Profit and sales growth plans
Thriving companies are finding effective strategies for improving profit margins and increasing innovation.
Although two-thirds of U.S. manufacturers and distributors expect increased profits over the next 12 months, many will find it challenging to maintain margins, given the planned investments and increased costs that come with rising demand, a larger workforce and continuing competitor competition.
Plans to maintain or improve profit margins among U.S. manufacturers and distributors show that executives are actively trying to manage the front end of demand (such as focusing on more profitable customers) and demand fulfillment (lowering costs through operational efficiencies). The most effective way to manage margins is to continue to improve manufacturing and distribution processes to maintain lower costs.
Thriving companies are able to manage profit strategies more effectively than other organizations (Figure 7), particularly regarding the effectiveness of implementing technology. For example, 24 percent report that upgrading technology infrastructure was highly effective in managing profits, compared to 14 percent of holding steady and 7 percent of declining companies.
Figure 7: Effectiveness of profit strategies
Percentages for “highly effective”
|Lowering costs through operational efficiencies||47%||35%||36%|
|Focusing on more profitable existing customers||39||28||35|
|Investing in equipment||36||21||26|
|Upgrading technology infrastructure||23||13||7|
|Strategic changes in product mix||22||17||21|
|Upgrading technology software||24||14||7|
|Increasing prices to a majority of our customers||25||15||12|
Thriving companies also avoid short-term profit strategies with negative long-term consequences, such as:
- Substituting lower priced inventory, materials and components
- Introducing or increasing surcharges
These initiatives are more common among declining businesses, yet they should be considered with caution.
Strategies for growing sales resemble findings from previous Monitor surveys, but at lower levels of involvement. For example, 66 percent of executives rate penetration in existing markets as extremely important or important, compared to 77 percent in 2013 (Figure 8). While the percentage remains relatively high, businesses may now simply be trying to keep up with demand rather than create more of it. Or they may be recognizing the need to find new or different ways to drive revenue growth.
Figure 8. Strategies to grow sales in next 12 months
For example, a carpet manufacturer with headquarters in North Carolina notes that pent-up consumer demand for floor covering is driving growth. In another industry sector, a Baltimore-based food manufacturer and distributor is finding that changing demographics are driving growth in markets around the world. With greater numbers of the population in China moving to cities, the company has opened a new facility there to accommodate the growing demand for prepared foods; they are also saving money on transportation and import costs by sourcing materials locally. Greater numbers of consumers—from young professionals to new retirees—are spending an increasing amount of disposable income on food as well.
Perhaps as a result, fewer companies are increasing penetration in existing markets, identifying new customer segments or developing new products. This may be due in part to a concentration on providing value-added, follow-up services to their current customers, an approach noted in the 2013 Monitor report. But it is also possible that these companies are seeing diminishing returns in these areas and are moving to different strategies with expected higher rates of return. Nevertheless, one Philadelphia-area lighting manufacturer, for example, finds its recent growth based primarily in new products. The company keeps in front of government regulations for LED bulbs and, as a result of their product innovations, they can sell their products based on a unique value proposition; consequently, they can command a higher price.
Thomas Edison’s Menlo Park, California employees called it “midnight lunch,” the inventor’s practice of creating an environment of social engagement and collaboration that took place after hours in his lab.6 It served as the foundation for the work in all of Edison’s labs by bringing individuals from diverse disciplines together to ensure multiple perspectives and rapid problem-solving.
Innovation—in new products, line extensions, processes, sales channels, markets—is the engine of growth. But the problem for most companies is in finding what customers want—or what they want but don’t know it yet. As Henry Ford is alleged to have said, “If I had asked people what they wanted, they would have said faster horses.”
"Innovation is about creating new value. That means innovation can be applied to products, services, business models, or even how your company serves its customers. Leaders today don’t have to have all the answers. But they do need to ask probing questions that get people thinking in new ways. They need to ask ‘what’s next?’ in provocative ways." –Sarah Miller Caldicott Chief Executive Officer Power Patterns of Innovation
Only 11 percent of Monitor participants described their company’s operations as “innovation-focused.” Those companies are more likely to be thriving, with higher median U.S. sales growth and higher profit margins (median 9 percent before interest and taxes).
Product and process innovation is necessary for all companies because, in trying to understand and satisfy customers’ future interests, they experiment and uncover better ways of doing business, even if those ideas don’t initially yield returns as a new product or service. Even 53 percent of declining companies report improved performance from product and process innovation.
Unfortunately, many firms focus their innovation efforts solely on products—not on evolving customer needs. Only 12 percent of companies report that new services are important for sales growth in the next 12 months. Service is a key contributor to customer value and can yield revenues and profits as much as a new widget. Examples abound in various industries: IBM IT and business services, Rockwell Automation energy management services, Apple retail stores and its Genius Bars.
One manufacturer of electric power monitoring equipment based in Washington state noted that having its research and development team members in disparate locations was not encouraging innovation and invention. The company began construction on a nearly 100,000-square-foot building that would, among its many features, include enough office space to put the company’s entire R&D team in one location as well as allow for a more creative and collaborative environment.
In 2013, one of the top sales strategies to drive growth was to provide new services. At the time, 19 percent of U.S. executives found this approach important or extremely important. In 2014, however, that percentage has dropped to 12. Companies outside the United States, however, see it differently. For 39 percent of survey participants in non-U.S. companies, this is an important strategy for sales growth.
- SM Caldicott, Midnight Lunch: The 4 Phases of Team Collab- oration Success from Thomas Edison’s Lab, Wily, December 10, 2012