In A Falling Tide, Some Manufacturers Will End Up On Dry Land

First and foremost, the fat times will not return until some real technological breakthrough occurs. While we can't predict when that might happen, we do know that adoption of any major improvement in technology is a slow build. In the meantime, though, we are going to see more consolidation and company failures, as it becomes apparent that more managers don't have the ability to manage through difficult markets.

We all know a rising tide floats all boats. What we don't know is which boats will end up on dry land when the tide falls.

In a market like this one, the points of differentiation get particularly difficult for vendors. Those that don't want to end up on dry land have to do a few things very well to be around for the next incoming tide.

Clearly, controlling costs is one of those requirements. And during a brief economic downturn, controlling costs could be enough. But in the current downturn,which has already proved itself to be anything but short,it is far from enough.

Vendors are discovering something now that the channel was forced to face years ago: When you are selling essentially the same product as everyone else, it is very difficult to differentiate yourself, and customers are not willing to pay very much for your product.

Most manufacturers buy into their own public relations and think their products truly are superior to those of their competitors. Trouble is, nobody else believes it.

Manufacturers are also having difficulty coming to grips with the fact that they may never see 25 percent-plus margins again, certainly not in the hardware area.

The vast majority of manufacturers still have not scaled their businesses for the new environment of declining sales and declining margins.

The answer for some is to push more toward the direct model for both products and services. I'm not arguing against a hybrid model. For many manufacturers, it's the right strategy. But some are rushing to the model too quickly because they believe it will solve all their problems and that it is necessary in all markets,enterprise and SMB. It's the one-size-fits-all strategy, which fails so often.

I think we are going to see more vendors adopting this strategy until the market improves. Most of the manufacturers that go down this route, however, will not be around in 2005,no matter how large they are today.

No one would have believed that Digital Equipment Corp. could disappear, but it did. Digital proved to be incapable of weaning itself off fat margins, and it failed to build a viable reseller channel and move toward at least some significant indirect sales.

It seems to me there are two things manufacturers need for survival, aside from cost containment. They need to understand that the channel is their entry point into SMBs. Vendors can't cover these markets without the channel, and those that attempt to are going to lose more sales than they gain.

The other ingredient for survival is to know that effective marketing is more important than ever in an environment where it's difficult to differentiate products from their competitors.

I have my own list of companies that I don't believe will be around three years from now because they don't get this. I'm sure you do, too.