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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 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

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

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

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

How successful was Cisco's reliance on information systems and the Internet? Explain their Business Model 2. 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. 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? . core routing. focusing on access. and service provider." 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. who was in charge of Cisco's information systems function. Cisco may have overrelied on forecasting technology. He denies that the company relies exclusively on its software. abandoning its "line of business" organization that had been in place since 1997. and technology factors influenced the way Cisco responded? Include evidence to support your analysis. Analyze the relationship between information systems.In sum. enterprise. 3." He admitted that if they had instituted a hiring freeze in the autumn of 2000. "Do our systems do a great job of telling us where we are today? Yes. "I have never been more optimistic about the future of our industry as a whole or of Cisco. but they don't tell the future. network management services. Cisco replaced this structure with a centralized engineering and marketing organization with 11 technology groups. According to him. voice. The question is. Internet switching and services. there would be no layoffs now. consumer. But. "We haven't seen any sign of a slowdown. and wireless technologies. leading people to undervalue or ignore human judgment and intuition. organization. Internet technology and Cisco's business strategy. that its service provider business was its poorest performer and that wireless networking technology promises rapid sales growth. In November 2000. also noting that pausing when sales hit a small decline would have prevented the company from reaching its $19 billion sales mark last year. In late August 2001." and Chambers announced. Cisco found through this reorganization. including commercial. Cisco underwent a major reorganization. were less useful as Cisco customer interest increasingly cut across multiple product lines. "We will always err on the side of meeting customer expectations. Chambers has expressed a very different view. that would have cost sales and market share. Cisco is suffering because of the sudden and unexpected economic deterioration. 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. Why did Cisco react so slowly to deteriorating economic conditions and declining sales in 2000? What management. when the economic troubles were clear to many. according to Peter Solvik. and optical. he added. The old lines of business." he said. Volpi said.

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