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Innovation, Not Cost, Drives Profits

May 20, 2003
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ATLANTA—Manufacturers that compete based on innovation in products and processes rather than on low cost earn higher profits and benefit from higher wages.

According to a biannual survey of Georgia manufacturers conducted by the Georgia Institute of Technology, annual wages were, on average, $10,000 higher at innovative manufacturing companies than at companies that compete on price. In addition, returns on sales were almost a full percentage point higher at innovative manufacturers than at low-cost companies.

Despite such benefits, most of Georgia manufacturers are competing based on cost rather than innovation. That is a bad sign, says Jan Youtie, one of the researchers who worked on the study. He says companies that compete on cost are vulnerable to competition from international producers, who can offer products at even lower costs. “What was disturbing in this survey is that even more of our manufacturers are competing on low price than when we last did the survey, when we were in a growth economy,“ says Youtie. “So when faced with a stressful economic situation, rather than innovating their way out, they are trying to get out of it by dropping their prices. That's not a good long-term strategy for global competition.“

The researchers define innovative companies as those that are developing new products and processes, improving current products and processes, or changing organizationally. Moreover, “innovative“ doesn't necessarily mean “high-tech.“

“There can be innovative companies in traditional sectors, such as textiles, food and apparel,“ says Philip Shapira, Ph.D., a professor of public policy at Georgia Tech. “It may be that they [find new] process and organizational methods to give themselves leverage in the marketplace in order to distinguish themselves from other companies.“

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