These are testing times for the UK economy and for companies that rely on the domestic market. With growth flagging and inflation rising, the coalition government is pressing ahead with its bold gamble that reining in the budget deficit will create the confidence for businesses to invest and expand.

That in turn poses a challenge for entrepreneurs, owners and managers. The strategies that carried them through the recession – such as conserving cash and controlling costs – are still relevant. But if they do those things alone, they risk seeing rivals overtake them.

By now, we must hope, companies have assessed where their most profitable growth prospects lie. They will know where and how they want to invest. The skill lies in deciding when the time is right and ensuring the organisation is in sound health before branching out.

George Osborne’s Budget last month lightened the mood among many businesses. “I thought it was quite positive,” says Iain McGeoch, chairman and chief executive of M&Co, one of the country’s largest privately owned fashion retailers, who had previously felt the government was not doing enough to lay out a path back to prosperity.

With little cash available, the chancellor found room for an extra 1 percentage point cut in corporation tax, along with incentives for angel investors, manufacturers, small businesses and multinationals. But, Mr McGeoch adds: “There is still a lot of pain in the system with all the new tax rates and everything coming through.”

The Office for Budget Responsibility cut its growth forecast for this year from 2.1 per cent to 1.7 per cent, with 2.5 per cent in 2012.

M&Co, a Scotland-based company with turnover of £182m and 300 stores around the UK, has seen sales fall since January, hit like other clothing retailers by a sharp rise in the cotton price coupled with higher value added tax and the squeeze on customers’ wallets.

“You have to think about your level of expansion and just be cautious. Make sure you don’t have too much stock and, if you find something that’s a winner, then get back in and repeat it as best you can,” Mr McGeoch says.

The company, known until recently as Mackays, was established in 1834 as a family pawnbroker business, before Mr McGeoch and his brother Len turned it into a clothing chain in the 1960s.

Mr McGeoch says he has “put off a little bit of investment” but is still expanding cautiously. M&Co is building a 50,000 sq ft warehouse extension at its Inchinnan headquarters in Renfrewshire to cope with online sales growth and will open five or six new stores this year, adding 100-150 to its 3,400 staff. It plans franchise operations overseas, having previously ventured unsuccessfully into the US and Poland in the 1980s and 1990s.

Speedy Hire, the UK’s largest tool-hire company, was driven into losses during the recession because of its dependence on the construction sector, but believes it is now turning the corner. Steve Corcoran, chief executive, says: “I don’t think the environment is without opportunity. We have all got to think differently, change our operating model and look at how we can get best value.”

The company has axed more than 300 jobs and closed 37 depots, and plans to reduce its 340 sites to about 270. It is reshaping its network along the lines of Tesco, the supermarket chain, with multiservice centres, superstores and local centres – three outlet sizes akin to Tesco Extra, Tesco superstores and Tesco Express stores.

Mr Corcoran believes Speedy Hire can emulate Tesco in another way: reinforcing its leading position in the construction sector, where equipment suppliers with national networks stand to benefit from infrastructure projects in water, waste, energy, transport and communications. He hopes to increase turnover from roughly £300m to £1bn.

“Most businesses I know have been looking at aligning customers’ requirements through innovative ideas, a change to partnership-type approaches and longer-term planning,” he says. “We have to get more consistency, data and management information, and become less reliant on labour.”

Other companies also see growth prospects in the UK market, in spite of its slow recovery. Arvato, the business process outsourcing arm of Bertelsmann, the German media group, operates contact centres, supply-chain services, finance services and customer retention programmes at 11 locations. It has a turnover of £200m in the UK and employs 3,000, which it aims to more than triple within five years by winning new contracts, taking it into the top four suppliers.

“The prospects for the British economy are not as good as in Germany,” says Matthias Mierisch, UK and Ireland chairman and chief executive. “However, there is a certain pressure to find better solutions in outsourcing. It’s definitely a strong market here, and we want to stay long term.”

Those that succeed will need to focus on their core elements and on innovation, he says.

Arvato is being squeezed on margins in the public sector – nearly half its business – but that is balanced by the opportunities created by the cuts to provide extra services to clients such as local authorities. Among the main obstacles, Mr Mierisch says, is the time it takes for political decisions by the government to filter down to those who have to execute them.

For John Morris, chief executive of JAM Recruitment, a specialist recruitment consultancy in engineering and manufacturing that he founded 10 years ago, it is a case of: what economic slowdown? His sales have grown by 59 per cent to almost £10m in the past year, and staff headcount has more than doubled to 106. “There is a lot of positivity out there, which is surprising when you read a bit of the news,” he says.

Business has been buoyed by manufacturing’s strong recovery – much of it led by exports, but not exclusively. Food and drink, packaging, and scientific and professional have all been busy categories. Weakness in defence has been offset by growth in motor vehicles, transport, civil aviation, mechanical equipment and general manufacturing.

Mr Morris wants to increase his staff to 250 within three years and expand into Germany. He may even enter the Chinese market. In the UK, he sees a big opportunity arising from the demand for engineers in sectors such as nuclear power and renewable energy, coupled with filling skills gaps already appearing as the older generation of engineering workers starts to retire.

He was pleased by the chancellor’s investment in 50,000 new apprenticeships and 12 extra university technical colleges, a new breed of vocational training school for 14- to 19-year-olds. “Hopefully that will help bridge the gap between education and industry,” Mr Morris says.

In the present climate, not all companies see the future as brightly as JAM. “They have to be concerned about some of the risks they are facing, to be honest,” says Barry Cole, head of risk at Barclays Corporate. “They have to try to look at the businesses they have. They have to stay very close to their customers and close to demand, and be prepared for a period of longer, slower growth.”

The good news is that the OBR expects growth to recover to 2.9 per cent by 2013. It does not, however, believe the supply-side measures in the Budget allow it to upgrade its assumption on medium-term sustainable growth from 2.35 per cent until 2014 and 2.1 per cent thereafter. For some time to come, companies focused on the UK market may need to burnish their skills in finding new opportunities in a slow-growth environment.

Don’t forget Britain’s mid-cap corporate army

Medium-sized UK companies sometimes feel ignored and underappreciated. John Cridland, director-general of the CBI employers’ group, calls them “Britain’s Mittelstand” – a version of Germany’s strong mid-cap sector – or the “forgotten army”.

While policymakers focus on start-ups and multinationals, mid-caps often get left out. Yet evidence suggests they produce some of the fastest-growing companies. Encouraging them will help the UK create the many private sector jobs it needs over the coming years.

Research last year by Ernst & Young, the professional services firm, suggested that mid-cap companies would invest £109bn in innovation by 2012, with the highest spending in research and development, market research and technical training, followed by diversification, bringing new products and services to market, and developing new technology.

In this year’s tougher environment, Stuart Watson, partner at Ernst & Young, believes they will continue to innovate, spurred by intense competition. But, he says: “The world is going to be a troublesome place for a while now. There will be losers as well as winners.”

A number are family owned. Grant Gordon, director-general of the Institute for Family Business, says family-owned businesses have come through the recession reasonably well because they are “patient investors”, although many are holding back on investment because of the state of the economy. He is encouraging mid-caps to look at faster-growth international markets, but agrees many will need to invest at home if the UK is to create the jobs it needs.

Public policy targeting innovation can help, but it is hard for civil servants to spot the fast growers, which can occur in any sector or any part of the country. They are typically at least five years old and not necessarily in high-technology sectors. Unlocking their potential will be the key to raising the UK’s growth rate.

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