Capstone Paper

MGMT 619: Business Policy of High Technology Firms Leavey School of Business, Santa Clara University

Prof. Tammy Madsen

Fall 2010

*Team SCUCarvers* Jakub Cech, Anirvan Das, Kyle Kaido, Prashanth Kalika,

Girish Navalgundkar, Vivek Durairaj

2

Table of Contents

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i

Wall Street Journal Article

World-Class Industry Leaders Join Polycom's Executive Team Polycom, Inc. (NASDAQ: PLCM), a global leader in unified communications (UC), today

announced the addition of six seasoned business executives to its leadership team. The Company

also announced the combination of its video, telepresence, and voice development units into a

single, aligned research and development organization to tap the tremendous potential of the

high-growth UC market.

In parallel with the alignment, Polycom will be forming three new lines of business (LOBs) --

enterprise and government/public sector, service provider, and small-to-medium business (SMB)

-- focused on meeting the unique needs of customers in each of these fast-growing technology

sectors. IDC reports that worldwide SMB information technology (IT) spending will grow to

nearly $630 billion by 2014. In addition, Wainhouse Research forecasts the hosted and managed

UC services market for North America, Europe, and Asia Pacific to reach approximately $6

billion by 2014.

The new executives will participate in leading the company through a period of expected

significant growth. The appointments include:

Joseph Burton, SVP, Chief Strategy and Technology Officer, General Manager

Enterprise and Service Provider. Burton served as Cisco's CTO for Unified

Communications since 2007, encompassing video technologies, WebEx collaboration,

call management, and social computing. Prior to that time, Burton was the Co-General

Manager of Cisco's UC Software business unit. Previously, Burton held several key

architecture-level positions at Cisco, Active Voice, and other technology leaders

Sudhakar Ramakrishna, SVP and General Manager Products, and Chief Development

Officer. Ramakrishna brings a wealth of strategy and execution experience. He will join

Polycom on October 11 from Motorola where he is Corporate VP and GM for Wireless

Broadband Access Solutions and Software Operations. Ramakrishna has been

instrumental in scaling the 4G (WiMAX and LTE) business and leading large multi-

ii

function teams of more than 2,300 employees and businesses across the globe.

Previously, Ramakrishna was the VP of Product Operations at Stoke Networks and has

held various senior management roles at 3Com and other companies.

Susan Hayden, EVP and General Manager, Polycom SMB. Hayden, a proven strategist

and go-to-market leader who is well-known for building and expanding large-scale global

operations in technology companies, will direct Polycom's LOB strategy. Previously, she

was Group VP of Sales for OracleDirect, where she transformed the unit into a fast-

growing SMB/Mid-market revenue engine for Oracle. At SAP, Hayden was responsible

for go-to-market strategy and sales optimization for SAP HR and Service Industries. She

also held management positions at Fidelity, Dun and Bradstreet Software, and

Monster.com.

Alan Rudolph, SVP, Global Services. Prior to Polycom, Rudolph served as SVP

Applications Management and Consulting for Affiliated Computer Services (ACS), a

Xerox Company, where he played a key role in transitioning the company to a services-

focused organization. Prior to Xerox, Rudolph ran Global Application Product Delivery

for IBM. Previously, Rudolph held various executive and management positions in

business applications and operations for Corio, Oracle, and other technology leaders.

Gary Rider, President, Europe, Middle East, and Africa (EMEA). Rider will complement

Polycom's existing Theater Presidents in the Americas and Asia Pacific. Previously,

Rider was VP of Europe Global Sales & Marketing for NCR, where he was responsible

for $1.3B in annual sales. Prior to that, Rider held senior sales management positions for

HP and Digital Equipment.

Ashley Goldsmith, SVP, Human Resources. Goldsmith comes to Polycom from F.

Hoffmann-La Roche, where she was SVP, Human Resources, for their Tissue

Diagnostics Division. Prior to that, she was SVP, Human Resources, for Ventana Medical

Systems (later acquired by F. Hoffman-La Roche). Previously, Goldsmith gained

increasing human resources management responsibility at The Home Depot, where she

led HR for divisions comprising more than 100,000 employees and generating more than

$25B in annual revenues.

iii

"Polycom grew sharply in the first-half of 2010 to a $1.2B revenue run-rate, and we expect this

growth to continue into 2011 and beyond," said Andy Miller, Polycom president and CEO.

"Unified Communications is expected to be one of the fastest-growing sectors in technology, and

Polycom is ideally positioned to deliver innovative solutions for our customers and strategic

partners. To best capture this unprecedented opportunity, we have assembled a management

team that is one of the best in technology. By blending the video and voice development teams

into one powerhouse UC innovation engine, we will further increase our agility and enable

efficiencies in R&D. Additionally, the LOB structure allows us to better anticipate and deliver on

our customer and partner needs."

Polycom also announced that Joe Sigrist, previously SVP and General Manager of Video

Solutions, has left the company.

iv

Executive Summary

Strategic Move and Key Issues:

In August of 2010, Polycom Inc (Nasdaq: PLCM), one of the leading voice and video

conferencing equipment makers announced a multi-year, strategic global agreement with

Microsoft Corp. (Nasdaq: MSFT) This agreement was created to develop an integrated end-to-

end unified communications (UC) solution that improves customers’ business productivity. As

part of this announcement, Polycom is developing enhancements to its comprehensive portfolio

of voice and video solutions to seamlessly integrate with Microsoft Lync Server 2010. Across

this industry, UC technologies are evolving with new elements including telepresence, cloud

computing and mobility. These elements are being integrated into the current business

communications paradigm. Enterprise customers of all sizes are looking for one solution that can

solve their communication needs, while at the same time improving company productivity. As a

result, the UC market is expected to grow from its current size of $4.8 billion to at least $16.8

billion by 2015 (Klie, 2010). Eager to gain market share in this industry, numerous competitors

are entering into key partner alliances to offer end-to-end solutions. This industry is currently

fragmented (CR7 = 70%) with Cisco and Avaya holding the highest market share. Current

industry dynamics create a high threat of rivalry along with immense opportunity for growth.

In September 2010, Andrew Miller, CEO of Polycom, hired top executives from Cisco

and Motorola to join Polycom and help establish Polycom as a major UC player. Miller himself

was once the CEO of Norway’s Tandberg, another videoconference business, which Cisco

acquired as part of an aggressive expansion into the UC market. Cisco is currently the only

player in this market that offers a complete end-to-end UC solution, connecting its end-points to

unified messaging software and telepresence. Other major UC vendors such as Microsoft, IBM,

and Avaya, lack one or more UC technologies to provide a full UC solution to customers on their

own. To be relevant in this rapidly growing UC market, Polycom has started to strategically

partner with various other complementary UC vendors to provide a multi-vendor alternative to

Cisco’s UC solution.

v

Another challenge for Polycom is its recent dramatic decrease in profits, which can be

mostly attributed to adverse economic conditions. In order to improve profitability, Polycom has

been decreasing R&D expenses. While this may be a good short-term strategy, it will affect

product quality and its ability to continue product innovation in the long run. Instead Polycom

should improve its cost structure by increasing its outsourcing and decreasing SG&A expenses.

In addition Polycom can improve its top line by aggressively pursuing the high growth video

conferencing segment.

Our recommendations focus on Polycom’s need to establish itself as a major player in the

UC industry. In the short-term Polycom will need to form strategic partners, which will give it

the highest strategic value possible. Polycom will need to remain conscious of other threats in

this industry including vertical integration strategies of various UC partners, contractual

obligations resulting from alliances, technology transfers, and emerging Asian low-cost

manufacturers. In the longer term, Polycom should focus on a strategic merger with a bigger UC

player such as Avaya or Microsoft, who can complement Polycom’s capabilities. A well

executed strategic merger will significantly improve the customer value of a combined UC

solution.

In consideration of the evolution of UC technologies, competitive dynamics and

consolidations in this industry our recommendations will create the best opportunity for Polycom

to reach its goal of becoming a major UC player.

1

External Analysis

Industry Definition

Our analysis focuses on the Unified Communications (UC) industry in which Polycom is

trying to establish its presence. The term UC refers to integration of all “communications with

business processes and requirements based on presence capabilities, while presenting a

consistent unified user interface and experience across multiple devices and media types”

(Pleasant, 2008, p1). UC is not a single product; rather it adds functionality to offered

applications by combining all real time and non-real time communication services such as email,

instant messaging, telephony, presence, information sharing, voicemail and video conferencing

(Blood and Elliot, 2010, p2).

Polycom currently supplies telepresence, video and voice solutions for the UC industry.

Exhibit 1 shows a diagram of this industry. More specifically, Polycom competes in the

Telephone Apparatus Manufacturing industry (NAICS 334210) which focuses on manufacturing

wired telecommunications equipment such as telephones and answering machines, telephone

switching systems, routers, modems, data bridges and gateways (Thormahlen, 2010). Polycom

also competes in the Audio and Video Equipment Manufacturing industry (NAICS 334310) with

its electronic audio and video equipment (Hoover’s Online, 2010).

Porter’s Six Forces Analysis Level 1 Analysis

See Exhibit 2a-f for our Level 1 analysis.

Level 2 Analysis

Threat of Rivalry: Tough economic conditions in 2008 and 2009 resulted in a slump for

deployments of UC solutions. Major factors that slowed growth include a lack of funds to

finance equipment upgrades and replacements. A recent Wainhouse report has projected

significant growth in UC services deployment in the period between 2009 and 2013 (Beattie and

Kelly, 2010). According to this report, the compound annual growth rate (CAGR) over this

period is forecast to be 21.1%. These demand growth conditions create a quite favorable outlook

for this industry (Beattie and Kelly).

2

A significant factor affecting rivalry in the UC industry is the concentration ratio. This

industry is quite fragmented with the top nine players accounting for 77% of total revenues

(Cramoysan, 2009). Many small players accounting for the remaining market share. Most

competitors have a strong forte in specific areas of UC. For example, Microsoft is a software-

focused company and uses its strong communication application infrastructure to provide a

software based UC solution. Similarly, Siemens utilized its strong telephony base to build the

Siemens Enterprise Communications UC solution. Products offered by rivals in this industry are

highly differentiated. The most important factor affecting rivalry is competitor commitment to

capturing maximum market share. Cisco is capturing market share with the most comprehensive

portfolio of UC products. Other competitors only offer partial UC solutions, meant to work with

products from specific UC suppliers. However, interoperability issues occur when using products

from different UC suppliers. Polycom is trying to promote common standards and

interoperability between vendors through its Open Collaborative Network (Polycom, 2010)

Industry players are filling gaps in their portfolios by acquiring other companies. The cost of exit

mainly consists of severance packages for employees in addition to customer and partnership

commitments leading to medium exit barriers.

Overall, there is high rivalry among competitors in the UC space causing a moderately

unfavorable effect on this industry.

Threat of Entry/Barriers to Entry: The most important factor in barriers to entry for the UC

space is the advantage incumbents enjoy in the marketplace, primarily due to their experience

and brand reputation. New entrants have a steep learning curve before they can become a

significant threat to incumbents. Extremely high switching costs incurred by business customers

also help to protect incumbents. Another significant barrier to entry is the moderate network

effect that exists as more enterprises adopt UC solutions. These factors create high barriers to

entry in the UC market resulting in a favorable effect on incumbents.

Threat of Suppliers/Supplier Power: Four important supplier groups have been identified –

Video conferencing and telepresence hardware vendors, IP Telephony Providers, Audio

Conferencing vendors and Software vendors (including email, instant messaging, soft phone,

web conferencing and database). The Video conferencing and telepresence group is powerful as

their products are differentiated, with high-quality, cutting-edge product offerings. Customers

3

also incur huge switching costs as a number of video conferencing providers have forward

integrated to offer their own UC solutions. The IP Telephony group has a relatively high

concentration level (indicating considerable power), but commoditized products exist in this

space (indicating weak power over the UC industry). Moderate switching costs exist associated

with changing telephony providers. These factors result in a neutral effect from the IP Telephony

group. Audio Conferencing vendors have limited power due to ease-of-substitute by hands-free

desk phones and commoditization of the audio conferencing products. Software Vendors consist

of software clients who create instant messaging, soft phone, web conferencing and databases.

These software products do not have substitutes due to the absolute necessity of computer

communication in enterprises. This factor as well as large switching cost, results in considerable

power over UC. Our weighted average of supplier group scores in Exhibit 2-c results in suppliers

showing high power over the UC industry.

Threat of Buyers/Buyer Power: UC products are used by many vertical markets, including

government, education, and healthcare companies. UC buyers can be categorized into two major

groups based on their UC needs. The first group consists of mid-market companies, large

enterprises and government agencies. Mid-market businesses employ between 250 and 1,000

people, while large enterprises have more than 1,000 employees. Various state and federal

government agencies are also buyers of UC products. This second buyer group consists of small

to medium sized businesses (SMB), which includes firms with total employees of between 5 and

250 (Faust and Fernandez, 2010).

Mid-market/Large Enterprise buyers are large in number but less fragmented than buyers

in the SMB group. These larger firms have more variation in terms of UC requirements for

voice, video and data. Businesses are more complex, demanding a system of solutions to

facilitate more engagement and efficient interactions among employees, partners, and customers.

This system of solutions is the foundation for a collaborative workforce. UC deployments for

this group require high upfront costs because of the need to upgrade old systems by purchasing

new software and hardware. Many applications and products can be complex to deploy,

requiring organizational changes or extensive product customization and integration. Therefore,

UC is seen a strategic tool for this group, rather than a short-term ROI solution. UC products

catering towards this group are well differentiated. Large investments are incurred in

4

implementing a particular UC solution, leading to moderately high switching costs. Overall, this

group does not exert significant power, resulting in a favorable effect on the UC industry.

Buyers in the SMB group typically invest in mainstream UC technology that is low-cost,

easy-to-deploy, easy-to-use and scalable. This group has been slow in adopting UC solutions due

to the recent poor economy and manufacturer’s dependence on channel partners/system

integrators for sales (IT Business Edge, 2010). Buyers in this group are extremely fragmented

and very price sensitive. UC products tailored towards this group are less differentiated, covering

a broad range of customer needs. Compared to the enterprise buyer group, this group is subjected

to lower switching costs for changing UC vendors. UC has less impact in terms of productivity

and cost reduction for this group than it does for enterprise customers. Overall the SMB group

exerts moderately unfavorable power on the UC industry. Since the Mid-market/Large

Enterprise buyer group is strategically more important to the UC industry, overall buyer power is

moderately favorable.

Threat of Substitutes: Our analysis considers non-communication products to be substitutes for

UC. These standalone products consist of instant messaging, email, Twitter, Facebook and video

services such as Skype that can be used in place of UC, utilizing the Internet to allow people to

communicate. Historically these services have only been used by consumers as a social tool but

are now recognizing an opportunity to provide value to enterprise customers through rapid

delivery of communication and high quality video. Since UC is a new industry, buyers are not

aware of the products available and the value proposition for a UC solution. Emerging

technologies typically face this hurdle of overcoming existing products in a market. UC products

are improving as increases in computing power and bandwidth allow for better IP-based

communication. Enterprise customers are currently more likely to adopt UC solutions than

SMBs because of the steep investment required. SMBs are likely to keep non-unified

communication as a substitute for UC because of the investment required to switch over existing

products and infrastructure. Enterprise customers recognize better ROI on their UC investments

because of improved business processes and economies of scale resulting from more employees.

Price and performance of the substitute is a less important factor than enterprise buyer’s

propensity to substitute but higher than SMBs’ propensity to substitute. If UC can be shown to

outperform non-unified communication, then buyers (especially enterprise buyers) will make the

5

investment. SMBs show more of a tendency to keep what currently works and protect their

existing infrastructure.

Enterprise buyer’s propensity to substitute outweighs other factors because of the

strategic importance of this group. This is evidenced by their interest in UC technology and

willingness to spend on productivity improvements. According to a survey by Infonetics, 52% of

enterprises have already integrated email, voice and IM. However, an additional 44% of

enterprises surveyed still plan to integrate these applications (Machowinski, 2010). Overall

ranking for threat of substitutes is low, resulting in a favorable effect on this industry.

Role of Complements: We analyzed two major groups of complements for the UC industry:

networking equipment manufacturers and computer equipment manufacturers. Both these groups

include large, established firms operating in mature industries with concentration ratios higher

than the UC industry.

The networking equipment manufacturing industry is more mature and products tend to

be commoditized with lower relative switching costs compared to the UC industry. Networking

equipment manufacturers are likely to enter the UC space, which poses a high threat of vertical

integration. Ease of bundling and the rate of growth for networking equipment have a favorable

effect on the UC industry. The UC industry is able to grow independently of networking

equipment demand, which we consider a very important factor. Limited investment ability forces

firms to choose between spending on networking equipment or UC solutions, not both. This

dependence has an unfavorable effect on UC and relatively high importance. The favorable

effect of pull through demand for UC products is ranked high as firms are likely to upgrade their

UC solutions independent of their choice in networking equipment.

The most important factor in our analysis of computer hardware manufacturers is the

favorable effect of pull through demand for UC products independent of demand for

complements. Improvements in UC solutions have a significant effect on demand for computing

power on hardware, especially servers and mobile phones. The UC industry is growing

independent of expected negative growth in computer hardware. A slightly unfavorable situation

exists since UC solutions are dependent on performance of computer hardware. Relative

switching costs are favorable since it is less expensive to replace computer hardware than a UC

solution. Computer equipment can be bundled with UC endpoints such as telephones to promote

a package solution and higher volume sales.

6

Networking equipment manufacturer group is strategically more important than the

computer hardware group since it is more closely linked to the UC industry. Our analysis shows

an overall favorable effect from complements. Even though the UC industry relies on these

complements, it is still able to grow and profit on existing infrastructure without improvements

from either complement group.

Level 3 Analysis

Refer to Exhibit 2-g, which summarizes the scores of our level 3 Five Forces analysis.

Overall we found the current UC industry has a slightly favorable effect on profits for existing

competitors. Rivalry has the strongest effect on this industry due to the unstructured

environment and high commitment from competitors. However, this industry is still being

defined as firms enter the market and aggressively compete to gain market share. Other

significant factors affecting rivalry include a relatively low concentration in the market.

Established competitors such as Cisco, Avaya, and Microsoft are very committed to this market

and likely willing to retaliate with either price cuts, acquisition of smaller competitors or new

product offerings. Favorable barriers to entry offset this unfavorable effect of rivalry on the

industry. A full UC solution requires a firm to provide cutting-edge video equipment, computer

equipment and application software for a user-friendly interface. Strong incumbency advantage

results from UC customer’s tendency to stay with a particular brand or solution. This tendency is

reinforced by the high switching costs of making a change. Supplier power is also a powerful

force since the UC industry is so dependent on numerous groups to create their solutions. Buyer

power was ranked in the lower half of the forces since this market has a broad customer base,

demand is growing and buyers are not shaping the market. UC providers are telling buyers what

they need, not vice versa. Complements also have a comparatively minimal effect on this

industry, yet their improvements in technology have the potential to create pull through demand.

Macro Environmental Forces Analysis and Economic Trends Macro environment analysis is a strategic analysis that recognizes external forces that

will be a major concern for a company or an industry. We used the PESTEL model to study the

UC macro environment. PESTEL stands for Political, Economic, Social, Technological,

Environmental and Legal factors.

7

Political factors: Worsening economic conditions prevailed throughout 2009, causing the

world’s GDP to drop almost 1%. These conditions forced the US government to enact new

policies and incentives aimed at stimulating new growth markets. These policies included

promoting businesses with clean-tech initiatives, creating green jobs. Green information

technology (IT) initiatives (including UC) have been attributed to driving new growth for

communications technologies and markets in the future. The use of voice and video

conferencing facilities and other attributes of UC significantly reduce long distance air travel and

commuting to lessen our dependence on oil. These political initiatives create an environment that

helps businesses of all sizes reduce their carbon footprint and impact on climate change.

Economic factors: According to the IMF’s Worldwide Economic Outlook published in October

2009, the recession has finally ended and recovery is expected to be slow and non-linear. This

economic environment had a significant negative effect on telecom and data communication

capital spending in 2009-2010 (United Nations, 2010). Economies of developed countries

shrank by 3%, while emerging economies saw lesser than expected growth (2%, instead of 6%),

with most of the growth coming from China and India. (Exhibit 3) To mitigate these crises,

various governments tried to instill confidence with strong public policies in financial systems

including stimulus programs and infrastructure spending. Despite these efforts, the recession had

a significant impact on consumer confidence creating major risks to telecom and communication

providers. This lower overall revenue growth contributed to a reduction in capital expenditures,

which are expected to grow only modestly until 2014 (see Exhibit 4). The two major customers

for telecom and data communication equipment are telecom providers and large enterprises. The

economic factors and trends within the following industries are also important data-points to

analyze.

Telecom industry is a cyclical industry, which reached a revenue plateau in 2008. From

this plateau, there was a decline of 6.4% in 2009, mainly driven by currency effects and spending

cuts in North America, the Middle East, and Africa. Another 0.7% decline is expected in 2010

(Téral, 2010). Various cyclical investment upgrades are expected, including LTE (long term

evolution) to enable 3G/4G mobility and broadband initiatives in various emerging markets that

will sustain a mild bottom (Téral, 2010). UC solutions as managed services could evolve as a

value driver to push high bandwidth rollouts for these telecom service providers.

The large enterprises group is severely affected by economic contraction and contributes to

8

higher unemployment during these periods (see Exhibit 5). A lack of business expansion and

creation of new business directly translates to fewer sales of new systems, upgrades and

replacement systems. Large enterprise can be frugal and tend to use their capital expenditures on

projects with the highest ROI possible. Investing in UC can be a worthy investment, since

solutions are designed specifically to increase efficiency and productivity, generating more

revenue with the same resources. If a UC solution is shown to create value for enterprises it can

be immune to spending slow-downs, but not necessarily “recession-proof”.

Social factors: There is an increasing and significant trend of social networking by users within

organizations. Individuals within user organizations are taking advantage of communication

technologies to blend personal and professional lifestyles. Employees exploit connectivity

available across public, private and home networks. The same network devices are also used for

work, personal and social networking needs. The distinction between these three modes blurs,

which creates environments and need for a unified communication infrastructure with

applications that can be personalized for every individual. This situation drives demand for more

pervasive networks, mobility devices, and more sophisticated applications and user interfaces.

Technological factors: As the overall economy is in a state of recovery, the potential for

inflection points in various industries with newer disruption technologies exists. This makes it

imperative to look into various technology trends influencing the adoption of UC across

businesses.

Top Technological Trends for 2010:

(1) Enterprise Social Networking: Social networking has become an essential part of our

culture, helping to create a very fine line between work and personal communications. This

trend is creating a need for enterprises to incorporate social networking into their UC and

collaboration strategies. Social networking tools have the ability to improve collaboration in

all organizations, large or small. As Facebook, Twitter and Wikis start to cater more to

business needs they’re more likely to become common tools in the workplace.

(2) Mobility: Telework to telepresense is an ability to collaborate seamlessly across an

enterprise from a mobile device to a videoconference room. Forecasters are predicting 400

million workers to be enterprise mobile users by 2012 (Telecom News, 2010). This trend

will define the level productivity an enterprise can achieve and has already become a key

9

differentiator between successful and failed enterprises. More companies will be deploying

UC and integrating mobile applications with an emphasis on network security. These

infrastructure advancements are meant to stimulate productivity and innovation.

(3) Cloud Computing: “The Cloud”, as it is called, is a new trend to centralize the public and

private infrastructure (servers, networks and storage). This enables low computing

enterprise clients to plug into the cloud to access their resources. Cloud computing offers

the ability to create a seamless and productive workplace. Businesses utilizing cloud

computing have less IT overhead costs, energy and real estate costs.

(4) Going Green: With the evolution of green initiative across enterprises, businesses and

consumers are becoming more energy-efficient. Long distance travel is being replaced with

UC and video conferencing tools. Rising energy costs and focus on sustainability is driving

utility companies to develop smart grid technology. Smart grid applications can be used to

share energy and integrate them into UC platforms will become an important element of

advanced communication systems in the future.

(5) Wireless Applications: With the growing use of smart phones, wireless applications are

transforming the need of high computing laptops and applications to access various

productivity tools. With the evolution of the cloud, development of wireless applications is a

trend that will have wide-ranging implications on how communication is defined in future.

Wireless applications that can integrate mobility into an enterprise unified communication

platform will be a trend to watch.

(6) Security: The importance of security has become evident as networks evolve to include

more capability, including the adoption of UC. Technological trends in this industry have

relied on government regulations to plug security loopholes at various levels of networks

including storage and applications. These regulations provide an end-to-end security blanket

for various enterprises tools. With the emergence of cloud technologies, the industry is

developing even more security applications to help plug in these gaps to protect users and

“the cloud”. Numerous companies including McAfee and Symantec are focused on

providing security for enterprise networks.

Environmental factors: The use of video conferencing tools as part of a UC solution is a viable

alternative to a face-to-face meeting, reducing long distance business travel. The major selling

10

point in addition to improved productivity and cost savings is the awareness that these companies

are contributing to the reduction of carbon emissions and environmental sustainability.

This is particularly evident in the US where, according to various environmental studies,

30% of American business flyers who are most concerned about climate change; termed “climate

citizens”, already tend to fly less than other business travelers. Climate citizens also show more

interest in switching their flights to some sort of videoconferencing or telepresence (Green Book,

2010).

Legal and Ethical Factors: The introduction of new Internet technologies attracts opportunists,

hackers and sophisticated criminal networks. These individuals or groups undertake malicious

activities to disrupt communications, or find holes in security of new solutions to obtain

unauthorized access to valuable data or services. The real-time aspects of VoIP and other UC

services create a range of security risks that need to be protected against for these services to be

viable and sustainable. In order to protect against malware and other malicious conduct, UC data

packets must be captured, filtered and analyzed. However, these essential Internet security

services are considered to potentially collide with laws regulating “interception”, “monitoring”,

access to stored content and other restrictions expressed in 20th century computer laws (The

White House, 2010).

Although the potential of UC technologies are significant in improving the economic and

competitive position of an enterprise, there are serious security issues that exist. Government

policies and regulations to deal with cyber security are evolving to meet the needs of the newer

and evolving cyber threats.

Competitor Analysis Key players in the UC space include Avaya-Nortel, Cisco, Microsoft and Siemens. The

competitive landscape is complicated by the fact that no player other than Cisco has the complete

product portfolio needed for a UC solution on their own. There is a tendency among the other

UC providers to partner with each other to provide a holistic solution. The UC industry has a

concentration ratio of CR9=77% with Avaya-Nortel and Cisco having the largest market shares

(Cramoysan, 2009). (Exhibit 6) However, the industry is still evolving and fragmented, with

many players offering pieces of the solution.

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Primary Competitors: Polycom’s primary competitor in the UC space is Cisco. Avaya-Nortel,

Microsoft and Siemens are additional key players that can pose a strong competitive threat to

Polycom. Avaya, with the acquisition of Nortel Enterprise Solutions (NES), has the largest

market share and broad market penetration. Microsoft is the market leader in email and software

applications, making it a market leader in business software. Siemens has 7% UC market share,

primarily due to the well-established telephony installed base.

Business Level Strategy: Cisco offers a fully functional UC solution that is unique to the

industry, with focus on differentiation. (Exhibit 7) Microsoft, in partnership with others, offers a

rich UC solution available at an attractive price. Avaya-Nortel offers a good range of UC

functionality, but without a comprehensive video conferencing offering. Siemens, on the other

hand, has a wide-range of UC functionality with niche focus on European markets while trying

to leverage its established tradition telephony installed base. Polycom is striving to provide a

fully functional UC solution by partnering with other companies (Blood and Elliot, 2010). (For

more details refer to Polycom’s business level strategy in internal analysis).

Corporate Level Strategy: Most competitors have two or more businesses that are part of UC,

and thus pursue a related diversification strategy.

Cisco’s key growth strategy has been to capture market transitions by diversification. The

company has been successful in implementing this diversification strategy by acquisitions.

However, most of Cisco’s acquisitions are related to computer networking. With the exception of

a couple of acquisitions, Cisco pursues a related constrained strategy to completely integrate the

new company into the Cisco family.

Avaya has made 13 acquisitions since 2001, the most notable being that of Nortel

Enterprise Solutions (NES). The NES acquisition was an attempt to beef up its UC portfolio

against Cisco. The company also pursued a related constrained strategy through integration of

operations and customer-facing activities of NES (Avaya, 2010).

Microsoft is the world leader in software products and services. The company pursues a

related constrained strategy by acquiring other software companies to complement its products

and services.

Siemens has diversified its businesses in sectors such as healthcare, energy,

telecommunications, heavy machinery and financial services. The diverse nature of these

acquisitions classifies Siemens as acquisitive conglomerate.

12

Polycom is the leading provider of audio and video conferencing hardware in this

industry. It also has a well-respected services offering. These businesses can be classified as

related constrained (for more details refer to Polycom’s corporate level strategy in internal

analysis).

Comparison of Key Competitors

Avaya-Nortel: Avaya’s acquisition of NES has enabled the company to integrate NES’s Agile

Communication Environment (ACE) platform into its flagship Avaya Aura UC solution. The

combined solution has richer software capabilities. Aura runs on industry standard servers and

offers high resiliency. Avaya Application Enablement Services facilitates integration between a

wide range of Avaya, IBM and Microsoft software. On the mobility front, Aura interoperates

with Symbian, Windows Mobile, RIM, Palm, Java and iPhone. Avaya is also moving towards a

virtualized environment that will result in cost reductions in deployment (Avaya, 2010). The

company has a popular partner developer program called DevConnect, and is integrating NES’s

channel partners into its mix (CurrentAnalysis, 2010; Blood and Elliot, 2010).

One issue with its UC solution is that some components run on Windows, while others on

Linux, leading to substantial complexity in deployment. Another issue is this solution’s inferior

video conferencing offering compared to the competition. Avaya is currently going through rapid

change due to the NES integration while trying to keep up with changing customer needs.

Cisco: Cisco is better able to provide its end-to-end UC solution primarily due to the acquisition

of WebEx and Tandberg. Cisco has also virtualized a lot of its software, thereby increasing

operational efficiency and lowering cost. Its UC solution runs on Cisco-specific hardware

platforms, and clustered servers provide redundancy. This solution offers a wide range of video

conferencing capabilities. Cisco’s Communications Manager IP PBXs interoperates with

Microsoft Exchange and IBM SameTime. This solution also has rich feature support for mobile

devices (CurrentAnalysis, 2010; Blood and Elliot, 2010).

The biggest shortcoming of the Cisco UC solution is that it does not interoperate with

many other vendors’ products including third party IP PBXs and IM clients. Cisco also has

multiple complex solution offerings that cause confusion among customers.

Microsoft: Microsoft has recently launched its new UC solution, called Lync, which is an

evolution of the Office Communication Server (OCS). This solution integrates the popular

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Microsoft Exchange Server and Active Directory and offers a unified interface to users. Lync

natively supports rich presence, real-time voice, video, multimedia conferencing and instant

messaging. It offers connectivity over the Internet without requiring a VPN connection.

Microsoft has partnered with many vendors to support a variety of IP telephony and audio/video

conferencing capabilities. Microsoft’s Office Communicator Mobile client runs on Windows

mobile devices to support IM, voice, audio conferencing, presence, and integration with Outlook

(CurrentAnalysis, 2010; Blood and Elliot, 2010).

One downfall of Lync is that it only runs on Windows servers, even though Linux servers

are the most popular among customers (Microsoft, 2010). In addition, a large number of physical

servers are needed for this solution.

Siemens: Siemens’ UC solution is called Siemens Enterprise Communications OpenScape UC

Server. OpenScape is a mature all-software solution that is primarily focused on medium and

large enterprises. This solution offers many own components including telephony. However, it

also integrates with third party applications (including those from IBM and Microsoft) and a

wide range of desk phones and legacy PBX systems. Siemens runs on IBM or Fujitsu servers and

needs a lower number of servers than competitors’ solutions. OpenScape supports a mobile client

that can run on iPhone, RIM BlackBerry, Symbian and Windows Mobile devices

(CurrentAnalysis, 2010; Blood and Elliot, 2010).

One issue with the OpenScape UC solution is that is does not support a native IM server,

increasing complexity in integration. Siemens is an established player in the telephony space and

was able to leverage that market penetration to gain some UC market share. However, the

solution lacks any key differentiating factors, which may cause problems in gaining further

market share. Another issue is the company’s go-to-market strategy centered on European

customers, while its strategy for North America is not clear.

Polycom: Polycom is an industry leader in voice and video communications solutions and

services. More specifically, Polycom has been very successful in penetrating the enterprise

market with its video conferencing hardware such as telepresence and low-end video products.

Its audio conferencing hardware includes, conference phones, desktop and wireless phone

products. Since the company does not have a complete UC solution, it partners with numerous

other vendors to come up with an end-to-end offering. The most notable partnership is with

Microsoft to deliver a complete standards-based solution customized for Microsoft

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environments. Polycom has started the Polycom Open Collaboration Network to enable partners

deliver complete UC solutions for mutual customers. Most recently, Polycom has launched a

marketing campaign called “UC Everywhere”, which unifies communications between mobile

devices, desktops and other conferencing solutions, targeting large enterprises, SMBs and

consumers (Polycom, 10-K, 2010 & Yahoo Finance, 2010).

The most notable shortcoming of Polycom is its lack of a single UC solution. Instead of

offering its own UC solution, it is positioning itself as a partner to others’ UC solutions. As a

result, customers are confused by the numerous solutions and may hinder their decision-making

process. Despite efforts to bring the various players together, Polycom may not have enough

power in a final UC solution if it remains a provider of audio and video conferencing hardware

only.

Resources and Capabilities

The resources and capabilities of the key UC players (including Polycom) are described

in Exhibit 8. All UC players have strong brand recognition in their respective areas of businesses.

Cisco, Microsoft and Polycom invest most heavily on R&D (as a percentage of sales). Siemens

pursues a strong innovation strategy even with lower R&D expenses as a percentage of sales.

Cisco and Polycom have the highest focus on customer service. Almost all manufacturing is

outsourced across competitors. Cisco seems to meet the strictest manufacturing quality

standards, and Microsoft’s software-focused strategy results in minimal manufacturing cost. All

the players have well-established channel partner programs, but Polycom, Avaya-Nortel and

Siemens have the most comprehensive strategic partner relationships. While all the players have

a wide range of products, Cisco has the most comprehensive UC product portfolio. In

comparison to these competitors, Polycom has the least products needed for a UC solution. All

the companies have worldwide presence and a well-penetrated installed base, except Siemens,

which has a stronger emphasis on Europe. (Information used from Cisco’s, Microsoft’s,

Polycom’s and Siemens’ annual reports and Avaya’s website).

Overall, Cisco has the most comprehensive resources and capabilities in the UC industry,

while Avaya-Nortel and Microsoft have enough to be strong players in this space.

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V-C Analysis

Values:

The value drivers that are considered to be the most important and used in out V-C

analysis are listed below:

(V1) Communication Applications – availability of different UC applications including email,

instant messaging, etc.

(V2) Availability of whole UC solution – Many firm offer partial UC solutions compared to a

complete UC solution

(V3) Brand – equity in Brand

(V4) Customer Service – Customer relation management and technical support.

(V5) Architecture – Availability of a hardware system platform and its performance.

(V6) Interface – Number of available client and control interfaces and how access does it

provide to the various UC services.

(V7) Interoperability – Compatibility of the firm’s product with that provided by other vendor

(V8) Mobility – Support for mobile devices.

Costs:

While R&D costs are common cost drivers for all the competitors, manufacturing costs

are the important cost drivers for Avaya and Polycom as they are more hardware focused. Even

with contract manufacturing, Avaya and Polycom seem to have a higher cost structure than the

competitors. (See comparative financial analysis section of this report for more information.)

Willingness to Pay Analysis:

Based on our analysis of various services and products provided by the competitors, and

from the Current Analysis Report that we obtained, we rated the different firms on the above

mentioned value drivers. (Current Analysis, 2010) A comparison of various products provided

by the competitors is shown in Exhibit 9.

Value Equation: V-P=!1*V1+!2*V2+!3*V3+!4*V4+!5*V5+!6*V6+!7*V7+!8*V8

Where, V1,V2.. V8 represent each firm’s rating in the respective value drivers and

!1, !2.. !8 represent the normalized weights of each value driver.

We created a ratings table for value drivers, which were used to determine betas for each

competitor. This analysis is shown in Exhibits 10-a and 10-b.

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From our interview with a Cisco product manager who is involved with UC solutions, we

obtained information on Cisco customers’ buying preferences (Exhibit 27b). Weights were

assigned accordingly to the different value drivers. We recognize the inputs from our contact in

Cisco may be biased but we were unable to obtain a contact at any of the UC customers. For the

purpose of this analysis we consider the data obtained to be unbiased.

V-C comparison for Polycom and its competitors is shown in Exhibit 10-c. For our

analysis, we considered a relative price of $1 to be the base and found how much value the

customer perceives for every $1 invested in the UC solution. A combination of Cost of Goods

(COGS)/Sales and R&D/Sales is used in lieu of the cost of the product as most firms’ entire

product portfolio is part of a UC solution. From our analysis, we found that Cisco offers the most

value and highest V-C. Avaya offers more value than Microsoft. However, since Microsoft is

more software based it is able to capture more value due to this cost efficiency.

Comparative Financial Analysis

Our financial analysis includes Cisco, Microsoft and Siemens, comparing their financial

performance with Polycom. Financial performance of Avaya, which is privately held since 2007,

could not be thoroughly analyzed due to incomplete publicly available financial data. Avaya’s

performance is included in discussions where applicable. However, only years 2004 - 2007 with

fully audited data are covered. Our main source of data for the financial analysis includes, the

companies’ annual 10k reports as well as data provided by Morningstar Inc. To properly assess

companies’ performance we analyzed thirteen ratios between years 2004 and 2009 (Morningstar,

2010). (See Exhibit 11 and Financial Appendix 1 and 2 for more detail). These ratios include

profitability, efficiency and liquidity ratios as well as sales growth, financial leverage and cost

performance. In addition, DuPont decomposition of ROE was performed for all companies.

Profitability: Microsoft shows steady and solid performance over the years compared to its

rivals. Its ROE and ROA (37 percent and 19 percent respectively), as well as net and gross profit

margins, are the highest for the select group. Polycom’s ROE of five percent is on the other side

of the spectrum. Polycom’s gross profit margin is much closer to Microsoft and Cisco than to

Siemens. This difference is a result of Siemens’ cost structure and higher COGS, since it

manufactures labor and material intensive equipment. In terms of Avaya’s performance, the

company had profits of about 8 percent in ROE and little below 4 percent in ROA. Historically,

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Avaya has had moderate gross profit margins but suffers in net profit margins due to high

expenses such as SG&A, R&D and recent restructuring expenses.

Efficiency: Microsoft proves to be the most efficient out of the group in terms of inventory

turnover (14 times) with a vast improvement in the last three years. Cisco’s 11-times inventory

turnover in 2009 has also been improving. Polycom’s performance is very steady over the years

with an average of five to six turns a year, lower than the industry average. Due to the lack of

inventory data, only asset turnover for Avaya was analyzed. Its total asset turnover was the

lowest out of the peers and trends show that it has been declining since 2004.

Liquidity: Cisco and Polycom are better than their peers in terms of meeting and covering short-

term financial obligations. Both these companies have current ratios around three, and quick

ratios around 2.5, which is much higher than their competition. Microsoft with a current ratio of

1.82 and quick ratio of 1.58 remains highly liquid. Siemens’ current ratio around one and quick

ratio below one indicate that the company could be vulnerable and become insolvent in a

continued or more severe economic downturn. Unaudited current and quick ratios were

calculated for Avaya in 2009 with values of 0.97 and 0.78 respectively. This is a big decrease

since 2007 when the company was moderately liquid. Nowadays, Avaya would barely be able to

cover its short-term obligations.

Growth: Polycom experienced the highest sales growth among its peer group before the current

recession, topping almost 37 percent in 2007. All companies experienced economic downturns in

recent years, which is evident in their 2009 year-over-year sales. If we compare the trends for

past six years, Polycom still enjoys the highest average annual growth of nearly 16 percent

followed by Cisco and Microsoft (both about 11 percent). Siemens’ YoY growth is only about 1

percent. Overall, the industry has been experiencing an average annual growth of about 8

percent. Avaya’s sales growth has declined since 2005 and it dropped by almost 1 percent in

2009. Average YoY sales growth is towards the bottom of the competition with about 2.2

percent.

Leverage: In 2009, Polycom was the only company with no leverage. It has no debt on its books

and thus is solely financed through equity. This is positive in terms of credit ratings because the

company faces less risk in difficult economic times. The most leveraged company is Siemens

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with a debt to equity ratio of 74 percent, followed by Cisco and Microsoft with debt to equity

ratios of 27 and 15 percent, respectively.

Cost Structure: Because the UC industry is in the early stages of its lifecycle, we analyzed

R&D and SG&A as percentages of sales for each company. These ratios provide an indication of

a companies’ cost structure and allow us to better understand the companies’ spending.

Polycom’s R&D spending has been decreasing over time while its SG&A expenses have been

increasing. Both Cisco and Microsoft are able to keep their costs lower and increase their R&D

spending to support innovation and new product development. Additionally, Avaya’s costs have

been some of the highest in the industry. Its COGS as percentage of sales has been second

highest right after Siemens. Avaya and Siemens’ R&D spending as a percentage of sales is fairly

low compared to their rivals, which indicates they may suffer in terms of new product offerings

in the future.

DuPont ROE Decomposition: In comparison of all four companies, DuPont decomposition

shows us the source of profitability for each company. See Financial Appendix 2 for details of

this decomposition. From our analysis, net profit margins for Microsoft and Cisco with average

of 27 and 20%, are higher than Polycom’s (8%). Due to Siemens’ multiple business structure

including heavy machinery, its net profit margin is even lower (average of 4%). In terms of

efficiency (asset turnover), all companies are very close with turnovers ranging from 0.64 to

0.87. This leads us to believe that for Polycom, Microsoft and Cisco the key driver in

profitability is margin, whereas for Siemens it is financial leverage (equity multiplier).

Our analysis leads us to the conclusion that Microsoft is in very good condition with

healthy margins, good returns and solid liquidity. On the other side of the spectrum is Siemens

with the lowest margins, low returns and very low solvency compared to its competitors. This

could be a problem in the future, especially with a high leverage and interest expense that has to

be paid annually. Polycom has the lowest profitability compared to its peer group. On the other

hand, it is financially strong in terms of liquidity with no debt on the balance sheet. In addition,

its annual sales growth has been the highest among the peers, supporting its future outlook. Cisco

is behind Microsoft in terms of profitability but leads the group with the strongest cash position

and only a moderate debt on its books. Avaya has some of the largest market shares in UC but its

financial performance in recent years seems weaker than the competition. However, due to a lack

of complete data, Avaya’s true performance is still in question.

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Intra-Industry Analysis To better understand Intra Industry UC trends, we need to look at the life cycle analysis

of UC technologies within the confines of convergence of network life cycle, Interoperability

standards and various vendor alliances and partnership (IDC Analyze the Future, 2001).

Within the convergence of network life cycle, unified communication solution life cycle

has moved from initial fragmentation stage with multiple fragmented solutions offered by

various vendors to shake out stage in 2010. Multiple new opportunities and elements (including

mobility and cloud) are currently evolving to exemplify a new and enhanced UC solution that

meets the overall needs of customers.

A UC solution encompasses various underlying technologies, integrating all or most of

these elements in an enterprise IT infrastructure. Almost all UC vendors provide only a limited

amount of UC products or services. Firms tend to have expertise in different areas of

communications, including voice, video or applications. Integration challenges exist between one

vendor to another in an enterprise-to-enterprise communications, as well as within an enterprise

(Unified Communications Strategies, 2010). These challenges to interoperability have multiplied

as vendors evolved from various silos of communication industry and are fighting hard to be

significant in UC market evolution. Multiple vendors are offering UC solutions with similar user

20

experience, but the standards and protocols used are different and widespread. There are many

strategic groups and regulatory institutions driven by major industry players working to build

open UC standards so UC implementation can be more seamless across various vendors.

Strategic Groups: Four distinct strategic groups exist (Exhibit 12 breaks down the groups into

separate components and shows opportunities for each group):

1) Data/Voice Communication Equipment Suppliers (IP& Hybrid PBX, IP telephony & End-

points)

2) Software Suppliers (Unified Messaging Applications)

3) Service Providers and System Integrators (Managed Services, IP contact centers &

Integration)

4) Conferencing Equipment Suppliers (Video, web and audio Conferencing)

Some firms are dominating one or more groups based on their product offerings.

Polycom currently is a player in video and audio conferencing segments with ongoing strategies

to offer a comprehensive UC solution. With reminiscence of the fragmented life-cycle phase of

the UC adoption to the current shake out phase, the industry has evolved. Some major players

such as Cisco are dominating multiple strategic groups of the UC solution and continuing to

acquire into new strategic groups to complete their single vendor offering. On other hand large

players such as Microsoft and IBM are looking for missing UC components to complete their

UC portfolios. There have been some major consolidations across strategic groups such as voice

player (IP PBX) where Avaya consolidated with legacy voice player Nortel. Cisco recently

acquired a video conferencing equipment player Tandberg. Logitech acquired a unified

messaging player, LifeSize.

Threats and Opportunities for strategic groups: As UC technologies are evolving with

addition of cloud, mobility, and sophisticated video conferencing products. Other firms are

entering the market and competition to become a single end-to-end UC solution is intensifying.

Threats of disruptive technologies within these strategic groups and threats from existing

dominant players evolve the direction of the UC adoption. This activity is sure to change the

competitive landscape in future. Similarly, multiple opportunities exist for firms to acquire or

ally across various strategic groups to meet the needs of customers, gain market share and

dominate the evolution of the UC. Threats currently exist from startups working on disruptive

technologies that can offer cheaper web based communication software. Even though the IP

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PBX, telephony, video and audio conferencing side of the UC market is capital intensive, Asian

firms are poised to offer cheaper products. On the Unified Messaging side, which includes

messaging, chat and voice conference, the barrier to entry is low and remains conducive for new

players to enter the market.

Competitive Dynamics: The UC industry currently has firms allying with multiple competitors.

These situations can lead to conflicts of interest, hold up issues, and high transaction costs.

Alliances considered to be strategic can become defunct with such issues leaving players who

have not invested in their own proprietary components leaving them vulnerable against

competitors who offer a whole solution on their own. Cisco currently sells Polycom’s

SoundStation IP conference phones, which are in direct competition with products sold by both

channel and strategic partners offering end-to-end UC solutions. For example, Cisco/Tandberg’s

video infrastructure, video conferencing and WLAN products compete with Polycom products

that occupy this space. Polycom recently entered into an agreement with HP under which its

complete portfolio of voice and video solutions will be sold and delivered through HP. HP also

sells a telepresence product that is in direct competition with Polycom’s telepresence product

offerings. In June 2010, HP went into partnership with Vidyo, a direct competitor of Polycom.

Polycom initiated strategic alliances with Microsoft and other key players as part of its

“Polycom Open Collaboration Network” to become relevant in the next generation UC market.

Without these partnerships, Polycom will remain a very small UC player and may simply remain

a supplier for this industry. Most alliances and partnerships in this industry are constructed to

compete against dominant players Cisco and Avaya-Nortel. In the case of Polycom, a

strategically and well-executed alliance with long term contractual commitments should be the

goal.

Threats and Opportunities Analysis Opportunities for UC industry

As the reach of communication spreads to more devices it creates new opportunity for

UC. With the advent of smart phones, the use of mobile devices in the enterprise level has

dramatically increased. Mobile devices increase productivity with uninterrupted communication

from anywhere. A variety of mobile devices are being used in enterprises, which has greatly

increased the need for mobile UC solutions. With 4G mobile technology offering better

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bandwidth and speed, the need for increasingly data intensive communication increases. The

potential of development for mobile UC is considerably high.

Cloud based solutions are facing increased used by enterprises even though security

concerns exist. Cloud based solutions offer cheaper alternatives than some existing UC

components currently in wide use. These solutions decrease the need for investment in hardware

and costlier network infrastructure. These solutions are currently being used by smaller

enterprises and have greater potential as companies want to become leaner. With companies like

Google that currently offer cloud-based solutions for consumers, there is a possibility that such

companies can widen their offerings to emerge as competitors at the enterprise level.

If Polycom can form alliances with firms that have core competences in the above

mentioned emerging technologies it would be able to leverage these partners expertise to

strategically position itself in the industry.

Threats for UC Industry

With open source software gaining more popularity, cheap alternatives are available for

chat, message and other communications software. Even though the quality of such open source

communication software is comparatively worse than enterprise solutions, these can eventually

replace several existing components of enterprise UC solution that could be used by smaller

firms.

Another threat to the UC industry is changing customer preferences as this is a relatively

new industry and there is some uncertainty about enterprise customers’ demands. Customers in

the future might prefer a complete solution from a single vendor rather than dealing with

multiple vendors that provide different components of UC solution. This might necessitate a

change in the industry structure. Polycom’s current strategy of growth through alliances, with

each partner offering a different component of UC, might be in jeopardy with this change in

customer preference.

Summary of External Analysis Our Porter’s Five Forces analysis shows the UC industry is slightly favorable at the

present time due to high barriers to entry, low threat of substitutes and low buyer power. High

barriers to entry mainly result from incumbency advantages. Favorable buyer power helps firms

in the UC industry as customers show brand loyalty. This industry shows very attractive growth

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potential creating an opportunity for Polycom if it can establish a competitive position for itself.

The UC market is only in its infancy with customers relying on solution providers to

communicate the value of UC and determine customer needs. Current macro economic

conditions contribute to challenges faced by firms attempting to shape the market for UC

solutions. Developed countries were hit especially hard by the economic downturn in 2009 with

negative GDP growth in the US and Europe. As the economy is showing modest recovery, large

enterprises continue to look for opportunities to improve efficiency and streamline business

processes. UC solutions target these customer needs as well as those looking to reduce travel

expenses. Other macro economic trends affecting UC include the extreme growth in network

usage driven by mobile smart phone users, which requires an increase in bandwidth on existing

networks. UC providers are capitalizing on this need for mobility by integrating video

conferencing and presence capability into smart phones. Improved networks also complement

UC solutions by enhancing the user experience with better voice and video clarity.

Cisco, Avaya-Nortel, Microsoft and Siemens are established UC solution providers

poised to gain market share in this growing industry. These are large competitors with

significant financial resources who are highly motivated to address customer needs in the UC

industry. Cisco has the largest line of products and therefore offers the most comprehensive

solution among these competitors. Firms other than Cisco are partnering to achieve a holistic

solution, which can compete with the giant. With 23% of the UC market classified as belonging

to “other” firms outside the top nine market share leaders, this industry is still forming and

competitors have plenty of opportunity to grow. Competitive dynamics include firms from

supplier groups, including network equipment manufacturers and computer manufacturers,

forward integrating into the UC industry. Audio and video conferencing equipment providers

like Polycom are forming alliances to offer more complete UC solutions. Many companies offer

valuable components to a UC solution (mobility, email, cloud capability, user-interface) but for

some the goal is to offer the best complete solution. The value of having a complete UC solution

is evident in our V-C analysis, which shows Cisco as the leader in value creation due to its high

ranking in this category. UC customer willingness to pay is also heavily influenced by

communication applications and brand of the offering. Cisco and Microsoft are able to capture

more value from their products because of these components, as well as their superior cost

structures, which are due in large part to economies of scale.

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Polycom is striving to level the playing field through its Open Collaboration Network,

which promotes interoperability. This forum provides an opportunity for smaller firms such as

Polycom to shape this industry to be able to compete against larger competitors.

Internal Analysis

Business Definition/Mission

Polycom considers itself a leading provider of high quality, easy-to-use UC solutions

which enable unification of video, voice, and content collaboration for its customers (Polycom,

10-K, 2010). Polycom is promoting open standards and interoperability between UC vendors

through its “Polycom Open Collaboration Network”. This gives customers the ability to leverage

their existing infrastructure and reap the benefits of UC. Polycom's mission is to create value for

customers by improving performance and removing the distance between today's globally

dispersed companies (Polycom, 2010). It is doing this by delivering high definition

communication solutions in order to enhance collaboration, improve efficiency and reduce

carbon emissions.

Organizational Structure, Controls and Values Polycom is a public company with headquarters in Pleasanton, California and offices

worldwide. The company has 2,700 employees and currently has 390 patents issued for its

proprietary technologies. Industry analysts regard Polycom as a very technology and product

focused company, but lacking in marketing vision and strategy (IT Business, 2010). Perhaps

recognizing this shortfall, Polycom appointed Andrew Miller as CEO in May 2010. Miller has

vast experience in the communications industry. He was a VP of Sales at Cisco for 10 years, and

served as CEO of Tandberg, one of Polycom’s biggest rivals. Since taking over as CEO at

Polycom, Miller has been quick to implement changes at Polycom to position it for the future.

He completely revamped Polycom’s executive staff, hiring six people from outside the company

to fill executive roles. He also fundamentally changed the organization structure from a strictly

product-based one to a more customer-centric one. Under the previous CEO Robert Hagerty,

Polycom organized its business units in three categories: video communication solutions, voice

communication solutions, and services. Miller’s new strategic business unit organizational

structure instead focuses on key customers in the UC market (Polycom, 2010). Polycom calls

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these strategic business units “lines of business” which include the following; enterprise and

public/government sector, service provider and small to medium size business.

Two important distinctions should be made between the old structure and the new

structure. (Exhibits 13-a and 13-b)

First, this new structure is based on the unique needs of customers in each of the three

lines of business. Each line of business represents a strategic customer segment and opportunity

for revenue growth. “Services” under the old structure refers to video and voice managed

services that support Polycom’s products and integration into its partner’s solutions. Polycom

has many service provider customers which buy IP phones and conferencing equipment and

deploy this equipment in end user environments as managed or hosted solutions. Some of these

customers are considered channel partners. The largest customers in this group include AT&T,

Verizon and British Telecommunications and serve a broad range of customers from large

enterprises to households. Some service providers manage or host networks for large enterprises

while others use Polycom telepresence equipment to hold satellite classes in an educational

environment.

The second distinction is the separation of R&D as its own entity under the new structure.

Polycom combined its voice and video product development to focus on opportunities in UC.

This organization change allows for a more holistic approach to UC product development. New

products will be more in tune with Polycom’s corporate strategy for UC since this new R&D

group is closer to the CEO than under the old structure. Polycom believes in keeping a level of

R&D investment that allows it to stay on the cutting edge of technology and remain competitive.

Polycom’s R&D spend as a percentage of sales is very comparable to much larger UC firms

Microsoft and Cisco, but far exceeds Avaya and Siemens. This comparison was shown in

Exhibit 11 under our competitor analysis. Our financial analysis shows the company is

profitable in 2009 but had to suspend merit increases and bonuses to employees. Polycom values

its employees and offers these programs as an incentive to share in its success. These programs

were scheduled to be reinstated in the second quarter of 2010. Polycom believes in being

socially responsible and has several major initiatives to showcase these values. First, the

company promotes charitable donations at the corporate and individual employee level. In 2007,

Polycom donated over $350,000 worth of funds and equipment to charities worldwide. The

company encouraged employee donations by matching $36,000 of these donations in the same

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year (Polycom, 2010). Polycom’s second initiative is a recycling program for its products.

Recycling programs have been instituted worldwide to minimize excess waste, and field

software upgrades are offered on many products to minimize shipping.

Polycom’s vision is to become a market leader for UC products and open collaboration.

Polycom is a founding member of UCIF (UC Interoperability Forum) which is meant to promote

open collaboration and interoperability between firms. Polycom believes open standards benefit

the industry by allowing customers to choose from multiple products without a significant

reinvestment in infrastructure. The company values the even playing field interoperability

creates between UC vendors. Polycom’s statements in the media definitely fall in line with its

actions. These values and actions are helping establish Polycom as a leader in the UC market.

Strategic Position Definition

Corporate Level Strategy

Business Portfolio: Polycom’s primary focus is in developing audio and video conferencing

products, which are an integral part of UC solutions. In addition it has a professional services

organization that enables deployment of various enterprise solutions involving multi-vendor

products. Polycom currently manages global sales and distribution process in America, EMEA,

and Asia-Pacific. In 2010, Polycom revamped its organization structure to address various

market challenges and address its new UC strategy (Exhibit 13b). The percent of net sales and

revenue for 2009 from North America (US/Can) and International (EMEA/Latin/Asia) was 52%

and 48% respectively (Exhibit 14).

Rumelt’s Classification: Given the revenue distribution of less than 70% of revenue coming

from a single business unit, the corporate strategy classification for Polycom is either related

linked or related constrained (see Exhibit 14 for Revenue breakdown). On further analysis of the

intersection between the businesses and overall corporate strategy, the classification fits a

related constrained environment (Exhibit 15). This analysis takes into account various factors

to better understand their linkages and effects leading to Polycom’s related constrained corporate

strategy. These factors include organization structure (along with a separate R&D division),

integrated service organization and supply base.

Acquisition, Mergers and Divestments: Polycom’s history shows it has a strong inclination to

invest in private held companies to increase its equity value and enhance its core-competencies.

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In 2007, Polycom acquired Destiny Conferencing Corporation “Destiny”, a telepresence

solutions company. This acquisition was completed to leverage Polycom’s HD video and HD

content expertise and establish itself as a market leader in telepresence. In the same year,

Polycom acquired SpectraLink Corporation “SpectraLink”, a leading provider of on-premise

wireless handsets. This acquisition increased the reach of Polycom’s brand, improved its

channels, and technology capability. The SpectraLink acquisition also allowed Polycom to

expand into mobility solutions (Polycom, 10-K, 2010).

Partnerships: UC technology is maturing and market adoption is increasing revenues to $16

billion by 2015. Currently, Polycom is under pressure to be relevant in this space and take

advantage of this growth potential. To make an impact in short-term, Polycom has chosen to

strategically partner with other UC vendors to better complement its product portfolio and meet

increasing market demands. Polycom recently launched “Open Collaboration Network”

enabling partners to deliver cutting-edge UC solutions and help their customers in terms of

investment protection and flexibility (Polycom, 2010). The strategic partners include Microsoft,

HP, IBM, Juniper, Avaya, Siemens and Broadsoft.

Using the strategic sourcing framework, we have analyzed important partnerships that

create strategic values and complement core competencies for Polycom (Exhibit 16). Based on

our analysis, Polycom has a high strategic value in partnering with all the above UC vendors.

Core competencies vary based on what these companies offer for end-to-end UC solutions. We

can reasonably conclude that with all these partnerships, Polycom considerably increases its

strategic value to offer a better end-to-end UC solution to customers. Partner compatibility,

complementarity and commitment have been analyzed in (Exhibit 17) along with each partner’s

corporate strategy (Exhibit 18). Our analysis concludes that the Microsoft alliance is a very

significant and strategic partnership in terms of joint product development, sales and marketing.

A Microsoft/Polycom alliance can definitely give Microsoft’s UC solution a competitive edge

over leading competitors in this space and create significant pull-through revenue for Polycom.

Other partners are more loosely linked with Polycom. Depending on the evolution of UC

technologies these partnerships could evolve and change rapidly.

BCG Matrix: A BCG matrix is used to evaluate Polycom’s business portfolio under the old

organization structure since enough information was not available to analyze the new structure.

(Exhibit 19) Polycom’s business portfolio includes video and voice businesses and professional

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services organization. The video business has been a high growth business accounting for 54%

of Polycom’s total revenue and a 29% percent market share in video conferencing equipment.

Polycom’s video business portfolio includes the business unit involved in developing

telepresence (immersive, room, personal) systems, Conferencing Infrastructure (RMX series)

systems, Management Applications, Streaming & Recording Applications, and Remote-Access

and Security Systems.

Polycom’s voice business portfolio includes the business unit involved in developing

conferencing phones, desktop phones and wireless products. These products have been widely

deployed and are at the peak of their product life cycle with sustained revenues for the last three

years. This business accounts for 28% of the total revenue and has been a cash cow business.

The most successful product for Polycom has been conference phones “Triangle Bridge”. With

the evolution of unified communication, integration of various unified messaging tools

(Microsoft Lync) with these phones creates a valuable investment protection for customers.

The services organization, which encompasses all products from various businesses, has

been the fastest growing business within Polycom. The service organization supports voice and

video product portfolios, as well as various UC partner products to provide an end-to-end

solution. It will be interesting to see how Polycom evolves this service business to keep its

growing at the current rate.

With Polycom’s current BCG matrix, it remains to be seen whether Polycom, with its

new alliances and partnerships, will be able to grow its UC business and create an eco-system

that enables a pull-through business strategy for its core video and voice products.

Business Level Strategy

Polycom pursues a cost leadership business level strategy for its voice communication

products due to commoditization in this market (Exhibit 20a). It pursues a broad differentiation

strategy for its video communication and services business (Exhibit 20b). Polycom’s customer

segments consist of large to medium sized enterprises for video/voice communication products

and small to medium businesses for voice communication products. Polycom’s services offerings

also meet the needs of mass market. Polycom’s core competencies have been in voice/video

conferencing products. Although its products are an essential part of the UC hardware

infrastructure, Polycom has limited offering in a complete UC product portfolio.

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Polycom has positioned itself at a lower price point compared to Cisco with its

telepresence and video conferencing equipment. Cisco emerged as a leader in this area after its

acquisition of Tandberg.

Voice, Video and Services businesses target the same communication market. Thus,

Polycom’s business strategy fits well with its related constrained corporate strategy. The

strategic move of alliance with other UC players has not impacted Polycom’s core business

strategy.

Resources and Capabilities

Polycom has developed various resources and capabilities in becoming a major

communications product and service provider. Exhibit 8 shows all Polycom’s resources and

capabilities in terms of value and cost drivers. This list is shown in decreasing order of

importance.

Value Drivers

(1) Technology and Innovation: Polycom invests heavily in R&D and has about 390 US patents

and non-US patents according to its 2009 annual 10-K report. This helps Polycom develop

high quality, reliable products and change its solutions and products according to changes in

technology trends. Polycom has been successful in developing new products with continued

innovation according to customer needs.

(2) Interoperability and Availability of Whole UC Solution: Polycom, being a major player in

Open network Collaboration and UC Interoperability Forum, is able to influence open

standards that improve interoperability. This in turn helps Polycom provide a comprehensive

UC solution to its customers by integrating its products with those from its partners.

(3) Customer Service: Polycom uses a customer relationship management system to better

service its customers. It provides both direct technical support, and field support to its

customers through outside contractors. Polycom also has a channel validation program that

allows certified channels to provide services to its end customers.

(4) Reputation: Polycom has a high brand reputation on audio and video conferencing products

as a communication end points maker. It has a huge client base in universities and large

enterprises, which use Polycom end points. This brand value and existing client can be

leveraged in promoting new products and solutions.

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(5) Product mix: Polycom offers many products in different segments along with various

services to its customers. This allows it to customize different solutions based on the unique

needs of these customers. This also allows it to cater to different customer segments of large

enterprises, government and SMBs.

(6) Network Externalities: Strategic partnerships help Polycom provide a whole UC solution and

interoperability. This indirectly contributes to network effects as it increases the value of

owning Polycom’s products across the customer base.

Value Chain Activities that contribute to Value drivers

Our Value Chain Framework shows how Polycom’s different value chain activities

contribute to its cost drivers (Exhibit 21).

The following value chain activities contribute to Technology, Innovation and Product Mix.

Infrastructure: Polycom has two manufacturing facilities: one in the US to manufacture

telepresence products and the other in Denmark to produce voice products. The US

manufacturing facility producing high-end products in telepresence and video products may

enable Polycom to transfer design specifications and knowledge about new technology more

easily to its manufacturing process. However, higher labor costs might be high making it a cost

drain. These activities do not align with the contract-manufacturing model used for other

products.

Technology Development: Polycom develops product designs and concepts in-house while

licensing software for its various products from third party vendors. This activity decreases

software development costs. Since Polycom is mainly a hardware-based company, these

software-licensing agreements allow it to channel its resources towards its core competencies.

With hundreds of patents and R&D centers in multiple countries, Polycom is able to develop

high end video and audio products.

The following value chain activities contribute to better “customer service” and “reputation”.

Human Resource Management: Polycom efficiently uses its sales personnel to provide both

direct touch sales and training sessions for its partners. It has stock compensation incentives to

motivate its employees and retain skilled personnel. The organization of Polycom was

restructured after hiring Andrew Miller, a veteran in UC industry as the CEO, into business units

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with more focus on UC customers. The culture of Polycom is undergoing a change with more

focus on marketing excellence and leadership.

Marketing and Sales: Polycom has sales offices in various metropolitan locations in US and has

sales offices in about 20 countries (Polycom, 10-K, 2010). Polycom’s direct touch strategy for

large enterprises through its direct sales force improves its customer service and reputation.

After Sales Service: Polycom provides after sales service through both direct service staff and

through outside contractors. It uses its customer relationship management system to increase

customer satisfaction. With technical support centers located in multiple countries, it offers

support to both its resellers and end customers. It provides a wide range of services and support

though telephone and Internet. Apart from technical support it also provides professional

services in planning and needs analysis for customers.

Outbound Logistics: Polycom currently operates a worldwide distribution network. Its channel

partners stock limited inventory and Polycom offers direct shipping to end customers of certain

channel partners. This decreases response time and helps to improve its relationship with these

partners. Polycom focuses on its response time commitments to customers and resellers. These

worldwide warehouses help with efficiency in shipping products.

Cost Drivers

(1) Scale Economies: The variety of products offered by Polycom help it to take advantage of

economies of scope by making product designs fungible. Polycom’s manufacturing facilities

can take advantage of economies of scale but high labor costs in US and Denmark create a

negative cost driver.

(2) Low Manufacturing Costs: By contract manufacturing most of its products in Asian

countries, Polycom is able to keep its manufacturing costs manageable. Even though

Polycom is sourcing from multiple suppliers and able to diversify its risk, it is still

comparatively more expensive than its competitor Cisco.

(3) Ability to manage inventory: With most of the products being expensive for customers and

the high cost of manufacturing, excess inventory can negatively impact Polycom’s earnings

through lost sales. Polycom has been successful in effectively managing inventory to

minimize this liability, decreasing the cost of inventory management.

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Value Chain Activities that Contribute to Cost drivers

Our Value Chain Framework shows how Polycom’s different value chain activities

contribute to its cost drivers (Exhibit 21).

Procurement: Polycom uses contract manufacturing for many of its components, with different

suppliers for different products. While using multiple suppliers might help in diversifying the

supply risks it might also decrease the benefits from the economies of scale and scope.

Inbound Logistics: Polycom sources many of its components from multiple suppliers in Asian

countries with cheaper labor costs, using ERP systems to coordinate its inventory and minimize

its inventory levels. Warehouses are strategically located worldwide to procure and stock product

components from suppliers.

Value Chain activity that contributes to both Value and Cost drivers:

Strategic Partnerships: Polycom has partnerships with multiple strategic players in the UC

industry. These partnerships enable Polycom offer a more comprehensive UC solution than it

could offer on its own. This also helps to customize its UC solutions according to customer

needs. Through these partnerships Polycom has been able to better position itself in UC space

without incurring a lot of incremental product development costs.

Channel Partnerships: Polycom not only uses traditional channel partners of resellers and

distributors but also uses its strategic partners to increase sell through. Its go-to-market strategy

along with its channel partners not only helps increase its market reach but also helps increase

sales without investing a lot on its direct sales force.

Our analysis on Polycom’s value drivers, cost drivers and value chain shows that the

number of cost drivers are comparatively less than the number of value drivers. Even though

Polycom says it concentrates on cost, reliability and quality of its products in their 10-K of 2009,

the cost still seems to be high compared to its competitors due to the lack of synergies between

the activities, which would decrease these costs.

VRIO Analysis

From our VRIO Analysis, Polycom does not have a significant sustained competitive

advantage in the UC industry (Exhibit 22).

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Polycom currently lacks resources to offer a comprehensive UC solution and has been

dependent on strategic partnerships to offer a whole UC solution. Even though these strategic

partnerships offer considerable value in the short term, they do not create a sustained competitive

advantage as many of the other UC players are forming similar partnerships. While Polycom has

a good reputation as an end points communication products provider, it is new to the UC

industry compared to its competitors which creates a parity situation.

Polycom has a strong product portfolio in high quality video and audio products that

cannot be easily imitated by its competitors as it holds numerous patents to protect its product

design and technology. This offers Polycom its only sustained competitive advantage.

Given its current position, Polycom needs to develop multiple resources and capabilities

in a short time that would be difficult to imitate in order to achieve a dominant competitive

position.

4P Analysis

Product: Polycom has products in video communications and voice communications categories,

which are the end points in a UC solution. Its video communications consist of telepresence

systems and video conferencing products. Polycom’s immersive telepresence products such as

RPX series, OPX HD 300, ATX series and TPX HD 306M show participants in their life-size

dimensions providing the sensation of sitting across the same table. Room telepresence solutions

use high definition technology to deliver a powerful experience for productive meetings and real-

time decision-making. Personal telepresence products such as CMA desktop provide a high

definition communication experience from mobile PCs, desktops and branch offices. Room and

personal video conferencing systems provide standard quality resolution solutions. The video

product line also includes recording, streaming and security products. Polycom’s product suite

also consists of managing applications (CMA 5000) for IT departments of enterprises to manage

their video communication systems.

Under voice communication category, Polycom has audio conferencing solutions,

desktop phones and wireless phone products. Its wireless phones including SpectraLink 8000

series, which support Voice over Wireless LAN, are useful for on-site mobility of employees.

Some voice products such as SoundStation IP 7000 utilize cutting edge technology to deliver

superior voice clarity. Polycom also sells voice products accessories including cell phone cables

that can be used for conferencing via mobile phone.

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Price: Polycom’s pricing strategy varies depending on the type of product. Cutting-edge high

definition telepresence products demand a higher price premium, whereas some commoditized

voice products have low profit margins. In 2009, the contribution margin from video

communication products was 48% of the segment revenue against 38% for voice communication

products (Polycom, 10-K, 2010). These product prices are typically found to be much lower than

Cisco’s competitive products.

Based on an interview with Cisco’s product manager (Exhibit 27b), prices for these types

of communication equipments are always negotiated. Such equipments are never sold at their list

price and negotiations occur between a sales representative and the customer. This gives the

company a chance to grab a portion of consumer surplus. This implies that Polycom engages in

first degree price discrimination and prices its products according to the customer’s willingness

to pay. Similarly, Polycom gives discounts to enterprises buying equipment in bulk quantities,

which exhibits second degree price discrimination. Polycom exhibits third degree price

discrimination by differentiating pricing based on location and type of customers. For example,

Polycom offers product discounts to educational institutions through its Honors Education

Program (Polycom, 2010).

Polycom sells some solutions as bundles by combining different products together

(Polycom, 2010). Some products are bundled along with a service package. Most of software

based video conferencing products such as Polycom PVX, offer a free trial version of the product

with limited features so customers can try it out before buying the full version.

Promotion: Polycom sells conferencing equipment products along with services in the business-

to-business market space. It uses a direct touch sales strategy to develop close relationships with

its customers by working with them directly as well as through partners. Because of technology

complexity, channel partners need training and certification. Polycom advertises in business

magazines and participates in a lot of communication trade shows. In addition, it invests heavily

in product demonstrations for potential enterprise customers. Polycom offers trade-in programs

through which it provides rebates to the customers for replacing competitor equipments such as

conference phones (Polycom, 2010). Polycom also offers free trials for its software based

conferencing solutions.

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Place: To satisfy the collaboration needs of customers across the globe, Polycom has product

distribution centers across North America, EMEA, Asia and Latin America. Polycom’s partner

ecosystem consists of UC solution providers such as Avaya, Cisco Systems, value added

resellers and system integrator partners such as SKC Communication, Solutionz, Digital China

and Otsuka Shokai Corporation. Service providers include British Telecommunications and

Verizon. Distributors include Imago Micro and retailers such as Best Buy and Amazon. Polycom

Choice Partner Program is a support network of knowledge, programs, tools, and resources

designed to sell Polycom solutions more effectively. As mentioned in intra-industry analysis,

Polycom’s partners such as Cisco offer products that compete directly with Polycom products.

Polycom currently has a strong relationship with its VARs and these service businesses

can create pull through demand for UC solutions. This effect increases as their knowledge of UC

products improves as well as their ability to convince customers of the value of UC. However,

not all system integrators and VARs are exclusive to Polycom. This can create channel conflict

since some integrators re-sell Polycom as well as other manufacturers’ products (Polycom, 10-K,

2010).

Product life cycle analysis

Polycom’s product life cycle analysis is shown in Exhibit 23. After the company launch

in 1990, Polycom’s first product was an audio conferencing speakerphone. After the introduction

of hands free speakerphone units by telephone manufacturers and increased demand for video,

the audio conferencing speakerphone market is shrinking and these products are in a decline

phase. Polycom is maintaining its lead in this market through cutting edge products such as

SoundStation IP 7000, which provide high definition voice clarity. Polycom’s desktop voice

products such as SoundPoint IP phones are in maturity phase. This market is highly

commoditized with stiff competition. Polycom’s wireless mobility products such as Kirk DECT

handsets are in introduction phase.

In the video communication product line, Polycom’s video conferencing and telepresence

products are in a growth phase. Traditional video conferencing products have been around for

quite some time, but with new advance presence technologies, the adoption rate is increasing.

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Product BCG Matrix

Polycom is a market leader in most of the products it develops. It is the second largest

vendor in video conferencing and telepresence solutions with 28.8% market share (Marketwire,

2010). Video communication products have strong growth potential because of telepresence and

UC. In audio conferencing equipments, it has 80% market share, with 48.7% share in single

mode wifi phones (Infonetics Research, 2010). It has 28.4% market share in the commoditized

desktop phone market (Frost &Sullivan, 2010). The BCG matrix shown in Exhibit 24 is based on

expected market growth in respective product lines.

Customer retention

Polycom products deliver bottom-line benefits to the customers by reducing costs,

shortening sales cycles and lowering carbon emissions by providing an effective travel

alternative. Polycom strives hard to retain its existing customers. It believes that excellent

customer service and prompt support are important for customer satisfaction. Polycom also

offers comprehensive professional and support services to its global customers. These are

provided by Polycom professional services group or through its worldwide channel partner

network. Polycom’s professional services group helps integrate Polycom products in the

customer network and also provides professional service and support for solutions offered by its

strategic partners. It also offers installation and implementation services as well as

customer/partner training services. Its 24x7x4 premier onsite service which provides entitlement

for 4 hour onsite response for some high end products is available in 20 metropolitan areas

around the world. The maintenance services provided to the customer include telephone support,

parts replacements, software upgrades and on-site assistance. Its Technical Support Centers

across the globe provide fast service to its customers.

Customers need to train their IT staff to install and operate Polycom’s high-tech products.

Once customers become familiar with communication products from one vendor, there is major

resistance from the IT staff to switch vendors without justified business reasons. Polycom invests

heavily in building relationships with its customers while taking their inputs to define its product

roadmap. It works closely with key customers to identify their business needs in communication

products. These activities along with valuable customer support help Polycom retain its growing

customer base.

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Customer Relationship Management

Polycom invests heavily in an extensive Customer Relationship Management (CRM)

system. Through CRM implementation, its sales force has instantaneous access to information in

any part of the world, resulting in significant growth in sales. The CRM system has improved the

accuracy of sales forecast and has helped in providing Polycom with visibility into future

revenues. This has enabled the company to improve sales productivity, operational efficiency,

and cost containment. By providing valid, real-time information to sales and other departments

such as manufacturing, accounting and marketing, Polycom improved efficiency in various

phases of the sales cycle including lead generation, order management and fulfillment.

Financial Analysis This section provides additional information about Polycom’s financial performance. All

other companies were discussed earlier in the external analysis competitors section. For more

details, see Exhibit 11, and Financial Appendix 1 and 2. Similar to our competitor analysis,

thirteen ratios over a period of six years were calculated. These include profitability, efficiency

and liquidity ratios as well as sales growth, financial leverage, cost performance and DuPont

decomposition of ROE.

Profitability: Polycom’s ROA and ROE have remained fairly stable in the last couple years. The

company is slightly behind its competition but still allows the company to remain profitable.

Both gross and net profit margins, which drive profitability, have been slightly declining in past

years. Even though Polycom is able to manage its operating costs, costs of revenue have

significantly increased over the same period.

Efficiency: Both asset and inventory turnovers have been declining in the last couple of years.

We can conclude that more than the company’s inefficiency the recent economic downturn was

the cause of this trend.

Liquidity: Both current and quick ratio (2.9 and 2.4 respectively) have increased in recent years

meaning the company is able to cover all current obligations with its current assets and is not

facing a risk of credit default in the near future. Hence we can conclude that Polycom has been

cautious and prudent about its cash flows and spending.

Growth: After a long growth period, Polycom has suffered the largest YoY percentage decrease

in sales in 2009 among its competitors. Nevertheless, for the past six years, Polycom had a

compound annual growth rate (CAGR) of 15.89%, which was the highest among all competitors.

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Leverage: Polycom has no debt on its balance sheet and thus is solely financed by equity. This is

in accordance with its liquidity position, indicating a very low credit default risk in the near

future.

Cost Structure: SG&A expenses have been slightly increasing in recent years but also have

been offset by a decrease in R&D expenses. Thus, overall operating expenses have remained

nearly the same for past couple of years. As mentioned previously, the biggest impact on cost

structure is its increase in COGS, which went from 37% in 2004 to 43% of sales in 2009.

Polycom’s Valuation

In estimating the value of Polycom prior to the strategic move, discounted cash flow

(DCF) method was used. From our analysis and industry forecasts, we assume the company will

grow about 6% annually, which is in accordance with the Telecommunication Networking

Equipment Manufacturing industry (Thormahlen, 2010). Prior to this strategic move, Polycom is

assumed to have power over current buyers due to its reputation and quality it provides but it will

not be able to offer a comprehensive UC solution. Polycom’s main competitors include Cisco,

Avaya and Siemens. We used a terminal growth rate of 3% and weighted average cost of capital

(WACC) of 8.8%. This valuation yields $1.06 billion. For a list of all assumptions, see Financial

Appendix 5,6 and 7. For our DCF valuation, see Financial Appendix 8.

Scenario Analysis

Five different scenarios were used in Polycom’s valuation and then applied to the DCF

model. For summary and details of the scenarios, see Financial Appendix 9-15.

Scenario 1 – Outlook with the current strategic move

This scenario assumes current prospects of the UC industry and Polycom’s outlooks; a

10-year 3-stage model was used in this valuation. We conclude that Polycom will grow 16% for

first five years, followed by 8.5% growth in next five years. This growth is mainly driven by the

video communication line of business followed by the supporting services for video equipment.

This valuation reflects current partnerships and announced changes in the UC strategy and yields

a value of $2.42 billion.

Scenario 2 - Partnerships will take off and will significantly boost earnings

This scenario assumes Polycom will actively engage in its current partnerships and use

them to their full potential. This industry move will significantly boost Polycom's sales allowing

it to have double-digit revenue growth for the whole period. This growth is due to worldwide

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demand of video communication equipment and supporting services created by the effectiveness

of the partnerships. We forecast a growth of 20% for the first five years and about 13% for the

next five years. This valuation yields $3.32 billion.

Scenario 3 - Partnerships fail

In this scenario Polycom's partnerships fail and the company will be left alone with no

growth in the following years. To re-establish itself in the market, Polycom will have to increase

spending on marketing, sales and R&D, and cut costs in G&A. This will increase expenses in

marketing and R&D, and decrease G&A expenses. Eventually the company will start growing

again at about 6% annually. As a result, the company will become only a supplier to UC players

and will not have any power over this industry. This valuation yields $537.9 million.

Scenario 4 - Close partnership with Avaya followed by a merger

Polycom will engage in a strategic partnership followed by a merger with Avaya where

both companies will benefit from reciprocal synergies. We assume that combining Polycom’s

resources in hardware development and R&D, with Avaya’s resources in communication

applications development will result in a more comprehensive UC solution with multiple

variations increasing the value perceived by customer. This scenario assumes a moderate

increase in restructuring costs, with decreases in costs of goods sold, sales and marketing, and

R&D expenses. For simplicity in comparing all scenarios, this valuation reflects the value of

Polycom as a stand-alone entity within the merger and yields $4.29 billion.

Scenario 5 – Close partnership with Microsoft followed by acquisition

This scenario reflects a strategic partnership with Microsoft turning into an acquisition of

Polycom by Microsoft. The acquired company will enjoy strong revenue growth of 20% in the

first 5 years and 13% in the second 5-year period due to a complete UC solution offering and

strong worldwide demand for UC products. Both companies will benefit from pooling R&D

resources together, decreasing COGS and marketing expense. However, due to the differences in

the cost structure and cultures of the companies, an increase in G&A expenses and restructuring

costs is expected. In this valuation, we omitted the value of Microsoft in the acquisition in order

to compare stand-alone value of Polycom across all scenarios. This approach yielded valuation

of $4.21 billion.

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Sensitivity Analysis

Sensitivity analysis was performed in all scenarios yielding different valuations. We

included changes in COGS, R&D, G&A and Sales and marketing expenses, as well as WACC

and sales growth variation to estimate the impact of these variables for the value of Polycom.

From the analysis, WACC is the single most important factor suggesting that the firm’s capital

structure has the most influence on its enterprise value. Other strong factors appear to be COGS

and sales growth, which had significant impact on the changes of the value in most of the

scenarios. Details of this sensitivity analysis are shown in Financial Appendix 16-18.

Effectiveness of Strategy Until the end of 2009, Polycom did not consider itself as a UC player, but was content in

being a market leader in audio and video equipment. However, in 2010 it shifted gears and

started strategically moving towards playing a major role in the UC industry and obtaining a

bigger piece of pie in the UC market. It first hired top-notch executives from major UC players

and then initiated Polycom Open Collaboration Network with an agenda of creating open

standards and interoperability between partner solutions. Polycom also launched UCIF to

promote interoperability between UC solutions (UCI Forum, 2010). As part of this strategy,

Polycom has announced an alliance with other UC players including Microsoft and IBM to

provide an end-to-end solution.

The Microsoft alliance includes joint development, selling and marketing UC products

based on Polycom endpoints and Microsoft Lync. Polycom is also working with IBM to

integrate its UC Intelligent Core video platform and IBM’s Lotus Sametime client, server and

middleware platform. This combined solution is sold as “Polycom Unified Collaboration

Solution for IBM Lotus Sametime” and will be available through Polycom’s channel partners.

Polycom thinks that it can become a stronger UC player through these alliances. However, we

think these types of alliances may not help Polycom to achieve its objective of becoming a major

UC player. It may be able to increase pull through revenue for its voice/video products through

these initiatives. In our opinion, this is more of a marketing campaign to attract attention and can

be quite confusing to its customers.

As discussed earlier, all the UC players, with the exception of Cisco, do not possess end-

to-end UC solution on their own. These competitors have intense rivalry to capture maximum

market share. Tandberg has more than 40% market share of video products, and is in direct

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competition with Polycom. Cisco’s acquisition of Tandberg gave it a bigger installed base for

telepresence products and low-end video conferencing gear. At the time of acquisition, it is

rumored that Cisco had also considered Polycom as an option. Cisco still sells some Polycom

audio conferencing endpoints as part of its UC solution. Polycom products are a crucial part of

UC solutions for almost all the UC players. Polycom IP phones are already being sold as part of

Microsoft Office Communication Server 2007 (OCS), which is a predecessor for the latest UC

solution Microsoft Lync. Polycom has developed numerous products, which are optimized for

Microsoft OCS solution. Polycom already offers a broad portfolio of integrated HD voice and

visual communication products for IBM’s unified collaboration platform.

Even before these latest alliances were announced, Polycom was in partnerships with UC

players, especially Microsoft and IBM. The Microsoft alliance was announced in August 2010

and three months later, we are still not clear about nature of this alliance including joint

development agreements or go-to-market initiatives. We tried to reach several contacts within

Polycom and Microsoft; however could not get any further information about the alliance. While

this alliance is being portrayed as a major breakthrough by many Polycom executives, it is not

their first alliance. In 2004, the two companies had announced an alliance for integrating the

Microsoft OCS solution with Polycom's widely installed video and audio conference systems

(Microsoft News Center, 2010). We found that there was mention of the 2004 alliance between

Polycom and Microsoft in Microsoft’s news archive, but no mention of the 2010 alliance.

Microsoft does not seem to give this alliance the same level of importance as Polycom. This

clearly indicates to us that the alliance is being used by Polycom as a marketing campaign to

position itself as a UC player.

In the case of its IBM alliance, Polycom’s strategic partners and channel partners will not

be more motivated to sell this product because since it’s called a “Polycom UC solution”. IBM’s

UC2 platform still remains as the underlying platform for this UC solution. Polycom’s role of

providing the audio/video endpoints optimized for this particular solution does not change. By

calling it a Polycom UC solution, a high possibility of channel conflict and confusion for

customers exists. This may create adverse impacts on Polycom’s relations with other UC players.

IBM is a relatively small UC player, so Polycom may not get much benefit by aligning with

them. Polycom’s products are complementary to products from other UC firms so no

cannibalization is created through this alliance with Polycom. However, due to fierce

42

competition Polycom may be walking a thin line by aligning with too many players in the same

space.

There will not be much impact on Porter’s six forces due to forging of these partnerships.

As per Cisco product manager, the position of players within UC industry has not changed after

this move (Exhibit 27-b). So there is no reaction from the rivals in the industry. Similarly, the

partnerships do not impact external forces such as buyer power, supplier power.

These partnerships may provide Polycom with a temporary boost in revenue, but will not

help in the long run. The company is still considered as a UC supplier by most of analysts and

players. In conclusion, this strategy falls way short of achieving Polycom’s objective of

becoming a major UC player. Polycom should aim at providing end-to-end UC solution and take

significant steps in attaining that objective.

Recommendations

Short-Term Recommendations

1) Develop well-defined strategic alliances with a few key UC players

Recent announcements from Polycom have created a lot of confusion in the market. It

looks like the company is poised to ally with almost all UC players with the exception of Cisco

and after all these alliances the company’s position might not change a bit. To achieve its

objective, Polycom should pick a couple of key players in the UC space and develop true

strategic alliances. These alliances should be more than a marketing campaign. The scope of

joint development and go-to-market initiatives for these alliances should be clearly defined.

These alliances should be structured to support an increase in the value of Polycom’s offerings.

Polycom should select partners using the compatibility, complementarity and commitment

framework discussed earlier. The short-term strategy of alliance should align with its long-term

objectives.

2) Improve Cost Structure

Our financial analysis of Polycom leads us to the recommendation that Polycom needs to

improve its cost structure. Polycom’s SG&A as a percentage of sales has been growing over the

last six years. In year ending 2009 it was 35%, which is higher than any of the competitors we

43

analyzed. Over the five year period from 2005 to 2009, Polycom’s revenues have grown an

average of 13% annually, while

SG&A expense has grown by an average of 18% per year. Polycom’s SG&A expense is

not resulting in an appropriate return on investment.

2009 2008 2007 2006 2005

Average Annual Increase

Revenue 967 1069 930 682 581 Annual % change in Revenue -10% 15% 36% 17% 8% 13% Sales, General and Administrative 340 364 304 215 178 Annual % change in SG&A -7% 20% 41% 21% 13% 18%

Polycom should reallocate funds appropriately between SG&A and various other product

development activities. Polycom can reduce these costs and improve its profitability with simple

measures such as a restructuring its sales force compensation to be more performance-based.

Polycom’s offices in expensive or non-strategic locations can be consolidated or moved to lesser

expensive locations. Our financial analysis in Exhibit 11 comparing COGS of each competitor

shows Polycom still lags behind its largest competitor, Cisco. We already mentioned Polycom

outsources its manufacturing, but outsourcing additional manufacturing could further improve

Polycom’s COGS. As this industry matures, Polycom will be in a better position to remain

competitive on price with a lower cost structure. These cost cutting measures will improve

Polycom’s V-C position.

Polycom’s R&D as a percentage of its sales is still less than its larger competitors and

therefore, cost cutting measures at Polycom should not include reductions in R&D investment.

3) Focus on Video Conferencing/Telepresence

Another short-term recommendation for Polycom is to concentrate on its video

conferencing offerings (which includes telepresence), especially in international markets. Our

macro analysis section mentions that there is higher growth in the enterprise video conferencing

space. This growth is the result of the reduction of cost by using this infrastructure as substitutes

for business travel. Industry research shows the CAGR for video conferencing in the next five

years will be about 23% (Daily Finance, 2010). However, video conferencing for businesses is

projected to grow at a CAGR of 57% over the same period (CityIS, 2010). Polycom has a 29%

44

market share in video conferencing today, which puts it in an excellent position to capitalize on

its current market position and grow along with this industry (Marketwire, 2010). Polycom is

able to provide superior value to customers as a result of the video and voice clarity of its

products.

R&D investments to enhance the video conferencing and telepresence technologies have

a direct impact on the value portion of V-C since there is a high demand for real-life video

applications and conferencing abilities. Customers may be willing to pay more for these

premium products due to a higher recognized value.

Long-Term Recommendations Polycom has a strong product portfolio in audio, video conferencing and telepresence but

currently lacks the resources and capabilities to develop the missing components of a UC

solution on their own. Polycom has followed the strategy of alliances and partnerships with other

strategic players who have these missing components to provide a complete UC solution to

customers. From our V-C analysis, customers attribute most of the value to the availability of a

complete solution. Strategic partnerships bridge the gaps in product portfolio, but this is a short-

term fix. With Polycom’s competitors making similar partnerships and some of them even

sharing the same partners as that of Polycom, it will lead to potential conflicts in the future. The

nature of these partnerships does not allow for full transfer of knowledge, which can leave

Polycom to be vulnerable without any new capabilities in case of a partnership failure. Without

new technology or capabilities transfer, strategic partnerships might not provide enough

continued value for Polycom. If this industry consolidates in future, Polycom as stand-alone

company could have a weaker competitive positioning. Hence in longer term Polycom should

consider the following recommendations.

1) Develop in-house end-to-end UC capability

Polycom is a market leader in audio and video conferencing equipment, with 80% and

29% market shares respectively. If Polycom is really serious about becoming a major UC player

it needs to step up its efforts to own more key UC components. A logical next step would be to

expand into communication software applications, which is a key UC component and is

considered the most important buying criterion (Interview with Cisco UC Product Manager –

Exhibit 27b), by increasing R&D in-house. We first analyzed the financial viability of Polycom

45

to start a communications applications software business by comparing the R&D and SG&A

spending of Mitel and Aastra, which are two small players that have significant portions of their

business in communications software (Exhibit 25). Our analysis shows that Polycom needs to

increase its R&D spending by 18% and SG&A by 22%. The company has a comfortable cash

position to be able to take on these additional expenses. In addition, it does not have short-term

debt so it can borrow in order to meet additional expenses.

Such a move will propel Polycom towards becoming a major UC player and a step closer

towards offering a complete UC solution. It will most definitely increase Polycom’s brand equity

in the UC marketplace. Even though Polycom will still need to partner with other bigger UC

players, having its own applications offering will provide the company more bargaining power

while negotiating partnership agreements.

The primary issue is that Polycom does not have any experience in software

development, as its current product offerings are very hardware-centric. To circumvent this

issue, it could consider outsourcing its software development needs to a capable independent

software vendor. Another issue is the learning curve of starting an in-house software

development capability. With the UC industry rapidly growing, this could pose a serious

impediment to Polycom’s UC strategy.

2) Acquire smaller UC providers

As discussed in our previous recommendation, Polycom needs to own more key UC

components in order to become a major player in the industry. The biggest disadvantage of

developing software capabilities in-house (or outsourcing) is that it will take time and Polycom

may miss the time-to-market opportunity. Another option that will enable Polycom to increase its

UC capabilities quickly is to acquire a smaller, complimentary UC software provider such as

AndTek or Mitel.

AndTek is a small vendor headquartered in Germany and a preferred development

partner for Cisco’s UC solutions (ANDTEK, 2010). It provides UC software solutions for its

customers and operates in eight countries. No financial information is available for AndTek.

Mitel is a provider of UC solutions to a wide range of enterprises and operates in 90

countries (Mitel, 2010). The company has a strong focus on software applications such as

desktop telephony and other business applications that integrate voice, video and data (Mitel,

46

2010). The company has a market capitalization of $366.7 million and is valued at about $635

million (Yahoo Finance, 2010).

Polycom has a comfortable cash position and no short-term debt. As a result, it could

start exploring the feasibility of acquiring a vendor such as Mitel at an approximate value of

$635 million. Polycom could possibly fund the acquisition using a combination of cash and

financing options.

This acquisition strategy will have the same advantages as the previous recommendation

– it will enable Polycom to become a major UC player. The additional advantage of this option is

that it will provide the competitive advantage to Polycom within a short amount of time.

The primary issue with this option is that Polycom does not have any experience

acquiring software companies. While these potential acquisition targets may offer

complimentary products, they may not be compatible due to the relative sizes of the companies

and different cultures. Also these target companies may not be readily committed to acquisition

by Polycom.

3) Strategic Merger

Polycom should explore the option of strategic mergers. From our analysis of resources

and capabilities of different strategic players, we found both Microsoft and Avaya to be strategic

fits with complementary assets and minimal resource redundancy.

Microsoft is more software oriented while Polycom is hardware oriented. With an

existing partnership and high interoperability, Microsoft seems to be a good fit in terms of

resources and capabilities. Microsoft has plenty of cash and Polycom could be the right

acquisition to make it a complete UC player.

Avaya has both hardware and software oriented resources and even though there may be

some redundancies with Polycom, they are comparatively less (Exhibit 9). Avaya and Polycom

have similar strategic goals in the UC space and both companies have a common history of being

in communication industry for a longer period. Even though Avaya is the market leader in UC

industry, its current V-C position is worse than Cisco and does not create much competitive

advantage (Exhibit 10c). A merger with Polycom might improve Avaya’s competitive

positioning and help it capture more value.

47

Strategy Implementation Alliance with few strategic partners

Our short-term recommendation for Polycom is to focus on few strategic alliances with

key partners to ensure these alliances are meaningful and productive. These alliances should be

decided and agreed upon within the next six months. It’s important to act quickly due to the fast

pace of industry dynamics and current growth period currently taking place. However, these

alliances should be built on the basis of a longer-term agreement rather than a quick marketing

scheme or publicity stunt. Our analysis shows strategic alliances with Avaya and Microsoft offer

the most strategic value with a minimal impact to operations.

Before initiating an alliance, Polycom should determine the objectives of a potential

partnership. In our view, the main purpose of an alliance should be a sharing of product

knowledge for UC solutions. Polycom’s most unique capability is its ability to produce video

and voice products with superior clarity. An alliance partner will benefit from having access to

this very difficult to imitate capability. Polycom should seek a strategic ally that can integrate

their software capabilities into Polycom’s hardware. Polycom has a strong executive team with a

wealth of industry experience, which can benefit both companies.

Polycom’s alliances should involve close collaboration on products and processes, but

not proprietary technologies or trade secrets. Polycom should consider enacting a structured

contract for alliances, which includes a specified time period, joint marketing strategy, and goals

for open collaboration. A joint marketing strategy should be used to promote both partners’

products in the marketplace. A joint marketing agreement will be especially useful for sales

development in strategic geographic regions. Interoperability and increased performance

between products will allow the companies to tout each other as a “preferred partner”. The

results of this alliance should be measurable, including setting appropriate targets for sales

increases in specific regions, advertisement expense, and timelines for collaboration

achievements.

Polycom can follow Cisco’s philosophy of forming a partnership to allow an opportunity

for two firms to work closer and determine if a merger makes sense in the future (Kale and

Singh, 2009). We feel this partnership philosophy applies well to Avaya and Polycom.

Polycom is in a relatively strong financial position as it is not carrying any debt and its

operations are generating a profit. An alliance should not require significant additional costs or

48

investments by either company. However, some redeployment of existing employees to support

alliance goals may be necessary. The following analysis compares two key financial areas for

Polycom and Avaya that will be affected in a strategic alliance:

(1) R&D Expenses – In 2009 Avaya was only investing 7.45% of its sales in R&D, compared to

12.2% by Polycom (Financial Appendix 1). This is based on $4.15B in sales for Avaya and

$967M in sales for Polycom. Since Avaya is a much larger company, matching Polycom’s

investment in R&D expense for collaboration on products should not pose a problem.

(2) SG&A Expenses – Polycom spent 35.16% of its sales on SG&A compared to 30.7% for

Avaya. Both companies have strong sales and marketing investments and likely willing to

spend on additional strategic marketing. If these companies target new geographic regions

for sales development some shuffling of sales personnel or additional marketing investment

may be required.

Strategic Merger

From our V-C analysis we found that Polycom has the lowest V-C position compared to

its competitors. Polycom’s core competence is in hardware development, so developing

communication applications in-house would require a huge investment in time and resources.

The learning curve for capability would put Polycom at a disadvantage during this current

dynamic industry. Acquisition of smaller players in the software space might provide Polycom

with needed resources, but few players have a reasonable product portfolio, which would require

acquisitions of multiple companies. This creates integration problems and the need for more

capital. Interoperability also becomes a concern with the acquisition of multiple players creating

compatibility issues.

This leads us the recommendation of Polycom seeking a strategic merger with a bigger

UC player. This strategy is similar to the one that was implemented by Tandberg, a previous

competitor of Polycom that was acquired by Cisco making the merged company a dominant UC

player. Considering the UC industry’s growth projections and Polycom’s current position, we

think it would receive a better valuation now than at a later period in time.

Multiple steps are needed to find the right strategic fit and execute a successful merger.

Based on our financial analysis, an alliance with Microsoft or Avaya creates more value for

Polycom as a combined company than as standalone companies (Financial Appendix 14 and 15).

While alliances create value, a merger might not only increases the value more than an alliance,

49

due to synergies of multiple value drivers, but also decrease costs due to synergies in cost

drivers. This ultimately increases the valuation of a combined company.

• Type of Synergy: For both Microsoft and Avaya, the synergies are reciprocal as it needs

interoperability between different products for seamless integration.

• Resources and capabilities: While Polycom has developed multiple resources in hardware

development and invests heavily in related R&D, Microsoft and Avaya both have

considerable resources in developing communication applications. Combining resources after

the mergers would result in a more comprehensive UC solution and multiple variations of

UC solutions, increasing the value perceived by customers. This might also help in reducing

redundancies in corporate staff. While a merger with Microsoft would not result in

economies of scope or scale, a merger with Avaya might result in economies of scope due to

commonalities in the hardware portfolios of the two. While Avaya and Polycom have similar

culture and industry experience as they emerged from traditional communications businesses,

Polycom and Microsoft might have cultural conflicts as Microsoft is mainly a software

focused company. Microsoft also has better marketing resources compared to Avaya that

could be leveraged by Polycom.

• Consistency with strategy: Polycom and Avaya have similar strategic goals to position

themselves as dominant players in the UC industry. Microsoft has a better V-C position

compared to Avaya and Polycom since its focus on the communication application side of

UC keeps costs lower. Microsoft’s strategy is not very consistent with Polycom’s.

• Cost of Entry Test: Polycom has a strong partnership with Microsoft and many of their

products are complementary and compatible with each other. Due to this existing strong

partnership, integration costs might be low and comparatively smaller investment may be

needed to merge the companies. Very few redundancies currently exist between Microsoft

and Polycom products, thus eliminating the issue of product cannibalization. Although

cultures between both firms are different due the size and focus of their businesses, their

integration cost might be higher compared to Avaya merger option.

With Avaya, there might be some redundancies in the product offering resulting in

cannibalization, though not considerable. Unlike Microsoft, Polycom does not have a joint

product development program with Avaya and partnership aimed to increase interoperability

50

of the products. So there would be a need for investments to increase compatibility between

communication applications and hardware products.

• Better off Entry Test: From our Scenario Analysis 4 and 5 we found Polycom’s valuation, as

a part of a combined company is far better than Polycom on its own. Our financial analysis

(Financial Appendix 14) shows that a Polycom/Avaya merger has a better valuation than a

Polycom/Microsoft merger. A more detailed financial analysis and comparison is needed to

determine the valuation change of Microsoft and Avaya after these mergers to determine the

NPV of the combined companies and see which merger is better.

Apart from the above-mentioned tests, Polycom’s management would need to address

antitrust concerns of an Avaya merger, as Avaya is already the market leader in UC industry.

Scenario Analysis and Sensitivity Analysis:

Multiple scenarios should be considered with these different merger options. As Avaya is

currently private the combined company can become private based on the funds available

through debt. The combined company could go public after a few years with a better valuation

after synergies are realized. Another scenario to be considered is to remain a public company

after a merger, but this would depend on a stock deal with Avaya.

Due to Microsoft’s healthy cash reserves it can either go for a cash-based acquisition or a

stock based acquisition of Polycom. After considering different scenarios, sensitivity analysis

should also be done for each scenario.

Changes to Value and Cost Drivers:

The V-C analyses of the two strategic mergers are shown in the Exhibit 26.

Microsoft/Polycom:

We expect that there will be a significant improvement in the rating of value drivers for:

Availability of whole UC solution, Communication applications and architecture that would

improve the incremental value. The total value of the combined company would be $1.90

compared to $1.63 for Microsoft and $1.59 for Polycom. We calculated the cost of

Microsoft/Polycom with a weight of 0.6 to Polycom and 0.4 to Microsoft as we think that

manufacturing costs will overshadow software development costs. The cost of Microsoft/

Polycom was found to be $0.47. The V-C of Microsoft/Polycom will be $1.43, which is highest

among all UC players. This creates a far better competitive positioning for a merged company

than it would for these individual companies.

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Avaya/Polycom:

The value drivers Architecture, Availability of whole UC solution and customer service

will significantly improve with this merger. The total value perceived by customers for

Avaya/Polycom would be $1.87, better than either of them separately. The cost of a merged

company was calculated as an average of the individual costs and decreased by 15% attributing it

to savings from economies of scope and scale. The cost of the merged company was found to be

about $0.50. The V-C of Avaya/Polycom is found to be $1.37, which is more than Cisco and

other players in UC current values.

From our preliminary analysis and financial analysis above (Financial Appendix 14), we

think an Avaya merger is a better option than a Microsoft merger.

Impact on five forces after the merger:

After the recommended merger, there are no impacts on Barrier to entry, buyer power,

substitutes, and complements. Due to vertical integration movement of Polycom from a supplier

to a UC player, the threat of supplier power will be reduced. The combined company will offer a

more differentiated UC solution, thus increasing rivalry in the industry.

Corporate Social Responsibility and Ethical Decision Making Practices Short-term Recommendation:

Polycom has recently entered many partnerships making management’s ability to control

employee behavior increasingly difficult. Therefore, it is important for Polycom to leverage

ethical values and social responsibility while managing the company. When management styles

differ across organizations and employees become confused about organizational goals, ethical

values need to be reinforced by management to support the company. In this case, management

has to set ethical standards and support these guidelines, leading by example. Actions by

management include resolving conflicts of interest and protecting confidential information of the

company and its partners. If all employees see this commitment from senior management, it

becomes easier for them to follow these guidelines, which are also stated in the company’s Code

of Business Ethics and Conduct (Polycom, 2010). Additionally, to support the creation of a

healthy and ethical environment, we encourage management to implement an ongoing process

where all employees can contribute to creation and review any changes to the ethical standards.

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Long-term Recommendation:

According to the Polycom’s Summary of Corporate Social Responsibility, the company

has two initiatives including environmental sustainability and charitable giving (Polycom, 2010).

The goal of these initiatives is to reduce organizations’ carbon footprint. We recommend

Polycom leverage its power in communications and focus on creating partnerships with

organizations that have similar goals. This would allow Polycom to enhance its environmental

friendly image while increasing awareness about the reduction of carbon footprints among other

organizations. We believe that continuous partnerships with educational institutions provides

creates this opportunity. Implementing Polycom’s technology in schools will increase student

awareness about unified communications and help connect these students across different

cultures. These programs aimed at increasing awareness among different cultures and nations

help support Polycom’s goal to create a more socially responsible society.

Conclusions

While Polycom considers itself a key UC player, most industry experts do not agree. The

company is still considered to be a mere supplier of audio and video conferencing equipment to

the industry. As a result, we believe that Polycom really needs to step up its efforts towards

offering increased UC functionality on its own. The company needs to strengthen and clearly

define the relationships with its partners, improve its cost structure and aggressively pursue

efforts to gain market share of the rapidly growing high-end videoconferencing and telepresence

business. In addition, our analysis suggests that Polycom should pursue a strategy of a strategic

merger with an established UC player such as Avaya or Microsoft. The combined company

would provide a comprehensive UC offering that would pose a serious threat to Cisco and

possibly emerge as the UC leader within the next few years.

We believe this is an exciting time for Polycom and if it makes the right strategic

decisions based on our recommendations, shareholders will benefit and the stock will outperform

expectations. However, if the company chooses to continue the strategy of partnerships alone, it

will soon lose its competitive advantage. Our recommendation is to wait and invest in Polycom’s

stock at the first sign of an increased ownership of additional UC components.

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Main Appendix

Exhibit 1: Industry Diagram

54

Exhibit 2: Five Forces Level 1/ Level 2 Analysis

Exhibit 2-a: Rivalry among existing competitors

Factors underlying Rivalry

Reasoning Score

Rank

Industry Concentration

The UC industry is quite fragmented with (CR7~70%) and unpredictable and the rules of the game are unknown, leading to an increase in rivalry.

5 2

Demand Conditions /Industry Growth Rate Is the industry growing at a decreasing rate or increasing rate?

The industry is on accelerated growth curve. The recent economic downturn showed some slump in demand. However, the industry is expected to grow at compound annual growth rate of 21% from 2009-2013. A lot of companies are turning to UC solutions to cut costs and improve productivity.

1 7

Exit Barriers Exit barriers are medium because industry is not capital intensive and most of the manufacturing is outsourced. The cost of exit mainly consists of severance packages for employees, in addition to customer and partner commitments.

3 5

High Commitment by Rivals

The rivals are highly committed. There is no industry standard for UC and each of competitors is trying best to capture the market share.

5 1

Diversity of Competitors: Do firms have different goals/ideas about how to compete or are they playing by the same set of rules?

Most of competitors offer partial UC solutions. Cisco is the only company with most comprehensive portfolio of UC products. Other players have strengths in few UC areas. The competitors are very diverse, with different goals.

5 3

Degree of Product Differentiation: Opportunities for Differentiation?

Most of competitors offer partial UC solutions. There is lot of differentiation in the products offered by the vendors.

4 4

Fixed Costs/Variable Costs Ratio

Fixed costs are low compared to variable costs. 2 6

Is capacity added in large increments?

In some commoditized UC components such as telephony equipments, capacity is added in large increments. In other niche products such as telepresence, capacity is added in smaller increments.

2 8

Level 2 Conclusion Unfavorable (Very high threat from rivalry) 5 Most Significant Factors 1. High commitment by rivals

2. Many players – industry not concentrated 3. Diversity of competitors

Exhibit 2-b: Analysis for Barriers to Entry (Threat of Entry) Factor underlying Barriers

to Entry Reasoning Score

Rank

Economies of Scale (supply side)

Some economies of scale exist in manufacturing the hardware components such as audio and video equipment.

2 6

Network Effects (demand side scale)

Some Network effects exist. As the same UC solution is adopted by more enterprises, it becomes easier for a company that has deployed a certain UC solution to collaborate with other companies (e.g. partners) that have deployed the same UC solution. So, the adoption

2 3

55

of the UC solution by an increasing number of companies increases the value of UC to each company.

Customer Switching Costs Very high. Customers need to retrain employees; the IT department needs to integrate the new solution.

1 2

Capital Requirements Capital requirements for the entire UC solution consist of R&D (primarily software) and hardware equipment manufacturing facilities. The total cost for a new entrant could amount to about $100 million*, which is about 2.5% of the $1B UC industry. Thus, capital requirements are low when compared to the size of the industry.

4 4

Incumbent Advantages independent of scale

Due to their experience and brand reputation, incumbents have an edge. There is significant customer stickiness to existing solutions. New entrants have a learning curve before they can pose a threat to incumbents.

1 1

Unequal access to distribution channels

Distribution channels to large enterprises may not be accessible to new entrants due to an established relationship with the incumbent players. However, channels to smaller businesses may be accessible to new entrants due to a possible cost advantage.

3 7

Restrictive government policy

There is some government policy to protect the privacy of end-users and the integrity of communications. However, in general, the industry is quite unregulated.

4 8

Expected Retaliation

The UC industry is still evolving and fragmented with many players offering pieces of the solution. Thus, a new entrant may not face fierce retaliation.

4 5

Level 2 Conclusion Favorable 2 Most significant Factors 1. Incumbent Advantages independent of scale

2. Customer Switching Costs 3. Network Effects

*Avg software R&D expense is $21M (Exhibit 25) and hardware cost is $81M (“PPE” - PLCM 2009 Balance Sheet)

Exhibit 2-c: Analysis for Supplier Power Supplier group 1: Videoconferencing and Telepresence hardware vendors

Factors underlying Supplier Power

Videoconferencing and TelePresence hardware vendors

Reasoning Score Rank

Concentration Ratio for each Supplier Group If the concentration ratio of the supplier group is greater than the concentration ratio of the industry ! the supplier group’s power increases

The industry is very concentrated (CR3 = 87%), with Cisco-Tandberg and Polycom as the major players (Marketwire, 2010); and Cisco and Polycom have UC solutions as well. Thus this supplier group has increased power.

4 4

Strategic Importance of the industry to the supplier group (strategic dependence) Does the SG depend on the industry for its revenues? If yes, the supplier group will want to protect the industry with reasonable pricing, etc.

Video conferencing is an integral part of UC. However, the supplier group does not depend on UC to sell their products.

4 5

Switching Costs (are the costs to switch suppliers significant)? When SC high, players have difficulty playing

Switching costs are significant. The replacement of a video conferencing supplier requires extensive testing

4 2

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suppliers off each other and integration effort, thereby increasing R&D cost.

Are the Supplier Group’s products/services differentiated? If yes, increases their power

Yes. Video conferencing and telepresence are very differentiated offerings and use cutting-edge technologies.

5 1

Are there substitutes for the Supplier Group’s products/services?

The substitute is video conferencing on a computer, hand-held device or a personal telepresence device. However, the quality-of-experience is inferior compared to high-end video products.

4 6

Do the Suppliers pose a credible forward integration threat?

Yes, and many providers such as Cisco and Polycom are already vertically integrating into the UC space.

4 3

Level 2 Conclusion Unfavorable (High threat from SG) 4 Supplier group 2: IP Telephony Providers.

Factors underlying Supplier Power

IP Telephony Providers

Reasoning Score

Rank

Concentration Ratio for each Supplier Group If the concentration ratio of the supplier group is greater than the concentration ratio of the industry ! the supplier group’s power increases

The IP telephony group is concentrated with CR5=80% (Avaya-Nortel, Cisco, Alcatel-Lucent, Siemens and NEC) (Machowinski, 2010). Even though there are many standalone phone manufacturers, customers prefer to buy the phones from the big IP PBX vendors. Thus, this SG has considerable power.

4 2

Strategic Importance of the industry to the supplier group (strategic dependence) Does the SG depend on the industry for its revenues? If yes, the supplier group will want to protect the industry with reasonable pricing, etc.

The SG does not depend on the UC industry. All enterprises need phone services, but not necessarily UC.

4 5

Switching Costs (are the costs to switch suppliers significant)? - when SC high, players have difficulty playing suppliers off each other

Switching costs are moderate. On one hand, telephony equipment needs to be replaced, resulting in testing and integration effort, thereby increasing R&D cost. On the other hand, the products are standardized, so the integration effort is expected to be smooth.

3 1

Are the Supplier Group’s products/services differentiated? If yes, increases their power

Telephony has become commoditized, and there is not much differentiation possible.

2 3

Are there substitutes for the Supplier Group’s products/services?

Substitutes are soft-phones that are available on computers, as well as mobile phones. However, still desk phones are an essential part of employees’ work lives.

4 4

Do the Suppliers pose a credible forward integration threat?

While some manufacturers have forward integrated, the threat is by and large minimal from an industry point of view.

2 6

57

Supplier group 3: Audio Conferencing vendors

Factors underlying Supplier Power

Audio Conferencing vendors

Reasoning Score Rank

Concentration Ratio for each Supplier Group If the concentration ratio of the supplier group is greater than the concentration ratio of the industry ! the supplier group’s power increases

Even though CR1=80% (Polycom, 2010), the audio conferencing industry is fragmented as there are numerous smaller players competing for the remaining 20% of the pie.

3 4

Strategic Importance of the industry to the supplier group (strategic dependence) Does the SG depend on the industry for its revenues? If yes, the supplier group will want to protect the industry with reasonable pricing, etc.

Traditionally, the audio conferencing did not depend on the UC industry for their revenues. However, in recent years, the products have become commoditized and may depend on the UC industry to drive its sales.

2 5

Switching Costs (are the costs to switch suppliers significant)? - when SC high, players have difficulty playing suppliers off each other

Switching costs are moderate. On one hand, audio conferencing equipment needs to be replaced, resulting in testing and integration effort, thereby increasing R&D cost. On the other hand, the products are standardized, so the integration effort is expected to be smooth.

3 3

Are the Supplier Group’s products/services differentiated? If yes, increases their power

The audio conferencing market has become commoditized, and there is not much differentiation possible.

2 2

Are there substitutes for the Supplier Group’s products/services?

Substitutes are the desk phones that have hands-free speakerphone capabilities and are used as conference equipment. In addition, videoconferencing and telepresence equipment has integrated audio conferencing capabilities.

2 1

Do the Suppliers pose a credible forward integration threat?

All vendors other than Polycom are small and do not pose a significant forward integration threat.

2 6

Level 2 Conclusion Favorable (Low threat from SG) 2 Supplier group 4: Software Vendors

Factors underlying Supplier Power

Software Vendors (Email, Instant Messaging, Soft Phone, Web Conferencing,

Database)

Reasoning Score Rank

Concentration Ratio for each Supplier Group If the concentration ratio of the supplier group is greater than the concentration ratio of the industry ! the supplier group’s power increases

While there are many software vendors providing IM, Soft Phone and Web Conferencing clients, there are only a few Email clients that have gained popularity. The main email clients are Microsoft Outlook, Mozilla Thunderbird, and Apple Mail. The database software

3 4

Level 2 Conclusion Neutral 3

58

providers are few in number, but they provide basic database services and do not have any specific power over the UC industry.

Strategic Importance of the industry to the supplier group (strategic dependence) Does the SG depend on the industry for its revenues? If yes, the supplier group will want to protect the industry with reasonable pricing, etc.

Soft Phone and Web Conferencing vendors have tailor-made their products for UC, and depend on the industry for their revenues. However, Email, IM and database software are well penetrated in enterprises with or without UC.

3 3

Switching Costs (are the costs to switch suppliers significant)? - when SC high, players have difficulty playing suppliers off each other

Switching costs are high, mainly for UC solutions targeting large enterprise customers. Extensive integration testing needs to be done, requiring high R&D cost. However, equipment costs are not involved in software client replacements.

4 2

Are the Supplier Group’s products/services differentiated? If yes, increases their power

No, most UC software applications have similar features with minor differentiation.

2 6

Are there substitutes for the Supplier Group’s products/services?

Computer communication has become ubiquitous in the modern-day workplace. As a result there are no substitutes for these software clients.

5 1

Do the Suppliers pose a credible forward integration threat?

With the exception of a few large software vendors, most are small and do not pose a forward integration threat.

2 5

Level 2 Conclusion Unfavorable (High threat from SG) 4

Supplier Groups Effect on Industry

Score Ranking Weights Weighted Score

Videoconferencing and Telepresence hardware vendors

Unfavorable (high threat from supplier group)

4 2 30% 1.2

IP Telephony Providers

Neutral threat 3 3 20% 0.6

Audio Conferencing vendors

Favorable (low threat from supplier group)

2 4 10% 0.2

Software Vendors

Unfavorable (high threat from supplier group)

4 1 40% 1.6

Overall Favorable 100% 3.6

59

Exhibit 2-d: Analysis for Buyer Power Factors underlying Buyers’

Bargaining Power: Midmarket companies/

Large enterprises/ Government

Reasoning Score Rank

Are Buyers concentrated or are there a few high volume Buyers?

Buyers are large in number, but less fragmented than SMB group.

2 5

Are the products differentiated?

The enterprise UC products are well differentiated. 2 4

Does the Buyer face low or high switching costs?

There are moderately high switching costs for switching UC vendors, especially for large enterprises where number of users is large.

1 3

Do the Buyers pose a backward integration threat?

UC products need heavy investments and the buyers do not pose backward integration.

1 7

Factors underlying Buyers’ Price Sensitivity

Is the product a significant fraction of the Buyer’s costs?

UC products are part of IT infrastructure investments for these customers. This group needs enterprise class UC solution and so spends more when compared to SMBs. However, as percentage of overall costs, UC costs are relatively low.

2 6

Does the Buyer earn low profits?

We cannot generalize about the profits earned by customers of UC products.

3 8

Is the Buyer’s productivity affected by the industry’s product?

Through improved communication and collaborative tools, UC products are effective in increasing the productivity of employees.

2 1

Does the industry’s product affect the Buyer’s other costs?

UC products are quite effective in reducing other customer costs such as travelling costs.

2 2

Level 2 Conclusion Favorable (Low threat from buyers) 1.5 Most Significant Factors 1. Buyer’s productivity affected by UC

2. UC affects buyer’s other costs 3. Moderately high switching costs

Factors underlying Buyers’

Bargaining Power: SMB buyer group (Small/Medium

business)

Reasoning Score Rank

Are Buyers concentrated or are there a few high volume Buyers?

Buyers are numerous and extremely fragmented. 3 6

Are the products differentiated?

These buyers are looking for low end, low cost UC solutions, which are not much differentiated.

4 1

Does the Buyer face low or high switching costs?

There are moderately lower switching costs for switching UC vendors in case of SMB buyer group.

4 3

Do the Buyers pose a backward integration threat?

This group of buyers does not pose backward integration.

1 7

Factors underlying Buyers’ Price Sensitivity

Is the product a significant fraction of the Buyer’s costs?

UC products are part of IT infrastructure investments. These products contribute relatively low percentage to the overall costs of buyers. These buyers are very price sensitive when it comes to choosing UC solutions.

5 2

Does the Buyer earn low We cannot generalize about the profits earned by 3 8

60

profits? customers of UC products. Is the Buyer’s productivity affected by the industry’s product?

UC products targeted towards SMBs are less effective in improving productivity compared to those targeted towards Enterprises.

3 5

Does the industry’s product affect the Buyer’s other costs?

UC products targeted towards SMBs are less effective in reducing other customer costs compared to those targeted towards Enterprises.

4 4

Level 2 Conclusion Moderately unfavorable (Higher threat from buyers)

3.5

Most Significant Factors 1. Products less differentiated 2. Buyers price sensitive 3. Comparatively smaller switching cost

Level 2 Analysis for Different Buyer Groups

Buyer Groups Score Rank Weights Weighted Score

Justification

Midmarket companies/ Large enterprises/ Government

1.5

1 80% 1.2 This buyer group is strategically more important to UC industry.

Small/Medium business 3.5 2 20% 0.7 Overall 100% 1.9

Exhibit 2-e: Threat of Substitutes

Factors underlying Threat of Substitutes:

Non-Unified Communication

Reasoning Score Rank

SMB buyer’s propensity to substitute

Smaller companies are more likely to use standalone products (standalone email, instant messaging, and video conferencing) rather than implement UC solutions. These companies are less flexible and willing to adopt new solutions.

4 3

Enterprise buyer’s propensity to substitute

Larger companies are more likely to use UC products due to expected ROI improvements. Large enterprises are able to make the larger investments required for UC.

2 1

Price/Performance of the substitute

Non-unified communication products are considered to have a lower ROI than UC solutions because of productivity gains.

2 2

Level 2 Conclusion Favorable 2

Exhibit 2-f: Effect of Complements Networking Equipment Manufactures: Routers, Switches, Wi-Fi connect

points

Reasoning Score Rank

Relative Concentration Networking equipment industry is more concentrated than the UC industry (CR5 = 67% for Networking and CR5=61% for UC).

4 5

Relative supplier or buyer switching costs

Networking equipment is more commoditized and interoperable. Therefore the cost of changing networking equipment is comparatively less than changing a UC solution.

2 4

61

Ease of Bundling Most products are meant to be sold as a bundle, which promotes increases in volume purchases.

1 7

Differences in pull through UC products create more pull through demand for network equipment manufacturers than vice versa.

2 2

Vertical Integration Networking equipment manufacturers are able to move products upstream to provide UC solutions.

4 6

Rate of growth of Networking Equipment and UC Industries

Networking equipment manufacturing is expected to increase at a rate of 5.6% per year due to increasing demand for bandwidth. UC industry is currently growing at 21%. Networking equipment industry can grow without UC industry growth.

2 1

Dependence of Complement Networking is the backbone for the function of UC. Networking infrastructure improvements increase UC performance.

5 3

Level 2 Conclusion Favorable (insignificant threat from complements)

2

Computer Manufacturers – Servers, PCs, Smartphones

and Laptops

Reasoning Score Rank

Relative Concentration The computer manufacturer industry is more concentrated than the UC industry. (CR4 = 77% compared to CR4 = 56% for UC) (Thormahlen, 2010).

4 5

Relative supplier or buyer switching costs

Servers, PCs and laptops are less expensive to replace than UC solutions.

1 4

Ease of Bundling Computer equipment is easy to bundle with UC solutions, promoting an increase in volume purchases.

1 6

Differences in pull through UC products create more pull through demand for computer equipment manufacturers than vice versa.

1 1

Vertical Integration No threat for vertical integration. 1 7

Rate of growth of Computer Equipment and UC Industries

Demand for computer hardware is expecting an average decrease of 7% per year for the next five years (Thormahlen, 2010). UC industry is currently growing at 21%, and can grow independent of computer equipment.

1 2

Dependence on Complement PC and servers are the platforms for UC. 4 3 Level 2 Conclusion Favorable (insignificant threat from complements) 2

Exhibit: Level 2 Analysis for Complements

Complement Groups Score Rank Justification

Networking Equipment Manufacturers

2 1 This complement group is more closely linked to the UC industry.

Computer Manufacturers 2 2 This group affects the UC industry to a lesser extent than networking equipment today.

Overall 2

62

Exhibit 2-g: Five Forces Level 3 Analysis Competitive Force Effect on Industry Score Ranking Weights Weighted

score Rivalry Very Unfavorable 5 1 23% 1.2 Buyer Power Favorable 1.9 4 15% 0.3 Barriers to Entry Favorable 2 2 20% 0.4 Threat of Substitutes Favorable 2 6 12% 0.2 Supplier Power Slightly Unfavorable 3.6 3 17% 0.6 Role of Complements Favorable 2 5 13% 0.3

Level 3 Conclusion Slightly Favorable 2.8 100% 2.9

Exhibit 3: World Wide Real GDP Growth

Source: Infonetics Research: Real GDP Growth – World Wide – May’2010

Exhibit 4: World Wide CAPEX Forecast (2010 – 2014)

Source: Infonetics Research: Long-term forecast: CAPEX, Revenue and CAPEX by Equipment Type – World Wide – May’2010

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Exhibit 5: World Wide - Standardized Unemployment Rate (2000-2009)

Exhibit 6: UC Market Share

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Exhibit 7: Business Level Strategy:

Exhibit 8: Resources and Capabilities

Resources/Capabilities Avaya-Nortel Value drivers and drains

Cost drivers and drains

Brand High brand equity in IP telephony and communications software

Reputation

R&D High investment in R&D (= ~7%-8% of Sales) Technology

Customer Service Avaya has a comprehensive support system for both Nortel’s and Avaya’s partners and customers.

Service

Manufacturing Most of the manufacturing is outsourced, but contractual agreements require the company to buy inventories of suppliers if Avaya’s forecasts are inaccurate.

Low cost + increased cost of inventory buy-back (cost drain)

Global Presence Substantial international presence Geography

Government Relationship The U.S. government is a major customer of Avaya’s telephony products.

Network externalities

Strategic partnerships Avaya has a popular partner developer program called DevConnect. In addition, it partners with other key UC providers to provide an end-to-end solution.

Partnerships

Channel Partners The revenue derived from sales via indirect channels has been increasing. This indicates an increased focus on channel partner relationships.

Partnerships

65

Product Mix Wide range of products in multiple product segments Product breadth

Economies of scope

High quality products Avaya has strict quality control standards for its products, including the manufacturers.

Quality

Existing client base Avaya with the NES acquisition has the largest UC market share. It has immense penetration in the IP telephony space.

Customer adoption

Inventory Management Avaya’s inventory turnover increased year-over-year, indicating better inventory management.

Reduced backlogs

Marketing and Sales More focus on direct sales to large enterprises. Major realignment in marketing/sales efforts after the NES acquisition.

Go-to-market Strategies

Resources/Capabilities Cisco Value drivers Cost drivers

Brand High brand equity in all areas of UC, especially after the acquisition of WebEx and Tandberg

Reputation

R&D Substantial investment (R&D = ~13%-14% of Sales) Technology

Customer Service Cisco has an entire business focused on services and offers a diverse range of services offerings for customers.

Service

Intellectual property Cisco has numerous patents in various technologies, but mainly relies on the innovation, expertise and management capabilities of employees for enforcement of IP protection.

Technology

Incumbency Advantage With Cisco been in UC space for a longer period than its competitors, it benefits from the learning curve needed in offering UC solutions.

Learning Curve

Manufacturing Primary strategy is to outsource, but also operates some owned facilities. Generally meet ISO 9001 or ISO 9003 standards.

Quality Cost savings

Employee Relationship More than 70,000 employees provided competitive benefits, attrition rate is lower than industry standards.

Productivity

Global Presence Strong worldwide presence Geography

Government Relationship Governments worldwide are major customers. Cisco executives sit in government technology advisory committees

Influence on regulation

Worldwide direct sales and marketing

25000 personnel in 90 countries, including direct and support for indirect sales. Separate central marketing and sales organizations.

Go-to-market

Product Mix Industry-leading product portfolio Product breadth

Economies of scope

High quality products Cisco has increased focus on quality for its manufacturing facilities as well as its software products. It follows strict quality standards for its offerings.

Quality

Existing client base Cisco has the largest market share in computer networking, and the second largest UC market share.

Customer adoption

Channel Partners A substantial percentage of Cisco’s products are sold via channel partners. Cisco has a history of working very closely with these partners and enabling them to be more

Partnerships + Increased Sales

Reduce direct sales force costs

66

profitable.

Inventory Management Cisco’s inventory turnover increased year-over-year, indicating better inventory management.

Reduced backlogs

Resources/Capabilities Microsoft Value drivers Cost drivers

Brand High brand equity in business software and operating systems

Reputation

R&D Huge investment in R&D (= ~14%-15% of Sales) Technology Wages

Customer Service Comprehensive customer service systems targeted for consumers, developers, SMBs and IT professionals of large enterprises.

Service

Intellectual property Large number of software patents and copyrights. However, rely on educating customers and pursuing lawmakers on the importance of IP protection.

Technology

Manufacturing Primary focus is software, so minimal manufacturing costs. And the manufacturing needs of the few hardware products are met by outsourcing to Taiwan.

Reduced manufacturing cost

Employee Relationship Competitive compensation package for the 93,000 employees, including bonus, stock awards and employee stock purchase plans. Focused efforts on attracting and retaining talent.

Productivity

Global Presence Well penetrated all over the world Geography

Government Relationship Governments worldwide are key customers. However, relationships with European governments are not good due to some pricing-related litigation.

Influence on regulation

Marketing and Sales 26,000 employees in Marketing and Sales. Expenses up by 7% from 2008 to 2009

Go-to-market

Channel Partners Strong focus on channel strategy, especially OEM partners that account for 80% of sales.

Partnerships + Increased Sales

Reduce direct sales force costs

Strategic partnerships Microsoft engages in strategic relationships with partners for complementarities as well as for entering new domains.

Product Mix Wide range of products, but primary focused on software applications.

Product breadth

Existing client base Massive client base in consumer and enterprise segments for Windows OS and business software.

Customer adoption

Inventory Management Primary focus is software, so minimal inventory needs to be maintained.

Reduced cost

67

New Product Introduction Microsoft has a key focus on innovation and believes that it is the key reason for their success. It uses innovation to initiate disruptive technologies in the marketplace.

Innovation

Resources/Capabilities Siemens Value drivers Cost drivers

Brand Powerful brand recognition due to its diverse lines of business. Its brand is especially powerful in Europe.

Reputation

R&D Due to its diverse nature of businesses, Siemens has a lower percentage of sales (4%-5%) compared to competition, but increased year-over-year.

Technology

Customer Service Wide range of customer services for enterprises and consumers, for the diverse lines of business.

Service

Intellectual property Several thousand patents and licenses. In fiscal year 2010, Siemens achieved an innovation record of 1300 patents from 12 inventors, and registered a total of 8800 invention disclosures.

Technology

Manufacturing Siemens has a heavy focus on manufacturing due to the nature of its businesses. It has manufacturing facilities in Americas, Europe and Asia that enables it to reduce lead times and shipping cost.

Lower lead times

Reduced shipping cost

Employee Relationship 405,000 employees worldwide, about 50% in Europe. Siemens incurs high employee cost due to stricter employee-protection regulation in Europe.

Higher cost (cost drain)

Global Presence Worldwide presence, but more focus on Europe Geography

Government Relationship Collaborates very closely with governments worldwide, especially due to its involvement in energy, healthcare and telecommunication. It has the ability to influence regulation.

Influence on regulation

Strategic Partnerships Siemens has extensive partner programs for the different businesses it is in. For the UC business, it has technology and OpenScape Fusion Developer partner programs.

Partnerships

Channel partners For the telecommunications business, it has a “Go Forward! Partner Program” for system integrators and manager service providers to increase customer reach.

Partnerships + increased customer reach

Reduce direct sales force costs

Product Mix Wide range of products in diverse business segments Product breadth

Economies of scope

High quality products Focus on quality to deliver competitive products and services. Quality Existing client base Well-penetrated customer base in diverse vertical markets and

geographic locations. Customer adoption

Inventory Management Inventory turnover increased slightly year-over-year, indicating better inventory management.

Reduced backlogs

New Product Introduction Siemens has a strategy called “Open Innovations” that allows it to initiate R&D efforts on new technologies. Siemens has disruptive innovation in energy, healthcare, automation and telecommunications.

Innovation

68

Resources/Capabilities Polycom Value drivers Cost drivers

Brand High brand equity in Video (29% market share) and Audio conferencing (80% market share)

Reputation

R&D Substantial R&D spending (~12%-14% of Sales) Technology Wages

Customer Service Polycom has an entire business focused on providing customer services to resellers, service providers and some end-users. Services include planning, design, implementation and troubleshooting (24x7 support with 4-hour guarantee).

Service

Intellectual property A total of currently valid 390 US and non-US patents, and over 300 pending. In addition, Polycom relies on employee talent, product quality and service offerings to maintain a technology leadership.

Technology

Manufacturing Outsources its audio equipment manufacturing to China, Thailand and Mexico, but owns its telepresence production facility in US even though components are obtained from overseas.

Economies of scale

Reduced cost

Employee Relationship Competitive compensation package for the 2,700 employees, including bonus, stock awards and employee stock purchase plans. In 2009, Polycom went through 2 restructuring efforts and eliminated 4% and 6% of its global workforce.

Productivity Reduced cost

Global Presence Worldwide operations. Strong revenues (48% of total revenue Exhibit 14 from international operations

Geography

Government Relationship Good relationship with European and US government who are important customers, but not strong enough to influence regulation.

Network externalities

Strategic partnerships “Open Collaboration Network” to partner with leading UC players to provide comprehensive UC solutions.

Partnership + increased customer reach

Lower product development cost

Channel Partners Polycom has a strong focus on channels, primarily for its commoditized audio conferencing products. As a result, it has comprehensive channel incentive and training programs, and manages channel conflicts effectively.

Partnerships Reduce direct sales force costs

Product Mix Wide range of audio and video products but lacks products in other areas of UC.

Product breadth + lack of entire UC solution (value drain)

Economies of scope

High quality products Reliable, agile, high quality audio and video conferencing products.

Quality

Existing client base Polycom has a wide client base in diverse vertical markets such as education, healthcare and energy, which it can leverage to sell UC solutions.

Customer adoption

Inventory Management Polycom’s inventory turnover increased from 4.9 to 6 year-over-year, indicating better inventory management.

Reduced backlogs

Industry influence Polycom has been effective in influencing the industry to adopt open standards to its advantage.

Network Externalities

69

New Product Introduction Innovation in audio and video conferencing products, as well as new UC architectures with partner products.

Innovation

Exhibit 9: Comparison of Competitors based on Products

Cisco Avaya Microsoft Siemens Polycom Computing Integrated data

center system Virtual enterprise data architecture

- - -

Core Applications

UC Mobility, Voice, Messaging, MeetingPlace Express, Presence,Work Place Licensing

Avaya Aura conferencing, End User Clients, Unified messaging, Web.alive

Microsoft Lync – messaging/web conferencing, Microsoft Exchange

Opencape- Mobility, messaging, Audio/Video/Web conferencing

-

IP Telephony Endpoint devices, telephones and call processing software

Digital phones and IP wireless phones, IP call control- Aura UC Manager

- - Conference phones, Desk phones, IP phones, wireless phones and other Video/audio end points

Communication Mgmt Application

UC Management Suite

Avaya Data solutions Mgmt, Aura UC Manager

Microsoft Lync, Microsoft Exchange

Openscape Converged Mgmt Application, Global mgmt. system Web commander

Communication Infrastructure

Media, Voice servers, gateways, switches

Gateways,video endpoints, switches and servers

- Switches, gateways

Exhibit 10-a: Ratings Table for Value drivers: Cisco

UC Microsoft UC

Avaya-Nortel UC

Polycom

Communication Applications 4 3 4 2 Availability of whole UC solution 5 2 4 2

Brand 5 5 4 4

Customer Service 4 4 3 4

Architecture 3 2 4 3

Interface 4 3 4 3

Interoperability 3 3 4 4

Mobility 4 3 3 3 Scale: 1-5(1 being the worst and 5 being the best in the industry)

70

Exhibit 10-b: Weights Matrix for Value Drivers

Importance Weight Normalized Weight (!)

Communication Applications 1 8 0.22

Availability of whole UC solution 2 7 0.19

Brand 3 6 0.17 Customer Service 4 5 0.14 Architecture 5 4 0.11 Interface 6 3 0.08 Interoperability 7 2 0.06 Mobility 8 1 0.03

Exhibit 10-c: V-C Comparison Table:

Value drivers

Normalized Weight

Cisco UC Ratin-g

Cisco UC Weighted Score

Microso-ft UC Rating

Micros-oft UC Weighted Score

Avaya-Nortel UC Rating

Avaya-Nortel UC Weighted Score

Polycom Rating without Partner-ships

Polycom Rating Weighted Score

Polycom Rating with Partner-ships

Polyco-m Rating Weight-ed Score

Communication Applications

0.22 0.8 0.18 0.6 0.13 0.8 0.18 0.4 0.09 0.6 0.13

Availability of Whole UC Solution

0.19 1 0.19 0.4 0.08 0.8 0.16 0.4 0.08 0.6 0.12

Brand 0.17 1 0.17 1 0.17 0.8 0.13 0.8 0.13 0.8 0.13 Customer Service 0.14 0.8 0.11 0.8 0.11 0.6 0.08 0.8 0.11 0.8 0.11

Architecture 0.11 0.6 0.07 0.4 0.04 0.8 0.09 0.6 0.07 0.7 0.08

Interface 0.08 0.8 0.07 0.6 0.05 0.8 0.07 0.6 0.05 0.6 0.05 Interoperability 0.06 0.6 0.03 0.6 0.03 0.8 0.04 0.8 0.04 0.9 0.05

Mobility 0.03 0.8 0.02 0.6 0.02 0.6 0.02 0.6 0.02 0.7 0.02 Incremental Value 0.84 0.63 0.77 0.59 0.69

Relative Price 1 1 1 1 1

Total Value(V) 1.84 1.63 1.77 1.59 1.69

Cost(C=COGS+R&D)

0.49 0.35 0.625 0.55 0.55

V-C 1.35 1.28 1.14 1.04 1.14

71

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Exhibit 11: Financial Ratios Summary

73

Exhibit 12: Unified Communication Market Opportunities by technologies

Exhibit 13-a: Polycom Corporate Old Organizational Structure (2009)

74

Exhibit 13-b: Polycom (New) Corporate Organizational Structure (2010)

Exhibit 14: Revenue per Business Unit

(in ‘000s) 2009 2008 2007 YoY (09-08)

% YoY

% Segment Contribution (09)

%Int'l Contribution (09)

Video Revenue $523,347 $560,062 $493,279 -$36,715 -7% 54% Int’l Revenue

$303,541 $324,836 $256,505 -$21,295 -7% 58%

Voice Revenue $268,161 $353,698 $313,202 -$85,537 -24% 28% Int’l Revenue

$93,856 $130,868 $112,753 -$37,012 -28% 35%

Services Revenue $175,476 $155,560 $123,427 $19,916 13% 18% Int’l Revenue

$66,681 $52,890 $37,028 $13,790 26% 38%

Int'l Total $464,078 $508,595 $406,286 -$44,516 -9% 48% Total $966,984 $1,069,320 $929,908 $102,336 -10%

75

Exhibit 15: Corporate Strategy Corporate and Business

Functions Comments/Assumptions Linkage Rank

Organizational Structure and Processes

The new organization structure has separated business units based on customer categories, common R&D and services lead by Chief Development Officer (CDO), Marketing and Finance Organizations are centralized and led by CMO and CFO. The Sales and Distribution Channels are spread across regions and theaters. In addition, the overall corporate strategy is defined as to drive Unified Communication solutions as the main value driver with all products from various business units as a single product. This shows a strong linkage in terms of P&L between corporate, business units and sales organization.

High 1

Common R&D and Product Development Strategy

There is common R&D in the new organizational structure.

High 2

Professional Services Organization

18% percent of the revenue is generated through services. These are specific voice and video services and combination of both in terms for unified communication solutions. The interaction between business units is very important to resolve various integration and interoperability issues within Polycom or 3rd party vendors.

High 3

Supplier of components, parts, procurement processes

The suppliers for most of the Polycom products are through contract manufacturers in China and South-East Asia. The process processes are centralized and streamlined based on the contract manufacturer and buyers. There are few suppliers for additional video accessories (plastic housings, metal castings, batteries, and other components) from suppliers located in China

Medium 4

Exhibit 16: Partnership: Strategic Sourcing Framework Partner Strategic Value Relative Core Competency Microsoft UC unified messaging

software (MS Lync, MS OSS server, Outlook integration) Polycom –Telepresence, Video and Voice end-points

In UC area Microsoft has primarily focused on unified messaging and software applications. Polycom’s focus is on video/voice end-points. There is an expectation that this partnership would increase adoption of Microsoft based UC solution and increase in sales of Polycom products.

IBM UC unified messaging software (Lotus Notes, Same-Time, UC2 web-conferencing) Polycom –Telepresence, Video and Voice end-points

In UC area IBM has primarily focused on unified messaging and Web conferencing software. Polycom’s focus is on video/voice end-points. There is an expectation that this partnership would increase adoption of IBM based UC solution and increase in sales of Polycom products.

AVAYA IP PBX, AVAYA AURA (web-conferencing) Polycom –Telepresence, Video and Voice end-points

Avaya has primarily focused on IP PBX, Voice communication and web-conferencing applications. Polycom’s focus is on video/voice end-points. There is an expectation that this partnership would increase adoption

76

of Avaya based UC solution and increase in sales of Polycom products.

Broad-Soft Broad Cloud – Cloud computing applications Polycom –Telepresence, Video and Voice end-points

Broad soft has primarily focused on cloud applications. Polycom’s focus is on video/voice end-points. There is an expectation that this partnership would increase adoption of cloud based UC solution and increase sales of Polycom products.

Exhibit 17: Analysis of Polycom’s Strategic Partners Partners Partner Complementary Partner Commitment Partner Compatibility Microsoft Microsoft’s software focus and

Polycom’s hardware expertise yields non-overlapping resources, which can be leveraged. In addition, potential for expanded market addressability, value-chain and protection of existing investments for customers, will create more partner complementarity.

From Microsoft’s perspective there is no mention of any exclusivity rights and partner commitment. There is no binding on Microsoft on not selecting Polycom’s competitor for its UC solution. There exists a prospect of creating more contractually partnership in future.

There is limited partner compatibility with Polycom in terms of core competencies, but culture and style of operations of two firms are and will be quite different.

IBM IBM’s software focus and Polycom’s hardware expertise yields non-overlapping resources, which can be leveraged. In addition, potential for expanded market addressability, value-chain and protection of existing investments for customers will create more partner complementarity.

The joint solution will be sold as Polycom Unified Collaboration Solution for IBM Lotus Sametime. It is not clear whether IBM will not sell its own solution using equipments from Polycom’s competitors. There exists a prospect of creating more contractually partnership in future.

There is limited partner compatibility with Polycom in terms of core competencies. But, culture and work style of both IBM and Polycom are and will be quite different.

HP As a existing channel partner, with the leverage of HP’s sales resources (non-overlapping resources) for selling Polycom products and potential for HP’s evolution in UC market, the partner

HP is just a channel partner for Polycom to integrate Polycom’s products in solutions from other UC vendors. However, for HP’s own Visual Collaboration solution, HP uses Tandberg products. Thus

There is limited partner compatibility with Polycom in terms of core competencies but culture and work style of both HP and Polycom are and will be quite different.

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complementarity will increase exponentially.

limited partner commitment. This opens up a opportunities in future to create more contractually partnership.

Avaya Avaya’s IP PBX and Voice Communication focus and Polycom’s Video hardware expertise yields non-overlapping resources, which can be leveraged. In addition, potential for expanded market addressability, value-chain and protection of existing investments for customers will create more partner complementarity.

No partner exclusivity. Both companies can work with others. So limited commitment. This opens up a opportunities in future to create more contractually partnership.

Limited partner compatibility exists based of each other’s core-competencies Avaya with its IP PBX, IP telephony and voice products and Polycom with its video Products and some voice end-nodes. Since both companies are in communication hardware business, the potential for culture and style to be similar is high.

Broadsoft Broadsoft’s Cloud focus and Polycom’s Video hardware expertise yields non-overlapping resources, which can be leveraged creating more partner complementarity.

No partner exclusivity. Both companies can work with others. So limited commitment. This opens up a opportunities in future to create more contractually partnership.

There is limited partner compatibility with Polycom in terms of core competencies. In addition based on the size and organization structure of the both firms, there is a potential for increased compatibility.

Juniper Juniper’s networking gear focus and Polycom’s Video hardware expertise yields non-overlapping resources, which can be leveraged creating more partner complementarity.

Primarily a channel partner. No partner exclusivity. Both companies can work with others. So limited commitment. This opens up a opportunities in future to create more contractually partnership.

There is limited partner compatibility with Polycom in terms of core competencies but culture and work style of both Juniper and Polycom are and will be quite different.

Siemens Siemens Voice focus and Polycom’s Video hardware expertise yields non-overlapping resources, which can be leveraged. In addition, add a strong Europe presence creating partner complementarity.

No partner exclusivity. Both companies can work with others. So limited commitment. This opens up a opportunities in future to create more contractually partnership.

Limited partner compatibility exists for Siemens IP PBX, IP telephony and Polycom Video Products in terms of core-competencies – but from culture and style perspective are and will be quite different.

Exhibit 18: Corporate strategies of Polycom’s strategic partners: Partners Corporate Strategy Microsoft Microsoft is a large corporation with various business units; the corporate strategy

is a related constrained environment with focus on building software products (OS and applications) for PC, laptops and servers.

IBM IBM is a large corporation with various business units; the corporate strategy is related linked environment with focus on server hardware, software applications, database applications and professional services.

HP HP is a large corporation with various business units; the corporate strategy is related linked environment with focus on PC’s, laptop, desktop, server hardware, printing, software applications and professional services.

Avaya Avaya is big corporation, after acquiring Nortel, they have various business units; the corporate strategy is related constrained with focus on UC based technologies, such as IP PBX, IP telephony and services.

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Broadsoft Broadsoft is public company is focus on communication through cloud and provides software applications and services to enable these features for various customers. The corporate strategy so far has been single business with focus on software development.

Juniper Juniper is big corporation with various business units; the corporate strategy is related constrained with focus on networking technologies, such as core, edge routers, enterprise switches and security products.

Siemens Siemens is large corporation with multiple divisions doing various businesses. The corporate strategy is acquisitive conglomerate firms focusing on healthcare, energy, consumables, communications, IT solutions, mobility and financials.

Exhibit 19: BCG MATRIX (Business portfolio)

Relative Market Share

(Cash Generation)

High Low

High

Market

Growth

Rate

Low

STARS

Video Communication

Business

QUESTION MARK

Professional Service

Business

CASH COWS

Voice Communication

Business

DOGS

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Exhibit 20a: Porter’s Generic Strategies: (Voice Conferencing Equipment)

Exhibit 20b: Porter’s Generic Strategies: (Video Conferencing Equipment)

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Exhibit 21: Value-Chain

• Green Text – Value Drivers • Orange Text – Cost Drivers - Synergies between the different activities of Polycom

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Exhibit 22: VRIO Analysis

Polycom Resource/ Capability

Valuable? Rare? Difficult to imitate?

Exploited by Firm?

Competitive Implications

Technology/High quality products

Yes, high quality HD video products and audio conferencing products.

Yes Yes. Numerous patents, high R&D

Yes Sustained Competitive Advantage.

Strategic Partnerships Yes, more inter-operability and sell through and whole solution capability.

No, many competitors have partnerships.

No, competitors can and are making similar partnerships.

Yes Parity

Customer Service Yes - valued more by the large enterprises.

No, Bigger competitors also have good customer service.

No. Many competitors are customer focused and have financial resources to offer a good customer service.

Yes Parity

Reputation Yes, renowned for quality communication products and services.

No, Cisco and Avaya have better reputation as UC player.

No. Yes Parity

Cisco Resource/Capability Valuable? Rare? Difficult to

imitate? Exploited by Firm?

Competitive Implications

Reputation Yes, has high brand equity in UC industry.

Yes Yes. Cisco is one of the first players to offer a complete solution and has built high brand equity in UC that would be difficult to imitate as it is path dependent.

Yes Sustained Competitive Advantage.

Experience with big acquisitions and smooth integration

Yes, has done a series of successful acquisitions.

Yes Yes, as it is path dependent.

Yes Sustained Competitive Advantage.

Incumbency Advantage

Yes, as Cisco has been in UC comparatively for a long time it benefits from learning curve.

Yes, very few players have similar experience as Cisco.

No. With time every competitor will improve due to learning curve.

Yes Temporary Competitive advantage

Vertical Integration Yes, no supply chain conflicts.

Yes No, competitors with financial resources can acquire too.

Yes Temporary Competitive advantage

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Whole UC solution capability

Yes, customers attribute more value to whole UC solution.

Yes No, many players are partnering to offer whole solution.

Yes Temporary Competitive advantage

UC Architecture Yes, UC architecture is important to offer a whole UC solution.

No, Avaya has better Architecture.

No Yes Parity

Microsoft Resource/Capability Valuable? Rare? Difficult to

imitate? Exploited by Firm?

Competitive Implications

Software development Capability

Yes, important for communication applications.

Yes Yes. Has 89,000 employees with most of them engineers. Due to time compression diseconomies.

Yes Sustained Competitive Advantage.

Software Technology Yes, has large number of software related patents.

Yes Yes. Microsoft has the top patent portfolio for 2008 (Microsoft News Center).

Yes Sustained Competitive Advantage

Marketing Resources Yes, has a large marketing department.

Yes, few players have the financial resources

No, the top competitors have financial resources to do similar marketing.

yes Temporary Competitive advantage

Strategic Partnerships Yes, provides sell through and the ability to offer whole solution.

No. Many competitors are forming similar partnerships

No. Yes Parity

Customer Service Yes, important for large customers.

No. Other players offer good customer service too.

No. Yes Parity

Avaya Resource/Capability Valuable? Rare? Difficult to

imitate? Exploited by Firm?

Competitive Implications

UC Architecture Yes, has the best architecture in the industry.

Yes. Only Cisco has a comparable architecture.

Yes, due to time dependent diseconomies.

Yes Sustained Competitive Advantage.

Whole UC solution capability

Yes, valued more by customers.

Yes. Very few players are capable of offering whole solution on their own.

No, many players are partnering to offer whole solution.

Yes Temporary Competitive advantage

Strategic Partnerships Yes, provides sell through and the ability to offer whole solution.

No No Yes Parity

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Exhibit 23: Polycom Product Lifecycle

Exhibit 24: BCG Matrix for Polycom Product Portfolio

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Exhibit 25: Financial impact of starting a communications application business

R&D Expenses SG&A Expenses Assumed % spending on

UC applications Mitel $25.85 $105.65 50% Aastra $16.06 $42.70 20% Weighted Average $20.96 $74.18 Polycom $117.50 $339.30 % Increase in expense needed by Polycom

18% 22%

*All numbers in USD millions Aastra numbers have been converted to US dollars using the Yahoo! Finance exchange rate on 11/29/2010 Source: Mitel Annual Report 2010 and Aastra Annual Report 2009

Exhibit 26: V-C of strategic mergers

Value Drivers Normalized

Weight Avaya + Polycom Rating

Avaya + Polycom Weighted Score

Microsoft + Polycom UC Rating

Microsoft +Polycom Weighted Score

Architecture 0.11 0.9 0.100 0.7 0.08 Interface 0.08 0.9 0.075 0.9 0.08 Interoperability 0.06 0.9 0.050 0.8 0.04

Communication Applications 0.22 0.8 0.178 0.8 0.18

Mobility 0.03 0.6 0.017 0.8 0.02

Availability of Whole UC Solution 0.19 1 0.194 1 0.19

Brand 0.17 0.8 0.133 1 0.17 Customer Service 0.14 0.9 0.125 1 0.14 Incremental Value 0.872 0.90 Relative Price 1 1 Total Value 1.872 1.897 Cost(COGS+R&D) 0.499375 0.47 V-C 1.373 1.43

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Exhibit 27a: Interview with Polycom’s Territory Account Manager on 11/8/2010 What is the most premium product that Polycom offers? Video, which can be placed into 3 categories: Personal: CMA-D (Converged Management Application for Desktop) and HDX4000 Small-Medium Sized Room: HDX codec’s (6000,7000,8000,9000) Immersive Telepresence: OTX, ATX, RPX The larger a corporations’ video environment grows, the more infrastructure they will need to purchase to power it. That’s what our focus is now at PLCM…selling infrastructure. We are now also making a push in the Wireless arena with our new 8400 series. This has drawn a lot of attention from our customer base. Who are the direct competitors for your products? Cisco/Tandberg, Logitech/LifeSize are the two major ones that come up in my accounts. What is Polycom's value addition? - UC is 100% of our focus compared to Cisco/Tandberg that has 1/80th of their focus on UC - PLCM does not aim to sell bandwidth. Instead and unlike Cisco/Tandberg, we created a protocol called H.264 High Profile that saves customers up to 50% on their bandwidth cost. So currently, H.264 is a big differentiator - PLCM has an open-standards approach where we work and interoperate with 7 Key Partners including Juniper, HP, Dell, IBM, McAfee, Microsoft, and Broadsoft. We call this network of partners, the POCN or Polycom Open Collaboration Network. Contrary, Cisco uses a closed standards approach and has drawn the line in the sand that their equipment will only work with Cisco - We utilize LPR or Lost Packet Recovery as one of our features in delivering video, which creates a seamless and undamaged video even when packets are lost Which of your products are positioned for UC? All of our products. How is UC tied into Polycom’s products? That’s our entire business. Are there any gaps in Polycom's current products to make UC work? None. What other opportunities in the market you are looking into? Delivering video on Tablet devices and smartphones such as Android, RIM/BlackBerry, Microsoft/Windows 7, and Apple.

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Exhibit 27b: Interview with Cisco’s Product Manager on 11/22/2010 How has the UC industry evolved over the years? 1) Past (2003-2005) - soft clients, unified messaging, IP telephony -Asynchronous Communication (email and chat), collaboration tools 2) Present - conferencing video (Telepresence, immersive) 3) Future - convergence of all these apps, in desktop, mobility, cloud computing, VXI client Do you think new Polycom/Microsoft alliance has impact on the industry? Polycom has products compatible with many UC players. So this is not news to me. Do you consider Polycom to be a threat for you as a key UC player? - Microsoft/Polycom - threat for communication manager Do you offer bundled solutions for your customers? - Register end-points as part of the Bill of Material - MC- Servers (IBM) - re-sell - UCS servers How would you rate the following value drivers if you were a buyer? 1) Architecture - 4 2) Interface - 5 3) Interop - 6 4) Applications - 1 5) Mobility =7 6) Availability of entire UC solution - 2 7) Brand/Reputation - 3 How do you see Polycom positioning itself in the next few years? 1) Video Leadership - High Growth 2) User experience and end product should be important factor 3) Software Application

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Financial Background Appendix

Financial Appendix 1: Financial Analysis

88

Financial Appendix 2: DuPont ROE Decomposition

89

Financial Appendix 3: Financial Summary – Balance Sheet

90

Financial Appendix 4: Financial Summary – Income Statement

91

Financial Appendix 5: Metrics Used in DCF Valuations Beta 0.90 Value Line Report 9/24/2010 Risk Free Rate (Rf) 2.77% U.S. Department of Treasury 11/23/2010

http://www.treas.gov/offices/domestic-finance/debt-management/interest-rate/yield.shtml

Market Risk Premium (MRP) 6.7% is the average market risk premium for the period between 1926 and 2009

Ibbotson Market Premia 1926-2009 report

Weighted Average Cost of Capital (WACC)

8.8% based on the Cost of Capital

Cost of Debt (Kd) Assumed 0% due to the immateriality of the debt of Polycom.

Cost of Equity (Ke) 8.8% was calculated using Beta, risk free rate and MRP

Terminal Growth Rate 3% - Polycom is a worldwide company and thus the long term world GDP growth rate is used as terminal growth period

OECD – Prospects for Growth and Imbalances Beyond the Short-term http://www.oecd.org/dataoecd/54/20/45652168.pdf

Tax Rate 26.2% was calculated from the historical data and applied to future periods

Financial Appendix 6: General Assumptions for Financial Analyses • All historical data in the valuations are from Polycom’s 10k annual SEC fillings report

• Because of the high volatility of restructuring costs, normalized restructuring costs were calculated. Median of past years was applied to future years.

• Percentage of Sales for each year was calculated for Net CAPEX and median of the yearly percentage was applied to future years.

• Percentage of Sales for each year was calculated for Change in WC and the average of the yearly percentage was applied to future years.

• Due to their unpredictability, litigation reserves and payments are assumed zero for all years

Financial Appendix 7: Assumptions in Polycom’s “Prior to move” Valuation: • Discounted cash flow (DCF) method with a 10-year two-stage model was applied.

• Our analysis and industry forecasts suggest the growth of 6 percent annually.

• Polycom’s costs structure remains the same, however no restructuring costs are expected since company will not undergo any changes.

• Prior to the strategic move, Polycom enjoys high power over the current buyers due to its reputation and quality it provides.

• Expected gross profit for the industry of 58% (IBISWorld) was used for all future years.

• This valuation yields $1.06 billion.

92

Financial Appendix 8: DFC Valuation Prior to Strategic Move

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Financial Appendix 9: Assumptions in Polycom’s DCF Scenario Analysis • Five different scenarios were used in Polycom’s valuation and then applied to the DCF model. • Weighted average cost of capital (WACC) of 8.80%, effective tax rate of 26.2%, 3% growth rate in terminal growth period, as

well as the same adjustments in NOPAT and FCF calculations are used in all scenarios. Scenario 1 – Outlooks with the current strategic move This scenario assumes current prospects of the UC industry and Polycom’s outlooks; a 10-year 3-stage model was used in valuing the company. We conclude that Polycom will grow 16% for first five years, followed by 8.5% in next five years. This growth is mainly driven by the video communication line of business followed by the supporting services of the video equipment. In this case, COGS remain at 42% of sales, marketing and sales expense is 29.5%, and R&D about 11% and G&A about 5% of sales. This valuation reflects current partnerships and announced changes in the UC strategy and yields a value of $2.42 billion. Scenario 2: - Partnerships will take off and will significantly boost earnings Company will actively engage in its current partnerships and will use their full potential. This move in the industry will significantly boost Polycom's sales and it will grow double-digit revenues for the whole period due to the demand of video communication equipment and the supporting services created by the effectiveness of the partnerships. We forecast a growth of 20% for first five years and about 13% for next five years. However, because of the strategy, Polycom will not be able to cut any more costs and will operate at the same level of efficiency as it did previously (Scenario 1). This valuation yields $3.32 billion. Scenario 3 – Partnerships fail Polycom's partnerships will fail and the company will be left alone with no growth prospects in the following years. In order to keep up with the market, Polycom will have to increase spending on marketing, sales and R&D, and cut costs in G&A. This will increase company's expenses in marketing by 7%, R&D by 5% and decrease G&A by 3%. Eventually the company will start growing again about 6% annually. As a result, the company will become only a supplier to UC players and will not have any power over a newly formed industry. This valuation yields $537.9 million. Scenario 4 – Close partnership with Avaya followed by a merger Polycom will engage in a strategic partnership followed by a merger with Avaya where both companies will benefit from reciprocal synergies. We assume that combining Polycom’s resources in hardware development and R&D, with Avaya’s resources in communication applications development will result in a more comprehensive UC solution with multiple variations increasing the value perceived by the customer. Because of the commonalities in the hardware portfolios, a newly formed company will enjoy better economies of scale/scope. Additionally, Avaya and Polycom have similar cultures as both emerged from the traditional

94

communications business and thus appear to be a good fit. Due to the merger, restructuring costs will increase to 3% in 2011 and 2012 but will decrease to 1.5% by 2014. By pooling marketing resources together, the newly formed company’s sales and marketing expense will account for 28% of sales. Additionally, the merger will allow decrease costs of goods sold to 40% and R&D expenses below 10% of sales. For the simplicity of comparing all scenarios, this valuation reflects the value of Polycom as a stand-alone entity within the merger and results in $4.29 billion. Scenario 5 – Close partnership with Microsoft followed by acquisition In this scenario, Polycom will enter a strategic partnership with Microsoft that will turn into an acquisition of Polycom by Microsoft. In this scenario, both companies will enjoy the same revenue growth of 20 percent in the first and 13 percent in the second 5-year period. Revenues will grow due to the offering of complete UC solutions and a strong worldwide demand for UC products. Both companies will benefit from pooling R&D resources together and the ability to decrease COGS. The new structure assumes 39% COGS and 8% R&D expenses. However, due to the differences in the cost structure and cultures of the companies, we assume an increase in G&A expenses to 8% and restructuring costs to 4% in years 2011-2012 with a steady decrease to 1% by 2018. Using Microsoft’s marketing channels and resources will allow decrease Marketing expenses to 28%. In this valuation, as well as in scenario 4, we omitted the value of the other company (in this case Microsoft) in the acquisition in order to compare stand-alone value of Polycom across all scenarios. This approach yielded valuation of $4.21 billion.

Financial Appendix 10: Scenario Analysis – DCF Valuation Summary

95

Financial Appendix 11: DFC Valuation Scenario 1

96

Financial Appendix 12: DFC Valuation Scenario 2

97

Financial Appendix 13: DFC Valuation Scenario 3

98

Financial Appendix 14: DFC Valuation Scenario 4

99

Financial Appendix 15: DFC Valuation Scenario 5

100

Financial Appendix 16: Sensitivity Analysis – Prior to Move DCF and Scenario 1

101

Financial Appendix 17: Sensitivity Analysis – Scenario 2 and Scenario 3

102

Financial Appendix 18: Sensitivity Analysis – Scenario 4 and Scenario 5

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