Aiming higher How manufacturers are adding value to their business A report from the Economist Intelligence Unit Sponsored by Aiming higher How manufacturers are adding value to their business Preface A iming higher: How manufacturers are adding value to their business is an Economist Intelligence Unit briefing paper, sponsored by Siemens PLM Software and Microsoft The Economist Intelligence Unit bears sole responsibility for the content of this report The Economist Intelligence Unit’s editorial team executed the survey, conducted the interviews and wrote the report The findings and views expressed in this paper not necessarily reflect the views of the sponsors The research drew on two main initiatives We conducted a global online survey in FebruaryMarch 2010 In all, 355 executives took part To supplement the survey results, we also conducted in-depth interviews with senior executives and independent experts knowledgeable in the field of manufacturing The following individuals were interviewed for this report: l Adam Buckley, head of programmes, The Manufacturing Institute (UK) l Carlos Cordón, professor of manufacturing management, IMD business school (Switzerland) l Matthias Dinse, managing director, AUMA (Germany) l Pat Hassey, chairman, president and chief executive, Allegheny Technologies (USA) l Frank Krause, director of competence development, Staufen (Germany) l Ann Marucheck, chair and professor of operations, technology and innovation management, KenanFlagler Business School, University of North Carolina (USA) l Per Hornung Pedersen, chief executive, REpower (Germany) l Mike Zinser, partner, Boston Consulting Group (USA) The author of the report is Sarah Murray and the editor is Iain Scott Our sincere thanks go to the executives who participated in the survey and interviews for sharing their time and insight  © The Economist Intelligence Unit Limited 2010 Aiming higher How manufacturers are adding value to their business Executive summary A s manufacturers nurse their wounds after the worst recession since the 1930s, many are taking a long, hard look at their business models and making some changes For many companies, this has meant increasing the proportion of revenue generated by non-traditional activities such as service provision For others, the soul searching has prompted a move from high-volume goods to high-value products Although some of this was going on before the global financial crisis hit, the downturn has forced manufacturers to step up their flight to value With orders shrinking and the crisis threatening the security of supply chains, many companies had to rein in their ambitions and focus more narrowly At the same time, cost-conscious industrial customers started to demand better value for money, such as including post-purchase maintenance servicing as part of the deal Whether prompted by a fight for survival or a desire to get ahead of the competition, high-value or value-added manufacturing is proving an increasingly popular business model for manufacturers This means different things to different companies—from speed of delivery, high-end products or unique production processes to highly customised packages and environmentally sustainable product lines What is clear, however, is that organisations once primarily engaged in making products are now also researchers, designers, services providers—and even retailers As they look to increase revenue streams and emerge from recession in a stronger position, manufacturers are redefining themselves as they evolve from being makers of boxed products to sophisticated providers of “solutions” This report looks at the strategies companies are embracing as they battle to win market share and how, in the process, they are starting to question the very notion of what it means to be a manufacturer The key findings from this research are highlighted below Manufacturers appear to be optimistic about business prospects Some 61% of respondents to our survey describe their business outlook as good, and that they expect things to continue to improve Over one-half (54%) are optimistic that the same applies to their sector This optimism bears out at a macroeconomic level: in the first quarter of this year, world trade rose sharply as business inventories were restocked and confidence picked up again This is in sharp contrast to a year ago, when barely onethird of manufacturers anticipated an upturn in business within the next year, amidst a general collapse in trade globally  © The Economist Intelligence Unit Limited 2010 Aiming higher How manufacturers are adding value to their business The recession has intensified efforts to target the high ground In an ongoing flight from volume to value, a growing number of manufacturers are changing their business models to target higher-value products, deliver more customised offerings or bundle in additional services Such a shift usually requires a greater focus on innovation and more highly skilled workers—and both of these trends are in evidence Despite the tough conditions, a high proportion of manufacturers (40%) invested in research and development (R&D) for product and process innovation over the last 12 months, while one in five (19%) took on board additional highly skilled engineers and other workers Manufacturers are rethinking their supply chains Alongside this shift towards value-added manufacturing, firms are also rethinking their supply chains Toyota’s fall from grace over quality concerns has raised question marks about the once-heralded “lean” manufacturing approach Others are considering suppliers nearer to home, especially as oil prices and related transport costs rise, while many are cutting back on their supply chains Almost one-half (48%) of executives say they are looking to shorten or simplify their supply chains Many are simply looking to bring previously outsourced process back in-house Regardless of the approach taken, suppliers are being squeezed on costs: more than onehalf (53%) of respondents say that they will be looking to form partnerships with cheaper suppliers Cost concerns continue to loom large Steel, iron ore and copper are just some of the raw commodities, crucial to many manufacturers, that have been rising in cost as the global economy rebounds A year ago, as credit dried up and banks sought to avoid risk, manufacturers worried most about a lack of access to capital But as the economy has improved, raw materials costs are back at the top of the agenda, along with transport costs More than one-half (55%) of manufacturers polled cite rising materials costs as a primary risk, while one in five (22%) cite transport costs as well Pressure to keep prices low (34%), as well as increased competition and currency fluctuations (both 32%), are other key risks Firms are reliant on their cash flow and bank loans for working capital The most common mechanism for funding operations is by far existing cash flow However, 38% rely on bank loans, which may be a risky strategy in view of the fact that bank financing is likely to be restricted, at least in the UK and Europe, according to Economist Intelligence Unit expectations Only a few (4%) rely on government subsidies, but more than one-half (57%) of respondents say that government support for firms in the market in which they operate has been either crucial or somewhat important in the last year The environment is rising up the agenda Also supporting the notion that there is a flight to value is the finding that more than two-thirds of manufacturers (67%) have already embarked on developing “green” products or services, or plan to so This proportion rises to about nine in ten among companies in the electrical equipment and appliances sector, as well as the textiles sector—driven in part by rising legislative pressure to recycle products and reduce the use of toxic chemicals This shift towards greener products and services will also add to the need for greater innovation within firms—as well as collaborations with new partners In addition, the environmental agenda, whether driven by sustainability initiatives or simple cost concerns, is also improving internal processes: 43% of companies plan to cut their energy consumption in the years ahead  © The Economist Intelligence Unit Limited 2010 Aiming higher How manufacturers are adding value to their business Key points n Manufacturers are emerging from the downturn leaner and hungrier for new markets and closer relationships with customers n Many are seeking to add value to their business propositions by offering more after-market services or tailored products n To achieve this, they will need to attract and retain highly-skilled workers Introduction S Institute for Supply Management, Manufacturing ISM Report On Business, April 2010 Boston Consulting Group Global Survey, Business Executives Expect Difficult Times to Continue in 2010—But Are Failing to Plan Tough, Defensive Actions, December 2009  ince the beginning of the global economic downturn, manufacturers have been through a harrowing time From carmakers and yacht builders to technology component producers, many firms have fallen over the edge of the precipice or have had their businesses snapped up by competitors, the victims of contracting order books and collapsing supply chains Even for survivors, recession has had an impact on operations Companies have looked for ways to trim their operational costs through everything from staff lay-offs and cut-back product ranges to partnerships with cheaper suppliers and energy-efficiency measures “Last year at this time, there was so much uncertainty that nobody dared to anything,” confirms Carlos Cordón, professor of manufacturing management at the IMD business school in Switzerland One multinational company in the electronics industry even did what Professor Cordón calls “the unthinkable” and abandoned the idea of an annual budget But today, the pessimism is not quite so pervasive “Companies are saying at least they know what is going to happen with a degree of certainty,” he says “They are more optimistic because they know what’s ahead.” That optimism is reflected in this survey of manufacturing executives More than one-half of respondents now see their business outlook as good and likely to improve; even among those less certain about the future, the sense of economic freefall no longer prevails The trend is supported by recent figures from the US In April, the Institute for Supply Management reported that factory output had grown for the ninth month in a row, and the manufacturing sector had grown at its fastest pace since June 2004.1 Manufacturing output has risen in the UK too: in April, the CIPS/Markit Purchasing Managers’ Index climbed to its highest level since September 1994 Meanwhile, the UK’s trade deficit narrowed to £2.1bn in February, compared with a deficit of £3.9bn in January Some countries are less optimistic than others According to a survey of manufacturers conducted in late 2009 by Boston Consulting Group (BCG), an advisor on business strategy,2 only 40% of Japanese executives predict growth for their companies in the near term, compared with 62% worldwide Fewer than one-half of Japanese executives predict that Japan’s GDP will grow; the same number expect that its economy will shrink Broadly speaking, however, optimism is gaining momentum As it does, manufacturers are seeking © The Economist Intelligence Unit Limited 2010 Aiming higher How manufacturers are adding value to their business ways to boost revenue They have sought new markets overseas, for example, increasingly regarding emerging markets as customers rather than simply as sources of cheap materials or labour At the same time, companies have brought back in-house many processes they had previously outsourced to low-cost markets Rather than companies seeing China as primarily the world’s factory, a more Dealing with the downturn Our survey reveals that over the past year manufacturers have embarked on a raft of initiatives in a bid to boost their business prospects Yet while many of the measures they have taken are commonly seen during hard times—such as management and structural tweaks, fixing operational inefficiencies and laying off staff—there is also evidence that companies are coming up with new, more innovative strategies for boosting business Such innovation is necessary Our survey shows that although manufacturers are generally optimistic about their own business prospects, they are less confident about their ability to access previous levels of capital Their customers’ finance prospects are also a source of concern “Things have improved, but for our customers it’s still troublesome to get project financing,” says Per Hornung Pedersen, chief executive of REpower, the German wind turbine manufacturer Many respondents worry that the costs of raw materials, transport and energy will rise, and that increased competition and shrinking markets will pose risks to their business To cushion themselves against these risks, manufacturers have sought cheaper suppliers, or simplified their supply chains, or tried to reduce their energy consumption But recession has provided opportunities too With plenty of downtime on their hands and reluctance on the part of many companies to get rid of their most valuable asset—skilled employees—manufacturers have been putting their houses in order and building competitive advantage More than one-third of respondents to our survey retooled their product development processes to get goods to market more quickly, while 30% diversified into new product markets Some are investing in skilled workers—Dyson, the British company best known for its vacuum cleaners, announced in April that it planned to double the size of its R&D team by hiring 350 new engineers and scientists Manufacturers in some sectors, such as technology, hardly broke their stride in the downturn Apple launched its iPad technology in April, in a move reminiscent of its decision to launch the iPod music player during the last global downturn Furthermore, although many manufacturers have developed service divisions as a result of the downturn, some technology service companies have branched into manufacturing—witness the move by Google and Microsoft to enter the smartphone space What are the primary risks to your business over the next 12 months? Select up to three (% respondents) Rising cost of materials 55 Downward pressure on our own prices 34 Increased competition 33 Currency fluctuations 32 Shrinking markets 23 Rising cost of transport 22 Skills shortages 21 Lack of access to capital 11 Protectionist measures 10 Political instability  © The Economist Intelligence Unit Limited 2010 Aiming higher How manufacturers are adding value to their business balanced picture is emerging Where outsourcing continues, companies in the US and Europe are looking closer to home—to Mexico, for example, or eastern Europe Meanwhile, manufacturers’ business models are changing shape, as they shift to production of higher-value products, or look to provide more services as part of their core offerings Customisation has also increased as companies seek closer relationships with customers “If someone needs something that’s different from what’s on the market, we develop alloys for specific end users,” says Pat Hassey, chairman, president and chief executive of Allegheny Technologies Incorporated (ATI), a US-based speciality metals company that has made customisation a central prong of its competitive strategy “We’ve learned to package in the way customers want, and since we have flexible assets we can ship in multiples and quantities that might be very different from a large mill.” To move into non-traditional activities and provide more tailored products to their customers, manufacturers need to invest in R&D In our survey, 40% of respondents have done just that, in order to improve their product and process innovation capability Respondents have also been hiring highly skilled workers and are seeking new partners for product or process development More than one-half (57%) aim to accelerate innovation in both products and services, and 23% in products alone The implications are clear Many manufacturers are realising that in order to thrive—if not simply to survive—they need to enhance their innovative prowess and equip themselves with skilled employees In the process, they are moving manufacturing away from its industrial roots, embracing added value, customisation and service provision The road to high-value manufacturing has seen some auspicious pioneers It was the road taken by Rolls-Royce, the British engine manufacturer, more than two decades ago By 2004, more than one-half of the company’s revenue came from after-market services.3 But those services contribute to only part of what Sir John Rose, Rolls-Royce’s chief executive, sees as the company’s “high-value activity” In a speech to the Royal Society for the Encouragement of Arts, Manufactures and Commerce in 2009, Sir John set out his definition of high-value manufacturing: “It is knowledge-intensive, rich in intellectual property, requires high-level systems integration skills, demands and supports a highly skilled workforce and an extensive supply chain, has a close involvement with universities, high barriers to entry and creates significant converted value.” Not every manufacturer will embrace value-added strategies to the same extent as Rolls-Royce However, in the process of retooling their business models at the tail-end of some tough times, many are putting a greater emphasis on customisation, service provision and high-value products University of Cambridge, Defining High Value Manufacturing, January 2006  © The Economist Intelligence Unit Limited 2010 Aiming higher How manufacturers are adding value to their business Key points n For some manufacturers, moving into value-added areas has been a necessity of increased competition or dwindling markets n Others have recognised that managing the data generated by their products is more lucrative than product sales alone n Some regions, such as the UK, are worried about a talent shortage in coming years High-value visions M any manufacturers see that their future profitability lies in offering their customers higher-value products, accompanied by a higher degree of customisation and an increasingly sophisticated range of services In fact, many manufacturers no longer describe themselves as such, preferring the term “solutions provider” When asked what critical changes their organisations plan to make to their business model in the year ahead, many of the manufacturing executives we surveyed point to high-value products They say their companies would supply products that are “more advanced and technical”, “more valuable”, “value-added” or “niche”, as well as striving for “upward adjustment in the area of product quality”, “providing superior tailored value” and focusing on “advanced technology product development” and on “small volume custom” products These are fine ideals, but to achieve them manufacturers need to embark on research and development Our survey clearly indicates that manufacturers expect to step up their R&D investments In the year to March 2010, one-fifth of respondents spent 4-6% of their revenue on R&D; in the next 12 months, one-quarter will spend that proportion Only a relatively small number—13%—aim to cut their R&D budgets Meanwhile, manufacturers are moving from working purely in production Some are engaging in areas such as product design, while others are offering support services and customisation In our survey, one-third of respondents say they are engaged in top-end manufacturing, while over onequarter are engaged in design services and 17% offer additional consulting services In the electrical equipment and appliances sector, when it comes to top-end manufacturing and design services, these figures rise to 54% and 40% respectively “Manufacturers are increasingly becoming service providers,” says Ann Marucheck, chair and professor of operations, technology and innovation management at University of North Carolina’s Kenan-Flagler Business School She cites the example of IBM, which in 2004 sold its PC manufacturing division to Chinese company Lenovo “Today IBM gets the majority of revenue from its service arm,” says Professor Marucheck “But it was always very astute in offering field service, installation, training and all sorts of what they would call ‘solutions’ around their products They finally concluded they were better service providers than they were manufacturers.”  © The Economist Intelligence Unit Limited 2010 Aiming higher How manufacturers are adding value to their business In the same year that IBM sold its PC division, Rolls-Royce reported that more than one-half of its revenue came from services In his 2009 speech to the Royal Society, Sir John Rose used as an example his company’s engine health monitoring unit, which collects detailed data about the performance of an engine in flight and transmits that data to operations centres, allowing the company to respond to customers in real time “This is a good example of how high-value manufacturing supports the most advanced services, which only the manufacturer of the product can supply,” Sir John told the audience As manufacturers produce increasingly technologically sophisticated products, this kind of data management could provide a new revenue stream Rather than relinquishing responsibility for their products at the end of their warranties, manufacturers retain responsibility—and, ideally, earn customers’ respect and repeat business—through service contracts for running the data networks needed to manage the information generated by their products REpower conducts 24-hour monitoring of its turbines for clients around the world “Often the services are done by someone in Germany doing a reset on a computer on a turbine standing in southern Italy or Inner Mongolia,” says Mr Pedersen “The data are interesting for the client because they can see how the turbines are performing, so that’s part of the package.” Sophisticated medical products also generate data that can be analysed and interpreted by the same companies that produce them One such company is Blue Chip, a Cambridge-based biotech firm and producer of DNA diagnostics technology The company not only produces microarrays, probes, labelling systems and software, but also accompanying services such as metabolic profiling Germanybased Fresenius, the world’s largest manufacturer of kidney dialysis machines, long ago realised that the real money in the business was in running dialysis clinics Fresenius now operates one-third of America’s dialysis clinics, allowing it to dominate both markets Following the finance The move towards solutions rather than products also reflects the concerns of lenders that emerged during the downturn, as they sought to reduce their exposure to risk “We see an increasing tendency to go more for solutions, and that fits into project financing,” confirms Mr Pedersen Because wind power projects require many suppliers, from logistics providers to construction companies, REpower will often include the services of those providers in a more comprehensive package, according to Mr Pedersen “The banks want less complexity, so that leads to deals where a limited number of parties are providing the solutions, rather than having 20 or 30 different providers.” In some cases, manufacturers’ push into high-value products is a result of the decline of their sector overall In Pittsburgh, for example, as the steel industry waned, new manufacturing industries emerged in the life sciences sector, along with businesses built on the American city’s industrial heritage such as speciality metals producers Some manufacturers in North Carolina’s once-thriving textile industry, finding themselves unable to compete on price with rivals in Asia, have moved into specialised products used by the healthcare industry “Some of the remaining manufacturers are dropping woven textiles and going on […] to become more customised contract textile makers,” says Professor Marucheck Working more closely with customers on their product specifications has become a critical element of ATI’s business strategy Mr Hassey points out that his customers not come to the company to buy  © The Economist Intelligence Unit Limited 2010 Aiming higher How manufacturers are adding value to their business a product but to fulfil a technical need “If a customer wants a specific shape or size or some fabrication done prior to receiving the material, we can accommodate those requests,” he says “So we are doing more fabrication and customising of the alloys.” Professor Marucheck sees this approach becoming a central strategy for many manufacturers “Customisation is part of this ‘servitisation’ of manufacturing,” she says Are talent issues back on the agenda? Engineering UK, Engineering the future - a vision for the future of UK engineering, 2009  In their new roles as “solutions providers”, identifying and maintaining a steady supply of talented workers will become increasingly important for manufacturers Many were forced to lay off hundreds of workers during the worst of the downturn, but retaining and hiring skilled workers remains a high priority The issue becomes more important as recovery starts to materialise In our survey, more than onefifth of respondents cite skills shortages as a risk to their business over the next 12 months Almost the same number have hired skilled workers over the past year, even though the downturn forced many companies to reduce their headcount It is not hard to see why An overwhelming majority (91%) of respondents say R&D investments have been spent in-house over the past year, and almost the same number not expect this to change in the next 12 months Meanwhile, many in the sector are concerned that the talent pool is shrinking Such fears seem particularly prevalent in the UK, where prominent industry figures such as Sir James Dyson—inventor of the eponymous vacuum cleaner—have repeatedly warned of a coming shortage of engineers One theory behind fears of a skills shortage may be that older workers are retiring faster than they can be replaced “Keeping hold of those skills has been more and more important,” says Adam Buckley, head of programmes at the Manufacturing Institute, a UKbased industry group In the institute’s regular survey of manufacturers’ priorities, the issue of talent and skills has moved sharply up the list of concerns, from seventh in the fourth quarter of 2009 to second after production costs in the first quarter of 2010 According to Engineering UK, an independent industry group, almost 600,000 new workers must be added to the manufacturing workforce It believes that demographic shifts will lead to an 8% drop in the number of 15-24-year-olds—the target group for new engineering graduates—over the next decade.4 Aware that demographic trends are not in their favour, companies have been less ready to lay off workers than in previous recessions “While historically, in a recession, manufacturers have got rid of people, this time they have looked at other ways to keep hold of those scarce skills resources,” says Mr Buckley Similar issues apply in the US, according to the Boston Consulting Group (BCG) However, striking a balance between being overstaffed and retaining talented employees can be tricky for companies, acknowledges Mike Zinser, a Chicago-based partner leading the manufacturing sector practice at BCG Our survey backs up that assumption Some respondents say they will have to outsource more of their R&D in the year ahead, perhaps indicating that they are worried about attracting enough skilled engineers in-house “Talent management is a critical area that a lot of organisations are starting to focus on,” says Mr Zinser “But with the downturn you can only cut so far without hitting the bone, so keeping the key folks busy while not shooting yourself in the foot economically is critical—that’s a hard balance to strike.” © The Economist Intelligence Unit Limited 2010 Appendix Survey results Aiming higher How manufacturers are adding value to their business Appendix Which of the following statements best describes business opportunities in the next 12 months? (% respondents) Your business Your sector Good, and we expect the outlook to improve 61 54 Good, but we expect the outlook to worsen 10 Somewhat affected, and expect the outlook to worsen Badly affected and expect the outlook to worsen 4 Badly affected but expect the outlook to improve 13 16 We not expect any significant changes Which of the following approaches will your company use to improve its cash position over the next 12 months? Select all that apply (% respondents) Seek new partnerships with lower-cost suppliers 53 Shorten/simplify supply chain 48 Reduce energy consumption 43 Improve access to working capital 34 Reduce head count and/or cut salaries and benefits 31 Deploy centralised procurement 29 Raise product prices 27 Reduce our product range 18 Close/mothball manufacturing facilities 17 Reduce R&D budget 13 Other 17 © The Economist Intelligence Unit Limited 2010 Appendix Survey results Aiming higher How manufacturers are adding value to their business What are the primary mechanisms for funding your operations? Select up to two (% respondents) Existing cash-flows 81 Bank loans 38 Shareholder capital 26 Government subsidies, eg for innovation Other forms of credit What are the primary risks to your business over the next 12 months? Select up to three (% respondents) Rising cost of materials 55 Downward pressure on our own prices 34 Increased competition 33 Currency fluctuations 32 Shrinking markets 23 Rising cost of transport 22 Skills shortages 21 Lack of access to capital 11 Protectionist measures 10 Political instability Other Over the next 12 months, what change does your organisation expect to the following aspects of your business? (% respondents) 36 25 No change 18 31 Company share price/ valuation 17 23 15 Opportunities for industry sector expansion 42 33 Opportunities for geographic expansion 35 Availability of talent 53 35 35 12 14 43 51 34 45 46 Deterioration Don’t know/ Not applicable 21 20 51 No change Transport costs 24 22 Impact of regulation relating to carbon Improvement 48 Don’t know/ Not applicable Energy costs 27 54 Deterioration Cost of raw materials Financing costs Availability of capital Improvement 50 12 © The Economist Intelligence Unit Limited 2010 Appendix Survey results Aiming higher How manufacturers are adding value to their business Which of the following has your company done over the past 12 months to add value to its business proposition? Select all that apply (% respondents) Made changes to management and/or organisational structure 49 Addressed operational/IT inefficiencies 43 Cut headcount 43 Invested in R&D for product and/or process innovation 40 Speeded up product development/time to market 35 Invested in emerging markets 31 Diversified by entering new geographical markets 30 Diversified by entering new product markets 30 Increased use of outsourcing/offshoring 26 Merged and/or acquired other businesses 23 Restructured financing arrangements 23 Sought new partners for product or process development 22 Added new high-skilled workers 19 Exited less profitable geographic markets 17 Other What percentage of revenue does your organisation invest in R&D? (% respondents) Past 12 months Next 12 months None 6 1.0 % 23 17 2.0 % 16 19 3.0 % 13 16 4-6% 20 7-10% 10 11 More than 10% 19 10 © The Economist Intelligence Unit Limited 2010 25 Appendix Survey results Aiming higher How manufacturers are adding value to their business Where is the majority of your organisation’s R&D investment spent? (% respondents) Past 12 months Next 12 months In-house 88 91 Outsourced 12 In your main market of operation, how important has government support been to the survival of firms in your sector? (% respondents) Crucial 18 Somewhat important 39 Neither important nor unimportant 21 Unimportant 22 How confident are you in your organisation’s ability to develop new innovations and bring them successfully to market? (% respondents) 39 20 Highly - we regularly set a benchmark for innovation in our market 41 Somewhat - we occasionally innovate in our market 50 Not very - we rarely innovate in our market Not at all - we lag behind our competitors © The Economist Intelligence Unit Limited 2010 39 Appendix Survey results Aiming higher How manufacturers are adding value to their business Over the next 12 months, does your organisation intend to collaborate and/or partner with more, fewer, or the same number of other organisations, in comparison with the year prior? (% respondents) More 34 The same 50 Fewer Don’t know/Not applicable What are the primary drivers for collaborating/partnering with more/fewer firms in the year ahead? Select all that apply (% respondents) More firms Fewer firms Cost reduction 58 22 Access to new technologies 57 12 Access to new customers/markets 57 12 Access to specialist skills 45 15 To enable us to focus on our core business 27 31 Increase speed of product development 53 15 Spreading risk across multiple partners 12 21 Being driven to this by key suppliers/customers 25 21 31 © The Economist Intelligence Unit Limited 2010 62 39 Appendix Survey results Aiming higher How manufacturers are adding value to their business With which of the following does your company currently collaborate/partner, and with which does it plan to collaborate/partner over the next 12 months? Select all that apply (% respondents) Now In the next 12 months Partner companies (eg, to provide a combined product/service) 49 54 Large corporate clients (eg, bespoke product development) 39 42 Suppliers (eg, to co-operate on product design) 57 61 Competitors (eg, to share resources in the face of competition from a larger company) 14 19 Personal consumers (eg, online customer-led product support/feedback) 23 27 Technology providers (eg, IT specialists) 36 39 Other Which factors are most critical for selecting another organisation with which to collaborate? Select up to three (% respondents) Availability of skills 34 Ability to innovate 34 Financial stability 34 Appropriate mix of products and/or services 32 Contacts/relationships within a particular market/territory 30 Shared ethical values/ Common approach to treatment of employees and other stakeholders 25 Convenient geographic location 21 Common cultural fit/open communication 19 Firms with a similar amount to gain from relationship 18 Don’t know/Not applicable Other 22 © The Economist Intelligence Unit Limited 2010 Appendix Survey results Aiming higher How manufacturers are adding value to their business Which of the following best describes your company’s focus on innovation in the next 12 months? (% respondents) We intend to improve our innovation for both products and services 57 We intend to improve our innovation for products only 23 We intend to improve our innovation for services only We not expect any change to our focus on innovation We expect to decrease our focus on innovation and concentrate on our core products/services 57 What is your organisation's stance on “open innovation”, in which companies leverage both internal and external sources of ideas rather than trying to develop these entirely in-house? (% respondents) 39 We are actively engaged in this 33 We not use open innovation 28 We have explored the concept but can't see how we might benefit from it 13 We have explored the concept but it is too difficult/costly for us to adopt 10 Have never heard of it We have applied it in the past without success We have successfully applied it before but are not doing so currently 23 © The Economist Intelligence Unit Limited 2010 Appendix Survey results Aiming higher How manufacturers are adding value to their business What are the main obstacles to innovating and/or developing new products/services in your company? Select all that apply (% respondents) Costs involved 53 Uncertainty about customer demand 39 Lack of appropriate in-house skills 38 Competitive pressures 28 Poor management/leadership 27 Poor sales and marketing follow-up 23 Rapid rate of change in our industry 20 Regulatory constraints 18 Poor operational/IT infrastructure 17 Lack of standards 14 Other Will your business develop new products/services over the next 12 months to specifically target the “green” or “eco” market? (% respondents) We have already done so 36 Yes, we plan to 32 Yes, we plan to, but not in the next 12 months No, we have no plans Don’t know/Not applicable 22 39 24 © The Economist Intelligence Unit Limited 2010 Appendix Survey results Aiming higher How manufacturers are adding value to their business In which of the following are you engaged now or expecting to be engaged in over the next 12 months? Select all that apply (% respondents) Now Next 12 months Discrete, top-end manufacturing (electronics, engines, cars etc) 34 29 Process manufacturing 50 59 Design services 25 27 Contract manufacturing 27 32 Additional maintenance services 19 20 Additional consulting services 17 18 Other 1 Which of the following best describes your company? (% respondents) 25 Public, listed 50 Private 48 Public sector organisation Other © The Economist Intelligence Unit Limited 2010 Appendix Survey results Aiming higher How manufacturers are adding value to their business In which country are you personally based? (% respondents) US 27 India 14 United Kingdom Denmark China Canada Spain Malaysia Japan Singapore Italy Belgium Brazil Australia Ireland Germany Sweden Nigeria France Finland Others 17 26 © The Economist Intelligence Unit Limited 2010 Appendix Survey results Aiming higher How manufacturers are adding value to their business What is your primary industry? (% respondents) Manufacturing: Chemicals, metals, paper and plastics 20 Manufacturing: Electrical equipment and appliances 11 Manufacturing: Information and communications technology 11 Manufacturing: Instruments and machinery 11 Manufacturing: Motor vehicles and related Manufacturing: Food and beverages Manufacturing: Healthcare and pharmaceutical goods Manufacturing: Apparel and textiles Manufacturing: Aerospace and defence Manufacturing: Rail, ships and transport equipment Other manufacturing 18 What are your company's annual global revenues in US dollars? (% respondents) 27 $500m or less 35 $500m to $1bn 20 $1bn to $5bn 16 $5bn to $10bn 12 $10bn or more 16 © The Economist Intelligence Unit Limited 2010 Appendix Survey results Aiming higher How manufacturers are adding value to their business What is your title? (% respondents) Board member CEO/President/Managing director 16 CFO/Treasurer/Comptroller CIO/Technology director Other C-level executive 22 SVP/VP/Director 11 Head of business unit Head of department Manager 18 Other What are your main functional roles? Choose up to three (% respondents) Operations and production 41 General management 33 Procurement 23 Strategy and business development 22 Supply-chain management 20 Finance 19 Marketing and sales 13 R&D 11 IT Information and research Customer service Risk Human resources Sustainability and/or environment Legal 28 © The Economist Intelligence Unit Limited 2010 Appendix Survey results Aiming higher How manufacturers are adding value to their business In which region are you personally based? (% respondents) Asia-Pacific 31 North America 30 Western Europe 29 Middle East and Africa Latin America Eastern Europe 29 © The Economist Intelligence Unit Limited 2010 While every effort has been taken to verify the accuracy of this information, neither The Economist Intelligence Unit Ltd nor the sponsors of this report can accept any responsibility or liability for reliance by any person on this briefing paper or any of the information, opinions or conclusions set out in this briefing paper Cover image - © Christian Delbert/Shutterstock LONDON 26 Red Lion Square London WC1R 4HQ United Kingdom Tel: (44.20) 7576 8000 Fax: (44.20) 7576 8500 E-mail: london@eiu.com NEW YORK The Economist Group 750 Third Avenue 5th Floor New York, NY 10017 United States Tel: (1.212) 554 0600 Fax: (1.212) 586 1181/2 E-mail: newyork@eiu.com HONG KONG 6001, Central Plaza 18 Harbour Road Wanchai Hong Kong Tel: (852) 2585 3888 Fax: (852) 2802 7638 E-mail: hongkong@eiu.com GENEVA Boulevard des Tranchées 16 1206 Geneva Switzerland Tel: (41) 22 566 2470 Fax: (41) 22 346 93 47 E-mail: geneva@eiu.com [...].. .Aiming higher How manufacturers are adding value to their business Key points n Tried and tested manufacturing models are giving way to greater in-sourcing and less complex supply chains n Meanwhile, many former supply countries are themselves becoming increasingly important customers n Some manufacturers are aggressively pursuing new retail markets as... firms to leverage ideas, rather than keep them all in-house—appears popular with manufacturers, to the extent that onethird of respondents to our survey are now actively engaged in it 12 © The Economist Intelligence Unit Limited 2010 62 Aiming higher How manufacturers are adding value to their business Shifting gear: A case study of AUMA AUMA, a German manufacturing company, knows a thing or two about how. .. manufacturing sector—one of the hardest hit during the downturn—is on the road to recovery or will continue to face difficult times, savvy companies are recognising that business as usual is no longer an option 16 © The Economist Intelligence Unit Limited 2010 Appendix Survey results Aiming higher How manufacturers are adding value to their business Appendix Which of the following statements best describes business. .. Appendix Survey results Aiming higher How manufacturers are adding value to their business What is your title? (% respondents) Board member 3 CEO/President/Managing director 16 CFO/Treasurer/Comptroller 7 CIO/Technology director 6 Other C-level executive 22 SVP/VP/Director 11 Head of business unit 5 Head of department 8 Manager 18 Other 4 What are your main functional roles? Choose up to three (% respondents)... company’s moves to add value by driving efficiency as a “cascade” “We initiate certain things at home and then transfer what we have learned to different countries—always taking into account the different mentalities and levels of education,” he says © The Economist Intelligence Unit Limited 2010 Aiming higher How manufacturers are adding value to their business Key points n More and more companies are developing... market/territory 30 Shared ethical values/ Common approach to treatment of employees and other stakeholders 25 Convenient geographic location 21 Common cultural fit/open communication 19 Firms with a similar amount to gain from relationship 18 Don’t know/Not applicable 3 Other 1 22 © The Economist Intelligence Unit Limited 2010 Appendix Survey results Aiming higher How manufacturers are adding value to their business. .. respondents) We have already done so 36 Yes, we plan to 32 Yes, we plan to, but not in the next 12 months No, we have no plans Don’t know/Not applicable 9 22 2 39 15 © The Economist Intelligence Unit Limited 2010 Aiming higher How manufacturers are adding value to their business Conclusion C ompanies are starting to see themselves as “solutions providers” rather than manufacturers This represents a significant... relating to carbon Improvement 48 7 Don’t know/ 3 Not applicable Energy costs 27 54 Deterioration Cost of raw materials Financing costs Availability of capital Improvement 50 8 4 12 4 © The Economist Intelligence Unit Limited 2010 Appendix Survey results Aiming higher How manufacturers are adding value to their business Which of the following has your company done over the past 12 months to add value to. .. innovation, but manufacturers are overwhelmingly looking for partners who will give them 11 © The Economist Intelligence Unit Limited 2010 Aiming higher How manufacturers are adding value to their business What are the primary drivers for collaborating/partnering with more/fewer firms in the year ahead? Select all that apply (% respondents) More firms Fewer firms Cost reduction 58 Access to new technologies... Limited 2010 Aiming higher How manufacturers are adding value to their business the environmental agenda When SC Johnson, a US family-owned cleaning products manufacturer, reformulated its Windex cleaner, reducing the amount of volatile organic compounds (which vapourise into air pollutants) in the product, it also boosted the product’s cleaning power by 30% Manufacturers are also going back to the design .. .Aiming higher How manufacturers are adding value to their business Preface A iming higher: How manufacturers are adding value to their business is an Economist Intelligence... Intelligence Unit Limited 2010 Aiming higher How manufacturers are adding value to their business Key points n For some manufacturers, moving into value- added areas has been a necessity of increased... Appendix Survey results Aiming higher How manufacturers are adding value to their business Which of the following has your company done over the past 12 months to add value to its business proposition?