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Cisco Systems, Inc.:
Acquisition Integration for
     Manufacturing
         Case Study Analysis by:
  Djadja Achmad Sardj...
Case Facts: Company Profile

    History :
    • Started in 1984 by 2 Stanford graduates: Sandra
      Lerner (Stanford Bu...
Case Facts: Company Profile


 Products :
 • Routing
 • Switching
 • Home Networking
 • IP Telephony
 • Optical Networking...
Case Facts: Cisco's Business Strategy

    •       Assemble a broad product line in order to provide customers one-
      ...
Case Facts:
                   Cisco's Merger & Acquisition Strategy
                                                     ...
Case Facts:
               Strategy Innovation                  Outsourcing

       • Keep the core to yourself, outsource...
Case Facts:
               Strategy Innovation                      M&A

   • Inorganic growth through acquisition  makes
...
Case Facts:
               Processes and Organizational Culture


       • Fully networked organization
       • Outsourci...
Case Facts:
            Cisco Acquisitions (Samples)
                                                               SMB
  ...
Cisco's M&A strategy today

    Silicon Valley Watcher Interview on March 07, 2005:
    Dan Scheinman, Cisco's head of M&A...
Cisco Financial Data 1990-2001




8/17/2005              DASMR - STMB Biztel   11
Cisco Financial Data 2003-2005


            Quarter                                   Revenues
            Fiscal year 20...
Screening Criteria for Acquisition




8/17/2005               DASMR - STMB Biztel      13
Examples of Acquisitions Type




8/17/2005              DASMR - STMB Biztel   14
Mandatory Manufacturing Integration
            Steps

                                 1.  ASSIGN EACH OF THE ACQUIRED
  ...
Post-acquisition Integration Steps




8/17/2005               DASMR - STMB Biztel      16
THE SUMMA FOUR ACQUISITION


    • Summa Four is a leading provider of programmable
      switches which will enable Cisco...
Summa Four Acquisition SWOT


    • Project Alpha was still in the development phase at
      the time of the acquisition,...
Strategic Questions


       1. Identify what are the most important elements (criteria,
          processes, specific act...
Conclusion

• Acquisition of winning external variations is the strategy that
  Cisco Systems has successfully pursued thr...
Conclusion (Cont.)

            • Cisco jump to next paradigm through acquisitions.
            • Cisco M&A Due Diligence ...
Cisco Systems, Inc.:
Acquisition Integration for
     Manufacturing
      Questions & Answer
Cisco Systems, Inc.:
Acquisition Integration for
     Manufacturing
      Back-up Presentation
Recent News : August 8, 2005


Reuters: Cisco Mulls Buying Finnish Phone Maker Nokia
     LONDON (Reuters)—Cisco Systems I...
Strategic Thrust

                                                          Strategy




                                 ...
Organizational and Political Processes
                  Strategy                                                         ...
Value Creation


            Integration Lost          Sub-               Cost
               costs customers        total...
Value Creation




    Organizational
    Self-sufficiency          Strategic Complementarities (Synergy)
                ...
Post-Acquisition Combination Process

                                             DISPOSE
                 FIRM A


   PO...
Post-Acquisition Replication Process

                                              DISPOSE
                  FIRM A


   ...
Linking Stage of Emerging Technology,
             Uncertainty and Alliance Strategy


            HI


Technological
and ...
STRATEGIC PERSPECTIVES


            • WINDOW STRATEGY
             – Objectives: Track technologies, learn
              ...
STRATEGIC PERSPECTIVES (Cont.)


            • OPTIONS STRATEGY
              – Objectives: Create new options for the
   ...
STRATEGIC PERSPECTIVES (Cont.)

 • POSITIONING STRATEGY

        – Objectives: Scale based advantages, market
          se...
Quotes:




8/17/2005             DASMR - STMB Biztel   35
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Case Study: Cisco Acquisition

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Case Study: Cisco Acquisition

  1. 1. Cisco Systems, Inc.: Acquisition Integration for Manufacturing Case Study Analysis by: Djadja Achmad Sardjana – STMB Biztel
  2. 2. Case Facts: Company Profile History : • Started in 1984 by 2 Stanford graduates: Sandra Lerner (Stanford Business School), Leonard Bosack (CS Department) • 1987: First round of venture finance by Sequoia Capital of USD 2.5 million, 10 employees (Sandra – VP Customer Services, Len – CTO, CEO from outside for 6% stock option) • IPO in Feb 1990, value of $ 222 million Founders sell their 67% stake back to the company • Large customers: Enterprise & Service providers • CEO (John Chamber) spends 50% of his time with customers 8/17/2005 DASMR - STMB Biztel 2
  3. 3. Case Facts: Company Profile Products : • Routing • Switching • Home Networking • IP Telephony • Optical Networking • Security • Storage Area Networking • Wireless Technology • Access • Network Management • Service 8/17/2005 DASMR - STMB Biztel 3
  4. 4. Case Facts: Cisco's Business Strategy • Assemble a broad product line in order to provide customers one- stop shopping for networking solutions. • Systematize the acquisition process. • Define industry-wide software standards for networking equipment. • Pick the right strategic partners. 8/17/2005 DASMR - STMB Biztel 4
  5. 5. Case Facts: Cisco's Merger & Acquisition Strategy Have highly centralized 7 marketing and customer contact. Plug the acquisition 1 into a powerful market access infrastructure, Decentralize releasing untapped on research potential. and upstream parts of product development. 6 2 Emphasis on speed. 5 3 Identify leaders in areas where Cisco does not Develop repeatable have a strong process of acquisition 4 Assess multiple deals enough evaluation, due presence diligence, and through the integration Bus-Dev 8/17/2005 DASMR - STMB Biztel function. 5
  6. 6. Case Facts: Strategy Innovation Outsourcing • Keep the core to yourself, outsource almost everything else to alliance partners – Networking standards (MPLS, OSPF) – Designs and algorithms – Manufacturing – Selling – Logistics – Training 8/17/2005 DASMR - STMB Biztel 6
  7. 7. Case Facts: Strategy Innovation M&A • Inorganic growth through acquisition makes sense as market evolves too rapidly • New technology start-ups market share enhancement • Process : Identify (Due Diligence) Acquire (Deal making) Merge, assimilate (Post Acquisition Integration, with “grafting” of new people) • 1993 onwards >70 companies acquired • 1997 acquisition of Stratacom for $4.4 billion • 1999 acquisition of Cerent Corp for $7 billion 8/17/2005 DASMR - STMB Biztel 7
  8. 8. Case Facts: Processes and Organizational Culture • Fully networked organization • Outsourcing, extended supply chains • Brand consciousness – – certification (CCNA, CCIE, CCDP etc.) – “Empowering the Internet Generation” slogan • 32000 people, USD 20 billion revenue, still manages to keep entrepreneurial culture • Truly transnational 8/17/2005 DASMR - STMB Biztel 8
  9. 9. Case Facts: Cisco Acquisitions (Samples) SMB 2000 1995 1996 2004 Service Provider 1998 2001 1998 2003 1998 1997 1999 Enterprise 1999 1993 1994 2005 8/17/2005 DASMR - STMB Biztel 9
  10. 10. Cisco's M&A strategy today Silicon Valley Watcher Interview on March 07, 2005: Dan Scheinman, Cisco's head of M&A and corporate PR • The downturn reset everything, there was no longer any need to rush, Cisco could go back to basics and take its time making acquisitions. • In the late stages of the bubble, there was a lot of pressure to make acquisitions because of the risk that a company would IPO and get a huge valuation and that would increase Cisco's acquisition costs in the future. Cisco learned to slowdown, to wait and have discipline. The trick is to find companies at the right inflection point in their business when customers are beginning to vote with their money. • He admits that he hasn’t picked all winners so far, out of the 15 acquisitions he has made. But new businesses are ahead of plan and produced $1.3bn in annual revenues versus a forecast of $1.2bn. He thinks Cisco might need to move a bit faster in making acquisitions this year. 8/17/2005 DASMR - STMB Biztel 10
  11. 11. Cisco Financial Data 1990-2001 8/17/2005 DASMR - STMB Biztel 11
  12. 12. Cisco Financial Data 2003-2005 Quarter Revenues Fiscal year 2005 (ending Jul. 2005) $24.8 billion Q4 FY05 (ending Jul. 2005) $6.6 billion Q3 FY05 (ending Apr. 2005) $6.2 billion Q2 FY05 (ending Jan. 2005) $6.1 billion Q1 FY05 (ending Oct. 2004) $6.0 billion Q4 & FY04 (ending Jul. 2004) $5.9 billion Fiscal year 2004 (ending Jul. 2004) $22.0 billion Fiscal year 2003 (ending Jul. 2003) $18.9 billion 8/17/2005 DASMR - STMB Biztel 12
  13. 13. Screening Criteria for Acquisition 8/17/2005 DASMR - STMB Biztel 13
  14. 14. Examples of Acquisitions Type 8/17/2005 DASMR - STMB Biztel 14
  15. 15. Mandatory Manufacturing Integration Steps 1. ASSIGN EACH OF THE ACQUIRED COMPANY’S PRODUCTS A NEW CISCO PRODUCT NUMBER 2. RE-CREATE THE BILL, OF MATERIALS IN CISCO’S MRP DATABASE. 3. CONVERT THE ACQUIRED COMPANY TO CISCO’S MRP SYSTEM. 4. CONVERT THE ACQUIRED COMPANY TO CISCO’S AUTOTEST SYSTEM. 5. EVALUATE SUPPLIERS. 6. CONVERT TO CISCO’S OUTSOURCING MODEL 7. DETERMINE PRODUCT LIFECYCLES 8. EMPLOY AN ACCEPTABLE DEFECT REDUCTION PROCESS 9. ADOPT CISCO’S FORECASTING METHODOLOGY 10. ADOPT CISCO’S NEW PRODUCT INTRODUCTION (NPI) METHODOLOGY 8/17/2005 DASMR - STMB Biztel 15
  16. 16. Post-acquisition Integration Steps 8/17/2005 DASMR - STMB Biztel 16
  17. 17. THE SUMMA FOUR ACQUISITION • Summa Four is a leading provider of programmable switches which will enable Cisco to offer value- added telephony applications to new and existing service providers as well as extending these services to a voice-over-IP (Internet Protocol) infrastructure. • Due to the deregulation of the telecommunications industry, service providers were in a fierce, competitive race to develop and deliver these types of enhanced services to their customers. • Cisco announced it would acquire the Manchester, New Hampshire—based company in July 1998. 8/17/2005 DASMR - STMB Biztel 17
  18. 18. Summa Four Acquisition SWOT • Project Alpha was still in the development phase at the time of the acquisition, and over a year away from product launch Key reason behind Cisco’s interest in Summa Four. • In September of 1998, the idea of being acquired by Cisco was still very new to Summa Four’s employees, but their exciting. • Summa Four’s plant compared favorably to many of the other plants that Cisco had acquired. However, the plant used a homegrown, PC- based test system that was far less automated than Cisco’s Autotest system. • Summa four purchased approximately 5,000 individual parts from 250 suppliers, 85 of whom were new to Cisco. 8/17/2005 DASMR - STMB Biztel 18
  19. 19. Strategic Questions 1. Identify what are the most important elements (criteria, processes, specific actions, etc.) of Cisco’s approach to selecting and integrating acquisitions. For each of the elements have identified, describe why it is important (what is its purpose?), and specify whether characterize it as typical (conventional practice by companies doing technology acquisitions) or unusual? 2. How would improve Cisco’s acquisition selection and integration process? What is missing? What would add or modify? Why? 3. What are the specific challenges of the Summa Four acquisition? Does the Cisco process adequately address these challenges? Why or why not? 8/17/2005 DASMR - STMB Biztel 19
  20. 20. Conclusion • Acquisition of winning external variations is the strategy that Cisco Systems has successfully pursued throughout the 1990s. • Cisco was able to quickly observe which technology-based variations in the external selection environment were successful and to use its highly valued shares to acquire these emergent winners. • Cisco developed a distinctive competency related to integrating acquisitions into its strategy-making process. • The integration task was probably facilitated by the fact that these were by and large young, relatively small companies – sometimes encompassing mostly a product team of scientists and engineers – with little institutional history and still inchoate cultures. 8/17/2005 DASMR - STMB Biztel 20
  21. 21. Conclusion (Cont.) • Cisco jump to next paradigm through acquisitions. • Cisco M&A Due Diligence includes non-financials • Post M&A integration is classic example of Knowledge Management, the forging of networks across business units 8/17/2005 DASMR - STMB Biztel 21
  22. 22. Cisco Systems, Inc.: Acquisition Integration for Manufacturing Questions & Answer
  23. 23. Cisco Systems, Inc.: Acquisition Integration for Manufacturing Back-up Presentation
  24. 24. Recent News : August 8, 2005 Reuters: Cisco Mulls Buying Finnish Phone Maker Nokia LONDON (Reuters)—Cisco Systems Inc. is considering buying the world's top mobile handset maker Nokia in a bid to gain its wireless infrastructure technology, the Business newspaper reported on Sunday. The paper, which did not reveal the source of its information, said U.S.-based Cisco had traditionally concentrated on acquisitions of niche technology players, but its Chief Executive John Chambers is believed to be interested in merging with a wireless infrastructure company. "Nokia has been identified as the most likely target," the paper said. Cisco, the largest maker of Internet equipment, is worth around $123 billion, while Nokia's market value is around $71 billion. The paper said Cisco's mainstay networking market was fast changing with the convergence of fixed-line and wireless networks, and Cisco needed a merger to acquire the technology to create intelligent wireless applications, which Finnish-based Nokia could provide. 8/17/2005 DASMR - STMB Biztel 24
  25. 25. Strategic Thrust Strategy Strategic Thrust Hardware Software Framework of Strategic Thrust (Product-Market Focus), with hardware levers such as structure, ( control and incentive systems, and software such as people mix and culture Johannes M. Pennings ) 8/17/2005 DASMR - STMB Biztel 25
  26. 26. Organizational and Political Processes Strategy Strategy M&A Framework Strategic thrust Strategic thrust of The firm of the acquired company, e.g. ??? Resources Processes& Resources Processes values & values Normative Normative claims claims Conflictory, creative process Strategy New Strategic Thrust Resources Processes & values 8/17/2005 DASMR - STMB Biztel 26
  27. 27. Value Creation Integration Lost Sub- Cost costs customers total synergies Cross- sell Systems Marketing Consultants Head office Operations 8/17/2005 DASMR - STMB Biztel 27
  28. 28. Value Creation Organizational Self-sufficiency Strategic Complementarities (Synergy) LOW HIGH HIGH Conservation Symbiosis LOW Acculturation 8/17/2005 DASMR - STMB Biztel 28
  29. 29. Post-Acquisition Combination Process DISPOSE FIRM A POOL OF KEEP RESOURCES AND CAPABILIES KEEP FIRM B DISPOSE SCREENING 0 INTEGRATION RESOURCE EVALUATION AGREEMENT PLANNING/DECISION REDEPLOYMENT/ NEGOTIATION TO PURCHASE MAKING CAPABILITY ASSEMBLY Combination Combination SELECTION DUE DILIGENCE 8/17/2005 DASMR - STMB Biztel 29
  30. 30. Post-Acquisition Replication Process DISPOSE FIRM A POOL OF KEEP RESOURCES AND CAPABILIES KEEP FIRM B DISPOSE SCREENING 0 INTEGRATION RESOURCE EVALUATION AGREEMENT PLANNING/DECISION REDEPLOYMENT/ NEGOTIATION TO PURCHASE MAKING CAPABILITY TRANSFER Replication Replication SELECTION DUE DILIGENCE 8/17/2005 DASMR - STMB Biztel 30
  31. 31. Linking Stage of Emerging Technology, Uncertainty and Alliance Strategy HI Technological and Market Uncertainty LO Time Window Options Positioning 8/17/2005 DASMR - STMB Biztel 31
  32. 32. STRATEGIC PERSPECTIVES • WINDOW STRATEGY – Objectives: Track technologies, learn what they mean, stay in the flow of ideas – Key success factors: ability to learn, absorb new information – Key hazards: misapplication of performance measures, protecting own proprietary knowledge 8/17/2005 DASMR - STMB Biztel 32
  33. 33. STRATEGIC PERSPECTIVES (Cont.) • OPTIONS STRATEGY – Objectives: Create new options for the firm, build a capability platform – Key success factors: Build a combination of people, routines, and assets that can be scaled up or down – Key Hazards: Reluctance to shift quickly after investing 8/17/2005 DASMR - STMB Biztel 33
  34. 34. STRATEGIC PERSPECTIVES (Cont.) • POSITIONING STRATEGY – Objectives: Scale based advantages, market segmentation, creating a customer base – Key Success factors: Positioning versus industry structure and customer preferences, scalability – Key Hazards: Retain key talent that grew up in the window or options stage, managing cultural differences and tension between those who seek efficiency and those who are following innovation 8/17/2005 DASMR - STMB Biztel 34
  35. 35. Quotes: 8/17/2005 DASMR - STMB Biztel 35

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