E&Y: Romanian executives see increasingly competitive local business environment

Newsroom 05/01/2011 | 15:27

Around 78 percent of Romanian executives answering an Ernst & Young survey titled Competing for Growth expect competition on the local market to increase in the next two years. A majority of Romanian executives (62 percent) cite that, in the coming years, new companies from developed markets as well as existing players from emerging markets will be the reason for the increased competition.

The study, which surveyed 1,400 senior executives around the world, found that 85 percent of respondent expect the market to become more competitive over the next two years.

According to the study, markets are expected to be more volatile than before the crisis, with profit margins under pressure due to decrease or containment of prices and increase in labor costs. Specifically, price increases globally are expected to be low, as about 60 percent of respondents expect a price rise that either only matches or is below inflation. 

51 percent of the businesses operating globally and 62 percent of the businesses operating in the area of CSE see new companies from developed markets as a driver of increased competitiveness.

Brand and reputation are seen as the most critical factors for competiveness by 61 percent of respondents globally, 48 percent of CSE respondents and 48 percent of the Romanian ones. Therefore, it is likely that we will witness a corresponding increase in marketing efforts over the next two years. Moreover, 39 percent of Romanian respondents indicated cost competitiveness in sales, distribution and service as the most critical factor for competitiveness in order for a company to respond more quickly to market changes, followed that that organizational flexibility (36 percent).

Penetration in new markets is seen as the most effective tactic for boosting business growth, by respondents at all levels of the study. Specifically, 60 percent of respondents worldwide, 71 percent of respondents from CSE and 87 percent of Romanian respondents believe that the best way to grow is by selling their services  and products in new markets.

Furthermore, innovation is becoming increasingly important with more than half of the companies, both worldwide and in Central and Southeast Europe, focusing their efforts in introducing new products or services to increase sales in markets where they are already present.

In Romania, while innovation is recognized as a factor of increasing importance in the market by 39 percent of respondents it is not dominant in the development strategy, as 70 percent of the businesses see their development linked to new services and products.

Equally different appears to be the approach that companies are adopting regarding the actions undertaken to increase their flexibility: the respondents of the global study focused their efforts on introducing new products to cover a wider range of market needs, but the respondents from CSE and Romania have focused on investing in more flexible production processes and technologies.

 With the general trend indicating a price rise that either only matches or is below inflation, profit margins remain tight as business costs rise. The main reason is the reduction in demand, which is indicated by all respondents as a major factor, especially from 57 percent of Romanian respondents, followed by input cost inflation (52 percent) and labor cost inflation (48 percent).

In this context, 35 percent of the local respondents indicate that companies aim to reduce their costs by 11-20 percent through different approaches, while 17 percent say their intention is to reduce costs by 5-10 percent and another 17 percent by over 20 percent.

More specifically, domestic firms are focusing mainly on adjusting headcount to market demand (48 percent, increasing the efficiency of human resources through the optimization of processes, tools and training (48 percent), and using better promotion, sales or distribution technology (35 percent).

The survey reveals either an inability, or an unwillingness to go to the capital markets for financing in all markets included in the study. Approximately half of the companies operating in Romania (48 percent) and abroad are planning to finance future growth from cash reserves. Further efforts to increase available working capital will be essential. However, according to the survey findings, the Romanian participants are also considering the following sources: equity release (44 percent), bond issue (35 percent), IPO (26 percent), and sale of non-core assets (26 percent) to finance company growth.

Nearly half of the respondents, especially those from CSE, have improved transparency and frequency of corporate communication on performance with stakeholders, over the last two years. Significant emphasis is also placed on managing their financial reputation. In Romania 78 percent of the respondents consider such actions as key to strengthening relationships with stakeholders, and 48 percent focus on providing additional non-financial reporting.

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