Tackling a more competitive market place

Companies face a far more competitive and volatile business environment in the immediate future where margins will be under pressure and innovation will be critical, a new survey has found.

Indeed, 85 per cent of the 1,400 senior executives polled around the world by Ernst & Young as part of its Competing for Growth study, believed their markets would become more competitive over the next two years.

Margins were also under pressure, with almost 50 per cent reporting price erosion and almost 30 per cent noting increased labour and input costs. And, many noted that markets were more varied and volatile than before the global financial crisis.

In this uncertain environment, Neil Plumridge, head of Ernst & Young’s advisory practice, says more so than ever before, directors need to be clear about their organisation’s strategic positioning and what they intend to do better than other players in the market. The execution of the strategy also needs to be far more refined.

“It’s one thing to have a good strategy document and to agree on what the strategy is, but if the management team’s capability to execute isn’t strong, then the document is essentially worthless,” he says.

“Getting executive alignment is paramount. It’s not only critical to have the CEO agreeing on what needs to be done. You also need to have the CEO’s team fully committed, passionate and aligned around that strategic agenda. Often this is where things come undone.”

With 71 per cent of the survey’s respondents stating that innovation was becoming increasingly important for survival, Plumridge advises asking management to provide the following:

• A list of the company’s top 10 innovations over the last three or four years and a description of how these have affected customers and value creation.
• A benchmarking report of the company’s innovation and ideation (idea creating) processes against that of competitors.
• A target for future revenue from new products and services.

To counter the erosion of margins from higher costs, Plumridge says directors should gain an understanding of the following:

• The price elasticity of the company’s products – what ability does the organisation have to pass price increases on to customers or do these need to be absorbed?
• How much unintended or poorly thought out price discounting is taking place – how much margin is being given away through poor discounting policies and processes?
• Can the organisation increase its share of wallet from the customers – can it keep customers longer and get them to buy more?

The study also suggests that responding quickly to rapid change in a more competitive marketplace will become increasingly important. With this in mind, Plumridge notes:

“If I were a director, I would want to understand how well the company does demand forecasting and the level of accuracy at which the company outperforms in this important activity. I’d also want to know how well integrated that forecasting was with key customers and the timeliness in which information is shared.

“I would also ask when management last did a thorough review of the safety stock levels – the trigger point at which you re-order your stock. In this environment, you’d want to have a very nimble and flexible inventory holding level so that you are not carrying too much stock … It’s about having a lot more science in the sales forecasting than there has been in the past.”

Does this ring true with your own experience?  Maybe you would like to comment and share your own perceptions of the market place?