Innovative manufacturing companies have a profit advantage over low-price firms

Innovation may cost more but it pays off in the long run. Profitability gaps between companies competing on the basis of innovative products or processes and those firms competing with a low-price advantage more than doubled over the past three years, says The 2008 Georgia Manufacturing Survey.

11/17/2008


Atlanta, GA – Innovation may cost more but it pays off in the long run. Profitability gaps between companies competing on the basis of innovative products or processes and those firms competing with a low-price advantage more than doubled over the past three years, according to The 2008 Georgia ManufacturingSurvey. For

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Georgia companies see significant progress in the adoption of sustainable techniques, another form of innovation, although they tend to focus on short-term cost reduction instead of long-term profitability and growth. The study was based on responses from 738 companies with more than 10 employees and conducted periodically to assess business and technological conditions in Georgia's manufacturing community. Results were released by the Enterprise Innovation Institute and the School of Public Policy at the Georgia Institute of Technology .
"Innovation remains as important as ever," says study co-author Philip Shapira, a professor in the School of Public Policy. "Those Georgia companies that innovate receive rewards for doing so . But a significant number of companies still have not adopted innovation as a leading strategy."
Companies competing on the basis of innovation had a three-year average return on sales of 14.5%, nearly twice the 7.6% for companies competing with low prices. In the 2005 survey, companies relying on innovation had an average return on sales of 6.3%, compared to about 3.6% for low-cost competitors. The gap between rewards for the competitive strategies nearly doubled between 2005 to 2008.
Slightly less than 20% of Georgia manufacturers compete based on price , compared to fewer than 10% that use innovation as a competitive edge. Half of the manufacturers gained a competitive edge from quality products or services. Other strategies include quick delivery, adding value, and adapting to customer needs. Wage rates are associated with competitive strategy; innovative companies pay an average of nearly $42,000 annually per employee, compared to $33,000 to $37,000 for other firms. The survey studied innovation in products, processes, organizational structures, and marketing. About 70% of respondents reported the introduction of new or technologically improved products or processes this year.
75% reported sustainability effort
About three-quarters of manufacturers report adopting at least one practice to make operations more sustainable. These include sustainability considerations in the choice of suppliers, selection of raw materials and processing techniques; application of sustainable principles to product design, processing, facility design, packaging, and marketing; employee training in sustainable practices; logistics, and transportation services; the use, re-use, and maintenance of the product, and product end-of-life issues.
Successful
Only one in five Georgia manufacturers has an environmental stewardship program, with 18% reporting setting targets to reduce energy use in facilities. "The importance of sustainability is driven by the growth in energy costs, the rise in the cost of natural resources and of waste disposal, and demand from customers who consider sustainability issues when making purchasing decisions," said Jan Youtie, study co-author and manager of policy services in the Enterprise Innovation Institute. "In the broadest sense, sustainability is about sustaining business , so if manufacturers want to succeed long-term, they need to pay attention to environmental and equity issues, not just economics. We usually see that large companies adopt new technologies earlier and at a higher rate than small companies, and energy has an inherent scale issue. But there are also benefits for small companies, which can be more agile in adapting to change."
Shapira adds: "Companies continue to focus on near-term cost savings and easily-achievable energy reductions. Too few are pursuing the long-term investments in innovation and product lifecycle costing that would help sustain them over the long term."
The new survey is sixth in a series in which manufacturers are asked their top concerns. In 2005, those issues related to process improvement through adoption of lean manufacturing principles; this year concerns shifted, with a third of manufacturers indicating problems with marketing and sales. Concerns about energy grew , with 23% of respondents indicating a problem in that area, up from 10% in the 1999 study. Educational needs generated attention , with concern about workers having basic skills such as reading, mathematics, and sophisticated technical abilities, although company training investments per employee averaged only about $150 per year.
The study found a correlation between the use of public knowledge sources and higher productivity growth. Companies using outside assistance reported up to 15% more value added for each employee. Research and development tax credits were used by only 5% of respondents in contrast to 45% of respondents who said that lack of funds was an important limitation to engaging in innovation.
Support for the study came from Georgia Manufacturing Extension Partnership at Georgia Tech, Center for Paper Business and Industry Services, Georgia Department of Labor, QuickStart Program of the Technical College System of Georgia, and Habif, Arogeti and Wynne LLP. Other study authors include Luciano Kay, Ashley Rivera, Bryan Lynch, and Andrea Fernandez Ribas.
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