At one point in my consulting practice I was engaged on assignments with two new client companies. Both of them had businesses selling to large, blue chip customers. Customers of the size that are used to “having it their way”. As a result, for these companies to get deals with customers of this stature they often feel the need to provide a lot of customization. This is a very common scenario, especially with young companies that are desperate for a key deal of this type–or even any kind of deal at all. The interesting thing about my two clients was how they perceived and approached that need to customize very differently. This is a story of emphasis: system integration vs. product development.
A Tale of Two Software Companies
Company A viewed customization somewhat as a pain and distraction, something to be controlled–I assisted them with creating a standard solution menu outlining the “Base” offering, with a list of options available at an added cost. They really wanted to discourage certain customization requests, absolutely wouldn’t do some things that were asked and wanted to make sure that they charged dearly for items that they found painful. They had the classic mentality of a product company; they wanted to do the minimum amount of customization necessary to make a large sale to this important class of enterprise customer–but NO more than they have to.
Company B, which also considered itself a product company had a very different mentality about customization. They welcomed it, prided themselves on it and positioned themselves to these potential large clients as someone that could quickly bring solutions to the client, fully customized to their desires. They really had a classic system integration mentality and wanted their reps to be scouring the big accounts for unique pain points or opportunities which might fall within the company’s core capabilities, enabling them to then propose a customized solution which would win the business. In fact, up till the point which I engaged with them their product development approach had really been to find out what individual accounts want–and build it for them.
So which of these two business models is the best way for software and hardware technology companies to adopt?
System Integration Focused Business Models
*More flexible and able to change with shifts in the marketplace
*Not as capital-intensive due to less “betting” on upfront product development
*Easier to grow business organically with internally-generated capital than in a classic tech product business
*Less risk due to lower upfront investments
*More competition; system integration is a more competitive, “easier-entry” business
*Generally lower operating margins than a standard software or hardware product business which reaches scale in their market
*Growth is less scalable than a product-oriented technology company
Product-Focused Business Models
*Provides greater opportunity for strategic advantage and resulting fast growth
*Less competition if a strong product/brand/technology differential advantage is created
*Can scale a tech business much quicker if a hit product is developed
*Higher operating margins if a standard hardware or software product is successful
*Usually more marketing-driven and less labor-intensive
*If creating a very large company is the goal, it’s much easier to raise outside capital for a tech product company
*Much greater risk of “crib death”, often resulting in complete capital loss if the initial product has problems in development or marketing
*Harder to “get over the hump”; standard product success is harder to come by and success often happens as a step function after a difficult startup period
I want to emphasize that there isn’t necessarily a “wrong” approach with either the product or system integration oriented business models. You can make a lot of money pursuing either model. Both of the companies I have used as examples have managed to attract blue chip customer which would be the envy of any company. What we are really talking about here are the operating and financial difference between a classic product-driven technology company and a system integrator.
Company A is that classic product-driven company. They customize when they have to, but also have a point where they will say “no”.
Company B also self-identifies itself as a product company and in fact they have built their business around a small number of standard offerings. But they really are utilizing relationships as well as the ability to react very quickly to customer requests as their core strategic advantage, plus the ability to customize beyond what classic standard product companies (especially larger ones) want to or are willing to do. They’ve built a very nice business doing this, but have some frustrations as well. They are highly dependent upon a small number of major accounts for virtually all of their revenue and have the major revenue/profit swings that are associated with this type of business–up one year, back down the next. They also are in constant fear that a larger company will come along and “take away” their marketplace, because they’ve continuously failed to create strong new standard products to build upon a core offering – which is very dated technologically. The core offering is long-in-the-tooth and appears very vulnerable. This company is very account-focused (and therefore reactive rather than proactive) and the resulting lack of a market focus has kept them from being able to create additional, broadly marketable products which could provide them with a strong proprietary advantage (the lack of which causes a lack of sleep at night!)
Company A understands who they are and what they want. That doesn’t guarantee success, but it makes it much easier to build a plan that everyone agrees on. At that point success or failure usually depends upon execution, unless the plan is awful. If failure is the end result in this scenario – more times than not, unfortunately – the problem is in execution. Company B’s biggest problem is that they are floating right in the middle between the two business models. They are trying to leverage both product and system integration business models and struggling with execution as a result, on both the product and systems integration side.
It isn’t impossible to combine these two business models successfully. I’m sure that many of you can point to several examples of such a very successful compromise. In fact, most successful B2B technology companies combine both of these models to some extent, with good success. But I find that usually a company identifies its business model primarily as a product company or a systems integrator. That identification drives their strategic focus and takes precedence when prioritizing the use of always scarce assets.
When combining these business models successfully, the secondary of the two models is usually utilized on an opportunistic basis. Product companies integrate and customize as needed to get a big deal. Integrators create “products” to fill the needs of a big account, and sometimes happily find they are salable to other accounts. Occasionally, these “products” prove so widely salable that they are spun off into a separate product company, or the integrator changes its focus into becoming a full-blown standard product company as its strategic focus.
The most important thing, in my opinion, is to understand who you are, where your strengths lie and what you are trying to accomplish strategically. It’s the companies that are trying to equally leverage both business models at once – somewhat schizophrenically – without one model taking the lead, that get themselves in a heap of trouble. That’s my opinion on Systems Integration and Product Development–what’s yours?
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