LONDON--(BUSINESS WIRE)--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 labor and key inputs.

Sixty percent of respondents cite developed markets as the likely source of profitable growth, while 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 global business outlook reported 12 months ago in similar Ernst & Young research, when emerging markets were the clear focus for overall growth.

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 there. 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. 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 53% are introducing new products/services to increase sales. Corporates are 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. 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 labor cost inflation. The emerging markets in particular are seeing rapid increases in labor costs due to increased competition. This is most pronounced in India, where 55% report labor 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 competitiveness for 61% 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 effort over the next two years.

Stakeholder management

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 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

In comparing “high performing” companies with others, there is a marked difference in future focus. While 31% of 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 organizations is likely to accelerate, and erode market share in the short-term.

- ENDS -

Notes to editors:

Research methodology:

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.

About Ernst & Young

Ernst & Young is a global leader in assurance, tax, transaction and advisory services. Worldwide, our 141,000 people are united by our shared values and an unwavering commitment to quality. We make a difference by helping our people, our clients and our wider communities achieve their potential.

Ernst & Young refers to the global organization of member firms of Ernst & Young Global Limited, each of which is a separate legal entity. Ernst & Young Global Limited, a UK company limited by guarantee, does not provide services to clients. For more information about our organization, please visit www.ey.com

This news release has been issued by EYGM Limited, a member of the global Ernst & Young organization that also does not provide any services to clients.