Case – Business Strategy

Cisco Systems
Cisco Systems is one of the great recent success stories. Two Stanford University
computer scientists, Leonard Bosack and Sandra Lerner, founded the company in
1984. In the early 1980s, Stanford University had accumulated many separate
computer networks, each using different machines and different electronic
languages to communicate themselves. The problem was that these networks
could not talk to each other. Bosack and Lerner, who were married at the time,
were the managers of separate networks and worked on the problem of hooking
these networks together, partly, so legend has it, in order to be able to send each
other email messages. Their solution was a specialized computer known as a
router that was able to connect different computer systems. Realizing that this
device might have commercial value, they established Cisco and shipped their first
product in 1987. The company went public in 1990 with annual sales of around $70
million. Soon after, Cisco's sales started to increase exponentially as routers
became a critical component of rapidly expanding Internet. By 1999, Cisco had
evolved into the dominant supplier of network equipment for the Internet—
including routers, switches, and hubs -with annual sales in excess of $19 billion,
no debt, and return on invested capital of around 22 percent.
Cisco’s rapid sales growth and high profitability owe much to its product
innovation, which has continued at a rapid pace since the company went public,
but it is also due to the company's aggressive adoption of an e-business
infrastructure. Here too Cisco has been an innovator. This infrastructure has
enabled the company to reap major efficiency gains, while providing its
customers with superior point-of-sales service and after-sales service and support.
Cisco was one of the first companies to move much of its sales effort onto the
Internet. The process began in 1996 when it realized that its traditional sales
infrastructure could not keep up with increasing demand. Rather than hire
additional personnel to manage customer accounts, the company began to
experiment with online sales. It developed a computer program to walk
customers through the process of ordering equipment online. A critical feature of
this program helps customers to order exactly the right mix of equipment,
thereby avoiding any ordering mistakes, such as ordering incompatible
equipment. In 1997, the company sold $500 million worth of equipment online.
By 1999, this figure had ballooned to $10 billion, or 80 percent of its total sales,
making the Company one of the most aggressive adopters of an online sales
approach in the world.
Customers seem to love the automated order processing system, primarily because
it minimizes ordering mistakes and allows for quicker execution of orders. For
example, at Sprint, a major customer, it used to take sixty days from the signing of
a contract to complete a networking project. Now it takes thirty-five to forty-five
days, primarily due to the efficiency of Cisco's online ordering system. Moreover,
Sprint has been able to cut its order processing staff from twenty-one to six,
significantly saving costs. As for Cisco, the company has just 300 service agents
handling all of its customer accounts, compared to the 900 it would need if sales
were not handled online. The difference represents an annual saving of $20
million.
Cisco has also placed its customer support functions online. All routine customer
service functions are now handled online by a computer program that can
translate a customer's fuzzy inquiry into a standard description of a familiar
problem; then it provides the four most likely explanations onscreen, allowing the
customer to avoid blind alleys and time wasted. Since implementing the system in
1996, Cisco's sales have quadrupled, while its engineering support staff has merely
doubled to 800. Without automated sales support, Cisco calculates that it would
need at least 1,000 additional service engineers, which would cost around $75
million. Cisco has also moved to distributing all support software over the Internet
rather than transferring it to disks and mailing it to customers. This has saved it
another $250 million per year in annual operating costs.
Questions
1. What are the sources of competitive advantage at Cisco?
2. How does the implementation of an e-business infrastructure at Cisco help the
company to create value?
3. How secure do you think Cisco's competitive advantage is?
4. In 2000-2002, the telecommunications equipment industry suffered a sharp
contraction in demand Although Cisco's sales continued to expand, hitting $22
billion in 2001, and its return on invested capital fell to just 6.7 percent. In 2002,
revenues fell to under $18.5 billion and profitability shrank to under 6 percent.
On the basis of the case, do you think that Cisco did worse or better than its
rivals? How successful do you think Cisco will be once demand revives? Why?