Increased competition and pressure on prices are causing many manufacturers continued strife in 2015. To stay ahead of the competition, companies are turning to innovation, research by KPMG shows. The number of companies planning to spend more than 6% of revenue on innovation has increased to 41%, with many investing in the improvement of their R&D process. In terms of the R&D itself, companies are increasing their spend on developing radical product innovation as well as continuing to improve their manufacturing technology.
The manufacturing industry has for some time now existed in economic uncertainty. Many companies are forced to deal with a rapidly changing economy in which there are constant disruptions from technology, increasing price pressures, volatile input costs, intense competition and continuous innovation. To identify how manufacturers are rising to the challenge, KPMG commissioned Forbes to run a survey of 386 senior executives in six industries: Aerospace and Defence, Automotive, Conglomerates, Medical Devices, Engineering and Industrial Products and Metals. Two thirds of the organisations surveyed have revenues above the $5 billion mark.
In terms of the challenges identified by respondents, the major issue cited by respondents remains the increased competition on the international market and pressure on prices – at a stable 39% over the past two years. Efficiency in research and development and product development is an increasing challenge, with 30% citing it as such in 2015, up from 25% in 2014. The concern of IT systems keeping pace with business demand has fallen from 32% to 22% since 2014.
To manage economic conditions in the wider markets, the strategic priorities of manufacturers surveyed have been changing. Sales growth decreased in importance between 2014 and 2015, down from 62% to 55%, while cost-cutting has become a significantly larger priority, with 41% indicating it as a priority in 2015, up from 28% in 2014. Developing new products has decreased in priority, dropping from 41% in 2014 to 32% in 2015. Two popular priorities in 2014, increasing cash-flow from operations (51%) and greater-speed-to-market (51%) have seen significant decreases in priority, down to 21% and 18% respectively.
The survey highlights that companies increasingly focus their technology spending patterns on the continued improvement of R&D capabilities, with 47% responding that they are moving a significant portion (more than 20%) of their technology spend into tools that catalyse the pace and value of innovation. The second biggest piece of the technology spending pie is invested in sales force management systems at 23%.
As a result of the uncertainty in the market, and with technologies providing a huge amount of possible avenues for innovation, manufacturing companies understand that investing in innovation will be key to their future success. From the survey it is clear that the need to create innovations is highly ranked by companies. Four in ten (41%) companies plan to spend 6% or more of their revenue of innovation, compared to just 24% that said they spent that amount over the past two years. The number of companies looking to invest 4-5% of revenue remains fairly stable.
Long-term radical innovation
The focus of investment in innovation has also been changing over the past years, with the focus of spending by companies is increasingly directed towards developing radical innovations (44%). Incremental innovation towards improvement in business and processes remains the area focused on by almost half (48%) of the companies. Finding new partners with whom to drive innovation comes in third at 36%.
“Manufacturers must evaluate the rapidly changing innovation ecosystem and develop a strategy for how they fit into it. Everything should be on the table, from re-evaluating your internal innovation organisation design, access to partnerships with new niche disruptive innovators, utilisation of open innovation communities or a reallocation of R&D investments to new and bolder product development ideas,” explains Jeff Dobbs, Global Sector Chair of KPMG’s Industrial Manufacturing Sector. “You can’t just sit back and wait for your current strategy for innovation to start driving growth; you must begin transforming that strategy if you expect to remain competitive in the new world order of manufacturing.”