In a soon to be published EMF white paper, cadres of comparable design outcomes were developed between developers that used MBD tools and those that didn’t. Cadres were established worldwide, for North America, for Asia, and for Europe.

In addition, specific analyses were conducted for MBD and non-MBD cadres for Telecom/Datacom, Medical, Automotive Transportation and Industrial Automation application markets.

Total Cost of Development calculations were conducted using:

• Number of software and hardware engineers per project
• Time from design start to product shipment
• Percent of designs cancelled and the number of months elapsed before cancellation
• Percent of designs completed behind schedule and number of months behind

The following table summarizes EMF’s findings. For comparison, the cost per developer man month was chosen to be $10,000. Clearly, this dollar value is high for Asian developers. However this value was chosen for internal geographic analysis only – to establish whether MBD provided an advantage or not. These values are not to be used to compare, for example,  Asian costs with European costs.

Looking at worldwide developments (that is interrogating the entire database irrespective of geographic considerations), the following table summarizes the EMF findings.

It is interesting to note that in every analysis, regardless of the cadres used (i.e., each vertical or geographic comparative breakout), MBD projects used fewer developers. When analyzing cost overruns (i.e., the number of developer months lost to cancellation or late completion) to total project developer months, the percent of cost overruns to total project developer months was less for MBD in every analysis.

EMF suggests that this data shows that the advantages in using simulation-modeling as a design methodology are real and that these practices will be adopted for reasons not only related to design outcomes, but for financial ROI reasons as well.

Each year EMF conducts a thorough and detailed survey of embedded developers. Using the EMF Dashboard – a web based tool that permits vendors and developers to correlate information between any responses to any question, EMF presents selected insights from its analysis of the 2010 data. The Dashboard enables vendors to look at the responses of their customers (and potential customers) as well as to their competitor’s customers. This provides invaluable insights for strategic and sales planning. Developers can see what their fellow developers are considering in their selection criteria

Product opportunity windows are fleeting and time-to-market issues dominate design considerations. The two factors that invariably make the difference between success and failure are first, the knowledge that comes with an accurate insight into the internal and external forces which drive product markets and second, an insight into the concerns, desires and thought processes of those customers who make the decision to purchase a particular product or deal with a particular vendor.

The following data, taken from the 2010 EMF Embedded Developer Survey, addresses many issues of which embedded vendors and developers should be aware. The data presented here represents embedded industry averages across many application verticals, many vendors, many OSes, etc. Subscribers to the 2010 EMF Market Intelligence Program have access to their custom Executive Dashboard with which they can create unlimited cross tabs to further examine the data presented here.

 Criteria Most and Least Important to Developers in Selecting an OS

Developers were asked to indicate which criteria were most important to their decision in selecting an OS. The top (most important) responses and the bottom (least important) responses are presented in the following tables.

There was an interesting reordering of priorities in 2010 with cost remaining the principal factor. Realtime performance fell (no surprise here) and safety certifiable and virtualization remained as a small part of the collective consciousness of embedded developers.

(Sung to Santa Claus is coming to town)

Yes indeed – and it’s about time.

The FDA’s Center for Devices and Radiological Health (CDRH) reported that in 2006, 21% of all medical device recalls were for software defects – it is also estimated that one-in-three software-based products is recalled. They haven’t updated this data since, but one can assume that it might have gotten worse.

Medical device developers and company CEOs should be aware that this is an unacceptable situation and that it is going to rapidly change. Those that don’t get it straight won’t be around when the dust settles.

Is there enough aspirin to relieve the headaches that our government is giving medical device manufacturers? Moreover, is it deserved? The answer – depending on the specific question – is yes and no.

The Obama administration under pressure from Congress has combined the medical device industry with the drug industry as one, and has proposed taxing both industries to pay for universal health insurance (Obama Care). Hopefully thoughtful senators and representatives will see that these taxes will be passed down to patients and other users and will also impact the elderly who most require such devices and can ill afford them – then again it is more realistic to depend on the Easter bunny. But logic is no relief for the headache – particularly when it comes to Washington politicians. It’s no fun being a medical device executive today.

On July 31, 2008 a Senate Bill cosponsored by Senators Edward Kennedy (D – MA) and Chuck Grassley (R– IA) was filed that  would require senior officers or directors of drug and medical device companies to certify under penalty of perjury that all information submitted for a product’s approval is accurate and in compliance with federal regulations.

The Drug and Medical Device Accountability Act Bill expired at the end of the two year Senate session on December 31, 2008, but was refiled in the Senate (2009) with the hope of amending the current legislation by the end of October 2009. This is an important piece of legislation, and medical device executives should get their house in order to accommodate the provisions.

The Bill provided that product applications later found to have contained false or misleading information would be subject to stiff fines (up to $5,000,000), assessed both to companies and their senior officers, who, in addition, could face jail sentences of up to 20 years. These are serious issues. Currently the CDRH has a forensic group that looks at device software only after a device has been recalled.

This is a bad time, and a very costly time (regardless of the Act) for a medical device manufacturer – particularly if software development hadn’t been given the detailed oversight of using best practices. The new Obama tax on medical devices – used to pay for Obama Care – is allready a blow to the industry and to smaller medical device manufacturers.

The “Drug and Medical Device Accountability Act” will change the medical devices industry similarly to how the Sarbanes-Oxley bill impacted corporate accountability. Laws being what they are, we should expect overkill from its enactment. This is why medical device company’s senior management should take time to rethink their strategic approach to the delivery of their products.

EMF has available a report presenting alternative paths for developers to produce quality software for medical devices, minimize product recalls, and affordably provide comprehensive audit trails for CDRH inspectors (Critical Issues Confronting Medical Device Manufacturers). Keeping the company alive and your CEO out of jail are bonuses.

Dolores and I made our annual trip to the Left Coast to attend the annual Embedded Systems Conference last week. It was the best ESC West in many years – more booths; larger booths; good floor traffic; interesting announcements and new to embedded players.

I’m not sure how Rich Nass does it – but the keynote speaker was again excellent. This time Michio Kaku, the co-founder of string theory and TV science presenter was the speaker and was charming, funny (but Seinfeld can breathe easy), informative and delightful. We joined the mass exodus to avoid the obligatory hour dedicated for the Microsoft Embedded Group (aka MS Purgatory – otherwise known as We B Arrogant). Granted that Microsoft contributes a lot of $$ to these very important events – for which I am grateful – but give me a friggin break MS, Windows 7 is not the promised land for the embedded world.

This was the year that the chip companies made confessions of love to many OS companies. Freescale made announcements with such stalwarts as Green Hills, while Intel teamed with LynuxWorks for an ill chosen medical product. ARM was very impressive as was Microchip, while Xilinx ran away with the FPGA application announcements. Xilinx for the 7^th consecutive year (by EMF survey data) was the most used FPGA in the embedded space (and had the best ROI).

Green Hills also made a networking arrangement with Cavium (who recently acquired MontaVista and MV Linux) which caused us to ask if Dan O’Dowd (who has publicly claimed that anyone who used Linux was brain dead – or worse) had to be drugged or restrained to cut a deal with a Linux company. We checked the stock market for Prozac manufacturers to see if consumption was up in Santa Barbara. All chuckles aside – it was an excellent deal for Green Hills.

It surprised and impressed us that Green Hills made behind the scenes moves that portend for significant growth and positioning against Wind River by hiring two individuals that bring another dimension to the competitive marketplace that will be to their advantage. Although I’m not obliged to keep such under wraps, I do respect the Green Hills folks and will keep these details to ourselves – other than to mention that they are the first of the usual suspects to clearly see the light.

Also impressive was the traffic through the VersaLogic and Synopsys booths. Although Kontron had the large booth, VL garnered significant leads. Also the large Express Logic booth had standing room only for their presentations – recognition of how ThreadX continues to grow. Micrium, though having a smaller booth had significant traffic as well. This shows that the smaller OS companies are making progress against the larger incumbents.

We were also impressed with our discussions with MontaVista. They had requested some specific questions be placed in the 2010 EMF Survey of Embedded Developers – questions that we didn’t clearly understand, but as we had the room for them we included such. They explained to us how these questions allowed them to quantify actual BOM costs for open source Linux and how this enhanced their market strategy. As they are the only commercial Linux company to provide a mid-development migration path for RYO Linux developers to roll into their MV6 product, we were delighted to learn how they used our data to arrive at their findings (we learn a lot from our subscribers).

A year ago Glenn Perry was handed the reins of Mentor’s group from Neil Henderson. Glenn at that time laid out what we thought was an overly ambitious agenda – we were wrong. Although much of our discussions were for internal consumption only, we can tell you that they have made impressive gains and are on the verge of major gains.

It is becoming clear that discretionary DoD funding levels are falling and OS companies have been running to the medical devices industry to compensate. As most companies are in love with their products and feel that they have the cure for the imaginary disease that they feel will cure and enhance the medical devices marketplace. Having built a number of medical device companies (taken two public) and having successfully filed a very large number of 510k applications, I found it interesting that no one wanted to listen to what we feel are the needs of medical device manufacturers and where the sales process differs from different verticals (most want to believe that medical and defense verticals have the same requirements).

It is interesting to have discussions with companies (they know who they are and I won’t embarrass them) to learn how many hundreds-of-thousands of $$ they have wasted being off message on who they were targeting and what they were offering. For such brilliant folks, they forgot the basics of market intelligence.

IBM Rational was in attendance and on-target and impressive as always. Artisan didn’t show with their MDD offering which was probably a good idea on their part. General Dorriot – the head of the original funding group of Digital Equipment Company – once wrote “bad ideas like dead horses should be buried with a minimum of ceremony”. Atego, the renamed Artisan group that includes Aonix, was represented by Gary Cato – a wonderful and incredibly patient and competent guy who made the rounds with spirit. As in the play Death of a Salesman, Gary is finding limited success notwithstanding that he’s firing at targets with limited ammunition. He has my vote as the most unsung hero at the show.

For those of our readers that are in or interested in the medical devices arena, EMF has produced a market brief, Critical Issues Confronting Medical Device Manufacturers – EMF Guide for Medical Device Developers

http://www.embeddedforecast.com/emf-briefs.php

A few months back I gleefully reported what the voters of Massachusetts did for the medical device industry by electing Scott Brown as our new Senator. The US Senate had cobbled together a poor Health Care Bill in order to send it onto the House of Representatives assured that the Republicans would not win Kennedy’s seat and gain the blocking vote. It was, by admission of many Democratic Senators, a terrible bill – but that it would be cleaned up in a House-Senate conference. 

With Senator Brown finally seated it seemed to be a no-brainer that the Health Care Bill would have to be dropped or reconfigured as it would not stand a filibuster challenge.

I was one of those relieved given my concern for my beloved medical device industry which was going to be the scapegoat of the current administration and be severely taxed for no other reason than its name sounded a lot like the pharmaceutical industry. I felt that we had ducked a massive bullet.

The gross distortions in favor of forcing through the bill under Reconciliation were mind-numbing. How the public could be convinced that spending more than a trillion dollars would result in a “massive middle class tax reduction” and how could taking $500 billion out of Medicare “strengthen” it?

Here’s what has happened and what we might expect – how much more damage can Congress inflict before the November elections?

Companies small to larger have written down expected charges to their bottom lines in order to comply with Sarbanes Oxley accounting practices. Caterpillar has charged their books a billion dollars while AT&T and other companies have taken write-downs in the range of $30 – $500 million. Of course Congress wants to interrogate their executives whose crime seems to be that they are complying with the laws set forth by Congress itself. Company executives could go to jail if they failed to disclose to investors how their expenses might change.

So the country is beginning to see the financial impact of Obama Care.

Massachusetts medical device companies are threatening to move their manufacturing and development facilities out of the US entirely. This is interesting given that our governor is a pal of the president. Our governor is “shocked” that hundreds of Massachusetts based life sciences companies would leave or export much of their business out of the country.

Of course he should be concerned – the medical industry is one of the few segments of the Massachusetts economy creating jobs. Thousands of Massachusetts jobs are at risk – and our federal and state elected officials seemed surprised. Go figure.

With many embedded vendors targeting the medical devices industry to hedge against expected A&D cutbacks, the consequences of the Health Care legislation couldn’t have come at a worse time. The financial impact of this legislation requires massive tax increases to pay for it, so if one group is given a safe haven from this taxation then other segments will be harder hit in order to cover the revenue needs.

Also, should the Supreme Court find that the legislative requirement that all US citizens must purchase health care (how can interstate transport laws pertain to those that don’t chose to buy?) is unconstitutional, the current congressional membership will certainly impose additional taxes on those already hit hard – and that would mean we the members of the medical device industry. We can’t expect that the members of congress would change their minds regarding the legislation given the sleazy way they forced the legislation through.

Of course should the mid-term elections change the constituency of the House of Representatives, they could choose not to fund the Program.

What is happening here in Massachusetts is happening across America. And those of you either currently in the embedded medical device industry or hoping to find new markets herein should pay careful attention.

Notwithstanding our weak global economy, the mindless imposition of new taxes (and the anticipation of additional taxes that are unknown to us at this time) can not only set our economy back further, but is likely to gut the embedded market segment that has shown the greatest growth in revenue and employment year-over-year.

Massachusetts Senator Scott Brown, who has filed an amendment that would repeal the tax, wrote “with unemployment in my state near 10%, placing a tax on medical devices is the absolute last thing we should be doing right now”. Our governor responded by saying health care reform is “very good for the people of America and the people of the commonwealth.”

Good luck Scott – November is only 8 months away.

I wonder how Schwarzenegger in California (whose state is harder hit than Massachusetts) is taking all of this. He’s not a buddy of our prez which might be a good thing.

 FIPS 140 (acronym for “Federal Information Processing Standard number 140”) is a US government standard, established by the National Institute of Standards and Technology (NIST), which specifies a series of requirements that must be met by an encryption module before it can be used in a Federal government system.  These requirements cover a range of subjects, from proper key management, to secure generation of random numbers, and from which encryption algorithms may be used, to module self-tests and error detection.

Put more simply, if a product performs encryption, the portion of that product which actually implements the encryption is the focus of FIPS 140. FIPS 140 is of interest to the embedded systems industry for several reasons:

First, under Section 5-131 of the Information Technology Reform Act of 1996 (Public Law 104-106), and the Computer Security Act of 1987 (Public Law 100-235), FIPS from NIST may be approved by the Secretary of Commerce and made binding to all Federal agencies.  FIPS 140 has been granted such approval, and therefore all Federal agencies are required to use FIPS 140-certified encryption to protect all sensitive information processed by all data processing systems, from embedded systems to mainframes.

This means that vendors cannot sell systems which use encryption to any Federal agency unless that system incorporates FIPS 140-certified encryption.

Why is there now a FIPS 140-3?

By mandate, NIST must review all Federal Information Processing Standards Publications every five years. Reviews determine if the standards should be modified, kept as-is, or deprecated as technology and government needs change. FIPS 140-2 was released in 2001 and came due for review in 2006. However, the CMVP had already begun planning for an update for FIPS 140-2 to reflect the ever-changing security technology industry. Although the existing FIPS 140-2 standard does a good job of addressing many validation needs, FIPS 140-3 will be designed to strengthen requirements, and update requirements in the face of new technologies, attacks, and techniques.

What will happen to FIPS 140-2?

Once FIPS 140-3 has been released, we will expect to see much of same transition rules as we say from FIPS 140-1 to FIPS 140-2. The new FIPS 140-3 will eventually completely replace FIPS 140-2. As with the prior transition we can expect to see a one year rollover and previous FIPS 140-2 validations most likely will not expire.

Due to the more stringent, revised requirements of the new release, it will likely be much harder to obtain FIPS 140-3 validation. For this reason, consulting companies expect to see a rush of vendors trying to achieve FIPS 140-2 certification before the end of the 1 year rollover period.

Revalidation will be possible under FIPS 140-2 still, but practically new versions will have to undergo a FIPS 140-3 validation after some time. Technically, a FIPS 140-3 revalidation might be called a new validation. However, FIPS 140-3 is just an evolution of FIPS 140-2, meaning that most of the technical points and work done for the prior validation can be reused. This will expedite certification under FIPS 140-3 and EMF believes this to be a good and timely investment.

Due to past experiences with the transition from FIPS 140-1 to FIPS 140-2, vendors looking to pursue a certification should consult with companies that assist in the certification process as early as possible in order to avoid common obstacles.

FIPS 140-2, like all Federal Information Processing Standards, is periodically reviewed, and changes and revisions are expected to be published in the form of the new FIPS 140-3. However, the draft FIPS 140-3 has not yet been finalized let alone signed into law. Although NIST is moving quickly towards this, it still takes significant time to publish and sign a FIPS into law. In addition, we expect NIST to provide transition time between the two standards, including roughly a one year rollover. FIPS 140-2 was signed into law in March 2001, but FIPS 140-1 validations could still be issued until March 2002. Thus, although plans for FIPS 140-3 are under way, vendors may still comfortably pursue FIPS 140-2 for some time.

Fanaticism consists in redoubling your efforts when you have forgotten your aim – George Santiago

Tough economic times create strange bedfellows. Does one need to purchase a technology, with its attendant costs and complications, when a lease or partner relationship would suffice? Do complimentary technologies and markets provide a return greater than the sum of the parts – or is the result characterized as “subtraction by addition?”

 EMF believes that embedded consolidation through acquisition will be the norm over the next few years as roll backs in DoD discretionary funding impact the larger purchasers.

 Let’s look to four recent acquisitions with an eye on compatibility, growth potential and whether there is a measurable outcome. Is this a trend, a lifeline or a passing strategic initiative – you decide.

 These include:

• IBM Rational buys Telelogic
• Intel buys Wind River Systems
• Cavium acquires MontaVista
• Artisan acquires Aonix

IBM Rational buys Telelogic

Recently IBM Rational added Telelogic to their comprehensive product lines and markets. We reported it as the Great Train Robbery of 2007. For around $800 million, IBM became the most capable and effective organization in the embedded industry, bringing with it the ability to link IT and embedded technologies under the rubric they call “smart devices”.

• Telelogic (along with the I-Logix acquisition) products have particular strength in software and systems development (in particular Rhapsody), requirements management (DOORS), and enterprise architecture. Their reputation in automotive, telecom/datacom and aerospace and defense systems development is outstanding
• IBM Rational brings IT development strengths to the partnership in addition to Rational Development Suite, DoDAF and MoDAF architecture capabilities as well as an impressive and unique communication infrastructure for cooperative development and management (JAZZ)
• This combination of capabilities gave IBM the ability to integrate many embedded tools within their Model Driven Development (MDD) thereby expanding the marketplace for other embedded vendors.
• IBM Rational acquired some of the best systems engineering talent in the industry – and a senior VP that is revolutionizing the embedded industry by organizing around markets rather than products.

How has this worked out for IBM? In 2009, which was admittedly an economically troubling year, Telelogic revenue contributions nearly tripled. EMF calls this acquisition multiplication by addition.

Intel buys Wind River Systems

Did either of them think through their respective channel strategies? Will Freescale users convert to Intel – or will there be a sales pushback?

So what’s in it for Intel and why did Wind River bail out so easily? Let’s look at the facts:

• Intel doesn’t need the additional $300 million on their balance sheet
• Wind River has been losing market share for some time now and their “subscription model” (which they have abandoned) cost them dearly in the mil/aero marketplace and allowed Green Hills and LynuxWorks to significantly underbid them
• Rob Davidson, Wind River’s VP of A&D, has publicly stated (at an Intel sponsored event no less) “let me make it clear that Wind River is a Freescale company” since 85% of Wind River’s military sales are Freescale-based
• Intel, notwithstanding their successes, is facing considerable competition from ARM and FPGA vendors – particularly Xilinx
• The Mil/Aero market and the primes that spend the most on embedded technologies and sub-systems are decidedly moving to a “software centric” purchasing model

Truth be told – both Intel and Wind River are missing the emergence of an embedded market that will soon overshadow the rest of the marketplace. It involves several components – none of which are within the new Intel’s capabilities.

• Systems development – with C and C++ developers working simultaneously on the same development
• Unique problems associated with systems-within-systems developments and long term support of such
• The new era of “Smart Devices” – the merging of IT database capabilities securely communicating with intelligent embedded devices

So, how will this work out? From Intel’s point they have really nothing to lose. They bought Wind River at a somewhat generous revenue multiple, but will get that back in a few years, even if Wind River continues to lose market share. Wind River’s legacy revenues in telecom and mil/aero will continue to fill Intel’s coffers.

There is a chance that Intel will be able to cut into Freescale markets and pick up new chip revenues. However they have a terrible record when it comes to successful acquisitions. Wind River’s global distribution agreement with Kontron for VxWorks and Wind River Linux is an example of why Intel will make back their investment.

EMF rates this “neutral”. Whereas mission critical applications are a fraction of broader embedded sales, the lack of a competent systems capability will be a drag on future expansion opportunities.

Cavium acquires MontaVista

Here we have a chip company acquiring an established Linux market leader. MontaVista is a major driving force in the embedded Linux marketplace.

Fifty percent of the current Linux marketplace is for in-house, or what EMF calls Roll Your Own (RYO) Linux – as distinct from commercial Linux offerings. EMF research has shown, year-over-year, that commercial Linux products produce a superior ROI to RYO Linux. The commercial Linux market opportunity would be enhanced if commercial Linux products were able to rescue RYO developments that are failing or reach a stand-still position. MontaVista is the first commercial Linux provider to provide such a solution.

By having Cavium’s resources behind them, MontaVista is in a commanding position to maintain their advantage over Blue Cat and Wind River Linux initiatives.

EMF believes that this acquisition is an excellent one for the following reasons:

• Acquisition gives Cavium multiple revenue account opportunities. One by winning the processor design, two by selling SW and services during the design phase, and three by generating revenue in software and services even if they lose the design
• Cavium’s 140-2 security certification makes MontaVista the only embedded OS vendor that has this important security capability
• The investment of a public company like Cavium in MontaVista adds stability to the embedded Linux market.
• Cavium has a history of delivering solutions that work with other company’s processors.
• MontaVista should be able to invest in more multi-core and virtualization technologies. While this benefits Cavium, it also benefits all of their semi partners with multi-core processors. Another potential win-win.

Embedded Darwin Awards

One of my favorite readings is from the book The Darwin Awards which reports on those whose carelessness and ignorance contributed to their early demise thereby removing them from the genetic pool. Quoting from the 2008 edition:

“The Darwin Awards celebrates those who have dived headfirst into the shallow end of the gene pool. From offering a beer to a bear to self-testing a Taser to jumping off a drawbridge on a bike, The Darwin Awards Next Evolution honors these macabre and entertaining feats of hapless misjudgment”

The following example might have earned at least an “Honorable Mention” if the book carried embedded technologies as a subtopic. 

Artisan acquires Aonix

This to EMF is one of the stranger acquisitions of recent memory. Take one struggling company attempting to climb out of the shadow of IBM Rational’s MDD capabilities acquiring a company that has been in free-fall for the past four years in order to gain a marginal Real-time Java capability. Some may remember that 5 years ago RT Java was forecast to displace C++ for military applications in order to permit software to inter-operate across different hardware systems. Fast forward to today and C++ is more entrenched than is Java. So buying Aonix to gain access to a Java capability (that is competing directly with IBM) that is readily available for licensing is like searching for a wife at a brothel – too expensive (it’s cheaper to rent) and history suggests that it won’t provide a long term benefit.

Someone should have asked Artisan if they knew the difference between Santa Claus and the need for RT Java (the answer is that there really is a Santa Claus) before they made the acquisition.

To add to their pain is the re-branding of the combined companies to be called Atego (this makes sense to change the Aonix name – but the Artisan name as well?). This is the 3^rd acquisition in the past year and a half for the management bought-out Artisan enterprise.

So why did this happen – and to whose benefit is the establishment of Atego?

EMF might accept the argument that a vastly superior management team could make a difference by integrating the companies – yet the Aonix component remains under the control of the management team that ignored market realities and caused Aonix’ decline.

The Artisan folks are not stupid people – misguided perhaps. EMF suspects that the investment bankers at risk for each of the enterprises came together to attempt to minimize risk.

If so, perhaps these bankers might have followed Warren Buffett’s admonition “When management with a reputation for brilliance tackles a business with a reputation for poor fundamental economics, it’s the reputation of the business that remains intact.”

We are not sure that Buffett would characterize Artisan’s management as brilliant.

File under “assured mutual destruction.”

When will the next shoe fall? 

The Aerospace and Defense Industries of the United States are poised to undergo one of the most significant changes since the end of the Cold War, perhaps the most significant since World War II.  These impacts will reach down into the value chain, in some cases devastating naive second and third tier vendors as major primes shift financial challenges to their vendors.

These third tier vendors constitute the embedded marketplace.

One might expect that in a market contraction, companies would seek to outsource more seeking lower costs.  We think this will happen for some defense firms, but we believe that many will resist it.  The largest contractors have been formed by merger and acquisition activity.   In many cases, large fixed costs have been merged on corporate balance sheets and are being depreciated.  Outsourcing might require significant write downs for post-merger balance sheets.

EMF expects to see a necessary consolidation of vendor offerings as falling revenues will be stabilized by acquisitions – acquisitions that might be found at bargain prices.

EMF considers the usual suspects in its published research.

The embedded marketplace is facing a financial tsunami that will have severe consequences for the largest consumers of embedded technology – the Tier 1 contractors. This in turn will significantly impact the lower tiers and cause a major upheaval for Tier 3 vendors – the embedded suppliers.

Steve Roemerman, CEO of Lone Star Aerospace a highly respected technology consultant to military and government agencies has written “The Aerospace and Defense Industries of the United States are poised to undergo one of the most significant changes since the end of the Cold War, perhaps the most significant since World War II. We believe observers who expect small changes are mistaken, fostering a false and dangerous sense of security across much of the industry and government”. 

This forecast and view is also strongly held by Ken Krieg, former deputy undersecretary for defense acquisition, and in publications from Booze Allen.

So you might be asking “Why haven’t we heard of this, Jerry and why are other analysts forecasting a very good year for 2010?” Being long in the tooth and having been here before when CompactPCI was being touted as the VME slayer and industry hopefuls along with participating analysts were forecasting a $2 billion merchant computer board marketplace (which EMF called a $zero billion market). Why were we correct and others in error? Because markets behave in predictable manners – even when disruptive technologies disturb the playing field. 96% of CompactPCI offerings were controlled by 3 companies – this represented a classic commodity market and there was little room for growth. It took 24 VME vendors to account for 75% of the VME market, by comparison – which made it a dynamic and growing market. VME is still around and holding market share. CompactPCI is now a custom product (not a COTS product) and is being abandoned by PICMG for PCIExpress.

The outcome was predictable. Today the Board marketplace is dominated by Kontron, GE, Curtis Wright and RadiSys. Gone are Motorola Computer Group, Force Computers and a litany of others.

The embedded world is characterized by a growing and vital marketplace that is forcing certain segments into commoditization while creating huge opportunities for those that take the time and invest the effort into understanding their market dynamics.

I love the following story – because for me it holds more than a kernel of truth.
 

Its late fall and the Indians on a remote reservation in South Dakota asked their new chief if the coming winter was going to be cold or mild. Since he was a chief in a modern society, he had never been taught the old secrets. When he looked at the sky, he couldn’t tell what the winter was going to be like. Nevertheless, to be on the safe side, he told his tribe that the winter was indeed going to be cold and that the members of the village should collect firewood to be prepared.

But, being a practical leader, after several days, he got an idea. He went to the phone booth, called the National Weather Service and asked,’ Is the coming winter going to be cold?’ ‘It looks like this winter is going to be quite cold,’ the meteorologist at the weather service responded. So the chief went back to his people and told them to collect even more firewood in order to be prepared.

A week later, he called the National Weather Service again. ‘Does it still look like it is going to be a very cold winter?’ When told it would be severe he sent his people to pick even more firewood.

Two weeks later, the chief called the National Weather Service again. ‘Are you absolutely sure that the winter is going to be very cold?’ ‘Absolutely, ‘ the man replied. ‘It’s looking more and more like it is going to be one of the coldest winters we’ve ever seen..’ ‘How can you be so sure?’ the chief asked.

The weatherman replied…

 ‘The Indians are collecting firewood like crazy’ 

So how much does our industry influence itself? Is the embedded industry too small to understand its dependencies?

Continued in Part II

Forecasting involves two distinct activities;

• Measuring the pulse of embedded developers to understand what they are doing, what success they are having, what are their deepest concerns and how do the use of different technologies (e.g., comparative RTOSes, development tools, communication middleware, testing processes, etc.) affect design outcomes (ROI, time to market, percent of designs completed ahead or behind schedule – or cancelled). Also it is helpful to compare final design outcomes to pre-design expectations.
• Following purchasing trends, funding sources and levels, and whether purchasers are bringing developments and tools in-house or by purchasing.

It is important for embedded vendors to use available data and information and to be able to cross-correlate findings to search out relationships that help define market directions as well as to provide sales support materials to better pursue qualified leads.

EMF published research has used developer-based user surveys and collaborative industry/government based usage and funding insights to forecast market segments that are growing and those that are contracting (at least in the short term). Given these insights there are steps that vendors can take to minimize risk while maintaining a positive positioning.

These include:

• A serious analysis of your competitive position is essential to not only getting qualified leads but also to having a competitive sales support program with which to follow up these leads. Customers are buying your competitor’s products. Do you know why? Do you know how best and affordably to find this information (talking to a few customers won’t get you there)? Can you prove that your products help your customers get to market faster?

• You really need to know what your customers really need – how do you find out? In our surveys we discover what issues are most troubling to them and what would motivate them to move towards you (or away from you).

• If your products and those of your competitors exceed the needs of current and prospective customers (notwithstanding how truly cool your products may be) mitigating factors will affect their purchasing decision – even if your product isn’t as cool as those of your competitors.

• Be able to demonstrate your value (they won’t do it for you). Be able to provide factual information – ROI if you can.

• Promote yourself. Is your marketing targeting the right customers and do they have compelling information to state your case? Be proactive – your competitors might have access to information that makes their case – and you wouldn’t know about it.

Be exceedingly careful as you look to expand your marketplace – either offensively or defensively. Vendors realizing the impending shortfall in mil/aero are looking to alternative markets without understanding the dynamics and true needs of those markets. Medical, for example, has been targeted by some of the larger mil/aero vendors stressing their DO 178-B and Common Criteria certifications. For the most part this is laughable given that the highest frequency response for monitoring a non-attended patient is 100 HZ.

We are seeing companies that have been successful in EDA (e.g., Synopsys) and IT communication systems (e.g., IBM) bringing their proven technologies to enhance systems development and deployment – which in turn change development paradigms by offering OEMs and systems integrators better long term solutions.

Smaller vendors need to be able to show their value and the ability to integrate their solutions with these more advanced solutions. IBM Rational’s Rhapsody is an example of a very powerful model driven development (MDD) tool that allows for competitor’s requirements management, RTOS, static and dynamic analysis technologies to be comfortably integrated.

Be careful where you get your information – and before you pay for it make sure you understand where it came from and how it was obtained.

Warren Buffett offers the following timely advice: “For some reason people take their cues from price action rather than from values. Price is what you pay. Value is what you get.”

Experience is not what happens to you; it is what you do with what happens to you – Aldous Huxley

This paper is intended to create a guideline to enhancing your sales and marketing capabilities. You can follow as many of the suggestions as you wish – I wanted to provoke your thinking.

EMF recognizes that businesses today are confronted by unparalleled rates of change that create tremendous challenges. Companies need to differentiate products, react to on-going market shifts, efficiently streamline support of deployed products and exploit globalization. The stories we present are true, the guidelines are proven and the theme is to stimulate you to rethink your strategy in a rapidly changing marketplace.

Since I was a young man I have always had the entrepreneurial desire. Setting out without a guide can be a tortuous experience. It’s bad enough knowing what you don’t know. In my case it was worse – I didn’t know what I didn’t know. Through trial and error I built five companies (4 medical, 1 computer). The first were near or actual disasters – but through good fortune I found several mentors who taught me the fundaments of customer-based selling and market driven strategies. My success included taking two companies public – I wouldn’t have reached that goal if I not for the good graces of my mentors.

I sold out the last of my businesses in the late 80’s, took a detour in academics and returned to the embedded playing field as an industry analyst in the mid 90’s. Although markets have changed over the past 20 years since I was on the product selling side of the industry, I believe that the strategies that were passed on to me have merit in today’s highly competitive and rapidly changing embedded marketplace.

My transformation as a tekkie to a businessman didn’t come from seminars and course work – it came from my guides posing significant questions to me that forced me to rethink my markets, products and corporate values. I’d like to share them with you. I took to these questions not unlike a Zen beginner confronting his koans. The answers to these questions took a lot of reflection on my part, and a rethinking of how business is done and might be done better. Looking back – it’s laughable that I had the temerity to advertise that our products outperformed those of Hewlett Packard (medical). They did but who was going to believe it? HP did me a favor by taking on our product line and selling it with theirs.

Let’s begin with what I feel was the most important thought and the questions that ensued:

Axiom #1: The Study of Your Competition is Critical to Your Success

Whether or not you consider your competitor’s products to be inferior to yours, they are competitors because customers are buying them.

Do you know what customers like about your competitor’s products? Dislike?

There will always be customers that favor your competition due to factors beyond your control. Perhaps they have been using them for so long that it is comfortable to resist change. Or perhaps they haven’t received the support that they desire or need. Do you know what embedded customers feel are the most troubling issues that confront them and what are the factors that would most influence them to change to you – or leave you for another vendor? Here we are speaking to the broad marketplace – not just your customers. If you’re not, why aren’t you?

Today’s embedded marketplace is not only highly competitive, but the factors that affect a purchasing decision are changing as well. Our underlying economic conditions are causing the large (mil/aero) and smaller customers (systems integrators and OEMs) to hold back on purchases until they see a market direction and their bottom line improves. Will you be ready and have a sales advantage to move quickly when market opportunities arise? What strategies have you in place to respond to opportunity – or are you going to be a follower?

Are your competitor’s products better than yours; cheaper than yours? Is your marketing strategy able to anticipate and handle objections?

Xerox copiers were the most expensive in the industry. Their sales force used an interesting strategy to overcome the issue. They referred to the now popular “total cost of ownership” theme. What was the cost of machine downtime? How much valuable time of senior people did it take to train the new users when the Xerox machine was intuitive and easy to use?

These are the questions you need to ask yourself

• Do you have access to data/information that shows that your product gets to market faster and/or that final designs are closer to pre-design expectations? Can you quantify a better return on investment with your product as compared with your competitors?
• Are you able to express value in measurable terms? Can you back up your claims with proof that a potential customer will respect and believe?
• How do you anticipate the strengths and weaknesses of your market position? What are your options?
• What is your VALUE proposition? Sell value – not product

Axiom #2: The generation of sales leads is the lifeblood of a company

• How do you currently generate sales leads? By media advertising? By having a booth at a conference? By cold calling?
• How do you qualify leads and how do you insure that you are calling on either the decision maker or the person that will carry your water to get you the order?
• Are you able to measure the cost per qualified lead – knowing that it also involves your marketing and sale department staff?
• Once you get a lead how do you deliver your message? Do you have sales and product information available to support your field efforts?
• Do you/can you tailor sales support materials to each unique potential customer – particularly one that has used/is using your competitor’s products?
• Are your sales reps trained to handle objections? Can they identify and get to potential users?
• Do you provide after sales service – and is it part of the acquisition cost?

Some enterprising embedded vendors have come up with a limited free-use strategy in which one can download a single user, limited function, product for use by developers to try and evaluate. If the developer likes the product and wants to use the design, it is easily transferable to the larger, more powerful purchased product. How does your sales strategy encourage a potential buyer to use and try your product?

As an illustration of these considerations, one of my medical products was a premature infant monitor that although less expensive than our competitors, usually exceeded a hospital’s capital equipment budget. Also the capital acquisition process took at least 4 months for approval. Moreover, if an intensive care facility had a maximum capacity of, say, 12 infants they would need to have at least than number of monitors available. Legal exposure to malpractice considerations made it such that they couldn’t monitor some of the infants and not others – they would have to monitor all or none.

In doing our research we found that hospitals had separate budgets for deposable products that didn’t come under capital equipment considerations. (Note – in the past, cardiac patient electrodes were cleaned and re-gelled by nurses; a time consuming, costly and unnecessary chore, so hospitals found it cheaper and more sanitary to buy pre-gelled, disposable electrodes).

So we leased our capital monitoring equipment for $1 per year per monitor, based on the purchase of an agreed upon number of disposables per monitor per month (which had a 95% gross margin). Based on our success in the nursery, we expanded into respiratory therapy and anesthesiology since our equipment worked on adults with little modification. This strategy was based on information gathering, user knowledge and on establishing a level of credibility.

What is your Cost Basis for Providing Sales and Marketing Support?

Let’s turn now to what you should consider as an internal cost review so that you strategically understand what it is costing your organization to sell into the embedded marketplace.

#1: How do you get your market information and what does it cost you?

• I purchase it from reliable market intelligence source (cost ranges from $12,500 to $100,000)
• I hire a market researcher to read through journals and use Google ($50,000+)
• I use my marketing staff to visit customers and listen to their complaints and needs (limited data). Cost is $100,000+
• I hire consultants to work with my researchers and marketing staff ($50,000+)

#2: How do you translate market information into strategic planning and sales support?

• I pay the market research data provider to do crosstabs that we think we need to look for competitive and sales support information ($10,000 – $50,000). I still need my staff to use the information effectively, but I can reduce the staff size.
• My staff takes the market data and excerpts relevant information and prepares reports (depends on the size of your staff – estimate $200,000 – $1 million)
• I hire a consultant who is recognized and respected and pay him/her/them to write favorably on my behalf ($25,000 – $75,000)
• I take out journal ads and buy booth space at conferences (very expensive) to get information and get my message out.
• I ask my sales team to provide me with information (minimal cost; minimal benefit)

Regardless of what you do – you are ALWAYS selling

Caution – you are entering a commercial message. We offer valuable sales and marketing information/intelligence at a cost effective price. Our subscribers get:

• Two extensive crosstabed databases from the EMF Survey of Embedded Developers that present the responses of 5 types of engineers, 10 vertical markets, chip architectures including DSP, FPGA and Multicore to each question in the survey
• A custom Executive Dashboard that permits you to filter the data according to  your customers, your competitor’s customers, potential customers and broad categories of developers. You will discover what they like and dislike and what issues most confront them. You can develop sales materials, competitive analysis, and target your competitor’s customers as well as potential customers with facts regarding the larger population of developers and their designs outcomes
• You can develop materials to support sales by responding to leads with accurate and persuasive supporting items – including ROI analysis
• Consulting: access to Dr. Jerry Krasner for discussions and feedback on your market analysis – and being kept up to date on buying trends and breaking embedded news

This is what we provide at a total cost of $12,500. We work to support your sales and marketing organization. Match that against the cost of employing a department of marketing/sales support or having your internal people try to obtaining compelling competitive information.

EMF data and the Executive Dashboard are use by the Navy, Marines, NASA and prime contractors as a definitive benchmark of embedded developments, OS and tools utilization and design outcomes. Your larger potential customers know how your products are being used – I would think that you might want to know this as well.

Jerry Seinfeld tells the story of a woman complaining to her hairdresser that she has a bad marriage and asks if she should get a divorce. The hairdresser says, “wow, that’ a serious question. I think that you should ask the manicurist instead of me”.

Be careful where you get your information – it can be more costly than you think.