capitalized operation leasing of Cisco systems as an operating asset of the organization.

Investment in goodwill and acquired intangibles– involves the deduction of the added amortization from the acquired intangibles. Goodwill is treated as an operating asset of the company and as a fixed asset of the organization according to the information generated from the company’s annual report. However, according to (Yadav, 2014) goodwill is treated as a fixed asset of any organization only that it is informed of intangible asset of the organization.

Other operating assets– CISCO systems may have to acquire extra assets in boosting its operations. In the cash flow of CISCO systems, we have treated this as part of operating assets of the organization in ensuring that it’s correctly posted into the organizations operating expenditures. According to CISCO systems annual report 2018, the “other operating assets” are treated as managing assets of the company.

To generate the cash flow available to investors, it is necessary to deduct the gross investments of the company from its reported free cash flow. This ensures that the money available to investors is accurate and free from any changes in the organizations capital structure. The free cash flow is then treated about the organizations non-operation assets through which the money available to investors is determined.

Interest income– The amount of interest generated in a particular period for Cisco Systems. This according to CISCO annual reports 2017 they treat them as part of their non-operation assets and thus used in adjustment of the organization’s free cash flows. However, about (Feldstein, 1993) study shows that the interest generated from the incomes of operations are part of the organization’s non-operation assets.

Non-operative taxes – these are the taxes generated from the company’s operations and are thus treated as non-operation expenses of Cisco Systems. The annual reports of CISCO show that the company non-operation assets are subject to taxes and therefore are treated as part of the company’s non-operation expanses.

Bibliography

Aglietta, M. and Breton, R., 2001. Financial systems, corporate control,and capital accumulation. Economy and Society, 30(4), pp.433-466.

Al-Harbi, E. and Zaghloul, S., 2013. A SWOT analysis on cisco® high availability virtualization clusters disaster recovery plan. In The Third International Conference on Digital Information Processing and Communications (pp. 501-506). The Society of Digital Information and Wireless Communication.

Cisco, C.V.N.I., 2014. Global mobile data traffic forecast update, 2013–2018. white paper.

Di Tella, S., 2017. Uncertainty shocks and balance sheet recessions. Journal of Political Economy, 125(6), pp.2038-2081.

Gnanasambandam, C., Madgavkar, A., Kaka, N., Manyika, J., Chui, M., Bughin, J. and Gomes, M., 2012. Online and upcoming: The Internet’s impact on India. Technology, Media and Telecom Practice, Mc Kinsey and Company.

Harrison, E.P., 2010. Depositional history of Cisco-Wolfcamp strata. Bend Arch, north-central Texas [unpublished Ph. D. thesis]: Texas Tech University, Lubbock, Texas.

Helms, M.M. and Nixon, J., 2010. Exploring SWOT analysis–where are we now? A review of academic research from the last decade. Journal of strategy and management, 3(3), pp.215-251.

Hosseinzadeh, S., Van der Wee, M., Vlassenroot, S. and Verbrugge, S., 2016. Using PEST as a framework for analyzing open mobility dataz. In 11th ITS (Intelligent Transport Systems) European Congress (pp. 1-10).

Jae-woong, B. and Geun-woo, R., 2010. A Global Brand of the Microsoft Company: 4Ps and PEST Analysis. ??????, 10(2), pp.185-196.

Kraemer, K.L. and Dedrick, J., 2002. Strategic use of the Internet and e-commerce: Cisco Systems. The Journal of Strategic Information Systems, 11(1), pp.5-29.

Krugman, P., 1999. Balance sheets, the transfer problem, and financial crises. In International finance and financial crises (pp. 31-55). Springer, Dordrecht.

Lev, B., 2000. Intangibles: Management, measurement, and reporting. Brookings institution press.

Person, L., 2014. Global hadoop market. Allied market research.

Realdon, M., 2013. Credit risk, valuation,and fundamental analysis. International Review of Financial Analysis, 27, pp.77-90.

Srivastava, R.M. and Verma, S., 2012. Strategic management: Concepts, skills and practices. PHI Learning Pvt. Ltd..

Velte, T. and Velte, A., 2013. Cisco A Beginner’s Guide. McGraw-Hill Education Group.