November 2013

Growth strategies

9th Australasian Capital Confidence Barometer

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Q. Which statement best describes your organisation’s focus over the next 12 months?

EY - Which statement best describes your organisation’s focus over the next 12 months?

An imperative, not an option

The number of companies focusing on growth has almost doubled in the past year, with 70% of respondents planning to grow in the next 12 months.

Even taking into account an uptick in corporate confidence from the Australian Federal election, it’s clear that executives are more confident in the outlook. The priority is now a return to growth, with a continuing focus on cost discipline and operational efficiency.

In any growth cycle, initially lower risk organic growth strategies will be pursued, with most companies concentrating on expanding in current markets, or pushing existing products and services into new geographies. In these circumstances, companies wanting to deliver faster growth will increasingly turn to M&A activity.

  • Major swing to focus on growth

In a major upward swing, 70% of companies plan to focus on growth over the next 12 months. This is well ahead of the global trend, which Australasia has lagged for the past two years. Although this overwhelmingly positive sentiment may moderate slightly in the future, it seems most executives believe the worst is behind them.

This is not to say that businesses are throwing caution to the wind. The percentage of companies focussed on cost reduction and operational efficiency remains high. Just over a quarter of local businesses continue to see this as their main priority. We expect boards and leadership teams to maintain cost discipline and seek further efficiencies for many months to come.

However, few companies (3%) remain concerned about just maintaining stability. This was the primary focus for a third of businesses a year ago. It seems local corporates reached the bottom of the growth sentiment curve in October 2012. After a year of slowly improving conditions, executives now feel sufficiently confident to concentrate on recovery and growth

Q. Which statement best describes your organisation’s focus over the next 12 months?

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  • Organic growth to come from core products

Not surprisingly, given the prevailing atmosphere of caution, most companies are still looking at lower risk growth strategies to start the recovery process. Generally, executives are sticking with what they know – almost 46% will concentrate on core products and existing markets, up from 18% six months ago.

The only higher risk organic strategy being pursued is in new geographies, where 12% of respondents plan to find organic growth – via existing products and services. Over time, as confidence strengthens, local companies will adopt bolder growth strategies. For example, we can expect future investment in technology and R&D to develop new markets and products. But, for now, most growth strategies will remain at the lower end of the risk curve.

  • 46% of respondents will be looking to core products and existing markets for growth, compared with 18% six months ago

  • Economic confidence boosts investment intentions

The positive shifts in both economic outlook and corporate confidence are reflected in our respondents’ capital agendas. The focus has shifted from raising, preserving or optimising capital to investing it, with 57% of businesses looking at investing capital, up from 32% a year ago.

That said, capital optimisation is still important, with 27% of companies still making this their focus, down from 36% six months ago. Notably, just over a quarter of non-stressed refinancing is being driven by capital optimisation, up from 11% six months ago.

With many companies sitting on cash, capital raising intentions are low. Only 11% of businesses have this as their focus – half the level we saw in April 2013 and October 2012. As cash is used in the first wave of M&A activity, the need to raise capital down the track will increase.

In another positive indicator, preservation is largely off the agenda.

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