Automation: Products Vs. Services

By : Jim Pinto,
San Diego, CA.

With the recent worldwide decline in the automation business, many major suppliers are trying to generate growth by becoming "total solution providers", rather than just product manufacturers. In my opinion, while this strategy may generate additional short-term revenue, in the long haul it is a business mistake.

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Check out, October 2002

Providing Productivity Tools
For manufacturers of industrial controls products, the essence of business is providing productivity improvements for their customers.

In a global market, businesses are pitted against global competitors with consistently improving productivity, better performance and shrinking prices. This global competitiveness is simply reflected back by end-users on automation suppliers with increased demands in every direction.

With the recent worldwide decline in the automation business, many major suppliers are trying to generate growth by becoming "total solution providers", rather than just product manufacturers. The total solution includes sales, distribution, engineering, systems integration, service. In my opinion, while this strategy may generate additional short-term revenue, in the long haul it is a business mistake.

Conventional Controls are Becoming Commodities
With aging technology, many products are becoming commodities - available from several sources with marginally different features and benefits. At this stage, the lowest cost producer usually wins. In a global market, requirements change quickly, margins shrink and remotely based suppliers lose market-share. A few decades ago, industrial automation involved a lot of proprietary knowledge, which generated significant value for the purveyors of that knowledge. Industrial automation products were an essential and proprietary ingredient in factories and process plants.

Today, a lot of the proprietary content has melted away through rapid and widespread dissemination of the information in the global arena. Automation knowledge that produces quality goods at low cost has now become a commodity - everyone knows how to do it. In many cases, the western world chased cheap labor in the Far East and educated the locals with their knowledge as part of the project - shortsightedly frittering away the value.

The core features and functions of PLC and DCS systems are easily copied and the cost reduces to quality manufacture of commodity products with the lowest overhead. Software is also quickly and easily copied - if not directly, then at least through availability of functional equivalents that can be developed quickly and cheaply in countries like India, which have rapidly become centers of the software universe.

Proprietary vs. Commodity
When products are proprietary, profit margins are high and this generates growth and success. The benefits generated by proprietary knowledge must be substantial, to get beyond the competitive noise level. Features that translate into marginal gains do not command much beyond commodity pricing. To remain "proprietary" in this day and age, developments must progress in months, rather than years, or value degenerates quickly.
Products vs. Services
Recognizing their inability to develop truly proprietary products in the fast-moving global environment, many industrial automation product manufacturers are migrating towards 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 startup). This type of business is usually subject to intense local competition and cannot easily be scaled up for consistent revenue growth and profit margins.

Automation product manufacturers attempting growth through systems integration and services must recognize that their services offerings put them into direct competition with some of their best customers the local systems integrators. It is true that 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.

Sales Channels Direct vs. Distribution
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.

The industrial automation business is very fragmented a broad spread of products, applications, industries, and requirements. This requires a significant amount of local support that can best be provided by independent third-party sales organizations, with strong factory support. Indeed, many customers rely on the distributors breadth of experience that is gained through experience with many different product lines. Also, the best distributors can recommend local systems integrators who have direct experience in specific types of industry applications. And, they remain as a catalyst to assure project success.

In a global environment, the best high-tech distributors they work together to coordinate product purchasing in one geographical area with installation and service in another. The price structures accommodate OEM accounts and systems integrators and they are equally effective with servicing small users and large end-user projects.

The Role of the Manufacturer
In my opinion, 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 as 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 who 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.

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