|
|
|
|
 |
 |
|
How Product Lifecycle Management makes a difference in your industry: 
AEROSPACE
AUTOMOTIVE
CONSUMER
CONSUMER ELECTRONICS
DEFENSE
EDUCATION
INDUSTRIAL EQUIPMENT
HIGH-TECH ELECTRONICS
LIFE SCIENCES
PLASTICS
SHIPBUILDING
TELECOM
|
|
Value Opportunity Seven: Lowering Product Cost By Kevin P. Hopkins The experience of Cisco, the telecommunications equipment manufacturer, demonstrates that cost-cutting strategies can solidify market position while they improve the bottom line When money is abundant, the winners in any given sector are often the companies that spend the most. But when the money dries up, as it has in Silicon Valley over the past three years, success shifts to the firms that aggressively cut costs without compromising product quality or customer service. To be sure, few tasks facing corporate executives are more challenging than this. Just ask John Chambers, CEO of Cisco, Inc., the world's leader in developing the hardware, like routers, hubs, and switches, that allow voice and data traffic to flow across the Internet and global telecommunications networks. For years, Cisco's financial statements read like a corporate Cinderella story. For example, during the second half of the 1990s, Cisco's revenues grew by more than 50% per year, an astounding accomplishment for a firm that was already selling billions of dollars in goods and services each year. And the future seemed to hold nothing but more growth: from mid-1999 until late 2000, Cisco doubled its work force and was acquiring companies at a rate averaging one every other week. And then, abruptly, the bottom fell out. As Scott Thurm writes in The Wall Street Journal, Cisco's customers simply "stopped buying. Telecommunications companies woke up to discover that they had massively overbuilt--and ordered too much gear from Cisco. Revenue fell for the first time in Cisco's history. By the summer of 2001, sales plunged one-third from their level six months earlier... The stock, already down by half from its bubble-era peak, fell a further 68% in 10 weeks." A New Cost-Cutting Philosophy It was not a pretty picture. Chambers and other Cisco executives faced an immediate need to adopt an unrelenting cost-cutting, hard-choices operating style that, he admits, was largely foreign to the Cisco culture. Cisco, of course, ultimately succeeded in this challenge--and did so without sacrificing its leadership position in any of its major product lines. The fact that it did is testimony to the strength of a business strategy that product development software maker PTC calls its seventh Value Opportunity, "Lowering Product Cost." (As discussed in previous columns, PTC's Product First Roadmap defines paths and strategies that companies can take to create and capture value for their firms.) Cisco first focused on reducing overhead--and that meant eliminating jobs. Cisco had never had a company-wide layoff before. But in the spring of 2001, Chambers handed out pink slips to 8,500 employees and contractors. The company's work force eventually stabilized at 35,000 employees--barely three-quarters of its peak level. Increasing Production Efficiency But a more significant and longer lasting cost savings approach came by rationalizing the company's product development processes. Prior to the economic downtown, the Journal reports, a "total of 44 largely autonomous teams [at Cisco] worked on often-overlapping, even competing projects." When new products or technologies were required, Cisco would merely buy up another company to take on the task rather than assiduously surveying its own, internal capabilities. The result was at best a maze of confusion. Cisco acted quickly to rationalize its design portfolio by pursuing an aggressively standardization campaign aimed at enabling the various Cisco products to use a larger quantity of common parts. In one case, engineers decided to use a single chip to power two of Cisco's simple routers, while simultaneously redesigning three circuit boards, so that the boards could be used in either machine. The result: Cisco now buys larger quantities of a much smaller array of products, and the savings are enormous. According to the Journal, these commonsense changes saved the company $117 per router, or a total of $23 million per year, increasing the firm's profit margins on the products by fully 13 percentage points. And the streamlining did not end there. A variety of similar changes--some relatively easy, some wrenching--pushed savings up to $91.5 million for the fiscal year ending July 26. As a consequence, Cisco has boosted profit levels despite the slowdown in sales. In the third quarter of its fiscal year, just recently reported, the Journal notes that Cisco's gross margin, or profits before operating expenses, climbed to 71%, almost one-tenth higher than the 66% figure posted a year earlier. Protecting Position, Enhancing Value Cutting product cost is difficult. But the key lesson from the Cisco experience is that such efforts, when intelligently and strategically employed, can solidify market position while improving the bottom line. That's a key element of PTC's Product First strategy--using product design to intelligently reduce product costs--and it's one reason that Cisco remains one of Silicon Valley's brightest success stories more than three years after the Internet bubble burst. PTC's Product First Roadmap highlights this and eight other Value Opportunities, which we will continue to explore in upcoming columns. |
|
|
|
|||||||||||
|
Copyright 2003, by The McGraw-Hill Companies, Inc. |
