A term has emerged in the business press to describe our current economic situation – the Reset Economy. The term, with attribution for origination typically given to Jeff Immelt of General Electric, refers to the sense that this economic recession is more than a simple business cycle correction, but is a permanent, fundamental change to how markets will operate and be influenced moving forward. To quote Mr. Immelt:
"I believe we are going through more than a cycle. The global economy, and capitalism, will be “reset” in several important ways. The interaction between government and business will change forever. In a reset economy, the government will be a regulator; and also an industry policy champion, a financier, and a key partner […] I think this environment presents an opportunity of a lifetime. We get a chance to reset the core of GE and focus on what we do best."
Perhaps the better term is the "Mulligan Economy" because no one needs a reset more than companies like GE who became embroiled in and paid for their involvement in the types of creative financing that initiated the current economic malaise. However, we agree that the inevitable economic recovery will be characterized by markets that look fundamentally different – more influenced by governments than the financial community, capitalized based on proven fundamentals rather than creative speculation, and serving discerning customers rather than impulsive buyers. The good news for GE and other industrial firms is that the "core of what they do best" – engineering, manufacturing, selling, and servicing products – will represent the most valuable capability in the new economic order.
The renewed appreciation for manufacturing firms is consistent with our predictions for 2009 which indicated that companies would seek to preserve capital while preparing for a 2010 recovery represented by markets that had undergone fundamental change. We were careful to emphasize capital preservation over cost cutting strategies and often point to the press releases and public statements related to layoffs at large manufacturing companies which specifically note that the moves were to preserve capital not to defend profitability. And the numbers for the first half of 2009 bear this out, according to the Bureau of Economic Analysis, United States businesses have cut inventories by almost $250 billion and capital expenditures by over $275 billion. Additionally, investors were flocking to safe corporate bonds which created a sellers' market that financially strong manufacturers have taken advantage of to restructure their debt, lower their cost of capital, and build cash to take advantage of opportunities in recovery.
Thin inventories, pent up demand for capital appropriations, and strong cash balances all translate to heightened economic activity in the manufacturing industry in the second half of 2009 and into 2010. What does this mean for the Information Technology buying? It doesn't mean a return to the pre-recession status quo, but to a reset for priorities, delivery mechanisms, and expectations for vendors.
We find it interesting to look at Information Technologies' impact on the current economic situation. Better information and decision support tools allowed companies to react faster to changing market conditions. Certainly, the rapid deceleration of activity and the nearly quarter of a trillion dollars in inventory reductions can be, at least in part, credited to the sophisticated systems companies have in place. Going forward manufacturing companies will have place a priority on three key investment areas:
- Cheaper (or more variable) infrastructure costs. Manufacturing companies were able to increase investment in improved organization and use of information without increasing overall IT budgets thanks largely to technologies like virtualization which allowed a more variable cost structure. One CIO told us that virtualization was a "game changer" for his organization because it gave him greater flexibility in provisioning data center resources. Going forward, growing acceptance of software as a service (SaaS) delivery models and cloud computing will take this to the next level.
- Integrated decision making. Manufacturing firms have invested heavily in the essential components of decision support – data warehousing, analytics, business intelligence, and collaboration tools. Companies will now invest to better integrate decision making. This includes better integration within a process domain (e.g. supply chain) where strategic decisions inform tactical decisions which inform operational decisions. It also includes better integration across domains such as product lifecycle decisions influencing sales and marketing decisions. Just as Enterprise Resource Planning (ERP) integrated a wide range of corporate process automation applications, integrated decision environments will unify decision support.
- Autonomic operational processes. The rise of sensors, identification, and location chips and the ability to wirelessly connect them represents an opportunity to acquire data without human intervention and facilitate the remote control of processes. These smarter operational systems will overtake the accounting centric ERP platforms as the center of a manufacturers' application portfolio.
These three areas of investment are relevant across all segments of manufacturing. IDC Manufacturing Insights recommends that companies look at the "reset" vision of company operations and how IT can align with delivering key capabilities. One thing is certain in the new reality, management will increasingly be evidenced based and information technology will no longer about just keeping score for the accountants, but about driving new operational capabilities, creating resiliency to risk, and delivering more rapid responses to shifting market conditions.
No other industry has been uprooted more in this economy than the automotive industry. What do you think its "reset" look like? Will it dictate similar IT investment strategies?