Here's What You Should Expect From Your Industry This Year
Max Nisen
Knowing and adapting to big industry trends is one of the key tests for any manager. They determine shareholder expectations, and the behavior of your biggest competitors.
If you know the biggest issues, you can position yourself as a leader on the most important questions at your company.
Defense: Lower budgets and more competition
Pure defense companies are under significant pressure. Rather than be fully functioning companies, many defense businesses are "program based," depending on a few giant contracts to fuel them.
That won't work anymore, and to succeed in the future, they'll have to behave more like traditional businesses and/or expand to more commercial areas.
Healthcare: Adapting to the full implementation of Obamacare
The ACA means consumers have more choices when it comes to plans and treatments. They'll always be looking for affordability, and providers will have to learn how to meet this need without compromising quality. Once they have that affordability, marketing will come to the forefront for the industry like it never has before.
Secondly, and most importantly, cost reduction has to become a part of strategy, not a series of isolated cuts. If you don't change the whole way you do business, for example, like the Cleveland Clinic has, real, long-term cost reduction isn't possible.
More mergers and acquisitions are likely as well, but will have to be handled carefully.
It's going to be a long time, if ever, before investment banking reaches pre-crisis heights. Many banks have already taken big steps to reduce personnel and costs. That won't be enough. They're going to have to start thinking seriously about what businesses to stay in, and which ones to leave. Fees are on the decline as well.
However, after years of uncertainty, things are perking up a little bit in Europe, which could provide some interesting opportunities.
Chemical companies: Dealing with over-investment in Asia
2012 was difficult for the chemicals sector, and 2013 looks like it will be as well. They came to depend on Asia during the region's massive expansion, and aren't seeing the profits they'd become used to, now that the area's economic growth has slowed.
By focusing on key areas of expertise, sticking to growth markets like agriculture and nutrition, and divesting less profitable, complicated, or operationally difficult parts of their business (think DuPont with their automotive paint business), companies can become leaner, weather this period, and still invest where the return is the greatest.
Wealth management: New ways of interacting with clients
Despite the fact that the investment climate remains uncertain, asset prices are finally starting to recover, which offers interesting opportunities. Whether it's interacting with clients via tablet or social media, or changing the way research, information, and ideas are presented, there's opportunity to offer more value.
Additionally, more science-based advice is coming to wealthy investors, and that's an opportunity for managers to possibly increase fees based on particular areas of expertise or value that they're bringing to their customers.
Retail banks: A drag from low interest rates and regulation
The current low interest rate environment has been extremely tough on retail banks, and that effect hasn't been helped by higher capital requirements and more regulation. Both are a huge drag on profitability, and don't seem likely to change soon.
Banks will have to maximize what they get from each and every dollar, cut costs, focus on frontline sales, and have "ruthless performance management." They'll have to grind out as much profit as they can from very rocky soil.
Autos: Building on a more stable platform
After the dark days of the financial crisis, the auto industry finally has a somewhat stable platform to grow on. Still, they've been far too slow to adapt to the industry's major trends, improve fuel economy, build better electronics, establish standard platforms worldwide, and design cars that appeal to young people.
They have the technology, including lighter materials, better batteries, and more advanced electronics. They just need to start getting it to the consumer faster.
Pharma: Figuring out a long term path
Profits and and budgets have been squeezed in the industry for years, forcing staff and research cuts across the board. That has led many companies to lose focus on their long-term sustainable growth paths.
That doesn't mean the newest, fanciest technology — personalized medicine, for example — is always difficult to scale. It could be something as simple as getting out of businesses you aren't leading in, focusing on unique capabilities, and aggressively pursuing market share, even in older drugs. The one thing you can't short-change for the future is the research and product pipeline.
Industrials: Learning how to adapt faster
While North America looks like it might be a bright spot, growth elsewhere is volatile and uncertain. Industrial companies need to change their strategies to accomodate that new reality.
They can't wait for growth, but have to change now. Mostly, they need to be more flexible in what they produce and where, and to be able to adapt to changing environments in different parts of the world faster. The most successful companies will be able to improve operations with digital technology, and differentiate their offerings by doing it well.
Aircraft manufacturers: Dealing with a massive order backlog
But before they can, they've got some challenges to tackle:
The ability to pump out new planes at higher rates is already strained. The supply chain isn't up to the ramp-up that's required.
It costs far too much and takes far too long to develop and produce a new commercial aircraft. A major new project is almost a "bet the company" proposition.
Desire for fuel efficiency reduces the life cycle of the current crop of aircraft, placing more pressure on production.
If manufacturers can ramp up production, 2013 could be a great year. Falling behind could have huge financial implications.
Oil and gas: The end of easy oil and high prices
Two eras that oil companies have gotten used to are coming to an end: easy oil from accessible sources, and easy money from high prices. There's still lots of oil, but it will be harder to get at, and Booz&Co. predicts the long-term price of oil will be well below boom highs. Gas prices will be low for the foreseeable future as well.
The companies that survive these trends will be the ones that are extremely cost disciplined, and that focus on their unique areas of expertise and competitive advantage.
Telecoms: Catching up with the mobile and data explosion
The mobile and data spaces have been among the most rapidly changing in the world. To keep up and make more money off of that, the telecom industry has to change as well. Data traffic has absolutely exploded as people buy and use tablets and smartphones.
The industry needs to get ahead and bring mobile networks up to the standard of fixed line networks, or watch more of their business be captured by internet players. Charging more for limited, existing networks based on higher demand isn't going to be a successful strategy in the long run.
Utilities: Seizing an opportunity to make historic upgrades
Hurricane Sandy put our infrastructure and utilities in the spotlight like almost nothing else could. The economic conditions are bringing government and media scrutiny. But it's also an opportunity, Booz's report says:
"Fortunately, these challenges come at a time of historic opportunity for the industry. During the past few years, an unprecedented convergence of low costs of capital and pent-up infrastructure demand easing rate pressures have created ideal conditions for building the electric and gas utilities of the future."
These aren't investments for tomorrow, they're investments for the next 50 years, and there won't be a better time to make them.
