Things are getting dicey at Cisco Systems Inc. (Nasdaq: CSCO). But it doesn't have to do with the widely cited problem of growing inventories. The inventory situation is only a small symptom of Cisco's current challenges, not a cause. The company is struggling through an enormous transition -- the most important transition in its career.

Cisco's troubles center around three things. First, Juniper Networks Inc. (Nasdaq: JNPR) is taking market share away from Cisco in the core IP router market, the very foundation of Cisco's power in the Internet infrastructure. Second, Cisco is now an enormous company, but for some reason investors still expect it to behave like a small-growth company. Maintaining annual growth in the 30 percent to 40 percent range becomes nearly impossible when your annual revenues are closing in on $40 billion. Third, the enterprise networking growth spurt that fueled Cisco's rise in the last decade is essentially over, and the company must now find an entirely new direction in which to grow. It has already chosen that direction: the telecom carrier market.

The first concern is not shaping up well for Cisco. Juniper continues to be the only router company that can deliver a product that processes IP at OC192 (10 Gbit/s) line speeds. Cisco has simply lost the race in that market -- and catching up is going to be very difficult.

The second issue is more related to the stock price than it is to the company itself. Cisco is in a financially strong position: It has $5.5 billion in cash and continues to churn out decent profits -- $800 million in the last quarter. But accelerating growth is a problem. A company this big simply cannot deliver the growth that investors became accustomed to in its earlier stages.

The third matter is extremely complex and largely up in the air. That is, how does Cisco enter and win the telecom market? The nod should be given to Cisco's operational and managerial excellence. But telecom services are radically different than Fortune 500 data equipment needs. Alcatel SA (NYSE: ALA), Nortel Networks Corp. (NYSE/Toronto: NT), and Lucent Technologies Inc. (NYSE: LU), have been in the market for years -- and they've all shown that it is a difficult place to dominate. Data and market research shows that Nortel's influence is growing, rather than waning, whereas Lucent's position has certainly weakened.

The answer lies where Cisco has always excelled -- acquisitions. Last year the company made its most important purchase to date, Cerent, which is now fueling new sales of optical equipment. But the company is far from done. It needs to make several more blockbuster acquisitions in the optical arena to generate the portfolio that would duplicate its enterprise success.

In other words, the world is watching the wrong part of Cisco: It may very well be that the future success of Cisco is more closely linked to what it's buying than what it's selling.

-- R. Scott Raynovich, executive editor, Light Reading http://www.lightreading.com