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In times of crisis innovation is not an option but a necessity

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The 15th annual PwC Global CEO Priorities Survey has been released: CEOs are nearly three times more confident in their company's growth prospects than they are in the global economy. And talent management remains a major challenge for business leaders around the world.

The study of PwC was conducted among 1,258 business leaders in 60 countries and presented at the World Economic Forum in Davos. Leaders are modifying their strategy to adapt to new risks on an ongoing basis and see emerging countries as more important for future growth than developed economies. 

According to the PwC study, almost half (48 %) of the business leaders surveyed worldwide expect the global economy to decline further in the next 12 months. Only 151 % expect the economy to improve. However, almost three times as many of them are confident in their own company's growth prospects over the next 12 months than in those of the global economy. For example, 40% of business owners say they are "very confident" in their company's revenue growth for the coming year - lower than last year's 48 %, but higher than the 31 % of 2010.

This suggests that they feel they have learned to cope with difficult and volatile economic conditions. 

A loss of confidence shared by emerging countries

Unsurprisingly, it is in Western Europe that the loss of confidence is most marked. Faced with the sovereign debt crisis, only a quarter of European business leaders are very confident in their revenue growth over the next twelve months, a percentage down sharply from last year's figure of nearly 40 %. Managers in the Asia-Pacific region are also less optimistic, with only 42 % of them expressing confidence, compared with 54 % last year. China shows the largest decline in the Asia-Pacific region, with 51 % of respondents declaring themselves to be "very confident" compared to 72 % last year. In India, they are 55 %, compared to 88 % last year. 

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Conversely, African business leaders are more confident, with 57 % of them anticipating growth compared to 50 % last year. The United States shows a slight decline, with 41 % of business leaders declaring themselves very confident in short-term growth prospects, compared to 45 % last year.

Leaders' concerns: economic uncertainty, deficit and taxation.

80 % of the business leaders surveyed are concerned about uncertain economic growth, 66 % about the government's response to budget deficits and debt, 64 % about financial market instability, 58 % about exchange rate volatility and 56 % about excessive regulation. European leaders are particularly concerned about government decisions on debt and market volatility (76%).

Among the threats to activity, 55% of business leaders cite tax hikes as the first threat. Especially since more than three-quarters of them claim that taxation impacts their decisions to set up or invest abroad. Next come the risk of a talent shortage (53%), changing consumer behaviour (50%), the cost of energy (46 %) and the inability to finance growth (40 %).

Emerging countries as a source of business growth

No one will be surprised to learn that the countries with the highest growth potential are China (30%), the United States (22%), Brazil (15%), India (14%) and Germany (12%). Emerging markets remain a vital source of growth for business leaders, with 59 % indicating that these growth markets are more important to the future of their business than developed economies. 83% executives report that they expect their business activity in South-East Asia to increase over the next 12 months, compared to 77% in Latin America, 75% in Africa and 67% in the Middle East.

What strategies to deal with the crisis?

While 56 % of them state that their company has been financially affected by the debt crisis in Europe, 45 % say they have already taken measures to deal with it (56% of Europeans).  

This adaptation appears to be continuous, as 70 % of the business leaders plan to modify their strategy in the next twelve months, this evolution being mainly dictated by customers' expectations and economic conditions. These strategic changes include talent management (78%), reorganizations (72%), risk management (67%), but also investment decisions (61%). However, the crisis has reduced the cash position of major international groups and increased uncertainty, which has weighed on corporate R&D spending.

What about innovation in all this?

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"In times of crisis, innovation should not be an option," says Mark Atkins in an article in Business Week. Mark Atkins' reasoning is that companies need to continue these investments in order to take dominant positions at the end of the decade. Quite the contrary, because it is in difficult phases that the real levers of success emerge. However, the return on investment is far from immediate and patience is required. Success will smile on the intrepid who continue to invest during crises - according to one study PIMS - in the years following the crisis through the acquisition of a few additional points of market dominance. Results will not be achieved in the short term and this is the real difficulty for innovators: it will be necessary to demonstrate to managers - themselves pressurized by short-term tensions - that budgets must be maintained and above all not cut.

However, investment in research and development has declined in industrialized countries, while China is innovating more than ever, according to a report by World Intellectual Property Organization (WIPO). He points out that, as a result of the crisis, companies around the world have cut their research and development budgets: the number of patent applications from the United States to protect their new inventions remained unchanged in 2009 and 2010. The number of patent filings in the United States to protect their new inventions remained unchanged in 2009 and 2010. The number of patent filings in the United States fell by 7.9% in Europe and 10.8% in Japan last year. By contrast, in China, they increased by 18.2% in 2008 and by 8.5% in 2011. In addition, Chinese trademark registrations jumped by 20.8% last year, while those in the United States, Germany and Japan fell by 11.7%, 7.7% and 7.2% respectively.

"As China moves up the value chain and rapidly increases exports based on its own innovations, there is inevitably an ever-increasing number of patent filings," said WIPO Director General Francis Gurry. Carsten Fink, the organization's Chief Economist, said that China's large cash reserves had enabled it to continue to finance innovation during a period of tight bank credit and a scarcity of venture capital. "There are (in China) huge reserves to finance domestic investment in R&D and industrial projects," he added. 

A fundamental trend in favour of innovation in emerging countries

"The innovation landscape in the aftermath of the crisis will continue to look different than it did ten years ago," said Francis Gurry. According to Gurry, developments during the recession are likely to become an underlying trend favourable to emerging countries. "While the strength of the recovery remains uncertain, the geographical shift in innovation should continue to be towards new players, particularly in Asia," he said. Other emerging countries also sought to protect their innovations before the end of the crisis, with double-digit growth rates in 2011 for patent filings in Belize, Peru, Romania and Turkey.

Innovating to bounce higher?

Periods of economic hardship usually bring bad news for innovation. Shareholders, banks and therefore management tend to focus on the short term, the certain, cost reductions... Concepts that are sometimes considered to be antinomic with innovation.

And yet! Previous crises have often led to upheavals in the competitive game: establishing or shaking leadership. We must be convinced that innovation is a powerful lever to turn these delicate moments into excellent opportunities to develop a competitive advantage. There is no shortage of examples: Renault, which successfully launched its Twingo in the midst of the 1992-93 recession; Technics, which turned its old turntables into products that are highly prized by DJs and enthusiasts at a time when the consumer market is collapsing; Apple's Ipod, launched in October 2001, just after the Internet bubble burst and September 11...

Today, faced with a major crisis, the innovation manager must rethink his activity: how to deal with short-term expectations ("quick hits"), how to innovate with reduced resources or even without R&D, how to multiply his chances through "open innovation", and all this without compromising the long term.

Methodology of the study :

As part of PwC's fifteenth annual Global CEO Priority Survey, 1,258 interviews were conducted with CEOs in 60 countries in the last quarter of 2011. 291 interviews were conducted in Western Europe, 440 in Asia Pacific, 150 in Latin America, 236 in North America, 88 in Central and Eastern Europe, and 53 in the Middle East and Africa. The full version of the study and the associated graphs can be downloaded at www.pwc.com/ceosurvey.

About PwC

In France, PwC develops audit, public accounting and advisory engagements that create value for its clients, with a focus on sector-specific approaches. More than 169,000 people in 158 countries across the PwC network share ideas, expertise and innovative perspectives for the benefit of our clients and partners. PwC's French member firms employ 4,000 people in 25 offices.  www.pwc.fr

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