Cisco 2013 Annual Report Download - page 20

The principal competitive factors in the markets in which we presently compete and may compete in the future include:
• The ability to provide a broad range of networking and communications products and services
• Product performance
• Price
• The ability to introduce new products, including products with price-performance advantages
• The ability to reduce production costs
• The ability to provide value-added features such as security, reliability, and investment protection
• Conformance to standards
• 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, Service Provider Video,
Collaboration, Wireless, Data Center, Security, and Other Product technologies, for this purpose. Our research and
development expenditures were $5.9 billion, $5.5 billion, and $5.8 billion in fiscal 2013, 2012, and 2011, 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, collaboration, 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. 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. We generally have the option to renew arrangements on
an as-needed basis. These arrangements generally do not commit us to purchase any particular amount or any quantities beyond
certain amounts covered by orders or forecasts that we submit covering discrete periods of time, defined as less than one year.
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