Cisco Systems
Managing The Go To Market Evolution
Cisco Systems
Managing The Go To Market Evolution

Analysis
Company background (Cisco Systems):
Cisco Systems is a world leading company in the switches and router market. Established in 1984 by a Stanford University couple, IT administrators Len Bosack and Sandy Lerner. Ina short period after founding, it became one of the most successful companies in high technology industry. In Cisco, manufacturing of its switches and router was outsourced, the company focused on core competencies: product design and development. Indirect sales and distribution through resellers became the major sales channel in the end of 1990’s; its “Value-Added Reseller” (VAR) was the most successful indirect sales channel strategy at that time. In later 1990s, Cisco had ever been the world’s most valuable company, its market capitalization exceeded $500 billion in 2000, and sales reached $18 billion. With the telecom and dot-com crash in 2001, Cisco’s business was hugely affected; $1 billion loss was reported in 2001. The shrunken market made Cisco’s management completely review and revamp its go-to market strategy.
Market and Products:
Cisco’s major products are switches and routers. A switch is used to connect workstations within a local-area network (LAN). The switch directs data only to the destination for which it is intended, and increases the efficiency of networks by reducing traffic and the number of “collisions” of data headed in opposite directions. Routers are the devices that connect networks to other networks in a wide-area network (WAN). Switches and routers are classified along a layer 1 to layer 7 continuums in technical point of view. Cisco competes on layer 2 onwards in the switches and routers market. With the explosion of the Internet in 1990s, Cisco achieved great success in the high tech industry, from basic connectivity to high-end, multilayer intelligent service switching solutions.
Cisco mainly competed in three big markets: Firstly. Core corporate networking gear market, it was severed for both enterprise accounts and small- and medium-business (SMB) accounts. Secondly, Telecommunication service providers. Cisco provided hardware devices and technical supports to telecommunication service providers. Thirdly, Consumer markets. After acquisition of Linskys, Cisco entered this home networking market.
Issues:
Before the dot-com bubble collapsed, Cisco was a conglomerate that achieved growth less through expanding marketing channels, and more through M&A. This was the industry standard of the time, because the market had a limited room to expand during the dot-com bubble. In the case, Cisco is shown to be a company that achieved a lot of cost cutting and streamlining at the end of the dot-com bubble. Much of this was accomplished through disciplined operations rationalization on many fronts. Cisco, which had agglomerated more than 75 firms since it’s founding, virtually halted its aggressive M&A. The main issue of note in this case is how Cisco, after surviving the dot-com boom and crash that ruined so many of its competitors, can maintain competitive advantage as a streamlined and still-expanding company. With the collapse of the dot-com market and related shrinkage in the high-tech industry, Cisco took a dip in its sales and profits in 2001. Coming back from the recession, Cisco had to manage and evolve its go-to-market strategy and design in keeping with its new business strategy. In terms of this evolution, the case focuses on marketing and management function objectives key to the company’s expansion. Cisco Systems accomplished its management functions by integrating its networked system with hiring practices- many of the company’s skilled and talented employees, most of whom have a high level of education required for the specialized field of networking, are garnered from the internet.
Cisco’s primary issue faced in the case is how to sustain change after the so-called bursting of the tech bubble or the stock market bubble, and how to revamp its route to market strategy. To expand its market in the face of dynamic competitors like IBM and Apple, Cisco faced a situation in which it must expand market channels. Because of its’ technology, Consumers are increasingly well informed, with the advent of internet technology which allows them to gather a great deal of information before making the choice to “hire” one product/service or another, according to their needs. Successful companies are increasingly turning to marketing to find niches spaces in the consumer consciousness in an effort to increase customer reaction by treating them as individuals with specific sets of needs. Company websites may offer specialized services that cover a wide range of possible targets in an effort to induce these more empowered customers to find value, displaying the loyalty that stems from satisfaction. The relationship between the consumer and the business is no longer necessarily determined entirely by the politics and media in this new age of marketing and the internet, which could afford to offer a sort of “one size fits all” package prior to macro-environmental reform initiatives that made the market more competitive and therefore individualized towards people’s needs. Successful and forward-thinking companies in the digital age must now concentrate on building profitable relationships with their customers, just as in any business.
Markets and Competitors:
As I mentioned before, Cisco was mainly competing in three big markets.
Firstly, Corporate networking gear market, including both enterprise accounts and small- and medium-business (SMB) accounts. In this $20 billion corporate networking gear market, Cisco was the market leader with shares of over 70% in the enterprise account segment and about 40% in the SMB segment. In the enterprise accounts, although the competition was aggressive with its major competitors Extreme and Foundry, Cisco was steadily keeping the market leader position base on its technical advantage. The reputation and recognition were established among customers with its technology leadership and product reliability. There were far more competition in the SMB segment from its competitors such as Hewlett-Packard, Nortel, 3Com, and Huawei Technology. Most of the products provided to this market were midrange and lower-end routers. Since the expected fast growth in the future years, this market was very attractive to Cisco. Secondly, Telecommunication service provider market is a huge market with $50 billion. However Cisco only took a 5% share in the overall market. Its products and service were focusing on the $2 billion - $3 billion top end of the market. Cisco faced aggressive competition from Nortel, Juniper, Siemens, Alcatel, and Lucent. Juniper was the market leader with nearly a 30% share. Cisco was currently designing next generation products to seize a bigger position at the higher end. Thirdly, with the M&A of Linskys, Cisco became the market leader in the consumer market; it had doubled sales to about $800 million and took a 40% market share. The competition was still strong from NETGEAR and D-Link. The aggressive competition eroded its margins to barely half the levels of the corporate networking gear business.
Routes to Market:
In overview, Cisco had six channels to sell its switches and router products to the customers. Channel one was the direct channel, which Cisco sold the products to the customers who had an application for its technology and services. Channel one contributed 10% of Cisco’s sales. Channel two was the partnership between Cisco and IT consultants and systems houses such as IBM, Hewlett-Packard and Accenture, in this channel the system houses provided turnkey solutions incorporating Cisco products and services. Channel three consisted of large telecommunications service providers, which installed and maintained voice, video, and data pipes for the customers. Each of channels two and three accounted for around 25% to 30% of Cisco’s sales. Channel four consisted of the value-added resellers (VAR) of Cisco that considered as a unique business model in the industry. The VAR channel focused on networking products and services and contributed most shares of Cisco’s sales around 30% to 35%. Channel 5 served the many dispersed small customers who requiring standardized products from Cisco. In this channel, Cisco delivered products through centralized distributors such as Tech Data, which provided efficient stocking, logistics support, and order fulfillment. By this way, Cisco could reduce the transaction costs effectively. Channel six was focusing on the home-networking market with the acquisition of Linksys. Channel five and six together accounted for less than 10% of Cisco total sales.

VAR Channel:
VAR was one of the most important channels of Cisco. It was based on hardware sales volumes and other criteria, VAR was defined as three-tier structure, which were “Gold”, “Silver” and Premier” status. Each status had different percentage of discount. VARs had to meet sales volume quotas to retain their status as well as technical qualifications. With this business model, Cisco had achieved high share in the switch and router market. However, after the dot-com bubble collapsed, the situation was drastically changed. With the shrunk market demand and more aggressive competition, the weight between the value of hardware and services were reversed. Since the competitors started to provide high technology and quality products into the market, Cisco’s hardware advantage was decreased. Besides, The telecommunications companies also decided to get into the networking business, they resold Cisco’s products and provided networking services and solutions by their own instead of cooperating with VAR of Cisco. The large telecoms even offered higher discount in certain special situations. With the increasing threat of market erosion, Cisco’s management sought channel reengineering. Cisco announced a drastic overhaul of its channel structure. It dropped sales volume requirements entirely and instead implemented a point system that rewarded levels of new technology specialization, engineering expertise, and customer satisfaction levels. This was a transformation from volume to value. With the variety of customers’ needs, specialization and expertise became the necessity to meet the customers’ satisfaction. Under the new criteria, points were awarded for those VARs who had extra specialization requirement met to achieve higher status of three-tier pyramid. In order to work closely with partners and improve the efficiency of business model change, Cisco developed a “channel MBA” course for its enterprise sales teams and created a series of “playbooks” that defined service offerings and their effective staffing. With the effect of channel reengineering, although the number of resellers dropped from 6000 worldwide to about 3000, the sales revenue could still maintain. Cisco also represented a significantly high proportion of an intermediary’s overall revenues.
Internet Channels:
Though Cisco was a pioneer in business-to-business tools for resellers, it attempted to develop direct web sales channel as well. By selling its preconfigured low-end equipment to the SMB and SOHO directly over its website, Cisco could successfully reduce the reseller cost and potentially increase products margin. Cisco contracted with online retailers such as CDW, Insight, PC Connection, and Micro Warehouse in order to expand direct-sell options, in this way, Cisco could attract more customers by offering more choices to them to decide if they preferred to buy from a systems integrator or an online retailer. Expanding in Internet direct selling channel might be reducing its VARs’ sales, but on the other hand, VARs could focus more on their high-end customers and improve their specialized services.
VoIP Telephony:
VoIP telephony market is the new emerging segment in the telecommunication industry; it was expected to grow rapidly from $3.5 billion to $10.5 billion by 2008. Cisco’s IP telephony solutions used a single network infrastructure to transmit voice, data and video communications. This convergence of infrastructure effectively reduced network maintenance cost. With its new video telephony advantage solution of the IP-based video telephony system, Cisco achieved leading position in the market. However, incumbent competitors like Avaya, Nortel, and Siemens quickly entered market. In current years, Cisco’s market share was dropped drastically from 40% to 23%, and lost its market leader position. Since telephony market growth is fast, it’s critical for Cisco to adjust its market strategy to gain back the market shares.

Recommendations
In the corporate networking gear market, Cisco was the undisputed market leader in both enterprise account and SMB account. This segment could be considered as “Cash Cow” in Cisco’s core business. Cisco should adopt “Defense” strategy to maintain the current market shares. In addition, there are three ways to consolidate and improve the Cisco’s core competency. Firstly, Cisco should take the advantage of its technical strength, to continuously invest in its hardware upgrade and technology innovation. In high tech industry, advanced technology and efficient solutions would always sever customers well, and keep the customers’ loyalty. Secondly, channels reengineering had successfully transformed Cisco’s VAR business model from “Volume” to “Value”. Researches should be kept going on to further dig out customer needs. Customized service will be the increasing trend in current industry; professional training could not only benefit the relationship between Cisco and its VARs, but also increase the satisfaction of its end customers. Thirdly, it is important to expand the Internet direct sales channel. With the increasing education level of middle and low-end customers, they would prefer more on the internet purchasing and DIY for their own small or home business. “Network in a box” products can be developed and diversified further to attract more customers.
Cisco was only presented 5% share in telecommunications service provider market. The situation suggests Cisco to take a “Flanking maneuver” which is attack strategy to compete in different two segments. One is the top end market which Cisco currently had a significant 25% share. In order to fully make advantage of its researching and innovation strength, Cisco should invest more in its products designing and development. Timing is one of the most important determinants in this high tech market, keep pushing new and advanced high end telecommunication products to the market will helps Cisco to consolidate its market position and gain more potential share in this $2-$3 billion market. The other segment that Cisco should focus is VoIP Telephony market. Cisco was used to be market leader, however the position was lost due to quick response of its competitors. The market is still huge and the growth rate is high. With the reengineering of its VAR channel, it would be a good choice to combine voice VARs and data VARs together. Expanding is a necessity in this market; the existing VAR resources could potentially attract demand of its networking equipment as well. The unique VAR system with its value added expertise would help Cisco to re-lock its market leader position strategically.
The home networking market is another potential area for Cisco to compete. Regardless of lower margins (30%) compare to its other networking business (65% +), the market is growing at a higher rate. With the acquisition of Linksys, it is important for Cisco to do more branding and penetration into this market. As current market leader with 40% market share, Cisco has an advantageous position to grow its sales rapidly in future years.