Manufacturers seeking long-term growth should look beyond short-term savings.

The growth of manufacturing companies will be dependent on innovation in the long term. Economists and politicians across the West agree that innovation is vital to secure competitiveness and see off the threat from low-cost countries.

This is borne out by recent research by PA Consulting (PA) that showed that nearly three quarters of the top-performing companies in the automotive, process industry, food and beverage, fast-moving consumer goods, and engineering/conglomerates sectors have adopted an innovation programme as a key strategic initiative.

Additional research by PA confirms the link between innovation and the ability to create shareholder value. This research showed that the companies that created the highest value were those that developed an innovation strategy focusing on areas that added value as well as variety.

They generated 9.9 per cent higher total shareholder return than their peers. Additional surveys by Fortune magazine and Harvard Business Review have supported these findings. They found that innovative companies not only have healthier growth rates but also deliver twice as much total shareholder return as the industry average.

However, as they seek the rewards of innovation, managers in manufacturing face an increasing threat from low-cost countries that offer growing labour skills and improving technology.

Although business executives acknowledge the long-term benefits of innovation, they are caught by the need to cut costs in the short term.

For example, VW has implemented "Four Motion" to save €3.1 billion; BMW has announced cost-reduction initiatives of several hundred million euro to offset the impact of raw material cost increases and currency movements; and GM has asked Opel in Germany to lay off 12,000 people to stay competitive.

Although there are many corporate-led initiatives, companies do not have the funds available to carry them out. Moreover, urgent short-term cost cutting and performance improvement projects divert companies from building successful innovation pipelines.

So how can business leaders overcome this dilemma?

PA's analysis of high-performing companies shows that cost reduction need not conflict with innovation. On the contrary, the two should run parallel.

Instead of traditional cost reduction, from laying off thousands of people to closing plants, successful companies conduct a balanced programme combining creative performance improvement and short- and long-term innovation projects.

PA analysed the return on equity and total shareholder return of the top 10 companies in each manufacturing sub-sector: automotive, process industry, fast-moving consumer goods, food and beverage, and general engineering. The results showed that the top companies outperformed their rivals in adopting innovation and applying creative performance improvement programmes.

Five key lessons can be taken from these successful companies:

1. Question the value of traditional cost-reduction programmes;

2. Align innovation initiatives with the company's overall strategic position;

3. Introduce creative performance improvement programmes that contribute to short-term requirements;

4. Implement short-term innovation initiatives balanced by longer-term programmes;

5. Allocate financial resources to businesses with major value.

By applying these five lessons, there need be no contradiction between cost cutting, performance improvement and innovating products, services or even entire businesses.

Successful companies have proven that the route to success is the exploitation of both sources of value-creation potential. The answer to the apparent contradiction is a strategicd programme that combines creative and smart performance improvement measurements with focused innovation initiatives.

It is entirely possible to save money on today's operations and invest prudently in tomorrow.

Colm Reilly is a consultant with PA Consulting Group.