Growing profitably and investing in capacities and research and development

Paul Boughton
A European study reveals that managers forecast a major profit boost of 12 per cent or more; short-term cost savings are over. Dr Karl-Heinz Sebastian and Sebastian Strasmann report.

European companies are forecasting double-digit profit growth in 2011. They also want to focus on long-term investments. These are among the findings of an online study conducted by Simon-Kucher & Partners among 200 managers in the construction, chemicals and base material industries in Europe. The respondents aim to improve sales while taking advantage of pricing measures; cost cuts will be kept to a minimum. Beyond this, over half of the managers plan to strengthen investments in R&D and step up their international expansion.

“The managers show that they now place more trust in long-term strategies. We won’t be seeing many snap decisions for quick profit wins,” says Sebastian Strasmann, co-author of the study and director at Simon-Kucher & Partners.

The managers have diverging opinions about the levels of profit growth: over 10 percent of the respondents foresee a profit surge of more than 20 percent in 2011. 18 percent, mostly from the building material industry, expect stagnating profits. Managers from the building technology industry are most optimistic; they plan on a 20 percent profit increase. Base material, building material and chemical sectors foresee a lower rate of 12 to 14 percent.

The profit surge, contend two-thirds of the managers, will result from sales improvements. Two-thirds of the respondents plan on boosting sales levels by expanding their products and services. Only one-third is relying on larger market shares to increase sales figures. Managers from chemical and base material companies are expecting their added profits to come from pricing measures. While over 70 per cent of the chemical and base material managers see price increases as a source of higher profits, only 40 per cent of the building material and building technology managers agree with them. "Price increases in the chemical and base material industries will translate into higher costs for industries further down the value chain, especially the construction industry. The problem for construction companies is that they haven’t fully developed a plan for higher prices to compensate for the rising costs. This could throw a major obstacle in their path toward higher profits,” warns Dr. Karl-Heinz Sebastian, head of the Chemical, Construction and Commodities Competence Center of Simon-Kucher & Partners.

Yet the construction industry respondents seem to recognize the necessity to improve sales efficiency more than their counterparts in the chemical and base material industries. 60 percent of the construction managers are focusing on sales optimization as opposed to only 30 percent of the chemical and base material respondents. “They are throwing away the opportunity to get more out of sales and cost opportunities,” comments Sebastian. The importance of classic cost reduction measures such as lower overhead costs, floating assets, and short-term liabilities is fading. Only 44 percent of the respondents continue to focus on reducing the costs of production; over half (55 percent) of building technology managers, who have also set the most ambitious profit targets, will pursue this strategy in 2011.

The managers are in agreement about where their profits will be invested: R&D, capacities, international expansion, and employee training. The main beneficiary of profits varies by industry. Base material companies (over 80 percent) plan on investing in capacities, while chemical firms will focus their extra earnings on both capacities and R&D (approx. 60 percent each). Building technology companies (approx. 65 percent) will concentrate primarily on R&D. A common position was taken by all respondents: these measures will take priority over profit distribution, debt reductions or increasing equity. The managers will invest their profits in forward-looking measures that will boost performance. Short-term withdrawals play a rather insignificant role. Sebastian Strasmann says: “Those who start paying off their debts instead of investing won’t achieve very much.”

Strasmann views the study findings as a very positive signal for developments in 2011. The strategies and measures for this year are long-term. Short-term ad hoc optimizations are becoming more seldom. All signs point toward sustainable growth. Strasmann adds, “Companies that invested in new products and services two or three years ago, despite the crisis, can already reap the benefits. This will also contribute to their bottom-line growth.”

Still, Strasmann predicts that managers will face a particular challenge in implementing their planned price hikes and in increasing and improving sales activities. His colleague Karl-Heinz Sebastian also cautions: “The economic crisis has been overcome in the minds of most managers. This is evident in their long-term plans for sustainable profits. Nevertheless, they shouldn’t be blinded by their optimism—the risks of rising and volatile raw material costs cannot be ignored.” Companies must prepare and consistently implement sufficient price increases to compensate for climbing costs. To achieve their ambitious profit targets, the managers must focus not only on tapping potential in sales efficiency, but also on the hidden risks of rising and volatile raw material costs.

Dr Karl-Heinz Sebastian is a senior partner at Simon-Kucher & Partners. He leads the Competence Center “Chemicals, Constructions and Commodities”.  Sebastian Strasmann is a director at Simon-Kucher & Partners. He leads the London branch of the Competence Center “Chemicals, Constructions and Commodities”.

For more information, visit /www.simon-kucher.com