Nortel Networks India Pvt Ltd

STATEMENT OF PROBLEM

Cash conversion cycle and its effect on financial statement

OBJECTIVES

The objectives of this study are,

To study cash conversion cycle Company’s ability to earn income and sustain growth Company’s ability to maintain cash flow Ratio Analysis

SCOPE OF THE STUDY

The main objective of the study is to understand cash conversion cycle.

COMPANY PROFILE

Nortel Networks was founded in Montreal, Quebec in 1895 and which is headquarters at Mississauga, Ontario, Canada. It deals with telecommunication equipments and is a public ltd company which is traded in NYSE and TSX.

HISTORY

Alexander Graham Bell conceived the technical aspects of the telephone and invented it in July 1874, while residing with his parents at their farm in Tutelo Heights, on the outskirts of Brantford, Ontario. He later refined its design at Brantford after producing his first working prototype in Boston. Canada's first telephone factory, created by James Cowherd of Brantford, was a three story brick building that soon started manufacturing telephones for the Bell System, leading to the city's style as The Telephone City.

After Cowherd's death in 1881 which resulted in the closure of his Brantford factory, a mechanical production department was created within the Bell Telephone Company of Canada and production of Canadian telephones and telephone equipment was transferred to Montreal in 1882, due to restrictions on importing telephone equipment from the United States. In addition to phones, four years later, the department started manufacturing its first switchboard, a 50 line Standard Magneto Switchboard. The small manufacturing department expanded yearly with the growth and popularity of the telephone to 50 employees in 1888. By 1890 it had been transformed into its own branch of operations with 200 employees, and a new factory was under construction.

As the manufacturing branch expanded, its production ability increased beyond the demand for phones, and it faced closure for several months a year without manufacturing other products. This was a problem because the Bell Telephone Company of Canada's (later renamed to Bell Canada) charter would not allow them to build other products. So in 1895, the Bell Telephone of Canada was required to spin off its manufacturing arm to build phones for sale to other companies, as well as other devices such as fire alarm boxes, police street call boxes, and fire department call equipment. This company was incorporated as the Northern Electric and Manufacturing Company Limited.

Northern Electric and Manufacturing Company

Northern Electric and Manufacturing Company Limited was incorporated on 7 December 1895, by the following corporate members (or Board of Directors) Charles Fleetford Sise Sr., President of Bell Canada – Provisional Director; Robert Mackay, merchant – Provisional Director; Hugh Paton, manager of the Shedden Company – Provisional Director; The Hon. Joseph Rosaire Thibaudeau, Senator – Provisional Director; Robert Archer, gentleman – Provisional Director; Charles P. Sclater, secretary – Provisional Director; Lewis B. McFarlane, manager, all of the city and district of Montreal, Quebec.

The initial stock capital was $50,000 at $100 per share, with 93 percent held by the Bell Telephone Company of Canada and the remainder held by the seven corporate members above. The first general stockholders meeting was held on March 24, 1896.

In December 1899, The Bell Telephone Company of Canada bought a cabling company for $500,000; a Canadian charter named it The Wire and Cable Company. Northern Electric and Manufacturing further expanded its product line in 1900, manufacturing the first Canadian wind-up gramophones that played flat discs. In 1911 the Wire and Cable company changed its name to the Imperial Wire and Cable Company.

Fig 4 : Company Logo

The construction of a new manufacturing plant started in 1913 at Shearer Street in Montreal, Canada, as preparations began for the two manufacturing companies' integration. Then, in January 1914, the Northern Electric and Manufacturing Company and the Imperial Wire and Cable Company merged into the Northern Electric Company, commonly known simply as Northern Electric, and the new company opened the doors on a new manufacturing plant in January 1915. This facility at Shearer Street was the primary manufacturing center until the mid1950s. Edward Fleetford Sise was the president and his brother Paul Fleetford Sise was the vice-president and general manager.

During the First World War Northern Electric manufactured the Portable Commutator, a one-wire telegraphic switchboard for military operations in the field. In 1922, Northern started to produce, for $5, the "Peanut" vacuum tube, which required only a single dry-cell battery. The use of alternating current was still under development during this time. The "Northern Electric Peanut tube was the smallest tube made, and drew only one-tenth of an ampere and was the most remarkable radio frequency amplifier ever made.” During the 1920s Northern Electric made kettles, toasters, cigar lighters, electric stoves, and washing machines. In January 1923, Northern Electric started to operate an AM radio station with call letters CHYC, in the Shearer Street plant, and much of the programming was religious services for the Northern Electric employees and families in the community. In July 1923, CHYC-AM was the first radio station to provide entertainment to the riders of the transcontinental train, in a parlor car fitted with a radio set to

receive the broadcast as it left Montreal and traveled west.[25] Later in the 1920s, Northern created the first talking movie sound system in the British Empire for a theater in Montreal.

During the Great Depression in the 1930s, Northern Electric was affected, like most other companies. From the beginning of 1930 through the end of 1933, sales dropped from $34 million to $8.2 million, and the number of employees dropped from 6,100 to 2,400.

On Jan. 14, Ontario Superior Court Justice Frank Marrocco acquitted three former Nortel Networks Corp. executives on charges of manipulating financial statements. The trial, one of the largest in Canadian corporate history, began on Jan. 16, 2012.The crown had alleged ex-CEO Frank Dunn, ex-CFO Douglas Beatty and ex-controller Michael Gollogly had manipulated the balance sheets at Nortel between 2002 to 2003 in a book-cooking scheme designed to trigger $12.8 million in bonuses and stocks for themselves.Marrocco ruled that the Crown did not meet the burden of proof and dismissed charges.Nortel once employed more than 90,000 workers worldwide and was worth nearly $300 billion, making it one of Canada's most valuable companies until the dot-com crash of 2000.

Here are some key dates in the history of Nortel Networks

1882: Nortel's predecessor company, Bell Telephone Co. of Canada, starts out in the business of manufacturing telephone handsets.

1895: Bell spins off Northern Electric and Manufacturing Co. but retains the vast majority of its shares.

1964: Northern Electric becomes a wholly-owned subsidiary of Bell Canada.

1977: Incorporates in Canada as Northern Electric Co. Ltd.

1998: Changes name to Nortel Networks.

2000:

July 26: Stock peaks at a high of $124.50, which would be the equivalent of $1,245 in today's terms, allowing for stock consolidation. Shares were worth just 39 cents before bankruptcy filing on Jan. 14, 2009.

Oct. 24: Stock has first of what would become many major tumbles, falling the equivalent of $246 in today's terms ($24.60 before the consolidation) after revenue growth missed company target.

2001:

Nov. 1: Career Nortel employee Frank Dunn promoted from chief financial officer to succeed John Roth as chief executive officer

2002: A series of workforce cuts reduces the labour force, over 90,000 at its peak in 2000, to 35,000, amid heavy losses and repeated warnings that revenue will miss expectations. Nortel stock hits what would be for years an all-time low of 67 cents ($6.70 in today's terms) in October 2002 on fears Nortel would seek bankruptcy protection.

2003:

Feb. 20: Dunn says Nortel is "starting to make money."

Oct. 23: Nortel acknowledges past accounting errors and says it will restate results, mostly upward, back to 2000.

2004:

Jan. 29: Announces net earnings of $732 million US for 2003, its first annual profit since 1997.

March 10: Delays audited financials for 2003, discloses it may further restate prior results.

April 28: Dunn fired, along with CFO Douglas Beatty, as Nortel says 2003 profit was about half what it previously reported. Former U.S. admiral Bill Owens becomes CEO.

Aug. 16: RCMP announces criminal probe into Nortel's accounting. Charges would be laid in 2008.

Sept. 2: Nortel postpones 2003 audited results to October, the first of several delays. The audited results wouldn't be released until 2005.

2005: Oct. 17: Owens announces his plans to leave the chief executive post, to be replaced within a month by former Motorola executive Mike Zafirovski, the company's CEO until 2009.

2006:

Feb. 8: Nortel Networks agrees to pay $2.5 billion US in cash and stock to settle shareholders' class action lawsuit over accounting scandal.

June 27: Restructuring announced. Nortel says it will cut 1,900 jobs and create 800 in restructuring moves intended to improve profitability.

2007:

Feb. 7: Restructuring announced. Another 2,900 jobs to be cut globally in 2007 and 2008, as the next step in business realignment. It also announced plan to shift 1,000 positions to lower-cost locations.

March 12: U.S. Securities and Exchange Commission files civil charges against four former executives of Nortel Networks, including ex-CEO Frank Dunn. Ontario Securities Commission alleges misconduct and negligence.

2008:

June 19: Royal Canadian Mounted Police lay fraud charges against former Nortel CEO Frank Dunn and two other former executives.

Nov. 10: Nortel posts a third-quarter net loss of $3.41 billion U.S. The company also suspends dividends on some of its preferred shares and announces 1,300 more jobs will be cut.

Dec. 10: Nortel defends itself as "a viable partner for the long term" despite a news report on debt worries. The Wall Street Journal says Nortel had hired legal counsel to explore bankruptcy court protection.

Dec. 11: Nortel says its shares may no longer qualify to be listed on the New York Stock Exchange, because they have had an average closing price below $1 US for more than 30 days

2009:

Jan. 14: Nortel files for court protection from its creditors.

June 26: Nortel shares are delisted by the Toronto Stock Exchange.

2011:

July 11: Bankruptcy courts in Canada and the U.S.approve the sale of 6,000 patents held by Nortel Networks for $4.5 billion U.S. to a partnership of Microsoft, Apple Inc., Research In Motion Inc., Sony, EMC Corp. and Ericsson.

2012:

Jan. 16: The criminal trial against ex-CEO Frank Dunn, ex-CFO Douglas Beatty and ex-controller Michael Gollogly begins in Ontario Superior Court.

2013:

Jan. 14: The three Nortel executives are acquitted in Ontario Superior Court of manipulating fiancial statements. Ontario Chief Justice Warren Winkler begins a week of talks in Toronto intended to find common ground on how to distribute Nortel's remaining $9 billion among the various Nortel insolvency and bankruptcy proceedings.

PRODUCT PROFILE

TELEPHONE SYSTEMS

Application Server 5200 and Application Server 5300 (AS5300)

Digital Multiplex System (DMS and SL-100 families) large-scale digital carrier phone switch

Meridian 1 (SL-1) medium-to-large-scale PBX

Meridian Norstar small-to-medium-scale digital key telephone system

Nortel Communication Servers, medium-to-large-scale VoIP PBX Systems; CS2100, CS2000, CS1500, CS1000

DV-1 minicomputer digital voice and data system

SG-1 analog stored program control PBX

SP-1 analog stored program control carrier switch

Routers

Secure Router 1000 Systems; SR1004, SR1002, SR1001S, SR1001

Secure Router 3120

Secure Router 4134

Secure Router 8000 Systems; SR8002, SR8004, SR8008, SR8012

TELEPHONE SETS AND TERMINALS

Nortel business phones, digital sets for Meridian and Norstar

Northern Electric home phones

Northern Telecom home phones

Nortel payphones

Nortel IP Phone 1120E

Nortel IP Phone 1140E

SOFTWARE

Visualization Performance & Fault Manager (VPFM)

Nortel Enterprise Switch Manager

Nortel File and Inventory Manager

Nortel Multi-link Trunking Manager

Nortel Multicast Manager

Nortel Speech Server

Passport Carrier Release

Nortel Routing Manager

Nortel Security Manager

Nortel VLAN manager

Unified Communications Management

LAN AND MAN EQUIPMENT

Baystack and ERS (Ethernet Routing Switch), managed network switches for Ethernet; ERS-8600, ERS-8300, ERS-5600, ERS-5500, ERS-4500, ERS-2500

Multiservice Switch (MSS) (formerly Passport); MSS20000, MSS15000, MSS7400, MSS6400

Metro Ethernet Routing Switch 8600

ROUTERS

Secure Router 1000 Systems; SR1004, SR1002, SR1001S, SR1001

Secure Router 3120

Secure Router 4134

Secure Router 8000 Systems; SR8002, SR8004, SR8008, SR8012

VPN Routers; 1750, 2700, 2750, 5000

OTHER WAN EQUIPMENTS

1 Mbit/s modem

S/DMS SONET

OPTera Long Haul

INDUSTRIAL PROFILE

While the Network Equipment Industry focuses on both private and public networks, the current emphasis is on the Internet, intranets, extranets and new technologies like VoIP, data storage networking, Network Mobility and new forms of Internet security. The logic of this focus is dictated by the fact that the Internet connects the entire world and as such has become the backbone of today’s economy while giving new meaning to the word globalization.

The Network Equipment Industry has gone through immense changes and has developed significantly in a relatively short period of time. The beginning of this significant industry as it is known today began with the introduction of the first router by Cisco Systems. The industry development was then a factor of fast economic growth and political stability throughout the world. Most importantly it was the huge revenues that companies in the industry experienced within a short period of time. Another strong reason, which is relatively a recent one, was the competition between the different companies and the struggle for market share.

There is much competition in this industry on every level. Companies of different sizes compete on different levels. Cisco Systems, Lucent Technologies and Nortel Networks are three major

.7

8.47

9.26

18.9

Revenues2013

0.550.890.67Juniper Networks

12.3

10.5

18.9

Revenues2012

21.3 28.67 Lucent Technologies

17.5 27.9 Nortel Networks

22.3 18.9 Cisco Systems

Revenues2011

Revenues2010Company

companies that dominate and influence the industry. In addition to these three large companies, the industry has a significant number of smaller companies that successfully focus on product niches. A good example is a company like Juniper Networks, which is significantly smaller than the other three large companies discussed in this paper, but continues to be successful

Table 1: Revenues for the major role players of the industry (*in billions)

Cisco Systems is the world leader in the Network Equipment Industry. It has been a very stable company that has gone through hard times recently. Figure 2 gives a pictorial representation of how the companies of the Network Equipment Industry compete and influence the market. The router market declined globally by as much as 32% in 2012. The graph shows the revenue for these companies, which have suffered significant losses. Cisco System’s revenues also dropped by about 3.4 billion dollars (about 15% of the total revenue) in just one year. But to date, Cisco

Systems has been the only company in the industry to regain its strength and maintain its influence on the market. Lucent Technologies and Nortel Networks on the other hand experienced a major setback and are still struggling to regain their strength in the industry.

Lucent Technologies, another significant company in the industry, also focuses on manufacturing products for networks. Its products comprise of telephone switches, Wireless Network equipment, Optical equipment, network management software and an aggressive customer support service. Lucent Technologies had to face hard times during the recession and is still recuperating from the damage that it suffered.

Nortel Networks, a well-known company in the Network Equipment Industry, also offers networking and communication services on a global level. Nortel originally focused only on voice networks and cellular technology until after its acquisition of Bay Networks in 1998. The acquisition facilitated Nortel Networks in expanding its operations and exploring the data networking market.

Juniper Networks is also in the manufacturing business of the industry, but focuses only on the IP segment of the industry. They mostly provide equipment to small Internet Service Providers and other small businesses. Juniper Networks has also experienced losses in the last couple of

years, like most of the other companies in the industry. But Juniper Networks regained its strength soon and is now a posing threat to all the companies in the industry. Juniper Networks is a new entrant in the industry that was founded in 1996. It has grown really fast and has shown exceptional results in a very short period of time despite the threats it has had to face in the industry. The key for Juniper Networks’ success was that it only focused on the IP routing segment of the industry, which helped the company survive and develop and get to the point where it is today.

0 billion

5 billion

10 billion

15 billion

20 billion

25 billion

30 billion

Cisco Systems

Nortel Networks

Lucent Technologies

Juniper Networks

2010 2011 2012 2013

Figure 1: A graph showing the fluctuation in revenues in the industry (*in billions)

In order to be able to compare these companies, it is important to understand that though these companies compete in the same industry, they also focus on product segments that make them different from each other. Focusing on different sectors give these companies a competitive advantage on each other.

For instance, Cisco Systems is a company that focuses specifically in data networking, end-to-end communication, and providing complete business solutions along with selling specific network equipment products. So basically, they focus on the LAN and WAN throughout the world. Lucent Technologies on the other hand are more into Wireless Base Stations, Telephone Switches, 3G solutions and other networking management software. Nortel Networks also focuses more on cellular technologies (CDMA, GSM, TDMA, UMTS), Optical Networks etc. Juniper Networks, unlike these giant companies, focuses only one segment of the market, which is IP routing. Though Juniper Networks is a small company that has emerged in the industry recently, it still poses a great threat to the giant companies in this industry.

MAJOR COMPETATIORS

Cisco Systems

Cisco Systems, Inc. designs, manufactures, and sells Internet Protocol based networking products and services related to the communications and information technology industry. It provides a broad line of products for transporting data, voice, and video within buildings and across campuses. The company's product offerings comprises of the following categories: Switching, Next-Generation Network (NGN) Routing, Service Provider Video, Collaboration, Data Center, Wireless, Security, and Other Products. Switching is an integral networking technology used in campuses, branch offices, and data centers. The Switches are used within buildings in local-area networks and across great distances in wide-area networks. Switching products offer many forms of connectivity to end users, workstations, IP phones, access points, and servers and also function as aggregators on local-area networks and wide-area networks. The Next-Generation Network Routing technology is fundamental to the foundation of the Internet. This category of technologies interconnects public and private wireline and mobile networks for mobile, data, voice, and video applications. The Service Provider Video delivers entertainment, information, and communication services to consumers and businesses around the world. The Collaboration portfolio integrates voice, video, data, and mobile applications on fixed and mobile networks across a wide range of devices and endpoints, including mobile phones, tablets, desktop and laptop computers, and desktop virtualization clients. The Unified Data Center unites computing, networking, storage, management, and virtualization into a single, fabric-based platform designed to increase and simplify operating efficiencies and provide business agility. The Wireless access via wireless fidelity (Wi-Fi) is a fast growing enterprise technology with companies and public institutions across the globe investing to provide indoor and outdoor coverage with seamless roaming for voice, video, and data applications. The Security portfolio of products and services offers identity, network, and content security solutions designed to enable customers to reduce the impact of threats and realize the benefits of a mobile, collaborative, and cloud-enabled business. Cisco's Collaboration portfolio integrates voice, video, data and mobile applications on fixed and mobile networks across a wide range of devices and endpoints from mobile phones and tablets to desktops, Macs and laptops to desktop virtualization clients. Cisco Systems was founded by Sandra Lerner and Leonard Bosack on December 10, 1984 and is headquartered in San Jose, CA

Alcatel -Lucent

Alcatel-Lucent is a telecommunications equipment vendor, the result of a 2006 merger between Alcatel and Lucent. As one of the largest telecommunicationsvendors in the world, Alcatel-Lucent offers wireless, wireline, convergence, and enterprise communications equipment.[1] Based in Paris, France, the company sources revenue evenly from North America, Europe and the rest of the world.

Since the merger ALU has performed poorly, posting a $751.8 million loss in 2009 and a loss of $7.29 billion in 2008. Telecommunication equipment providers depend heavily on a small group of service companies such asVerizon Communications (VZ) and AT&T (T), which provide consumer services such a Internet access, wireless voice and data, andvideo. On the positive side, Alcatel-

Lucent's broad offerings allow the company to sell a suite of products, services and upgrades, effectively locking in service providers for periods of time.

Alcatel-Lucent depends on continuous innovation in order to meet demands for newer, faster telecom products. While the company has 40% market share of CDMA (wireless) and DSL (Internet access) technologies, both are reaching maturity and may be displaced by newer equipment, which the company may or may not currently offer. The company has made a significant bet on third generation (3G)wireless, which allows high-speed concurrent transmission of voice and data over wireless networks. One potential threat to this technology is the emergence of WiMAX, a 4G technology that could potentially leapfrog 3G as wireless service providers migrate directly to this even faster, newer standard

Teracom

Teracom is one of India's fastest growing company with business interests in TELECOM and POWER Infrastructure Sectors . Incepted in 2002, the company's turnover has grown to INR 8 Billion with a CAGR of 125%.Within a short span of Eight Years Teracom has established 5 world class manufacturing factories, spread over 1.5 Million square feet to manufacture Optical Fiber Cable, FRP Rods, Broadband CPEs, Optical Transmission Equipments, Microwave Equipments, LT/HT Power Cables and ACSR/AAAC Conductors. Our EPC Division has Pan India Presence with very good track record of timely completion of many big Telecom Rollouts, FTTH Networks, 220 KV/400KV Transmission Lines, 220KV Underground Cabling, Substations and Integrated Security Solutions.To ensure timely after sale service of our manufactured Telecom Products, we have also established a network of over 100 after-sale service centers spread all over India .

To ensure continuity & sustainability of our commitment & continuous improvement in our products to our valued customers, Teracom has put in place Quality Management Systems & Processes in accordance with ISO 9001 & ISO 14001 international quality standards.

Teracom provides a broad portfolio of innovative, field-proven, high capacity Broadband solutions for Wired and wireless Telecom service providers as well as private businesses. These solutions are designed to deliver voice and premium data services, eliminate the backhaul capacity bottleneck, significantly reduce backhaul costs and transition to next generation IP-based networks. With comprehensive strengths in Optical Fiber Cable, Wired Broadband CPEs e.g. ADSL 2+, VDSL and GEPON, Wireless Broadband CPEs based on CDMA 1X, EVDO, 3G, Wimax and TD LTE, Microwave based Backhaul solutions, Optical Transmission Equipments and a PAN India based efficient Telecom EPC division, Teracom has gained a leading position in Telecom Sector in India.

As a long-time leader, Teracom has achieved numerous industry "firsts", including the first in India to Commercially supply 3G USB Datacard of 3.6 & 7.2 Mbps, the first company in India to develop Wimax CPE, First company in India to be selected for Integrated Security System.

Coral Telecom

Coral Telecom’s portfolio of solutions cover the full range of communication needs, delivering highly flexible, reliable and cost effective solutions to suite the various needs of its customers with extensive scalability for investment.The company exports its products to 14 countries across the globe with a strong presence in UAE, and the entire African continent . It also exports its tactical range of products to European partners. Its products are approved by the telecom regulatory authorities of South Africa, Sri Lanka, Kenya,Tanzania, UAE and others.In an environment of high technological obsolescence , Coral Telecom has developed a highly scalable business model to elongate the product life cycle by providing innovative solutions through costant design and upgradation of technology.

Coral Telecom’s synergetic approach to technology enables it to address market demands even as the market grows and changes. Its diverse experience in telecommunications, converged communications, software, hardware, application development and project management provides the basis for its integrated approach to product development. 

Coral Telecom has implemented large telecom projects both in the private and government sectors. These projects include development and deployment of ‘end-to-end’ communication networks.

Kavveri Telecom

Kavveri Telecom is a leading telecom products manufacturer, providing world-class, hardware products and solutions for the telecom industry.Founded in 1991 by a highly innovative team, Kavveri Telecom designs, develops, tests and implements a diverse range of products, from concept to deployment. With over 150 R&D man-years of experience, Kavveri Telecom is uniquely positioned to offer an array of world-class products and solutions to meet all hardware requirements of telecom manufacturers, telecom service providers and telecom users. Kavveri Telecom Products Limited is a company registered under Companies Act 1956 vide CIN L85110KA1996PLC019627. The company had changed its name from Kaveri Telecoms Limited to Kavveri Telecom Products Limited vide fresh certificate of incorporation dated 19.08.2003 issued by ROC Karnataka.

Kavveri Telecom combines expertise with experience to deliver state-of-art products and solutions spanning the wide spectrum of wireless Telecommunications. The diverse range of products manufactured by Kavveri Telecoms includes Antennas, RF Components, Repeaters, TMA/TMB.The Company also enjoys the stature of being the largest manufacturer of Antennas & RF products in India. With 30,000 Sq. ft. area of R&D manufacturing infrastructure for design, development & production of Microwave Components, RF products and Antennas,

3.6

Net Income

2013

1.9(1.014)2.7Cisco

Net Income

2012

Net Income

2011

Net Income

2010Company

Kavveri Telecoms has the capacity of manufacturing over 1,00,000 high quality Antennas & 10,000 RF products per month.

Headquartered in Bangalore, India, with three well-equipped production plants, Kavveri Telecom is geared to meet all telecom hardware needs of clients across the globe. Kavveri Telecom's esteemed clientele include industry giants such as Ericsson, Motorola, Spice, Airtel, BSNL, ISRO, World Space and Airports Authority of India

INDUSTRY COMPETITIVE STRATEGY

To understand the competitive strategies of these market leaders, it is essential to first understand what business they are in. Networking equipment can be divided into different categories as mentioned earlier. When we think of Cisco systems, we think of cable modems, LAN and WAN, Wireless networking etc. When we think of Lucent Technologies, we think of Telephone Switches, routers, Wireless Base Stations etc. When we talk about Nortel Networks, we think about cellular technologies, 3G wireless etc. These companies have products that overlap each other or depend on each others products. They all make routers and switches but Cisco Systems is the industry leader. Nortel is the leader in the cellular phone technology along with phone switches and Optical Networks. Lucent Technologies is known for its Telephone Switches, routers and Wireless network products.

The Network Equipment Industry is a very competitive industry. There is a lot of competition and marketing strategies these companies use to stay ahead of each other and in order to keep innovating. Outsourcing is a major and one of the most recent competitive strategies in this industry. Companies are getting a significant chunk of their manufacturing done offshore, which is cutting their cost down by a huge percentage. Along with manufacturing, companies are also moving their product and technical support offshore, resulting in major cost reduction.

Cisco Systems has moved most of its manufacturing and support to India. It has even sent its employees to train the people that are being hired there. Outsourcing increases profits, to which these companies are able to spend more on Research and Development. Figure 3 shows a little comparison of what these companies’ net incomes were in the last four years. Nortel Networks net income for 2013 is not yet published, but their revenues are shown in Figure 1. Cisco Systems has been able to stay stable and it is evident by the numbers in the figure. Lucent Technologies, overall has suffered the highest losses in the industry. It has shown a great improvement in the year 2013 though. This was mostly made possible by laying off employees and cutting down other expenses. Research and Development is one of the most important ingredients of this industry, since the products being manufactured and technology are constantly being innovated. These companies, in order to keep their influence in the market, have to come up with new and improved products on a regular basis that could give them a niche in the industry.

Table 2: Companies Net Incomes show the competitive edge in the market (* in billions)

PORTER MODEL EVALUATION

The Porter Competitive Model examines the Network Equipment Industry in detail in relation to the buyers and suppliers of the industry. There are four main parts to the Porter Competitive Model: Potential New Entrants, Bargaining Power of Buyers, Substitute Products and Services, and the Bargaining Power of Suppliers. This model identifies all the competitive forces in the market, existing alliances, potential threats and other sources of positive and negative influence instead of just focusing on the use of Information Technology

The analysis clearly shows that the Network Equipment Industry encompasses all kinds of companies. Some of these are struggling for survival, some are trying to gain a bigger industry share and some are just too big for most of the companies to compete with. The Network Equipment Industry is a very competitive industry. The Porter Competitive Model shows three enormous corporations in the industry that dominate along with the new entrant that could impose a threat to these giant corporations

Potential New Entrants

SubstituteProducts

And Services

Bargaining Power

of Suppliers

Bargaining Power

of Buyers

Intraindustry RivalrySBU: Nortel Networks SystemsRivals: Lucent Technologies, Cisco

Barriers to EntryStill Attracts startupsForeign Companies

Outsource network managementUsed Equipment Sales

IT vendorsStandards OrganizationTechnically Skilled PersonnelComponent and end product manufacturers

Internet Service ProvidersCorporationsSmall/Medium BusinessesGovernment Entities

Figure 2: Porter Competitive Model for Network Communication Equipment Industry

The Bargaining Power of Suppliers

The bargaining power of suppliers is significantly based on the uniqueness of their products or services that they have to offer. Since, Cisco Systems is essentially in the business of manufacturing, IT vendors and skilled personnel have the most bargaining power. Standards Organizations such as ANSI, NIST, and IETF are considered to have significant bargaining power also Component and end-to-end product manufacturers are the most significant suppliers of the industry and have a great deal of bargaining power.

The Bargaining Power of Buyers

The bargaining power of the buyers mostly depends on the volumes of production. The Internet service providers are the most significant buyers in the industry. They depend on the networking equipment to provide service to businesses as well as individuals. Corporations depend on networking equipment to perform almost any aspect of their business. Government entities are also buyers in this industry, since they buy some of the most sophisticated and expensive equipment to run their operations.

Potential New Entrants

New entrants are companies that are either new competitors in the industry or existing companies that have grown, developed, and are highly capable of competing with the strategic business unit directly.Leaders of this industry are under constant threat by startups and foreign competitors. Their strategy is to manufacture and sell the same products at a price lower then these industry giants.

Foreign competitors in this industry are one of the biggest threats because of the fact that most of them do not have any laws regarding intellectual property. Sometimes these competitors, by means of reverse engineering, create most of these products at a very low cost. This in turn increases their profit and influence over the industry.

Threats of Substitute Industries

A substitute is an alternative to doing business with the strategic business unit. The two biggest substitutes for the industry are the outsourcing of network management and sellers of used equipment. Most of the work these days is being transferred offshore because of the cost efficiency factor. In the last couple of years, a significant number of companies ran out of business due to recession and most of them sold a lot of equipment for a lower price. This reduced the sales for the companies in the Network Equipment Industry.

The analysis of the Porter Competitive Model of the Network Equipment Industry helps us derive various conclusions about the industry. The bargaining power of suppliers is predictably high, since this is an industry that depends on highly skilled personnel and IT vendors for manufacturing, support and sales. The bargaining power of the buyers is also high, since there are so many end users of these products and services that are offered by the industry. Though, this is a highly competitive industry, we still see new entrants frequently. This is because a lot of these companies are still capable of generating profits in the industry and because they realize a possibility of getting bought out by one of these giant corporations. The threat of substitute products and services is something that this industry has started experiencing recently. Outsourcing network management is something that can turn out to be a threat in the long run, since the companies that are providing these services can end up gaining too much control of the industry, which could harm the Network Equipment Industry itself.

GLOBALIZATION OF THE INDUSTRY

In today’s world, globalization is the most important element needed for the growth of any kind of business. Without globalization, it is almost impossible for any business to grow after a certain point. To understand globalization in this industry, it is important to first understand that globalization can be divided into two types, push and pull. Push is the type of globalization in which the company goes global just for the simple fact that it is pursuing added business potential. The pull form on the other hand, is based on the needs of foreign customers. Network Equipment industry is one of the most globalized industries for the simple reason that there are customers for this industry all over the world. For instance, these days the technology of VoIP is

Research and Development Engineering

Production and Manufacturing Marketing

Sales and Distribution Services Customer

being used to communicate throughout the world. Companies are setting up their networks to make these calls possible throughout the world using the VoIP technology. This is just one small and recent example of globalization in this industry. Economies, businesses, and individuals throughout the world depend on it on a day-to-day basis. Capturing the world market not only means increased sales and increased profits, but also means lowering the manufacturing cost by outsourcing. That makes both the suppliers and buyers of this industry global. Cisco Systems, Lucent Technologies, and Nortel Networks all compete on a global level since without being global; it would be impossible for these companies to compete in the industry.

One main advantage for globalization in this industry is that many of the products only need minor changes to be sold in other countries. All products and services travel well to many countries with only minor changes. This is a big advantage because companies do not need to spend too much money on modifying and creating new products in order to compete globally. Mostly the changes are in documentation of the products or some minor manufacturing changes that do not require too much time or capital. A company in this industry cannot thrive if it does not have a strong global presence. However, the risks of globalization include strain on company resources, cost and legal issues.

IMPORTANCE OF IT TO THE INDUSTRY

Information technology plays a great role in this industry from the manufacturing standpoint as well as the service point of view. First, and most importantly, information technology is used in the manufacturing of all the products. Research and Development through the use of information technology makes it possible for the companies to keep innovating and developing their products.

Nortel networks has used IT throughout its operations because they want to show that proper use of their products and services can result in a more efficient business environment. In a way, they are just marketing their products by using them for their own operations. Also sales of their equipment and service over the Internet accounts for a majority of their sales, which would be impossible without the support of IT. Cisco Connection Online uses IT to offer online customer services such as product support and sales.

Figure 3: Value Chain for the Network Communication Equipment Industry