How SMEs grow in an uncertain global economy

Global headwinds such as slowed economic growth in China and low oil prices challenge small and midsize companies, PwC research suggests.

Of the more than 200 CEOs of US-based SMEs that PwC polls quarterly, only 53% were optimistic in the fourth quarter of 2015, down from 71% in the first quarter.
 
Respondents in the PwC Trendsetter Barometer are part of the growth engine of the US economy, said Ken Esch, CPA, a tax partner in PwC’s private company services section who oversees the survey. And they view the uncertain US economy and even more so the international economy as a challenging environment.

“The No. 1 issue on the minds of business leaders is ‘How do I continue to grow my business in a very challenging economy?’ ” Esch said.

The Trendsetter Barometer taken during the fourth quarter of 2015 and PwC’s 2016 global CEO survey present five strategies that US-based SMEs are pursuing to boost revenue, profits, and value:

Mergers and acquisitions, joint ventures. The number of SMEs planning a merger, acquisition, or joint venture rose a record 7 percentage points to 17% in the fourth quarter of 2015, up from 10% in the third quarter. M&A and joint ventures are an important strategy for SMEs to increase revenue, Esch said. “Financing [costs] remain historically low for many companies, [but] the current low rates will stay low for only so long. Companies planning to take advantage of them should probably do so sooner rather than later.”

Customer experience. In the fourth quarter, 30% of SMEs planned major new investments in 2016, up from 25% in the previous quarter. Many of the investments (74% of respondents) are earmarked to go into operations, up from 65% the previous quarter.

The emphasis on operational investments is meant to improve customers’ experience, including how customers can find out about and order products and services and how purchases are delivered, Esch said. “A lot of it is through technology platforms.”

Overseas expansions. About half of the SMEs polled for the Trendsetter Barometer do business abroad, and the economic slowdown in China is affecting them. Of the companies selling in China, only about 54% polled in the fourth quarter of 2015 expected to meet their revenue targets for the year, down from 70% polled a year earlier. China’s long-term potential, however, remains substantial, Esch said. “You need to continue to evaluate how you enter this market, but companies should not take their eyes off the ball in terms of growth opportunities.”

While growth overseas is slower than in years past, high-performing SMEs continue to look for opportunities to expand in developed economies such as Canada, Germany, and the UK and emerging economies. Brazil, which presents a very challenging economic and regulatory environment, as well as India, Mexico, Russia, and the United Arab Emirates, were among the ten most important countries CEOs named for growth prospects in 2016, according to PwC’s CEO survey.

Among multinational SMEs polled for the Trendsetter Barometer, 44% planned major capital investments overseas and 37% planned increased spending abroad to introduce new products and services.

Data analysis. The increase in planned technology investments aims to improve customers’ experience and help the companies learn more about their customers and their customers’ buying habits, Esch said. Harnessing this information will allow SMEs to better identify new products and services and to fine-tune pricing.

SMEs “use this information to determine what types of products and services to present, when to present them, whether they can connect one service or product with another,” he said. “There’s focus on the top-line growth, but there’s also benefit to bottom-line results.”

Talent. Fifty-eight per cent of SMEs polled in the fourth quarter of 2015 planned to increase their headcount, up slightly from 56% in the previous quarter, but companies are predominantly looking for specialists, particularly in sales, marketing, and technology.

Most of the hiring is in the US, Esch said, but companies will consider global resources to attract hard-to-find skilled talent. For example, one company he works with hired ten engineers from Ireland last year because it had such a hard time filling the positions in the US.

—Sabine Vollmer (svollmer@aicpa.org) is a CGMA Magazine senior editor.