What are manufacturers’ hoping to achieve in their businesses, how will they go about delivering these ambitions and where can a new industrial strategy play a strong supporting role in sustaining growth across the economy – these are some of the questions that our latest report, in partnership with NatWest – is seeking to answer.
We’ve been talking about industrial strategy and its components for ages (see here, here, here and here...). In preparation for a big post-referendum push – regardless of the outcome – we asked manufacturers before the vote about their ambitions to help focus minds on what the priority actions should be on the domestic policy front.
And this is what we found…
1. Ambition – there’s a lot of it about
Pre-referendum over three-quarters of the manufacturers we surveyed were planning for growth over their business plan (and yes, manufacturers have these, with 71% looking at setting strategies for the next three to five years) and a third of those were shooting for substantial growth.
2. The importance of productivity is not lost on industry
But growth in what? It’s not just economists and politicians that have been pre-occupied with productivity, the need to squeeze out on-going improvements in productivity is high on industry’s agenda with almost two-thirds having an explicit productivity goal in their growth plans. It’s about profits too, of course, and even as manufactures have seen sales growth, they’ve struggled with improvements in margins – a situation 70% are looking to reverse in the next few years.
3. How’s it going to happen a) new business models
Making progress on market share, profits and productivity won’t just happen by doing more of the same. We see many future-focused manufacturers looking at new ways to improve their competitiveness and change the ways in which they create value. New business models that are turning towards deriving fresh revenue streams from services (interesting fact: manufacturing has a trade surplus in the provision of services), focusing on whole solutions rather than just products and some early movers into the field of mass-customisation.
Some things don’t change though, and the underpinning importance of innovation is one. Two-thirds of manufacturers have already raised their game and a further 30% planning to up their efforts in the coming years.
4. How’s it going to happen b) supply chain cooperation
No manufacturer is an island. Close collaboration with customers and the supply chain is critical in building a successful growth strategy. Manufacturers are already engaging in cooperation on the design, development and production processes around their product offerings and working to improve order visibility and demand forecasting. And it’s not for nothing – companies report tangible benefits in terms of quality, delivery times and inventory management.
Many – but arguably not enough – are also engaging in more intensive collaborations on new business development, new technology uptake and more widespread adoption of lean processes.
5. How’s it going to happen c) investment in new technology
Profitable and productive manufacturers need to invest on multiple fronts. We’ve seen emphasis being given to innovation, but new technology is playing a strong supporting role. Our survey zeroed in on technology that will support manufacturers’ 4IR journey and we find that despite the aim to move into new business models, capital investment will be driven by the production agenda.
However, investment in kit with sensors and embedded data analysis, for example, could accelerate innovation efforts and increase customisation.
6. This is good, but we’re not sure it’s enough to take manufacturing through the growth frontier
Pre-referendum, there was a lot of positive intent across the manufacturing sector as companies had clear plans to help them succeed in a tough economic climate and to start making the most of new technological developments. But – there’s always a but – we still think there’s more to do to get UK manufacturing on the growth trajectory to hit some lofty ambitions over the next decade.
7. Facing down a trio of challenges
And inevitably, it’s not one thing that stands in the way of success.
Manufacturers face internal challenges – not enough of the right skills to deliver their business plan; inadequate leadership skills to manage conflicting priorities; not enough financial resources and the tricky business of getting strategy buy-in from boards and overseas parents.
They face supply chain challenges – pressure to reduce costs; difficulties collaborating with suppliers spread over large geographical distances; and not enough domestic supply chain options.
And then there’s the economic uncertainty – Brexit, eurozone financial crisis, hard landing in China etc.. (and the political ones; all the domestic issues, elections in Europe, and in the US). So plotting a course through everything that could go wrong together with investing in the right areas at the right time is no easy task.
8. And some business environment ones too
While we have to point to some of the areas where businesses could do more to collaborate with their supply chain or to develop management and leadership capability, it’s only natural that we point out some of the ways in which government policy can do better. These aren’t new issues, our blogs are full of recommendations on addressing longstanding problems and righting the inconsistent focus on international competitiveness.
9. Getting government in the same page
Industrial strategy is back on the agenda. It’s been promised by the PM, there’s a government department with industrial strategy in its name, there’s a cabinet sub-committee on it and it’s been debated in parliament (*link to blog).
What better way to get all parts of government lined up to finally conquer the hurdles to manufacturing success and be ambitious about improving our economic performance. But what should industrial strategy actually look like….
10. An industrial strategy framework
We see three main components of an industrial strategy
A clear sense of economic outcomes, with measures that ensure progress can be monitored and acted upon: It starts with clarity on the end goals – a rebalanced model of growth to deliver greater productivity and prosperity for the UK. This means more investment and exporting, with a focus on building the foundations for future competitiveness.
Cross-government agreement on the most important policy priorities, affecting all parts of the supply chain, to deliver on the agreed goals: This would send a signal to manufacturers about government priorities and keep government focused on where its actions make the biggest difference. We’ve consulted with industry and identified four main policy pillars:
Delivering a more skilled and adaptable workforce.
Building more reliable and resilient infrastructure.
Providing better support for growing businesses.
Reducing the cost of doing business in the UK.
A coherent strategy to ensure the UK is at the forefront of exploiting opportunities in new sectors, technologies and capabilities: Sticking with the structured approach to collaboration between government and industry sectors. We can build on business-government cooperation in identifying future growth opportunities. This can bring significant co-investment commitments from industry and government to developing future technologies and capabilities.
11. Putting it into action
OK – that’s just the elevator pitch, there will be more detail of this, in the report and in the coming weeks, ahead of the government’s green paper on industrial strategy.
But industrial strategy also has to produce some new policy thinking that really supports the growth ambitions that manufacturers have laid out for the year ahead. The autumn statement next month provides a good opportunity for some down payments in this respect. Again, we’ll be publishing the full details of our submission soon, but digital infrastructure, skills development, energy costs and innovation support are high on our agenda for action and should be on the government’s too.
So …. If you take one thing away from this monster blog – manufacturers’ want to grow in the UK and industrial strategy should be a power tool to ensure that Brexit doesn’t get in the way of those ambitions.