Recommended Manufacturing Expansion Strategies (And Economic Gardening Can Help!)

A new Price Waterhouse Cooper (PWC) article provides sound advice on expansion strategies manufacturers should consider at this point in time. I think this is sound advice for Ashtabula County manufacturers as well.

According to PWC, the manufacturing sector has seen a burst of M&A activity over the past several years. More than 1,900 deals were completed in 2013 in the United States alone, for a total of almost US$70 billion, and 2014 will likely reach similar levels. Deal valuations, too, were sky-high, averaging 11.7 times EBITDA in 2013. And that doesn’t count the number of proposed acquisitions that were rejected by sellers seeking even higher multiples. We expect M&A transactions to increase markedly, given how cash-rich the sector is as a whole.

Industrial firms are already bulking up their corporate development staffs to take advantage of all the activity. Whether their expansion strategies and operational capabilities are tightly aligned with the nature of the markets they may be hoping to enter, however, is a different story. Diversification merely for its own sake is not a winning strategy (strategy+business), and the list of companies that have found themselves adrift and losing money in unfamiliar markets is long.

Indeed, in many cases, consolidation is the best route to expansion for industrial companies, because it involves zeroing in and doubling down on what they do best and on what differentiates them from their competitors. For this strategy to succeed, however, companies must concentrate fully on those capabilities and products that distinguish them in their chosen markets, while minimizing their investments in other activities.

A firm focused on small-batch, high-performance materials products, for example, would do better to consider buying or merging with firms that similarly have strong research and development capabilities and the ability to price competitively; both of those factors can make the most of the intrinsic high gross margins in their sector.

Deals that might help such a firm build a supply chain cost reduction capability that saves mere pennies would likely destroy firm value. For high-volume, large-batch manufacturers supplying stable long-term contracts, the reverse is true. But those in the middle must think carefully about how and where to invest, because if they make the wrong bet, they are unlikely to survive.

Moreover, industrial firms should be more aggressive in adopting new methods for reaching out and understanding new markets or targeting specific customers (for example, OEMs) and their product sets; these methods include rich information accessible through market research tools such as online surveys and social media. When combined with input from industry experts and deep research into the sector, these tools can help create a mosaic of insights into unknown markets for different products, different customer bases, and new territories.

Read the full PWC article.

AND THIS IS EXACTLY WHAT ECONOMIC GARDENING IN MANUFACTURING WILL DO! What is economic gardening? Economic gardening is an entrepreneurial approach to economic development that seeks to grow the local economy from within. Its premise is that local Stage 2 companies that bring new wealth and economic growth to a region in the form of jobs, increased revenues, and a vibrant local business sector. Stage 2 companies have 10-50 employees, 1-10 million in sales, and they have been in business 3-5 years.

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