Focusing on the value add

Transcription

1 Focusing on the value add Practice Area: Strategy Industry Sector: Manufacturing A look at how Australia s manufacturing sector can use innovation to compete in today s high cost economy David Mackay Adam Gray October 2012 Page 1

2 STRATEGY Focusing on the value add Manufacturing accounts for one third of Australian exports. Competing as a low cost manufacturing firm, based purely on price, is no longer an option Manufacturing plays a significant role within the Australian economy The Australian manufacturing industry plays a significant role within the Australian economy providing both direct and downstream benefits. The industry employs close to one million people, provided a total industry gross value-add i of 10 per cent in and accounts for one third of Australian exports ii. The impact of manufacturing however is deeper than its direct economic contribution. A report by the Productivity Commission into trends within Australian manufacturing shows that manufacturing accounts for 45% of business R&D economic activity, despite its relatively small size in value-add. Professor Göran Roos, Chairman of VTT Technical Research Centre, Finland, in a 2012 presentation entitled Making things in a High Cost environment, challenges the notion of a service economy and its ability to survive without a manufacturing base. He uses a microeconomic example of a small town built around a manufacturing industry. If that manufacturing industry dies, the service industries that have been built around it will also die there is a dependent relationship whereby service industries rely on upstream manufacturing and production industries to survive. Australia has become, and will remain, a high cost environment The manufacturing industry, like most other domestic industries, is facing a broad set of macro- and micro-economic challenges. The rise of globalisation, exchange rate increases eroding margins, lacklustre domestic growth and a shortage of skilled workers are commonly cited as key challenges facing the sector. Perhaps the biggest issue facing the industry however has been Australia s shift from a low cost to a high cost environment iii. This change is due to more than the exchange rate. The (relatively) strong Australian economy, driven by the mining boom, has resulted in significant increases in major input costs, such as labour, rent and utilities. These input costs are unlikely to drop significantly while the economy continues to grow and unemployment remains low. So what defines a high cost environment? The simplest way to define a high cost environment is to compare your cost base with your nearest competition. In many cases, this will be China, India, south east Asia and other regions synonymous with cheap labour. When compared to these regions, competing as a low cost manufacturer (based purely on price) is no longer an option for the majority, if not all, Australian manufacturing firms. Manufacturing in a high cost environment therefore requires a different approach, where you compete on perceived value and not on price. This approach requires a constant focus on innovation and productivity to ensure you stay one step ahead of the game. i Industry Total Gross Value Add measures the value of industry production. It is used to measure the contribution of individual industries to the gross product of a state or territory (source ABS). ii Future Manufacturing Council 2011, Trends in manufacturing to 2020, Discussion Paper, Department of Innovation, Industry, Science and Research, Canberra. iii Prime Minister s Manufacturing Taskforce, Smarter Manufacturing, Report of the Non-Government Members, August 2012 Page 1

3 For Australia, over 70% of value added by manufacturing comes from medium-low and low tech industries Lessons can be learnt by looking at other high cost environments Succeeding in a high-cost environment is possible; the small-to-medium manufacturing enterprises of Germany, Sweden, Switzerland and Finland are prime examples. Manufacturing firms in these countries compete and win by providing exceptional value for money for their customers. When we look at the successful firms in these regions and the drivers of their success, we see a number of common themes: identifying niches, moving from transactions to solutions, differentiating and embracing uniqueness, leveraging knowledge and people, and working collaboratively. Focus on high value offerings in a niche Niche does not mean small. Niche simply means identifying a unique value proposition and leveraging competitive strengths within a well-defined market segment. Successful manufacturing firms in highcost European regions focus on delivering unique high value products and services so they can compete on their value proposition, not price. German company RUD, a manufacturer of high quality chains and chain related systems, achieves a higher price and market leading position by constantly developing unique and innovative products for specific applications such as snow chains, and lifting and lashings. Developing niches also allows manufacturing firms in these regions to find success by avoiding the competition with large corporates. For example Baader, a German manufacturer and installer of high quality machinery for the food processing industry, dominates the fish processing sector commanding more than 80% market share globally. Provide products and services that cannot be delivered competitively anywhere else in the world By offering products and services that cannot easily be delivered anywhere else in the world, particularly low cost environments, the European SMEs avoid competing on price. It is important to understand that many of these firms are high or medium-high tech based, whereas the majority of Australian firms are medium-low and low tech. This can clearly be seen when comparing the breakdown of value added to the economy by manufacturing technology sector for Germany, Sweden and Australia, as shown in Exhibit 1. For Australia, over 70% of value added by manufacturing comes from medium-low and low tech industries, whereas for Germany and Sweden it is less than 50%. The harsh reality is that some industries will not survive. However, this does not imply that only hightech manufacturers will survive. The tuna industry of Port Lincoln, for example, went from producing low-cost tins of tuna to high-value, high cost bluefin tuna for the insatiable Japanese sashimi market. Exhibit 1 Australia: a low tech provider Breakdown of value added by the manufacturing sector 12% 23% 21% 21% 44% 31% 21% 27% 7% 20% 32% 42% % HIGH TECH % MEDIUM-HIGH TECH % MEDIUM-LOW TECH % LOW TECH Germany Sweden Australia (source: OECD STAN Database, Value-Added Current prices 2005, accessed 27th June 2012) Provide products and services to create an end-to-end solution for customers Successful European SMEs enhance the value of their offering by providing services that complement their products. The addition of services can be a low risk, low cost approach to expanding a firm s portfolio in comparison to developing new products. Scania, a Swedish manufacturer of trucks and buses, offers fleet management, rental and financial services in addition to standard warranty and maintenance services. Scania even offers truck and bus driver training. Page 2

4 Value adding services can be a low risk and low cost approach to expanding a firm s portfolio Not all innovations have to be gamechanging inventions The exact ratio of big bets to new ventures to quick wins for a firm will vary Services also leverage an important competitive advantage of high cost environments a highly skilled work force. Having a highly skilled workforce allows high tech firms to provide heavily customised solutions. German manufacturer of industrial sewing machines and automation, Dürkopp Adler established an application centre for developing customer specific and specialised solutions. The centre is staffed by highly skilled consultants that will develop custom solutions comprising new and existing components. Moving away from commoditisation and providing customised solutions is one way that firms can deliver more value and strengthen relationships with their customers. Understand the value of knowledge and people The SMEs in these regions have an unrelenting focus on innovation and productivity. They understand that their growth and survival is predicated on staying one step ahead of the competition and to achieve this requires the attraction and retention of the right level of skills and knowledge within the firm. On average, employee turnover within these firms is low, enabling them to preserve the knowledge and expertise they develop. Many SMEs have close relationships with universities for research partnerships and sourcing new talent. Germany s apprenticeship program is one of the factors behind the success of the Mittelstand, the collective name given to over 3 million SMEs that provide 2.4 trillion Euros to the German economy. The Mittelstand consumes over 80% of all apprenticeships, highly skilled blue collar workers, and many firms offer University scholarships to apprentices on the basis that they return to the company after their studies iv. Work together and collaborate Many of the SMEs in these regions are organised into clusters. These clusters allow companies to optimise supply chains and add value to primary industries. In Germany, clustering often occurs around large manufacturers. Clustering has been particularly successful in Finland in the forestry, chemical and ICT industries. Innovation provides opportunities for Australian manufacturing firms to succeed in this new environment If Australian manufacturing firms are to survive and grow, they will need to learn to compete on value and not price. This requires a change in focus from costs and cost cutting, to innovation, revenues and growth. Innovation is often unnecessarily associated with large and costly R&D investments. Innovation covers a broad spectrum of improvement activities encompassing product, process, service and marketing. However, despite its prevalence, innovation is rarely managed in a structured manner and often attributed to good luck rather than good management. To reduce some of this complexity, firms should start by defining an innovation strategy and focusing on value add. Define an innovation strategy The first thing to note when defining an innovation strategy is that not all innovations have to be game-changing inventions. The key to creating a good innovation strategy is to create the right balance of short term wins through long term game-changing advances. Most innovation strategies use a three tier approach which includes the following categories of initiatives v : Big bets: big strategic bets (or game changers), which represent the highest risk and reward; Mid-range ideas: new ventures, enhancements or additions to existing offerings, which represent the majority of new products and services; and Incremental improvements: incremental improvements and quick wins which represent the least risk and reward The exact ratio of big bets to mid-range ideas to incremental improvements for a firm will vary depending on internal and external factors, such as the level of innovation in the industry and the capabilities and maturity of the firm vi. To develop their innovation portfolio, manufacturing firms could use a matrix similar to that shown in Exhibit 2. This innovation matrix reflects the innovation pyramid across two axes, innovation through new customers and markets, and innovation through development of products and services. Each region within the matrix describes a different type of activity a firm could look at executing. For iv Bloomsburg BusinessWeek, Germany's Mittelstand Still Thrives, accessed July 2012, v Kanter, R.M., Innovation: The Classic Traps, Harvard Business Review, Nov 2006 vi Harvard Business Review May 2012, Managing Your Innovation Portfolio, Monitor Group Page 3

5 Customers and Markets example, many of the handheld GPS manufacturers, such as Garmin and Navman, started selling their turn-by-turn software as applications for smart phones, modifying an existing product and applying it to a new market opportunity. Exhibit 2 Innovation Matrix Establish new markets Use existing offerings to service new customer needs Modify existing offering to address new customer needs Create a new offering to address new customer needs Quantity of initiatives within innovation strategy pipeline Low Medium High Enter new markets or regions, look for adjacencies Existing offering servicing the same customer needs in new market Modify existing offering and expand to new markets Develop a new offering that can be distributed to new markets Existing customers and markets Optimise existing offering for current customer base Modify existing offering to address more existing customer needs Develop new offering for existing customers Optimise and leverage existing offering Extend, modify or add to existing offering Develop a new breakthrough offering (source: SPP Innovation Matrix adapted from Ansoff s Matrix) Focus on the value add When developing an innovation strategy it is important to have a relentless focus on adding value to the customer. This is reflected in the Innovation Matrix where every region shares a common theme, refining or leveraging a new or existing offering to meet a customer need. To make sure that manufacturing firms are focussing on delivering high value to their customers, they should ask themselves these basic questions: What is my current offering? What problem does it solve? Who are my customers? What do they want? What problems are they trying to solve? What can I do to better meet my customers needs? What will differentiate my offering from the competition? Keeping these questions in mind when looking to the future will help Australian firms stay focused on developing value for their customers and avoid the zero-sum game of competing on price. Next steps to capitalise on the right approach for your organisation For many, the challenge of moving from a low cost environment to a high cost environment will be a difficult and long process. Focusing on innovation and delivering value requires a different culture and mindset. Critical to success is establishing a clear innovation strategy that establishes a balanced pipeline. SPP is able to assist you at each of the critical phases of this process. Offering - Products and services Establishing the ground work conducting an assessment of the organisation s offering and performance for input in the innovation strategy process. Developing an innovation culture delivering workshops for senior managers and leaders on establishing and supporting an innovation culture within the organisation Identifying and assessing opportunities investigating new market opportunities including identifying and quantifying the target market segment, and guiding organisations through the development of new, unique and compelling value propositions. Execution planning mapping out the go-to-market strategy and identifying the necessary investment in resources and capabilities to deliver the value proposition to customers. Generating buy-in develop compelling business cases for seeking approval from senior stakeholders or applying for grants and funding. Page 4

6 ABOUT SPP Strategic Project Partners is a management consulting firm that brings clarity and direction to difficult strategic and operational challenges. Our manufacturing practice has a specific focus on capturing growth opportunities through innovation. Insight Influence Established in 2005, SPP has delivered successful outcomes for a broad range of commercial and Government sector clients. As a result we have strong relationships with many businesses, from Top 50 listed companies through to small enterprises. When we deliver our projects, whether it s a strategic study or the implementation of large-scale change, we focus on: Impact Strong project management Clarity of outcome An obsessive focus on project benefits Robust, fact based analysis Simple communication Bringing experience to bear ABOUT THE AUTHORS David Mackay Associate Director david.mackay@spp.com.au David leads SPP s Manufacturing practice. He assists organisations in developing and realising business growth strategies from early stage new ventures to major corporations. Prior to SPP, David has held responsibilities encompassing business development and bid management, project and operational management, and strategy development and implementation for organisations such as Atos, Fujitsu and Toll. Adam Gray Consultant adam.gray@spp.com.au Adam has extensive experience in program management, product lifecycle management, strategy, business case development, market research, ICT and business process improvement. Prior to SPP, Adam held various program management, line management and R&D roles within a global manufacturing company in the biotechnology sector. Adam holds a BEng (Hons) and is a certified Prince2 project management practitioner. Page 5