Business growth barriers & plateaus for Automation suppliers

Business growth barriers & plateaus for Automation suppliers

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Published February 12, 2008
 
There are several obstacles/plateaus/barriers to growth which are important to understand. Recognition of these growth patterns allows companies to plan for survival beyond the initial entrepreneurial stages towards the next levels of growth and success.
 
Growth stages
 
All organizations go through five stages of growth. Each stage needs different management structures and strategies to optimize business, financial and marketing during that phase of development. It is important to understand why certain management styles, organizational structures and coordination mechanisms work and don't work at each step in the development of an organization.
 
Here are the characteristics that describe each growth phase:
  • Entrepreneurial: $ 1m company, with 10 - 20 people. Start-up, informal communications, hard work with minimal pay. This stage usually ends with a leadership crisis for the founder or founders.
  • Direction: $ 10-50m, 100 - 300 people. Good, functional organization structure with well-defined responsibilities in all the primary growth disciplines. Typically there are 3 or 4 key owners/managers who divide up the primary responsibilities and work well together. – Marketing, Sales, Production, Accounting & finance. This usually ends with an autonomy crisis – inability to expand beyond local markets, lack of management depth, and age of the key founders. This typically leads to acquisition by a larger company.
  • Delegation & Functional Management: $ 100M - $300 M, 1,000 - 3,000 employees. Decentralized organizational structure, operational and market level responsibility, profit centers, financial incentives, decision making based on periodic reviews, top management acts by exception, formal communication. This ends with a control crisis, with management or ownership changes.
  • Coordination and monitoring: $ 1B+, global span, 5,000 - 10,000 employees. Formation of product and market groups, thorough review of formal planning, centralization of support functions, corporate staff overseeing coordination, corporate capital expenditures, accountability for ROI at product group level, motivation through broad-based profit sharing. This ends with an organization crisis.
  • Collaboration & Global organization: $ 10B+, 25,000 employees. New evolutionary path, team action for problem solving, cross-functional task teams, decentralized support staff, matrix organization, simplified control mechanisms, team behavior education programs, advanced information systems, team incentives. This may end by a stalled-growth crisis, and lack of visionary leadership.
Industrial Automation Startups
 
The problem with industrial automation is that it is NOT one market, but rather a loose conglomeration of vertical market segments and specialized applications. The products are all kinds of gadgets and instruments – sensors, displays, recorders, and actuators – and everything else is a system with a mixture of those products, plus systems and services.
 
Many industrial automation companies start with a good idea. Once they expand beyond the natural volume of applications, they get topped out. Industrial automation has very few requirements for tens of millions of a product – hardly any millions of anything.
 
The problem is the variety of applications. There are millions of thermocouples used, but mostly specialized and related to specific industries and requirements. Wander around the next ISA or automation exhibition; 90-95% of the companies there have annual revenues of under $10M.
 
A company usually starts with one or two founders. In the automation field, this is usually an engineer with a good idea, and perhaps a marketing or sales person who teams up to generate brochures and sales. Or, it could be a sales guy who is disenchanted with his position in a big company, and feels he should work for himself and start his own sales company, taking on familiar products with the goal of expanding business in a specific territory.
 
There are good reasons for lack of continued growth – founder(s) management capabilities; insufficient capital; limited market-size for the original products; inability to expand products/markets; lack of global resources. Eventually the original founder(s) age, or quarrel among themselves, or lose interest. Then the company is sold to a larger organization which integrates it with other complementary businesses. The products are "milked" for profit and eventually the company gets merged into oblivion.
 
There are several examples of this syndrome: my own company, Action Instruments was typical. At $20M, Action was sold to Eurotherm, a $300M UK company – itself a significant exception, with a talented team of 4-5 founders. Eurotherm was sold to Invensys, an example of companies stuck at the next plateau.
 
Years ago, Doric was sold to Emerson at less than $10M and is now just history. IDT was sold to Eaton/Cutler-Hammer at about $20M. Mini-conglomerate like Spectris, Roper Industries and Ametek continue to prospect for companies in this range, looking for growth through collaborative marketing and sales channels, with strong, central financial controls.
 
Companies like Moore Industries (founder Len Moore is still there at 74) and Opto-22 (the son of the founder is President) are still trying bravely to get to $100M. The software company Iconics remains independent at about $ 30M, with founder Russ Agrusa still at the helm.
 
Another Moore (Moore Products) continued to run with the founder's sons, and eventually sold at the $170M level for all the same reasons. Rosemount (sold to Emerson), Modicon (changed ownership a couple of times, and now part of Schneider), Wonderware (now part of Invensys). There are several more examples of good, growth companies which got acquired before they attained $100M.
 
Industrial Automation – the next plateau
 
Then there are those companies that get stuck at the next plateau: $100M+. Typically, the founder is still around (getting older), the company is stuck in a niche that defies growth to the next level, it stays independent (read cannot be acquired because the major shareholder refuses to allow it). OPTO-22 (still below $ 100M) and OSIsoft ($150M) are examples.
 
Public companies too get stuck at mid-size. Analogic ($400M revenue, 1,500 employees) and its founder Bernie Gordon (now 81 and an advisor) is an examples of this perennial mid-size malaise. Eurotherm got acquired by Siebe/Invensys after the founders exited. At $ 170M, UK-based MTL Instruments was recently acquired by Cooper Industries and became part of Cooper-Crouse Hinds.
 
An unusual and significant company that is now $750M in annual revenues, and looks like it will grow well beyond $1B is National Instruments. Founder Jim Truchard (63) is still in charge, with a well-balanced management team in place.
 
At mid-size, there are the older German "mittelstand" companies like Weidmuller and Phoenix Contact, which primarily sold connectors and, recognizing the market shift (fewer connections in a networked age) expanded into electronic instrumentation and controls. Weidmuller has stalled below $ 1B, though Phoenix Contact has been more successful and has broken through that barrier.
 
Now there are new, fast-growing Europeans such as Beckhoff which was founded by a young talented engineer, focused on new growth arenas such as industrial PCs, networking and I/O. Beckhoff has grown past $ 300M and is still growing at a rate of 25% a year. You may find other Europeans and Japanese, but they are all smaller players, looking for growth in a deceptively big market.
 
Systems integrators cannot scale up
 
There are lots of systems integrators. They look like they are serving big markets and can grow. But, it takes good systems talent to design and install a system, to develop the right cost tracking and controls, to expand beyond a home territory without running out of talent or money. Go to the Control and Information System Integrators Association website, and find out how many systems integrators there are beyond $10m. Not many.
 
In their search for growth, many product manufacturers have expanded in to systems integration – to become "total solution providers", rather than just product suppliers. In my opinion, this is a mistake. It simply puts them into direct competition with some of their best customers – the local systems integrators. It’s 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.
 
Fragmented automation markets inhibit growth
 
The only growth is through new products, or new markets, on a much broader scale. New markets are different applications for the same products, or new products, or new geographical territories. For different applications, the product needs to be re-packaged and marketed differently. For new products, it takes development talent, which is seldom replicated (few company founders come up with more than one good idea). For new geographical markets it takes international marketing experience, which few can muster.
 
Even large companies like Siemens and Yokogawa think too linearly to fathom the needs of a fragmented market with multiple geographies. Growth in industrial automation takes time, money and marketing, which few people in the instrument business really have, or can afford.
 
And so, in the automation business, there are no billion-dollar Apple Computers, or Compaqs – which had good ideas that spanned broad markets, strong manufacturing talent (to manufacture millions of computers within a couple of years, with quality), strong marketing talent, and enough growth to generate capital through venture capital initially, and then public markets.
 
I once asked a successful venture capitalist (VC) why he never got involved in industrial automation. His response: no growth potential, too much investment, for too long, and too little reward. Growth in industrial markets is steady, but slow, and very few founders stay for the long haul. It takes a different mindset to get to the next level.
 
Phase 5 – Reshuffling the Automation Majors
 
Over the past several years, the automation business has been though tough times – many products had become commodities, global competition caused reduced prices and margins, innovation was scarce in an overcrowded market. To generate revenue, many product suppliers moved into services, often putting them into direct competition with systems integrators who were part of their own supply chain.
 
After a few lean years, industrial automation companies have started to thrive again; most of the majors have announced respectable growth and profits for a couple of years. As predicted previously, this signals a period of new mergers and acquisitions; the weak players are vulnerable to buyout, and the strong are looking for an expanded customer base plus consolidation of talent and resources.
 
It is very difficult for automation companies to continue to generate organic growth, and so some of the automation majors get stuck at the 5th phase – collaboration & global organization. This leads them to mergers and acquisitions in related areas with accompanying divestiture or elimination of duplication.
 
At about $ 5B in annual revenues, Rockwell is a good example of a company that can grow only by acquisition, or be acquired by a larger automation major – like ABB. The acquisition path is fraught with problems – implementing good management and controls to stimulate growth of the acquired company, and continued profitability to maintain earnings. The larger the acquisition, the more the danger; one slip and earnings may collapse, causing the stock to dive – making Rockwell a buyout target.
 
The under $10B automation majors – Invensys, Rockwell are good examples – are at the Phase-5 growth barrier. I have already forecasted that the industry Big-10 will reduce to the Big-5 – that prediction will be realized this year, or at the latest by 2010.
 
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 Jim Pinto is an industry analyst and commentator, writer, technology futurist, angel investor. You can email him at: [email protected]. Or review his prognostications and predictions on his website: http://www.jimpinto.com/. Review the contents of his new book “Pinto’s Points – How to Win in the Automation Business” at: http://jimpinto.com/writings/points.html