At one point in my consulting practice, I was engaged in assignments with two new client companies. Both of them had businesses selling to large, blue-chip customers. Customers of the size are used to “having it their way”. 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 the need to provide customization very differently. This is a story of customization emphasis. I’ll call it system integration vs. product development.
A Tale of Two Software Companies
Company A is a product-oriented business that viewed customization as a pain and distraction. Something to be controlled and minimized. I assisted them with creating a standard solution menu outlining the “Base” offering. A list of options would be available at an additional cost. This company wanted to discourage certain customization requests. They absolutely wouldn’t do some things that were asked. They also wanted to make sure that they charged dearly for items that they found painful. This is the classic mentality of a product company. Do the 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 and prided themselves on it. This company positioned itself to these potential large clients as someone who could quickly bring solutions to the client. Fully customized to their desires. They had a classic system integration mentality and wanted their reps to be scouring the big accounts for unique pain points or opportunities that might fall within the company’s core capabilities. Thus enabling them to propose a customized solution that would win the business. Up till the point when I engaged with them their “product development” approach had been to find out what an individual account wanted. Then 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 a 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 upon reaching 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
No Wrong Business Model, But Details Matter
I want to emphasize that there isn’t necessarily a “wrong” approach between the two. Either the product or system integration-oriented business models can work. 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 customers which would be the envy of any company. What we are talking about here is the operating and financial difference between a classic product-driven technology company and a system integrator.
Know Who You Are
Company A is of course that classic product-driven company. They customize when they have to, but also have a point where they will say “no”.
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 result in this scenario, more times than not, 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.
And Who You’re Not
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. They are heavily utilizing relationships as well as the ability to react very quickly to customer requests as their core strategic advantage. Also, 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. This results in 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. That’s because they’ve continuously failed to create strong, newer standard products to build upon their core offering, which has become dated technologically. The core offering is long-in-the-tooth and appears very vulnerable. This company is also very account-focused (and therefore reactive rather than proactive). This has led to a resulting lack of a market focus. This lack of market focus has kept them from being able to create additional, broadly marketable products. The type of broadly marketable products that could provide them with a strong proprietary advantage. The lack of which causes a lack of sleep at night!
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. Most successful B2B technology companies combine both of these models to some extent, with success. However, 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 scarce resources.
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 that often struggle. Without one model taking the lead, they get themselves in a heap of trouble. That’s my opinion on balancing Systems Integration and Product Development–what’s yours?
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