Market Insights: Is that big OEM right for your photonics business?

Capturing a game-changing OEM has the potential to transform how a company operates, organizes, and creates a sustainable and profitable revenue stream.

Jan 23rd, 2017
1701lfw Mi H Sta

JOHN STACK and JOE DELFINO

Capturing a game-changing OEM has the potential to transform how a company operates, organizes, and creates a sustainable and profitable revenue stream. For photonics companies with hopes of rapid growth, engaging in large moves can be their undoing if not approached from a position of strength. Successful photonics companies adopt an objective approach and possess the willingness to walk away from an opportunity that does not leverage the value of client and company. Acquiring that discipline sounds easy, but when faced with lower-than-expected sales, an under-loaded factory, or a parent company wanting to grow quickly, such opportunities can lead to a lot of sleepless nights for managers on the front lines.

Consider the following example: two photonics companies suddenly find themselves in the envious position of landing sizable contracts to develop and manufacture a complex optical assembly for a new semiconductor tool. The pressure mounts for both companies to ramp up quickly in terms of manufacturing capability, dedication of engineering resources, and compliance to demanding quality standards. Both have also negotiated hard to win the business and initial margins will be slim.

John StackJoe Delfino

Then, the other shoe drops and what was supposed to be steady production suddenly turns into an exercise of hurry-up-and-wait. As the first year of slow production turns into the second, both companies scramble to manage idle capacity. Meanwhile, the issue of pricing enters back into the conversation as the customer starts hinting of consolidating manufacturing to a 70-30 split to deal with their own customer pricing issues.

What's the difference between the two companies? The first was willing to do anything to get into the coveted semiconductor business and invested well ahead of demand to appease the customer. The second anticipated that such a delay scenario was possible, and had decided to stretch their current resources until real production demand became visible. In addition, the second company went into the contract knowing they had a unique assembly process that could ramp much quicker than the competition—a clear advantage when negotiating with the customer.

Photonics leaders seeking paths to successful OEM projects learn how to extract the untapped leverage within their business and use it to guide their decision-making process. Discovering your company's leverage points often begins with a realistic definition of core strengths and weaknesses that bring meaningful value to your customers. Assessments of this nature must be clear-eyed. Just because your company has mastered a skillset does not automatically make it valuable to potential customers, especially if that skill set has become dated or no longer cost effective.

Managers should include their core business skills such as market domain knowledge and ability to read the competitive landscape when building their decision model. For example, a company faced with a large medical device opportunity will rapidly find a very different business landscape when compared with a typical defense contract.

Manufacturing the product is only one part of the challenge. Not understanding customer expectations on issues such as delivery changes to quality metrics or long-term pricing can cause a company to lose money at every turn. Worse yet is the dreaded second-source syndrome, where you have made the investment but only get 20–30% of the business because the customer's primary interest is to keep the other guy honest.

If you are brand new to a market, a quick sanity test is to ask yourself the following: Is my product offering truly unique and valuable to the target market? And second, am I in contention just because I have a low price? If you answered no to the first question and yes to the second, chances are you are in for a tough road ahead.

Understanding your sustainable leverage

Once a company identifies their sustainable leverage, it must educate all personnel with customer facing responsibilities. To a salesperson with a quota to achieve, opportunity lurks around every corner, and when a significant opportunity presents itself, it may be difficult to be objective. A good salesperson knows how to sell in both directions and create scenarios that has managers quickly scrambling for resources.

On the other hand, a salesperson who understands the company's leverage will focus their efforts on finding customers that have a higher probability of success-or at a minimum, seek opportunities that allow for a reasonable stretch of capabilities and risk. Sales are your first line of defense in filtering opportunities, but they cannot do that if all they are ever told is to "go out and find more sales."

If salespeople are the optimists, then the operations folks are the pessimists—and for good reason. Operations must deliver on the promise. When operations are feeling reasonably comfortable, you are good to push forward. When they are feeling anxious, it is time to start thinking about raising your price. Correctly pricing your product with risk has an amazing way of keeping you within your areas of strength.

Customers will recognize your value and be willing to pay for it or they will release you early in the bid process, saving everyone a lot of time and money. On the other hand, if your manufacturing process is at the highest level, you can comfortably lower your price without driving below the threshold margin that is critical to the safety of your business.

When do you take the plunge into the large-scale unknown? Growing a company is similar to acts of a play—often, you need to close the curtains and reopen them to get to the next level. Large OEM opportunities often take you outside of your comfort zone and can be just such a catalyst. As managers, we need to seek out such opportunities as part of a larger growth plan that has buy-in from the entire organization. We also need to be honest about the financial risks and rewards.

Spend time analyzing the downsides and tempering the upsides. Seek out people inside and outside of your organization who have domain expertise and can speak from a position of experience. And most importantly, identify the champions within your organization from all disciplines who are willing to fight when things get difficult. Eventually, your customer will recognize them as your most valuable product and, for your company, your greatest leverage.

John Stack and Joe Delfino are both with HighPath Partners, Chester, CT; e-mail: jstack@highpathpartners.com; www.highpathpartners.com.

More in Lasers & Sources