Growth and expansion into other related higher-volume markets have been inhibited because of reluctance to change the ground rules. The fear is that new markets have different cost structures and sales channels that take time to develop. And in a flat or declining economy, everyone seems to be too busy staying afloat to consider new avenues of growth.
Low-priced, high-value, high-volume products can indeed generate healthy margins. The key is to market a balanced value proposition. The problem is that no one wants to break price barriers because of the mindset that lower price means lower margins. So, everyone continues to market products at established prices to meet the business plan—the self-fulfilling prophesy of low volume.
The planning problem
A significant problem is that business plans, usually made annually, are typically extrapolations of previous budgets. Companies (especially large, public companies) are judged primarily by growth and profit—the top and bottom line. Senior management’s responsibility (and attendant compensation) is to juggle all other expenditures to fit.
Once revenue is budgeted, the fastest way to reduce production costs and related overhead is to transfer manufacturing offshore—usually projected to provide significant savings within a year. Minimal attention is given to knowledge-transfer and the possibility of at least temporarily reduced quality.
Industrial automation has long been stuck in the mold of being a stable, slow-growth and low-profit business. This has generated a mindset, perhaps even complacency, which inhibits change. In my opinion, it’s more like marketing myopia, an unwillingness to think “outside the box.”
Traditionally, automation business is based on higher gross margins and lower net profits. The industry norm is gross-profit margins of 45 percent to 50 percent, and net profits of 3 percent to 5 percent. In other similar businesses, large companies generate much lower gross margins, in the region of 20 percent to 25 percent, with higher net profit margins, typically 10 percent to 15 percent. In the automation business only 1 percent to 2 percent is spent on R&D, with some lower than that. By contrast, many high-tech manufacturers spend 10 percent to 15 percent, some as much as 20 percent to 25 percent.
Organic growth comes from expansion of old business, plus new business (new products and new customers). When old business shows flatness, or decline, and new products are projected to contribute only minimally, attention turns to immediate contributors to growth. For automation suppliers, this has been systems integration, which generates lower margins and much higher service content.
Perhaps the biggest growth constraints in industrial automation are the sales channels. This is indeed a specialized, fragmented market with a tremendously broad range of applications and environments, overlapping and diverse products, and industries.
The sales channels are correspondingly confusing—a mix of direct sales, systems integrators, distributors, representatives, catalogs and, more recently, Internet store-fronts. Traditionally, automation companies pick one primary channel and stick with it. But, especially during a decline, the urge develops to gain growth through switching sales channels, or utilizing more, and even all, channels. This results in cross-channel conflicts that are difficult to manage. The resulting confusion causes further slippage of revenue with budgetary impact.
During difficult economic periods, the confluence of all the problems outlined results in healthy weeding out of poorly managed companies; short-term thinking shows up in poor results. Companies that can adapt their mindset to suit the changing business environment will continue to generate growth and success.
Jim Pinto is an industry analyst and commentator, writer, technology futurist and angel investor. You can e-mail him at: firstname.lastname@example.org. Or review his prognostications and predictions on his Web site: www.jimpinto.com