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, 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 ³Cisco 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 was²and still is²Cisco.
route. called the Cisco Employee Connection. or CCO. and submit forecasts and inventory information. Four-fifths of employee technical training take place online. In 2000 Cisco was selling about $50 million in products daily via the Web. make reports.Cisco began selling its products over the Internet in 1995. giving employees ³real-time access to detailed operating data. according to Peter Solvik. suppliers. called the Cisco Connection Online.´ Although the employee turnover rate is very high in most technology companies. not on projections. saving the company employee time and travel money while enabling employees to receive more training. the firm simply could not sort or read them all. much less select out and consider the most promising of them. Those orders are never touched by Cisco. and product margins by the minute.000 monthly job applications to Cisco come over the Internet. according to Chambers. and submit orders electronically to Cisco. Cisco shares a great deal of its own knowledge on its intranet. while leaving customers pleased with the speed of fulfillment. Cisco claims it has seen a 25 percent increase in customer satisfaction since it established these portals in 1995. at Cisco it is very low. whereas many corporations believe that most of their knowledge must be guarded. ³we update our bookings. enabling managers to determine which salespeople and regions are not meeting quotas. About 85 percent of 25. Cisco even developed what it calls its ³virtual close. One reason may be Cisco¶s use of its employee intranet. It has established a business-to-business supply chain extranet called Cisco Manufacturing Connection Online (MCO) for its manufacturers and suppliers. it is shipped directly to the customer. said that it used to take Cisco 14 days to close its books. ³These tools and data have been invaluable in helping Cisco manage its .´ Now the finance group achieves its close in only a few hours. revenues. this has enabled Cisco and its suppliers to manufacture based on actual orders. Customers can use Cisco¶s Web site. More than half of the orders entered on CCO are sent directly to the supplier. Moreover. collect information on competitors. and once the product has been manufactured. and they are usually reimbursed within 48 hours. Engineering managers receive e-mail alerts if a big problem occurs that is not solved within one hour. In addition. The manager will then call the appropriate customer and offer help.´ Today. to configure.´ said Carter. Cisco¶s chief financial officer.´ Larry Carter. and distributors to selected portions of its intranet. When customers call Cisco with problems. is ³to create a relationship where customers can get access to every aspect of their relationship with our company over the intranet or Internet. 85 percent of customer support queries are handled through Cisco¶s Web site. Employees use it to enroll in company benefits and file expense reports. Cisco employees use its Web site to help solve the problems. which is used to purchase supplies. The company¶s sales database is updated three times daily. price. Managers review their employees. all on-line. lowering inventory costs for both Cisco and its suppliers. saving the company $600 million in 2000 alone. The result is that the company has reduced its order-to-delivery cycle from six to eight weeks to less than three weeks. Cisco¶s CIO and senior vice president. This Web site has helped Cisco and its manufacturing partners reduce their inventories by 45 percent. If most came on paper. and monitor sales or other functions the manager is responsible for. The company¶s stated goal for admitting many customers. ³a real hindrance. Cisco uses the Internet in many other ways.
this time proved to be different. resulting in the sharp decline in Cisco¶s stock. Cisco continued to thrive a while longer and its management remained absolutely optimistic. Although some of these manufacturers were concerned that Cisco was being too expansive. Yet according to Chambers. Some of these companies. Cisco¶s sales to newer companies didn¶t grow at all. orders were ³comfortably´ up by more than 70 percent from the previous year. a Cisco rival. including several that had borrowed funds from Cisco. Meanwhile. Cisco launched a two-fold strategy to resume filling orders quickly. Cisco¶s systems also are used to forecast sales. following its earlier slowdown strategy. just before December 15. shortfalls in supplies. In November 2000 Cisco¶s orders for its telecom division reported a sales decline of 10 percent from the previous quarter. and Carter said Cisco expected sales to grow by nearly 60 percent in the current quarter.´ he claims. Cisco¶s chief strategy officer. The forecasts primarily are based on past sales and current orders. Many customers waited as long as 15 weeks for delivery. Moreover. he said. ³Cisco is actually better off if the stock market stays tough for the next 12 to 18 months. Cisco had previously projected telecommunications sales to double in 2000± 2001. It received an outpouring of orders. ³Daily information about our product backlog. did fall 33 percent in two days because Nortel announced slowerthan-expected sales. and lead times. a pivotal field for Cisco. so many in fact that it lacked many parts. causing massive delays in fulfilling orders. In the summer of 2000 Cisco still believed its situation was very positive. Cisco faced a decline of two-thirds in the technologyladen Nasdaq stock market which included a major pull back in telecommunications.´ he said. The company aggressively hired new staff. These forecasts also include information about bookings. However. During market declines in past years when sales of networking devices slowed (1994 and 1997± 98).´ are included. Michelangelo Volpi. 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. Each time Cisco had increased its market share. Although the stock market reached its all time high in March 2000 and then started to correct. after Chambers¶s vaunted virtual close system told him that daily sales were 10 percent below expectation for two weeks. Also the company lent $600 million interest-free to its contract producers so they could purchase the missing parts. he called his top sales executives. It started purchasing key components months before they were ordered. Executives can constantly analyze performance at all levels of the organization. but the opposite happened. Cisco¶s July 29 year end showed a revenue jump of 60 percent from the previous year. two Cisco manufacturers informed the company that their shipments were slowing. However. Although the stock for Nortel Networks Corp. because. .8 billion. said Nortel had fallen prey to management ³exuberance. ³We try to very precisely set expectations [using our virtual close].rapid growth. By September the company backlog was more than seven weeks with a value of $3. The group agreed to delay both hiring and inventory building for the next 45 to 60 days. He then met with his senior executives to let them know about his concern over the sudden drop in quarterly sales.. declared bankruptcy.´ Chambers emphasized that Cisco could meet Wall Street projections.´ This was not true of Cisco. and delayed product deliveries. On December 4 Chambers again described the perceived slowdown as a Cisco opportunity. according to Carter. who verified the unexpected numbers. and that triggers decisions throughout Cisco¶s chain of suppliers. product margins.
interest rates. rapid backlog decline. ³People see a shortage and intuitively they forecast higher. causing the backlog to look greatly larger than it actually was. ³We knew there were multiple orders. Cisco¶s second quarter ended with sales to young telecom companies down by 40 percent. Cisco announced it would write off $2. economic spending.000 new staff. By April Cisco was selling to only about 150 young telecom companies. and the stock market. a company that produced networking parts for Cisco. 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.´ However. Cisco¶s information systems could not account for that situation.5 billion of its swollen inventory. the company had hired about 5.´ commented Ajay Shah.6 billion. and so the company was misled by the very systems in which it had so much pride. in late spring 2000 as Cisco was planning its 2000±2001 fiscal year to begin in October. Chambers had said the dot.´ One explanation was that.coms ³had money´ and ³they were buying.´ His view was.Earlier. But Solectron has to watch its own business.´ said Volpi. barely used network equipment had come on the market at steep discounts of around 15 cents on the dollar. Eric Johnson. He did not urge Cisco to do the same. facing delays in shipments after ordering. He went on. the CEO of Solectron Technology Solutions Business Unit. at the end of January 2001. It had relied on past rosy sales and never considered the possibility that sales might actually decline. No one looked at the macroeconomic factors overshadowing the entire communications industry. In November 2000. resulting in a sudden. ³These orders can¶t be sustained.´ M. What went wrong? It was crystal clear the company was suffering from overordering. In addition. Moreover. ³To not plan to meet that growth is the quickest way to lose customers. those companies cancelled the other orders.000 companies only one year earlier. ³Salespeople don¶t want to be caught without supply.000 (soon increased to 6. so they make sure they have supply by forecasting more sales than they expect. said Cisco¶s outsourcing business model ultimately worked against the company. ³We just didn¶t know the magnitude.´ Cisco¶s forecasting software focused on growth data and ignored such macroeconomic data as debt levels. On April 16. he said. 2001. many customers began ordering from Cisco and also ordering from two or three other suppliers. because. When an order did arrive. Cisco was focused on what their customers were ordering.000 temporary workers while restructuring its business. one-third higher than the previous summer.000) employees and up to 3. but on March 9 Cisco announced it would lay off 5. Sales to dot. down from 3. Someone should have said. He said the outsourcing model has ³done some wonderful things. It matters less to them if Cisco¶s numbers look off. the bank market. leading people to undervalue or ignore human judgment and intuition.´ Shah also noted that his company (and some others ) saw a decline and began to cut back. Misleading. an associate professor of business administration at the Tuck School of Business and an expert in supply chains. Between November 2000 and March 2001. with so many bankruptcies.´ In sum. The software was not designed to deal well with declining demand. though accurate. Management was more concerned about turning away orders than about whether the orders were real. information had resulted in bad decisions. although it was still left with an inventory of $1. when the economic troubles were .coms were down by half rather than rising by half as the Cisco¶s vaunted computer systems had predicted. Cisco may have overrelied on forecasting technology. ³Can 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.
Why did Cisco react so slowly to deteriorating economic conditions and declining sales in 2000? What management. ³I have never been more optimistic about the future of our industry as a whole or of Cisco. Internet switching and services. Analyze the relationship between information systems.´ Only when the virtual close showed the actual sales line crossing under the sales forecast line in midDecember did the company see a problem for the first time. core routing. Cisco replaced this structure with a centralized engineering and marketing organization with 11 technology groups.´ he said. there would be no layoffs now. Cisco found through this reorganization. The old lines of business.clear to many. Analyze the current competitive landscape along-with company¶s internal and external environment scan http://www.com/management-information-systems/case-study-on-information-systemscisco-systems/ . consumer. 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. Cisco is suffering because of the sudden and unexpected economic deterioration. including commercial. that its service provider business was its poorest performer and that wireless networking technology promises rapid sales growth. were less useful as Cisco customer interest increasingly cut across multiple product lines. 3. ³We haven¶t seen any sign of a slowdown. enterprise.mbaknol. and optical.´ He admitted that if they had instituted a hiring freeze in the autumn of 2000. According to him. organization. But. ³We will always err on the side of meeting customer expectations. Chambers has expressed a very different view. focusing on access. Cisco underwent a major reorganization. and service provider. Internet technology and Cisco¶s business strategy. also noting that pausing when sales hit a small decline would have prevented the company from reaching its $19 billion sales mark last year. Chalk out the performance of the company after the 2001 slowdown. 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. and wireless technologies. he added. 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? 4. network management services. Volpi said. according to Peter Solvik. but they don¶t tell the future. The question is. voice. ³Do our systems do a great job of telling us where we are today? Yes. that would have cost sales and market share. In late August 2001.´ and Chambers announced. who was in charge of Cisco¶s information systems function. abandoning its ³line of business´ organization that had been in place since 1997. and technology factors influenced the way Cisco responded? Include evidence to support your analysis. He denies that the company relies exclusively on its software. How are they doing things differently now. How successful was Cisco¶s reliance on information systems and the Internet? Explain their Business Model 2.
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