Innovation Increases Profitability in Georgia

March 17, 2011
Survey reports that innovation strategies were associated with the highest mean return on sales -- over 14%

While question marks still hover as the economic recovery lurches along, one thing's for sure: manufacturers of all sizes that have operations in Georgia are riding the recovery wave with a close eye on their companies' purse strings and many are looking for innovative ways to expand their horizons.

It Pays To Innovate

These days, just about every manufacturer is facing some kind of economic challenge. From cancelled products to reduced spending to legislative changes that will affect their bottom line, Georgia businesses are working hard to retain their market share.

Not surprising, the manufacturing industry is one of the sectors hit hardest by the recession. So how are manufacturers that have operations in Georgia fairing in light of the recession? Relatively speaking, the manufacturing economy in Georgia is doing as well the rest of the nation and in some cases better than comparable states. To gauge the recessionary activity of the state's manufacturers, the recent 2010 Georgia Manufacturing Survey looked at how manufacturers in the state are responding to the economic downturn. Conducted by Georgia Tech, Kennesaw State University, and the accounting firm, Habif, Arogeti & Wynne (HA&W), the survey included almost 500 regional, national and global manufacturers that have operations in Georgia.

In the bi-annual survey, respondents were asked to rank order several business strategies by degree of importance: high quality, adapting products to customer needs, low price, innovation, and quick delivery.

The survey results clearly illustrate that those manufacturers that have embraced innovation-namely taking new products and solutions to their customers-were able to sustain more growth and experience higher profits than their peers. In fact, by looking internally and making investments to enhance people, processes, and products, several of the manufacturers are now more efficient and lean in this challenging economy.

Consider this: Across all five strategies, results revealed that innovation strategies were associated with the highest mean return on sales -- over 14%. Low-price and quick delivery strategies were linked to the lowest mean return on sales at 6%. High-quality strategies brought margins in the 8% range and adapting to customer needs was associated with a 10% range.

Likewise, 51% of the manufacturers who responded to the survey introduced processes that were new to their company or significantly improved their efforts. Specifically, 42% of respondents introduced new innovations that would impact their manufacturing technologies and techniques on the shop floor. Not surprising, 59.6% of manufacturer respondents within the science industry segment introduced new processes, including technology, purchasing and accounting innovations.

Numbers aside, one thing's for sure, manufacturers with operations in Georgia are a resilient, patient, and innovative bunch. Some are finding growth opportunities by looking at other stable or growing industries such as alternative energy or medical equipment. Other manufacturers are identifying growth opportunities in new markets in the U.S. or outside our borders. And some are building and redesigning their products for use in new applications. But it's their adoption of innovative strategies-namely, product innovation, process innovation, organizational innovation, marketing innovation-that makes them stand out from the crowd.

Companies that focused on innovation were able to sustain more growth in the weak economy than their peers. Innovating new products generally enables companies to charge a premium because they're bringing something new to the market; these companies are first-movers. With the economy recovering slowly, manufacturers have time and opportunity to meet with clients, understand their needs and then innovate toward that.

Andy Lewis, vice president of RLR Industries, which manufacturers plastic components for lighting companies and headquartered in Mableton, Georgia, says that three years ago RLR exercised layoffs due to a drop in demand, but today the manufacturer is seeing signs of recovery.

Lewis says: Since the latter part of 2010, the economy and our business has somewhat turned around. In the production areas where we have been able to get back into a full schedule, we've also been able to hire. Bringing new product ideas to our customers has buoyed us, helping us stay afloat. With plastic resin increasing over 70% in the past four years as well as everything that's happened with the economy, manufacturers cannot create products the way they did before the recession and expect the same kind of profit levels."

A surprising result of the survey is that more than 80% of companies that are eligible for tax incentives aren't taking advantage of them. Why? Most manufacturers think erroneously that they don't qualify for the tax incentives or they think the incentives don't amount to much. Additionally, some manufacturers aren't educated about the tax incentive opportunities available for their company. Still other manufacturers think that the process to identify and then obtain the credits is too time intensive and difficult. What's most important, though, especially in an economic climate like today, those tax credits can make a big difference. Tax incentives are available for a variety of reasons, like training employees, investing in machinery and equipment, and hiring.

For example, a manufacturing company that's operating at a 10% margin, $100,000 in tax credits is equal to adding a million dollar in sales. That's not inconsequential. Furthermore, if manufacturers don't take advantage of state and Federal tax incentives, governments are more likely to discontinue them.

Of course, staying afloat is top of mind for most Georgia manufacturers and many are concerned that the economy will not really recover at a pace that everyone hopes. That said, the 2010 Georgia Manufacturing Survey clearly illustrates that when hard economic times hit, companies who embrace a creative, innovative spirit will thrive. In fact, the state's manufacturing industry seems to be regaining some confidence through their innovative strategies. It is hard-won confidence, coming in the trough of the recession. But it is a hint, at least, that there may be some light at the end of the tunnel.

Richard Kopelman is the partner in charge of the manufacturing practice at Habif Arogeti & Wynne LLP

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