Innovation Key to Survival for Manufacturers in Global Economy

By barb schmitz | Published: April 11, 2011

 

It appears that innovation may be the key to helping manufacturers compete effectively post-recession.  A recent survey of manufacturers in Georgia found that manufacturers that compete based on innovation in new or technologically improved products, processes, organizational structures or marketing practices are more than twice as profitable than ones that compete based solely on low price.

The 2010 Georgia Manufacturing Survey found that companies are preparing for post-recession growth, expanding export capabilities, addressing sustainability issues, while still dealing with out-sourcing and in-sourcing.  The survey, which included nearly 500 manufacturers, was conducted by Georgia Tech’s Enterprise Innovation Institute, the Georgia Tech School of Public Policy, and Kennesaw State University, with support from the Georgia Department of Labor and accounting firm Habif, Arogeti & Wynne, LLP.

The survey identified a widening profitability gap between manufacturers that compete on the basis of innovation compared to those that use other competitive strategies, with that gap growing every year since 2002. As part of the survey, the companies were asked to rank six competitive strategies for their importance to winning sales. More than half cited “high quality,” while approximately 20% cited “low price” and “adapting to customer needs.” Fewer than 10% reported “innovation/new technology” as a primary competitive strategy.

Across all six strategies, innovation was associated with the highest mean return on sales; 14% compared to 6% for low-price strategy. “Companies that compete on the basis of innovation are much more profitable, pay higher wages and more likely to benefit from in-sourcing opportunities than firms that compete on low price,” says Jan Youtie, the survey’s director and a principal research associate at Georgia Tech’s Enterprise Innovation Institute.

The top five innovative strategies reported included: working with customers to create or design a product, process or other innovation; signing a confidentiality agreement to access a new product or process; working with suppliers to create or design a product, process or other innovation; purchasing new equipment; and conducting R&D activities in-house.

Though more than two-thirds of the manufacturers have cut jobs or lost sales during the recession, many are now planning for the future by locating new customers (70%), expanding capital investment (20%), expanding R&D (15%) and continuing to reduce costs (60%).

Another trend identified in the survey was the increase in companies selling to international markets, with more than half of manufacturers saying they were exporters. Those manufacturers were 50% more profitable than the non-exporters. The survey also found that out-sourcing seems to have leveled off, while in-sourcing seems to be on the rise. The percentage of firms benefitting from in-sourcing—movement of work to Georgia—has grown to nearly 15%.

The study also looked into the issue of sustainability. It found that 60% of companies recycle and aim to reduce waste, though just 11% of respondents had inventoried their carbon footprint or emissions, and fewer than five percent were using renewable energy.

What what’s the take-home message here for manufacturers struggling to get their competitive footing after several consecutive years of recession? To stay competitive, they must innovate. “The results of our survey can point manufacturers to a way forward for getting ready for the next phase,” says Youtie. “Companies can develop innovation capabilities; they can look into exporting, and they can collaborate more with suppliers and customers.”

The complete  “Enabling Manufacturers to Compete in the Global Economy: the 2010 Georgia Manufacturing Survey” is available for free.