As manufacturers nurse their wounds after the worst recession since the 1930s, many are taking a long, hard look at their business models and making some changes. For many companies, this has meant increasing the proportion of revenue generated by non-traditional activities such as service provision. For others, the soul-searching has prompted a move from high-volume goods to high-value products.

Although some of this was going on before the global financial crisis hit, the downturn has forced manufacturers to step up their flight to value. With orders shrinking and the crisis threatening the security of supply chains, many companies had to rein in their ambitions and focus more narrowly. At the same time, cost-conscious industrial customers started to demand better value for money, such as including post-purchase maintenance servicing as part of the deal.

Whether prompted by a fight for survival or a desire to get ahead of the competition, high-value (or value-added) manufacturing is proving an increasingly popular business model for manufacturers. This means different things to different companies—from speed of delivery, high-end products or unique production processes to highly customised packages and environmentally sustainable product lines. What is clear, however, is that organisations once primarily engaged in making products are now also researchers, designers, services providers—and even retailers. As they look to increase revenue streams and emerge from recession in a stronger position, manufacturers are redefining themselves as they evolve from being makers of boxed products to sophisticated providers of "solutions".

This report looks at the strategies companies are embracing as they battle to win market share and how, in the process, they are starting to question the very notion of what it means to be a manufacturer. The key findings from this research are highlighted below.
Manufacturers appear to be optimistic about business prospects. Some 61% of respondents to our survey describe their business outlook as good, and that they expect things to continue to improve. Over one-half (54%) are optimistic that the same applies to their sector. This optimism bears out at a macroeconomic level: in the first quarter of this year, world trade rose sharply as business inventories were restocked and confidence picked up again. This is in sharp contrast to a year ago, when barely one-third of manufacturers anticipated an upturn in business within the next year, amidst a general collapse in trade globally.

The recession has intensified efforts to target the high ground. In an ongoing flight from volume to value, a growing number of manufacturers are changing their business models to target higher-value products, deliver more customised offerings or bundle in additional services. Such a shift usually requires a greater focus on innovation and more highly skilled workers—and both of these trends are in evidence. Despite the tough conditions, a high proportion of manufacturers (40%) invested in research and development (R&D) for product and process innovation over the last 12 months, while one in five (19%) took on board additional highly skilled engineers and other workers.

Manufacturers are rethinking their supply chains. Alongside this shift towards value-added manufacturing, firms are also rethinking their supply chains. Toyota's fall from grace over quality concerns has raised question marks about the once-heralded "lean" manufacturing approach. Others are considering suppliers nearer to home, especially as oil prices and related transport costs rise, while many are cutting back on their supply chains. Almost one-half (48%) of executives say they are looking to shorten or simplify their supply chains. Many are simply looking to bring previously outsourced processes back in-house. Regardless of the approach taken, suppliers are being squeezed on costs: more than one-half (53%) of respondents say that they will be looking to form partnerships with cheaper suppliers.

Cost concerns continue to loom large. Steel, iron ore and copper are just some of the raw commodities, crucial to many manufacturers, that have been rising in cost as the global economy rebounds. A year ago,as credit dried up and banks sought to avoid risk, manufacturers worried most about a lack of access to capital. But as the economy has improved, raw material costs are back at the top of the agenda, along with transport costs. More than one-half (55%) of manufacturers polled cite rising materials costs as a primary risk, while one in five (22%) cite transport costs as well. Pressure to keep prices low (34%), as well as increased competition and currency fluctuations (both 32%), are other key risks.

Firms are reliant on their cash flow and bank loans for working capital. By far the most common mechanism for funding operations is existing cash flow. However, 38% rely on bank loans, which may be a risky strategy in view of the fact that bank financing is likely to be restricted, at least in the UK and Europe, according to Economist Intelligence Unit expectations. Only a few (4%) rely on government subsidies, but more than one-half (57%) of respondents say that government support for firms in the market in which they operate has been either crucial or somewhat important in the last year.

The environment is rising up the agenda. Also supporting the notion that there is a flight to value is the finding that more than two-thirds of manufacturers (67%) have already embarked on developing "green" products or services, or plan to do so. This proportion rises to about nine in ten among companies in the electrical equipment and appliances sector, as well as the textiles sector, driven in part by rising legislative pressure to recycle products and reduce the use of toxic chemicals. This shift towards greener products and services will also add to the need for greater innovation within firms—as well as collaborations with new partners. In addition, the environmental agenda, whether driven by sustainability initiatives or simple cost concerns, is also improving internal processes: 43% of companies plan to cut their energy consumption in the years ahead.