Despite some positive signs, particularly in the U.S. manufacturing sector, industrial companies face shrinking growth in revenue and earnings. They will need to think differently about their investments, and how their business models are structured.
For industrial companies in North America, 2012 has been a mixed bag of challenges and opportunities. As the following figures demonstrate, it’s been a tough year for the sector, with revenues and earnings down, but other factors encourage optimism.
Growth in revenues among industrial companies in North America slowed to 5.4 percent for the most recent 12 months, after growing 12 percent in 2011.
Earnings for the same period grew just 5.9 percent after surging 15.7 percent last year.
Net margins shrank slightly, from 5.9 percent in 2011 to 5.8 percent this year.
U.S. industrial capacity utilization stood at 76.6 percent in September 2012, just a shade above the 76.1 percent of a year ago.
Industrial companies continued to increase cash on hand, raising their overall quick ratio of cash to liabilities from 0.8 in 2011 to 1.2 this year.
The unemployment rate in the U.S. manufacturing sector decreased from 7.7 percent in October 2011 to 7.0 percent in October 2012.
Investors remain confident and the Dow Jones U.S. Industrial Sector Index is up 12.9 percent over the past year .
In our view, the outlook for industrial companies in 2013 will depend largely on whether the pattern of slowing growth that we have witnessed in North America, Europe, and the Asia/Pacific region can be broken. North America is most likely to see an uptick in growth, assuming that the United States continues its resurgence as an attractive manufacturing location and that President Barack Obama’s reelection produces more clarity around U.S. fiscal policy.
However, the outlook for increased exports seems less rosy, given the limited levers Europe can pull to stimulate its economic growth. China’s leadership transition creates another unknown, as questions arise about whether the new government can find a sustainable way to restore the country to something close to its historically impressive growth rates—despite weakening exports, slowing investment domestically, and a negative long-term demographic outlook as a consequence of the government’s one-child policy.
Given this increasingly uncertain environment, the imperative for companies in the industrial sector over the coming year is to position themselves for growth while maintaining agility, by evolving their business models to be able to adapt to changing circumstances in different regions. What was once a trade-off has become a careful balancing act, but there are tools available that enable success. To boost profits and achieve sustained growth, companies must make the right investment choices to take advantage of coming growth opportunities, develop new ways to better manage their product portfolios, and prepare themselves to benefit as the business world becomes more and more digitized.
1. Fine-tune the cost structure to fund growth
Many industrial companies have been working hard to rethink costs and free up funds to invest in future growth. As a result, they are making real gains in productivity, enabling them to keep costs down, and some (such as automotive plants and industrial equipment companies) are even bringing jobs back to the U.S.—thanks to higher costs abroad, an improved cost structure at home, and the need to improve distribution response time in an increasingly competitive environment.
Other companies, however, have been waiting patiently for demand to recover. This is a mistake: The time to act is now. Every industrial company needs to adopt a Fit for Growth℠ approach, making the right choices about where to cut back and where to invest, with a focus on finding the most attractive market expansion and new product opportunities. This will require the company to rethink its manufacturing footprint, and build competitively differentiated and sustainable capabilities in innovation and product development, lean global digital supply chains, and business development and sales management.
A variety of factors will influence the decisions that industrial companies make along the way about their manufacturing footprint. For example, the wage gap between the U.S. and China is narrowing: Chinese workers are getting annual wage increases of as much as 20 percent, and other Asian countries, including Indonesia, Malaysia, and Thailand, are following suit.
The costs and risks of logistics have also gone up significantly; the inflation-adjusted cost of one barrel of oil has tripled over the past 10 years, boosting transport costs significantly, while commodity prices have become more volatile. Finally, intangible factors are playing a greater role in determining the optimal manufacturing footprint: More companies understand the costs involved in maintaining increasingly long, complex supply chains and the vulnerabilities that environmental disasters and other disruptions can expose them to.
2. Manage for agility
Given the dynamic global environment in which industrial companies now operate, companies need to rethink how they manage their product portfolios. Many have product development and management models that don’t allow for the high degree of agility they need. When product managers lack the authority to carry out major changes in the products they are responsible for, or to choose suppliers and gather the information on customers they need, the result is a loss of focus regarding which products are succeeding in the marketplace, and, frequently, an excessive level of complexity in the product lineup.
To counter these problems, companies need to consider adopting strong-form product management. The primary organizational change required involves creating a new type of product manager, with both increased authority to make the many decisions that affect his or her product, and full responsibility for the ensuing financial results. The strong-form product manager’s role ranges from product development and manufacturing through to marketing, sales, and brand management.
These managers need to be able to rely on a high level of customer insight, as well as greater transparency into the financial and other metrics required to understand their markets and their own operational performance. Given their multifunctional role, they must also be able to operate across functional boundaries and collaborate successfully with functional leaders. In doing so, they have to ensure that all of their many decisions are made with the product’s value and long-term profitability in mind. Strong-form product managers must also maintain a creative, entrepreneurial mind-set, and be willing to take risks and be responsible for the results.
Strong-form product management offers a model for rationalizing the product lineup, ensuring the future success of strong products, and weeding out loss-leading nonstrategic ones. And as demand for customized products continues to grow, this model can help companies manage the increasing level of complexity in their product lineups, keeping healthy, profitable complexity and eliminating unhealthy, unnecessary complexity.