Figure 4: www.yahoo.finance.com
Companies in the industry tackled massive reorganization schemes, including layoffs and spin-offs, to cope with the crippling combination of sales downturn and debt caused by bankrupt customers defaulting on loans. Overseas markets, particularly China, provide an increasingly lucrative opportunity for expansion. Encouragingly, the 2003 net income for most of the companies shown significantly improved over 2002 net income. However, the prevalence of negative numbers suggests that the industry is still on the road to recovery.
Competitive Strategies in the Industry
The industry exists in four major markets: North America, Latin America, Europe, and the Asia/Pacific Region. Within each of these geographic markets there are four types of customers: large corporations, small/medium businesses, public institutions, and service providers. Each of these customer types desires a different mix of products. The main product segments in the Telecommunications Network Equipment Industry are routers, switches, network software, cable products, services (support and educational), and voice/data integration.
Companies within the industry tend to structure themselves in three ways: independent enterprises, allied with other companies, and as joint ventures and/or subsidiaries. Manufacturing is handled through vertical integration, through vendors, or through outsourcing. Sales can be through the Internet, distributors, or a full sales force. Information systems tend to support the business strategies of the industry’s companies in four main areas: engineering, manufacturing, sales, and businesses processes.
The main industry strategy to date has been differentiation, however new entrants from both other industry and geographic areas are trying to gain market share through an emphasis on lower costs. This strategy may cause headaches for current market leaders; still, telecommunications network equipment is often a large capital expenditure and many large customers place importance upon established, stable companies when they decide where to buy. Innovation is key to the strategy of differentiation. Companies that can provide new products and services, or can provide products and services in a new way that offers increased value to the customer gain an advantage over competitors. Growth drives much of the industry’s expansion into emerging markets both technological and geographical. Alliances and acquisitions allow companies to expand product portfolios and become the end-to-end solution provider that customers desire.
Porter Model Evaluation of Industry Forces
Michael Porter’s Competitive Model analyzes industry structure, typical competitive strategies, and the power structure within the industry in a specific market. The model in figure 6 outlines the Telecommunications Network Equipment Industry in the United States Market, offering a more concentrated look at the environment surrounding the companies and the interactions between rivals, suppliers, and buyers, new entrants, and potential substitute products and services. The Strategic Business Unit identified in this case is Cisco Systems, Inc. and its foremost competitors in the United States market are listed under intra-industry rivalry
The Bargaining Power of Buyers
The bargaining power of buyers generally hinges upon volume. The greater the percentage of a company’s business a customer provides, the more influence that customer has upon the company. Another factor is the nature and degree of competition among companies in the industry.
Although there are multiple companies within the Telecommunications Network Equipment Industry, relatively few of them have large market share and provide the end-to-end product and services portfolio that many buyers seem to prefer. Despite some recent low-price tactics taken by new entrants, the primary strategy of companies within the Telecommunications Network Equipment Industry is differentiation. Most buyers value the stability of an established company when making significant technological investments, and also place importance upon timely, skilled support services. The most successful companies in the industry place great importance upon customer feedback and maintaining good business relationships.
The Bargaining Power of Suppliers
Key providers of products and services can contribute to the competitive posture of companies within an industry. However, due to the large number of suppliers to the Telecommunications Network Equipment Industry, companies can acquire their inputs from a variety of sources. Because the products and services supplied aren’t unique, the suppliers don’t have very much bargaining power. In fact, Cisco Systems gives out awards each year to the suppliers that it feels have provided the best support, and the suppliers thus honored vary from year to year.4 Due to the economic downturn during the last few years, many of the telecommunications networking equipment companies have been struggling to find customers and thus the few more successful companies had a strong bargaining position with suppliers.5 Many system builders also are giving current and potential passive and active components suppliers extra scrutiny as reports persist of failures tied to unreliable parts procured from local sources in Taiwan, China and elsewhere. Cisco, for example, has started a new program that classifies component suppliers into several categories, including preferred and prohibited. Using the guidelines of this ranking system, Cisco tries to leverage its purchasing power to cut component costs and focus its business on fewer suppliers. The highest-level and preferred suppliers are those who feature the broadest offering, global presence and technology leadership. 6
There are no significant unions involved in this sector. Thus the human resources although necessary, especially in the areas of business savvy and technical expertise, are not collectively organized and don’t command group power over the industry’s companies. However, the increasing trend toward outsourcing may increase the bargaining power of suppliers in the future.
Threat of New Entrants
Three main types of new entrants can exist: new companies, existing companies from different industries, and existing companies from geographical regions. One use of the Porter Competitive Model is to identify high entry/exit costs or high switching costs for customers which might deter new entrants.
Possible new entrants to the Telecommunications Network Equipment Industry would be existing telecommunications or computer equipment companies in the United States seeking to expand in new areas. Dell came from this category, selling networking equipment to the “cost conscious small- and medium-sized businesses” to which it was already selling desktop computers and servers. 7 Foreign telecommunications or network equipment companies can also seek to expand into the U.S. market. Such was the case with Alcatel, attracted by the “fat gross profit margins, which can top 70 percent of sales”. 8 Huawei Technologies, the largest telecom equipment manufacturer in China, has indicated strong interest in establishing a significant presence in the U.S. market.9
Threats of Substitute Industries
The products and services provided by the Telecommunications Network Equipment Industry focus on timely information. Substitutes would be video-conferencing, telephone calls, overnight delivery services, and business trips. Each of these tend to take more time and be less flexible than e-mail, websites, electronic message boards, and the other technologically enabled means of communication. While business trips and video-conferencing may result in more personalized contact, they are more expensive in terms of employee time and thus don’t scale well as communications solutions. Video-conferencing technology still needs to grow to be as mature as networking technology.
The two main substitutes that most affect the relationship industry players have with customers are outsourced network management and used equipment sellers. Both of these trends address customers’ desire for cost-cutting alternatives. These trends have been especially prevalent among small and medium businesses, and during the last few years with the downturn in information technology spending.
Conclusions Based on Porter Analysis
The Porter Competitive Model provides a structured evaluation of the Telecommunication Network Equipment Industry. It explores the industry’s environment through the interaction of major competitors, and the influence of buyers and suppliers with industry players. Buyers of large product volumes have significant power. Suppliers, however, have little power due to fierce competition and the large percent of their income that stems from the telecommunications network equipment industry. New entrants and substitutes continue to pose potential threats to current industry leaders. Through a low-cost strategy, foreign companies, startups, and existing companies making an industry shift continually attempt to enter the telecommunications network equipment industry and steal market share. The main substitutes adopted by customers have been outsourced network management and used equipment sellers. Competition within the industry has increased due to these factors.
Globalization of the Industry
The increasing globalization of the telecommunications network equipment industry is directly linked to the increasing importance of global communications in the business world. The Internet in particular provides a far-reaching, cost-effective channel to reach new geographic markets. As more companies desire to sell products and services in distant markets, the demand for telecommunications network equipment grows. Thus companies within the industry have found it vital to do business on a global scale. In 2004, companies based in the United States, including Cisco, Nortel, and Motorola, won contracts worth $2.3 billion with Chinese phone companies.10 The products and services provided by the telecommunications and network equipment industry travel easily across national boundaries, with only minor language changes necessary for success.
Importance of Information Technology to the Industry
Companies competing in the Telecommunications and Network Equipment industry depend upon information technology to enable every major business function in the value chain. The global communications capabilities made possible through IT are vital to these multinational companies to maintain relationships with company departments, customers, suppliers, and partners worldwide. Many competitive advantages within the industry such as greater efficiency, leaner operations through outsourcing, expanded customer service through online applications, and the increased volume of online sales all depend upon effective use of information technology. Furthermore, the increasing numbers of global companies dependent upon information technology provide a rich market for the products provided by the industry.
Section II: Cisco Systems
Cisco Systems Profile
Cisco is the industry leader in data networking, IP Communications, and the fastest-growing company in the enterprise telecommunications marketplace. 11 Now a global giant, legend has it Cisco began as an idea when Sandy Lerner and Len Bozack, both graduate students at Stanford University, desired to solve the inconsistencies between the networks in their separate departments. During their early search for funding, they journeyed to over the Golden Gate Bridge to San Francisco and claim that both Cisco’s name and its company logo were inspired by that trip. Gifted with the right product at the right time, and aided by the efforts of many determined, talented people, Cisco grew. In 1990, the company went public as Cisco Systems, Inc. Today, the company operates worldwide. Even while restructuring due to the market downturn of the last couple years, Cisco earned a net income of $3,578 million for a one-year net income growth of eighty-nine percent.
Don Valentine: former Chairman
Don Valentine’s efforts shaped Cisco Systems, Inc. into the company it is today. As general partner of Sequoia Capital venture fund, he was the company’s sole initial investor and hired many of the formative people in Cisco’s early history, including John Morgridge. He also became the initial chairman of the Cisco board of directors providing a stable influence during the management turmoil of the early years.
John P. Morgridge: Chairman
John Morgridge was hired as Cisco’s Chief Executive Officer in 1988 by Valentine to bring order and unification to the chaotic management team of Cisco. Under his leadership, the company expanded from $5 million in sales to over $1 billion and from 34 employees to over 2,260. In 1990 he took the company public, after restructuring helped Cisco grow out of its early engineer-focused culture. Morgridge, known within Cisco as “Mr. Frugality”, continued the company’s early established tradition of keeping costs low. He was appointed Chairman in 1995 and shares a background in sales with his successor, John T. Chambers.12
John T. Chambers: President and Chief Executive Officer
John Chambers’s sales background has served him well as Chief Executive Officer of Cisco Systems, Inc. His articulate evangelizing promoted networks as the future, with his own company not only a prominent supplier but also an excellent example of implementation. His competitive personality led to Cisco’s principle not to compete in markets unless it believes it can win either the first or second position. Chambers adopted this fundamental tenet of his leadership from former General Electric CEO Jack Welch.13 As CEO of Cisco, John Chambers reinforces the company’s culture continually. His emphasis on customer satisfaction and maintaining Cisco as its own best IT example influence all levels of the company.
Pete Solvik: former CIO
As the Chief Information Officer for Cisco Systems, Inc. Pete Solvik supervised the launch of many of Cisco’s key IT systems including the Client Funded Project,
Enterprise Resource Planning, and Cisco Connection Online systems. Through the implementation of these systems, the role of IT within Cisco expanded from a cost center to an enabler of business strategy tying the company closer to its customers, partners, and suppliers.
In the 2001 expansion of the company’s Information Technology Organization, Brad Boston was appointed as Cisco’s CIO. Peter Solvik continues to lead Cisco’s Internet Capabilities Group.14
Brad Boston: Senior Vice President and CIO
Brad Boston held various executive positions at a variety of companies before becoming CIO of Cisco Systems. This depth of business experience provides a valuable resource to the CIO in understanding the best use of IT to enable Cisco’s business strategies.
According to Boston, the goal of IT today is “leveraging a foundational set of systems across the business to increase productivity.” As senior vice president and CIO of Cisco Systems, Inc. Boston is responsible for the company’s worldwide use of IT, and led the launch of Cisco’s new web site in 2002 to provide increased value to the customer. He is driving Cisco's IT foundation strategy to enable end-to-end business processes and IT efficiencies throughout the organization. 15
Wim Elfrink: Senior Vice President, Customer Advocacy
Sandy Lerner, co-founder of Cisco Systems, Inc. established the customer advocacy focus in the company’s early days. From the beginning, she made sure that Cisco’s engineers listened to the customers believing that this focus was critical to the company’s success.
As the former Chief Customer Officer, Doug Allred persisted in the promotion of customer interests within Cisco. He championed the Oracle ERP system in the early 1990s that decreased order lead time from twelve to three weeks thus increasing customer satisfaction. 16
As current head of Customer Advocacy, Wim Elfrink takes up the charge to accelerate customer success with Cisco network technology and applications that meet business needs. He reports directly to CEO John Chambers, while customer service, product design, and IT groups all report to Customer Advocacy. This organizational structure clearly emphasizes the central role customer satisfaction plays at Cisco Systems.17
Market and Financial Performance
According to John Chambers, Cisco expects a rise in information technology investments in 2004. As the demand for data storage systems equipment, security, and personal computers gains strength, the company’s prospects should improve. As seen in the figure below, although revenue has decreased over the past three years, net income has risen significantly. Following the downturn of the technology sector in 2001, Cisco Systems restructured its business to aid recovery.
Cisco Systems, Inc.
Even as the technology sector begins to regain health, Cisco will not be adding more staff until revenue per employee reaches at least $700,000, and its ultimate goal is to generate $1 billion in revenue per employee, Chambers said. In the previous quarter, Cisco's sales per worker reached $596,000. 18
Competitive Strategy Statement
Cisco Systems focuses its differentiation strategy on three key markets: routing/switching, service providers, and emerging technical markets. The company targeted growth by acquiring network start-ups rather than relying solely on the more traditional industry strategy of cultivating relationships with established companies.19 A recent example is the purchase of Linksys, the leading manufacturer of home networking products, through which Cisco can move into wireless home networking and the consumer marketplace.20 Still, Cisco did not ignore alliances. In 2003, Cisco and AT&T announced their intention to collaborate by aligning their marketing and sales forces to promote the delivery of AT&T services that use Cisco networking technology.21 Further, John Chambers has publicly announced his intention to “partner with Microsoft and other key players in the industry.” 22 In February 2004, Cisco announced a joint product offering of voice-over-IP for mobile service providers with its competitor, Lucent Technologies. This example also highlights Cisco’s strategy of innovation, with regard to both products and services. The company continually seeks out developing technologies and fresh applications with the goal of expanding into new markets and increasing customer satisfaction.
Chambers is particularly enthusiastic regarding virtual network organizations where companies focus on what adds sustainable value and outsource to take advantage of other’s strengths, tying the virtual organization together with a network.23
Significance of Information Systems
According to CEO John Chambers, “Cisco’s use of information technology is one of the key historical success factors of the company.” Cisco defines the mission of IT as a partnership with the business to define, implement, and support leading Internet capabilities in all functions. Specifically, Cisco’s IT department seeks to increase revenue in new markets and channels; increase customer, client, and partner success and satisfaction; and increase efficiency and effectiveness throughout the company. Further IT aspires to serve as Cisco’s first and best customer, while scaling to support the growth of the company to $50 billion in revenue. And the IT department intends to accomplish all of the above cost effectively.
Contributing to the successful use of information systems at Cisco is the extensive functional management team involvement in IT. With an eye toward flexibility and the rapidly shortening product cycle, each business function makes rapid tradeoffs between the costs of IT related decisions and other unit expenses. Although the company manages infrastructure investment centrally, IT employees reside in functional areas and have a dual reporting relationship.
Pete Solvik, former Cisco CIO, points to the IT investment model as “one of three key shifts that made Cisco IT successful.” There are four strategic objectives that comprise Cisco’s IT investment model. The first is the Client Funded Project (CFP) model. In following the CFP model managers make specific trade-offs, weighing business unit costs and benefits against the costs of their IT related decisions. Secondly, all IT activities are measured for value and continual productivity improvements both initially and on an ongoing basis. Thirdly, Cisco aims to minimize IT allocations and achieve consistent global treatment of IT accounting. Finally, Cisco operates with the assumption that the networking and data center infrastructure is, or will be, in place and well run so that business results are obtained quickly from applications investments. Within this last strategic objective lies a directive to the IT department to make sure that the capabilities and capacity of the information technology infrastructure remain ahead of the company’s growth and evolving business needs. 24
Figure 10 : CiscoExpo Belgrade 2002 Opening and Keynote
Strengths and Weaknesses of Cisco
The strong brand name, expertise, and global reach of Cisco Systems have allowed it to collaborate with the International Telecommunication Union (ITU) to provide Internet education and greater access to information technology throughout the developing world. This collaboration includes establishing 20 new Internet Training Centers in Ministries of Communications, or their equivalent, all running the Cisco Networking Academy Program.25 By training people worldwide with their networking equipment, Cisco encourages the demand for networking equipment in general and for their familiar brand in particular.
By offering a wide array of benefits and focusing on the details of workplace satisfaction, Cisco achieved an attrition rate of less than 9 percent, remarkable for Silicon Valley.26 One facet of workplace satisfaction lies in providing employees with information technology tools that allow them to increase productivity and work both more efficiently and more effectively.
Cisco’s strong culture, continually emphasized and championed by CEO John Chambers, is one key to the company’s success. Each employee must carry his or her culture badge at all times while working. This card tangibly emphasizes the commitment of senior management and the company as a whole to the values that have led to their phenomenal success and contains a reminder that the ultimate goal is customer success.
The large number of company acquisitions that allowed Cisco’s rapid growth in multiple emerging markets, also resulted in an unwieldy product development system. Not only did many of the hundreds of products in inventory failed to contribute much to the bottom line, but Cisco was plagued by delivery lapses too. After the dot-com bubble burst in 2001, CEO John Chambers realized the need for reorganization for better control over the product development system.
Big-name customers can be key for investor confidence during periods of economic shakiness, and in this area Cisco has been vulnerable. Another of Chamber’s post-bubble goals directs Cisco’s sales staff to pursue more stable telecommunications customers. 27
With the end of the dot-com growth era in 2001, the trade-offs that Cisco made between growth and efficiency became apparent. To aid recovery, the company laid off a fifth of its workforce and began consolidating and streamlining its far-flung operations. The lack of prior planning for shrinkage necessitated a stressful evolution in Cisco’s corporate culture. 28
Section III: Structured Analysis of Information Systems Use
This section addresses the business strategies that have established and maintained Cisco Systems Inc. as a major player in the Telecommunications Network Equipment Industry. Further, it explores the company’s use of information systems to gain competitive advantage by supporting and enabling those business strategies.
Strategic Option Generator
The Strategic Option Generator identifies strategic opportunities for information systems to enable business processes, and can also be used to evaluate the competitive advantage gained by companies that have successfully used information systems. Analyzing the layers of the model helps identify the combination of factors that enabled the enterprise to gain and maintain a competitive advantage through the utilization of information systems.
The three possible strategic targets are customer, competitor, and supplier. Identifying the primary target helps to understand the focus and logic of a major business strategy that resulted in the successful use of information systems. Through Cisco’s ongoing emphasis on being its own best example of product use it has focused upon targeting the customer. The innovative implementation of this business strategy supported by the very information systems that Cisco touts to its customers, has enabled Chambers to confidently espouse the value of Cisco products and services. For example, the Manufacturing Connection Online allows Cisco to operate as if its suppliers and business partners were internal business divisions, in terms of information flow. This accomplishment allows Chamber’s to advocate the value of virtual network organizations from a position of experience.
Thrust deals with business strategies based on the Porter competitive strategy concepts. Cisco has chosen and maintained differentiation as its primary competitive strategy. Some of the new entrants to the Telecommunications Network Equipment Industry, such as Dell and Huawei, are trying to gain market share with a least-cost strategy. However, Cisco maintains that customers prefer the security of established stable companies with which they can maintain an ongoing relationship. The information content and customer support which Cisco offers translate to customer value by improving the performance of Cisco products.
In addition, Cisco has selected all of the secondary strategy options: innovation, growth, and alliances. With the Cisco culture emphasizing the criticality of flexible change in today’s fast-paced environment, the company constantly looks for emerging technologies and market transitions. Taking advantage of new opportunities means not only innovating products and services, but also business processes. When opportunities were identified, Cisco relied primarily upon acquisitions to achieve significant growth and expand into new markets. It also utilized alliances to quickly position the company in new technological and geographical markets.
Although adopting a previously proven strategy can minimize technical risk, the business risk generally increases when companies follow in the footsteps of their competitors. Generally only large, established companies with a lot of resources can hope to gain significant market share after letting other companies prove that the market is viable. While Cisco is now a fairly large and established global company, it wasn’t that many years ago that it was small. John Chambers believes the days where large companies could enter markets late and use their vast resources to take over a large portion of market share are over. So the company continually looks for expansion opportunities in new market niches. Often the markets are so new that there aren’t any proven paths to follow. Thus Cisco has adopted an offensive strategy, leading in both business strategy and information systems use.
Appropriate users of the new system are identified based on the importance, implications, and benefits of whether the use of information systems lies within the bounds of the company or extends beyond. In identifying the users of the Cisco information system, both the categories of internal use and external provide qualify. The customer focus that pervades Cisco culture led to the establishment of systems extending beyond the boundaries of the company for customer support, like Cisco Connection Online. In addition, the emphasis that Cisco has placed upon being its own best example of product and service use led to highly developed internal information systems, such as the Cisco Employee Connection.