Competition set to intensify for global businesses

In spite of the economic recovery, businesses see a far more challenging environment in the immediate future, with 85 percent stating that their market will become more competitive over the next two years, according to Competing for Growth, an Ernst&Young report. The latter is based on a poll of 1,400 senior executives around the world.

The study indicates that executives believe that the next two years will see a more intense focus on growth, and that markets are more complex and volatile than before the crisis. Profit margins are being strained, with almost 50 percent of respondents reporting price erosion and almost 30 percent reporting increases in labor and input expenses.

Sixty percent of respondents cite developed markets as the likely source of profit growth, while the emerging markets will be more tougher, due to a competition between local and foreign companies. The report contrasts with a similar one released a year earlier — also by Ernst&Young — when emerging markets were the main source of growth.

Jay Nibbe, Ernst&Young’s Deputy Area Managing Partner for Europe, the 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 strategies. 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 there. In the current economic climate, we are likely to see companies focusing additional attention on developed markets, where opportunities for short term profits are greater.”

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

Innovation is becoming increasingly important for survival for 71 percent of respondents and 53 percent are introducing new products/services to increase sales. Corporations are focusing their efforts to better take advantage of existing markets, with 58 percent looking to sell new products and services on markets where they are already present. In fact, 63 percent report that incremental product/service innovation has been more successful than transformational innovation.

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 the sectors and it 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. Other companies will need to follow their example to secure future success.”

Brand and reputation is seen as the most critical factor in remaining competitive for 61 percent of respondents. As companies turn their attention 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 efforts over the next two years.

Yet improved competitiveness will have to be funded from one’s own pocket, rather than loans, as before the crisis. 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 reserves. In spite of low interest rates, only 36 percent of respondents are considering the use of debt to fund their growth. Therefore, further efforts to increase available working capital will be essential.