Running Head: Cisco Case Analysis
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Implementing Cisco’s ERP Case Analysis
University of Houston-Victoria MGMT 6352-2014FA-24826
November 2014
Cisco Case Analysis
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Table of Contents
Executive Summary
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Case Synopsis
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Strategy Analysis
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Business model and Business Goal
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Major Business Strategies
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IS Strategy: ERP Implementation
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Problems Analysis
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Firm-Based Value Chain Model
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Model Application
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Implementation Opportunity Analysis
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Implementation Effectiveness
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Summary of ERP Implementation at Cisco
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Tangible and Intangible Costs Estimation
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Tangible and Intangible Benefits Estimation
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Conclusions
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References
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Executive Summary
In FY09, Cisco Systems, Inc. coordinated with more than 600 suppliers across more than 34 countries to deliver more than 24.5 million network hardware products. Using Michael Porter’s value chain analysis, the primary and secondary activities of the firm were identified to better understand company’s business processes and where information systems could improve the functions and add value. In 1994, Cisco used an ERP implementation as their strategic information system to achieve operational excellence in preparation for soon to follow growth. While focused on improving operational excellence and driving down costs, Cisco worked to implement their project within a nine month window and $15 million budget.
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Case Synopsis
Founded by two Stanford computer scientists in 1984, Cisco Systems, Inc has become the worldwide leader in Information Technology (IT). Cisco was founded when the two scientists, husband and wife, wanted to email each other from their respective offices located in two different buildings on Stanford’s campus, but were unable to due to technological shortcomings. As a result of solving their challenge, the multi-protocol router was born and so was the inception of Cisco. Today, Cisco produces and transports more the 35,000 components, as well as designing, fabricating, delivering, and managing the lifecycle of approximately 225 hardware product families. Cisco has become one of the largest networking equipment providers. Not only do they provide networking products, but they provide networking services as well. Cisco relies on more than 600 suppliers worldwide to manufacture, test, ship, and recycle products designed by Cisco (Cisco). Although the organization started in San Jose, California, the company now has operations in North America; Latin America; Europe; the Middle East and Africa; and Asia Pacific regions (Datamonitor, ?). In this case, Cisco faces challenges with their UNIX-based software package to support financial, manufacturing, and order entry. Because Cisco had made active acquisitions part of its growth strategy, it has caused the organization to grow faster than their current software could handle. Cisco quickly became the largest customer of the software vendor that supported the application. The current system lacked redundancy, reliability, and maintainability. The company continued to grow and maintained an 80% growth rate. Meanwhile, the system routinely shut-down causing outages. In 1994, the legacy environment failed so dramatically, something had to be done. Cisco determines there is a need to move towards the use of an Enterprise Resource Planning (ERP). The implementation is their Information Systems (IS) strategy to achieve operational excellence. Although the project presented problems of its own, the project team worked towards a quick deadline and expensive budget to prepare Cisco for the growth ahead.
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Strategy Analysis
Business model and Business Goal Cisco Systems, Inc. focuses on transforming how people connect, communicate, and collaborate. According to their company website, they help companies seize the opportunities of tomorrow by proving amazing things can happen when you connect the previously unconnected. Edna Conway, Cisco Senior Director, Advanced Compliance & Social Responsibility, Customer Value Chain Management says “We strive to meet the challenge of managing a socially responsible value chain through continued focus on our key social and environmental impacts. We have moved forward substantially in FY09 and are committed to driving incremental improvement over the long term.” Major Business Strategies Cisco Systems designs, manufactures, and sells Internet Protocol (IP)-based networking and other products related to the communications and IT industry and provides services associated with these products and their use (Datamonitor, 2011). Employing over 70,700 employees, the company recorded revenues of $40,040 million during the financial year ending in July 2010. Cisco’s operations are categorized into two offerings: products and services. Products include routing, switching, advanced technologies, other products, and services. Cisco’s products are designed for enterprises, as well as the home consumer. With Cisco’s products, at home consumers are able to connect different devices in a household, allowing people to share access to printers, storage, video, music, movies, and games. For the enterprise, Cisco’s has a broad portfolio of application networking solutions that enable secure, high performance, reliable delivery of applications within data centers and across WANs to remote and branch office users (Datamonitor, 2011). In addition to these products, the company offers many, many more. On the service side of Cisco’s offerings, the portfolio is just as expansive including technical support services and advanced services.
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IS Strategy: ERP Implementation A strategic information system is information systems used strategically to enhance the competitive advantage of a firm against the competitors. These strategies are always in response to a corporate business initiative or need. In the Cisco case, they use an ERP implementation as their IS strategy to achieve operational excellence. An Enterprise Resource Planning (ERP) is a suite of applications, a database, and a set of inherent processes for consolidating business operations into a single, consistent, computing platform (Kroenke, 2014). ERP systems are used to forecast sales, create manufacturing plans, and schedules to meet those forecasts. Problems Analysis To better understand the problems encountered in Cisco’s business processes and operations, let’s review the primary and secondary activities of the firm’s business using Michael Porter’s value chain model described below.
Firm-Based Value Chain Model In 1985, Michael Porter introduced the firm based value chain model in his book. He suggests that in order to understand where a company’s competitive advantage lies and how to improve operational excellence, you must work to understand the company’s activities through a detailed model; the value chain model. This model helps determine how an organization can add value to their products and services. Porter defines value as the amount of money a customer is willing to pay for a resource, product, or service (Kroenke, 2014). According to Porter, to be effective the organization’s goals, objectives, culture, and activities must be consistent with the organization’s strategy (Kroenke, 2014). Basically, all information systems in the organization must facilitate the organization’s competitive strategy. The model is used to identify an area of opportunity where information systems could enhance its competitive advantage. Within the model, Porter suggests that the organization split its activities into primary activities and support activities. The primary activities are those that relate directly to the production of the organization’s products or services (Kroenke, 2014). They include activities such as inbound logistics, operations, outbound logistics, sales and marketing, and customer service. The support activities are those activities that assist and facilitate the primary activities. They contribute only indirectly to the production, sale, and service of the product. They include
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technology, firm infrastructure, human resources, and procurement. Even these activities have added cost. The model indentifies where and if these activities work together, possible opportunities for improvement to the organization and therefore create a competitive advantage.
Model Application The value chain model for Cisco Systems is shown in Figure 1 below:
Figure 1: Cisco System’s Value Chain from 2009 Corporate Social Responsibility Report
Above you will see in Figure 1, Cisco Systems performs a number of activities, both primary and support. The primary activities include inbound logistics, operations/manufacturing, outbound logistics, sales and marketing, and customer service. These activities are business functions that relate directly to the production of products or services. Cisco’s value chain is demand driven, distributed, global, and collaborative. While focused on improving operational excellence and driving down costs, they balance traditional supply chain goals with a strategic focus on meeting specific customer needs, capturing new market adjacencies, and delivering value to customers faster and more reliably (2009 Social Response). They produce and transport more the 35,000 components, as well as designing, fabricating, delivering, and managing the lifecycle of approximately 225 hardware product families. Cisco relies on more than 600 suppliers worldwide to manufacture, test, ship, and recycle products designed by Cisco (Cisco). They are significantly dependent on their suppliers and due to their outsourcing manufacturing strategies they have limited control on their delivery schedules. If input materials are limited or are experiencing shortages, Cisco is left to source these materials from other sources, often times at a higher price. This may lead to not only a delay in order fulfillment, but an impact to the revenues and margins. When it comes to operations and manufacturing, Cisco focuses on environmental sustainability. They work closely to manage the environmental impacts associated with their products. Everything from reducing water use at manufacturing sites,
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reducing energy use and carbons emitted, Cisco is focused on reducing environmental impacts at every point of the value chain. Cisco is supported by various activities such as procurement, technology, human resources management, and the firm’s infrastructure. On the support side of Cisco the technology or design and planning function is a large portion of the firm’s expenditures. Research and development expenditures were $5.8 billion and $5.3 billion in fiscal years 2011 and 2010, respectively. With the rapid changes in technology and changes in customer’s needs to match those changes, new products are necessary. Therefore, procurement is a vital aspect of the organization’s support activities. Bound by established process for procurement, Cisco shares their Supplier Code of Conduct with all of their suppliers and has set expectations for how they will work together. The company requires evaluations of suppliers, self assessments, and corrective actions and agreed upon solutions to ensure they continue to meet the requirements. The code is organized around precepts of labor, ethics, health and safety, environment, and management systems. With over 70,700 employees, Human Resources play a significant role in the support of the growing organization (Datamonitor). Cisco’s goal of Human Resources is to build a global culture of people and organizational capability to keep a competitive advantage through market transitions (Cisco). The infrastructure of organization includes the general management, finance and accounting, legal and government affairs. Although the organization started in San Jose, California, the company now has operations in North America; Latin America; Europe; the Middle East and Africa; and Asia Pacific regions (Datamonitor). All of these areas require a strong infrastructure to operate effectively. Too long, but no deduction Implementation Opportunity Analysis Cisco has used information technology and systems within various functional areas. Using a Problem Identification Table, it becomes easier to identify problem areas within primary and secondary activities. The table helps identify those areas of opportunity easier than looking at the organization as a whole. Looking at the table below it is clear to see that the UNIX-based Software package has brought about its own issues within the organization.
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Problem Identification Table Primary Activity
Already Has Problems/Needs Affected Decision Level UNIX-based Software Problems: package -Lack of redundancy, Senior Vice President reliability, and Operations/ maintainability with Manufacturing current system -Required workaround -Transaction volume UNIX-based Software Problems: Sales and Marketing package -Lack of redundancy, reliability, and maintainability Support Activity Already has Problems/Needs Affected Decision Level Problems: UNIX-based Software -Too customized, Technology package -System outages
Infrastructure -Financial
Problems: -Lack of redundancy, UNIX-based Software reliability, and package maintainability; -System outages
Cisco has made active acquisitions part of its growth strategy and has made investments in acquiring complementary companies, products, services and technologies. Although this inorganic growth strategy enhances investors’ confidence and broadens the product lines, it caused the organization to grow faster than their current software could handle. Using a UNIXbased software package to support financial, manufacturing, and order entry, Cisco became the largest customer of the software vendor that supported the application. The current system lacked redundancy, reliability, and maintainability. Although the vendor offered an upgraded version, they knew they would still need a more robust system. The company continued to grow and maintained an 80% growth rate. Meanwhile, the system routinely shut-down causing outages. Pete Solvik, the company’s CIO wanted to avoid an ERP solution and planned to let each functional area make arrangements for a new application of their choice. They would have to use common architecture and databases, but he wanted to avoid a “mega-project” like an ERP. The outages continued while the individual groups took their time finding a replacement.
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Eventually, there was an outage so severe it caused a two day shut-down. Cisco knew a new approach was needed and started looking for single integrated replacement of all the applications. Implementation Effectiveness
Summary of ERP Implementation at Cisco The single integrated replacement for all of the applications became the ERP implementation project. Once the board approved the project, CEO Morgridge made it clear to the rest of the organization that the project was a priority. The project became a goal for the organization and they began building an implementation team. With only 2,500 total employees at Cisco at the time, the team grew to 100 members, representing a cross section of the business community. With a tight time line, the team broke into various work groups to push the project along. They used a concept known as “rapid iterative prototyping” for development. The team met in a series of phases called “conference room pilots” (CRP). Although the team hoped to avoid any major software modifications, they soon learned that it would require some pretty substantial changes. In addition to the modifications, the team discovered changes were needed to the Oracle package to handle the after sales support needs.
Tangible and Intangible Costs Estimation With only nine months to complete the project and a budget of $15 million, this project would constitute the single largest capital project ever approved by the company. Cisco allocated 14% of the budget towards headcount, 16% towards software, 32% towards hardware and 38% towards systems integration (Austin, Nolan & Cotteleer, 2002, p.14, Exhibit 3). In addition to the budgeted team, Cisco also had to involve the entire 100-person IT department. They had to start decommitting themselves from other projects to focus on the ERP project for an entire year contributing both tangible and intangible cost. While working on this project, all others would halt. Once they turned on the new system, their on-time ship, shipping on the date, fell from 95% to about 75% (Austin, Nolan, Cotteleer, date?). Their business plummeted as users dealt with a new system. The new system was unstable and went down once a day, due to insufficient hardware. The system was unable to handle the transaction volume, making it difficult to process the load. All of these disrupted the organization’s workflow for at least 90 days while
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they worked to resolve them. The disruptions contributed to both the tangible and intangible cost of the project. They would have had a loss of orders, revenue, morale, and research and development time for other products.
Tangible and Intangible Benefits Estimation Although the project came with its challenges, once they were resolved Cisco would reap the benefits. The ERP would stream-line operations and decrease inefficiencies in communications between various business activities. The company would no longer suffer from the costs associated with “patching” the existing systems. System outages or the corruption of the database could be avoided. Employees who worked on the project would be considered subject matter experts and could help trouble shoot when needed, instead of solely relying on the IT department. There would be employee ownership at every level. Most importantly, less than a year after implementation, the company achieved net sales of approximately $2.2 billion. Three years later, this number increased by 286% to net sales of about $8.5 billion (Austin, Nolan & Cotteleer, date?). Substantial growth wouldn’t have been possible if Cisco continued to experience frequent system outages as they did prior to the ERP implementation. Conclusions I believe that (Comment: Avoid using “I” in the paper) Cisco Systems made a great decision to implement their Enterprise Resource Planning (ERP) system when they did. The suite of applications included a database, and a set of inherent processes for consolidating business operations into a single, consistent, computing platform (Kroenke, 2014). The ERP system would help Cisco forecast sales, create manufacturing plans, and schedules to meet those forecasts. In addition, it would help with the flow of communication amongst the various crossfunctional teams in the organization. The information would become more timely and relevant and consequently lead to an improvement in resource control, organizational planning, operations and decision making for organization. For an improved implementation, I would recommend testing and validating the system with a larger database and truly running the system the way it would operate in the live environment. If Cisco would have tested the system this way, they could have determined
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potential failures and challenges before going live. This may have saved them valuable time and resources. Although the cost of implementing the system was one of the largest in Cisco’s history, the benefits outweighed the cost. Without the implementation, Cisco may not have been able to grow at such an outstanding rate. Without the growth, they wouldn’t have become the worldwide leader in Information Technology.
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References Austin, R., Cotteleer, M., & Nolan, R., (2002) May 6. Cisco Systems, Inc.: Implementing ERP. Harvard Business School Focus Area: Supply Chain, Cisco Systems, Inc. Company Website, Retrieved at http://www.cisco.com/web/about/ac227/csr2010/our-value-chain/index.html Reducing Environmental Impact, Cisco Systems, Inc. Company Website, Retrieved at http://www.cisco.com/web/about/ac227/ac333/the-environment/supply-chain.html http://newsroom.cisco.com/overview Data Monitor (2011), Cisco System, Inc. - Company Profile. Kroenke, D., (2014) Experiencing MIS. New Jersey: Pearson Corporate Social Responsibility Report, 2009, retrieved at http://www.basis.org.bd/csr_example/CISCO%20CSR_09_ValueChain.pdf There are some citation and style problems.
