Blog Entry

Aug 3
2011 

From Equipment Manufacturer to Software Vendor: Five Common Phases of Transition

Part 2 of 3 from the series “Take on Licensing: What High-Tech Manufacturers Need to Know”

Shifting from an equipment manufacturer business model to that of a software company does not happen overnight, and typically occurs in phases. These are the common phases that take place during the transition from equipment manufacturer to software vendor:

  1. Solution-specific hardware (machine manufacturer)
  2. Solution-specific hardware packaged with solution-specific software
  3. Combination of off-the-shelf hardware and solution-specific hardware, packaged with solution-specific software. Typically, additional pure-software products, sold to the same customers, are added to your offering at this stage
  4. Off-the-shelf hardware, packaged with solution-specific software
  5. Solution-specific software (with hardware provided by customer or a partner)

As a somewhat natural progression, companies that reach phase three typically start offering added value software packages in addition to their traditional hardware-based offering. Here’s one example.

Imagine a professional printer manufacturer that started their company in phase one by manufacturing printing equipment. Over time, their technology evolved to digital printing and their equipment became more sophisticated. In phase two, they were using a simple processor running dedicated software.

The need to add value to their offering, and the decreasing cost of x86 processors, drove them to embed a PC-based computer in their printing equipment, putting them squarely in phase three.

Having a powerful computer embedded in their equipment, they add more value over time by continually enhancing their software. They now have a large team of software developers in-house, and have recognized the potential in expanding the business by developing pure-software products to sell to their customer base.

It is inevitable that, with the reduction in manufacturing costs in emerging markets and the entry of Asian competitors, this printer manufacturer will experience erosion of profitability on their hardware products.  As a result, they will shift their focus to software.

Sink or Float?

In today’s high-tech world, companies that have not successfully moved from phase one to two have probably already gone out of business. Companies that have evolved and are now in phases three, four, or five are facing the challenges described earlier in this series:

  • Competitive advantages have a short life-span as a result of Intellectual Property theft.
  • The ability to support an expanded product line using a single codebase for increased organizational efficiency.
  • The ability to monetize the value added by an increased software development investment.

As your company progresses through each phase, you can expect to be exposed to more of these challenges.

How do you overcome security challenges while moving through this transition process?  In my next post, I’ll share some best practices that high-tech manufacturers have implemented.