Flaws & Fix Of Cisco Software Company
What Went Wrong At Cisco
This study is about Cisco, a networking software company, and what it went through in 2001. It is a comparison of the company before and after it went through a supply chain disaster. The company suffered a huge financial loss, but was able to make a progressive comeback in the market as an industry leader.
Overview
In this case study, Cisco, who was initially a midsize company, went through a growth opportunity, became a networking market leader, failed, and then learned to become one of the most successful companies today. Cisco is a California based software company who saw an opportunity to shine in the age of the internet. As a result, Cisco unveiled “virtual close.” A system that allowed managers to have instant access to operating data. With this information, managers were able to manage the expenses and execute strategized operational decisions.
Cisco saw the competitive advantage of virtual close because of its nimble performance. Due to its innovative nature, it was praised as an efficient user of the web and received an award. Although it was a heavy weight contender in the technological advancement, not everyone liked the idea and called the system phony and overrated. The reason some disliked the system was because it did not take into account external factors, such as market growth, effects on the forecast, etc. Nonetheless, Cisco continued to expand exponentially.
Cisco was so successful, that the company couldn’t keep up with manufacturing and delivering some of its products: routers and switches. Because of this, Cisco came up with a strategy: outsource manufacturing. The company entered into long term commitments with vendors and manufacturers. As a result, the inventory flowed smoothly. Cisco shined as the fastest growing company in the world with approximately 44,000 employees and potentially a trillion dollar company. Because of the success, management continued to over forecast sales, which in turn created an inventory buildup. Unfortunately, virtual close was not programmed to understand the input strategy of the mangers of forecasting higher demand than expected. Despite the signs that the supply and demand were not aligned, the executive team made no changes. Manufacturers and suppliers gave feedback, but Cisco continued to rely on its forecasting technology and ignored human judgement and intuition.
On December 15, 2001, Cisco admitted that there were inconsistencies and a flaw in the system. Three weeks later, Cisco began cutting down on expenses which included laying off employees. The damage could have been more severe if Cisco did not have real-time access to the data. Cisco immediately acted to understand discrepancies and found out that the virtual close and forecasting did not include the right economic indicators. Since it was heavily focused on the customer demand, the macroeconomic factors were overshadowed. Cisco took initiatives towards making an intelligent virtual supply, which would have better visibility to all levels of networking industries. This system would allow companies to observe data sent between two companies and also enhance forecasting software for each business unit.
Before & After (Flaws and Fix) of Cisco
Virtual close made a business reporting convenient due to its instantaneous reporting procedure immediately afterwards. “Decision makers need more than quarterly reports; they need daily financial insight” (Larry Carter, 2001). This is exactly what Cisco had in mind to accomplish in the age of the internet. Cisco saw this opportunity in the fast-paced changing network market to tackle unreliable financial information reporting systems. With numerous amount of time-data, refined accounting system, and increased distribution, Cisco unveiled “virtual close”. This allowed companies to expedite book closing within hours, consolidate financial statements on a daily basis, and have monthly, quarterly and annual reporting. Most importantly, it allowed the management team to view real time operating data and enable them to achieve sales targets and strategize daily operations.
As once Neil Bohr Said, “Future is often hard to predict” that is exactly what Cisco’s virtual close failed to do. Virtual close let company look at the current financial state, but did not allow to make the future prediction which is one of the critical aspect of business to see macroeconomic trends, such as rapid decline in the economy. This is where Cisco’s downfall started because it’s system overshadowed external macro factors and made it to believe it’s model. With being such biased towards its technology and blindsided, Cisco continue to perform behind closed doors and was not able to see the market on time before it was late.
Cisco’s comeback to prove a concept of how a damaged highflier can use flump to clean up the mess, but also build a better base. With the worst tech wreck in the company history, once the executive team realized it was no more mere dip, they immediately rethought every aspects of the company- overturning its’ operations, priorities and the company culture. “Process was a dirty word at Cisco, including for the CEO”( John Chambers, 2001). Likewise, Cisco implemented revolutionary changes and implemented a six-point plan, imposed operating discipline, engineers to work only on approved technology, authority to invest by midlevel managers stopped, encouraged teamwork-competition and incentives, holding personnel accountable for 73-company buying binge from 1993 to 2000 for the deal’s financial results.
What is virtual close?
According to Cisco’s CEO John Chambers, in his interview of 1999 with the USA Today, virtual close is an ability to close financial books within a span of time, which could be within an hour of the financial ending period. Not only was it nimble, but it also gave managers the ability to pin-point problems real time and execute actions accordingly.
How did it contribute to Cisco’s problem?
The challenges regarding financial reporting were major hindrance to Cisco’s business. As a result, Cisco accelerated the financial reporting process utilizing the rapidly evolving web. So, to achieve some aggressive goals, such as consolidate financial statements within a day, slashing finance cost by 50%, and transforming a decision making process through the real time data, a revolutionary product “Virtual Close” was developed. Virtual close was not only just a hype but also a doom for the Cisco. It overshadowed the economic indicator and make Cisco believe that the forecast model it was producing was correct, which led to the inventory build-up. As a result Cisco was forced to write off $2.2Billion in debt and stock price drop.
Why is environmental scanning so important to companies?
Environmental scanning is monitoring, evaluating, and disseminating information from the external and internal environment to decision makers within the corporation (Kazmi, 2008). It is important to companies for the following reasons:1) It helps the company improve its ability to work in changing environments2) It alerts organizations of the warning signs before any possible catastrophe hits3) It helps discover qualitative information which assists in strategic decision making4) It helps managers develop the right up-to-date strategy to compete against its rivals
In the case of Cisco, environmental scanning played a big role in making it one of the fastest growing company to potentially losing its business success before and after 2001, respectively. It helped Cisco understand the web better to unveil virtual close, but when the virtual close was no designed to be intuitive and intelligent, unlike human intuition, it lead to the down fall of Cisco. So, understanding environmental scanning can help and hurt at the same time, depending on its utilization.
What take away lessons can be learned from Cisco’s problem?
There were multiple flaws with Cisco’s operations. The virtual close that the company unveiled from the beginning was not encompassing, as Cisco claimed. Unlike human judgment, the system was counterintuitive, a simple input was a simple output. Because it solely relied on the forecast model and ignored environmental scanning warnings, created multiple problems including inventory buildup. After failure, Cisco took initiative to improve its forecasting. It paid a close attention to creating visibility into all levels of networking and updated forecasting model such as ‘Crystal Ball”. Likewise, what we can learn from the Cisco’s problem is that not too rely heavily on the technology, instead paying attention to the market and environment is just enough to see the doom.
How is Cisco doing today?
Cisco is on the right track compared to its downfall in 2001. Since the stock price fall from $82 to $13 in 2001, Cisco has managed to make progress in its business every year. Currently, Cisco is trading at $49 with 2.5% dividend yield every year to its shareholders. Besides better performing finances, it is currently transitioning from hardware based to an integrated hardware and software focused company. In mid 2017, Cisco launched a new intent based networking (IBN) focused around software defined networking. The company is expecting to reshape it’s future networking management roadmap. Cisco currently stands at 444th in Forbes Global 2000 list with a market capital of $221 billion.
Conclusion
Industries, companies, and organizations go through cycles. In each cycle, lessons are learned. Cisco had a phase where it evolved and failed, but recovered on-time. When evolving, Cisco became a renowned name in the software networking market with the introduction of its revolutionary product “virtual close”. Due to its nimble performance, it was praised as an efficient user. Virtual close relied heavily on the forecast model and ignored external macro-economic factors which resulted in wort tech downturn in Cisco’s history.Within a short span, the company was able to realize the problem before its severity. Even though Cisco had multiple opportunities to spot and fix the problem on time, it continued to ignore warnings due to its confidence in virtual close. What Cisco did not realize was its revolutionary product, virtual close, did not make future prediction on critical aspects of macroeconomics. When problem became distinct, it took necessary measures to avoid catastrophe and put Cisco in the path to recovery.
References:
- Carter, L. (2001). Cisco’s Virtual Close. Harvard Business Review, 79(4), 22–23. Retrieved from http://search.ebscohost.com/login.aspx?direct=true&db=bth&AN=4288757&site=ehost-live
- Cope, J. (2001). “Virtual Close” Fails To Work for Cisco. Computerworld, 35(8), 24. Retrieved from http://search.ebscohost.com/login.aspx?direct=true&db=bth&AN=4265521&site=ehost-live
- Kazmi, A. (2008) Strategic Management and Business Policy 3rd Edition, New Delhi, Tata McGraw-Hill Publishing Company Limited.
- Burrows, P. (2003). Cisco’s Comeback. BusinessWeek, (3859), 116–124. Retrieved from http://search.ebscohost.com/login.aspx?direct=true&db=bth&AN=11419430&site=ehost-live
- “Cisco Present Day” n.d., https://en.wikipedia.org/wiki/Cisco_Systems#Present_day
