Industry overview the computer network and

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INDUSTRY OVERVIEW The computer network and information technology service industry is characterized as one that must be extremely nimble and fast at meeting the needs of customers. The firms’ customers in this industry are primarily large businesses both within the technology sector but also in all other sectors. Customers who purchase network equipment seek equipment that will meet their needs for an extended time period but with the capability of being upgraded as needed. High-end network equipment can cost over $100,000, so the purchases are viewed as capital equipment and are highly scrutinized by the buyers. While price does factor into the decision, buyers also recognize that performance and ease of maintenance are other major, important decision factors. For the technology services part of the industry, customers seek products that come with substantial and timely service packages. For the firms, selling the equipment and then the service package extends the value of each sale and provides an
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Page 89 Academy of Accounting and Financial Studies Journal, Volume 15, Number 4, 2011 opportunity to solidify the relationship and thus expand it into future sales. Because of the size and technical requirements of the hardware in this industry, it is capital intensive but with a requirement of highly-skilled employees who can explain to the customers how the product can benefit the buyer firm. In order to stay fresh and gain access to new markets, many of the firms are active acquirers of competitors. The goal of the acquisitions is to gain a blockbuster product. Customers and stock investors quickly change allegiance to the latest hit product and reward it with sales and stock price jumps. The five computer network and information technology services companies included in the study are Cisco Systems (CSCO), 3Com (COMS), Ericsson (ERIC), Nortel Networks Corporation (NT), and Yahoo Inc. (YHOO). The five firms in this study all followed an aggressive acquisition strategy to gain access to blockbuster products or customer bases. Cisco Systems (CSCO) is a leading supplier of internetworking hardware, such as routers and switches, to direct data, including voice and video. Approximately half of its revenues are from outside of North America (Value Line, 2010). Like the other firms in the industry, Cisco is an active buyer of competitors and firms in related but new markets. Notable purchases over the years have included Kalpana, a switch manufacturer in 1994, Percept Software, video transmission software maker in 1998, Andiamo Systems, storage network switch maker in 2002, Linksys, home network specialist in 2003 and WebEx Communications, conference systems in 2009 (Hoover’s Online, 2010). The list demonstrates how Cisco uses acquisitions to strategically place itself in all points of the networking supply chain but without having to conduct the initial research & development required of each new sub-area of networking.
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