The new reality for business
Our research suggests that companies are increasingly accepting that the length of the downturn is fundamentally uncertain.
As they face up to the downturn in mature markets, they are pouring significant efforts into cutting both costs and prices to compete in shrunken mature markets and highly competitive rapid-growth markets. Our survey results show this shift in thinking.
Pricing pressure has become the biggest risk noted by companies this year. Mature markets nearing saturation have led to fierce price competition, with little or no organic growth expected.
Such problems are exacerbated by the strength of both low-cost competition and online rivals, which have made brand-driven price premiums hard to sustain. High wages and input costs, as well as significant new regulatory burdens on various sectors, mean that the pressure on pricing will impact profit without firm action.
Cost cutting and the related pressure on profits is cited by respondents as the second-biggest risk they face.
Five years into the global crisis, most of the simple cost cuts have already been made by companies. This is now pushing businesses into tough decisions over how to cut costs without damaging product and service standards.
But for those who get this right, the payoff can be dramatic. We estimate that cutting costs by just 1% can help improve bottom-line results as much as a 10% boost in sales.
Firms are using technology to improve productivity, introducing more flexible working practices and re-engineering supply chains to service emerging markets growth. However, there is also acceptance that the increasing reliance on emerging markets for growth brings new risks.
For the first time, firms list sovereign debt, the impact of austerity and political shocks as among the top 10 risks they face. These fears are especially acute within mature markets — most notably the Eurozone, where the threat of a deep recession remains and some countries face the definite possibility of a debt default.
What it all means for businesses
The challenges presented by weak mature market growth will continue to influence the global economy into 2015, with increasing volatility in commodities and currencies putting upward pressure on costs and squeezing profits. Political shocks across both mature and rapid-growth markets will continue to catch those companies without adequate response strategies off guard.
To mitigate the risks and enable opportunities companies could: