What's in a brand? Any investor who follows the Dow Jones Industrial Average (DJINDICES:^DJI) knows how important a strong brand can be -- and how damaging it is when a company's brand becomes tarnished. The index has undergone many changes over the years, and many of these changes were enacted in response to the diminished value of one brand or the strengthening of another.
When the automobile became a common sight on city roads, the Dow responded by adding the strongest auto manufacturers to its exclusive list. The rise of a consumer culture prompted the Dow's inclusion of the most popular department stores. Companies that developed and marketed advanced technology have found a place in the Dow's ranks in every era from the Electric Age onward. Branding mattered then, and it matters even more today.
Today, we'll be taking a look at the brand behind Cisco (NASDAQ:CSCO), a Dow component since 2009 and Interbrand's 14th-most valuable global brand of 2012, to better understand how it was built and how it has helped create one of the world's largest companies.
Building brand value
Thanks to a decade's worth of data from the Interbrand consulting firm, we can analyze Cisco's branding successes (or failures) over the past 10 years relative to some more standard corporate measures. We'll also dive into some of Cisco's pivotal public moments to see how those moments helped build a brand to stand the test of time.
Over the last decade, Cisco's market cap has fallen by 33%. However, its annual revenue has grown by 44% in the same time frame, and the company's latest brand value is 72% greater than it was a decade ago. Cisco was briefly the most valuable company on the world at the height of the dot-com boom, but its bubble-fueled gains had to end at some point, and for the past decade Cisco has seen its P/E reduced by 60%, while its net income has grown by 189%. At a barely double-digit P/E of 12.1, Cisco is at its cheapest levels in years. Will its brand strength allow Cisco to rebound over the long run? Let's find out.
Behind the brand
Despite granting Cisco a 7% increase in brand value this year, Interbrand points out that the company's relevance in the switching and router market it dominates may not be able to carry it through an uncertain future. Interbrand goes on to say that "strong and nimble competitors, like the Chinese powerhouse Huawei, will bring new challenges to Cisco's reputation as an innovator -- especially outside the U.S."
With Cisco's widely panned foray into consumer electronics behind it, its current marketing campaign built on its "The Human Network" tagline may need to be refocused on the business customers that have historically been Cisco's main audience. Interbrand also contrasts Cisco's worthwhile efforts to improve its software and services capabilities with its repeated layoffs, which risk damaging employee morale and internal perceptions of Cisco's brand.
One recent defection in particular might worry some Cisco brand-watchers. Earlier this week, my fellow Fool Anders Bylund called Brocade Communications' (NASDAQ:BRCD) big swipe of a key Cisco architect of software-defined networking, or SDN, "a big deal." This technology is both important and hard to get right, so Cisco's remaining SDN wizards had better be up to the task of maintaining the company's image in this emerging field.
Although Cisco's market cap is much smaller today than it was 12 years ago, the company's overall position is much stronger, even though it has faced tough competition from Alcatel-Lucent (UNKNOWN:ALU.DL) and Juniper Networks (NYSE:JNPR) as well as from Huawei. Alcatel has had a difficult time staying competitive with Cisco, leading it to repeated rounds of workforce reductions, but Juniper could soon dip into some deep pockets, as it's currently exploring buyout offers. If that effort falls through, it would leave Cisco in a stronger position to move in on Juniper's larger customers. Huawei's also going to be at a severe disadvantage domestically, as the federal government has pressured potentially lucrative clients to avoid the company for fear of potential snooping by Chinese infiltrators.
Cisco's long period of market leadership has given it the opportunity to develop a wide range of professional certifications, which help enhance its brand standing in the eyes of its target market, much as Oracle's (NYSE:ORCL) range of software-focused certifications have helped create a virtuous circle of credibility and further adoption. If Cisco intends to refocus on its business-networking products, these certifications might be a good base from which to modernize its brand. Cisco's recent tie-up with cloud-computing leader VMware (NYSE:VMW) also gives it the chance to increase its visibility in the highly competitive cloud-computing arena.
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