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  • A report from the Economist Intelligence Unitsponsored by SAP

    Thinking bigMidsize discrete manufacturing firmsand the challenges of growth

  • The Economist Intelligence Unit 2006 1

    Thinking bigMidsize discrete manufacturing firms and the challenges of growth

    Thinking big: Midsize discrete manufacturing firms andthe challenges of growth is an Economist IntelligenceUnit white paper, sponsored by SAP.

    The Economist Intelligence Unit bears soleresponsibility for the content of this report. TheEconomist Intelligence Units editorial teamconducted the interviews, executed the survey andwrote the report. The findings and views expressed inthis report do not necessarily reflect the views of thesponsor.

    Our research drew on two main initiatives: We conducted a wide-ranging survey of 961

    executives of midsize discrete manufacturers fromOctober 2005 to January 2006, using bothtelephone and online surveying techniques. Thiswas part of the Economist Intelligence Units globalsurvey, Midsize companies, in which 3,722executives took part.

    To supplement the survey results, we alsoconducted in-depth interviews with several seniorexecutives of midsize discrete manufacturing firms. The author of the report was David Cowan and the

    editor was Denis McCauley. Mike Kenny wasresponsible for design and layout.

    Our sincere thanks go to the interviewees andsurvey participants for sharing their insights on thistopic.

    March 2006

    Preface

  • 2 The Economist Intelligence Unit 2006

    Thinking bigMidsize discrete manufacturing firms and the challenges of growth

    Executive summary

    Midsize discrete manufacturing firms, likemanufacturers overall, are encouraginglygrowth-oriented. Most plan to boost revenuethrough new customer acquisition, and many plan toseek new sources of demand in foreign markets.However, they also find themselves squeezed by theeffects of an increasingly tough global competitiveenvironment, with strong downward pressure onpricing and rising input costs. To cope with thesepressures while continuing to pursue growth, they willtake great pains over the next three years to improvetheir operating efficiency.

    This white paper, sponsored by SAP and based onan Economist Intelligence Unit survey of 961 seniorexecutives, suggests that midsize discretemanufacturing firms will focus on the following growthpriorities over the next three years:

    Expand aggressively but profitably. Midsizemanufacturers may be growth-oriented, but they willexpand with a keen eye on the bottom line. Nearlytwo-thirds of survey respondents (64%) say thatimproving operating efficiency and reducing costs is acentral plank of growth strategy. Two-thirds alsoorient themselves toward an optimal rate of growth,suggesting a recognition that expanding too fast canstrain existing resources and structures.

    Grow organically. Manufacturers in the survey planto pull themselves up by their bootstraps in order togrow. Nearly 70% of respondents will pursue organicgrowth, and 43% will do so by relying entirely on theirexisting resources. At the same time, a largeproportion (20%) will also utilise networks of thirdparties to help themselves grow.

    Stay nimble and responsive. Consolidation isproducing larger and more powerful competitors,customers and suppliers. Midsize manufacturersbelieve they hold advantages over larger rivals in theform of greater operational speed, pricing flexibilityand customer intimacy. But many also fear that theseadvantages will be lost as their businesses expand.

    Good IT, good people. Speed, flexibility andresponsiveness need not be sacrificed at the altar ofscale. More than 70% of respondents believe that ITwill be critical to their ability to maintain operationalflexibility as they grow. The majority also view IT ascentral to their efforts to improve innovation, supplierand partner interaction and customer relationships.But IT will only deliver this edge with skilled staff tomanage and use it. The ability of manufacturers tohire, train and retain skilled managers and staff willalso do much to determine their future growthprospects.

  • The Economist Intelligence Unit 2006 3

    Thinking bigMidsize discrete manufacturing firms and the challenges of growth

    Who took the survey?

    A total of 3,722 executives fromaround the world participated in theMidsize companies survey, conductedby the Economist Intelligence Unitfrom October 2005 to January 2006.Of this number, 961 respondentshailed from the discretemanufacturing sector, which consistsof companies engaged in theproduction of distinct units such asdurable goods, automotive products,

    electronics and engineeringmachinery. The survey group wassenior: 45% of the sample were C-level executives such as CEOs, CFOsand CIOs as well as owners, and theother 55% were other seniormanagers.

    We have chosen to employ adefinition of midsize firms based onrevenue. Thus, 87% of the discretemanufacturers in our survey haveannual global revenue of betweenUS$20m and US$500m. The other

    13% range slightly above or belowthese thresholds. (For more detail onthe survey sample and results, pleasesee the Appendix to this report.)

    In addition to our survey, weconducted in-depth interviews withsenior executives of midsizemanufacturing firms in differentregions, obtaining their insights intothe nature of the growth challengesfacing them over the next three yearsand how they plan to overcomethem.

  • 4 The Economist Intelligence Unit 2006

    Thinking bigMidsize discrete manufacturing firms and the challenges of growth

    Buoyed by the progress of globalisation, midsizemanufacturers maintain an enormous appetitefor growth. However, they also face the twinpressures of rising input costs and declining pricesthat customers are willing to pay for their products.Managing growth in this environment requiresflexibility and speed, but it also requires astuteleadership from the top. The trick for midsizemanufacturers, say surveyed executives, is to grow at asustainable pace, without overheating the business.

    To encourage rational, sustainable and, above all,profitable expansion, they pay much attention tooptimal growth measurements. Fully two-thirds ofdiscrete manufacturers in the survey say that seniormanagement have set an optimal rate of growth fortheir company, and nearly the same number (62%) saytheyve identified an optimal size. Markets andcompetition define what your optimal size is, saysRonald Black, CEO of Wavecom, a French manufacturerof mobile phone components. Profitable growth isthe optimal size for a firm, he adds.

    Firms in Asia-Pacificwhere much of the growth inmanufacturing has been centred in recent yearsaremore oriented than those in other regions toward suchmetrics: 79% there work toward an optimal rate ofgrowth, compared with 76% in the United States andonly 54% in Europe.

    Midsize firms stress on profitable growth indiscrete manufacturing is underscored by anotherfinding from the survey, namely that the largestproportion of firms consider increases in profit as theirmain measure of growth, more than that of revenue ormarket share. The preference for the profit growthmetric reflects the significance of cost-cutting in themanufacturing sector, where margins are undercontinual pressure.

    Multiple paths to growthMidsize manufacturers aspire to growth, but how dothey plan to they achieve it? The answer for themajority of executives in the survey is to pullthemselves up by their bootstraps. Nearly 70% ofglobal survey respondents will pursue organic growth,and 43% will rely entirely on their existing assets andresources to achieve it. Mergers and acquisitions(M&A) and joint ventures do not figure prominently indiscrete manufacturer strategies, although thepreference for M&A is stronger among the largermidsize firms in the survey.

    Not all midsize discrete manufacturers will pursuegrowth entirely alone, however. One-fifth ofrespondents say that their primary growth strategywill involve building networks of third parties to assistin the production or distribution of their goods andservices.

    Wavecom has sought growth by organic means inwhat it does best, and by using third parties where itcan best leverage external resources. Mr Black claimsthat we are a poster child for sourcing globally. Wedefine carefully what we do. You cant be good at

    In your company, what is viewed as the single most important measure of growth? (% respondents)

    Growth of total revenue 30

    Growth of market share 19

    Growth of profit 37

    Growth in number of customers 8

    Growth in number of employees 1

    Growth in number of geographic markets reached 6

    Source: Economist Intelligence Unit

    Strategies for growth

  • The Economist Intelligence Unit 2006 5

    Thinking bigMidsize discrete manufacturing firms and the challenges of growth

    everything, so what is not there you consider foroutsourcing.

    HiEnergy Technologies is a midsize USmanufacturer with one main product, a roboticchemical-based bomb detection unit. Its growth willbe determined by the response to global terrorism anddemands for higher levels of security. The companyplans to grow organically through the strategic use ofthird-party relationships. I believe in the factorywithout walls, says Bogdan Maglich, HiEnergysfounder and CEO. Most of our components are madeby outside contractors, and we assemble them here.

    First things firstboost operating efficiencyDownward pressure on prices combined with the risingcost of inputs (particularly energy and raw materials)are combining to squeeze the margins ofmanufacturers of all categories and sizes. Executivesin our survey are clear that, in this environment, thepath to growth lies not only through revenueexpansion but also through further cost reduction.Fully 64% of midsize discrete manufacturers, and 73%of those in Asia-Pacific, cite cost reduction through

    improved operating efficiency as one of the mostimportant ways they will implement growth strategy inthe coming three years.

    When it comes to increasing revenue, new customeracquisition as well as product diversification are thepreferred means of achieving growth among discretemanufacturers. 42% of executives in the global samplepoint to expansion of the customer base as amongtheir main paths to growth, and 39% tap portfoliodiversification.

    Alexandra, a UK-based producer of uniforms andwork apparel, is one firm looking to diversification forgrowth. In contrast to the dominant preferencerevealed in the survey for organic growth, thecompany will diversify through acquisition, accordingto CEO Julian Budd. Alexandra has already bought twocompanies, one of which is a specialist in corporatetailoring, serving customers in the banking andairline business sectors who have numerous staffwearing suits. The other is a supplier to the transportand security sectors. Mr Budd is keen to establishmarket leadership as a consolidator, and the companyis likely to continue growing by acquisition.

    Please characterise the primary type of growth strategy that your company will pursue over the next three years. Top responses (% respondents)

    Organic growth via the use of wholly owned resources

    Organic growth via a network of third parties for production and distribution

    Mergers and acquisitions (M&A)

    Joint ventures

    434242

    47

    2018

    2316

    1415

    1222

    89

    68

    Global Europe APAC US

    Source: Economist Intelligence Unit

    What are the most important ways in which your company will implement its growth strategy over the next three years? Top responses (% respondents)

    Cost reduction via better operating efficiency

    Expansion of the customer base

    Diversification of product/service portfolio

    Tapping new geographic markets

    6458

    7365

    4237

    4445

    3932

    4435

    3636

    4033

    Global Europe APAC US

    Source: Economist Intelligence Unit

  • 6 The Economist Intelligence Unit 2006

    Thinking bigMidsize discrete manufacturing firms and the challenges of growth

    Much of midsize manufacturers expansion willoccur outside their home base. 36% of surveyedexecutives say that entry into new geographic marketswill be a growth priority. Globalisation, then, is not

    just for the big players. Mr Black of Wavecom says that,in his industry, you have to be global. There is nooption to focus on a small part of the world. If yourcustomers are global, you go where they are.

  • The Economist Intelligence Unit 2006 7

    Thinking bigMidsize discrete manufacturing firms and the challenges of growth

    Globalisation cuts both ways. It creates newopportunities for midsize manufacturers toboost revenue and slash costs. But it alsogenerates threats, principally through the emergenceof new, often lower cost competitors and the marginsqueeze this helps to generate. In fuelling this kind ofcompetition, globalisation also contributes to thetrend toward consolidation. For midsizemanufacturers, this means having to grapple withlarger and more formidable competitors, as well aswith more powerful and demanding customers.

    Feeling the squeezeMidsize discrete manufacturers are certainly feeling asqueeze as price competition intensifies and inputcosts increase. Downward price pressure is identifiedby a clear majority of respondents58%as a majorobstacle to growth over the next three years, withAsia-Pacific executives exhibiting the greatest degree

    of concern. A large proportion of survey respondents also

    express concerns about the rising cost of inputs.Almost half the sample see this posing a major barrierto growth over the next three years. Here again, Asia-Pacific respondents betray the most serious worries,but in the US it is the most frequently citedimpediment to growth. Worries about the scissoraction between downward price pressures and upwardcosts helps explain why so many firms remainpreoccupied with improving operating efficiency.

    Escalating energy prices are feeding these worries,but the high cost of labour is also part of the equation.Nearly one-third of survey respondents claim that highlabour costs in relation to other countries will harmtheir growth prospects over the next three years.Another 27% say a shortage of skilled staff will be agrowth barrier.

    Labour availability and cost is a particularly vexingissue at R&D-intensive manufacturers such asHiEnergy. Mr Maglich says that his company isunderstaffed and its employees over-worked. Heexplains: Scientists have to believe in their research.If you have a young an inexperienced team withoutexperienced leadership, then you end up with lowmorale. The human capital issue is exacerbated whenfirms go global.

    Size isnt everythingAs wary as discrete manufacturers are about newmarket entrants, survey respondents in all regionsmake clear that the chief competitive threats to theirposition over the next three years will emanate fromexisting players in their markets, particularly thoselarger than them in size. Anthony Cardinale,operations engineering manager of c-Cor, a US$250m

    Staying one step ahead: Competitors, customers and suppliers

    What do you believe will be the most serious impediments to growth in your key markets over the next three years? Top responses (% respondents)

    Downward pressure on prices

    Rising cost of raw materials and services

    Market saturation

    High labour costs vis--vis competitors in other countries

    5853

    6739

    4938

    6153

    3230

    3627

    3035

    2724

    Global Europe APAC US

    Source: Economist Intelligence Unit

  • 8 The Economist Intelligence Unit 2006

    Thinking bigMidsize discrete manufacturing firms and the challenges of growth

    US producer of telecommunications gear, for example,relates that his firm is number two in its niche market,but is dwarfed by a market leader that is 20 times c-Cors size.

    Consolidation creates larger and more powerfulcustomers as well as competitors. Reliance on a fewlarge customers can cause problems for midsizemanufacturers, particularly if they wish to dictateprices or impose strict product or technologystandards. 61% of survey respondents believe there isa medium or high degree of risk that they will becomedependent on a few large customers for revenue overthe next three years. 56% say the same aboutdependence on a few large suppliers for inputs.

    Size can generate significant competitiveadvantage, but it can also reduce operationalflexibility and sap responsiveness. Midsizemanufacturers believe they enjoy a competitive edgeover their larger rivals in these and other attributes.Nearly half (47%) of respondents claim greater speedin executing strategy changes, and 42% point togreater flexibility in pricing. Another 39% say thatmidsize firms are better able to maintain closecustomer relationships than bigger players.Flexibility and speed to market are the key successfactors for us, says Mr Cardinale.

    But heres the rub: as midsize firms grow into largerentities, the advantages of speed, flexibility andcustomer intimacy that they hold over larger firms willtend to erode. Nearly the same number of respondentswho claim greater speed of execution as a competitiveadvantage also say that its one the attributes that are

    In your view, which of the following attributes is most likely to erode as your company expands in size? Top responses (% respondents)

    Ability to execute changes in strategy quickly

    Deep customer relationships

    Pricing flexibility

    Low cost of inputs and/or operations

    High quality of products/services

    Ability to innovate continuously

    Deep product/service specialisation

    Intimate knowledge of local market conditions

    Ability to enter new geographic markets quickly

    Deep supplier relationships

    Other

    46

    34

    32

    25

    23

    22

    21

    17

    13

    12

    6

    Source: Economist Intelligence Unit

    Riding out the storm fromlow-cost competition

    UK-based Alexandra, a producer of workapparel and uniforms, has arguably had atougher challenge than most as a midsizemanufacturer in an industry in steepdecline. The once proud British garmentindustry has been decimated by low-costcompetition. At one time 95% of thegarments sold in the United Kingdom weremade by Alexandra, which employed 1,500

    machinists, but then the business slumpedin 1996.

    On the principle of if you cant beatthem join them, the firm changed itssourcing strategy to the extent that allinputs now come from low-cost markets. Asa result, Alexandra has established itself asa survivor in a still declining industry.According to CEO, Julian Budd, his companyprovides a salutary example of a firm thathas met the competitive threat fromcompetitors in lower cost markets bysourcing inputs from there. As Mr Bond

    argues: You need to see these markets asan opportunity to source products that willput you in a more competitive position.

    Alexandra has not only survived, but it isexpansive as well. Part of this is due to thesaturated nature of Alexandras markets,meaning that revenue growth may need tobe pursued through aggressive means.Indeed, Mr Budd does not see manyopportunities for organic growth in itsindustry; instead, his firm will grow throughacquisition and diversification into relatedproduct lines.

  • The Economist Intelligence Unit 2006 9

    Thinking bigMidsize discrete manufacturing firms and the challenges of growth

    most likely to erode with growth. They say the same ofthe advantages they hold in pricing flexibility andcustomer intimacy.

    Not all leaders of midsize manufacturers believethat erosion of these attributes is inevitable. Takedepth of customer relationships. Alexandras Mr Budd,for example, does not see a major threat to itscustomer relationships as the firm grows. The trick isbeing able to stay close even as the number of

    customers expands. If you stay close, he maintains,there is no way customers will move their business justto get a better deal elsewhere.

    This may be easier said than done. Retaining someof their competitive advantages as they grow is a tallorder for midsize firms, but it is not impossible. Onetool at their disposal in trying to pull this off is a teamof managers skilled in adapting business processes.Another is IT.

  • 10 The Economist Intelligence Unit 2006

    Thinking bigMidsize discrete manufacturing firms and the challenges of growth

    Mr Black of Wavecom maintains says that thecompetitive issues faced by large and midsizecompanies are much the same. The difference,he agrees, is that companies our size have the abilityto make decisions and transform ourselves rapidly.One reason has to do with the much higher rate ofinformation flow in midsize firms, he adds. In this andother areas, IT can make the difference for companiesbetween smooth or rockyand possibly evenunprofitablegrowth.

    Manufacturers have been slower than firms in othersectors to deploy IT, and until recently, few have doneso with anything other than improved cost-efficiencyin mind. But our survey suggests that midsize discretemanufacturers are taking a broader and moreenthusiastic view of what IT can do for them. Over two-thirds of respondentsand considerably more in Asia-

    Pacific and the USconsider IT to be an importantenabler of growth. An even more decisive majority of73% believe that IT will be critical to their ability tomaintain operational flexibility as they grow.

    Asked what will be the key drivers of IT investmentat their firms over the next three years, the largestproportion of executives in the survey point to theneed to accommodate growth of the business.

    Mr Budd agrees that the key to manageable growthis to have flexible IT, responsive to the changing needsof the business. He also advocates letting big firmsadapt new technology first, and seizing theopportunity when advanced technology is moreavailable and at a lower price. Let the big firmsidentify and improve the technology first.

    Midsize company executives share the recognitionthat heads of large corporations frequently profess,which is that business objectives must dictate how IT isdeployed and used. Nearly three-quarters of oursurvey group (82% in the US) maintain that theyintegrate IT strategy closely with overall businessstrategy. And in 63% of firms in the survey, the CEO ormanaging director takes direct responsibility for majorIT decisions. This suggests that, at most midsizemanufacturers, the CEO is on hand to ensure that ITstrategy is adequately aligned with the businessobjectives.

    Where IT will make a differenceThere are three key areas where midsize discretemanufacturers believe technology can help them scaleup their operations successfully.

    Customer relationships. With the help of IT,smaller companies may be able to improve their levelof customer service and response time, even as the

    The IT opportunity

    What are likely to be the main drivers of IT investment in your company over the next three years? Top responses (% respondents)

    Need to accommodate growth of the business

    Pressures on operating efficiency

    Inadequacy or obsolescence of current IT systems

    Need to support company's competitiveness in global markets

    Need to create or maintain ability to innovate continuously

    Need to support company's competitiveness vis--vis larger firms

    Increasing concerns about information security

    Need to enable adaptation of business model

    Increasing regulatory and reporting requirements

    Mandates by key customers or suppliers(eg, on business processes, reporting standards)

    Other

    46

    43

    38

    32

    22

    22

    21

    20

    17

    15

    4

    Source: Economist Intelligence Unit

  • The Economist Intelligence Unit 2006 11

    Thinking bigMidsize discrete manufacturing firms and the challenges of growth

    customer base expands. Tools such as data analyticsenable companies to develop better insights intocustomer preferences and behaviour, and customerrelationship management (CRM) systems can helpentrench consistently high standards of service. Some60% of discrete manufacturing respondents believethat IT is critical to their ability to improve customerrelationships.

    Supplier and partner interaction. The supply chainis part of the guts of any manufacturing firmsoperation, and a focus of where companies are seekinggreater cost-efficiencies as well as speed. It notsurprising, then, that two-thirds of surveyedexecutives view IT as critical to their firms ability tointeract with suppliers and partners more effectively.

    Automating the supply chain has helped apparelproducer Alexandra to reverse its fortunes over thepast decade. According to Mr Budd, a new globalprocurement system linking its overseas partners andits factories was put in place while the company was

    paying down its debt. The new IT systems have made itpossible, says Mr Budd, to ensure continuousavailability of stock. And by giving customer serviceagents visibility of stock levels, they have also had apositive impact on customer relationships.

    Innovation. Our survey respondents are alsoenthusiastic on ITs potential to enhance theinnovation process. Fully 67% believe that IT is criticalto their firms ability to innovate continuously. Theywill use technology to improve product design and tocompress the product development cycle. Knowledgemanagement applications will also play a role: forexample, information captured from customers andbusiness partners can help midsize companies todetermine where, for example, product enhancementsare most needed.

    No panaceaThis does not mean that discrete manufacturers willembark on a new IT spending spree. Too many recall

    Share of respondents agreeing with the following statements about the role of IT in their company. Top responses (% respondents)

    IT is critical to our ability to grow

    IT is critical to our ability to retain operational flexibility amid growth

    IT strategy is closely aligned with business strategy

    6762

    7471

    7372

    7973

    7370

    7782

    Global Europe APAC US

    Source: Economist Intelligence Unit

    Share of respondents agreeing with the following statements about the role of IT in their company. Top responses (% respondents)

    IT is critical to our ability to improve customer relationships

    IT is critical to our ability to interact with suppliers and partners more effectively

    IT is critical to our ability to innovate continuously

    6053

    6867

    6864

    7290

    6764

    7373

    Global Europe APAC US

    Source: Economist Intelligence Unit

  • 12 The Economist Intelligence Unit 2006

    Thinking bigMidsize discrete manufacturing firms and the challenges of growth

    the excesses of the technology boom years and thedisappointment in IT that followed. For one thing, costwill restrain the new investment of many midsizefirms, notwithstanding the steady decline ofequipment and software prices. The limited IT budgetstypical of small and midsize firms, and fierce internalcompetition for funds, also mean that other businesspriorities will often take precedence over ITinvestments.

    Moreover, technology is only as good as the peoplewho manage and use it. A large share of our surveygroup (28%) say that a lack of adequate IT skillsamong employees will hamper investment. Moreimportantly, the ineffective use of technology willlimit the impact of new systems that are deployed.

    Regardless of region, management discussionalways comes back to the issue of skills and talent.Says Mr Black of Wavecom: What is most hard to do isattract bright young people with the courage to dothings that are extraordinary.

    What are likely to be the main impediments to IT investment in your company over the next three years? Top responses (% respondents)

    Cost of new systems and implementation

    Other business priorities take precedence

    Lack of employee technical skills to use technology

    Lack of understanding of/confidence in technology benefitsby senior management

    Technical shortcomings in IT systems and infrastructure

    Employee resistance to change

    Ineffective management of IT

    Need to amortise existing technology investments

    Risk of business disruption from a failed IT project

    Other

    67

    37

    28

    23

    23

    23

    23

    22

    14

    6

    Source: Economist Intelligence Unit

    HiEnergy

    HiEnergy Technologies, a midsizemanufacturer based in the United States,developed and manufactures a chemical-based bomb detection system. The companydeveloped its technology through severalyears of research and testing, undercontracts sponsored by the US Departmentof Defense and the US Customs Service, aswell as by private funding.

    The cost of technology is a challenging

    one for companies like HiEnergy growingout of the scientific research community,according to firms founder and CEO,Bogdan Maglich. The neutron generatorsthat HiEnergy uses carry a high price tag,and the firm has to use university-levelresearch devices at a commercial level. In auniversity, if [the systems] fail you stop andwait for repair, says Mr Maglich. We cantafford to do that. His company has tooperate 24 hours a day without failures, soeven laptops are hardened for performance.

    Funding technology or other investmentis another challenge for midsize companies,believes Mr Maglich. A midsize company

    does not always have the resources foroutreach to the investment community. Asan innovative midsize company, says MrMaglich, HiEnergy is caught between theventure capital situation where risk istolerated, and that of the large publiccompany that can self-fund research. By thesame token, however, big companies do nothave the flexibility to innovate so easily,nor the same instinct for innovation. Thereality, according to Mr Maglich, is that95% of US inventions come from smallercompanies. Smaller organisations canmake decisions that are not possible in alarge company, he notes.

  • The Economist Intelligence Unit 2006 13

    Thinking bigMidsize discrete manufacturing firms and the challenges of growth

    It sometimes seems that the forces of globalisationbuffet manufacturing firms as much as they helpthem. Heightened competition from low-costmarket entrants is generating relentless downwardpressure on their prices, and ultimately their margins.Meanwhile, consolidation is producing larger andmore powerful competitors, as well as more powerfuland demanding customers. Midsize manufacturers willthus have to fight that much harder for their survival,and without much hope of government assistance thattheir smaller brethren often enjoy.

    The challenge for midsize discrete manufacturersas for all midsize firmsis to grow while retaining theadvantages of smaller scale that they enjoy over largerivals, namely speed, flexibility and customerintimacy. If used effectively, IT will help them toachieve this balance. But the effectiveness of IT isdown first and foremost to people. The ability ofmanufacturers to hire, train and retain skilledmanagers and staff will do much to determine theirfuture growth prospects.

    Conclusion

  • 14 The Economist Intelligence Unit 2006

    Appendix: Survey resultsThinking bigMidsize discrete manufacturing firms and the challenges of growth

    From October 2005 to January 2006, the EconomistIntelligence Unit conducted a survey of 961 executivesof midsize discrete manufacturing firms from 18countries in Europe, Asia-Pacific and the Americas. Oursincere thanks go to all who took part in the survey.

    Please note that not all answers add up to 100%,because of rounding or because respondents were ableto provide multiple answers to some questions.

    What is your firms ownership status? Select all that apply.(% respondents)

    Privately owned 63

    Publicly traded 27

    Joint-venture ownership 7

    50% or more state-owned 7

    In which region are you personally based?(% respondents)

    Asia-Pacific

    Western Europe

    Latin America

    North America

    CIS (Commonwealth of Independent States)

    Eastern Europe

    43

    13

    5

    5

    1

    33

    Which of the following titles best describes your job?(% respondents)

    Head of department

    Manager

    CFO/Treasurer/Comptroller

    Other, please specify

    CEO/COO/President/Managing director

    Other C-level executive

    CIO/Technology director

    Head of business unit

    SVP/VP/Director

    Board member

    Owner

    18

    16

    14

    12

    11

    8

    7

    6

    3

    3

    3

    In which sector does your organisation belong?(% respondents)

    Engineering and machinery manufacturing

    Electronics and electrical equipment manufacturing

    Automotive

    Durable goods manufacturing

    Telecommunications and IT equipment manufacturing

    Aerospace and defence

    30

    23

    20

    14

    8

    6

  • The Economist Intelligence Unit 2006 15

    Appendix: Survey resultsThinking big

    Midsize discrete manufacturing firms and the challenges of growth

    What is your companys annual turnover in US dollars?(% respondents)

    Under $10m

    $10m to $20m

    $20m to $40m

    $40m to $50m

    $50m to $100m

    $100m to $200m

    $200m to $300m

    $300m to $500m

    $500m to $600m

    $600m to $700m

    $700m to $1bn

    More than $1bn

    3

    4

    25

    9

    11

    2

    20

    0

    15

    8

    3

    2

    What are your main functional roles? Select up to three.(% respondents)

    General management

    Finance

    Marketing and sales

    Strategy and business development

    IT

    Operations and production

    Customer service

    Human resources

    Information and research

    Procurement

    R&D

    Other, please specify

    Supply-chain management

    Risk

    Legal

    28

    26

    20

    19

    15

    14

    11

    9

    7

    6

    6

    7

    4

    3

    5

    Please characterise the primary type of growth strategy that your company will pursue over the next three years.(% respondents)

    Organic growth via the use of wholly owned resources

    Organic growth via a network of third parties for production and distribution

    Mergers and acquisitions (M&A)

    Other, please specify

    Joint ventures

    Organic growth involving a public offering of equity

    43

    20

    14

    9

    8

    6

    In your company, what is viewed as the single most important measure of growth? Select one only.(% respondents)

    Growth of total revenue 30

    Growth of market share 19

    Growth of profit 37

    Growth in number of customers 8

    Growth in number of employees 1

    Growth in number of geographic markets reached 6

    What are the most important ways in which your company will implement its growth strategy over the next three years? Select up to three.(% respondents)

    Cost reduction through improvement of operating efficiency

    Expansion of the customer base

    Diversification of product/service portfolio

    Tapping new geographic markets

    Further penetration of existing customer accounts

    Establishment/expansion of distributor network

    More aggressive pricing

    Establishment/expansion of marketing alliances with third parties

    Outsourcing of production to third parties

    Establishment/expansion of licensing or franchising agreements

    Other

    64

    42

    39

    36

    33

    14

    13

    12

    11

    5

    4

  • 16 The Economist Intelligence Unit 2006

    Appendix: Survey resultsThinking bigMidsize discrete manufacturing firms and the challenges of growth

    Please indicate whether you agree with the following statements about your companys size and growth.(% respondents)

    Owners and senior management have identified an optimal rate of growth for our company 66 22 13

    Owners and senior management have identified an optimal size (in revenue or other terms) for our company 62 24 14

    Agree Disagree Dont know

    What do you believe will be the most serious impediments to growth in your key markets over the next three years? Select up to three.(% respondents)

    Downward pressure on prices

    Rising cost of raw materials and services

    Market saturation

    High labour costs vis--vis competitors in other countries

    Shortage of talented staff

    Consolidation among competitors

    Tight availability of financing

    Customer-driven mandates(eg, on product standards, business processes, reporting standards)

    Consolidation among customers

    Increased regulatory pressures

    Other, please specify

    58

    49

    32

    30

    27

    18

    15

    12

    11

    9

    5

    What types of firms are likely to pose the main competitive threat to your company over the next three years? Select one only.(% respondents)

    Existing players in our market(s) larger than us in size 41

    Existing players in our market(s) smaller or equivalent to us in size 30

    New entrants to our market(s) larger than us in size 15

    New entrants to our market(s) smaller or equivalent to us in size 14

    Competitors from which country are likely to present the biggest threat to your company in your existing market(s)? Select one only.(% respondents)

    China

    United States of America

    Germany

    Japan

    Italy

    Korea (South)

    France

    India

    Brazil

    Other

    34

    14

    9

    7

    3

    3

    3

    3

    3

    20

  • The Economist Intelligence Unit 2006 17

    Appendix: Survey resultsThinking big

    Midsize discrete manufacturing firms and the challenges of growth

    To what extent does your company enjoy the following types of competitive advantage vis--vis firms of different sizes?(% respondents)

    Higher quality of products/services 33 31 36

    Deeper product/service specialisation 35 32 33

    Deeper customer relationships 39 27 33

    Deeper supplier relationships 29 38 33

    Better ability to execute changes in strategy quickly 47 26 27

    Better pricing flexibility 42 29 29

    Lower cost of inputs and/or operations 34 34 32

    Deeper knowledge of local market conditions 35 32 33

    Ability to innovate continuously 33 32 35

    Better ability to enter new geographic markets quickly 23 43 34

    Vis--vis Vis--vis Vis--vis larger firms smaller firms firms of the same size

    To what extent will large customers come to dictate the following aspects of your companys operations over the next three years?(% respondents)

    Pricing of our products/services 49 41 10

    Deployment of staff 17 38 45

    Financial reporting 14 35 52

    Product standards 41 40 19

    Technology standards/systems 37 43 20

    Business processes 22 49 29

    Terms of delivery 46 38 16

    Substantially Somewhat Not at all

    Please indicate whether you agree with the following statements about the role of information technology (IT) in your company.(% respondents)

    IT strategy is closely integrated with business strategy 73 21 6

    Achieving competitive advantage is dependent on IT 56 34 9

    IT is critical to our ability to grow 67 25 8

    IT is critical to our ability to attain or retain flexibility of operation while continuing to grow 73 18 9

    IT is critical to our ability to improve customer relationships 60 30 10

    IT is critical to our ability to interact with suppliers and partners more effectively 68 24 8

    IT is critical to our ability to innovate continuously 67 24 9

    Agree Disagree Dont know

    In your view, which of the following attributes is most likely to erode as your company expands in size? Select up to three.(% respondents)

    Ability to execute changes in strategy quickly

    Deep customer relationships

    Pricing flexibility

    Low cost of inputs and/or operations

    High quality of products/services

    Ability to innovate continuously

    Deep product/service specialisation

    Intimate knowledge of local market conditions

    Ability to enter new geographic markets quickly

    Deep supplier relationships

    Other

    46

    34

    32

    25

    23

    22

    21

    17

    13

    12

    6

  • 18 The Economist Intelligence Unit 2006

    Appendix: Survey resultsThinking bigMidsize discrete manufacturing firms and the challenges of growth

    How would you characterise the risk of your company becoming, over the next three years, overly dependent on a few large customers or suppliers?(% respondents)

    A few large customers, for revenue 21 40 28 11

    A few large suppliers, for key inputs 17 40 35 9

    High risk Medium risk Low risk Were already overly dependent

    What are likely to be the main drivers of IT investment in your company over the next three years? Select up to three.(% respondents)

    Need to accommodate growth of the business

    Pressures on operating efficiency

    Inadequacy or obsolescence of current IT systems

    Need to support company's competitiveness in global markets

    Need to create or maintain ability to innovate continuously

    Need to support company's competitiveness vis--vis larger firms

    Increasing concerns about information security

    Need to enable adaptation of business model

    Increasing regulatory and reporting requirements

    Mandates by key customers or suppliers(eg, on business processes, reporting standards)

    Other

    46

    43

    38

    32

    22

    22

    21

    20

    17

    15

    4

    Please indicate whether your companys current IT infrastructure and systems meet business requirements in the following areas.(% respondents)

    Scaling up to accommodate growth of business 60 30 10

    Conforming to business process requirements set by customers or suppliers 64 26 10

    Conforming to government-mandated reporting and other standards 70 15 15

    Meet requirements Do not meet requirements Dont know

    How influential are the following executives in key decisions your company makes on IT?(% respondents)

    Owner/board members 54 28 14 5

    Chief executive/managing director 63 25 7 5

    CIO/CTO 44 34 11 12

    CFO 35 42 14 9

    IT manager 40 39 11 9

    Line-of-business managers 18 51 22 9

    Very influential Somewhat influential Not influential Dont know

    To whom does your company typically turn for external assistance on IT matters? Select all that apply.(% respondents)

    IT consulting firm/value-added reseller

    IT specialist with supplier(s)

    Software/hardware/telecommunications equipment vendor

    Management consultant

    Accountant

    Industry analyst

    Legal counsel/solicitor

    Other

    57

    44

    42

    21

    10

    9

    8

    9

  • The Economist Intelligence Unit 2006 19

    Appendix: Survey resultsThinking big

    Midsize discrete manufacturing firms and the challenges of growth

    In your view, what will be the most effective ways that government can help mid-size companies grow over the next three years? Select up to three.(% respondents)

    Offer more favourable tax incentives for investment

    Reduce red tape (procedures for approvals, licenses, etc.)

    Develop more innovative financing support mechanisms

    Introduce more flexible labour laws

    Provide better information about foreign market conditions and opportunities

    Expand export credit schemes

    Negotiate favourable trade agreements

    Invest directly in companies

    Other

    63

    50

    45

    33

    32

    23

    22

    9

    5

    What are likely to be the main impediments to IT investment in your company over the next three years? Select up to three.(% respondents)

    Cost of new systems and implementation

    Other business priorities take precedence

    Lack of employee technical skills to use technology

    Lack of understanding of/confidence in technology benefitsby senior management

    Technical shortcomings in IT systems and infrastructure

    Employee resistance to change

    Ineffective management of IT

    Need to amortise existing technology investments

    Risk of business disruption from a failed IT project

    Other

    67

    37

    28

    23

    23

    23

    23

    22

    14

    6

  • Whilst every effort has been taken to verify theaccuracy of this information, neither TheEconomist Intelligence Unit Ltd. nor the sponsorof this report can accept any responsibility orliability for reliance by any person on this whitepaper or any of the information, opinions orconclusions set out in the white paper.

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