Internal Organization Analysis of Cisco - Essay Example

Cover page Introduction In August 2001, Cisco Systems declared its first negative earnings in more than a decade. The companys sales had decreasedby one third and Cisco had to write off inventory worth billions and lay off 8,500 people. To identify the root cause of these devastating drops in sales, we will analyze the company internally before and after the bubble, provide the networking industry analysis using the porter five forces framework, and provide a SWOT analysis for Cisco Systems Company. Once the issues identified, we will proceed with recommendations and implementation of the strategy that we believe will help Cisco goes through the economic downturn and position it to take advantage of the rebound that we hope will happen soon. 2. Analysis 2.1 Internal organization analysis In 1997 Cisco structured its business around three distinct business units: Enterprise, Service Provider and SMB (Small and Medium Business). The organizational structure was designed to address two major new market opportunities at that time: the service provider migration to IP services and the adoption of IP products by small and medium-sized businesses through channel distribution. The change was a clear move from a product-focused structure, which had been Cisco’s organization model since its beginning, to a customer-oriented, solutions-based structure. All of Cisco’s research-and-development, marketing and solution integration would be organized under the three Lines of Business. The Line of Business teams were responsible of defining and implementing both market and operational strategies that enabled them to deliver end-to-end solutions to their target customers. The main objective of the organizational alignment was to increase focus on specific and dedicated customer to provide complete end-to-end solutions, including system integration, integrated software, and network management. The different Line of businesses at the time had nothing in common. The fact that Cisco was making higher profit and phenomenal growth in the networking industry meant Cisco did not have to worry so much on costs since margins were very high. In August-2001, Cisco changed its organizational structure to deal with the changing environment of the industry and customer requirements, and to position the company as a dominant force in the networking industry. Customer segments and product requirements that were distinct in the past had come under the same umbrella. The downturn in the telecom and networking industry across the technology sector in early pushed Cisco to act quickly to minimize costs and reduce overhead. 2.2 Porter Analysis Rivalry among competitive firms Rivalry among competing firms in the telecom (networking) industry is the most powerful of the five competitive forces. There is an ongoing war between the firms competing in the network industry for gaining customer share in order to increase their revenues and profits. Nortel is the main fierce rival of Cisco, offering VOIP to most of the east Asian market. Many Networking industry firms are lowering their prices. Huawei Technology a Chinese base company aggressively pursuing the market in Asia and Europe region, marketing Routers and switches half the price of Cisco, making Huawei an ultimate rival for Cisco. Potential entry of new competitors High barrier can restrict the firms from entering the router industry. In fact, The Router industry is considered as a capital-intensive business, which required a large sum of money to operate efficiently and effectively. However, since Cisco successfully create proprietary standard in market. The new entrants potentially copy Cisco formula and enter the industry. Potential development of substitute products Until now it is highly unlikely that other products or applications can substitute Cisco product. However substituted services can be questionable, like Huawei and Nortel connectivity are pressing hard for total customer solution strategic model, therefore Cisco have to follow the pursuit and start providing global solution fulfillment. Bargaining power of suppliers Semi conductor manufacturing are the main suppliers to Cisco and often Cisco new designs is linked with development done at the semiconductor level. The bargaining power of these suppliers may be sometimes strong and difficult to handle. This is true especially towards the mid life cycle of the products, where it is not any more profitable for the semiconductor manufacturer to provide minimum quantity of devices. Often the discontinuity of certain type of components leads to a redesign of the entire board. Cisco needs to maintain very good relationship with its semiconductor partner. The bulk of the rest of supply is sheet metals for mechanical frames, power supply modules and cabling. I do not thing that these suppliers can have any power over Cisco. Bargaining power of consumers There are many players in the market that provide routers, switchers and networking infrastructure. The switching cost is not important. Therefore Cisco has to face the buyer bargain power that are most of the case price sensitive and will look for cheaper solutions available on the market. 2.3 SWAT Analysis See appendix 1. 3. Problem Identification The 2000 bubble caused lot of problems and issues for the telecom industry. For Cisco, sales dropped significantly, market share started shrinking and the telecom industry started to consolidate. The telecom industry is no more attractive and the comfortable margins and growth achieved before 2000 are out of the question. At Cisco, the line of business structure had served them very well in the past, when customer segments and product requirements were very distinct. After 2000 the differences had blurred between the customer segments. In fact, some Enterprise product can be suited for service providers. Cisco cant have two of its three profit centers as losers; therefore they had to restructure to get synergy among their technology groups and to cope with the economic situation they were facing. Cisco’s decision to restructure the company into technology groups should help cut costs and bolster the company’s underperforming products and services. However it could hurt its ability to maintain and develop customer loyalty. The main issues that Cisco was facing at that time were: Line of business structure cannot be maintained since differences had blurred between customer segments. Cisco needs to align the companys focus around changing customer requirements and emphasize the companys advantages as the communications market consolidates The cost of support of the line of business structure (marketing, sales, engineering, etc.) represents a huge amount of the total sales made per year. In the actual economical context, it is highly likely that Cisco cannot afford to incur that cost and stay competitive in the market. Moving to a centralized structure may have an impact on customer loyalty, as in a centralized structure; a company may be less able to respond to customer demands. 4. Recommendation Cisco must reinvent the organizational chart to save money and at the same time keep the same customer focus or better. Reorganizing around functions will force Cisco to learn a new way to grow in the new economical context. Developing a centralized structure in the actual economic conditions is more suitable for Cisco because it will help them: Eliminate product and resource overlaps and be more efficient Develop team work and collaboration Promote common manufacturing and test platform to realize economies of scale. The main external factors that I believe are the most important drivers for such an organizational change are: Diverging growth rates Increasingly competitive landscape Customers evolving and consolidating Economic value shifting Disruptions emerging Consolidating and converging industries The main internal factors that I believe a centralized organizational structure will strengthen are: Focus / Differentiation Alignment across businesses / Plan Of Record execution Ability to develop new business models & drive transitions quickly Profitability / growth Making decisions The rationale behind a centralized organizational structure is to have a common and unified baseline standard and architecture to introduce new products, to lower the cost of product development and manufacturing. A centralized organization structure will enable Cisco to respond successfully to changing market conditions. With the recession, customers are focusing on cost and Cisco needs to optimize its cost structure to stay competitive, not lose market share and respond to revenue shortfalls from declining growth prospects within the industry. In addition Cisco needs to innovate and fast by putting new type of products on the market. Putting in place a centralized structure does not mean being less focused on customer. Cisco needs to put in place processes to help employees stay more focused on customers, and serve them in a distinctive way. As a solution, CISCO should provide customers low price products without additional services to align to market needs of prices. Besides, CISCO should provide different services packages based on time of response to problems, priorities, guarantee and maintenance support; the higher the service level the closer the engineers to customers. The point is that Cisco needs to reach a state of delivering the best product at reasonable cost while providing customer support. A centralized organization by itself won’t help Cisco reach the planned goal of growth; it needs to be coupled with a much disciplined process that can empower groups in a way that allows them to move across markets with speed and efficiency. In addition, during economic downturn, Cisco needs to be realistic and understand how much did the macro environment cause, and for how much it is self-inflected? And it has to address the self-inflicted part, as It gets ready to come out. 5. Implementation For efficient and effective Implementation of the ambidextrous leadership strategy, Cisco must ensure that various business components are aligned with the explorative and the exploratory components of the ambidextrous leadership strategy. These components include the strategy intent, critical tasks, competencies, structure, control and rewards, culture, and leadership role. There should be a delicate balance between explorative and exploitative business such that the intent on profit maximization does not result in loss of quality customer experience. Cisco should formulate the strategy such that the company reverses its current situation, and maximize profits while keeping the costs of doing business at their minimum. However, minimizing costs and maximizing revenue should not be done at the expense of innovation and growth. The company should use available resources efficiently to minimize on costs, but there should be room for experimentation that could result in better products, maybe at lower costs. Company operations should be a blend of autonomous functionality of departments, with interdependence such that a novel idea in one department is communicated to other departments to curb duplication of tasks. Another key component that Cisco should consider in implementation is competency or availability of necessary skills in the firm; maintaining a balance between operational and entrepreneurial competency. Key players in the firm should have the necessary skills to keep the current system running, and another set of skills that enable them to venture into new businesses. The company should also be structured such that the management and operations system is stable enough to keep the firm formal and operational, but should be flexible to allow for adaptation to market fluctuations. Cisco should adopt an employee recognition system that not only recognizes achievement of one’s target, but also rewards innovation; encouraging both traits in employees. Company culture should be a mix of conservative where employees follow company rules without question, and liberal where innovation and risk taking is encouraged. While the former is more favorable for customer trust due to stability, the latter is even more valuable as it encourages company growth through innovation. Finally, the management at Cisco should practice authoritative rules where employees do as they are told, and mix it with consultations and involving employees in the management process. Centralization and Decentralization As discussed above, adopting an ambidextrous strategy involves practicing both the old system of doing things and the new one, balancing between stagnation and change. To do this, Cisco should have two leadership levels, the overall administration, and management at the department level for each department. There should be a division of labor between these two levels of management such that company directives clearly state the role of each to avoid conflicts of interest. In addition, there should be clear communication channels because with two bosses, as it would be difficult for an employee to discern the roles of each. Efficiency Ambidextrous management involves making the business more efficient and maintain or improve the quality of customer service. At Cisco, this will be achieved by having a centralized system for all shared functions in the company. On the other hand, departments will maintain their autonomy in specialized functions and will be independent of the company management in these functions. 6. Exhibits Exhibit 1 – Cisco SWOT Analysis Internal Strengths Weaknesses 1. Asset Leverage 2. Market share leadership 3. Strong brand equity 4. Strong management team 5. Strong financial position 6. Well planned channel network 7. Technology leadership 1. High pricing 2. Unstable supply chain 3. Inefficient consolidation of bill of materials 4. Duplications across the line of business 5. China counterfeit and particularly Huawei technology as violator of Cisco patents External Opportunities Threats 1. Market of enterprise solutions 2. Convergence of voice and data 3. Voice over Ethernet 4. Innovation 5. Product and service expansion 1. Emergence of new competitor in the Asian market 2. Convergence and consolidation trend 3. Economic slowdown 4. Price reduction 5. Shrinking margins Read More