Cisco 2012 Annual Report Download - page 21

• Market presence
• The ability to provide financing
• Disruptive technology shifts and new business models
We also face competition from customers to which we license or supply technology and suppliers from which we
transfer technology. The inherent nature of networking requires interoperability. Therefore, we must cooperate
and at the same time compete with many companies. Any inability to effectively manage these complicated
relationships with customers, suppliers, and strategic alliance partners could have a material adverse effect on our
business, operating results, and financial condition, and accordingly affect our chances of success.
Research and Development
We regularly seek to introduce new products and features to address the requirements of our markets. We
allocate our research and development budget among our product categories, which consist of switching, NGN
routing, collaboration, service provider video, wireless, security, data center, and other product technologies, for
this purpose. Our research and development expenditures were $5.5 billion, $5.8 billion, and $5.3 billion in fiscal
2012, 2011, and 2010, respectively. These expenditures are applied generally to all product areas, with specific
areas of focus being identified from time to time. Recent areas of focus are tied to our foundational priorities and
include, but are not limited to, our core routing and switching products and the Cisco Unified Computing System
and other products related to the data center. Our expenditures for research and development costs were expensed
as incurred.
The industry in which we compete is subject to rapid technological developments, evolving standards, changes in
customer requirements, and new product introductions and enhancements. As a result, our success depends in
part upon our ability, on a cost-effective and timely basis, to continue to enhance our existing products and to
develop and introduce new products that improve performance and reduce total cost of ownership. To achieve
these objectives, our management and engineering personnel work with customers to identify and respond to
customer needs, as well as with other innovators of internetworking products, including universities, laboratories,
and corporations. We also expect to continue to make acquisitions and investments, where appropriate, to
provide us with access to new technologies. We intend to continue developing products that meet key industry
standards and to support important protocol standards as they emerge, such as IP Version 6. Nonetheless, there
can be no assurance that we will be able to successfully develop products to address new customer requirements
and technological changes or that those products will achieve market acceptance.
Manufacturing
We rely on contract manufacturers for all of our manufacturing needs. During fiscal 2012, we completed the sale
of our manufacturing operations relating to set-top boxes to a contract manufacturer located in Juarez, Mexico, in
furtherance of our strategic objective to simplify our operating model. We presently use a variety of independent
third-party companies to provide services related to printed-circuit board assembly, in-circuit test, product repair,
and product assembly. Proprietary software on electronically programmable memory chips is used to configure
products that meet customer requirements and to maintain quality control and security. The manufacturing
process enables us to configure the hardware and software in unique combinations to meet a wide variety of
individual customer requirements. The manufacturing process uses automated testing equipment and burn-in
procedures, as well as comprehensive inspection, testing, and statistical process controls, which are designed to
help ensure the quality and reliability of our products. The manufacturing processes and procedures are generally
certified to International Organization for Standardization (ISO) 9001 or ISO 9003 standards.
Our arrangements with contract manufacturers generally provide for quality, cost, and delivery requirements, as
well as manufacturing process terms, such as continuity of supply; inventory management; flexibility regarding
capacity, quality, and cost management; oversight of manufacturing; and conditions for use of our intellectual
property. We have not entered into any significant long-term contracts with any manufacturing service provider.
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