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EY Growth Barometer 2018
US

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How US companies are harnessing disruption, digitization and customer insights to push forward growth plans

The US continues to lead the world in its focus on the customer, the EY Growth Barometer 2018 survey shows. Not only does customer demand drive innovation, but company leaders are investing in new, digital technologies to improve the customer experience and using customer data to increase agility. Growth rates settle this year as the domestic economy improves. US CEOs are grasping opportunities to expand into new sectors and sub-sectors as industry convergence accelerates, hampered only by a deepening lack of skilled talent.

EY Growth Barometer survey methodology

EY commissioned Euromoney Institutional Investor Thought Leadership to undertake an online survey of 2,766 C-suite (60% CEOs, founders or managing directors) in companies from 21 countries and with annual revenues of US$1m-US$3b. The survey was conducted from 15 January-1 March 2018. EY further invited the network of EY Entrepreneur Of The Year alumni from across the globe to take the survey. The survey was available in English and six other languages. Further in-depth interviews were carried out during March-April 2018 to provide additional specific insights.

Contact

EY - David Jolley

David Jolley
Americas Growth Markets Leader, Ernst & Young LLP US

Growth strategies

US middle-market companies are looking forward to strong, steady growth in 2018, powered by a commitment to customer centricity and a willingness to exploit new technologies.

Amid a mood of growing confidence, industry convergence is fueling such expansion through growth strategies such as M&A activity and moves into adjacent sectors, but lack of skilled talent is a burning issue. As the second EY Growth Barometer reveals, few American business leaders expect double-digit growth rates. Instead, just over 7 out of 10 (72%) expect growth rates of 6%-10% in the next 12 months, up 44% from 2017, and higher than the figure of 56% for respondents in the rest of the world. This is more bullish than global growth predictions from the International Monetary Fund of 3.9%.1

Looking forward to stable growth

While globally, companies are focused on international expansion, in the US a different mood prevails. This reflects the maturity and scale of the US economy, boosted by recent tax reforms. Far fewer US middle-market companies are looking to overseas market opportunities as strategic priorities than non-US middle-market companies (12% compared with 26% elsewhere). Moving into an adjacent business activity, sector, or sub-sector is the top growth strategy for companies (cited by almost one-quarter), with M&A second, up 6% from 2017. This may be a response to industry convergence – one of the key drivers of M&A deals worldwide2 – and the disruptive force that US middle-market companies believe will have the biggest impact on their business, at 31% compared to 21% elsewhere. Meanwhile, extra cash from US tax reform may be fueling acquisition ambitions.

Revenue growth projections

This chart shows growth expectations for 2017 and 2018, ranging from negative growth to growth above 50%, including year-on-year percentage point changes.

EY - Revenue growth projections

Challenges to growth

Unsurprisingly, as leaders focus on the domestic market, the biggest external risk to growth plans is slow or flat local economic growth. Talent shortages are another hurdle. Indeed lack of skilled talent is a bigger headache for US companies than for others, with 25% citing this as a challenge to growth compared to 10% in the rest of the world. Even so, the US leads in its ability to attract, develop, and retain talent, ranking third in the 2018 Global Talent Competitiveness Index.3 This may be because 31% of middle-market leaders prioritize acquiring talent with the right skills, making this the top contributor to an accelerated growth strategy.

However, hiring plans reflect a note of caution, with 59% of companies planning to maintain current staffing levels over the next 12 months (compared to 28% elsewhere). Some 30% foresee an increase in the hiring of full-time staff and there is a move away from part-time and gig hiring, in line with the global trend. “Company leaders in the US are being realistic in their hiring plans,” says Jolley. “With unemployment at a historic 40-year low, there just aren’t the numbers of suitably qualified people in the talent pool to hire.”

Caution among US middle-market companies may reflect the impact of US President Trump’s corporate tax cuts. These gave a stimulus to business but will push up the US current account deficit and may prompt further rises in interest rates.4

“Lack of skilled people is the biggest challenge to accelerated growth.”

David Jolley

Americas Growth Markets Leader, EY

Building stronger teams

For US middle-market leaders, top priorities in improving their organizational culture are attracting digitally native talent and creating a flatter structure to empower employees, with 23% citing both of these. And it is no surprise that these two priorities are ranked closely since the two are linked. Reflecting the talent crunch, 16% of middle-market leaders believe more government investment in education would boost their growth plans, compared to 9% elsewhere.

Paradoxically, given their views on the need for skilled talent and digital literacy, when thinking about their human resource needs US companies prioritize team players (23%) over those with specialist skills (10%). "Finding the right talent is a global battle," says David Jolley, Americas Growth Market Leader, EY "and the US is not immune to its effects. Ensuring new recruits fit well into the organization culture and can work in teams is key to effectiveness and growth." Surprisingly, diversity is a recruitment priority highlighted by just 22% of respondent CEOs, compared to 45% elsewhere. Given that competition for talent can lead companies to look to non-traditional labor pools, this is likely to change.

Embracing business change

The US outstrips global peers in its customer focus. Whether guiding innovation, increasing agility, or driving investments in technology, the customer is key. And when it comes to the need for innovation, customer demand is a far more powerful driver in the US than in the rest of the world. Despite this customer focus, other nations are challenging the US when it comes to innovation. For the first time in six years, the US dropped out of the top 10 in the 2018 Bloomberg Innovation Index.5

Drivers of innovation

This chart shows companies’ key drivers of innovation within their business.

EY - Drivers of innovation

In the US, 17% of middle-market leaders cite customer understanding as doing most to increase their company’s agility (compared to 7% elsewhere), making this the second most important agility enabler after rapid decision-making, at 27%. In line with this focus, the most important objective of technology investments for the biggest group (34%) is improving the customer experience.

Technology moves up the agenda

Digital technologies are moving rapidly up the US business agenda, with most companies expecting to adopt artificial intelligence (AI) in the next five years. Technology is closely linked to industry convergence, which is transforming US business at a heightened pace. “Tech enablement or digitization drives convergence to some degree in almost every sector,” says Jolley.

US middle-market companies are looking to technology as a fundamental tool underpinning their growth strategy: one quarter say technology is the best way to contribute to improved productivity and 21% cite new technology as the most important enabler to accelerated growth. Companies also see digitization as the third among the disruptive forces having impact on their business, with one in five citing this, versus 13% globally. And in a dramatic shift since last year, AI is now viewed as a crucial growth enabler and efficiency tool, with 54% of all respondents either already adopting AI or planning to do so within two years. This compares markedly with 2017, when almost the same percentage worldwide (74%) said they would never do so. In the US, 89% plan to adopt AI over the next five years and 48% plan to do so in the coming two years, up 39% since 2017.

AI adoption

This chart shows the massive shift in the number of companies in 2017 and 2018 that intend to embrace artificial intelligence (AI) over the next 10 years.

EY - AI adoption

Surprisingly, however, the enthusiasm for technology among middle-market leaders is not reflected in spending plans. While Gartner estimates that this year’s global IT spending will be up 6.2% from 2017,6 US middle-market leaders place investments in digitization and technology low on their list of growth strategies, with only 14% citing these investments. There is also evidence that they are underestimating the risks from cyber threats, with just 6% seeing these as a significant challenge to their company’s growth. This under-investment could leave middle-market companies exposed to cyber risk.

While talk of technology often centers on the potential loss of jobs to automation, US middle-market companies do not share this worry. For example, they see AI adoption as a means of increasing productivity rather than cutting jobs, with 75% saying they envisage that headcount reduction will be less than 10%. “One of the fears you hear out in the economy is that robots are going to take our jobs,” says Jolley. “But in reality what we’re seeing here is that lack of skilled people is the biggest challenge to accelerated growth.”