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Cisco Systems case analysis...

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In the early 1980’s a Stanford University couple, Len Bosack and Sandy Lerner invented a multiprotocol router. In 1984 after being rejected by most venture capitalists, they became the founders of one of the most successful companies in modern history in a short period of time. Cisco Systems is now a world leading company in the switches and router market. Cisco manufactured the switches and routers through outsourcing. The company mainly focused on core competencies, which included the product design and development. Major sales channels were indirect sales and distribution through resellers; their innovative idea; its “Value-Added Reseller” (VAR) was the most successful indirect sales channel. Cisco market capitalization was greater than $500 billion in 2000. Cisco’s market coverage followed a model that contemplated approximately five tier customer based on opportunities available. Cisco was known as a company who manufactured highly reliable, innovative, and quality products. The company was highly regarded for the quality of the company’s relationships with the reseller- distributors, and VARs. Cisco products are available for all the layers of ISO-OSI model of communications except for the first layer. The main product line of Cisco switches were the Catalyst series, these products consisted of basic solutions for small businesses to high end solutions for larger enterprises. Prices varied greatly from the low end routers to the high end routers. Cisco uses the high touch approach by system engineers and account manager to generate demand. Cisco has strengthened their sales channels by ways of re-engineering and creating strategic links with their partners. Core corporate networking gear holds greater than 70% for the enterprise account segment and nearly 40% of the SMB or commercial account being the undisputed market with 20 billion in market share. Cisco telecommunications has a market share of 5% share in the overall market with 25% in the top end of the market with a market size of 50 billion. In the

consumer market has the greatest market leader with nearly 40% share and has a market size of 2 billion. High competitors were Extreme and Foundry, HP, Nortel, 3Com, Huawei technology, Juniper, Siemens, Alcatel and Lucent, NETGEAR and D-Link. Cisco has many routes to market the first is the direct channel, with a sales contribution of 10% having the ability to target all customers. The second sales channel is the IT consultant and system house which has a sales contribution of 25-30% targeting corporate customers. The third sales channels are the large telecommunication service providers who have a sales contribution of 25-30% targeting customers of carriers. With little room for expansion during the dot-com bubble, Cisco was a conglomerate that achieved growth through M&A and less through expanding marketing channels. Cisco achieved a lot of cost cutting and streamlining at the end of the dot-com bubble. Through a re-engineering process involving the switching from volume based approach to a value based one, cutting down on resellers, remodeling incentive structures and offering post sales customer services. Cisco has a five tier segmentation of the customer that depended on the opportunity they offer to the company, which helped them to be served in a unique manner as per the requirement of the company. The pyramid model of Cisco Partners program currently only provides partners with incentives to enlarge the sales volume. The major measure of discount level is according to the sales volume. Tier levels such as “Gold”, “Silver“, and “Premier” statuses are awarded to resellers who meet certain sales volumes. With a greater sales volume resellers gain the ability to have higher discounts on Cisco products, the gold status receives 42%, silver 40%, and premier 38%. This was the typical for a company as it increased market share in simplicity, effectively and was goal oriented. Cisco also pushed itself into the adjacent markets by making the go-to-

market pyramid more complex. The existing model however lacks the ability to reward highly qualified channel partners efficiently and fairly. The three-tier pyramid structure only addressed sales and discounts ignoring the service and other value-adding activities that could produce higher margins preventing vicious competition. Prices could be maintained and vendors could expand the market share while maintaining the profit using the three-tier pyramid structure. With entrances of new competitors price wars are unavoidable. Cisco wants to evolve the go-to-market strategy and to implement the customized pyramid model, so that the new strategy does not create inter-channel conflicts. The VoIP market has high growth potential with cost advantages presenting a strong indication of demand to increase due to high channel margins. Cisco’s go-to-market has however resulted in decelerated growth, as there are very small discount of 2% between the currently offered pyramid models. Cisco, prior to Dot-Com bubble burst has a volume based with a number of 6,000 resellers with a CCIE requirements at one per $10 million revenue. Customer incentives were based on the number of units sold by VAR. There was no customer service emphasis rather it was on the hardware and the product that was brought to the customers. Cisco post dot-com bubble burst had a more value based approach with 3,000 resellers at a CCIE requirements at one per $40 million revenue. Incentives were given based on the specialization, expertise and customer satisfaction. Cisco did not focus on the products hardware rather more on the post sales offered. VoIP telephony was a market opportunity that was growing in the internet phone systems market. It was going to be a single network infrastructure that transmitted audio, video and data. This would decrease the maintenance cost of networks. With VoIP has high channel margins along with possibility of increased revenues due to services provided for maintenance. With high

cost advantages for end users, VoIP telephony would definitely be pulled by end users. Although some disadvantages of the VoIP is the already existing better relationships that competitors have with the voice channels. Degraded quality and unreliability of the network is also a lingering issue. VoIP however has some disadvantages; it has greater benefits than disadvantages. The demand for internet based phones systems are increasing due to the cost advantages for end consumers and high channel margins. One motive for Cisco to revamp their existing model was to remove the “box movers” from the distribution channel. Cisco had chosen to remove or cut down the resellers by half to reduce those lacking in sale or value adding expertise. Cisco wanted to also improve the profitability, working capital, inventory and other aspects of the business of channel partners. Cisco can better handle their channel partners’ business model and their customer service parameters. Cisco will also be able to better communicate the company’s trustworthiness in addressing the dealer’s concerns about loss of business in a tough competitive environment. Alternatives available for Cisco are setting product boundaries by channel differentiation that will be characterized by product specifications and dimensions. Product differentiation already exists among Cisco products and since products are not substitutable among themselves, products are quite well differentiated. The second alternative is to set market boundaries through channel differentiation attributed to buying process of end customers. Cisco could produce a direct supply of products to large enterprises or two-tier distributors. The third alternative is for Cisco to promote price convergence, reducing the price differences among channels for the same products by using discounts to the end of purchasing cycle. Currently Cisco only offers a 2% discount at various pyramid levels. This alternative focuses more on volume generated than value generated by channel partner. The fourth alternative is for Cisco to compensate for cost

differences by reduction in leakages across channels through cost compensation and value incentive programs. The existing pyramid model lacked fair distribution of rewards for highly qualified channel partners than box movers. It is recommended that Cisco keep a minimum threshold sales volume level at each level of pyramid. Cisco should also include a VoIP in their product portfolio that will avoid channel conflicts by the sales through data VARs. Best performing channel members should be rewarded at the end of each selling period to avoid price conflicts across channels. Direct sales for the core corporate networking gear market to ensure high service levels by internally trained technical workforce. CCIEs support for small and medium businesses. Cisco should also exploit the internet channel to reach home networking customers to ensure efficient handling of small orders. Cisco has no advantage to engage in a price war with the new competitors such as Huawei China. Cisco needs to introduce new factors to maintain leadership in the industry. Due to high amounts of resellers there was high inter-channel competition. As a result telecommunication companies had decided to enter the networking business therefore increasing the competition’s intensity. The entrance of telecommunication companies entering the networking business resulted in a grey market. To gain customers for the transport business telecommunication companies sold Cisco products at wholesale prices which lead to the accusation of “router dumping” by Cisco resellers. Cisco should focus on improving the design of satisfactory incentives for the resellers in order to better achieve a better coordination. Cisco should shift the volume driven marketing strategy to a value driven one that does not offer the cheapest product but focuses on offering the best solution and value to its customers....