The Pursuit of Shareholder Value: Cisco’s Transformation from Innovation to Financialization
Authors:   Marie Carpenter is professor of strategy at Institut Mines-Télécom Business School in Paris and vice-president of the Academic-Industry Research Network., Carpenter Marie , Lazonick William ,   William Lazonick is professor of economics emeritus at the University of Massachusetts and president of the Academic-Industry Research Network.
Published: February 2023

Once the global leader in telecommunication systems and the Internet, over the past two decades the United States has fallen behind global competitors, and in particular China, in mobile communication infrastructure—specifically 5G and Internet of Things (IoT). This national failure, with the socioeconomic and geopolitical tensions that it creates, is not due to a lack of US government investment in the knowledge required for the mobility revolution. Nor is it because of a dearth of domestic demand for the equipment, devices, and applications that can make use of this infrastructure. Rather, the problem is the dereliction of key US-based business corporations to take the lead in making the investments in organizational learning required to generate cutting edge communication-infrastructure products. No company in the United States exemplifies this deficiency more than Cisco Systems, the business corporation founded in Silicon Valley in 1984 that had explosive growth in the 1990s to become the foremost global enterprise-networking equipment producer in the Internet revolution. This paper provides in-depth analysis of Cisco’s organizational failure, attributing it ultimately to the company’s turn from innovation in the last decades of 20th century to financialization in the early decades of the 21st century. Since 2001, Cisco’s top management has chosen to allocate corporate cash to open-market share repurchases— aka stock buybacks—for the purpose of giving manipulative boosts to the company stock price rather than make the investments in organizational learning required to become a world leader in communication-infrastructure equipment for the era of 5G and IoT. From October 2001 through October 2022, Cisco spent $152.3 billion—95 percent of its net income over the period—on stock buybacks for the purpose of propping up its stock price. These funds wasted in pursuit of “maximizing shareholder value” were on top of the $55.5 billion that Cisco paid out to shareholders in dividends, representing an additional 35 percent of net income. In this paper, we trace how Cisco grew from a Silicon Valley startup in 1984 to become, through its innovative products, the world leader in enterprise-networking equipment over the next decade and a half. As the company entered the 21st century, building on its dominance of enterprise-networking, Cisco was positioned to upgrade its technological capabilities to become a major infrastructureequipment vendor to service providers. We analyze how and why, when the Internet boom turned to bust in 2001, the organizational structure that enabled Cisco to dominate enterprise networking posed constraints related to manufacturing and marketing on the company’s growth in the more sophisticated infrastructure-equipment segment. We then document how from 2002 Cisco turned from innovation to financialization, as it used its ample profits to do stock buybacks to prop up its stock price. Finally, we ponder the larger policy implications of Cisco’s turn from innovation to financialization for the competitive position of the US information-and-communication technology (ICT) industry in the global economy.