Jomo Kenyatta University of Agriculture and Technology

Kigali Campus
Management Information Systems
Assignment 1 [30 Marks]
Case Study on Information Systems: Cisco Systems
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
Ciscos 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.

Ciscos 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. Ciscos 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
wasand still isCisco.
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 Ciscos 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 Ciscos Web site, saving the company $600 million in
2000 alone, according to Chambers. Cisco claims it has seen a 25 percent increase in customer satisfaction
since it established these portals in 1995.
Cisco uses the Internet in many other ways. It has established a business-to-business supply chain extranet
called Cisco Manufacturing Connection Online (MCO) for its manufacturers and suppliers, which is used to
purchase supplies, make reports, and submit forecasts and inventory information. This Web site has helped
Cisco and its manufacturing partners reduce their inventories by 45 percent.
Cisco shares a great deal of its own knowledge on its intranet, whereas many corporations believe that most of
their knowledge must be guarded. The companys stated goal for admitting many customers, suppliers, and
distributors to selected portions of its intranet, according to Peter Solvik, Ciscos 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.

Although the employee turnover rate is very high in most technology companies, at Cisco it is very low. One
reason may be Ciscos use of its employee intranet, called the Cisco Employee Connection. Employees use it
to enroll in company benefits and file expense reports, and they are usually reimbursed within 48 hours. Fourfifths of employee technical training take place on-line, saving the company employee time and travel money
while enabling employees to receive more training. Managers review their employees, collect information on
competitors, and monitor sales or other functions the manager is responsible for, all on-line.
The companys sales database is updated three times daily, enabling managers to determine which salespeople
and regions are not meeting quotas. Engineering managers receive e-mail alerts if a big problem occurs that is
not solved within one hour. The manager will then call the appropriate customer and offer help. When
customers call Cisco with problems, Cisco employees use its Web site to help solve the problems. About 85
percent of 25,000 monthly job applications to Cisco come over the Internet. If most came on paper, the firm
simply could not sort or read them all, much less select out and consider the most promising of them.
Cisco even developed what it calls its virtual close. Larry Carter, Ciscos chief financial officer, said that it
used to take Cisco 14 days to close its books, a real hindrance. Now the finance group achieves its close in
only a few hours, giving employees real-time access to detailed operating data. Today, we update our
bookings, revenues, and product margins by the minute, said Carter. These tools and data have been
invaluable in helping Cisco manage its rapid growth. Executives can constantly analyze performance at all
levels of the organization, he claims. Ciscos systems also are used to forecast sales. The forecasts primarily
are based on past sales and current orders. Daily information about our product backlog, product margins, and
lead times, are included, according to Carter, and that triggers decisions throughout Ciscos chain of
suppliers. These forecasts also include information about bookings, shortfalls in supplies, and delayed product
deliveries.
Although the stock market reached its all time high in March 2000 and then started to correct, Cisco continued
to thrive a while longer and its management remained absolutely optimistic. During market declines in past
years when sales of networking devices slowed (1994 and 199798), Cisco had continued to aggressively
expand even though its competitors slowed their activities or merged with other companies. Each time Cisco
had increased its market share.
However, this time proved to be different. Cisco faced a decline of two-thirds in the technology-laden Nasdaq
stock market which included a major pull back in telecommunications, a pivotal field for Cisco. Cisco had
previously projected telecommunications sales to double in 20002001, but the opposite happened, resulting in

the sharp decline in Ciscos stock. In the summer of 2000 Cisco still believed its situation was very positive. It
received an outpouring of orders, so many in fact that it lacked many parts, causing massive delays in fulfilling
orders. Many customers waited as long as 15 weeks for delivery. Cisco launched a two-fold strategy to resume
filling orders quickly. It started purchasing key components months before they were ordered, so they would
be available when needed. Also the company lent $600 million interest-free to its contract producers so they
could purchase the missing parts. Although some of these manufacturers were concerned that Cisco was
being too expansive, Ciscos July 29 year end showed a revenue jump of 60 percent from the previous year. By
September the company backlog was more than seven weeks with a value of $3.8 billion. Although the
stock for Nortel Networks Corp., a Cisco rival, did fall 33 percent in two days because Nortel announced
slower-than-expected sales, Michelangelo Volpi, Ciscos chief strategy officer, said Nortel had fallen prey to
management exuberance. This was not true of Cisco, he said, because, We try to very precisely set
expectations [using our virtual close]. Chambers emphasized that Cisco could meet Wall Street projections.
Meanwhile, two Cisco manufacturers informed the company that their shipments were slowing.
In November 2000 Ciscos orders for its telecom division reported a sales decline of 10 percent from the
previous quarter. Moreover, Ciscos sales to newer companies didnt grow at all. Some of these companies,
including several that had borrowed funds from Cisco, declared bankruptcy. Yet according to Chambers,
orders were comfortably up by more than 70 percent from the previous year, and Carter said Cisco expected
sales to grow by nearly 60 percent in the current quarter. The company aggressively hired new staff. On
December 4 Chambers again described the perceived slowdown as a Cisco opportunity, following its earlier
slowdown strategy. Cisco is actually better off if the stock market stays tough for the next 12 to 18 months,
he said. However, just before December 15, after Chamberss vaunted virtual close system told him that daily
sales were 10 percent below expectation for two weeks, he called his top sales executives, who verified the
unexpected numbers. He then met with his senior executives to let them know about his concern over the
sudden drop in quarterly sales. The group agreed to delay both hiring and inventory building for the next 45 to
60 days.
Earlier, in late spring 2000 as Cisco was planning its 20002001 fiscal year to begin in October, Chambers had
said the dot.coms had money and they were buying. His view was, To not plan to meet that growth is the
quickest way to lose customers. However, at the end of January 2001, Ciscos second quarter ended with sales
to young telecom companies down by 40 percent. Sales to dot.coms were down by half rather than rising by
half as the Ciscos vaunted computer systems had predicted. Between November 2000 and March 2001, the
company had hired about 5,000 new staff, but on March 9 Cisco announced it would lay off 5,000 (soon
increased to

6,000) employees and up to 3,000 temporary workers while restructuring its business. By April Cisco was
selling to only about 150 young telecom companies, down from 3,000 companies only one year earlier. On
April 16, 2001, Cisco announced it would write off $2.5 billion of its swollen inventory, although it was still
left with an inventory of $1.6 billion, one-third higher than the previous summer. In addition, with so many
bankruptcies, barely used network equipment had come on the market at steep discounts of around 15 cents on
the dollar.
What went wrong? It was crystal clear the company was suffering from overordering. Cisco was focused on
what their customers were ordering. No one looked at the macroeconomic factors overshadowing the entire
communications industry. Someone should have said, These orders cant be sustained. One explanation was
that, facing delays in shipments after ordering, many customers began ordering from Cisco and also ordering
from two or three other suppliers, causing the backlog to look greatly larger than it actually was. When an
order did arrive, those companies cancelled the other orders, resulting in a sudden, rapid backlog decline.
Ciscos information systems could not account for that situation, and so the company was misled by the very
systems in which it had so much pride. We knew there were multiple orders, said Volpi. We just didnt
know the magnitude. Ciscos forecasting software focused on growth data and ignored such macroeconomic
data as debt levels, economic spending, interest rates, the bank market, and the stock market. The software was
not designed to deal well with declining demand. Misleading, though accurate, information had resulted in bad
decisions.
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. It had relied on past rosy sales and never
considered the possibility that sales might actually decline. Management was more concerned about turning
away orders than about whether the orders were real. Moreover, People see a shortage and intuitively they
forecast higher, commented Ajay Shah, the CEO of Solectron Technology Solutions Business Unit, a
company that produced networking parts for Cisco. He went on, Salespeople dont want to be caught without
supply, so they make sure they have supply by forecasting more sales than they expect. Shah also noted that
his company (and some others
) saw a decline and began to cut back. He did not urge Cisco to do the same, because, he said, Can you really
sit there and confront a customer and tell him he doesnt know what hes doing with his business? The
numbers might suggest you should. M. Eric Johnson, an associate professor of business administration at
the Tuck School of Business and an expert in supply chains, said Ciscos outsourcing business model
ultimately worked against the company. He said the outsourcing model has done some wonderful things.
But Solectron has to watch its own business. It matters less to them if Ciscos numbers look off.

In sum, Cisco may have overrelied on forecasting technology, leading people to undervalue or ignore human
judgment and intuition. In November 2000, when the economic troubles were clear to many, Volpi said, We
havent seen any sign of a slowdown, and Chambers announced, I have never been more optimistic about the
future of our industry as a whole or of Cisco. 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,
according to Peter Solvik, who was in charge of Ciscos information systems function.
Chambers has expressed a very different view. According to him, Cisco is suffering because of the sudden and
unexpected economic deterioration. He denies that the company relies exclusively on its software. Do our
systems do a great job of telling us where we are today? Yes, but they dont tell the future. He admitted that if
they had instituted a hiring freeze in the autumn of 2000, there would be no layoffs now. But, he added, that
would have cost sales and market share. We will always err on the side of meeting customer expectations, he
said, 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, Cisco underwent a major reorganization, abandoning its line of business organization
that had been in place since 1997. The old lines of business, including commercial, consumer, enterprise, and
service provider, were less useful as Cisco customer interest increasingly cut across multiple product lines.
Cisco replaced this structure with a centralized engineering and marketing organization with 11 technology
groups, focusing on access; core routing; Internet switching and services; network management services; and
optical, voice, and wireless technologies. 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 found through
this reorganization, that its service provider business was its poorest performer and that wireless
networking technology promises rapid sales growth. The question is, 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. Analyze the relationship between information systems, Internet technology and Ciscos business strategy.
How successful was Ciscos reliance on information systems and the Internet? Explain their Business
Model

[10 Marks]

2. Why did Cisco react so slowly to deteriorating economic conditions and declining sales in 2000?
What management, organization, and technology factors influenced the way Cisco responded? Include
evidence to support your analysis.

[10 Marks]

3. What do you think Chambers and Cisco could and should have done differently in 2000 and early
2001? Do you agree or disagree with Chamberss conclusion that the company had to take the steps it did?
Why or why not?

[10 Marks]