Managing external challenges

Thriving companies view external challenges as the price of doing business.

Dealing with internal strategic and operational issues is a 24/7 role for manufacturing and distribution executives. Yet external challenges also loom, and even the best-laid internal plans can be washed away by factors beyond executive control. It was only a few years ago that the nuclear disaster in Japan had repercussions felt in distribution channels around the world. More recently, the extended cold weather and a “polar vortex” contributed to lower volumes, profits— and more disruptions in distribution.

As noted in previous Monitor surveys, external challenges such as government regulations and taxation are beyond the control of companies. Yet thriving companies are less likely to be concerned than others. Even competition is viewed as a growth inhibitor by a lower percentage of thriving companies (50 percent) than by those that are holding steady (70 percent) or declining (80 percent). These elements are part of the business environment, and thriving companies are moving ahead with their strategies.

External challenges most likely to limit growth this year are government regulations (66 percent of all executives); competition from other companies (63 percent); and taxation (61 percent).

The tax environment in Washington, D.C., and across the country is especially vexing to manufacturers and distributors, and can be summed up in one word: uncertainty. In this environment, companies cannot plan what they need to do to improve their business, or where and how they want to invest. At the federal level, for example, executives find it problematic to wait on tax credit extensions such as those for R&D that may or may not come. At the same time, many state tax agencies have become increasingly aggressive in levying and collecting taxes, such as those for unclaimed property, or asserting that a nexus has been established within the state’s jurisdiction.

"Businesses face a number of challenges, many of which are of our own doing. The good news, however, is that we can improve the nation’s business environment — for example, reforming the tax code or adding balance and transparency to our regulatory system. This report is yet another call to policymakers that it is time to get serious about the nation’s competitiveness" –Jay Timmons President and Chief Executive Officer National Association of Manufacturers

U.S. tax law has driven some companies to purchase overseas entities located in lower-tax countries, allowing them to shift their corporate addresses (and accompanying tax burdens). This practice— inversion—has acquiring companies paying higher purchase prices (premiums up to 50 percent) in order to reduce their tax rates by as much as 10 percentage points.15 The widening gap between the corporate tax rate in the United States and in other major trading partner countries has given companies an incentive to reincorporate abroad in order to realize a substantial reduction in their U.S. effective tax rate. This expensive practice may only be possible for larger companies with substantial capital available.

Several high-profile transactions have attracted the attention of Congress, with various members offering proposals to shut down the technique. Companies need to carefully map out and manage their international business strategy in a way that takes into account this enhanced global focus on business taxation.

Yet thriving companies are clearly less affected by external factors (Figure 15). Thriving companies are better able to manage some external pressures (e.g., supplier availability, material pricing) and less likely to encounter others (availability of financing). And for the big two—regulation and taxation—an in-depth understanding of their business fundamentals and financials allows them to be nimble in their responses to changing regulatory and tax landscapes. Even when unpredicted changes occur, executives and their accounting teams find opportunities to minimize financial fallout on their organizations.

Figure 15: External factors and thriving companies

However, not every company views government regulations in a negative way, like one focus group executive, whose Philadelphia-based company provides cleaning chemicals to restaurants and plants. The regulations for his customers require them to buy his company’s products. But many do view taxation and regulations as the price of doing business.

Specifically, government regulations are likely to limit growth this year include implementation of the Affordable Care Act (69 percent of executives), state regulations (52 percent), and Environmental Protection Agency or environmental regulations (50 percent). Tax issues include federal business taxes (61 percent of executives), state business taxes (60 percent), federal individual income tax rates (50 percent), and uncertainty over extension of bonus depreciation (47 percent).

Of these, the Affordable Care Act has captured the most attention. The centerpiece of political infighting and government shutdowns, the act moves onward, with manufacturers generally falling in line: Three-quarters of companies will offer fully compliant coverage to employees as required by the act (Figure 16).

Many companies are already compliant with the act— or at least, that is their intention. Because the act’s regulations are still being revised, many companies may not have a complete understanding of what being in compliance means for them. For now, they are focusing their attention on how to lower the premiums that they and their workforces will pay. About half of the companies are implementing incentive programs to promote healthier lifestyles or are adopting wellness programs (Figure 17).

Figure 16. Likely response to Affordable Care Act’s employer mandate

Figure 17. Scenarios resulting from Affordable Care Act

At the root is a desire to get employees to be proactively responsible for their own health. For example, rather than watch employees rush to emergency rooms with lingering health issues, some companies are reimbursing individuals for scheduling checkups with their doctors. Some innovative companies have even incorporated clinics at their facilities that employees can use at no cost, resulting in savings as outpatient or emergency room charges are avoided; the cost to the company is essentially space and salary for nurse practitioners or other health care resources.

  1. Dana Mattioli,“Tax advantages raise premiums in cross- border deals,” The Wall Street Journal, May 11, 2014.