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Manufacturing business models

Rethinking corporate structures and business models

INSIGHT ARTICLE  | 

Rethinking corporate structures and business models

Industrial companies are rethinking corporate structures and business models as they assimilate their experiences from the pandemic. Like any crisis, the pandemic has accelerated certain trends, and industrial companies are exploring strategies to create sustainable value to their stakeholders.

Many large and midsize industrial companies cater to multiple industries and sectors, and hold diverse product and business portfolios. Such companies have long faced the question of whether to diversify and expand into new markets or simplify and focus on their core business. Before the pandemic, larger industrial companies were rushing to sharpen their focus via asset sales and spinoffs. Companies such as Johnson Controls, Honeywell, Ingersoll Rand and General Electric have shed business units and created more focused organizations. The pandemic has served as a trigger point to galvanize some of the focus on business simplicity for the middle market, too, as midsize companies increasingly reevaluate which of their existing business units complement the “core” of what they do. Midsize companies are entering into carve-out deals to spin off business units or products and rationalize operations, hoping to maximize value.

Companies realize complexity makes it difficult to navigate downturns. Successfully growing diversified businesses across geographic regions is no easy task. However, as past crises and the current pandemic have demonstrated, multi-industrials or diversified businesses are generally more stable due to risk diversification across sectors, some of which may be registering high growth and some of which may faring poorly at a given time. Diversified companies such as Pentair highlighted diversification as an asset in their third-quarter earnings. In contrast, companies focused on a single sector or business line are more prone to economic swings.

Diversified companies held their ground during the pandemic

Carbon pricing policies—aimed at applying a market price or a monetary value to carbon emissions—are already in place in many countries, including Canada, Europe and even some parts of the United States, forcing companies to take the impact of these emissions into account in their decisions to make carbon-intensive goods. Making green products can be more expensive than the status quo, but also creates the opportunity for companies to invest in advanced technologies to garner a greater share of the market. But given the focus on sustainability by countries around the world, companies ranging from glass to steel to automotive are left with no choice but to rethink product design and process.

MIDDLE MARKET INSIGHT

The pandemic has served as a trigger point to galvanize some of the focus on business simplicity for the middle market, too, as midsize companies increasingly reevaluate which of their existing business units complement the “core” of what they do.

As companies assess whether to embrace a diversified or simplified corporate structure, leaders should question efforts to diversify without strategic thought. A company seeking to diversify primarily because target multiples are low or for the sake of commanding a valuation premium, for instance, will lack the more holistic approach needed in the current environment.

Midsize companies with limited operational, managerial and financial resources should think through the expected value proposition, model out scenarios of varying levels of success, and evaluate the strategic purpose when acquiring what they consider synergistic businesses or when divesting business units they may not consider synergistic. Take, for example, Roper Technologies, a pump and valve manufacturer that successfully diversified into software solutions because it figured out an asset-light, cash-generative strategy with an aggressive focus on software acquisitions across various end markets. An intentional framework behind each acquisition or divestiture or a management strategy that glues together diversified businesses is critical.

Diversifying with technology-enabled business models

Companies are taking a closer look at their existing business models to exploit potential opportunities in an industrial ecosystem shaped by emerging technologies and changing customer preferences. Manufacturers are exploring alternate business models that can provide sustainable growth, provide recurring streams of revenue and/or reduce the asset intensity of a traditional industrial business. Some machinery manufacturers, for example, are considering “equipment as a service” offerings, where the customer pays for use of machine time rather than purchasing the machine itself. This provides the company with deeper customer relationships, recurring streams of revenue and critical data on customer behavior to improve their products, services and business model.

Large and midsize industrial companies alike have introduced industrial Internet of Things-enabled platforms that combine products, expertise and data to improve customer productivity. One example is Rexnord, a midsize bearings and couplings manufacturer that introduced a digital productivity platform to help customers maximize production uptime and lower maintenance costs. Such platforms, which are still complementary to the traditional business model, have helped companies experience the benefits of asset-light, “as-a-service” business models that enable revenue growth without traditional levels of capital investment.

On the cusp of so much change, companies need to take a closer look at their corporate structure and business models to ensure they align with the long-term strategy of the business and will be adaptable in the transforming industrial ecosystem.

Online marketplaces and direct-to-customer e-commerce business models are almost table stakes in today’s environment. Midsize industrial companies that have not developed their online delivery and data-capture capabilities are consequently forgoing huge market potential. According to Forrester Research, U.S. business-to-business e-commerce transactions are expected to reach $1.8 trillion by 2023. The industrial buyer will increasingly be a millennial, and as the “typical” buyer changes, so does the business sales process.

On the cusp of so much change, companies need to take a closer look at their corporate structure and business models to ensure they align with the long-term strategy of the business and will be adaptable in the transforming industrial ecosystem.

Here are some questions that may help leadership teams assess their readiness for change:

  • Does the company have access to relevant data and insights to help determine which markets and products it should be investing and operating in?
  • How can the company capitalize on the direct-to-customer trend with online sales and distribution capabilities? How can the organization glean better customer insights from such online capabilities?
  • Has the company performed thorough due diligence in evaluating all operational, financial, market and strategic considerations when selling or acquiring business units?

Any decisions around corporate structure or business model will have both pros and cons. While no decision is foolproof, what is important is the intentional thought process that takes into consideration long-term goals and objectives, industry and sector trends, and the realistic investments and resources needed to realize expected benefits.


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