Growth Strategies for Automation Companies

While there are some exceptions, most industrial automation markets are typified by stagnating or declining revenue streams, full commoditization of prices and aggressive competition. With these and similar characteristics being commonplace, most corporate executives are finding it extremely difficult to maintain current revenue streams, increase market share and drive shareholder value year over year.

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Virtually any industrial automation company, regardless of specific market vertical, can implement several growth strategy solutions. Companies looking to improve their fortunes dramatically, both in mindset and on the books, need to pull themselves out of the day-to-day trenches and do a self-assessment of their organizations. Companies need to determine what business they are in, how good their financials are, where they are when ranked against their competitors in terms of customer perception, market share, quality of service and other similar issues.

Once this has been accomplished, companies need to determine where they want to be with regard to the same metrics. Inevitably, companies will find “gaps” between the two comparisons. Identifying gaps is not inherently bad; conversely, by opening its eyes to its own situation, a company has a better chance of righting itself and reaching its stated goals and objectives.

The chart shows that the Global Test & Measurement market is expected to grow at a lowly 4.1 percent Compound Annual Growth Rate (CAGR) through 2012.

While this is the case, certain companies in this market, such as Agilent Technologies and Tektronix, have stronger growth. Why? They have recognized niche opportunities within vertical applications such as health care, communications and computer applications, where demand for high-quality products with high-profit margins exists. Building a product strategy that focuses on specific niches where there is little competition enables an organization to generate strong profits and maintain a leadership position. To be able to do this, companies need to recognize untapped existing or “new” high-tech applications and move into them ahead of their rivals.

Agilent Technologies should serve as a beacon to any industrial automation company for its good merger and acquisition (M&A), and divestiture practices. While Agilent is a market leader, that is not a requirement for those wishing to emulate its model. In fact, a merger of equals between Tier Two companies should be more palatable than that of an outright acquisition. Executives of smaller companies can focus on synergies, such as adding high-margin product lines and opening new sales channels, instead of focusing on operational savings such as reducing employee head counts.

For organizations that are short on capital, today’s private equity markets afford many opportunities. Most industrial automation businesses seem hesitant to bring in new capital from groups that have little or no direct experience in the automation space.

Fresh ideas

This type of knee-jerk reaction is short-sighted for multiple reasons. By not considering outside investment, companies are breaching their fiduciary obligation to create shareholder value. Additionally, private equity investors might not have industry experience, but they do have relevant knowledge from other markets. They are not encumbered with industry mindset and can offer fresh ideas and solutions to old problems and spot overlooked opportunities.

Further, investors with limited experience in a particular field are likely to maintain current management teams to ensure that they have adequate industry knowledge on hand. Finally, outside investment will ensure that a company can implement its growth strategies efficiently and effectively without missing opportunities.   

It will never be easy for companies to grow in commoditized markets, but if a company’s management team can recognize and alleviate shortcomings, focus the business on high-value niches, take advantage of M&A opportunities and be open to outside investors, it is likely success will follow.  

Robert Allen,

 

 

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