Innovative Firms Gain Widening Profit Advantage, Study Shows
The profitability gap between companies that compete on the basis of innovative products or processes and firms that compete with a low-price advantage has more than doubled over the past three years, a new survey of Georgia manufacturers has found.
The 2008 Georgia Manufacturing Survey also found that Georgia companies are making significant progress in adopting sustainable techniques - another form of innovation - though they tend to focus on short-term cost reduction rather than long-term profitability and growth.
Results of the survey, done periodically to assess the business and technological condition of Georgia's manufacturing community, were released this week by the Enterprise Innovation Institute and the School of Public Policy at the Georgia Institute of Technology. The results are based on responses from 738 companies with more than 10 employees.
"Innovation remains as important as ever," said Philip Shapira, a professor in Georgia Tech's School of Public Policy and one of the study's co-authors. "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."
The survey showed that companies competing on the basis of innovation had a three-year average return on sales of 14.5 percent - nearly twice the 7.6 percent average for companies competing with low prices. In the 2005 Georgia Manufacturing Survey, companies relying on innovation saw an average return on sales of 6.3 percent, compared to about 3.6 percent for the low-cost competitors. The gap between the rewards for these two competitive strategies nearly doubled during the 2005 to 2008 period.
Slightly less than 20 percent of Georgia manufacturers compete based on price, compared to fewer than 10 percent that use innovation as the competitive edge, the study found. Half of Georgia manufacturers report gaining a competitive edge from quality products or services. Other strategies include quick delivery, adding value and adapting to customer needs.
Wage rates are also associated with competitive strategy. Innovative companies pay an average of nearly $42,000 annually per employee, compared to a range of $33,000 to $37,000 for other firms.
The survey studied innovation in products, processes, organizational structures and marketing. About 70 percent of the manufacturers responding to the survey report that they had introduced a new or technologically improved product or process in 2008.
About three-quarters of the Georgia manufacturers report adopting at least one practice aimed at making their 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.
However, only one in five Georgia manufacturers has an environmental stewardship program, and just 18 percent have set targets for reducing energy use in their facilities. Sustainability is defined as steps taken to minimize the use of natural resources, toxic materials, waste emissions and production materials over the life cycle of the product produced. But it also includes functions to expand sales, such as green branding and eco-labeling - not just cost savings benefits.
"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, a study co-author and manager of policy services in the Georgia Tech 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."
Manufacturers have long focused on cutting costs through approaches like lean manufacturing, and many companies see sustainability primarily as a way to further those efforts. Such viewpoints may miss important opportunities, Shapira warned.
"Companies continue to focus on near-term cost savings and easily-achievable energy reductions," he said. "Too few are pursuing the long-term investments in innovation and product lifecycle costing that would help sustain them over the long term."
Adoption of sustainable techniques varies with the size of companies. "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," Youtie noted. "But there are also benefits for small companies, which can be more agile in adapting to change."
The 2008 survey is the sixth in the series, and in each edition, manufacturers are asked their top concerns. In 2005, those issues related to process improvement through adoption of lean manufacturing principles. For the 2008 study, those concerns shifted, with a third of manufacturers indicating problems with marketing and sales. Concerns about energy cost grew, with 23 percent of respondents indicating a problem in that area - up from just 10 percent in the 1999 study.
Educational needs also generated attention, with manufacturers concerned about workers having basic skills such as reading and mathematics, as well as more sophisticated technical abilities. Despite the concerns, however, company training investments per employee average only about $150 per year.
The study also found a correlation between the use of public knowledge sources - such as technical or management assistance from Georgia Tech, other universities or public agencies - and higher productivity growth. Companies using outside assistance reported as much as 15 percent more value added for each employee.
And despite its prominence in national public-policy discussions, research and development tax credits were used by only five percent of respondents. This percentage is in contrast to the 45 percent of respondents who said that lack of funds was an important limitation to engaging in innovation.
"Taxes don't really have a big impact on a company's strategic decision making," said Shapira. "If they are doing to do research and development, they're going to do it regardless. If there are tax breaks available, some companies may apply for them, but we don't find that the availability of tax credits much affects strategy decisions."
Support for the study came from the Georgia Manufacturing Extension Partnership at Georgia Tech, the Center for Paper Business and Industry Services, the Georgia Department of Labor, the QuickStart Program of the Technical College System of Georgia, and Habif, Arogeti and Wynne, LLP. Beyond Shapira and Youtie, authors included Luciano Kay, Ashley Rivera, Bryan Lynch and Andrea Fernandez Ribas.
For more details about the Georgia Manufacturing Survey and to download the 2008 report, please visit (www.cherry.gatech.edu/survey).
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Writer: John Toon