30 August 2007

Growth through products or services

By Jim Pinto

Today, quite a bit of proprietary content has melted away. Automation knowledge that produces quality goods at low cost has become a commodity. The core features and functions of PLC and DCS systems are easy to copy, and the cost reduces to quality manufacturing of commodity products with the lowest overhead.

Software is also easy to copy—if not directly, then at least through availability of functional equivalents that a programmer can quickly and cheaply develop in countries like India, which have rapidly become centers of the software universe.

Recognizing their inability to develop truly proprietary products in the fast-moving global environment, many industrial automation product manufacturers are migrating toward the supply of services to generate growth. This is a shortsighted strategy. “Services” are knowledge intensive (people and labor) and typically local (on-site systems design, integration, and start-up). This type of business is usually subject to intense local competition and cannot easily scale up for consistent revenue growth and profit margins.

Automation product manufacturers attempting growth through systems integration and services must recognize their service offerings put them into direct competition with some of their best customers—the local systems integrators. It is true the manufacturer has the advantage of additional margins and proprietary product applications knowledge, but the integrator has the advantage of being local and can often defect to competitors’ products.

A similar situation exists in the development and expansion of sales channels. Product manufacturers, faced with shrinking margins, often attempt to bypass third-party representatives and distributors by “going direct,” or by disintermediating their sales channels via direct Internet B2B storefronts.

Migrating to the supply of services and integration is just an excuse for the inability of a product manufacturer to fulfill its primary role. The successful manufacturer must remain a product supplier. Their primary mission should be world-class product development—being first-to-market with effective technology, with proprietary content that generates high margins. This must be backed up with best-in-class quality and lowest cost, high-volume, worldwide production.

In the new economy, the winners will be technology product suppliers that have the best products, combined with the ability to disseminate their proprietary knowledge effectively within a global organization, to provide high-value-added services through effective local service providers.

Related links:

• Automation Services:
  http://r.listpilot.net/c/isa/175jmi9/bmek
• Products vs. Services:
  http://www.johnsanders.com/product.html

Behind the byline

Jim Pinto is an industry analyst and founder of Action Instruments. You can e-mail him at jim@jimpinto.com or view his writings at www.JimPinto.com. Read the Table of Contents of his book, Pinto’s Points, at www.jimpinto.com/writings/points.html.