How quickly the mood can change. One year ago, U.S. manufacturers were expressing a renewed sense of confidence in the economy and in their business prospects. At that time, 70% of MA readers responding to a poll said that they expected the U.S. economy to improve at least moderately in the year ahead.
Flash forward 12 months and feelings about the economy have down-shifted noticeably. In a new, exclusive MA reader poll, confidence about the economy is still strong, but nowhere near where it was a year ago. Now, 53%, still a majority, say that they believe the economy will improve in 2006, but that's down a significant 17 points.
Why? The more recent poll, taken in October of 2005, came at a time when a confluence of negative events no doubt had altered manufacturers' feelings about the economy. Hurricane Katrina was still fresh in people's minds even as other storms were hitting the U.S. gulf coast and further threatening the already-damaged oil and gas industry. The Federal Reserve was increasing interest rates, and government deficits, influenced by the Iraq war, were continuing to mount.
It still remains to be seen what effect higher energy prices and the other factors will have on manufacturers and the nation in general in the coming winter months, but most respondents to the October poll are saying that even though confidence levels about the economy are down, they have not seen any major change in their own business prospects. When asked whether they were more confident about the state of their businesses going into 2006, the percentage of respondents answering yes, 53%, was in a dead heat with the number recorded the previous year. Similarly, the percentage saying they expected their businesses to be flat compared with 2005 grew two points to 35%, a statistically insignificant change.
These are just some of the major findings of MA's latest reader poll of the business and technology attitudes of U.S. manufacturers as the new year begins. More than 450 MA readers voiced their opinions on the U.S. economy, the state of their businesses, key business priorities, technology budgets, their spending plans on a range of technologies, the importance they place on vendor initiatives such as total cost of ownership, and, new to this year's poll, their thoughts about the important idea of business agility. The subject of agility is further explored in a series of articles which follow this story.
Topping the list of business priorities again this year is the goal of cost reduction. A solid 61% of survey respondents said that of a menu of eight business priorities put before them, cost reduction remains their predominate concern by a wide margin. The cost disadvantage U.S. manufacturers labor under in relation to competitors overseas -- 22% according to the National Association of Manufacturers -- shows no signs of abating anytime soon. Rising health care and other benefits costs, wage differentials, and expected higher energy costs, which were already experienced in the aftermath of Katrina, are among the most obvious pressures facing companies as they plan for 2006.
Within this cost-conscious context, manufacturers are nevertheless pressing ahead, as they did last year, on two related priorities: penetration of new markets and new product introductions. This year, nearly half of those surveyed, 46%, indicated that entering and establishing themselves in new markets, either by industry segment or by geography, is their highest priority after cost reduction. That 46% response was identical to last year's finding.
Closely following, at 42% of survey participants this year and down just two points from the prior year, is new product introductions. Clearly, manufacturers' ability to bring more new products to existing and additional markets with increased speed is fundamental to their feelings about their business prospects going forward. Other business priorities on which respondents indicated a heightened emphasis this year over last were regulatory compliance, which saw a 7-point jump among those saying it was a high priority for them, and global material sourcing, which edged up in the "high" category by 4 points.
Is there some correlation among the priorities of cost reduction, new market penetration, new product introductions, and global material sourcing? As manufacturers attempt to execute on these priorities, perhaps simultaneously, they continue to do so with the belief that advanced technologies are an important partner in realizing their successful execution. When asked what emerging technologies they intend to investigate in 2006, survey respondents registered significantly higher interest in such things as service-oriented architectures (SOAs) and wireless communications than they did in last year's survey. Interest in SOAs, for example, garnered 30% of the respondents this year, compared with only 12% last year.
Perhaps even more important is top management's perceptions of the value of technology. Again this year, more than a quarter of survey respondents said that top management believes that advanced technology is a strategic investment and one that clearly provides competitive advantage.
This finding, however, was essentially flat with last year's. This may be due to a variety of factors. Coming off a robust investment year in 2005 -- the MA survey for which showed that 58% were planning significant technology budget increases -- many manufacturers went ahead to replace aging systems or to automate previously under-automated or manual processes in their companies. Such activities often mean a lengthy process, both in terms of reconfiguring business processes and implementing new technologies as well as measuring and realizing bottom-line financial and competitive returns. This may partly explain the apparent flatness in manufacturers' spending plans for 2006.
Moreover, this year's survey indicates that respondents are planning technology budget increases almost equal to those indicated in the 2005 survey. Again this year, a double-digit number, 13%, said that technology budgets would increase more than 10%, statistically equal to the 14% saying so last year. Nineteen percent indicated that a 5-to-10% increase is in the offing, down slightly from the 22% last year. But when looked at cumulatively over two years -- a time period which saw a return to double-digit budget growth after several very lean years -- manufacturers are evidently making technology investments for the longer term. It should be expected that perceptions of the value of these investments would therefore require some time to crystallize.
What's also emerging from the survey -- and it is a new area of inquiry this year -- is that the business notion of agility clearly has been recognized by survey respondents, and not just in a superficial manner. When asked how significant business agility is to them, 40% of survey respondents attached a "high" priority to it for 2006. Slightly more than a majority of respondents, 53%, ranked it as a moderately important priority.
Most interestingly, though, is why and where they intend to apply the idea. Perhaps not surprising given the business environment manufacturers find themselves in, a whopping 60% of survey respondents most closely associate becoming agile with cost reduction; 54% hope it will make them more competitive.
Just as interesting is that survey participants do not seem to have identified any preferred functional area for applying agility principles. Survey results indicate an almost even distribution of emphasis on where respondents would like to become agile. From managing demand signals, to designing products, to managing the supply chain, to production and assembly operations, agility is seen as a discipline that is applicable to just about everything they do. Only the production and assembly area, for which 42% of respondents indicated a "high" degree of emphasis, tends to have somewhat more focus at this point in time.
But the Achilles heel in the finding is the technology infrastructure necessary to support and execute on agility. A scant 15% of the survey base felt that their IT infrastructures today are fully capable of supporting the requirements of an agile enterprise, while 38% indicated that they could support some aspects of what's needed. And more than one-third, 35%, said they were currently in the process of modernizing their IT infrastructures to support agility. Thirteen percent said their portfolios were substantially inadequate.
The good news is that the shortcomings are recognized. For those indicating that their infrastructure is currently inadequate to support agility, 71% said they were planning on investing to modernize it, with a solid majority, 55%, saying they would do so in 2006.
But that may be only half the battle. In fact, modernizing the IT infrastructure to support agility may be even less than half the battle, according to the survey. When asked to assess the key challenges they see in becoming agile and sustaining the discipline over time, a majority of survey respondents, 53%, indicated that implementing business process changes associated with agility is their single biggest issue.
Not far behind are the ability to collaborate with customers and partners and to access and analyze information related to agility. Both factors garnered a 45% share of respondents indicating a "high" degree of concern. Surprisingly, the lowest degree of concern was registered with a factor that has negatively affected such other disciplines as lean manufacturing: Only 36% of survey respondents said that sustaining management's focus on agility was a significant issue. But this is an area to watch closely: another 52%, the highest response on this question, indicated that management focus was of moderate concern at this point. Time will tell whether this factor becomes a serious concern for manufacturers.
Time will also tell whether the mood swing this past fall about the U.S. economy translates into a business slowdown as 2006 unfolds and results in technology budget-cutting and project deferrals. For now, manufacturers are continuing their march into the future still focused on rationalizing their technology portfolios, integrating their systems from the factory floor to the executive suite, and adopting modern information models such as service-oriented architectures and wireless communications systems.
They know that the global market demands persistence as well as resilience, two qualities that have been well honed over the decades. After all is said and done, it may very well be that these two qualities -- more than simply buying new technologies and revamping business processes -- are the real keys to business success.
Additional Charts from MA's 2006 Readers Poll:
IT's purchasing prospects
Businesses' top tech priorities
Top vendor initiatives