Strategic business risk 2008 — The top 10 risks for business2 We have found the use of the radar — our risk radar — to be a simple and useful device to allow us to present a snapshot of
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business risk 2008 The top 10 risks for business
Trang 2In collaboration with:
Strategic business risk 2008 — The top 10 risks for business
About this report
Risks are inherent in every forward-looking business decision so successful risk management should be an integral part of an organization’s strategy and operations —
an important dimension of good management practice
There has been a great deal of work done in the area of risk management in recent years Ernst & Young has been engaged in significant global activity to clarify stakeholder perspectives, map management activities and identify leading practice from which all can benefit Likewise, many companies have invested significant resources globally in risk and compliance initiatives
Financial risk and regulatory risk have been the focus of much of this effort In both cases, there are externally determined rules and frameworks with which companies need to comply and emerging best practice guidance on processes and controls that can help
We have worked with many companies who have found that the challenge of compliance can lead to opportunities for performance improvement through improved processes and enhanced communication Some companies are now looking more closely at their operational risks, prioritizing these and thinking about how they can manage and monitor these in a coordinated way, the result of which can again be opportunities for performance improvement What is clear is that to gain further business advantage, companies must increasingly look at the extended risk universe, from finance and compliance risk —
to operational and finally, strategic risk
A different perspective on strategic risk
Our experience, however, suggests that strategic risk has not necessarily benefited from developments in management practice Much that has been written about strategic risk seems to be at such a macroeconomic level that the implications for action by the management of a specific company can be lost More significantly, the different implications for companies operating in different sectors can be blurred Someone’s challenge is frequently someone else’s market opportunity
We decided to explore the area of strategic risk from a different perspective
In collaboration with Oxford Analytica we focused on the strategic risks facing 12 of the world’s most important sectors: asset management, automotive, banking and capital markets, biotechnology, consumer products, insurance, media and entertainment, oil and gas, pharmaceuticals, real estate, telecommunications and utilities These sector studies served as the primary source for the overall comparative report of our findings
It is never the risk that
causes damage or
creates opportunities —
it is how we respond.
Trang 3Contents
Trang 4Strategic business risk 2008 — The top 10 risks for business
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We have found the use of the radar — our risk radar — to be a simple and useful device to allow us to present a snapshot of the top 10 strategic business risks for a company, a sector or indeed the global economy
as a whole The radar allows us to show both the scale of the challenge and its nature
To arrive at our findings, we worked with Oxford Analytica to interview more than 70 analysts from around the world and from over 20 disciplines that shape the business environment, including law, finance, the sciences, business strategy, geopolitics, regulation, medicine, economics and demographics The focus of our interviews was to identify the emerging trends and uncertainties that will drive the fortunes of leading global businesses over the next five years
Our interviews were open-ended in that we did not provide a list of pre-determined risks for the analyst to rate Rather we asked each analyst to tell us what he or she believed would be the most important strategic challenges for global business ahead Many different risks and challenges were identified, with in excess of 40 by more than one analyst In order to prioritize the top risks for each sector, panels of sector experts including journalists, researchers, advisors and our own Ernst & Young practice professionals rated the severity of each of the risks for the sector concerned
The risks that appear at the center of the radar are those that our panels believed will pose the greatest challenge to business in the coming year Those on the outer edge — whilst not small and still in the top 10 — are considered to be of slightly lower priority
It rapidly became clear that not all strategic business risks are the same in nature We have therefore also divided the radar into three broad sections: (1) macro threats that emerge from the general geopolitical and macroeconomic environment in which we all operate; (2) sector threats that emerge from trends or uncertainties that are re-shaping the specific industry; and (3) operational threats that have become so intense that they may impact the strategic performance of leading firms We believe this distinction is helpful, whilst recognizing that these categories are not completely exclusive Hence, we can present one radar for a company or sector, as collectively, these are the principle strategic risks that industry-leading firms must manage if they are to maintain their dominant competitive position
“Strategic Risk (str-t’jk rsk)—
a risk that could cause severe
financial loss or fundamentally
undermine the competitive
position of a company.”
The Ernst & Young
strategic business risk radar
Macro Threats
O
tio
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hrea ts Se
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Trang 5Risk weighting and
risk prioritization
Phase 1:
• We asked the pool of analysts to list and
to rate (on a scale of one to ten, with
one having the least impact), the 10
most significant trends or uncertainties
that may impact companies, and to
provide commentary on why these are
important to their industry
• Analysts were then asked to list the five
most significant business risks to firms
within their industries — considering in
particular those of a strategic nature
— that might bring about shifts in the
industry or put leading firms in peril of
losing their position A numerical rating
was applied from one to five
Phase 2:
• In order to prioritize the top risks for
each sector, panels of sector experts
including journalists, researchers,
advisors and our own Ernst & Young
practice professionals rated the severity
of each of the risks for the sector
concerned Panelists were asked to
assign a numerical severity rating, from
one to five, based on the likelihood that
a risk issue would lead either to severe
financial impact or undermine the
competitive standing of the leading
firms in their sector The ratings
assigned by each sector panelist were
averaged to build the lists of top risks
by sector
• The risks that were rated as having
the greatest impact across the largest
number of sectors were identified as
the ‘top 10 risks for global business
in 2008.’
Scanning the sectors
We have assumed that a ‘scan’ is or should be the most appropriate collective noun for the resulting grouping of strategic business risk radars and present (overleaf) the results of this analysis for each
of the 12 core sectors.
We hope that what is immediately clear is the extent of variation between these 12 radar snapshots The most significant strategic business risk is different for most of them and the nature of those strategic business risks is varied for all of them
Variation in risk
Close examination of the radars — individually and collectively — shows that there is no consistent list of top 10 strategic business risks faced by the sectors It is not just the weighting of risk that varies, but the positioning and the nature of risk Moreover, it is not just the sector-specific risks that vary, but the macroeconomic and operational risks
as well This does not surprise us or any who recognize the importance of sector in determining business challenges
Variation in significance of risk
We have highlighted one of the most significant strategic business risks — regulation and compliance — in red This makes it easier to see that for four of the sectors — real estate, biotechnology (biotech), pharmaceutical (pharma) and oil and gas — this is perceived
as one of the top strategic business risks Banking and capital markets, insurance and telecommunications (telecoms) also perceive these risks as having high impact
Other sectors including automotive (auto), consumer products and utilities believe that the same issue rates lower in their top 10 strategic risks
Equally, a fundamental shift in consumer demand (marked in green) is a top risk for consumer products, asset management and media and entertainment, but rates lower for many of the other sectors
Trang 6Macro threats
O er
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Monitoring
Raising capital
Product development and clinical trials Strategic
transactions
Accessing talent Protecting
intellectual
property
Price pressures
and access
Demonstrating
value
Regulatory
compliance
Harnessing
emerging
markets
Biotechnology
Strategic business risk 2008 — The top 10 risks for business
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Indicates regulatory and
compliance related risks
Indicates consumer
demand related risks
Macro threats
O e
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ti on a l th r e
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s Se
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to
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e
Geopolitical or macroeconomic shocks Global financial
developing retail competencies
Cost and pricing controls
Poor execution
of M&A
Changing needs of
an aging population
Polarization between alpha and beta business models
Growth of
alternatives
Rise of financial
conglomerates as
asset gatherers
Innovation away
from traditional
asset managers
Asset management
Macro threats
tio
na
l th rea
ts Se
ct t hr ea
Corporate governance and internal controls failures
IT risks Reputation risks
Credit shocks and exposures
Global financial shocks Geopolitical shocks
Compliance and regulatory risk
Competition from non-bank banks and specialists
Increasing pressure
on margins
Global market liberalization and consolidation
Banking and capital markets Macro threats
O pe ra
tio
na
l th
rea ts Se
ct t hr ea
Fuel price
risks
Cost controls and cash flow pressures
Workforce aging and escalating legacy costs
Failed product launches
Environmental pressures
Emerging markets
Consolidation, restructuring and poor execution
of M&A
Consumer demands
Entry of private equity
Automotive
Macro threats
O pe ra
tio
na
l th rea ts Se
ct t hr ea
Managing sourcing strategies
Cutting edge IT
Emerging markets strategies
Pricing pressures and input price risks
Strategic alliances and transactions
Consumer demand shifts
Shifting regulatory threats
Marketing and branding
Supply chain risks
Product development and innovation
Consumer products
Macro threats
O pe ra
tio
na
l th rea ts Se
ct t hr ea
Securities
Regulatory intervention
Geopolitical or macroeconomic shocks
Channel distribution
Integration
of technology with operations and strategy
Legal risk
Climate change
Demographic shifts
in core markets Catastrophic events
Insurance
The Ernst & Young strategic business risk radars
Trang 7Macro threats
O pe ra
tio
na
l th rea ts Se
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t
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ea
Inability to control costs
Corporate governance and Maturation of
key markets
M&A activity
and entry of
private equity
Emerging markets
Asset protection risks
including piracy and digital
intellectual property rights
Consumer demand
shifts
Business model
innovation
Managing the infrastructure of new business models
Backlash against
globalization
Media and entertainment
Macro threats
O pe ra
tio
na
l th rea ts Se
ct t hr ea
Failure to generate sustainable revenues from new business models
Inappropriate processes and systems to support new business strategies
Privacy and security risks
Inaccuracy in forecasting returns
investments
Decline in fixed and mobile voice ARPU
Competition from internet companies
Consolidation and M&A Regulatory risks Technological shifts
Globalization of markets and services
Telecommunications
Macro threats
O pe ra
tio
na
l th rea ts Se
ct t hr ea
Human capital deficit
Cost controls
Worsening fiscal terms
Competition for reserves from NOCs
Political constraints
on access to reserves
Energy conservation
Climate concerns
Supply shocks Demand shocks
Uncertain energy policy
Oil and gas
Macro threats
O pe ra
tio
na
l th rea ts Se
ct
t
hr
ea
Geopolitical shocks
Global economic and
market fluctuations
Rise of
private equity
Increased complexity
of real estate finance
Green
Regulatory and compliance risks
Infrastructure investment challenges
Volatility in emerging markets
Inability to find and exploit global and non-traditional opportunities
Real estate
Macro threats
O pe ra
tio
na
l th rea ts Se
ct t hr ea
War for talent
Cost pressure
Product diversion and parallel trade
Regulatory risk
Possible overriding
of intellectual property rights
Global pandemic
Price controls and reimbursement levels
Drug counterfeiting
Product pipeline Adverse drug effects
Pharmaceuticals
Macro threats
O pe ra
tio
na
l th rea ts Se
ct t hr ea
Energy politicization
Entry of infrastructure and private equity
Inability to respond to market
long-term fuel supplies
Compliance and regulatory risks
Strategic exploitation
of monopoly advantages
by incumbent firms
Damage or disruption losses
Challenges
of scale
Climate change/
environmental awareness
Cost or accessibility
of capital
Utilities
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Two of the sectors did not perceive a single
macroeconomic threat oil and gas and insurance,
however, perceive that half of their top 10 strategic
business risks are macroeconomic in nature.
Different types of risk
It is also apparent that the nature of risk varies considerably between the sectors Analysts in two of the sectors — biotech and consumer products — did not perceive a single macroeconomic threat as being in the top 10 strategic business risks, but were focused entirely on operational or sector-specific challenges By contrast, the oil and gas and insurance analysts we interviewed indicated a much greater exposure to the global environment, and at least half of the top 10 strategic business risks for these sectors are macroeconomic in nature
Some sectors are undergoing dramatic transformation Technological advances are driving change in the basic business models of many firms In these industries, sector-specific challenges tend to dominate the risk lists Particularly notable in this regard is media and entertainment In five other sectors — asset management, biotech, consumer products, pharma and telecoms — analysts indicated that half of the most significant strategic business risks are also specific to their sector
This analysis highlights the importance of sector in driving strategic business risk analysis and management action Hence, we have produced separate reports exploring strategic business risk in detail for each of these sectors (Contact information for each report can
be found on page 28)
Given the observations above, what conclusion, if any, can be drawn from the aggregation
of these sector findings? We believe that there are two sets of valid conclusions to
be drawn:
Firstly, we believe that, because we have followed a consistent process and used a weighting system, it is possible to compare the riskiness of sectors one with another Secondly, from consolidating the findings of the 12 sector studies, it is possible to form
a view of the 10 most important strategic risks across these sectors and hence for the economy, and this is the focus of the bulk of this report
Trang 9Identifying the global top 10
By consolidating and aggregating the findings of our 12 sector studies, it is possible to form a view of the 10 most important strategic risks across the sectors — concerns that will be common to leading firms in many industries
The table below shows the weighting of the top 10 strategic business risks across the 12 sectors that we studied While many risks were unique to a sector, a few key challenges had a high or critical impact for many, or even all of the sectors Hence the risks at the top
of the chart are those that, according to the analysts we interviewed, will do the most to influence markets and drive corporate performance in 2008 and beyond
Our analysis would suggest that the sectors that broadly have the greatest exposure to the top 10 strategic business risks are automotive and asset management, with four critical strategic business risks each Insurance and real estate follow with three of the top 10 risks rated critical within their sectors At the other end of the spectrum, for telecoms, none of the top 10 strategic business risks were marked as critical
This cannot, however, be used to definitively conclude that one sector is more or less risky than another It may be that the unique sector-specific factors are in themselves more high risk than these 10 However, we can infer that, compared with what we believe are the most common strategic business risks, some sectors are more exposed than others
ta Biote
Industries
1 Regulation and compliance
2 Global financial shocks
3 Aging population
4 Emerging markets
5 Consolidation/transition
6 Energy shocks
7 Strategic transactions
8 Cost inflation
9 Radical greening
10 Consumer demand shifts
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The top 10 risks for business
1 Regulatory and compliance risk
2 Global financial shocks
3 Aging consumers and workforce
4 Emerging markets
5 Industry consolidation/transition
6 Energy shocks
7 Execution of strategic transactions
8 Cost inflation
9 Radical greening
10 Consumer demand shifts
O pe ra tio na
l th rea
ts Se
ct or t hr ea ts
Energy shocks
Industry consolidation/transition
Regulatory and compliance risk
Emerging markets Radical greening
Consumer demand shifts
Aging consumers and workforce
Cost inflation
Global financial shocks
Execution of strategic transactions
As the greatest strategic challenge facing leading global businesses in 2008, the industry analysts we polled selected regulatory and compliance risk This is being driven by an escalating regulatory burden in many markets, as well as numerous compliance challenges
as companies extend their value chains well beyond Europe, North America, and the BRICs (Brazil, Russia, India and China)
The possibility of regulatory intervention in sectors such as pharma, biotech, insurance, telecoms and utilities, is further elevating this risk Such intervention could shape the competitive environment and drive fundamental change in business models One telecoms analyst wrote, “Regulation has a tremendous effect on the competitive landscape, not only between incumbents and new entrants, but between countries.” In other sectors, the continued viability of current business models may be threatened by future
regulatory decisions
In the following section, we explore the top 10 strategic business risks that have emerged from our study, and we share the thinking of some
of the leading analysts to whom we have spoken.
Continued on page 10