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
Table of Contents
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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-

i
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.

ii
"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.

iii
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.

iv
 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.

v
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).

1
 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

2
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

3
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

4
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.

5
 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.

6
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

7
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

8
 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

9
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.

10
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.

11
 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

13
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,

16
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

17
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.

18
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

19
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

20
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

21
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

22
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.

23
 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

24
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

25
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

27
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

30
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.

37
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

38
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

40
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

41
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

42
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.
Average
Annual
2009 2008 2007 2006 2005 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%

43
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

44
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,

45
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.

46
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

47
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,

48
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

49
 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.

50
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.

51
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.

52
Main Appendix

Exhibit 1: Industry Diagram

53
Exhibit 2: Five Forces Level 1/ Level 2 Analysis

Exhibit 2-a: Rivalry among existing competitors

Factors underlying Reasoning Score Rank
Rivalry
Industry Concentration The UC industry is quite fragmented with (CR7~70%) 5 2
and unpredictable and the rules of the game are
unknown, leading to an increase in rivalry.
Demand Conditions The industry is on accelerated growth curve. The recent 1 7
/Industry Growth Rate economic downturn showed some slump in demand.
Is the industry growing at a However, the industry is expected to grow at compound
decreasing rate or increasing annual growth rate of 21% from 2009-2013. A lot of
rate? companies are turning to UC solutions to cut costs and
improve productivity.
Exit Barriers Exit barriers are medium because industry is not capital 3 5
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.
High Commitment by Rivals The rivals are highly committed. There is no industry 5 1
standard for UC and each of competitors is trying best to
capture the market share.
Diversity of Competitors: Most of competitors offer partial UC solutions. Cisco is 5 3
Do firms have different the only company with most comprehensive portfolio of
goals/ideas about how to UC products. Other players have strengths in few UC
compete or are they playing areas. The competitors are very diverse, with different
by the same set of rules? goals.
Degree of Product Most of competitors offer partial UC solutions. There is 4 4
Differentiation: lot of differentiation in the products offered by the
Opportunities for vendors.
Differentiation?
Fixed Costs/Variable Costs Fixed costs are low compared to variable costs. 2 6
Ratio
Is capacity added in large In some commoditized UC components such as 2 8
increments? telephony equipments, capacity is added in large
increments. In other niche products such as telepresence,
capacity is added in smaller increments.
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 Reasoning Score Rank
to Entry
Economies of Scale (supply Some economies of scale exist in manufacturing the 2 6
side) hardware components such as audio and video
equipment.
Network Effects (demand Some Network effects exist. As the same UC solution is 2 3
side scale) 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

54
 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 1 2
department needs to integrate the new solution.
Capital Requirements Capital requirements for the entire UC solution consist 4 4
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.
Incumbent Advantages Due to their experience and brand reputation, 1 1
independent of scale 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.
Unequal access to Distribution channels to large enterprises may not be 3 7
distribution channels 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.
Restrictive government There is some government policy to protect the privacy 4 8
policy of end-users and the integrity of communications.
However, in general, the industry is quite unregulated.
Expected Retaliation The UC industry is still evolving and fragmented with 4 5
many players offering pieces of the solution. Thus, a
new entrant may not face fierce retaliation.
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 Reasoning Score Rank
Supplier Power
Videoconferencing and TelePresence
hardware vendors
Concentration Ratio for each Supplier Group The industry is very concentrated 4 4
(CR3 = 87%), with Cisco-Tandberg
If the concentration ratio of the supplier group and Polycom as the major players
is greater than the concentration ratio of the (Marketwire, 2010); and Cisco and
industry ! the supplier group’s power Polycom have UC solutions as well.
increases Thus this supplier group has
increased power.
Strategic Importance of the industry to the Video conferencing is an integral part 4 5
supplier group (strategic dependence) of UC. However, the supplier group
Does the SG depend on the industry for its does not depend on UC to sell their
revenues? If yes, the supplier group will want products.
to protect the industry with reasonable pricing,
etc.
Switching Costs (are the costs to switch Switching costs are significant. The 4 2
suppliers significant)? replacement of a video conferencing
When SC high, players have difficulty playing supplier requires extensive testing

55
suppliers off each other and integration effort, thereby
increasing R&D cost.
Are the Supplier Group’s products/services Yes. Video conferencing and 5 1
differentiated? telepresence are very differentiated
If yes, increases their power offerings and use cutting-edge
technologies.
Are there substitutes for the Supplier Group’s The substitute is video conferencing 4 6
products/services? on a computer, hand-held device or a
personal telepresence device.
However, the quality-of-experience is
inferior compared to high-end video
products.
Do the Suppliers pose a credible forward Yes, and many providers such as 4 3
integration threat? Cisco and Polycom are already
vertically integrating into the UC
space.
Level 2 Conclusion Unfavorable (High threat from SG) 4

Supplier group 2: IP Telephony Providers.

Factors underlying Reasoning Score Rank
Supplier Power
IP Telephony Providers
Concentration Ratio for each Supplier Group The IP telephony group is 4 2
If the concentration ratio of the supplier group concentrated with CR5=80% (Avaya-
is greater than the concentration ratio of the Nortel, Cisco, Alcatel-Lucent,
industry ! the supplier group’s power Siemens and NEC) (Machowinski,
increases 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.
Strategic Importance of the industry to the The SG does not depend on the UC 4 5
supplier group (strategic dependence) industry. All enterprises need phone
Does the SG depend on the industry for its services, but not necessarily UC.
revenues? If yes, the supplier group will want
to protect the industry with reasonable pricing,
etc.
Switching Costs (are the costs to switch Switching costs are moderate. On one 3 1
suppliers significant)? hand, telephony equipment needs to
- when SC high, players have difficulty playing be replaced, resulting in testing and
suppliers off each other integration effort, thereby increasing
R&D cost. On the other hand, the
products are standardized, so the
integration effort is expected to be
smooth.
Are the Supplier Group’s products/services Telephony has become 2 3
differentiated? commoditized, and there is not much
If yes, increases their power differentiation possible.
Are there substitutes for the Supplier Group’s Substitutes are soft-phones that are 4 4
products/services? available on computers, as well as
mobile phones. However, still desk
phones are an essential part of
employees’ work lives.
Do the Suppliers pose a credible forward While some manufacturers have 2 6
integration threat? forward integrated, the threat is by
and large minimal from an industry
point of view.
56
 Level 2 Conclusion Neutral 3

Supplier group 3: Audio Conferencing vendors

Factors underlying Reasoning Score Rank
Supplier Power
Audio Conferencing vendors
Concentration Ratio for each Supplier Group Even though CR1=80% (Polycom, 3 4
If the concentration ratio of the supplier group 2010), the audio conferencing
is greater than the concentration ratio of the industry is fragmented as there are
industry ! the supplier group’s power numerous smaller players competing
increases for the remaining 20% of the pie.
Strategic Importance of the industry to the Traditionally, the audio conferencing 2 5
supplier group (strategic dependence) did not depend on the UC industry
Does the SG depend on the industry for its for their revenues. However, in
revenues? If yes, the supplier group will want recent years, the products have
to protect the industry with reasonable pricing, become commoditized and may
etc. depend on the UC industry to drive
its sales.
Switching Costs (are the costs to switch Switching costs are moderate. On one 3 3
suppliers significant)? hand, audio conferencing equipment
- when SC high, players have difficulty playing needs to be replaced, resulting in
suppliers off each other 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.
Are the Supplier Group’s products/services The audio conferencing market has 2 2
differentiated? become commoditized, and there is
If yes, increases their power not much differentiation possible.
Are there substitutes for the Supplier Group’s Substitutes are the desk phones that 2 1
products/services? have hands-free speakerphone
capabilities and are used as
conference equipment. In addition,
videoconferencing and telepresence
equipment has integrated audio
conferencing capabilities.
Do the Suppliers pose a credible forward All vendors other than Polycom are 2 6
integration threat? small and do not pose a significant
forward integration threat.
Level 2 Conclusion Favorable (Low threat from SG) 2

Supplier group 4: Software Vendors

Factors underlying Reasoning Score Rank
Supplier Power
Software Vendors (Email, Instant
Messaging, Soft Phone, Web Conferencing,
Database)
Concentration Ratio for each Supplier Group While there are many software 3 4
If the concentration ratio of the supplier group vendors providing IM, Soft Phone
is greater than the concentration ratio of the and Web Conferencing clients, there
industry ! the supplier group’s power are only a few Email clients that have
increases gained popularity. The main email
clients are Microsoft Outlook,
Mozilla Thunderbird, and Apple
Mail. The database software

57
 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 Soft Phone and Web Conferencing 3 3
supplier group (strategic dependence) vendors have tailor-made their
Does the SG depend on the industry for its products for UC, and depend on the
revenues? If yes, the supplier group will want industry for their revenues. However,
to protect the industry with reasonable pricing, Email, IM and database software are
etc. well penetrated in enterprises with or
without UC.
Switching Costs (are the costs to switch Switching costs are high, mainly for 4 2
suppliers significant)? UC solutions targeting large
- when SC high, players have difficulty playing enterprise customers. Extensive
suppliers off each other integration testing needs to be done,
requiring high R&D cost. However,
equipment costs are not involved in
software client replacements.
Are the Supplier Group’s products/services No, most UC software applications 2 6
differentiated? have similar features with minor
If yes, increases their power differentiation.
Are there substitutes for the Supplier Group’s Computer communication has 5 1
products/services? become ubiquitous in the modern-day
workplace. As a result there are no
substitutes for these software clients.
Do the Suppliers pose a credible forward With the exception of a few large 2 5
integration threat? software vendors, most are small and
do not pose a forward integration
threat.
Level 2 Conclusion Unfavorable (High threat from SG) 4

Supplier Groups Effect on Score Ranking Weights Weighted Score

Industry
Videoconferencing Unfavorable 4 2 30% 1.2
and Telepresence (high threat
hardware vendors from supplier
group)
IP Telephony Neutral threat 3 3 20% 0.6
Providers
Audio Conferencing Favorable (low 2 4 10% 0.2
vendors threat from
supplier group)
Software Vendors Unfavorable 4 1 40% 1.6
(high threat
from supplier
group)
Overall Favorable 100% 3.6

58
 Exhibit 2-d: Analysis for Buyer Power
Factors underlying Buyers’ Reasoning Score Rank
Bargaining Power:
Midmarket companies/
Large enterprises/
Government
Are Buyers concentrated or Buyers are large in number, but less fragmented than 2 5
are there a few high volume SMB group.
Buyers?
Are the products The enterprise UC products are well differentiated. 2 4
differentiated?
Does the Buyer face low or There are moderately high switching costs for 1 3
high switching costs? switching UC vendors, especially for large enterprises
where number of users is large.
Do the Buyers pose a UC products need heavy investments and the buyers 1 7
backward integration threat? do not pose backward integration.
Factors underlying Buyers’ Price Sensitivity
Is the product a significant UC products are part of IT infrastructure investments 2 6
fraction of the Buyer’s costs? 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.
Does the Buyer earn low We cannot generalize about the profits earned by 3 8
profits? customers of UC products.
Is the Buyer’s productivity Through improved communication and collaborative 2 1
affected by the industry’s tools, UC products are effective in increasing the
product? productivity of employees.
Does the industry’s product UC products are quite effective in reducing other 2 2
affect the Buyer’s other costs? customer costs such as travelling costs.
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’ Reasoning Score Rank

Bargaining Power: SMB
buyer group (Small/Medium
business)
Are Buyers concentrated or Buyers are numerous and extremely fragmented. 3 6
are there a few high volume
Buyers?
Are the products These buyers are looking for low end, low cost UC 4 1
differentiated? solutions, which are not much differentiated.
Does the Buyer face low or There are moderately lower switching costs for 4 3
high switching costs? switching UC vendors in case of SMB buyer group.
Do the Buyers pose a This group of buyers does not pose backward 1 7
backward integration threat? integration.
Factors underlying Buyers’ Price Sensitivity
Is the product a significant UC products are part of IT infrastructure investments. 5 2
fraction of the Buyer’s costs? 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.
Does the Buyer earn low We cannot generalize about the profits earned by 3 8

59
profits? customers of UC products.
Is the Buyer’s productivity UC products targeted towards SMBs are less effective 3 5
affected by the industry’s in improving productivity compared to those targeted
product? towards Enterprises.
Does the industry’s product UC products targeted towards SMBs are less effective 4 4
affect the Buyer’s other costs? in reducing other customer costs compared to those
targeted towards Enterprises.
Level 2 Conclusion Moderately unfavorable (Higher threat from 3.5
buyers)
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 Justification
Score
Midmarket companies/ 1.5 1 80% 1.2 This buyer group is strategically more
Large enterprises/ important to UC industry.
Government
Small/Medium business 3.5 2 20% 0.7
Overall 100% 1.9

Exhibit 2-e: Threat of Substitutes

Factors underlying Reasoning Score Rank
Threat of Substitutes:
Non-Unified
Communication
SMB buyer’s propensity to Smaller companies are more likely to use standalone 4 3
substitute products (standalone email, instant messaging, and
video conferencing) rather than implement UC
solutions. These companies are less flexible and
willing to adopt new solutions.
Enterprise buyer’s Larger companies are more likely to use UC products 2 1
propensity to substitute due to expected ROI improvements. Large enterprises
are able to make the larger investments required for
UC.
Price/Performance of the Non-unified communication products are considered 2 2
substitute to have a lower ROI than UC solutions because of
productivity gains.
Level 2 Conclusion Favorable 2

Exhibit 2-f: Effect of Complements

Networking Equipment Reasoning Score Rank
Manufactures: Routers,
Switches, Wi-Fi connect
points
Relative Concentration Networking equipment industry is more 4 5
concentrated than the UC industry (CR5 = 67% for
Networking and CR5=61% for UC).
Relative supplier or buyer Networking equipment is more commoditized and 2 4
switching costs interoperable. Therefore the cost of changing
networking equipment is comparatively less than
changing a UC solution.

60
Ease of Bundling Most products are meant to be sold as a bundle, 1 7
which promotes increases in volume purchases.
Differences in pull through UC products create more pull through demand for 2 2
network equipment manufacturers than vice versa.
Vertical Integration Networking equipment manufacturers are able to 4 6
move products upstream to provide UC solutions.
Rate of growth of Networking Networking equipment manufacturing is expected to 2 1
Equipment and UC Industries 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.
Dependence of Complement Networking is the backbone for the function of UC. 5 3
Networking infrastructure improvements increase
UC performance.
Level 2 Conclusion Favorable (insignificant threat from 2
complements)

Computer Manufacturers – Reasoning Score Rank

Servers, PCs, Smartphones
and Laptops
Relative Concentration The computer manufacturer industry is more 4 5
concentrated than the UC industry. (CR4 = 77%
compared to CR4 = 56% for UC) (Thormahlen,
2010).
Relative supplier or buyer Servers, PCs and laptops are less expensive to replace 1 4
switching costs than UC solutions.
Ease of Bundling Computer equipment is easy to bundle with UC 1 6
solutions, promoting an increase in volume purchases.
Differences in pull through UC products create more pull through demand for 1 1
computer equipment manufacturers than vice versa.
Vertical Integration No threat for vertical integration. 1 7

Rate of growth of Computer Demand for computer hardware is expecting an 1 2

Equipment and UC Industries 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.
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 2 1 This complement group is more closely

Manufacturers 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

61
 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)

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-./01!"23/$'%! -./01!"23/$'%!
-./01! 676"!
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"23/$'%)! "23/$'%)!
45,! 4*,!

Source: Infonetics Research: Long-term forecast: CAPEX, Revenue and CAPEX by Equipment Type – World Wide – May’2010

62
Exhibit 5: World Wide - Standardized Unemployment Rate (2000-2009)

Exhibit 6: UC Market Share

YB$?"'V(&$%G"'($$
'#)*)FG235"$H%
..I%

P5Q"3+H%./I%
')+53)H%/I%
1,+<2H%.&I%
K,5"$H%DI%
O8KH%DI%
GN1H%MI%
K,<32+2L5H%MI% '$<)5"$F
!9<"(5H%0I% 6,"A"(+H%JI%

63
 Exhibit 7: Business Level Strategy:

Exhibit 8: Resources and Capabilities

Resources/Capabilities Value drivers Cost drivers

Avaya-Nortel and drains and drains
Brand High brand equity in IP telephony and communications Reputation
software
R&D High investment in R&D (= ~7%-8% of Sales) Technology

Customer Service Avaya has a comprehensive support system for both Service
Nortel’s and Avaya’s partners and customers.
Manufacturing Most of the manufacturing is outsourced, but contractual Low cost +
agreements require the company to buy inventories of increased cost of
suppliers if Avaya’s forecasts are inaccurate. inventory buy-
back (cost drain)
Global Presence Substantial international presence Geography
Government Relationship The U.S. government is a major customer of Avaya’s Network
telephony products. externalities
Strategic partnerships Avaya has a popular partner developer program called Partnerships
DevConnect. In addition, it partners with other key UC
providers to provide an end-to-end solution.
Channel Partners The revenue derived from sales via indirect channels has Partnerships
been increasing. This indicates an increased focus on
channel partner relationships.

64
Product Mix Wide range of products in multiple product segments Product Economies of
breadth scope
High quality products Avaya has strict quality control standards for its products, Quality
including the manufacturers.
Existing client base Avaya with the NES acquisition has the largest UC market Customer
share. It has immense penetration in the IP telephony adoption
space.
Inventory Management Avaya’s inventory turnover increased year-over-year, Reduced
indicating better inventory management. backlogs
Marketing and Sales More focus on direct sales to large enterprises. Major Go-to-market
realignment in marketing/sales efforts after the NES Strategies
acquisition.

Resources/Capabilities Value drivers Cost drivers

Cisco
Brand High brand equity in all areas of UC, especially after the Reputation
acquisition of WebEx and Tandberg
R&D Substantial investment (R&D = ~13%-14% of Sales) Technology
Customer Service Cisco has an entire business focused on services and Service
offers a diverse range of services offerings for customers.
Intellectual property Cisco has numerous patents in various technologies, but Technology
mainly relies on the innovation, expertise and
management capabilities of employees for enforcement of
IP protection.
Incumbency Advantage With Cisco been in UC space for a longer period than its Learning
competitors, it benefits from the learning curve needed in Curve
offering UC solutions.
Manufacturing Primary strategy is to outsource, but also operates some Quality Cost savings
owned facilities. Generally meet ISO 9001 or ISO 9003
standards.
Employee Relationship More than 70,000 employees provided competitive Productivity
benefits, attrition rate is lower than industry standards.
Global Presence Strong worldwide presence Geography
Government Relationship Governments worldwide are major customers. Cisco Influence on
executives sit in government technology advisory regulation
committees
Worldwide direct sales and 25000 personnel in 90 countries, including direct and Go-to-market
marketing support for indirect sales. Separate central marketing and
sales organizations.
Product Mix Industry-leading product portfolio Product Economies of
breadth scope
High quality products Cisco has increased focus on quality for its manufacturing Quality
facilities as well as its software products. It follows strict
quality standards for its offerings.
Existing client base Cisco has the largest market share in computer Customer
networking, and the second largest UC market share. adoption
Channel Partners A substantial percentage of Cisco’s products are sold via Partnerships + Reduce direct
channel partners. Cisco has a history of working very Increased sales force costs
closely with these partners and enabling them to be more Sales

65
 profitable.

Inventory Management Cisco’s inventory turnover increased year-over-year, Reduced

indicating better inventory management. backlogs

Resources/Capabilities Value drivers Cost drivers

Microsoft
Brand High brand equity in business software and operating Reputation
systems
R&D Huge investment in R&D (= ~14%-15% of Sales) Technology Wages

Customer Service Comprehensive customer service systems targeted for Service

consumers, developers, SMBs and IT professionals of
large enterprises.
Intellectual property Large number of software patents and copyrights. Technology
However, rely on educating customers and pursuing
lawmakers on the importance of IP protection.
Manufacturing Primary focus is software, so minimal manufacturing Reduced
costs. And the manufacturing needs of the few hardware manufacturing
products are met by outsourcing to Taiwan. cost
Employee Relationship Competitive compensation package for the 93,000 Productivity
employees, including bonus, stock awards and employee
stock purchase plans. Focused efforts on attracting and
retaining talent.
Global Presence Well penetrated all over the world Geography

Government Relationship Governments worldwide are key customers. However, Influence on

relationships with European governments are not good regulation
due to some pricing-related litigation.

Marketing and Sales 26,000 employees in Marketing and Sales. Expenses up Go-to-market
by 7% from 2008 to 2009

Channel Partners Strong focus on channel strategy, especially OEM Partnerships + Reduce direct
partners that account for 80% of sales. Increased sales force costs
Sales

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 Product
applications. breadth

Existing client base Massive client base in consumer and enterprise segments Customer
for Windows OS and business software. adoption
Inventory Management Primary focus is software, so minimal inventory needs to Reduced cost
be maintained.

66
New Product Introduction Microsoft has a key focus on innovation and believes that Innovation
it is the key reason for their success. It uses innovation to
initiate disruptive technologies in the marketplace.

Resources/Capabilities Value drivers Cost drivers

Siemens
Brand Powerful brand recognition due to its diverse lines of business. Reputation
Its brand is especially powerful in Europe.
R&D Due to its diverse nature of businesses, Siemens has a lower Technology
percentage of sales (4%-5%) compared to competition, but
increased year-over-year.
Customer Service Wide range of customer services for enterprises and Service
consumers, for the diverse lines of business.
Intellectual property Several thousand patents and licenses. In fiscal year 2010, Technology
Siemens achieved an innovation record of 1300 patents from
12 inventors, and registered a total of 8800 invention
disclosures.
Manufacturing Siemens has a heavy focus on manufacturing due to the nature Lower lead Reduced
of its businesses. It has manufacturing facilities in Americas, times shipping
Europe and Asia that enables it to reduce lead times and cost
shipping cost.
Employee Relationship 405,000 employees worldwide, about 50% in Europe. Siemens Higher cost
incurs high employee cost due to stricter employee-protection (cost drain)
regulation in Europe.
Global Presence Worldwide presence, but more focus on Europe Geography

Government Relationship Collaborates very closely with governments worldwide, Influence on

especially due to its involvement in energy, healthcare and regulation
telecommunication. It has the ability to influence regulation.
Strategic Partnerships Siemens has extensive partner programs for the different Partnerships
businesses it is in. For the UC business, it has technology and
OpenScape Fusion Developer partner programs.
Channel partners For the telecommunications business, it has a “Go Forward! Partnerships + Reduce
Partner Program” for system integrators and manager service increased direct sales
providers to increase customer reach. customer reach force costs

Product Mix Wide range of products in diverse business segments Product Economies
breadth 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 Customer
geographic locations. adoption
Inventory Management Inventory turnover increased slightly year-over-year, Reduced
indicating better inventory management. backlogs
New Product Introduction Siemens has a strategy called “Open Innovations” that allows it Innovation
to initiate R&D efforts on new technologies. Siemens has
disruptive innovation in energy, healthcare, automation and
telecommunications.

67
 Resources/Capabilities Value drivers Cost drivers
Polycom
Brand High brand equity in Video (29% market share) and Audio Reputation
conferencing (80% market share)
R&D Substantial R&D spending (~12%-14% of Sales) Technology Wages
Customer Service Polycom has an entire business focused on providing Service
customer services to resellers, service providers and some
end-users. Services include planning, design,
implementation and troubleshooting (24x7 support with 4-
hour guarantee).
Intellectual property A total of currently valid 390 US and non-US patents, and Technology
over 300 pending. In addition, Polycom relies on employee
talent, product quality and service offerings to maintain a
technology leadership.
Manufacturing Outsources its audio equipment manufacturing to China, Economies of Reduced cost
Thailand and Mexico, but owns its telepresence production scale
facility in US even though components are obtained from
overseas.
Employee Relationship Competitive compensation package for the 2,700 Productivity Reduced cost
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.
Global Presence Worldwide operations. Strong revenues (48% of total Geography
revenue Exhibit 14 from international operations
Government Relationship Good relationship with European and US government who Network
are important customers, but not strong enough to influence externalities
regulation.

Strategic partnerships “Open Collaboration Network” to partner with leading UC Partnership + Lower product
players to provide comprehensive UC solutions. increased development
customer reach cost

Channel Partners Polycom has a strong focus on channels, primarily for its Partnerships Reduce direct
commoditized audio conferencing products. As a result, it sales force
has comprehensive channel incentive and training costs
programs, and manages channel conflicts effectively.
Product Mix Wide range of audio and video products but lacks products Product Economies of
in other areas of UC. breadth + lack scope
of entire UC
solution (value
drain)
High quality products Reliable, agile, high quality audio and video conferencing Quality
products.
Existing client base Polycom has a wide client base in diverse vertical markets Customer
such as education, healthcare and energy, which it can adoption
leverage to sell UC solutions.

Inventory Management Polycom’s inventory turnover increased from 4.9 to 6 year- Reduced
over-year, indicating better inventory management. backlogs
Industry influence Polycom has been effective in influencing the industry to Network
adopt open standards to its advantage. Externalities

68
New Product Introduction Innovation in audio and video conferencing products, as Innovation
well as new UC architectures with partner products.

Exhibit 9: Comparison of Competitors based on Products

Cisco Avaya Microsoft Siemens Polycom

Computing Integrated data Virtual - - -
center system enterprise data
architecture
Core UC Mobility, Avaya Aura Microsoft Opencape- -
Applications Voice, conferencing, Lync – Mobility,
Messaging, End User messaging/web messaging,
MeetingPlace Clients, Unified conferencing, Audio/Video/
Express, messaging, Microsoft Web
Presence,Work Web.alive Exchange conferencing
Place Licensing
IP Telephony Endpoint devices, Digital phones - - Conference
telephones and and IP wireless phones, Desk
call processing phones, phones, IP
software IP call control- phones,
Aura UC wireless
Manager phones and
other
Video/audio
end points
Communication UC Management Avaya Data Microsoft Lync, Openscape Converged
Mgmt Suite solutions Mgmt, Microsoft Mgmt
Application Aura UC Exchange Application,
Manager Global mgmt.
system Web
commander
Communication Media, Voice Gateways,video - Switches,
Infrastructure servers, gateways, endpoints, gateways
switches switches and
servers

Exhibit 10-a: Ratings Table for Value drivers:

Cisco Microsoft Avaya- Polycom
UC UC Nortel
UC

Communication Applications 4 3 4 2
Availability of whole UC
5 2 4 2
solution
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)

69
 Exhibit 10-b: Weights Matrix for Value Drivers
Normalized
Importance Weight Weight (!)
Communication
1 8 0.22
Applications
Availability of
2 7 0.19
whole UC solution
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 Norma Cisco Cisco Microso- Micros- Avaya- Avaya- Polycom Polycom Polycom Polyco-
drivers lized UC UC ft UC oft UC Nortel Nortel Rating Rating Rating m
Weight Ratin- Weight Rating Weight UC UC without Weighted with Rating
g ed ed Rating Weighte Partner- Score Partner- Weight-
Score Score d Score ships ships ed Score
Communi
cation
0.22 0.8 0.18 0.6 0.13 0.8 0.18 0.4 0.09 0.6 0.13
Applicati
ons
Availabili
ty of
Whole 0.19 1 0.19 0.4 0.08 0.8 0.16 0.4 0.08 0.6 0.12
UC
Solution
Brand 0.17 1 0.17 1 0.17 0.8 0.13 0.8 0.13 0.8 0.13
Customer
0.14 0.8 0.11 0.8 0.11 0.6 0.08 0.8 0.11 0.8 0.11
Service
Architect
0.11 0.6 0.07 0.4 0.04 0.8 0.09 0.6 0.07 0.7 0.08
ure
Interface 0.08 0.8 0.07 0.6 0.05 0.8 0.07 0.6 0.05 0.6 0.05
Interopera
0.06 0.6 0.03 0.6 0.03 0.8 0.04 0.8 0.04 0.9 0.05
bility
Mobility 0.03 0.8 0.02 0.6 0.02 0.6 0.02 0.6 0.02 0.7 0.02
Increment
0.84 0.63 0.77 0.59 0.69
al Value
Relative
1 1 1 1 1
Price
Total
1.84 1.63 1.77 1.59 1.69
Value(V)
Cost(C=C
OGS+R& 0.49 0.35 0.625 0.55 0.55
D)
V-C 1.35 1.28 1.14 1.04 1.14

70
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71
Exhibit 11: Financial Ratios Summary

72
Exhibit 12: Unified Communication Market Opportunities by technologies

Exhibit 13-a: Polycom Corporate Old Organizational Structure (2009)

73
Exhibit 13-b: Polycom (New) Corporate Organizational Structure (2010)

Exhibit 14: Revenue per Business Unit

(in ‘000s) 2009 2008 2007 YoY (09- % % %Int'l
08) YoY Segment Contrib
Contributi ution
on (09) (09)
Video
Revenue $523,347 $560,062 $493,279 -$36,715 -7% 54%
Int’l $303,541 $324,836 $256,505 -$21,295 -7% 58%
Revenue
Voice
Revenue $268,161 $353,698 $313,202 -$85,537 -24% 28%
Int’l $93,856 $130,868 $112,753 -$37,012 -28% 35%
Revenue
Services
Revenue $175,476 $155,560 $123,427 $19,916 13% 18%
Int’l $66,681 $52,890 $37,028 $13,790 26% 38%
Revenue
Int'l Total $464,078 $508,595 $406,286 -$44,516 -9% 48%
Total $966,984 $1,069,320 $929,908 $102,336 -10%

74
Exhibit 15: Corporate Strategy
Corporate and Business Comments/Assumptions Linkage Rank
Functions
Organizational Structure The new organization structure has separated High 1
and Processes 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.
Common R&D and Product There is common R&D in the new organizational High 2
Development Strategy structure.
Professional Services 18% percent of the revenue is generated through High 3
Organization 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.
Supplier of components, The suppliers for most of the Polycom products are Medium 4
parts, procurement through contract manufacturers in China and
processes 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

Exhibit 16: Partnership: Strategic Sourcing Framework

Partner Strategic Value Relative Core Competency
Microsoft UC unified messaging In UC area Microsoft has primarily focused on unified
software (MS Lync, MS messaging and software applications. Polycom’s focus is
OSS server, Outlook on video/voice end-points. There is an expectation that this
integration) partnership would increase adoption of Microsoft based
Polycom –Telepresence, UC solution and increase in sales of Polycom products.
Video and Voice end-points
IBM UC unified messaging In UC area IBM has primarily focused on unified
software (Lotus Notes, messaging and Web conferencing software. Polycom’s
Same-Time, UC2 web- focus is on video/voice end-points. There is an expectation
conferencing) that this partnership would increase adoption of IBM based
Polycom –Telepresence, UC solution and increase in sales of Polycom products.
Video and Voice end-points
AVAYA IP PBX, AVAYA AURA Avaya has primarily focused on IP PBX, Voice
(web-conferencing) communication and web-conferencing applications.
Polycom –Telepresence, Polycom’s focus is on video/voice end-points. There is an
Video and Voice end-points expectation that this partnership would increase adoption

75
 of Avaya based UC solution and increase in sales of
Polycom products.
Broad-Soft Broad Cloud – Cloud Broad soft has primarily focused on cloud applications.
computing applications Polycom’s focus is on video/voice end-points. There is an
Polycom –Telepresence, expectation that this partnership would increase adoption
Video and Voice end-points 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 From Microsoft’s perspective There is limited partner
Polycom’s hardware expertise there is no mention of any compatibility with Polycom in
yields non-overlapping resources, exclusivity rights and partner terms of core competencies,
which can be leveraged. In addition, commitment. There is no binding but culture and style of
potential for expanded market on Microsoft on not selecting operations of two firms are
addressability, value-chain and Polycom’s competitor for its UC and will be quite different.
protection of existing investments solution. There exists a prospect of
for customers, will create more creating more contractually
partner complementarity. partnership in future.
IBM IBM’s software focus and The joint solution will be sold as There is limited partner
Polycom’s hardware expertise Polycom Unified Collaboration compatibility with Polycom in
yields non-overlapping resources, Solution for IBM Lotus Sametime. terms of core competencies.
which can be leveraged. In addition, It is not clear whether IBM will But, culture and work style of
potential for expanded market not sell its own solution using both IBM and Polycom are
addressability, value-chain and equipments from Polycom’s and will be quite different.
protection of existing investments competitors. There exists a
for customers will create more prospect of creating more
partner complementarity. contractually partnership in future.
HP As a existing channel partner, with HP is just a channel partner for There is limited partner
the leverage of HP’s sales resources Polycom to integrate Polycom’s compatibility with Polycom in
(non-overlapping resources) for products in solutions from other terms of core competencies
selling Polycom products and UC vendors. However, for HP’s but culture and work style of
potential for HP’s evolution in UC own Visual Collaboration solution, both HP and Polycom are and
market, the partner HP uses Tandberg products. Thus will be quite different.

76
 complementarity will increase limited partner commitment. This
exponentially. opens up a opportunities in future
to create more contractually
partnership.
Avaya Avaya’s IP PBX and Voice No partner exclusivity. Both Limited partner compatibility
Communication focus and companies can work with others. exists based of each other’s
Polycom’s Video hardware So limited commitment. This core-competencies Avaya
expertise yields non-overlapping opens up a opportunities in future with its IP PBX, IP telephony
resources, which can be leveraged. to create more contractually and voice products and
In addition, potential for expanded partnership. Polycom with its video
market addressability, value-chain Products and some voice end-
and protection of existing nodes. Since both companies
investments for customers will are in communication
create more partner hardware business, the
complementarity. potential for culture and style
to be similar is high.
Broadsoft Broadsoft’s Cloud focus and No partner exclusivity. Both There is limited partner
Polycom’s Video hardware companies can work with others. compatibility with Polycom in
expertise yields non-overlapping So limited commitment. This terms of core competencies.
resources, which can be leveraged opens up a opportunities in future In addition based on the size
creating more partner to create more contractually and organization structure of
complementarity. partnership. the both firms, there is a
potential for increased
compatibility.
Juniper Juniper’s networking gear focus Primarily a channel partner. No There is limited partner
and Polycom’s Video hardware partner exclusivity. Both compatibility with Polycom in
expertise yields non-overlapping companies can work with others. terms of core competencies
resources, which can be leveraged So limited commitment. This but culture and work style of
creating more partner opens up a opportunities in future both Juniper and Polycom are
complementarity. to create more contractually and will be quite different.
partnership.
Siemens Siemens Voice focus and No partner exclusivity. Both Limited partner compatibility
Polycom’s Video hardware companies can work with others. exists for Siemens IP PBX, IP
expertise yields non-overlapping So limited commitment. This telephony and Polycom Video
resources, which can be leveraged. opens up a opportunities in future Products in terms of core-
In addition, add a strong Europe to create more contractually competencies – but from
presence creating partner partnership. culture and style perspective
complementarity. 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.

77
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

STARS QUESTION MARK

High

Video Communication
Business Professional Service

Market Business

Growth
Rate CASH COWS DOGS

Voice Communication
Low Business

78
Exhibit 20a: Porter’s Generic Strategies: (Voice Conferencing Equipment)

Exhibit 20b: Porter’s Generic Strategies: (Video Conferencing Equipment)

79
Exhibit 21: Value-Chain

• Green Text – Value Drivers

• Orange Text – Cost Drivers - Synergies between the different activities of Polycom

80
Exhibit 22: VRIO Analysis

Polycom
Resource/ Valuable? Rare? Difficult to Exploited Competitive
Capability imitate? by Firm? Implications
Technology/High Yes, high quality HD Yes Yes. Numerous Yes Sustained
quality products video products and patents, high Competitive
audio conferencing R&D Advantage.
products.
Strategic Partnerships Yes, more inter- No, many No, competitors Yes Parity
operability and sell competitors have can and are
through and whole partnerships. making similar
solution capability. partnerships.
Customer Service Yes - valued more by No, Bigger No. Many Yes Parity
the large enterprises. competitors also competitors are
have good customer
customer service. focused and have
financial
resources to offer
a good customer
service.
Reputation Yes, renowned for No, Cisco and No. Yes Parity
quality Avaya have better
communication reputation as UC
products and services. player.
Cisco
Resource/Capability Valuable? Rare? Difficult to Exploited Competitive
imitate? by Firm? Implications
Reputation Yes, has high brand Yes Yes. Cisco is one Yes Sustained
equity in UC industry. of the first Competitive
players to offer a Advantage.
complete
solution and has
built high brand
equity in UC that
would be
difficult to
imitate as it is
path dependent.
Experience with big Yes, has done a series Yes Yes, as it is path Yes Sustained
acquisitions and of successful dependent. Competitive
smooth integration acquisitions. Advantage.
Incumbency Yes, as Cisco has been Yes, very few No. With time Yes Temporary
Advantage in UC comparatively players have every competitor Competitive
for a long time it similar will improve due advantage
benefits from learning experience as to learning
curve. Cisco. curve.
Vertical Integration Yes, no supply chain Yes No, competitors Yes Temporary
conflicts. with financial Competitive
resources can advantage
acquire too.

81
Whole UC solution Yes, customers Yes No, many Yes Temporary
capability attribute more value to players are Competitive
whole UC solution. partnering to advantage
offer whole
solution.
UC Architecture Yes, UC architecture No, Avaya has No Yes Parity
is important to offer a better
whole UC solution. Architecture.
Microsoft
Resource/Capability Valuable? Rare? Difficult to Exploited Competitive
imitate? by Firm? Implications
Software Yes, important for Yes Yes. Has 89,000 Yes Sustained
development communication employees with Competitive
Capability applications. most of them Advantage.
engineers. Due
to time
compression
diseconomies.
Software Technology Yes, has large number Yes Yes. Microsoft Yes Sustained
of software related has the top Competitive
patents. patent portfolio Advantage
for 2008
(Microsoft News
Center).
Marketing Resources Yes, has a large Yes, few players No, the top yes Temporary
marketing department. have the financial competitors have Competitive
resources financial advantage
resources to do
similar
marketing.
Strategic Partnerships Yes, provides sell No. Many No. Yes Parity
through and the ability competitors are
to offer whole forming similar
solution. partnerships
Customer Service Yes, important for No. Other players No. Yes Parity
large customers. offer good
customer service
too.
Avaya
Resource/Capability Valuable? Rare? Difficult to Exploited Competitive
imitate? by Firm? Implications
UC Architecture Yes, has the best Yes. Only Cisco Yes, due to time Yes Sustained
architecture in the has a comparable dependent Competitive
industry. architecture. diseconomies. Advantage.
Whole UC solution Yes, valued more by Yes. Very few No, many Yes Temporary
capability customers. players are players are Competitive
capable of partnering to advantage
offering whole offer whole
solution on their solution.
own.
Strategic Partnerships Yes, provides sell No No Yes Parity
through and the ability
to offer whole
solution.

82
Exhibit 23: Polycom Product Lifecycle

Exhibit 24: BCG Matrix for Polycom Product Portfolio

83
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 18% 22%
needed by Polycom
*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 Avaya + Avaya + Microsoft + Microsoft

Weight Polycom Polycom Polycom UC +Polycom
Rating Weighted Rating Weighted
Score 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
0.22 0.8 0.178 0.8 0.18
Applications
Mobility 0.03 0.6 0.017 0.8 0.02
Availability of Whole
0.19 1 0.194 1 0.19
UC Solution
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

84
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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.

85
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

86
Financial Background Appendix
Financial Appendix 1: Financial Analysis

87
Financial Appendix 2: DuPont ROE Decomposition

88
Financial Appendix 3: Financial Summary – Balance Sheet

89
Financial Appendix 4: Financial Summary – Income Statement

90
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 Ibbotson Market Premia 1926-2009 report
for the period between 1926 and 2009
Weighted Average Cost of Capital 8.8% based on the Cost of Capital
(WACC)
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 OECD – Prospects for Growth and Imbalances Beyond
thus the long term world GDP growth rate the Short-term
is used as terminal growth period 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.

91
Financial Appendix 8: DFC Valuation Prior to Strategic Move

92
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

93
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

94
Financial Appendix 11: DFC Valuation Scenario 1

95
Financial Appendix 12: DFC Valuation Scenario 2

96
Financial Appendix 13: DFC Valuation Scenario 3

97
Financial Appendix 14: DFC Valuation Scenario 4

98
Financial Appendix 15: DFC Valuation Scenario 5

99
Financial Appendix 16: Sensitivity Analysis – Prior to Move DCF and Scenario 1

100
Financial Appendix 17: Sensitivity Analysis – Scenario 2 and Scenario 3

101
Financial Appendix 18: Sensitivity Analysis – Scenario 4 and Scenario 5

102
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