Principles of Marketing
This study aims to provide information on key marketing concepts and strategies adopted by Cisco Systems Inc. It critically analyzes Cisco's business strategies and practices by describing and evaluating its market orientation along with the impact of its marketing practices on business thereby providing an overview of its competitive advantage and SWOT analysis. One of the most vital and comprehensive marketing tools Ansoff Product-Growth Matrix has been implemented for Cisco, identifying its potential development, segmentation and diversification tactics. Porters Five Forces framework has also been included to derive five forces that determine competitive intensity and attractiveness of markets. Cisco's B2B and B2C segments are identified in conjunction with the marketing mix of product, price, promotion and place to support its marketing strategies in order to align it with its adopted business model.
Cisco Systems Inc, a networking systems developer and manufacturer, was founded by two computer scientists at Stanford University in 1984. Cisco went public in 1990. Computers on local networks had not been able to communicate easily with computers outside that network, until Cisco introduced its first commercial router in 1986. Geographically dispersed networks of computers using different networking protocols, were able to be linked together by Cisco's multi-protocol router. Cisco quickly emerged a global leader in networking hardware, software and services, expanding to over 40,000 employees along with annual revenues of $23.8 billion by the end of 2000, although the economic downturn affected Cisco's 2001 revenues and compelled Cisco to layoff close to 14% of its employees (Massachusetts Institute of Technology 2001).
Cisco Systems, Inc. is the global leader in computer networking for the Internet. Today, networks form an integral part of education, government, business systems and home communications. Cisco hardware, software and service contributions are used to establish the Internet solutions that make complex networks possible, enabling easy access to information anywhere, at any time, by individuals, organizations and countries. Additionally, Cisco has pioneered the utilization of the Internet in its own business practices and provides consulting services based on its experience and expertise to support other organizations around the globe.
Since the company's inception, engineers at Cisco have promptly contributed in the innovation of networking technologies based on Internet Protocol (IP). This tradition of IP innovation endures with the evolution of industry-leading products in the core technologies of switching and routing along with advanced technologies in areas like home networking, security, IP telephony, storage area networking, optical networking, and wireless technology. Cisco offers a broad range of services, including technical support and advanced services in addition to its products. Cisco markets its services and products, both directly through its channel partners as well as through its own sales force, to service providers, commercial businesses , large enterprises and consumers. Social responsibility and customer focus are the core values on which Cisco operates as an organization (Cisco Systems Inc 2004).
Over time, Cisco has proved its ability to successfully capture market transitions. Commencing in 1997 with the certainty that voice and video would all be converged to one, proceeding to the Network of Networks in 2000 and the network becoming the podium for all related web technologies and the base of customer solutions along with the most recent market transition of collaboration and Web 2.0 technologies. At Cisco, product offerings evolve as per market transitions only to best meet customer requirements.
Cisco has emerged from Enterprise and Service Provider solutions to recognizing and approaching customer needs in numerous other segments including Small, Consumer and Commercial. To a large degree, the network has evolved to into a platform for providing one transparent and seamless customer experience. A key aspect of Cisco's culture is connecting and collaborating with others to make the world smaller through innovative technology and use it to enhance life experiences. "That's the 'Human Network' - a place where everyone is connected." (Cisco n.d.)
Jaworski and Kohli (1996) defined market orientation as "the organization wide generation of market intelligence pertaining to current and future customer needs, dissemination of the intelligence across departments, and organization-wide responsiveness to it."
Customer and Market Focus
In recent years, market-driven organizations have begun to evolve as the new industry giants. "The market-driven formula for success in today's marketplace is to produce the right product at the right price at the right time" (Bill Barrett 2001). The right product is the one that solves the customer's problem and delivers the highest value. The right price is what the customer is willing to pay. The right time is when the customer needs the product. Customer needs and priorities are continuously changing. Therefore, an organization must know how customers' wants, needs and values emerge over time to be successful. To gain the desired knowledge of the customer, an organization must focus on the current and prospective markets and customers it serves and put the customer first in every aspect of the organization. "Marketing-orientated companies focus on customer needs" (Jobber 2007: 6).
By including the customer in an organization's mission and goals, market-driven organizations make providing value to the customer a top priority.
This commitment to the customer is evident in Cisco System's mission statement:
"To shape the future of the Internet by creating unprecedented value and opportunity for our customers, employees, investors and ecosystem partners"
Cisco's market focus begins with its emphasis on delivering unprecedented value to its customers, as well as other stakeholders, including employees, investors, and environmental partners. Cisco's mission statement is consistent with market-driven perspective of serving the objectives of all the stakeholders (Bill Barrett 2001).
We believe Cisco's market orientation emphasizes continuous improvement of the processes since information gathering is one of the main characteristics of a market driven organization. As the market demands and customers' requirements change continuously, it is extremely essential for such organizations to gather relevant data in all environmental sectors - competitive, political, cultural, economic, technological, human resources and most importantly the consumer. Thus, it can be said that Cisco's orientation is rightly aligned with its mission statement./p>
The market-driven concept suggests that putting the customer first in all aspects of an organization results in satisfying all stakeholders, which challenges the belief that multiple stakeholders often have conflicting goals. Market-driven organizations use relationship strategies to form partnerships and alliances with stakeholders to create synergy and minimize or eliminate conflicting goals. Cisco Systems has formed strategic alliances with suppliers and customers to deliver a customer-centric, total solutions approach to solving problems, exploiting business opportunity, and creating sustainable competitive advantage for our customers (Bill Barrett 2001). "Cisco and its partners recognized that their products and services, combined with those of suppliers and customers, created a total solution that was more valuable than the sum of the individual pieces" (Bill Barrett 2001).
The most fundamental way in which Cisco views its strategy is around the idea of change, and how change affects customers. Essentially, it believes that market transitions that most affect customers define competitive opportunities. "Change is recognized as endemic and adaptation considered to be the Darwinian condition for survival" (Jobber 2007: 6).
Cisco prepares for market transitions by listening to customers and by taking risks, innovating and investing 3-5 years in advance of a major transition in order to capitalize on it before competitors when the transition is realized in the market (Cisco n.d.). Cisco's vision and innovativeness can be clearly seen from the above statements that promote its connoisseurship in computer networks and the recent developments of the Internet. Its ability to anticipate and prepare for such market transitions is the key plot of its customers and its own success.
"Changing needs present potential market opportunities, which drive the company" (Jobber 2007: 6). Cisco makes every effort in its power and scope to work towards its vision by its innovativeness which has provided enormous potential market opportunities. This approach is by far one of the largest contributors to its success in the Silicon Valley amongst its competitors in the industry. It has led to Cisco being one of the big names among industry giants like Microsoft, Apple, Sun Microsystems etc.
Elements of Market Orientation
"Customers guide where we go and we stay ahead of market shifts so that we are ready to help our customers evolve, as their industry evolves" (Cisco n.d). The customer centric approach is vital to the product development at Cisco. It signifies the presence of market orientation in the organization with respect to the customers' needs and requirements that form the basis of marketing strategies at Cisco.
Some of the most influential market orientation elements are strategies based on providing value for customers, rapid response to negative customer satisfaction, immediate acknowledgement to competitive challenges, and speedy detection of changes in customer product preferences (Pelham 2000). Cisco has been concentrating on the consumer markets as part of their marketing strategies. It transitioned itsLinksyssubsidiary into a dedicated consumer business group, formed a consumer-focused council, and made key changes in the way it builds consumer products. This change has accentuated Cisco's efforts in building brand awareness among customers worldwide.
Cisco has tried to adopt a unified approach to consumer market since it acquired Linksys, a home networking company. It can be seen as a strategy based on creating value for customers and its focus on the much fragmented home networking segment where Cisco had expansion plans due to its belief in home networking being on the cusp of a major market transition.
Cisco - Business Strategies
Reaching Market Adjacencies through a New Management Model
Cisco business strategy for the fiscal year 2009 was to address not less than 30 market adjacencies, and they concentrated mostly in those areas where the networking technology and protocols have not seen widespread adoption (Chambers 2009). Emerging markets like India and China have provided Cisco ample growth opportunities and value for their customers and shareholders. In order to capture these opportunities, Cisco requires to move with speed and thought leadership. To accomplish this, they have a new management model based on Councils and Boards which will collaborate to set a long term direction for their business strategy. The council and board members' decisions will help the organization to ensure that the goals are aligned throughout the company (Chambers 2009).
Capturing Market Transitions
Cisco's success also comes from capitalizing on market transitions before they occur. Their goal is to capture these market transitions faster than their competitors by identifying the technologies which play a crucial role in the future of communications and Information Technology. Acting on this differentiated strategy, they made multiple acquisitions in fiscal 2008 & 2009 (Chambers 2008) including wireless, unified communications and security technologies.
Cisco continues to grow through internal development, acquisitions, their global partnerships, and cross-functional teamwork. One area of their differentiated strategy includes a goal of growing each product category in their advanced technologies to capture $1 billion-plus in annual revenue and the number-one market position (Chambers 2008).
Providing customer satisfaction is one of Cisco's core values. Creating sustainable customer partnerships is a crucial part of Cisco strategy and provides invaluable insight into market transitions. In addition to their technology, Cisco's knowledge of economic development, education, government, healthcare, national security and public safety issues has increased customer trust in Cisco (Chambers 2008). Being close to their customers is they believe the best way to uncover opportunity for the next market transition, long before it becomes obvious to others.
Sustained Differentiation across Customer Segments and Geographies
Cisco's strategy is made upon four pillars:
- To capture customer driven market transitions by identifying, investing and positioning.
- Constant innovation which is enabled through building, buying or collaborating with their partners.
- Cisco differentiated market approach with their ability to bind together both their business architectures and the technology.
- Prioritization of initiatives and cross functional teamwork that drive execution across customer segments, products, geographic theaters and value added services.
Cisco's differentiated strategy has evolved based on their customer requirements to create sustainable differentiation in the industry and better serving of the needs of all their customers (Chambers 2007).
Cisco is continuing to expand their services, product offerings and distribution capabilities to the strategic market. Small and medium sized businesses are increasingly taking on networking technology as they realize efficiencies from their investments in Cisco's products. With the use of efficient networking hardware and software products, SME's have discovered new ways to work effectively and efficiently (Chambers 2007).
From a geographic perspective, Cisco was pleased with the strong and balanced performance they achieved in their four largest theaters. These include European Markets, United States and Canada, Emerging Markets and Asia Pacific. Perhaps Cisco's greatest geographic success of fiscal 2007 was their Emerging Markets Theater, where their revenue grew by 39 percent on a yearly basis (Chambers 2007). Cisco believes that its business processes and collaborative approach to their emerging markets sector have significantly contributed to its growth.
Cisco Channel Strategy
Cisco is partnering with best in class providers to ensure that their customers receive the highest standard of support and the solutions for its products (Cisco 2009). They consider their partners as an extension of Cisco and their partnerships are truly based on long term commitments and mutual benefits. Cisco is creating market growth through their direct investments, in conjunction with the investment in partnerships which allows them to expand their knowledge, visibility and experience in new technologies.
Cisco's strategy is to actively invest in all the major technology segments on a global basis. As with acquisitions, all the investment targets are thoroughly examined and analyzed for both their business and technology. Below are the Cisco acquisitions for the fiscal year 2009 (Cisco 2009).
- Set-Top Box Business of DVN (Holdings) Ltd.-November 2, 2009
DVN has major operations in China and they are the market leader in digital cable solutions. DVN shares Cisco's vision of performance, scalable and services-rich cable interactive platform extending into every home.Market opportunity for Cisco with this acquisition is cabling solutions.
- ScanSafe, Inc.-October 27, 2009
The company ScanSafe is a market leader of software services and they provide web security solutions for global enterprises as well as small businesses. By this acquisition Cisco can lead as provider of on-premise content security and their market opportunity from this acquisition turns out to be network security.
- Starent Networks, Corp.-October 13, 2009
Starent Networks is a leading supplier of IP based mobile infrastructure solutions, targeting mobile and converged carriers. According to Cisco there is an active investment in this market by the service provider, since the global mobile data traffic is expected to double every year. The market opportunity for Cisco with this acquisition is mobility.
- Tandberg-October 1, 2009
Tandberg is a global leader in video communications. They have a broad range of world class video endpoint and network infrastructure solutions. So with this acquisition, Cisco will expand its collaboration to offer more solutions to a number of customers further accelerating market adoption globally.
- Tidal Software, Inc.-April 9, 2009
Tidal Software is the creator of intelligent application management and automation solutions. This acquisition will advance Cisco's data center strategy by enhancing product and service delivery offerings.
- Pure Digital Technologies Inc.-March 19, 2009
Pure Digital, are creators of the best-selling Flip Video brand. They are pioneers in developing consumer friendly video solutions and with this acquisition Cisco can expand in the media enabled home solutions segment and capture the consumer market transition to visual networking (Hooper 2009).
- Richards-Zeta Building Intelligence, Inc.-January 27, 2009
Richards-Zeta Building Intelligence Inc, they are leading provider of intelligent middleware technology that enables businesses to integrate building infrastructure and information technology (IT) applications over a common Internet Protocol (IP) network, resulting in improved efficiencies, greater energy savings and a reduced carbon footprint. Cisco's market opportunity with this acquisition is physical network security.
The Next Market Segmentation for Cisco
Cisco has been targeting towards getting a two digit sales growth from the telecommunication sector for the year 2009. Cisco is a market leader in the telecommunication sector and they are very optimistic to realize the target. For Cisco, telecommunication sector is one of the massive market segmentations for their products, especially in the IP technology. Cisco launches 2 to 3 solutions periodically for their technology which consists of updates or some added features as extensions of their current products (Yulyanto 2009).
Cisco Key Success Factor
After only a few years of its foundation, Cisco became a powerhouse in network technology. It was largely unfamiliar to the average consumer until the dot-com explosion, which resulted in a large customer base, such that it became worthwhile to reach potential decision-makers in a variety of ways. The arrival of the Internet as a ubiquitous part of our lives meant that increasing numbers of small businesses and average consumers rapidly became a part of Cisco's customer base. Both market segments contribute to the addition of extra computers, whether for new employees or for family members who want to surf the web simultaneously, which has driven the demand for simpler networking products that even a non-techie can set up. In fact, sales to small and medium businesses accounted for approximately 20 to 30 percent of Cisco's US$ 18.878 billion in revenue that ended in July 2003 (Cook 2004). While the late 1990s and early 2000s saw an explosion in large computer networks as companies upgraded their infrastructures or simply set them up for the first time, the next several years likely saw a huge jump in small networks, thanks to the ability of Wi-Fi to share a single broadband connection with several computers without the need to drill holes or run Ethernet cables (Cook 2004).
The Impact, Positive and Negative, of the Organization's Marketing Mix
Marketing mix is defined as "the tactical tools that the marketers use to implement their strategies mixing the controllableelementsof aproduct's marketing plan which arecommonly termed as 4P's: product,price, place and promotion" (Kotler 2008: 202). These elements are adjusted until a balanced proportionis found thatservestheneedsof the customerswhile generatingoptimumincome.
Product can be defined as "anything that can be offered to a market for attention, acquisition, use or consumption that might satisfy a want or need. It includes physical objects, services, persons, places, organizations and ideas" (Kotler et al. 2008: 539).
Ciscooffers a wide range ofproductsand networking solutions designed for enterprises and small businesses across a variety of industries. They are also addressing their customer requirements in many other segments including commercial and small business. The network has become a platform for providing a transparent customer experience (Insight 2009).
Managing the Product Mix - Positioning and Repositioning
A well planned and executed brand repositioning helps Cisco to increase their brand value along with sales. Cisco is very closely aligned with their corporate strategy, regular investments in their brand positioning or repositioning to always renew the brand significance and maintain its connection with their customers.
By brand positioning Cisco has gained enormous benefits as shown below:
The branding campaigns conducted by Cisco have lifted its brand equity and helped it to gain shares and grow sales. This has also helped them to strengthen their overall brand recognition and exceed the averages on core brand measures. After the campaign launch, Cisco has been positioned into the security space by lifting their IT security brand consideration by 54% among their tech audience in six months (Slideshare 2008). Cisco's success brand repositioning depends upon their close alignment with their overall corporate strategy which includes product positioning, channel/alliance strategy and acquisitions (Slideshare 2008).
Cisco has strengthened its dominant share in the core market by 72% in switching and 80% in routers. It has also expanded their share in the new products by 6% in messaging applications, 41% in web conferencing and 21% in the video conferencing segments respectively (Slideshare 2008).The market share has been increased for the entire range of Cisco security products including their firewall applications, VPN and for secure routers.
Jobber (2007: 405) explains Product Strategy as:
"The emphasis on product portfolio analysis is managing an existing set of products in such a way as to maximize their strengths. But companies also need to look to new products and markets for future growth. A useful way of looking at growth opportunities is the Ansoff Matrix".
Cisco Ansoff Analysis
Market penetration is the fundamental method of a growth strategy in which the business focuses on selling current products into existing markets. It maintains or increases the market share of current products, restructures mature markets by driving out competition and increases the usage by existing customers (Tutor2u 2009). Acquiring competitors may be one of the major ways of gaining market penetration. It may also be achieved by more aggressive ways of promotional campaigns, supporting it with a competitive pricing strategy and dedicate more resources to selling products.
Cisco is known for its innovative products and introduction of those products into the market before its competitors that helps in generating mature markets. Its products like Cisco Catalyst 6500 Series Network Analysis Module, Cisco 7600 Series routers, Cisco Catalyst 6500 Series Firewall Services Module and many other products have already captured the market (Cisco 2009).
It is increasing the market share and customer loyalty through social networking sites, blogs and public interviews. Its main strategy to penetrate the existing market is through acquisitions. It acquired Audium Corporation in June 2006 that gives it opportunity to penetrate into the IP enabled voice telephony market, Cognio, Inc in September 2007 through which it entered into wireless networking, Nuova Systems, Inc in April 2008 that gives it chance to enter into data centers and ScanSafe, Inc in October 2009 that helped Cisco to capture the network security market (Cisco Systems 2009).
Market development can be essentially termed as a growth strategy where the business aims to sell its current products into new markets. Such a strategy can be achieved by venturing into new geographical markets, new product dimensions and new distribution channels. Alternatively, different pricing strategies can be adopted to attract customers and create new market segments (Tutor2u 2009).
Cisco recognizes the common strings that exist between sales, engineering, security and marketing groups. Once the main links are identified by its R&D Team, it tries to build a suitable interface between the groups which contributes to the company's market development. Develop, Partner or Acquire is the 3 Tier strategy followed by Cisco. It teams up with industry's major companies and then provides persuasive offers to the customers. WirelessLANs, content networking,storage networking, voice over IP and Metro IP includingoptical networking are the extended product dimensions for market development (Cisco 2001).
In addition to this, Cisco is attempting to establish its marketing presence in other potential geographical locations like China, Saudi Arabia, Pakistan etc.
Product development can be defined as a strategy where a business seeks to introduce new products into current markets. It requires the development of new competencies and new products which may appeal to the customers (Tutor2u 2009). Existing product lines may be extended to provide existing customers with greater choice.
Cisco sets vision and then makes its strategies to achieve its targeted goals. Its strong R&D capitalizes the current market situation and then provides customized business solutions according to customer needs and further plans for new products.
"Cisco has identified four key requirements to increase acceptance in the business world: security, availability, quality of service, and reliability" (Payataqool 2009).
Diversification is the advancement strategy where a business introduces new products in new markets (Tutor2u 2009). This strategy involves high risk since the business targets markets where it has no or very little experience.
Cisco has started its diversification in the emerging countries that extend from Russia to the Eastern Europe and Middle East that will also include Africa and Latin America. Industries in developing countries still use limited technology despite of having concentrated wealth, less government transparency and the customer's willingness to use the most advanced and high tech products and services. The company not only targets to supply advanced networking equipment but also focuses on the target country's revolution. Cisco has successfully initiated transformation projects in Chile, Turkey and South Africa as part of its diversification strategy (Deign 2009).
Managing product over time - Product Life Cycle
"With the dynamic state of today's economy, an organizational change should not only adapt to the current climate, but it must also encourage growth" (Wrage 2009).
Cisco has followed this by moving from a traditional silicon based organization to a lifecycle business model. These changes are challenging for Cisco since they have more than 60,000 plus employees supported by their 46 data centers worldwide.
This new life cycle consists of six separate stages: In the prepare phase it determines the business case and the project requirements. Plan phase develops the detailed project plan describing the resources and responsibilities. In the design phase it details the alignment of business goals and the technical needs. Implement phase delivers the new capabilities with the integrations. Operate phase monitors and reviews the implementations. Lastly, the Optimize phase has a continuous improvement activity of the existing processes (Wrage 2009).
So with these steps in place, "Cisco has started progressing into an organization that is best suited for the service-oriented network infrastructure organization making the cost savings and efficiency a reality" (Wrage 2009).
"Promotion means activities that communicate the merits of the products and persuade the target customers to buy it" (Kotler 1999). Promotion is one of the factors which influence the buying behavior of the customer. It helps to inform people about the product and its usage.
Cisco is using many means of introducing their products in global markets. They use advertising as the main tool to introduce new products and to connect with potential customers. They advertise their new products and services through public relationship, direct marketing, internet and online promotions. Cisco also uses the social media channels such as networking and blogs as a tool to promote and to extend their products to the larger audience.
Cisco follows the following elements for their promotion strategy:
As stated by Peter Drucker (2009), "Marketing is not a function; it is the whole business seen from the customers' point of view". Direct marketing captures the customers by avoiding intermediaries. Cisco uses various methods to promote their product such as direct mail, telephone, telemarketing, e-marketing and other tools to directly communicate with the customers.
Cisco conducts various direct marketing campaigns such as online shopping, cable television infomercials, which helps them in getting the direct response from their target audience and also to meet their demand generation goals.
Advertisement can be defined as "Any paid form of non personal presentation and promotion of ideas, goods or services by an identified sponsor" (Armstrong, Kotler 2009:383). Cisco can be grouped under the product oriented advertiser category, which highlights product features, their services and price through various advertising channels as internet, magazines, television and by e-marketing.
AIDA is a model generally adopted by the sellers to stimulate the purchase decision of the customers.
The element attention, describes the stage where the brand manages to obtain customer attention, informing the customers about the product. This could be either a positive or a negative attention. The next step is to build a relationship with customers by means of advertising which is a prominent tool in the marketing mix. The product is then launched in order to encourage the customer decision of buying the product.
In this stage, it generates the confidence in the buyers about the products that company plans to promote. The seller then explains how this product will meet the customers' requirements. Cisco as a brand has interested its customers and built the confidence in the buyer about their product interests the customers.
In this stage the seller inspires the customer towards the product and then relates the products to their needs. Here, advertising strategies are best suited. Since customers have the choice of choosing their configuration, it stimulates the desire to purchase the product.
This phase deals with persuading the consumer's to buy the product and explain them the immediate benefits of the product. Advertising and direct marketing methods are extremely effective in this phase, which influence the customers to buy the product.
Internet Promotions and Sales Promotions
Cisco broadly uses this media to promote their existing and newly introduced products to their targeted audience. This also enables their stake holders and potential customers to be updated with the latest promotional deals. Cisco provides 24/7 online support for their products.
Sales promotions help Cisco to increase their sales and business partners to buy their products in bulk. Sales promotions give incentives to their customers and partners to increase their sales.
Public relation is great way to increase the company visibility and achieve full potential. This helps to develop a strategy that uses social media to promote their core products. Cisco uses several social networking tools like news, twitter, Facebook, Flickr as part of the public relations.
"Marketing channel is a set of inter dependent organizations involved in the processes of making a product or service available for use or consumption by the consumer or industrial user" (Kotler et al. 2005: 858).
The distribution channel is a well defined path which producers use to supply their products to the consumers. Distribution of products to different segments of customers can be done in numerous ways. Distribution channels are classified into two, as per the end user. Channels differ as products are transferred to different types of consumers.
Cisco has an online portal (Cisco Consumer Online - CCO) which enables customers to buy products directly, based on their needs. Technical support is provided to them by trained Cisco agents.
Channel Strategy Decision
Cisco has the highest level of customer satisfaction. In order to maintain their position in the market, they follow different channel strategies and select the right strategy that helps Cisco to increase their sales in the global market.
Channel Strategy followed by Cisco
In direct marketing, Cisco uses the internet as their distribution channel. By using this media they market their products according to the customer requirements. By using this media, Cisco attempts to increase their sales and profit margins.
Cisco has been partnering with the best in class service providers to make sure that their customer receives the highest standard of support and service for the products. Collaboration with channel partners helps to focus on their strengths and allows Cisco to participate in broader markets simultaneusly (Jose 1999).
There are three main methods a company may use to set the price of their products. The first is cost based pricing, which is dependent solely on the cost of producing the product. The next important method is the competitor-orientated pricing, where the company will compare the price level which is set by its competitors. The final one would be the market-led pricing, because it plainly focuses on the values which the customer sets on the product and nature of marketing methods used to promote a particular product (Jobber and Fahy 2006: 195).
This will indicate the company to set the minimum price needed to be charged for a product, so that the company may reach its breakeven point. The company may imply full cost pricing and assume that sales will reach to the company's forecast or marginal cost pricing where the company will sell the product below the actual price of the product (Jobber and Fahy 2006: 196-197). Cisco products are higher priced in the global market, since they invest a huge amount on their innovation year after year (Mazzola 2004).
A company may decide to benchmark the price of the product against their competitors and set the price either above, equal or below them. If the company is producing identical products as their competitors, they can go for the going-rate pricing, and introduce new marketing methods to set the price of the product. Another process of setting the price of the product may be through competitive bidding. Here the potential suppliers will bid and set the price of the product (Jobber and Fahy 2006: 197-199).
An important factor for setting the price is to evaluate the value of the product the consumers are willing to pay for it. There are three useful techniques a company may use to find the correct price of the product:
- Trade-off analysis - it is the comparison between the price and the features of other products.
- Experimentation - here the company will set different prices for a particular product and sell them at different locations. Two factors are needed to be taken into consideration for doing this; the areas should match with the target customer profile and finally the promotional campaign should be identical.
- Economic value to the customers (EVC) - this is a powerful tool which a company may use to set a price for a product. If a company produces a product which has a high EVC, then the company can set the price high and still make large profits because by producing quality products they are able to reduce the production cost (Jobber and Fahy 2006: 199-200). The pricing strategy of Cisco entirely depends upon technology sectors (Mazzola 2004).
Price / Quality Matrix
Price quality matrix displays the positioning of the products of a company with respect to price and quality. Cisco has positioned is "Router CRS-1" under premium positioning tag , N+1 RF Switch under High price medium quality and EtherSwitch under medium quality Low price.
SWOT analysis summarizes the strengths and weaknesses of the company together with the opportunities and threats it faces. It draws the critical strengths, weaknesses, opportunities and threats from the strategic audit and distils this data to show the critical items from the internal and external audit (Kotler et al. 1999:
A formal SWOT analysis not only increases the awareness of the unique situation the firm is in, but also provides a roadmap to maintain, build and to act effectively as well as to eliminate weaknesses so as to capitalize on the opportunities even while defending against potentially harmful threats.
In the words of a top consultant: "It gives a comprehensive concept of internal and external factors and how to creatively and innovatively develop a strategy that is directional, cost-effective and of course executable" (Excelsia Blog 2009).
SWOT Analysis of Cisco
· Market leaders
· Dedicated Management Team
· Strong brand value
· Strong financial hold
· Technical Skills (R&D Team)
· Product Quality
· Fluctuating global margins
· High pricing
· Reliability on external vendors
· Services expansion
·Liberalization of geographic markets
· New customers needs
· Mergers & Acquisitions
· Economic downturn
· Price wars
· Entrance of a new product by competition
·Strong Competitors like Dell and IBM
· Change in customers' needs
Financially, Cisco is debt-free and has about $30 billion cash (Pimentel 2008). It generated around $3.2 billion in cash flow from operations alone for the second quarter of fiscal 2009, compared with $2.4 billion for the second quarter of fiscal 2008, and $2.7 billion for the first quarter of fiscal 2007 (Cisco 2009). The huge turnover not only aided them to fund the critical areas such as R&D or marketing, but also gave them the strength to acquire technology with lower venture capital funding in the market. It also enabled the company to buy back $2 billion in common stock during FYQ1 (Omnivorous 2003).
Cisco's financial strength has complemented its long term vision and strategy since it moved into new market adjacencies in conjunction with prioritizing the existing opportunities (Chambers 2009). Thus, Cisco has been working on the simple principle of acquiring new companies as a part of its business strategy.
Moreover, Cisco Management is well-respected for its ability to react to adverse business conditions, especially during the downturn. "Even in this downturn," says chairman and CEO John Chambers, "We intend to be the most aggressive we've ever been" (Malone 2009).
The sales management of the company is highly respected. They are accustomed to work with aggressive targets in mind, good international coverage and participation in all key segments -- from international service providers (ISPs) to government education and Fortune 1000 distributors (Omnivorous 2003). The one piece missing in their long list of achievements was a strong product offering for small businesses and home users. The Linksys acquisition filled in this gap. Cisco Management also has strong ability to manage channel partnerships, including IBM (storage area networks), Verizon Communications, Telstra, Sony Electronics and others.
Considering the work environment, Cisco was recently nominated to the National Association for Female Executives' (NAFE) list of "Top 50 companies for Executive Women" (Cisco 2009) that encourage organizations involving women's advancement as a part of their work culture. Highly skilled employees from different business sectors help in individual's mentoring and its professional development through NAFE's Inclusion Advocacy Program (Cisco 2009). Cisco is extremely proud of this achievement and feels privileged to be recognized on this list.
As is often the case, some strength's are also potential weaknesses. Cisco's high gross margins are not believed to be sustainable, even by management. With the acquisition of Linksys, average gross margins declined by 1% because consumer products typically have gross margins in the 30-40% range (Omnivorous 2003). Analysts feared Dell's entry into the business, using low-cost off-the-shelf components (Omnivorous 2003) to cut down into Cisco's business.
The pricing strategy of Cisco has come under scrutiny as some of the products are highly priced in the market. Customers of Cisco have expressed their perception of the pricing of the individual products as overpriced compared to Cisco's competitors.
The company has also done some vertical integration, including purchasing chip-maker Seagull Semiconductor in 2000 (Cisco 2000), but with this another problem arises which is, it has become highly reliant on outside vendors who may be capacity-limited during periods of high demand.
The company is positioned well overall, as IP-based networks that form the backbone of the Internet expand, and drive productivity. Cisco has abundant inputs in respect to the evolving market of IP sector and can play an important part in this business sector. Specifically, presenting the following types of opportunities, as per market research:
Storage Area Networks: 16% CAGR (Compounded Average Growth Rate)
oice-over-IP (VOIP): 44% CAGR
Security: 20% CAGR
Wireless LAN: 18% (Omnivorous 2003).
The company has been seeking to identify 12 advanced technologies that could generate $1 billion per year if markets develop up to the expectations. According to John Chambers, CEO Cisco, six have been identified and are in the Advanced Technology revenue group (IP telephony, home networking, optical networking, security, storage networking, and wireless) (Omnivorous 2003). The remaining six are yet to be identified.
Finally, the increase in networking speed has offered the company substantial growth. The common standard today is 100Mbps Ethernet (often referred to as 10/100 Ethernet because of its support for the older, slower 10Mbps speed). Christin Armacost, of SG Cowen, believes that growth in that market will fuel Cisco growth, as it's only about 10% of the market -- and has an average sale price of $356 vs. $61 for 10/100 Ethernet (Omnivorous 2003).
The comprehensive summary report of the company's own analysis of threats realized top three risks as:
- Uncertain global economy
- Variability of revenues
- Product gross margins may not be sustainable (Omnivorous 2003)
Additional threat factors mentioned by analysts and management include the following:
An alliance of Microsoft (as software supplier) and low-cost hardware vendors (Dell, Gateway or offshore PC suppliers) may eat into the market share of Cisco (Omnivorous 2003). There is also a possibility that Juniper Networks, which outsources all of its manufacturing (in contrast to Cisco), is able to build a lower-cost operating model, particularly in the high-speed network arena. Also, potential acquisition of Juniper by a major strategic partner, such as IBM is a hindrance to its strategy of global expansion (Omnivorous 2003). Lately there have been plenty of low cost hardware entries in the Wireless LAN market as well, that contribute to significant erosion of Linksys's profit margins.
Asian markets contain enormous potential but due to inadequate intellectual property protection, Cisco is unable to invest heavily in these markets. Regulatory and logistical issues have prevented the emergence and establishment of new market areas such as Voice Over IP.
"A competitive advantage exists when the firm is able to deliver the same benefits as competitors but at a lower cost (cost advantage), or deliver benefits that exceed those of competing products (differentiation advantage). Thus, a competitive advantage enables the firm to create superior value for its customers and superior profits for itself" (Internet Center for Management and Business Administration n.d.).
"Cisco works hard to retain staff in the acquired companies as these are the most valuable asset. They are quickly integrated, provided with new opportunities and much freedom" (Jobber 2001:606). Cisco provides various relevant trainings to its acquired staff in order to make them well equipped with necessary skills. For e.g. Training from Cisco Learning partners, Cisco 360 learning Program for CCIE, Cisco networking academy, Learning Credits Cisco E-Service Training and many other training programs designed for their employees (Cisco n.d.).
A Model of Competitive Advantage
The Cisco's network-centric approach is used by almost 85% of all the Fortune 500 listed small to large companies (Gartner 2007). To serve the communication and Information technology (IT) industry, Cisco designs, manufactures and sells Internet Protocol (IP) based networking products. It provides numerous customized services related to these products and their use. It also supplies a broad range of products for transporting data, voice and video across different campuses. The company mainly focuses at how people connect, communicate and collaborate with each other. It has a strong customer base and its products are installed in commercial businesses, public sectors, SME's, large enterprises and residences. It has divided the market into 5 major segments: United States and Canada, European Markets, Emerging Markets, Asia Pacific, and Japan (Thomson Reuters 2010). Major companies like Southern U.S. bank, Greater Toronto Airport Authority (GTAA), European sports retailer and many others use Cisco IP Communications solution to save time and money and to achieve higher customer satisfaction (Cisco n.d.). Cisco gains competitive advantage by bringing the innovative and effective products to market faster than its competitors.
Porter's Five Forces Model to analyze Competitive Advantage for Cisco
Michael Porter, a Professor at Harvard Business School created this tool to analyze the attractiveness and likely-profitability of any industry. The following illustrates how Porter's 5 Forces Model helps to analyze Cisco's current and future market position.
Threat to New Entry: MODERATE
- Large enterprises can enter but only through acquisition
- High financial investment and detailed R&D
- High product differentiation providing complete business solutions
- No restrictions by government
- Expertise domain knowledge required
- Established larger enterprises with brand name and royalty can enter with innovation and rapid progress in networking technologies
- Walker et al. (n.d.) suggested that it is difficult for new entrants to establish new customers wherein Cisco enjoys serving large enterprises as its customers
- Large infrastructure is required to offer networking services and to develop software business solutions
Competitive Rivalry: MODERATE
- Dell emerges as Cisco's rival in coming years by providing low cost products
- Although Juniper has emerged as a strong competitor, it hasn't been able to level with Cisco in its core business line of networking products like routers and switches. On the contrary, the firewall solutions provided by Juniper are acquiring large parts of Cisco's business
- Other competitors are 3Com, Alcatel Lucent, Citrix systems, Nortel Networks Corporation etc. (Walker et al. n.d.).
- Cisco still leads due to its diverse products and high quality business solutions.
Threat of substitutes: LOW
- Very few competing technologies compare with Cisco's current networking products (Walker et al. n.d.).
- Cisco has emerged as the greatest power in networking capturing 80% of the industry and has earned a well respected brand name
- Hubs, routers and switches are vital to the network infrastructure
- Niche companies cannot compare to the business solutions provided by Cisco
Buyer Power: HIGH
- Cisco has diverse products that provide integrated business solutions.
- Reliability and Customer satisfaction are the key features
- Cisco has provided many innovative and reliable products with high customer satisfaction. These features have helped it to gain edge over its competitors
Supplier Power: LOW
- Cisco's sale offices are in every continent except Antarctica (Walker et al. n.d.).
- Cisco has created large suppliers through E-Commerce, internet and its CCO Portal.
- Cisco doesn't compete primarily on Price, but competes on Reliability, Quality and Customer Satisfaction (Walker et al. n.d.).
- It has strong ability to manage channel partnerships
Porter's Generic Strategies
Michael Porter has further suggested a generic strategy model. This model defines that "even though an industry may have below-average profitability, a firm that is optimally positioned can generate superior returns". The industry's strengths can be examined through one of the following factors:
- Cost Leadership
(Internet Center for Management and Business Administration n.d.).
Figure 15: Porter's Generic Strategies (Internet Center for Management and Business Administration n.d.)
Cisco Systems has been ranked No. 1 on Fortune's Most Admired Networking communications Companies (Cisco n.d.). It has various products ranging from £8 to £3500+ depending upon customer needs and company size. Cisco has products to serve every consumer's requirement whether it is a home user, SME or large enterprise. It believes in its product's uniqueness, reliability, quality and customer satisfaction.
Cisco is totally based on differentiation strategy which provides a unique experience to its customers. It has great expertise in the networking domain where the organization always comes up with innovative products and different business solutions based on consumer's business needs. The urge to spend more on R&D than its competitors is a key factor to Cisco's competitive advantage. Cisco has always been an aggressive company and has gained large market share through mergers and acquisitions. Cisco has gained its popularity through blogs, YouTube videos and social networking sites like Facebook, Twitter etc. to obtain customer feedback on its product and services.
"One of the key ingredients in John Chamber's strategy is Customer Focus. Every evening, he listens to taped conversations with corporate clients." (Jobber 2001:606)
This illustrates Chambers' dedication towards Cisco's goals and objectives keeping customer focus as one of the top priorities. Having sound knowledge about the customers' needs and expectations plays a vital role in formulating the organizations strategies, thereby providing a valuable contribution to Cisco's market leadership.
John T. Chambers vision
"CEOs and government leaders worldwide clearly understand the productivity opportunities and the associated standard of living implications that Internet business solutions provide" (Cisco n.d.).
Value Chain Analysis
Porter has suggested that Value Chain Model is essential to analyze the firm's competitive advantage.
The goal of primary and support activities is to create value that exceeds the cost of providing the product or service, thus generating a profit margin. Cisco's global supply chain management has turned complex, high-end, configure-to-order products or high-volume commercial goods into the solutions (Cisco n.d.). Cisco has given top priority to order fulfillment and project management to achieve on-time delivery to customers. According to many analysts, the company's networking strategy played a major role in its success over the years. After the low sale value in 2000, Cisco, through an online information and communication system, linked suppliers, manufacturers, customers, resellers and employees seamlessly (ICMR Case Studies and Management Resources n.d.). Hence, Cisco's proactive supply chain boomed the networking industry.
- Since Dell is emerging as a strong competitor to Cisco, with the introduction of low cost switches, hubs and other networking equipment, Cisco should form alliances with Dell's competitors in its core business in order to maintain its competitive advantage.
- Cisco should mediate with its consumers through the internet by providing promotional offers. For example, if a large enterprise purchases Cisco's products, it should have the privilege of being offered price reductions on future purchases. Alternatively, Cisco can also provide extended service offerings to exceptional customers. Quantity discounts to its premium customers is a flexible way to foster customer relationships and help to reduce the stock period. Cisco should work on analyzing the consumer's buying behaviour and should attract them with effective discounts on new products.
- Cisco's main strength is its R&D Team. Cisco should sharpen its research team further to analyze current market situation and start working on its ten year strategies utilizing the competencies of its R&D Team. It can also consider to persistently work on developing and manufacturing new products so as to retain its existing customers and more essentially, to attract new customers.
- Unarguably enough, Cisco is the leader in networking equipment. However, we believe Cisco can enter into newer non-networking product segments in familiar markets. This may prove to be a giant leap for Cisco and can boost its expansion plans.
- With the introduction of Porter's Sixth force i.e. Complementary products / public / government, Cisco can formulate strategies to sell its products and services that complement the products or services of other companies by adding value to mutual customers. For instance, Cisco and Microsoft can partner (following Intel and Microsoft) to supply bundled products mutually to customers seeking to purchase from both the companies.
- On the advertising front, Cisco is already into social networking sites but it should also enhance the popularity of its products through Television Networking as T.V. and Radio are the communication media that are easily accessible by a large chunk of its customers in the non-commercial segment. Additionally, it should organize public meetings and delegations for small and medium sized organizations and entrepreneurs in order to attract this valuable segment to stay ahead of emerging competition.
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