The ever-changing business model
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Initially, in the board business, there were only three variations in business models: representative sales teams vs. direct sales teams, national versus international sales, and which processor technology you chose to support. Small companies start with outside sales representatives. Once sales in specific areas reach a certain level, those companies can cost effectively change to the direct sales force model and eliminate the outside representatives. If sales goals are not met, the company eliminates the direct people and goes back to the external sales representative model. I have seen this cycle time and again.
Most smaller companies maintain a purely national sales focus and avoid the export paperwork, credit issues, currency exchange, and cultural difference involved in selling in foreign countries. Even smaller companies adopt an international sales model, using foreign distributors and sales representatives. Eventually, they go through the same representative versus direct sales team oscillations.
In the eight-bit beginning, a company had to decide to support either the Zilog (Z-80) or Motorola 6800 processor. Some bus architectures, such as STD, were heavily populated with Z-80 vendors, and that opened nice niches for 6800 vendors. Multibus was almost exclusively populated by 808X processors. VME was almost exclusively populated by 68000 vendors for some time. However, each of those architectures created niche opportunities for other processor technologies such as DSP, Intel on VME, 88000, SPARC, and so on. With today's 32/64-bit buses and new serial fabric technologies, most vendors today have both PowerPC and Intel-based CPU offerings. So the previously compelling technical business model of supporting only one CPU family has diminished.
While the primary market for boards was the industrial controls market in the '70s and '80s, there was little business in telecom or in MIL/COTS. Those users made their own proprietary boards. Most board vendors back then had many hundreds of customers. Each of these customers bought 50 to 100 boards annually, and rarely did you find a customer who would buy 1,000 boards or more.
The COTS mandate from Secretary of Defense William Perry, along with the consolidation of the prime contractors, changed the direction in the MIL/COTS supply chain in favor of specialized board vendors. But, it is clear that MIL/COTS programs use small numbers of very specialized boards, and it is a low-volume/high-margin segment. Some board companies recognized the opportunities and changed their business models to focus on these specific market and application requirements.
Time-to-market, cost factors, the breakup of the telecom industry, and technology complexities caused similar changes in the telecom supply chain, too. Telecom Equipment Makers (TEMs) started to buy boards from outside vendors, but demanded that those products be highly customized to insure that they could not operate in competitive equipment. The TEMs promised high-volume orders if the vendor would only do all the proprietary engineering work free of charge. Very few of those large orders have ever materialized; however, the increased engineering costs to telecom board vendors surely have. Additionally, once the volumes of these board orders came into the range of a Contract Electronic Manufacturer (CEM), the board vendor was removed from the supply chain for price reasons.
While the telecom and the military markets were making these major transitions, the industrial markets simply moved to commodity PC technologies for low-end control applications, and the board makers followed suit. The larger suppliers have direct sales forces, and many still have outside sales representatives. Most of the industrial board makers adopted an international sales focus many years ago. Now, some of them are trying to establish themselves in the telecom or MIL/COTS markets as they struggle for growth or a higher-profit margin.
When you look at the target markets, manyof those original business model decisions are automatically made for board vendors today: direct sales people, and a few outside sales representatives, deal with tens of customers who buy small quantities of highly specialized boards at high margins (MIL/COTS); a few direct sales people to deal with only a few customers who buy small volumes of commodity boards but promise to buy large volumes in the future at very low margins (telecoms); or outside sales representatives to deal with hundreds of customers, who buy small volumes of somewhat specialized boards at mid-range margins (industrial). If you are diversified, you will be dividing up sales responsibility on a line-of-business basis, not a territory basis, with a large hybrid salesforce.
For more information, contact Ray at exec@vita.com.
