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Strategies for growth
Thriving companies leverage strategic investments for greater growth and operational improvements.
From a strategic level, thriving companies are focusing on mergers and acquisitions. Additionally, they have enjoyed significant improvements in company performance, driven by investments in information technology, operations practices and capability, and customer service, among other areas.
How are thriving companies making those decisions?
Mergers and acquisitions
With cash and credit more readily available, companies are looking with renewed interest at merger and acquisition (M&A) opportunities. Through Q1 2014, U.S. industrial and chemical M&A deal value was $28.6 billion, up from $14.8 billion in Q1 2013. The U.S. technology sector also saw deal value rise—up to $38.1 billion from $27.1 billion a year ago.1
The deals will keep coming: 21 percent of U.S. executives plan to acquire a company in the same business, while 17 percent plan to acquire a company in a complementary business. In fact, thriving companies are making these acquisitions primarily to expand product lines to reach new customers, create cost synergies, improve margins and improve their market position (Figure 2).
Figure 2. Reasons for U.S. recent and upcoming M&A activity by thriving companies
For example, Bimba Manufacturing Company, a leading provider of pneumatic, hydraulic and electric solutions based in Illinois, recently acquired Acro Associates, a California firm. Acro’s non-contact pinch valve product line provided Bimba with the ability to expand further into the medical industry, while also bringing new technologies to their existing industrial customers in food and beverage and other sectors.
"This acquisition reflects Bimba’s commitment to providing more value and solutions to our customers. Adding Acro’s pinch valves and controls capabilities increases our strategic value in our key industries and reflects our long-term commitment to growth." –Patrick J. Ormsby, President Bimba Manufacturing Company
Regardless of the reasons for buying or selling, the process may be new to some executives. Although experienced in other areas, these leaders may be unaccustomed to leveraging growth opportunities.
Corporate governance and operational integration will be important areas of focus for companies growing through M&A. Creating a common culture within the newly combined entity will be critical for efficiency of integration and development of a consistent governance program. For example, one Philadelphia-based distributor of glass bottles and related packaging grew by acquisition in order to bring the company expertise in specific domestic markets. However, they tended to operate in regional silos and, as a result, were unable to leverage that expertise across the country. In an effort to work more “as one company,” the company began moving to a single information technology platform in order to share data and leverage the knowledge they acquired throughout the organization.
M&A activity may be all the more difficult due to a significant gap between potential buyers (30 percent) and potential sellers (8 percent) identified in the Monitor survey. This gap will likely drive M&A deal prices higher, and will mean that buyers need to plan transactions carefully, from identification of compatible candidates through due diligence to final integration. But strategic buyers are able to pay more as they can leverage their platform and remove expenses for the business.
Mergers and acquisitions
U.S. businesses are more likely to be buyers than their global counterparts. Among non- U.S. companies, 17 percent plan to acquire a company in the same business and 18 percent in a complementary business. Twenty-six percent of non-U.S. participants will sell in some manner (to a strategic acquirer or private-equity firm), compared to just 8 percent of U.S. companies. This may be due to an assessment by non-U.S. companies of the fund raising success in the United States. by private equity firms and those groups’ willingness to invest overseas.
Many companies plan to increase investments this year, despite the expiration of bonus depreciation and enhanced section 179 expensing at the end of 2013. A majority will boost spending for equipment and machinery, and information technology (Figure 3). Dramatic differences between the median and average statistics for investments indicate the extent to which some companies will increase their spending.2
In February 2014, the month the Monitor survey was launched, 70 percent of Standard & Poor’s companies that had announced 2014 spending plans exceeded Wall Street expectations, the highest level in five years. In addition, the average capital expenditure for the year is approximately $1.71 billion, a 2 percent increase from last year.3 Add in the fact that U.S. industry capacity is approaching 80 percent4—a level considered full utilization—and the reasons behind plant expansions and investments in new equipment become obvious: Manufacturers and distributors are racing to keep up with rising demand after years of potential underinvestment.
Yet 50 percent or more of the respondents did not intend to increase investment spending in the next 12 months, in areas such as physical facilities and warehouses, fleets and vehicles, and research and development. This may reflect their uncertainty regarding the stability of the overall economic recovery or their concern with their own growth prospects.
Figure 3. Investment increases in the next 12 months
Thriving companies, however, are leaders in investments for the future, with median spending increases of:
- 8 percent for equipment and machinery (compared to 5 percent at companies holding steady and 0 percent at declining companies)
- 2 percent for physical facilities (compared to 0 percent at all other companies)
- 2 percent for research and development (compared to 0 percent at all other companies)
Information technology investments
The differences are all the more stark for investment averages in information technology. Thriving companies are anticipating increases by an average of 17 percent, compared to 10 percent by companies that are holding steady and 7 percent by declining companies over the next 12 months.
Most IT investments involve upgrading or reconfiguring the solution rather than purchasing new, which can be expensive.
Many industrial firms have not undertaken major IT investments since Y2K. After delaying or canceling IT projects during and after the recession, more executives at these firms, now recognize the opportunities to streamline operations via IT—from sales, design and procurement through delivery and customer support. Having delayed IT improvements for so long, they are anxious to add new capabilities, such as business analytics. They may also see the investments that their competitors are making and recognize the high-paced change in business communications and operations has an impact on their company’s performance.
More than one-third of executives plan to purchase new, upgrade or reconfigure the following systems and applications in the next 12 months (Figure 4):
These investments are not being made in a vacuum. Companies are integrating and aligning IT investments throughout the business, in areas such as customer relationship management, enterprise resource planning and business analytic solutions. Notably, most of the activity in these areas revolves around upgrading or reconfiguring the solution rather than purchasing new, which can be expensive. The high level of interest in mobility solutions and Web applications is not surprising; these technologies are relatively new, and some organizations may just be initiating the implementation stage.
Figure 4. IT system or applications to purchase new, upgrade or reconfigure in the next 12 months
In fact, thriving companies are more likely to invest in mobility solutions, with 45 percent planning to purchase new, upgrade or reconfigure, compared to 40 percent of holding steady and 32 percent of declining companies (Figure 5).
One Seattle-based manufacturer, for example, is rolling out a new Web-based application to allow its 1,400 customers to reach them online. The software enables customers and prospects to get quotes, view product drawings and submit orders. As companies invest in online applications that make doing business easier, however, they also need to keep data security and infrastructure stability in mind.
Figure 5. Investment in mobility solutions
Since the recession, executives have been very cautious about making workforce investments. They worry about whether or not the economic recovery will hold and justify bringing on additional labor, and they try to anticipate the eventual impact of the Affordable Care Act.
In the last few years, Monitor surveys have noted increases in productivity as demand rose following the end of the recession. But since 2010, these increases have leveled off to historical (and, it might be said, more realistic) levels. Productivity gains were lower in 2014 (3 percent average), for example, than in 2013 (5 percent).
Although most executives are anticipating sales in the United States to increase by an average of 8 percent in the next 12 months, they are being cautious and anticipate only hiring by an average of 5 percent in the United States. But thriving companies, in anticipation of a domestic sales increase of 13 percent, are investing in their total workforce by an average of 9 percent. This is an increase over workforce hiring in 2013, when thriving companies anticipated expanding their workforces by an average of 7 percent, compared to 4 percent overall. Thriving companies are continuing to stay ahead of the curve, confident that demand—and their businesses—will continue to grow.
"The manufacturing sector has rebounded significantly since the end of the recession, and there is data showing high levels of anticipated activity across the board over the next 12 months. The sector has benefited from manufacturers seeking greater efficiencies in the production process. While these have slowed more recently, we could see further productivity gains in future years if we allow technology and innovation to push the envelope." –Chad Moutray, Ph.D., Chief Economist National Association of Manufacturers
Yet even with these increases, hiring clearly is not keeping pace with demand—and the workforce pinch will only tighten if markets continue to improve. Monitor results show that the availability of skilled workforce personnel is expected to limit or significantly limit growth at 50 percent of companies.
Companies looking outside for new workers must also pay attention to current employees, because the number of employees who are retiring or quitting jobs is rising5 and the skills of experienced workers are in higher demand.
The majority of the respondents are focused on investments in operations practices and capabilities as well as product and process innovation. Unfortunately, many of those investments in the past have not yielded improvements; still other companies don’t invest at all.
Yet thriving companies invest differently—and earn outsized returns on their investments. Thriving companies are also far more likely to invest in operations practices and capabilities, lead generation and sales practices, and marketing strategy and execution. A greater percentage of thriving companies are seeing improvements compared to survey participants overall in a number of critical areas (Figure 6).
A Seattle-based manufacturer invests in continuous improvement initiatives on an annual basis to eliminate defects and improve performance. Their efforts have resulted in tripling productivity in one of the company’s steel lines with half the number of personnel. Through lean manufacturing processes and the application of technology, the workforce is able to work that much more efficiently.
Figure 6: Investment in the past year and effect on company performance
Non-U.S. businesses are more likely to invest in research and development in the next 12 months (a 5 percent median increase, compared to 0 percent in the United States). This holds true for thriving companies as well: investment in R&D by non-U.S. thriving companies is anticipated to increase by a median 5 percent, compared to 2 percent by those thriving in the United States. This may be due in part to better tax incentives for R&D outside the United States.
- Mergermarket M&A Trend Report: Q1 2014, Mergermarket, April 2014.
- Median of 0 percent indicates that half or more will not increase spending.
- Caroline Valetkevitch, “U.S. companies ramp up capex as confidence grows," Reuters, Feb. 20, 2014.
- Industrial Production and Capacity Utilization, Federal Reserve, April 16, 2014.
- Bureau of Labor Statisctics.