Research Shows What Best-in-Class Manufacturing Growth Looks Like

How does your business growth compare to your industrial peers? To help executives answer that question we captured company financial data as part of The Business Growth Report.

We then grouped the data along two dimensions.

First, the data was organized pursuant to the three business outcomes of annual revenue growth, EBITDA growth, and revenue vitality. Each of these dimensions is described below.

We then aligned survey respondents pursuant to the above outcomes. This allowed us to rank the respondents into three performance-based archetypes of Best-in-Class (the top 15%), Medians (the middle 50%) and Laggards (the lower 35%.)

So, consider the below data findings to understand what Best-in-Class manufacturing growth looks like.

1

Annual Revenue Growth

Based on the most recent three-year average, the Best in Class companies achieved an average 15.7 percent annual revenue increase. That was 4.3 times higher than the combined average of the Laggards and Medians.

Manufacturing Revenue Growth Rate

When analyzing the data, one variable stood out more than others.

We found a significant performance difference among manufacturers that apply mostly organic or inorganic growth strategies. As shown in the bar chart below, manufacturers with inorganic strategies achieved higher growth rates than their organic peers.

Manufacturing Revenue Growth Rates

For respondents with inorganic strategies, acquisitions accounted for an average of 26 percent of their annual revenue growth.

2

Annual EBITDA Growth

Also based on a three-year average, the Best-in-Class manufacturers achieved a 17.9 percent annual EBITDA growth rate. That was a staggering 430 percent higher than the combined average of Laggards and Medians.

Manufacturing Profit Growth

EBITDA margin and growth rate are top performance measures among executives and shareholders. They are also very common benchmarks to understand how an industrial company compares to industry peers.

While Generally Accepted Accounting Principles (GAAP) do not use EBITDA as a profitability measure, investors do. That's because this metric reflects a company's short-term operational efficiency. It shows investors how much of the company's earnings are attributed to operations.

The data found that the EBITDA growth rate correlated with technology effectiveness. That suggests better use of technology increases productivity, decreases business process cycles, and ultimately lowers cost of sales and SG&A expenses.

3

Vitality Index

Vitality is a standout innovation measure that has a direct impact to manufacturer company expansion and financial margins.

The vitality index is an important industry metric for two reasons.

First, it shows the effectiveness of the company's R&D. A high score validates the manufacturer is effectively using its R&D resources to develop a continuous stream of new and improved products.

Second, the data reveals that a company's vitality index score directly correlates to both revenue and EBITDA growth.

We calculated this measure as the percentage of current-year revenues attributed to new-to-market offerings launched in the past three years. The results are shown below.

Manufacturing Vitality Index

For most industrial companies, new products are no longer new after three years. Manufacturers with less than 30 percent of annual sales from new goods are likely to incur increasing commoditization and deteriorating business growth.

Creating new products or providing significant improvements to existing products will counter commoditization, create differentiation, accelerate revenue, permit price premiums, and improve margins.

The data found that the Best-in-Class industrial companies achieved a 62 percent higher vitality index than the combined average of Laggards and Medians.

How to Achieve Best-in-Class Manufacturing Growth

Now you know what Best in Class manufacturing growth looks like. The next question may be how to achieve that level of performance to grow your manufacturing company.

The research answered that question by analyzing data which measured company strategies, operational processes and technology effectiveness. That analysis identified what the Best in Class leaders do differently than their lower performing peers.

Nine initiatives stood apart. These 9 development programs are referred to as evidence-based best practices and often organized into a Manufacturing Growth Engine. They are shown below.

  1. Growth Strategy
    Do not confuse your growth strategy with your annual plan. The growth strategy is singularly focused on the actions that drive revenue improvements. It defines the optimal roadmap to achieve targeted revenue results in the shortest time and least cost.
  2. RevOps
    Only 15% of respondents reported centralized groups with enterprise-wide revenue accountability. However, 86% of that small cohort was made up of the Best in Class archetype. Also, 76% of this cohort used Revenue Operations (RevOps) as their centralized revenue management program.
  3. Technology
    The top performers used more technologies, including tools such as Configure-Price-Quote (CPQ) and IoT. However, the biggest technology-related disparity among performance archetypes was the effectiveness of their AI program. The leaders ranked AI effectiveness 37% higher than the combined average of Median and Laggards.
  4. Innovation
    The average innovation investment among all respondents was 5 to 9%. However, the average for the highest growth companies was 11 to 16%. The data also demonstrated a difference in how the innovation budget was allocated. The highest growth companies invested about 42% of their budget into transformative innovation. That was different than the lower performers who allocated the bulk for their innovation budget toward incremental improvements of existing products.
  5. Company Culture
    Respondents that cited an active and measured corporate culture as part of their expansion strategy achieved an average 36% higher revenue growth than those who did not. These companies recognize that company culture directly impacts employee engagement and productivity.
  6. Customer Affinity
    A majority of the top industrial growth companies applied a specific customer strategy to build customer affinity and measured the ROI of their program. The majority of lower performers did not. Customer relationships are particularly important as most industrial companies incur a higher percentage of growth from existing customers compared to new customer acquisitions.
  7. Performance Analytics
    The majority of leaders cited more advanced business intelligence tools and used predictive analytics about 2.5 times more than their lower performing peers.
  8. Mergers & Acquisitions
    86 percent of the top performers cited M&A as an active growth strategy. That was 47 percent more than the combined Median and Laggard cohorts.
  9. Strategic Alliances
    89 percent of the top performers actively use alliances as part of their expansion strategy. That was an overwhelming majority and 43 percent higher than the combined average of Laggards and Medians.

Manufacturing a Better Future

Successfully replicating any one of the above best practices will deliver an incremental uplift. That may be sufficient for some industrial executives.

Others may seek more significant company growth. That requires a more holistic approach, which can be achieved by replicating a mix of the evidence-based best practices.

The research was conclusive in showing that the growth leaders excelled in at least five, and on average, 7 or more of the nine best practices.

Manufacturing Best Practices

The More You Know the Faster You Grow

Most industrial companies apply cost of sale and SG&A expense benchmarks to ensure their costs are managed. However, most do not apply revenue and growth benchmarks. Mostly because they don't have them. Now you do.

Business growth recommendations without supporting data are just opinions. The 9 evidence-based best practices herein are born from field research and show what the highest growth industrial companies do differently than their peers.

When you start with these findings, learn from industry peers that have achieved success and apply their methods to repeat that performance, you eliminate guesswork and pursue the straightest and shortest route to targeted outcomes.

One more important note.

Most respondents indicated they adopted all or most of the 9 best practices. However, there is a big difference between adoption which is often a casual participation and dedication which creates expertise.

Dedication requires programs with executive sponsorship, budgeted resources, enabling technology, performance analytics and continuous process improvements. Dedication goes from being a generalist to becoming a specialist.

And when the criteria for dedicated programs were considered, the majority of the Best in Class engaged in 7 or more of the best practices.