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Cisco Systems: Poster Child for the Digital Firm? What went wrong for them?

Cisco Systems advertises itself as the company on which the Internet runs, and this San Jose, California, company does dominate the sale of network routers and switching equipment used for Internet infrastructure. Under the leadership of CEO John Chambers, it has been so successful that it even briefly became the most valuable company on earth in early 2000, reaching a valuation of $555 billion and a stock price of more than $80 per share. One key to its success is that Cisco uses information systems and the Internet in every way it can. However, by April 2001 the stock closed below $14, a decline of more than 80 percent, while the company value fell to around $100 billion. What was to blame for this precipitous plunge? What role did Cisco's information systems play? Cisco was founded in 1984 by Stanford University computer scientists looking for an easier and better way to connect different types of computer systems. By 1990 the company was growing at a double-digit rate, which it maintained for 10 years, even surpassing 50 percent in growth during some years. The company claims it now has 85 percent of the Internet switching equipment market. Cisco's growth was based on two main strategies. First, the company outsources much of its production, and second, a significant portion of its growth has been through strategic acquisitions of and investments in other companies, amounting to $20 billion to $30 billion between 1993 and 2000. Cisco's investments were carefully selected as a means of building internal competencies in areas where the market was evolving. In September 2000, six months after the stock market decline began, Cisco announced its sales were growing at an annual rate of 66 percent. Cisco was very proud of its use of the Internet to drive its business and has actively promoted itself as a model for other companies. It is generally believed that "Cisco uses the Web more effectively than any other big company in the world. Period," according to Fortune Magazine. If any company epitomized the digital firm, it was—and still is— Cisco. Cisco began selling its products over the Internet in 1995. In 2000 Cisco was selling about $50 million in products daily via the Web. Customers can use Cisco's Web site, called the Cisco Connection Online, or CCO, to configure, price, route, and submit orders electronically to Cisco. More than half of the orders entered on CCO are sent directly to the supplier, and once the product has been manufactured, it is shipped directly to the customer. Those orders are never touched by Cisco. The result is that the company has reduced its order-to-delivery cycle from six to eight weeks to less than three weeks. Moreover, this has enabled Cisco and its suppliers to manufacture based on actual orders, not on projections, lowering inventory costs for both Cisco and its suppliers, while leaving customers pleased with the speed of fulfillment. In addition, 85 percent of customer support queries are handled through Cisco's Web site, saving the company $600

suppliers. shortfalls in supplies. Four-fifths of employee technical training take place on-line. the firm simply could not sort or read them all. said that it used to take Cisco 14 days to close its books. revenues. Cisco shares a great deal of its own knowledge on its intranet. and monitor sales or other functions the manager is responsible for. This Web site has helped Cisco and its manufacturing partners reduce their inventories by 45 percent. according to Peter Solvik. Cisco even developed what it calls its "virtual close.000 monthly job applications to Cisco come over the Internet. and delayed product deliveries. Executives can constantly analyze performance at all levels of the organization." said Carter. enabling managers to determine which salespeople and regions are not meeting quotas. whereas many corporations believe that most of their knowledge must be guarded. Engineering managers receive e-mail alerts if a big problem occurs that is not solved within one hour. The company's stated goal for admitting many customers. Cisco uses the Internet in many other ways. Cisco's systems also are used to forecast sales. much less select out and consider the most promising of them. and product margins by the minute. according to Carter. One reason may be Cisco's use of its employee intranet. The forecasts primarily are based on past sales and current orders. product margins. according to Chambers. at Cisco it is very low. The company's sales database is updated three times daily. and submit forecasts and inventory information. and distributors to selected portions of its intranet. These forecasts also include information about bookings. Cisco employees use its Web site to help solve the problems. and they are usually reimbursed within 48 hours. Employees use it to enroll in company benefits and file expense reports. giving employees "real-time access to detailed operating data. Cisco claims it has seen a 25 percent increase in customer satisfaction since it established these portals in 1995.million in 2000 alone. saving the company employee time and travel money while enabling employees to receive more training. About 85 percent of 25." he claims. Managers review their employees. "we update our bookings. which is used to purchase supplies. When customers call Cisco with problems." are included. The manager will then call the appropriate customer and offer help. If most came on paper. ." Today. all on-line. and lead times." Now the finance group achieves its close in only a few hours. make reports. Cisco's chief financial officer." Although the employee turnover rate is very high in most technology companies. "a real hindrance. Cisco's CIO and senior vice president. is "to create a relationship where customers can get access to every aspect of their relationship with our company over the intranet or Internet. It has established a business-to-business supply chain extranet called Cisco Manufacturing Connection Online (MCO) for its manufacturers and suppliers. "Daily information about our product backlog. collect information on competitors." Larry Carter. and that triggers decisions throughout Cisco's chain of suppliers. "These tools and data have been invaluable in helping Cisco manage its rapid growth. called the Cisco Employee Connection.

a pivotal field for Cisco. in late spring 2000 as Cisco was planning its 2000–2001 fiscal year to begin in October. "We try to very precisely set expectations [using our virtual close]. On December 4 Chambers again described the perceived slowdown as a Cisco opportunity. Some of these companies. "To not plan to meet that growth is the quickest way to lose customers." However. Cisco continued to thrive a while longer and its management remained absolutely optimistic. Cisco faced a decline of two-thirds in the technology-laden Nasdaq stock market which included a major pull back in telecommunications. Each time Cisco had increased its market share. It started purchasing key components months before they were ordered. By September the company backlog was more than seven weeks with a value of $3. so many in fact that it lacked many parts. Moreover. he called his top sales executives.coms "had money" and "they were buying. The company aggressively hired new staff. and Carter said Cisco expected sales to grow by nearly 60 percent in the current quarter. following its earlier slowdown strategy. Chambers had said the dot. Meanwhile. In November 2000 Cisco's orders for its telecom division reported a sales decline of 10 percent from the previous quarter. "Cisco is actually better off if the stock market stays tough for the next 12 to 18 months. two Cisco manufacturers informed the company that their shipments were slowing. . Although some of these manufacturers were concerned that Cisco was being too expansive. Cisco had continued to aggressively expand even though its competitors slowed their activities or merged with other companies. so they would be available when needed. Michelangelo Volpi. However. resulting in the sharp decline in Cisco's stock. However. Cisco had previously projected telecommunications sales to double in 2000–2001. Cisco's July 29 year end showed a revenue jump of 60 percent from the previous year.. orders were "comfortably" up by more than 70 percent from the previous year. He then met with his senior executives to let them know about his concern over the sudden drop in quarterly sales. did fall 33 percent in two days because Nortel announced slower-than-expected sales. who verified the unexpected numbers. Cisco's sales to newer companies didn't grow at all. just before December 15. Many customers waited as long as 15 weeks for delivery. Also the company lent $600 million interest-free to its contract producers so they could purchase the missing parts. Earlier." This was not true of Cisco." His view was. but the opposite happened. Cisco launched a two-fold strategy to resume filling orders quickly. The group agreed to delay both hiring and inventory building for the next 45 to 60 days.Although the stock market reached its all time high in March 2000 and then started to correct. It received an outpouring of orders. Cisco's chief strategy officer. after Chambers's vaunted virtual close system told him that daily sales were 10 percent below expectation for two weeks. he said. this time proved to be different. including several that had borrowed funds from Cisco. a Cisco rival." Chambers emphasized that Cisco could meet Wall Street projections. Yet according to Chambers." he said. Although the stock for Nortel Networks Corp. said Nortel had fallen prey to management "exuberance. because. During market declines in past years when sales of networking devices slowed (1994 and 1997–98).8 billion. declared bankruptcy. In the summer of 2000 Cisco still believed its situation was very positive. causing massive delays in fulfilling orders.

those companies cancelled the other orders. Cisco's information systems could not account for that situation.000 new staff. "We just didn't know the magnitude." commented Ajay Shah. Between November 2000 and March 2001. It matters less to them if Cisco's numbers look off.5 billion of its swollen inventory. and the stock the end of January 2001. "Can you really sit there and confront a customer and tell him he doesn't know what he's doing with his business? The numbers might suggest you should. Cisco's second quarter ended with sales to young telecom companies down by 40 percent. an associate professor of business administration at the Tuck School of Business and an expert in supply chains. When an order did arrive. "We knew there were multiple orders.000 companies only one year earlier." Shah also noted that his company (and some others ) saw a decline and began to cut back. the company had hired about 5. But Solectron has to watch its own business. facing delays in shipments after ordering." Cisco's forecasting software focused on growth data and ignored such macroeconomic data as debt levels. Management was more concerned about turning away orders than about whether the orders were real. one-third higher than the previous summer. Cisco was focused on what their customers were ordering." said Volpi." M. information had resulted in bad decisions. What went wrong? It was crystal clear the company was suffering from overordering.coms were down by half rather than rising by half as the Cisco's vaunted computer systems had predicted. economic spending. barely used network equipment had come on the market at steep discounts of around 15 cents on the dollar. and so the company was misled by the very systems in which it had so much pride. He said the outsourcing model has "done some wonderful things. On April 16." One explanation was that. Eric Johnson. By April Cisco was selling to only about 150 young telecom companies. many customers began ordering from Cisco and also ordering from two or three other suppliers. interest rates.000 (soon increased to 6. he said. causing the backlog to look greatly larger than it actually was. Misleading.000 temporary workers while restructuring its business. The software was not designed to deal well with declining demand. He went on. down from 3. Moreover. with so many bankruptcies. 2001.000) employees and up to 3. In addition. "People see a shortage and intuitively they forecast higher. said Cisco's outsourcing business model ultimately worked against the company. He did not urge Cisco to do the same. "Salespeople don't want to be caught without supply. Sales to dot. though accurate. a company that produced networking parts for Cisco. Cisco announced it would write off $2." . rapid backlog decline. Some observers expressed their belief that Cisco sales forecasts were way too high because the company suffered from overconfidence after years of remarkable sales growth. resulting in a sudden.6 billion. because. Someone should have said. the bank market. It had relied on past rosy sales and never considered the possibility that sales might actually decline. so they make sure they have supply by forecasting more sales than they expect. No one looked at the macroeconomic factors overshadowing the entire communications industry. but on March 9 Cisco announced it would lay off 5. "These orders can't be sustained. although it was still left with an inventory of $1. the CEO of Solectron Technology Solutions Business Unit.

3. and optical. including commercial. He denies that the company relies exclusively on its software. "We haven't seen any sign of a slowdown. "Do our systems do a great job of telling us where we are today? Yes. leading people to undervalue or ignore human judgment and intuition. that would have cost sales and market share. But. and wireless technologies." and Chambers announced. "We will always err on the side of meeting customer expectations. he added. Cisco replaced this structure with a centralized engineering and marketing organization with 11 technology groups. How successful was Cisco's reliance on information systems and the Internet? Explain their Business Model 2. Internet technology and Cisco's business strategy. Cisco is suffering because of the sudden and unexpected economic deterioration. "I have never been more optimistic about the future of our industry as a whole or of Cisco. Why did Cisco react so slowly to deteriorating economic conditions and declining sales in 2000? What management. enterprise. but they don't tell the future. when the economic troubles were clear to many. that its service provider business was its poorest performer and that wireless networking technology promises rapid sales growth. voice. In November 2000. The old lines of business. Cisco found through this reorganization. network management services. According to him." He admitted that if they had instituted a hiring freeze in the autumn of 2000. focusing on access. Chambers has expressed a very different view. were less useful as Cisco customer interest increasingly cut across multiple product lines. how quickly and effectively can Cisco rebound? Can it maintain its leadership role in networking technology? And is its digital firm strategy a recipe for future successes or pitfalls? Case Study Questions 1.In sum. In late August 2001. according to Peter Solvik. consumer." Only when the virtual close showed the actual sales line crossing under the sales forecast line in mid-December did the company see a problem for the first time. and technology factors influenced the way Cisco responded? Include evidence to support your analysis. core routing. also noting that pausing when sales hit a small decline would have prevented the company from reaching its $19 billion sales mark last year. there would be no layoffs now. organization. and service provider. who was in charge of Cisco's information systems function. What do you think Chambers and Cisco could and should have done differently in 2000 and early 2001? Do you agree or disagree with Chambers's conclusion that the company had to take the steps it did? Why or why not? . Cisco underwent a major reorganization. The reorganization enables Cisco to more closely track which products and technologies are the most and least profitable so that it can focus on them. The question is. Cisco may have overrelied on forecasting technology. Internet switching and services. Volpi said." he said. abandoning its "line of business" organization that had been in place since 1997. Analyze the relationship between information systems.

How are they doing things differently now. Chalk out the performance of the company after the 2001 slowdown. Analyze the current competitive landscape alongwith company’s internal and external environment scan .4.