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(originally published by Booz & Company)


Six Keys to a Winning Manufacturing Strategy

How John Deere bucked industrial trends to become an international growth star.

With so many sectors of the U.S. economy suffering, it may come as a surprise that old-line manufacturers are emerging as growth stars on the international stage. Deere & Company, Caterpillar, Honeywell, and United Technologies are just some of the companies that have defied long-held nostrums about the death of American manufacturing by achieving double-digit sales increases. They are also staking out dominant global positions, particularly in emerging markets.

Based in Moline, Ill., Deere has major plants in Brazil, India, and China, as well as in Mexico, France, and Germany. With 50,000 employees, nearly half located outside the United States, Deere manufactures its John Deere agricultural and construction equipment in 15 countries. The company is enjoying notable sales success in Brazil, Russia, India, and China, where its revenues doubled in 2007. Its total sales in 2007 were US$24 billion, with net income of $1.8 billion, far higher than that of the Detroit auto manufacturers.

Robert Lane, chief executive officer of the 171-year-old company, says its current success is the product of its manufacturing strategy. In his view, that strategy has six main components.

1. Strong links with the market. Raw manufacturing prowess alone does not create business success. “It has to start with the customer,” says Lane. “Whatever you manufacture has to be something that customers really want to buy. You have to design it right. We’re really focused on being connected to the customer.” To that end, Deere’s factories maintain a robust feedback loop with the design, engineering, and research and development functions. Nurturing market sensitivity can be a problem for manufacturers that shift production offshore in pursuit of cost savings.

2. Rigorous financial discipline. Deere has embraced a system called shareholder value added (SVA) that, simply put, measures the difference between operating profit and the company’s cost of capital. “We estimate productivity and cost, and go through a basic analysis and determine if we can compete,” says Lane. Every factory and every product gets graded. And compensation for everyone from top management to unionized labor is based in some respect on SVA. “Nobody gets paid at Deere for just making money,” Lane explains. “Everything is a ratio of what we earn over what we invest.” That gives the whole organization an incentive to drive down costs. “For 30 consecutive quarters, we have reduced inventory and the ratio of receivables to sales,” Lane says. “That is a huge reduction in the amount of capital that had to be deployed. In the process, we are getting faster and faster at providing the right products to the right customers at the right time.”

3. Balanced investment approach. Many American manufacturers have closed U.S. factories and shifted production offshore or simply decided to source from other offshore companies. For these manufacturers, it has been a largely one-way flow. But, says Lane, Deere uses “a balanced investment approach that includes a substantial reinvestment in the United States.” For example, Deere used to build diesel engines in Dubuque, Iowa, but has shifted that production to Waterloo, Iowa, and to Mexico in order to improve SVA and boost efficiency. Says Lane, “We’ve been investing heavily in bringing the most modern, advanced productivity tools to factories” such as the one in Waterloo, where the investment amounts to $140 million over the past seven years. By moving engines to existing plants in Waterloo and Mexico, the company improved the economies of scale of those operations. Meanwhile, it filled the space vacated in Dubuque with other product lines such as skid steer loaders and forestry equipment.

That Deere also manufacturers diesel engines in France suggests that the company is not interested only in low-cost locations. Its European factories are important launch pads for the emerging markets of Eastern Europe and central Asia. Western European nations are seen as “home” markets, whereas the emerging markets in Eastern Europe and central Asia have not yet demonstrated their size and staying power.

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  1. Kaj Grichnik, Conrad Winkler, and Jeffrey Rothfeder, Make or Break: How Manufacturers Can Leap from Decline to Revitalization (McGraw-Hill, 2008): An examination of the flaws and limitations of lean manufacturing and Six Sigma, and how businesses can revolutionize their manufacturing practices.
  2. Kaj Grichnik, Conrad Winkler, and Peter von Hochberg, “Manufacturing Myopia,” s+b, Spring 2006: How manufacturers can avoid drifting into decline and irrelevance.
  3. Bill Jackson and Conrad Winkler, “Building the Advantaged Supply Network,” s+b, Fall 2004: Focused, flexible, and lower-cost manufacturing through supply chain network innovations.
  4. Hans-Jörg Kutschera, Peter Obdeijn, Michael Ilgner, and Peter von Hochberg, “Relocate? Transform? Which Option Is Right?s+b Resilience Report, 10/17/06: How to make smart decisions that will maximize manufacturing efficiencies.
  5. Jeffrey Rothfeder and Georgina Grenon, editors, Manufacturing Realities: Breaking the Boundaries of Conventional Practice (strategy+business Books, 2006): Offers a set of solutions for the crisis facing manufacturing today.
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