How Engineered Products Companies Prepare for the Downturn

Roland Berger offers five strategies for ensuring flexibility and successful cycle management

Munich, Germany — December 12, 2009 — Engineered products companies suffer from two widely recognized problems: high volatility and the cyclical nature of the business. The question that companies must answer is how to manage these challenges effectively, and the current situation on the market is such that many companies need to take urgent action.

To help them in this task, Roland Berger Strategy Consultants has produced a new report based on 300 interviews with experts from the European engineered products industry. They identify the key drivers and strategies that can help companies master the next industry downturn.

The key to success: flexibility. Companies that react more quickly to changes in the market are able to stay solidly in the black even during a downturn. And the best companies actually act against the cycle, using their competitors' weaknesses to strengthen their own position.

The biggest risks in the engineered products industry remain susceptibility to industry cycles and increasing factor costs. But most of the experts interviewed in the study also recognize a number of opportunities: new customer requirements, technological shifts and changes in the structure of regional markets, for example.

"The findings show that many companies already have a strong customer orientation," says Thomas Ring, author of the reports and a partner in Roland Berger's Operations Strategy Competence Center. "At the same time, some companies seem to give up the game when it comes to adapting flexibly to industry cycles."

Identify Changes Early On

Successful companies carry out appropriate planning and scenario analyses and regularly review their risk profile. "It's what the planning system actually looks like in practice that sorts out the men from the boys, however," says Ring.

Successful companies have early warning systems based on macroeconomic and company-specific indicators, plus close observation of the competition. The best companies actually include their competitors in the scenario planning. This enables them to spot opportunities for acquisitions early on. It also helps them to recognize sales options for business segments that have a substantial risk of random fluctuations during upturns

Act Quickly

If the scenarios indicate a downturn in the market, companies should increase their level of flexibility and prepare themselves for a reduced workload. In case of emergency, they will have to act quickly. Almost all interviewees in the study considered strategic and financial levers highly significant. A particularly popular approach is to focus on one's core areas of competence — successful companies use this as a way of improving their cost structures.

On the negative side, companies often ignore good opportunities for selling off parts of the business during an upturn. They also fail to build up partnerships or make acquisitions when the industry is no longer booming. "Only the best companies view crises as an opportunity. They act against the cycle and therefore faster than the competition. In this way they improve both their standing on the market and their risk position," says Ring.

The study finds that companies use traditional methods aimed at building customer loyalty and strengthening key account management in order to stabilize revenues. These levers are critical for stabilizing cash flow during a downturn. Weaker companies also cut their sales and marketing costs across the board during a downturn. Not so successful companies: They increase their spending on sales and marketing precisely in order to maintain customer loyalty and stabilize sales, according to the research.

Keeping the cost base flexible is another underdeveloped skill for many companies. "Part of the problem is that the engineered products industry, by its very nature, requires large investments. This creates structural rigidity in terms of costs. At the same time, the value chain is highly inflexible," says Ring.

Successful companies improve their risk position by means of targeted actions, Roland Berger found. These include outsourcing, partnerships and franchise arrangements. By building flexible production networks and involving their partners closely in the value chain, successful companies incur lower costs during fluctuations in the workload. They also put themselves in a position to react more quickly to new market opportunities.

Cycle Management Is the Key to Survival

Cycle management is not an end in itself. "Companies that pull the right levers not only ensure that they can adapt quickly to altered circumstances and survive the downturn," says Ring. "They also put themselves in a position to improve their competitive position and boost profitability in a targeted way."

Best practice companies achieved EBITs of 5-7 percent during the most recent downturn. That means that they enjoyed bigger margins than their competitors in the same segment are achieving during the current boom

Five Factors for Success

On the basis of the new study and numerous consulting projects, Roland Berger Strategy Consultants identified five key factors for ensuring flexibility and successful cycle management:

  • Check your susceptibility to industry cycles — this is a strategic task.
  • Monitor external and internal indicators and keep an eye on what the competition is up to — this should form the basis for your early warning system and scenario planning.
  • Take appropriate action on costs and sales in order to strengthen your core competences and competitive position.
  • Ensure swift implementation and targeted action against the cycle — both in mergers and acquisitions and elsewhere.
  • Make flexibility a matter for top management.