Los Jabalis

Cisco Case
Study
A Solution by
Los Jabalis
November 2016
Group 3: Los Jabalis

Cisco's channel evolution an overview

Which changes demanded a channel evolution?
1980s

1995

Start-up phase

How did Cisco respond to these changes?

Focus on direct sales as the product was in the
introduction phase

Focus on indirect sales as Cisco needed to make

Booming internet usage spurs massive
2 growth in the network market including Cisco products available across many distribution channels
to ensure a quick and broad distrubution

2001

1) Raise certification standards for resellers & link

3

Product life-cycle enters maturity stage:

Shift of consumers needs and increasing
competition in the retail

discounts to meeting the certification

2) Shift Value engagement model
3) One-stop shop: hardware and service bundling
4) New partner ventures

Telecom and dot-com crash leads to a

decrease in sales in turn pressuring
Cisco to change the business model

Expansion in the mass consumer market by

acquiring Linksys

Why has there been so much change?

Product demand was limited and focus on direct sales:
Cisco sold to whoever had an application for its technology

Until 1995:
Start-up phase

Direct sales made more than 90% in the beginning but the distribution shifted slowly to indirect channels
Outsource manufacturing and focus on core competencies: product design and development

Booming internet usage spurs massive growth in the network market

High demand for Cisco products (PLC stage = accelerated growth) need for broad availability
Expansion of indirect channels (90% of sales) due to need for increased value proposition,
cost efficiency and a quick and broad distribution to meet tremendously increasing demand

1995-2001:
Accelerated growth
and
Internet boom

Consumers needs shifted from buying hardware and software alone to bundles:
Goal: remain competitive by focusing more on the value provided by its partners than the volume generated

Consequence: Cisco needed to adapt its 3 tier partner program requirements to decrease the number of distributors and
to increase the customers and resellers satisfaction
Increasing competition:
1) Aggressive forward integration of telecommunication companies
Underpricing of gold partners by offering better discounts (45% vs. 42% of Gold partners)
Telecommunications companies develop more capabilities
2) Increasing number of reseller companies to enter the market
Lowering margins of new technology & leading to disaffection and dissatisfaction among resellers in a shrunken market
Telecom and dot-com crash: pressuring Cisco to change the business model
To diversify risk Cisco Internet boom allows Cisco to target customer segments directly:

Cisco pushed direct sales via online direct distribution for end users by serving the SMB &SOHO with low-end equipment

2001-2004:
Post dot-com and
telecom crisis

How have Cisco's channels evolved in the 10 years between 1995 and 2005?
Expansion of indirect sales network (90% of sales)

1995-2001:
Expansion of
indirect sales
network

1. Direct sales (10%), 2. System houses (25-35%), 3. Telecommunications (25-35%), 4. Value added resellers (30-35%),
5. wholesale channel, 6. Home-networking suppliers Linksys (5+6 <10%)
Strong relationship between Cisco and its distributors :
Close collaboration to generate sales for channels 2,3,4,5

1) Raise standards of selection for resellers & link discounts based on certification and specialization requirem
Point system: technology specialization, engineering expertise and customer satisfaction
Capture highly skilled partners that could compete based on value-added solutions
Consequence: decrease of the number of partners (from 6000 to 3000) & impact on the distribution of partners
(gold (+10%) and silver (+5%)increased, premier decreased (-10%))
2) Shift to a value engagement model: better coordination and earlier integration of resellers
Integrate resellers at the presale design stage for a better understanding of partners, their capabilities, challenges and goals

2001-2004:
Focus on value
proposition and not
sales

Development of specific trainings: Channel MBA course and series of playbooks

3) One-stop-shop: hardware and service bundling (2001):

Ease customer shopping experience by consolidating different touchpoints to one

4) New ventures (2001-2003)

Partnering with telecommunication providers: market jointly SBCs managed services
Partnering with Data Tech: offer a bundled ATT-T1 offering
Direct online sales with the end user : Pilot program aimed at selling its product to the SMB and SOHO market
5) Acquisition of Linksys and expansion in the mass consumer market (2003):
Mass market to grow from 800mn to 4bn and Linksys held 39% of consumer retail market share at that time

Possible channel options for Ciscos new VoIP

products
Advantages
Voice

VARS

Data

VARS

Voice channel more consolidated than Data

channel: it is easy to enter this channel as Cisco needs
to partner with a low number of distributors to cover a
broad reach

Disadvantages

Higher margins for resellers : +20% compared to

Data VARS for 2 reasons .
Since Voice channels are more consolidated, distributors
have a higher bargaining power on margins.
Ciscos new product will cannibalize existing voice products,
therefore the higher margins are the only way to attract
Voice distributors

More credibility through the Voice channel for

VoIP products: resellers have more specialized
knowledge on voice technologies in Voice VARS

Potential future agreements to enlarge Ciscos

product portfolio : if Ciscos new VoIP products are
successful, it will be effective to expand, through this
Voice channel, the VoIP line as the channel receives
higher customer acceptance

VoIP technology will increase demand of existing

customers: this channel already has sales experience
and established customer relationships offering potential
for cross-sales

Lack of expertise : lack of expertise in voice technologies to

accurately sell Ciscos new VoIP products

Acquisition of new customers due to cost

advantage passed to shoppers: the consumer will pull
the product

VoIP product will help sustain growth in this

channel: offering a new product allows a smooth shift
away from maturing product categories with declining
demand

Partnership already established: no investment

needed to build relationship with this channel

Relatively low margins compared to Voice VARS:

12%-20%

New distribution channel will modify the current

channel design: need of redesigning the Value-added
resellers (VAR) structure and program could create conflict
with the existing partners

A broad distribution channel, through Voice VARS,

will provide Ciscos products with a wide reach: insuring
that customers wont by the competitors products (Telecoms
VoIP products). Since the market is highly competitive, Cisco
needs to be accessible so as to gain market share.

Possible channel options for Ciscos new VoIP products

Advantages
Both

New VoIP product will be highly

demanded: thus, ubiquitous distribution
availability is needed. Ciscos new VoIP
products will have broader by using both
channels
Possibility to reach different
segments
Distributing the product via both
channels will increase the total
coverage

Disadvantages
Create tension between partners: it
will increase the number of competitors
Channel management complexity
Higher distributor margins: the
distributors margins will be higher than if
Cisco only used Data VARS as their
distribution channel for their VoIP
products.

DATA VARS
Since the success of this new Ciscos product cannot be guaranteed, the
existing Data VARs distribution channel represents the less risky
option, in terms of overall investment and commitment. Hence, the
company maintains a distribution channel that approves Ciscos legitimacy
and does not question its bargaining power. Furthermore, the choice in
favor of Data VARs secures and strengthens the existing relationships
with the distributors, avoiding potential multi-channels conflicts.
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