Cisco System

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What is the core concept of the model?
The pyramid model of Cisco Partners Program provides the partners with incentives to enlarge the sales volume. The major measure of discount level is according to the sales volume. The “Gold”, “Silver” and “Premier” status are awarded to resellers as they meet certain sales volume. Greater sales volume allows resellers to receive higher discounts on Cisco products (Gold 42%, Silver 40%, Premier 38%). This is typical in the market to increase market share because it is simple, effective and goal oriented.

What are your reactions to the “Pyramid” Model advanced in figure C of the case? The three-tier pyramid structure addresses only sales and discounts. It is dangerous that it ignores the service and other value-adding activities, which can assure higher margins and prevent vicious competition in a race to the bottom. Historically, prices could be maintained, venders could expand the market share while maintaining the profit by using the 3-tier pyramid structure. Currently, due to the entrances of new competitors, price wars are unavoidable. In this case, Cisco has no advantages if they chose to engage in price war with those new competitors such as Huawei of China. Therefore Cisco needs to introduce new factors to maintain its leadership in the industry.

As seen in the case, focusing on volume rather than value paired with the unique competitive situation of Cisco leads to what is called a “clash of domains”. Due to the high amount of resellers there was high inter-channel competition. As a result of Cisco’s pyramid model, telecommunication companies decided to enter the networking business, which made competition even more intensive. Furthermore with the entrance of telecommunication companies entering the network business a grey market arose. To gain customers for their transport business Telecommunication companies sold Cisco products with wholesale prices. That lead to an accusation of “router dumping” by Cisco...
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