Cisco Systems: loss of global leadership as innovation turns to financialization

At the start of the 21st century, Cisco Systems exemplified the capacity of a "new economy" firm to emerge from Silicon Valley and become a global leader in the fast-growing sector of enterprise-networking equipment. Founded in 1984, it was able to benefit from outsourced manufacturing to electronic manufacturing service (EMS) providers and to rely on value-added resellers (VARs) to engage with buyers. During the Internet boom in the late 1990s, high margins combined with growing dominance in the router and server sectors accelerated the rise in Cisco's share price. This, in turn, supported to its "growth through (primarily stock based) acquisition" policy. With a broad-based employee stock option program, Cisco was also able to integrate highly qualified employees rapidly to adapt to changing requirements of its markets. In August 2000, Cisco was briefly the most valuable company in the world. This valuation included anticipation of the success of the company's intention to upgrade its technological capabilities to become a major infrastructure-equipment vendor to service providers. With the bursting of the Internet and telecommunications bubbles in 2000 and 2001, however, Cisco retreated from its innovative ambitions and pursued far less ambitious diversifications that proved to be unsuccessful. Rather than invest in innovation in more complex markets, the corporate cash generated from the markets that Cisco Systems dominated – routers and servers – were increasingly allocated to "maximizing shareholder value" through share repurchases in addition to dividends. William Lazonick's framework of the "social conditions of innovative enterprise" enhances understanding of the changing growth dynamics and value distributions among participants that explain Cisco's rise and fall. In this sector, the theory of the innovative enterprise also helps consider the larger policy implications of financialization as the United States has fallen behind global competitors, including China, in communication infrastructure.