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HBR case on Cisco Sales and Distribution
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Agenda• Introduction
• Evolution of CISCO
• Channel
• Rating the channels
• Re-engineered channel
• Distribution of VoIP
About Cisco• Leader in switches and router market
• Growth through acquisitions
• Highly reliable, innovative and quality product’s Brand
• Highly regarded for the quality of reseller network
• Products available for all the layers of ISO-OSI model but layer 1
• Price variability high from low end routers to high end routers
Market AnalysisMarkets Market Share Competition
Corporate Network Gear Market 70% Extreme, Foundry
SMB 40% HP, Nortel,3Com, Huawei Technology
Telecommunication Service Providers 5% market share in overall market
25% market share of narrow, $2 billion-$3 billion top end of the market
Nortel, Juniper(market leader in higher end – 30% market share), Siemens, Alcatel, Lucent
Consumer market 40% market share
Doubled sales to nearly $800 mi after acquiring Linksys
NETGEAR, D-Link
Direct
Other Channels22%
78%
Prospecting
Cisco Customers
Cisco made its wide range of products in multiple plant locations worldwide, channels became important staging points before fulfillment to the customers
• Early 90’s indirect sales was responsible for small percentage
• Grew almost 90% by the end of the decade• Emergence of thousands of new companies• Cisco increasingly relied on channel partners• Partners added unique value and it was cost effective• Divide and grow principle• Instituted “value-added-reseller” pyramid• Demand for network gear was enough through box pushing
• 2:1 split between the value of hardware and services
Pre Dot com bubble blast
Value-added reseller pyramid
GOLD
SILVER
PREMIER
42% discount
40% discount
38% discount
The gross margin boils down to 5% -18% across the industry, depending on the product
Minimum 16 ER
Minimum 8 ER
Minimum 3 ER
One Additional CCIE per $10 million in Cisco Business
• Demand of routers and switches reduced. • Reverse trends in value of hardware and software split• Companies with international presence (HP, IBM), and niche
player, solution houses, though small but specialized in regions, technologies and vertical markets were the survivors.
• Cisco’s direct online selling to SMB and SOHO was perceived as a threat by the VARs
• Telecommunication companies entered the networking business causing further problems for other resellers by “router dumping”• Cisco was loosing smaller regional solution provider• Competitors had started exploiting this unhappiness
Post dot-com bubble blast
Channel
Cisco
Linksys
Direct
System Houses
Telecommunication
Value Added Resellers
Direct Marketing resellers
Retailers
2 Tier Distributors
Customers
Consumers
10% sales
25-30%
25-30%
30-35%
<10% sales
Gross Profit Margin 5%-7%
Gross Profit Margin in 2003, 20%
Channel RatingsPost Dot Com Crash
Shift from volume to value
Reward for resellers based on levels of new technology, certification and customer satisfaction
Cisco would work with the reseller during the 6 months “get-well” period
Reduction in the no. of gold, silver and premier-certified partners from 6000 to 3000
All discounts based on meeting “certification” and “specialization”
“value engagement” model bringing resellers early into the selling cycle
Internet one stop solution for SMB and SOHO, discontent of resellers
Agreement of Cisco with SBC communications – discontent of resellers
Channel conflict between carriers and resellers
Rating
Pre Dot Com Crash
Reseller Program Based on sales volumes
Humongous demand for both resellers and carriers
Reseller program successful for indirect sales channel strategy
Cisco Certification requirements for engineering professionals
Quality of relationships with value added resellers
Distribution Model and reseller program suited the demand
Reseller Discounts based on sales volumes achieved
Channel most reseller friendly
Rating
Re-engineered Channel
VOLUME VALUE
Point system for reseller6 months “get well” period for unsatisfactory resellers
Based on specialization, expertise & customer satisfactionAimed to reduce competition among resellersResult and suggestions provided based on analysis
Raised certification requirements
Reduced the number of Gold, Silver and Premier resellers
Discounting policyChanged the discounting policy for 3 tier VARsWould be based on “certification” and “specialization”
Value engagementRenewed signed of commitment towards VARsBring resellers early in selling cycle with Cisco generated lead
Created “playbooks” defining services and effective staffing“Channel MBA” for enterprise sales team
Re-engineered Channel
Top 100 enterprise accounts & about 25 service providers. Global Customized Sales Model. Intense Interface
Nest 125-10000 Customers, with a collaborative channel partnership. High Degree of Interface.
Next 10000-100000 customers with a significant channel activity and marketing support. Medium degree of Interface
Nearly 1 million Small business customers completely channel lead. Low level of Interface, high level of marketing
Nearly 10 million consumer accounts served through retail and/or web, with heavy marketing and promotional support
B
A
E
D
C
COMPLEXITY
SPECIALIZATION
INTERFACE
Re-engineered Channel
VP of Worldwide Service Provider Partners
To show both service provider and channel partner can succeed
Created New Position
Agreement with SBC CommunicationsCisco, SBC and select reseller jointly market Services managed by SBC
Reseller not happy with the agreement
Bundled Internet AccessAnother vendor congruence method
Through Tech Data
Included opportunity for solution provider
AlternativeAlternatives Description Evaluation
Set product boundaries Channel differentiation based on product specification and dimensions
Product differentiation already exists.
Set Market boundaries Channel differentiation based on buying process of end customer
Exists except for Telecommunication service provider and VARs
Promote price convergence Reduction of price difference among channels by pushing the discounts to the end of the purchasing cycle
Value based discounting implemented
Compensate for cost difference Reduction in leakage across channels through cost compensation and value incentive program (penalties/incentives)
Distribution of reward for high qualified and performing channel partners
Distribution of VOIP Products
VOIP technology - Pull in demand from end consumers
Threat to other existing line of products
Expertise of handling networking equipment
Dilemma of channel’s influence on final sale
Avoids channel conflicts-demand for core products increases
No clear calculation / knowledge of margin
Growth rate is high due to improvement in technology
Depend on the incumbent firm such as PBX firms - No expertise of handling new product
Voice channel is more consolidated in market
May lead to channel conflict, demand - core product increase
Individual attention as competition is growing
Uncertainty whether work or not
VOIP products: Infrastructure, IP, Cisco Call Manager and Voice applications
Data VARs
Suggestion: Sales of VOIP products should be through Data VARs.
Voice VARs