November 2010

Channel Chat

Old mindset inhibits new growth

By Jim Pinto

It is strange how some companies do the same-old, same-old things they used to do, and expect success. A decade ago, they were successful, so they follow the same plans, expecting success. When business declines, they blame the poor economy and wait for "the good old days" to return. They are stuck in the old mindset.

The annual business plan mindset

All businesses, including professionally managed automation companies, generate annual business plans. The core is budgeting-growth, production-costs, gross-profit margins, R&D, marketing and sales costs, overhead and administrative costs, and net profit. Companies (especially the large, publicly held companies that dominate the automation industry) are judged by the first and last items in that list-growth and profit. Senior management juggles all the ratios to fit, and their compensation is tied to results.

Growth projections are made through a variety of mechanisms, typically a review of industry statistics. Irrespective of business conditions, at least some growth is usually demanded by senior management; pessimists do not get promoted. Once the top-line is cast, the remaining ratios must fall in line with projected improvements. It is strictly a bean-counting exercise.

The fastest way to reduce production costs and related overhead is to transfer production to lower cost facilities, typically offshore. This is usually projected to provide significant savings, with minimal attention given to knowledge-transfer and the possibility of more complicated logistics and at least temporarily reduced quality.

After direct-costs have been reduced, the first "overhead" costs to be squeezed are engineering and development (which has only long-term effects) and administrative overhead (which is expected to have no immediate customer impact).

Marketing and sales are usually treated as ratios, usually decreased in a low or no growth business environment. There is usually scant recognition of the need to increase advertising and sales efforts to generate new business. And so, in a flat economy, the cycle of failed forecasts is perpetuated.

The "lock-box" of business ratios

Industrial automation seems to be stuck in the mold of being a slow-growth, stable business. This generates a mindset, perhaps even complacency, which inhibits change. In my opinion, it is market myopia, a reluctance to deviate from "industry norms."

Most major automation companies have gross-profit margins of 40-50%, the industry mindset. Many other large companies in other businesses generate much lower gross margins, in the region of 20-25%. But, because automation is traditionally low-volume and highly specialized, business is based on higher gross margins and lower net-profit.
It is difficult to think outside that box.

Sales and distribution budgets

If you are a sales manager for a product or equipment manufacturer, you will find old-style company management expects costs, pricing, and margins to be as they used to be "in the old days," with inflexible territory quotas for your sales force. To protect the bottom line, commissions or discounts will be questioned ad-infinitum, expecting to be squeezed in line with other savings. Then you will lose some of your best representatives and distributors (who will switch to competitors), and the mediocre ones who stay will not meet sales targets. This generates the downward loop of declining sales; the usual excuse is "poor economy."

If you are a sales representative or distributor in the industrial instrumentation and automation business, you will notice many of your principals are stuck in the old mindset, and will expect you too to be stuck with them while they wait for the economy to revive. In the meantime, they will keep hustling you to meet old sales projections, to keep pace with their own view of how things used to be.

Change your mindset

Here are some ideas for re-thinking the possibilities and moving to new paradigms. The suggestions are for sales managers as well as sales and distribution channels (two different sides of the same coin). Here is how you can generate growth:

  1. Old products, old customers: In a flat economy this will not generate growth, except for the old already budgeted projects that drop in your lap (but do not plan on that; let it happen as an unexpected bonus).
  1. New products, new customers: Find new customers for your old products, with added or eliminated features and functions. Look for new products for your current (old) customers; ask them what other projects they are planning, and find out how you can fill those needs. Be creative; think outside the box. If you are a manufacturer, find products you can private-label and re-sell. If you are a representative or distributor, sign up other complementary lines.
  1. Change the price paradigm: Do not cut your price-offer more value, perhaps including support services and training, to suit your customers' needs. A low-volume, high priced control system may only generate low margins; low-priced, high value, high volume products could generate healthy margins. The key, of course, is to pursue a balanced value proposition - for yourself, and for your customer.
  1. Broader horizons: The basic technologies of industrial instrumentation and controls include a tremendous range of knowledge and experience that can and should be applied to other markets that have similar requirements, but may not be considered traditional industrial automation applications. In today's fast-changing business environment, spend time looking for new sales opportunities with new types of businesses.

During difficult economic periods, there is a healthy weeding out of companies stuck in a short-term thinking and inflexible mindset. Those that can adapt to suit changing technology and business environments will continue to generate growth and success.

ABOUT THE AUTHOR

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.