Mastering Growth Strategy Through Boom or Bust with ITR Economics
Dorn recently hosted a presentation featuring ITR Economics analyst Taylor St. Germain. As a member of ITR’s Leading Indicator team Taylor contributes to the firm’s legendary 94.7% forecast accuracy rating. He shared manufacturing sector trends and what to expect into the early 2020s. Dorn’s J Schneider was also on hand to share actionable strategies you can use to optimize for growth during times of Accelerating Growth, Slowing Growth, Recession, or Recovery phase.
You will take away from this webinar:
- Clear, practical, and accountable tactics for shifting your growth strategy with industry trends.
- Tools that will help leverage your own company data for improved decision making.
- Actionable strategies to sustain and increase growth in any business cycle phase.
Sign-Up To Watch Now:
Dan Roglin: Good afternoon, welcome to the Mastering Growth Strategy Through Boom or Bust webinar. My name is Dan Roglin, I’m a VP of strategy here at Dorn. Our presenters today are, Taylor St. Germain from ITR Economics. Taylor will share manufacturing sector trends and discuss how to tell when your company has shifted to an accelerated growth, a slowing growth, a recession or recovery phase. J Scheider is from Dorn. J will share actual strategies you can use to optimize for growth during each of the four phases. Feel free to post questions, we’ll try to get them as we go probably at the end of each person’s section. There will be a recording available so look for an email next week with the links to that. So let’s get started, Taylor, do you want to jump in now?
Taylor St. Germain: Yes, thank you very much I appreciate it and certainly thank you for having me here. Welcome everyone, my name is Taylor St. Germain, I’m an analyst at ITR Economics. We’ll be talking about this uncertain economy that we’ve inherited here today. So right now we’re at the peak of the business cycle in the economy, and we’re going to start slowing down throughout these next few quarters, but it’s not the end of the world. We’re not expecting to see any major economic events, but it’s still worth noting and preparing for in our businesses, so that’s my goal today is to change this title from managing in an uncertain economy to hopefully managing in a certain economy by the end of today. So what we’ll be discussing today, we’ll be taking a look at some different trends that are impacting the US economy. I’ll give you our expectations for the upcoming business cycle both in terms of GDP and industrial production, so we’ll see where the US is headed. I’ll give you an update on our perspective on tariffs and trade that’s certainly a big action item out there that we’re all concerned about, so I’ll give you an update there.
And then we’ll look at some more indicators and leading indicators that are specific to the industry looking at manufacturing B2B activity, and finally we’ll finish up with some employment trends that we should be keeping in the back of our minds and as we move throughout this year. So that’s the plan for today please type in any questions I’ll answer as many as I can at end of my session. Before we get going, I did just want to show you our report card for ITR Economics. Every time you hear a presenter or speaker at ITR Economics, you will see this slide, so this is just our forecast accuracy through 2018, major series we forecast is down the left-hand column. The duration in months is this middle column, so that’s how long our forecast has been put in place without changing, and then finally our accuracy is down the right-hand column. Again, this is not just a means of us bragging, but to establish credibility with all of you that the information I’m sharing with you today, you can hold that with a high degree of confidence even one or two years in the future.
So just to start I did want to give you an idea of how we develop our leading indicators here at ITR Economics. We leverage our leading indicators in business cycle theory to give us an idea of where we’re headed as an overall economy, and this is an example of how we develop that methodology. So what you’re looking out in the screen is the orange line is one of our ITR leading indicators, our proprietary leading indicators we’ve created to give us an idea of where we’re headed as an overall economy. The blue line is us industrial production so our benchmark for the industrial economy, and I want you to notice that this orange leading indicator tends to go through these low points and high points before we see it in the overall economy. So we can determine that there is a lead time in this orange line compared to the overall economy. So what that allows us to do is then offset the graph to line up those high and low points giving us a nice high correlation and then giving us a degree of confidence in the future where we’ll be headed based on what’s a leading indicator is telling us.
So we leverage this leading indicator methodology to find evidence for the forecast that we put in place, and I’ll share a lot of these leading indicators with you today. So we’ll jump right into the expectation for the overall economy first. I want to give everyone an idea of where we’re at from a global perspective, this will be important as we tie this in with our tariffs conversation that’s coming right after this slide. But I just wanted to give you an idea of where we’re at. This is world industrial production that’s what you’re looking at on the chart, so it’s a benchmark for the global industrial economy, and you’re looking at the year-over-year growth rate, that’s that solid blue line you see on the screen. Our forecast for world industrial production is represented by these markers over the next 12 quarters through 2021. So the immediate takeaway you can see here is we are in a very clear slowing growth trend when we look at the global economy. So we have passed through the peak and that rate of growth is now slowing down compared to where we were in 2018, and we expect that to continue for the next five to six quarters.
Now we don’t expect this rate of change to fall below zero like we saw in 2008-2009, so no major global recession expected, but certainly a slowdown that’s worth noting and taking into consideration in our business, so the global economy is slowing down. And it’s important to note that because the US economy is still up here at the top of the business cycle, so the US economy is outperforming the rest of the world, but the world will be a headwind for us as we move through the remainder of this year. Now just like on the previous slide I want to show you some leading indicators that support this forecast that we have in place. I not only want to share the forecast with you, but share some of our evidence behind those forecasts, so you have some more confidence in the information I’m providing you today. So the first indicator here is the OECD leading indicator all 34 countries in the OECD are included in this indicator. It has a 12 month leading relationship as you can see here, it overlaps with our forecasts for the next 4 quarters, and it’s right in line with the trajectory that we’re expecting, so supporting the slowdown in the global economy.
The second indicator we look at for the global economy is crude oil prices, so this is West Texas Intermediate pricing, and you can see that rate of change has been slowing down throughout this year, and we expect that to continue. Now for those of you out there that are interested in that oil price we still do expect the price to remain between the mid 50 and mid 60 level, and that’s in line with most economists here in the US, but the rate of change compared to last year is starting to slow down. And then finally the last indicator here is the JP Morgan global manufacturing indicator, a very important indicator for the global economy. 86% of all manufacturing output in the world is captured in this economy, so this is capturing the activity that’s going on in India, in China, and some of those other major countries around the world and some of our major trading partners, and that is trending downward in support of this slowing forecast that we have, so do expect the global economy to be a headwind for the US moving forward, which I think ties in nicely with our tariff conversation here.
And this chart here is illustrating where we’re at from a tariff perspective. So the column on the left is tariffs the United States has put in place against countries around the world, of course specifically China, and then the column on the right is reciprocal tariffs that countries like China in some other countries around the world have responded with against the United States. But it’s important to notice that there is an actual and proposed column here in the US tariff, so actual is what the current administration has put in place. We can see that most recent 200 billion in tariffs that just jumped up to that 25% is the most recent activity that we have here. So a little insight from ITR regarding these tariffs. We saw a lot of companies in 2018 when those steel and aluminum tariffs were put in place, increased cost and increased cost at a level that was above what you would see normally from businesses. And we saw those costs passed along to the customers.
Now it didn’t have a very big impact on the overall economy, but we did see some elevation in input prices specifically some steel prices out there. So that does compress some margins and there’s a trend that we have to take into consideration. With that tariff jumping up to 25%, we would expect that we see more of these price increases passed along to US businesses and the US consumer. The Wall Street Journal said that on average the US consumer could be spending $767 more this year just due to this tariff situation, so that is starting to work its way down toward US consumer. However, we have not changed any of our major macroeconomic forecasts simply because of tariffs.
We still believe that we’re going to come to an agreement with the Chinese here in the next couple of months, and we will not see those 325 billion in tariffs put in place, that’s our expectation because we know China understands that they have a slowing economy right now and to see another 325 billion put in place that would have a very significant impact on their economy, that would also have a significant impact on our economy here in the United States. So while we’re not changing our forecasts and while we don’t expect to see that 325 billion put in place, it is important that you all understand that it is a downside risk to our forecast if we do see the additional tariffs of the 325 billion put in place. So no changes to the forecast right now, we should expect some more price increases passed along due to the tariffs, but we’re not expecting it to affect the overall macroeconomic picture to a level where we change our forecasts at this time, but certainly worth keeping an eye on and noting.
Now we’ll take a deeper dive into the US economy, so I want to talk US GDP first, give you an idea of where we’re headed over the next three years. But we’ll spend more time talking about US industrial production, so US GDP is, of course, a perfectly fine benchmark for the US economy, but many of us play in the industrial and the manufacturing space, so we’re more concerned with activity with US industrial production, so we’ll talk about US industrial production right after.
The expectation for GDP is that we’re going to really grow over the next 12 quarters, which is a good sign for the US economy. This chart on the left is the dollar value of GDP, so currently at 18.8 trillion dollars in US GDP. And our forecast is represented by these teal bars, which clearly shows you that we expect to be moving in this upward trend over the next 12 quarters. However, take a look at the chart on the right, which is the rate of change. So while we will be growing generally over these next 12 quarters it is important to note when we’ll see periods of slowing growth or accelerating growth. It’s very important for us at ITR to identify those different phases of the business cycle. And J will certainly be talking as we move into his segment about how to manage those different phases of the business cycle. So I want to give you an update on the phases, we’re right at the peak right now in terms of US GDP, so we expect GDP to start slowing down over these next 5 to 6 quarters really into the first half of 2020 before we start accelerating back up in the positive direction.
So plan for a slowdown over the next five to six quarters, but no recession expected in GDP so nothing to be overly concerned about from that standpoint. And then the second half of 2020 into mid 2021 we’re going to see some nice accelerating growth great time to be in business here in the United States. And as we move later into 2022 we’ll start to slow down again, but it’s important to note next 5 to 6 quarters, slowing growth compared to next year, as we move into the back half of 2020, we’re going to see that acceleration return and continuant mid 2021. So that’s the GDP expectation, but as I said many of us on this webinar we’re more concerned with the B2B activity to manufacturing space, which we represent through US industrial production. Another way to look at the overall economy, but specifically looking at mining, manufacturing, and utilities when we look at this index and the stories a little bit different than GDP, same type of business cycle trend that we’re expecting to see. But it’s important to note that we’re expecting to see a little more weakness in the industrial side of the economy in the manufacturing economy as we move into that 2020 timeframe. So when we look at the previous chart, GDP did not fall below the zero line during 2020.
Now when we look at US industrial production, we do expect to fall below that zero line and see a mild period of contraction in the industrial economy, so plan for slowing growth through 2019, but for the real weak part of this cycle to be the first half of next year and that’s what we need to be focused on and preparing for. Now this is a very mild recession so not all segments of your business will see this period of contraction, there are certainly still opportunities out there. But when we look at the overall landscape we do expect to see a small period of decline before we start to rise once again in the second half of 2020 like we’re expecting in GDP, so nothing to worry about in terms of a significant recession. We’re only talking about one and a half percent contraction here, and when we compare that to 2008 or 2009, which was about 13.5% you can see it’s very mild, but again still worth planning for over these next 5 to 6 quarters.
We’re going to have to work harder to find that growth because the organic growth just won’t be there like what we saw back in 2018. So let me show you some of the leading indicators that are supporting that forecast. Again, I want to give you as much information as I can in terms of supporting evidence behind these forecasts. So the first indicator that we’re going to compare to US industrial production is the G7 indicator, this is an aggregate index of some global economies as well. It includes Japan, Canada, the United States, France, England, Italy, and Germany, so it’s all seven countries are included in that pink indicator. And you can see it very clearly has passed through this peak and is below the zero line, so it’s right in line with the trajectory of our industrial production forecast, so that’s our first piece of supporting evidence, the global economy and some of our major trading partners will certainly help contribute to the slowdown that we’re seeing in the industrial production. The PMI, this is ISM’s purchasing managers index, so that’s our PMI.
We’re looking at the 112 rate of change, so we’re comparing a month-to-month percent change here. It lines up very well historically with US industrial production as you can see, one of our favorite leading indicators for the manufacturing economy and it is right in line once again with our expectation of a slowdown over these next four quarters, so those two leading indicators that are right in line with our forecast. Some of you might ask how the stock market correlates to our expectation? It correlates very well, that blue line you’re looking at, the Wilshire market cap, so it represents the major financial institutions here in the United States, and that is also supporting our forecasts. The stock market looked like it was going to recover a little in the first quarter of this year. We had some positivity but then tariffs and trade happened, and that downward trend continued, so there is certainly some cyclicality to the stock market as well. And then finally here’s that JP Morgan global manufacturing indicator again very nice correlation, 12 month leading relationship to our forecast. So I think it helps to understand why we expect slowing growth when you look at all four of these indicators that have tracked so well historically with the overall economy, all supporting this slowdown that we have, so I hope that provides more clarity and evidence behind the industrial production forecast.
Now I want to transition into talking about CAPEX in some interest rates, of course, trends that severely impact the industrial side of the economy. Non-defense capital goods new orders, which is what you’re looking at my screen right now is our proxy for B2B activity here in the United States, so this represents CAPEX spending in B2B activity, top two lines are the rates of change, the bottom two lines are the dollar values of CAPEX. And the important thing to know is this rate of change is slowing already just like what we’re seeing develop in the overall economy, so we do expect CAPEX to slow down this year, and that of course will have an impact on the manufacturing side of the economy. So here’s our CAPEX forecast, this is that same rate of change we just saw in the prior chart with our forecast.
And you can see this forecast looks very similar to that industrial production forecast that I just showed you, we have that mild period of contraction in the first half of next year right after we slow down through the majority of this year and all of our leading indicator evidence for CAPEX is also supporting the CAPEX slowdown, so that green line small business optimism index, it’s exactly how it sounds, how optimistic small business owners are out there. We have a utilization rate for machinery, which is that pink line, that’s just showing you output over capacity, so basically when that line is declining we’re seeing less machinery utilized here in the United States and that’s a good indication CAPEX will slow down. We have another purchasing managers index this time looking at the dollar value of new orders here in the US and that trajectories almost right on top of our forecast expectation. And then finally believe it or not copper prices, which is in blue is a great indication of where CAPEX activity is headed. So these major benchmarks for the manufacturing economy are all supporting this slowdown and mild period of contraction that we have coming our way.
Interest rates, not expecting interest rates to rise any further this year. This is the feds dot plot, so each one of these dots represents an FOMC member and their projections. We do not expect any interest rate hikes this year in 2019, so we expect borrowing costs to remain about at the level they are now. There’s even some whispers out there that we could get a quarter point decrease, so in terms of making investments investing in CAPEX, don’t expect those borrowing costs to rise throughout this year just something to keep in the back of the mind as well. And as we look further out a fairly conservative estimate here from the FOMC members. They’re saying a potential for maybe one quarter point increase next year, so don’t expect borrowing costs to really change a whole lot throughout these next 12 months. A big reason, of course, is inflation, the Fed likes to keep inflation at 2%, they’re doing a very good job at that now, which is why they backed off of those interest rate hikes.
They saw inflation fall below 2%, so they backed off the interest rate hikes that got inflation back up to that 2% level, which they believe is healthy for a growing US economy, so no interest rate hikes expected this year because the Fed has their inflation benchmark exactly where they’d like it to be. The last section I have here is just some employment trends that I wanted to share with you. If I were to ask when I’m not presenting, I’m a consultant for manufacturing and construction companies here in the United States. And if I had to ask them to give me three things that keep them up at night, employment is always on that list because of such a tight labor market that we have now and that’s certainly supported by this data. This is private-sector employment growth, which is taking almost right off the chart here, and that’s accelerating growth. We have a tight labor market right now, job openings are up 17%, we have a rising quit rate, so it’s a very tight labor market, and we’re seeing people leave their jobs to go find that X plus one salary simply because they can. You see these job openings numbers, a lot of opportunity out there, so and hiring and retention is going to be incredibly important this year as we’re seeing a lot of rising costs out with our input costs related to tariffs.
There’s a lot of pressure on our margins so retaining those key employees is going to be very important as we work throughout this year. And I wanted to show you some population trends, give you an idea of how difficult hiring will be here in the United States based on where you’re located in the US, so this does not include immigration. This is simply showing you for those US citizens that live in our country now, what states are we leaving, what states are we moving to. You can see areas that are this darker blue green color are areas where people are moving to. The darker the red you see the more people leaving that state, so we have a lot of people moving to the southeast to Texas and out west with the exception of California, of course. So those states are going to have a lot more opportunity in a larger pool to hire from, so if you’re in some of those states, good news for you. If you’re in some of those states that are red on the chart that means we’re going to have to work a little harder to hire, to find that talent and retain those employees, so make sure that’s not a trend you’re ignoring. And of course a big driver behind that trend is housing prices, so also a good idea to understand how much your employees will be paying on average to afford a home.
You can see areas like California on the west coast, very clear to understand why on this prior chart they’re red when you see you need about 135,000 dollars just to afford the average home. So just something to keep in the back of our minds. But when we factor in immigration you can see most of these states are green, so most of these states are growing when we factor in immigration so you should plan on hiring more immigrants as we move through this next decade because they’re driving a significant portion of this population growth. So another thing to keep in mind as you’re thinking about your hiring and retention strategies. In the last group of people we need to talk about, of course, is the millennials. The millennials are a headache for many of those out there, which I enjoy to hear being a millennial myself, but the point of this chart is showing you where the millennials are and, sure, you might have more millennials, but that just means you’re going to have more people to hire. And if you inherit a job market like the millennials have today I think you can understand why they’d be job hopping when you have 17% job openings out there, so a lot of opportunity for those Millennials.
But this chart will show you what states have a larger concentration in the millennials because, again, we do have to cater to that millennial generation different from prior generations, so it’s important to keep in mind. And then finally here I have wage growth, this is probably the most important slide out of this employment conversation because if we look back to this earlier portion of the decade wages on average were growing at about 2%, that is no longer the normal. The new normal is around 3.5 to 4%, so you should be planning for about a 3.5-4% increase in your cost of labor over the next 12 months. Please don’t ignore that trend, because if we ignore that trend 17% job openings out there, some of these employees at your business will go find that new job so make sure you’re keeping that in the back of your mind and keeping that in consideration. So just to summarize my section 2018 for the US industrial economy, the US man you factoring economy was in phase B accelerating growth, so that was our year that we saw the accelerating growth, but we are right now at the top of this business cycle transitioning to this slowing growth trend.
And you might have several markets in your business that are headed for this phase D recession, so it’s important we take advantage of this slowing growth trend to prepare ourselves for what is potentially coming at the end of 2020, which could be a recession. So here’s a couple pieces of advice from us, develop your rates of change, take advantage of this rate of change methodology to identify the phase of the business cycle you’re in. Focus on the segments of your business that are most profitable, and I know J will go into the segments of your business here shortly and give you some more insight there. Make sure you’re using your competitive advantages out there to leverage your business, this is certainly a great time to be taking market share out there as we’re transitioning at the peak of this business cycle.
Start thinking about having some cash on hand and controlling that inventory if your industries are headed for that phase D recession by the end of this year. And then finally number five, there’s something in your business that might not be profitable that you shouldn’t be doing, this is that phase two take a look at those different aspects of the business. We want to carry the profitable segments of the business into the next portion of the cycle, so just a few pieces of advice from all of us here at ITR. So that’ll conclude my section and happy to take any questions there are.
Dan Roglin: Taylor, I don’t see any questions coming up on the board, so maybe we can jump into J’s section now, but thank you that was awesome.
Taylor St. Germain: Absolutely, I just handed over the controls to J.
Dan Roglin: Very good, thank you.
J Schneider: Good afternoon everyone, again, my name is J Schneider, I’m the vice president strategy here at Dorn, and thanks particular time today and thank you Taylor for an update on where the economy is and what we should expect over the next few years. Hopefully everybody can see the screen now.
Dan Roglin: J, before you get started here I do have one question… Can China wait us out on tariffs, Taylor?
Taylor St. Germain: Yeah, so the most recent development with China?
Dan Roglin: Yeah, the question is will they wait us out on tariffs, so I think [inaudible 00:26:26] implied its sort of a game of chicken, and will they just wait us out and call our bluff?
Taylor St. Germain: Yeah, I think there’s a couple different pieces that go into that, of course, we know that the United States announced the most recent tariffs on May 10th and China announced another 60 billion that will go in place on June 1st should we not come to an agreement. Both presidents are understanding of the slowing growth trends that they’re inheriting in their economies, so I do believe that they both understand that coming to a deal is the most important thing that could be done for the sake of the strength of the economies, which is why if we’re betting men here overhead ITR, our president, CEO, and myself, we do believe that we’re going to come to an agreement before we see that 325 in reciprocal tariffs from the US. So we could see those 60 billion in tariffs put in on June 1st, but we will come to an agreement before we see anything further from there, so that’s our general expectation right now.
Dan Roglin: Great, thank you, J?
J Schneider: Perfect, thanks Dan and thanks Taylor. So yeah so a lot going on in the industry, a lot going on in the market, companies have a lot of challenges ahead of them, competitive challenges, market conditions, macro/micro trends, so I hope that we’ll be able to give you some perspective here on some tools and opportunities to weather your way through that. But the open question now is really where do you go from here, with GDP slowing, what does it take to move the ball forward. And so here at Dorn what we wanted to do is … Let me just move this over, is focus on three main areas. So in this section of the webinar my goal is to take you through the ITR data and provide three main takeaways for you. One is clear, practical advice based on the current economic environment, and where you believe your company will be through end of 2019, 2020, and 2021. The second is tools that you may be able to use or leverage within your company to make different decisions or focus on areas of our business where you believe you can win with a slowing of the economy. And third, provide actionable strategies that you can sustain your growth long term as well as a short term, so the net of this really is an understanding of how to look at your business through a lens of a segment revenue profit plans by functional group.
And how to apply the resources within your organization to win in the marketplace while the economy may be slowing in certain segments. So first what I wanted you to do is think of your business a little bit differently. So at Dorn, we personalize business cycles for a lot of our clients, which provides a granularity and a view to make it actionable for them. So in this view I want you to focus on a couple areas, what we do is we look at understanding the key market segments for them. Right? Understand what’s granular enough for the organization and determine where that is within the growth cycle. In some cases currently you may be in high growth, or medium growth, in other cases it may be slowing, and in some cases your segments may be in decline or recessionary. And then we help our companies move in the forecast phase where we look at 2020, 2021, 2022, and beyond, and really take a holistic view of the business and understand what lens they should be looking at to navigate through a continuing change in economy in the future.
So as you look at it from a corporate level at the highest level within your organization, we define certain segments and those segments give you the data and the analysis that you can provide to understand where you are today. But then as developing strategies and tactics as you drill down and further segment your business depending on what’s trending if you’re in recovery, or accelerated growth, or slowing as an example. So on the left you assume the key market segments that ITR identifies, looking at trying to score those and give those some weighted averages within each one of those as compared to what the future might look like. And yeah, in some cases some of those markets may be easing or slowing, for other markets they may be growing. But again, it’s taken a different view of your business and understanding what’s trending up or down and adjusting your resources accordingly. But again in this view it’s really about balance and the lens you’re looking through for both a short and a long term view. Next, as you look at them your segmentation what I wanted to do is kind of give you an idea of how you can further your approach and view the business, and your market for success and growth within this uncertainty.
So at the top what we do here is we kind of provide a framework that says, you have a typical audience segment and that audience segment will provide a certain amount of revenue or, margin, or profit to your business as a whole, and we’re going to call that maybe tier one at the very, very top. And within that segmentation you have growth goals. Right? Maybe 30% manufacturing, 12% within construction, and so as a diversified industrial manufacturer you’re going to look at this and break down your core markets of manufacturing into sub markets. And those sub markets might be aerospace or fabrication metals, within transportation it may be auto repair or even additional business services, repair services, and then within government could be military or educational as an example. But the goal here is to look at creating good enterprise segmentation not just from a channel perspective but from a market back perspective, using that lens to give you clarity within the sub segments that you support and you sell into, and then further drilling that down. So ultimately what we want to do is we want to reach that end user, all the way at the bottom of this chart where we can look at their job to be done and the work that they’re doing and align our business to that work.
So as you go through you have shop types and then there’s applications that service those shops, and then at the very bottom it’s the ultimate job whether it’s cutting, or assembly, or design, or fabrication, or repair, the products and services that we offer and the customers of our clients offer in the industrial manufacturing space and others are providing goods and services to support those jobs to be done. So we’re looking to get down to that level, which is using a different lens than maybe the channel lens. The channel lens may say industrial manufacturing or automotive may be a distribution channel for that. But as we further define that down we want to understand how we can reach, and connect, and segment to that ultimate end user or that job to be done so we can further align our resources and our time and effort in a slowing or easing economy in some cases. So moving through that as you start building out your performance and results at a segmentation level the question really becomes sourcing the data. How are we going to view it, what information are we going to use and how are we going to capture that data and determine what resources we apply and don’t apply to different segments within our business.
This is a question we often get when we work with industrial manufacturers around the country is what do we weigh heavier. Is It purely a financial discussion? Is it an end market discussion? How important is the current channel I serve versus the product segments that I’m currently in? So at Dorn we break it out into five areas of analysis. You have your typical financials, your product segments, your customers, your end markets, and then we look for something called leakage, and I’ll talk about that a little bit more here. But as an example if your segment is aerospace and you’ve got a heavy focus in a sub-segment of avionics and flight controls as an example, that could be in commercial military, could be space, ground systems. Your company is going to perform in various levels it maybe high performer, a neutral, or low within each one of those different segments with respect to revenue, margin, or market share. But what we often do is we start with the company’s financials, how is your company doing with in each one of those segments?
So in this case you might have military, you might have space, you may have ground systems as an example, or commercial aviation as an example. Those may be a defined segment at the top and the green, orange, and red, and then you may further define that down when you get into sub segments within those. And then we ultimately try to look for the most granular subsegment we can that aligns as close as we can with those jobs to be done or end segments. And then we categorize the product segment themselves. Do we have an understanding of how well our products are doing within each one of those segments? We sell a variety of products as a company, there may be 500 to 1000 of them. How is products A, B, and C doing in segment one versus segment three. Are they accretive? Are they dilutive to the business? So we often want to break that out and understand and analyze that and create a view of how we do as a product perspective. When we start looking at customers then we do the same thing we say, “Okay, within our segments, our definable markets, we have A customers and B customers. Customers that we do a lot of business with, some we do less, some that are highly profitable, some that are less profitable.”
So we further refine that and understand where our customers are driving our incremental growth, who’s loyal to our brand, who may be loyal to our offering, who may come and go often. So you try to segment those out and determine who is also creative and decretive to your business. And then we look at measuring the end markets, we look at share, your penetration rates, and where the opportunity would exist to improve your profit, your market share, and your revenue by looking at end markets that you can win in with your current organization or the organization that you’re currently going in the market with. And the last thing we do at the bottom is ultimately drive toward an area that we call leakage. Determine what is leaking within the business, you may have product leakage, you may have customer leakage, whereas their opportunity to reduce the amount of leakage within the company, which may be margin loss, revenue loss, or misaligned resources, or focus as an organization.
Your customers may be high churn in certain segments because you’re not resonating. You haven’t modified your approach with the changing market in a variety of those things, so we ultimately try to capture what a leakage would be and then for our private equity companies, we ultimately try to give that into a gross margin or an EBITA form that you may lose X number of basis points of EBITA, it may be X number of dollars or percentage in gross margin. We even look at that at the contribution or operating income level for other firms as well. But ultimately what we want to do is understand our sources of data and what we can use to determine where we are and where we want to go based on what the market’s doing and opportunities. So Taylor talked quite a bit about the ITR cycle framework and certainly covered it at the end of this presentation. But what I wanted to do is kind of rebaseline where we are. So in ITR’s presentation kind of saw this view, it gives you a view of the current market landscape or the where the segments are currently performing along the sine wave. But using this framework what I wanted to do is kind of break into a growth back matrix that we use.
So market back growth strategy matrix is a tool that we use at Dorn when we work with industrial companies on how to develop market back growth strategies by segment and functional groups. So at the top you’re going to kind of see the traditional ITR recovery, accelerating, slowing, and recession phases. And within each of those you’re going to have manufacturing and different segments like commercial construction, residential construction, retail trade, medical, aircraft, aerospace, what have you. So all the segments in industrial space are going to fall within one of those four buckets. And this is just really a sampling of that. But on the left what we do is we start off by understanding the functional groups or the functional areas within the company or the firms and breaking that down into areas where we can align the resources and the tactics as an organization to the different phases of their business or products maybe at. So you’ve got things like your product team, your sales, your marketing organization, your channel, your infrastructure, and even your M&A strategy as an example. What are we doing for acquisition, is this a good time to divest certain parts of our business if we think it’s going to move into slowing, or what have you.
So again, it’s about developing true market backed functional strategies, really getting a sense of what the end market is looking for, where you can win and deploy resources based on where the market is in each one of these phases, so we use this simple matrix. So if we use an example of hand tools and specialty tools in the top left, we may say in some markets like aircraft production or manufacturing conduction, those are currently identified by ITR in recovery. And so if you’re selling hand tools or specialty tools as an example, from a product perspective you have different strategies in the way maybe a VoC, you might be looking at improving your margins in some cases, and adding additional resources, or sales, or marketing organization, finding channel partners that can support your growth. So that’s one of the common challenges that we find with organizations is that the channel that they currently have while they were in maybe a slowing or recessionary phase of their segment in prior years have now moved into recovery, but the channel really isn’t designed to offer that. It really can’t maybe keep up with the pace of growth for them, so you may need to look at your channel and look at your infrastructure and determine if it’s adequate for your growth aspirations and your goals.
And then your M&A strategy may look at acquiring or leveraging in those cases. Now if you have products in this case or channels that you serve that are currently in Accelerating where now your past recovery, you’re moving, you’re well into acceleration. Now you’re looking at understanding I’ve got quality, ways to maximize my price return, new product innovation, continuing to push growth in the market. Expanding maybe credit to sales and customers to grow your business and further align them with your brand, expand your distribution channel. Earlier in the session we talked about hiring and workforce challenges that are out in the marketplace today, again, an accelerating area or subsegment of your business you may need to look at workforce hiring, developing retention rates, things of that sort. And in other cases you may as you’re accelerating continue to keep those businesses, but it may be a good time to exit. You may be able to maximize your exit of that business because the business may be at its peak at that point.
And then you move into products or segments that may be in Slowing, so if you sell hand tools or specialty tools and there may be a retail version or retail product as an example, or you’re currently supporting a lot of residential construction in that case you might be seeing a slowdown in those tools. So whether your business is diversified or modestly diversified, you may have challenges in that space particularly in ways of sales and trying to reduce your long term exposures. You might be looking at how you might negotiate your agreements or contracts and pricing and things of that sort. From a marketing perspective you may have to add creativity or do some things that a little bit different particularly from an entrepreneurial and countercyclical perspective meaning, hey, it’s hard to get noticed in a slowing economy or slowing market segment. Companies may be tightening their belt, funds may be limited. I need to get the attention of my end users and customers out there, so I’m going to have to do some things differently maybe that I wouldn’t have done in an accelerating market or even as Recovery.
And infrastructure perspective you may need to manage your cash flow a little differently within that segment, there may be a hiring freeze where you’ve got to cross train talent and things of that sort or revisit any CAPEX expenditure that you may have. But if your product segment is or subsegment is in recession or maybe approaching recessionary period, and maybe you serve the public water or sewer segment as an example, it’s really understanding what can I do? Right? Where can I reduce my risk? How can I insulate myself to the best that I can? Maybe it’s a question of tightening credit within the sales, reduce non-generating activities. So if you’re not really driving a lot of marketing revenue with the activities you’re doing you may need to further align that, or reduce that, or simplify it through that period. But as a diversified manufacturer, again, not all of your products would be in this. So the objective here is to really understand your business to where you can apply the resources appropriately within each one of these segments.
So while you may have a product category or even a product segment within a product category that’s currently moving through a slow down or maybe greater than average slow down, other parts your business may be increasing or may need additional investment. So it’s effectively squeezing that balloon or applying those resources in sub segments, and channels, and markets that you can win and succeed in. And this is a view of all of it put together. So ultimately where you would go with this is you would map out your products and your customers within the same matrix and you would understand, hey, which part of our products are really in this Recovery, which ones are in Accelerating, which ones are we going to invest in heavier or more so than others, which ones are we going to reduce our investment in? So it’s trying to create a simple framework and structure for you and your organization to apply the resources effectively. So again, a little recap on that. One, diversified companies are going to have multiple segments, you have them in various phases, and again, it’s applying those resources in a balanced approach, but it’s also applying them in areas where you can continue to capture market share, revenue, and drive incremental profit, and share.
The second is avoid sacrificing your future growth, and we talk a lot to our clients about this is that it’s easy to turn the spigot off on everything that you don’t think is going to be a growth for you in the future. Now there are short-term wins that you’d be driving, but the long-term aspect to your business whether it’s margin growth versus cash today, there is a balance to that. And so we often recommend not necessarily turning something off but just reassigning resources at a more proportion or balanced approach to where you can still maintain an investment level in areas where you think will come back maybe in one or two years, and then turn the faucet back on for those markets. And then revisit your plan is number three, and really establishing a metrics, so what is the metrics we’re going to use for a recovery phase or an accelerating phase may be different than slowing. So in Slowing we may not expect 6 or 8 or 12% year-over-year growth, you may expect one or two, that may be adequate for that market segment and certainly that product category. But in other categories you may expect 12 or 15% year over year growth or higher depending on the innovation or the markets that you’re serving.
And then fourth is really about reducing and mitigating risks, right, so as you enter those slower phases in some of your segments, or you may enter some of those segments are slowing, it’s really ensuring your company is aligned in those plans and in that risk mitigation. Is the entire organization aligned in how we’re going to navigate our strategy through these cycles, and as different parts of the business go up, and others go down, is the company aligned and is the resources applied correctly in that? So now we’ve developed kind of the tactics. Right? We’ve looked at this matrix and said, “Okay, here’s kind of how we’re going to lay it out. We’re going to put some structure around this.” Now you need to develop tactics and products by segments and growth phase, which you’ve done, but is your organization ready. Is it ready to deliver on this strategy?” And we work with a lot of our clients, and we find that it’s a best practice is developing kind of this truly objective view on your internal capabilities, your gaps, and your investment areas. Now this probably seems pretty basic and rudimentary in some cases, but it’s often something that is missed and overlooked with the organizations that we work with from time to time is the saying, “Hey, we developed a strategy, but do I have the infrastructure, the product offering, the path to the end-user?”
Is it really there to execute this? And am I looking at it objectively, or am I using a biased view that I’ve had over the last four or five years? So we started looking at different considerations and critical success factors, but every company is going to be different and these are just four or five of them that we’ve kind of highlighted here. Is my product offering ready? Now from an operations perspective, yeah, they might be pretty solid on that. The product we think is solid, it has the value propositions we need, but our sales team may be under staffed, or under trained, or not quite ready to deliver what’s needed to capture that market share. We think our marketing team has got a lot of infrastructure there, but we still think there’s holes and gaps in reaching the end user and creating end-user demand. And then we start looking at things like the path to the end-user, my channel is there, I might have a strong channel in some markets, but weak in others, and so we really start looking at a true assessment of our channel capabilities, the resources within the organization, is it assigned and allocated correctly to capture what we want?
And then our competitive pressures. Right? Is there changes in the competitors? Do we have the ability to win based on the value of our product and the customer preference of what they’re looking for whether it’s direct or indirect customers? So whether you sell directly through the channel or you sell direct to an end user, you still want to ensure that you have organizational readiness and that you can look at it objectively as an organization to determine whether or not you can deliver on these strategies without utilizing a disproportionate amount of resources in one product category, one channel versus the other. And so lastly what I wanted to say is that there’s a few key takeaways I wanted to leave you with as a recap. And what I wanted to highlight four areas for you to consider as you navigate through this future uncertainty in the markets particularly within your sub markets, and what some options may be. So one is look at adopting a market back segmentation view. Look at what that means to really get a market back segmentation, identify the segment’s you want to pursue as both a future and current state, understanding where you are, use a different lens, use the lens of the end market, use the lens of your channel or customer in some cases, but look at it from a different perspective.
And also look at it from a product and/or channel centric view depending on the market that you’re serving. Second, is map your segment cycle into what’s trending, so understand your own segments within the ITR economic view, and also what you understand the markets to be doing, so some markets are growing or slowing, really map your product, and your channel, and your customers into that matrix, use that tool as a way to define where I’m going to apply my resources and look at it objectively. Third, is develop cross functional strategies, these are strategies that look at the organization as a whole, but also align your resources based on the cycle and where you believe you are on where you can win and where you can continue to capture market share. Even in slowing or easing economies where the growth may not be 12%, and now it’s only going to be 6%. There’s significant opportunity for industrial manufacturers to continue that growth while it may be a different path or it may be different tactics of strategies, there’s certainly opportunity for manufacturers to continue to grow and capture that share even in a slowing or easing segment.
And then fourth is operationalized that growth. And what we mean by this is manage those strategies through maybe a new GTM, get organized, and get focused on where you’re going to apply those resources to find those strategies, put it into a process and framework that you can use and leverage throughout your organization. And then lastly is define those new metrics to measure success. The metrics that you are using or may have been using in a growth or an accelerating market may be different metrics that you use in an easing or slowing market. While you may look and predict at the market in your sub segment, take aerospace, or construction, or industrial, or manufacturing construction as an example, may be expected to come back in two or three years. The metrics you use today and the way you measure that may be different in the interim until that market comes back or adjusts to a recovery or a growth segment. So again, look at those different metrics, understand if your organization is ready and provide some operational framework and structures around that to further align your resources to navigate through the change in the business.
And so what I wanted to leave you with today was at Dorn we spend a lot of time with our end customers and our industrial manufacturers and going and providing these one-day workshops. And what I mean by this is we go out to their sites or they come here and we provide kind of a strategy workshop, which is a one-day session, which we kind of take the ideas that you have as an organization. We look at the market dynamics, where you’ve been able to win, where you’ve struggled, and we try to get some structure and create some action plans, and ideas that your entire organization can get around as they navigate through this trend. And that’s kind of a big piece of where we focus with our industrial manufacturers is getting the alignment throughout the organization. Now who should attend these types of meetings? Well typically they’re going to be executive leaders like yourselves, owners, board members, can be CEOs, CFOs, or what have you, but also many functional leaders, the individuals that are running the day-to-day operations of the business. We call it kind of our kickstart program, and in this program it’s really designed, again, to get the organization aligned and focused on where they can navigate through uncertainty in the future and what resources and tactics they should use to continue the success they’ve had over the last several years.
So with that said that’s the end of this phase of the webinar.
Dan Roglin: J, thanks, awesome job, Taylor, awesome job. We’ll be sending a follow-up email with links to a recording of today’s webinar, looking for questions, I don’t see any posted just yet. But there is a handout for the kickstart workshop that J just mentioned, and also I’ll be sending one along too for ITR. They have a special offer for an upcoming summer special seminar that they’re doing in July, and you’ll be seeing something from us with that as well. If there’s no other questions we can wrap this up, and I thank everybody for attending, and I appreciate you being here.
J Schneider: Thank you.
Dan Roglin: And we’ll sign off, thank you very much.