Competition to intensify for global businesses despite economic recovery

In spite of economic recovery, businesses see a far more challenging business environment in the immediate future, with 85% stating that their market will become more competitive over the next two years.

This is according to Competing for Growth, an Ernst & Young study of 1,400 senior executives around the world.

The results show that the next two years will see a more intense focus on growth, with respondents reporting that markets are more varied and volatile than before the crisis. Margins are under pressure with almost 50% reporting price erosion and almost 30% reporting increases in costs for labour and key inputs.

Sixty percent of respondents cite developed markets as the likely source of profitable growth, while the emerging markets growth will be more competitive given the focus of both local companies and companies from Western markets. This is in contrast to the outlook from global businesses reported 12 months ago in similar Ernst & Young research, when emerging markets were the clear focus for overall growth.  

Emerging markets

Jay Nibbe, Ernst & Young’s Markets Leader for Europe, Middle East, India and Africa comments: “Emerging markets offer enormous potential for growth but, as global markets become more competitive, companies are reassessing their market strategy. Emerging markets present a complex set of challenges and achieving profitable growth in the short term is not easy, particularly as competition is increasing most quickly in those markets. In the current economic climate, we are likely to see companies focusing additional attention on developed markets, where opportunities for short term profit are greater.”

Significant geographical variations in outlook are apparent, reflective of this change in attitude. In Brazil, 86% of companies believe their market is becoming more volatile, whereas in the Middle East the number drops to just 20%. Japan and India report the second and third highest levels of volatility (74% and 69% respectively).

Innovation critical

Innovation is becoming increasingly important for survival for 71% of respondents and more than half of the companies are introducing new products or services to increase sales. Corporates are also focusing their efforts on finding growth from existing markets, with 58% looking to sell new products and services in markets where they are already present. In fact, 63% report that incremental product/service innovation has been more successful than transformational innovation.

Jay Nibbe comments: “Companies need to be prepared to respond to rapid change – in demand, in economic conditions and in markets. Speed is the key characteristic of high performers across sectors and will become increasingly important in a more competitive global marketplace. Companies that demonstrated speed and flexibility and continued to innovate throughout the crisis are now reaping the rewards and other companies will need to follow their example to secure future success.”

Pressure on margins

Expectations of future price increases are low – almost 60% of respondents expect a price rise that either only matches or is below inflation. In addition, margins are under pressure from inflation in key inputs – 29% of respondents report cost inflation and 31% report labour cost inflation. The emerging markets in particular are seeing rapid increases in labour costs due to increased competition. This is most pronounced in India, where 55% report labour cost inflation.

Financing growth

The survey reveals either an inability, or an unwillingness to go to the capital markets, with more than half of companies planning to finance future growth from cash reserves. Further efforts to increase available working capital will be essential. In spite of low interest rates, only 36% of respondents are considering the use of debt to fund their growth.

Reputation matters

Brand and reputation is seen as the most critical factor in competiveness for 61% of respondents. As companies turn their attention back to growth, there seems to be recognition of the importance of branding to build differentiation and loyalty. It is likely that we will witness a corresponding increase in marketing effort over the next two years.

Stakeholder management

The area of stakeholder management has been one of the biggest areas of change in the way businesses compete. Businesses are moving away from a compliance mindset to managing stakeholders more proactively and have adopted a number of measures to do so. Almost half of the companies have improved transparency and frequency of communications with stakeholders over the past two years and a third now produce additional non-financial reporting.

Cost competitiveness

The economic downturn has required businesses to focus on being more cost competitive, both to protect margins as well as market share. However, in comparing the “high performing” companies with others in the survey, there is a marked difference in the future focus of these high performers. While 31% of the low performing companies continue to focus on reducing costs by more than 10%, many high performers have secured cost efficiencies, and are focused on product differentiation and expanding share. The pressure on the higher cost organisations is likely to accelerate, and erode market share in the short-term.

This study was conducted by the Economist Intelligence Unit (EIU) between 1 September and  14 October 2010. Globally, over 1,400 C-Suite, board directors and senior managers responded.

Results were compared by relative high and low performance for each sector based on EBITDA and revenue growth over the past two years.

Ernst & Young has developed a model (see graphic) to demonstrate how high performers are succeeding in an increasingly competitive marketplace.