The top 10 risks for business phần 3 docx

• War for talent• Pandemic • Private equity’s rise • Inability to innovate • China setback The next five Following these top 10 threats to global business, there are some risk issues wit

John Nendick

Ernst & Young

Responding to shifts in consumer demand

The media and entertainment industry continues to evolve at a pace

unimaginable even five years ago

Advances in technology have enabled improvements in content delivery at unprecedented levels Empowered by mobile technology and new home entertainment devices such as digital video recorders (DVRs), consumers are

in charge They insist on programming tailored to their individual tastes, preferences and schedules and they take their audio and video streams on the road and around the world We now live

in an era where consumers expect consumption of their personalized content anywhere, anyhow and anytime

Three years ago in an Ernst & Young survey of Global Media and

Entertainment company CEOs, 75% of those surveyed believed that DVRs would have the biggest impact on the industry

In a similar Ernst & Young 2006 study of leading finance executives, over 80% of the participants thought that personal entertainment and communication devices and changing content and distribution models would have the biggest impact on the industry over the next 2-3 years

Technology is dramatically changing the playing field for content production as well It seems that anyone with a digital device and broadband capacity can produce his or her own content overnight and distribute it to a global audience via the internet This growth in user

Aware of the issues that faced and damaged the music business over the last 5-10 years, media and entertainment companies are focused on maximizing the healthy margins and cash flows from the mature businesses such as newspapers and magazines and radio and television broadcast, while being proactive in the search for new internet and mobile device enabled distribution platforms for both their content and the related advertising Within this strategic process reside a number of key tactical issues whose execution can be as important as the strategy itself These include assessing the nature of the relationship and business model with the internet media company or mobile device business, be it merger, joint venture, or basic contractual distribution or license arrangement Digging deeper, a number

of other issues arise including assessing the new risks and appropriate controls surrounding these new relationships, assessing the tax implications and ensuring that revenue is being received in accordance with the arrangement as well

as appropriate contractual payments made for the rights of distribution

• John Nendick is the Global Leader of Ernst & Young’s Media and Entertainment Center

“ Advances in technology have enabled improvements in

content delivery at unprecedented levels Consumers are

now in charge, empowered by technology.”

John Nendick, Ernst & Young

• War for talent

• Pandemic

• Private equity’s rise

• Inability to innovate

• China setback

The next five

Following these top 10 threats to global business, there are some risk issues with impacts that are — though perhaps less strategic than the top

10 — nonetheless crucial in a number of sectors We review here the ‘next five,’ any of which could easily rise into the top 10 list in the future.

The War for Talent is already having a serious impact in some sectors, notably in oil and gas, which is facing a shortage of technical expertise; asset management and real estate, which are seeing talented staff poached by alternative investments; and pharma, which is facing a ‘skills crunch.’ More broadly, analysts highlighted that as growth in emerging markets takes off, companies in developed markets would no longer be able to draw on the “global pool of mobile, multi-lingual professionals possessing advanced degrees from leading universities, a growing share of whom originate from emerging markets.” In addition, one of the scientists we surveyed, a specialist in corporate innovation at the Massachusetts Institute of Technology (MIT), noted that there is a “growing regional concentration/clustering of talent — while expertise can be found in more nations than ever, within nations it is becoming more concentrated in a small number of clusters This phenomenon is particularly true in biotech and other high-tech areas This leads

to increasing wage rates, property rental, and competition for expertise.”

The possibility of a disease Pandemic is a strategic risk that our panelists rated as significant The potential market, economic and operational impacts of an avian flu pandemic have been much discussed, and a major outbreak would have a dramatic impact

in nearly every sector There are also more subtle potential consequences including a dramatic shift in consumer demand which could have large competitive impacts on the pharma and biotech sectors

“In the near future, banks will not be able to say they

are global unless they have a presence in China, India

and a few other countries, because these emerging

markets are going to be a major source of financial

sector revenue and profit growth.”

Keith Pogson, Ernst & Young

Most manufacturers’ largest

markets are mature Stagnation

in mature markets means that

companies have to innovate to

find profit However, innovation is

a substantial risk as nine out of

ten new products fail.

The threat of Private Equity’s Rise has been a serious strategic threat in sectors such

as auto, where “new, non-traditional investor groups such as private equity firms are leading unplanned, hostile takeovers within the automobile industry consolidating, and forcing restructuring and creating spin-offs.” In real estate ownership, there has also been “a shift from public to private as record amounts of capital continue to flow into real estate Companies will need to re-evaluate their global competitive positioning in light of the wave of recent M&A activity.” Several analysts also noted that private equity might crash just as quickly as it has risen — a risk alluded to in the second ‘on the radar’ risk, global financial shocks

The threat of an Inability to Innovate is significant for business in 2008 In a number of sectors, long-standing patterns of innovation are changing dramatically In pharma,

“the productivity of pharmaceutical companies continues to decrease as disease targets become more difficult: big pharmaceutical companies are not discovering or launching new products This will have the greatest impact as the patents for the top 10 selling drugs expire.” In asset management, “the best money managers are setting up boutiques… The giants cannot hope to compete with the boutiques, despite the risks.” Firms in these sectors need to replace internal innovation with acquisition of innovation Even in sectors where the impact is less extreme, innovation is becoming an increasingly crucial strategic challenge as markets mature A consumer products panelist noted, “Most manufacturers’ largest markets are mature Stagnation in mature markets means that companies have to innovate to find profit However, innovation is a substantial risk as nine out of ten new products fail.”

The threat of a China Setback was the last of the ‘next five’ risks Several analysts we polled expressed concern that China might experience volatility as it continues with an extraordinary pace of development A growth slowdown in China could leave oil and gas companies suddenly facing a low oil price environment; a severe slowdown could add to turmoil to world markets or threaten banks or insurance companies with large China exposures; or a natural disaster in China could disrupt global supply chains Just as firms worldwide must manage the risks arising from potential instability in the US dollar or US financial system (see risk two on the radar), China’s emergence as a major global player dictates that China’s fortunes will soon become a focus of attention even in companies without direct China exposures

Simon Perry

Ernst & Young

The importance of private equity

Growth continues

The annual Ernst & Young study ‘How do

Private Equity Investors Create Value?’

revealed how the private equity (PE)

industry is consistently able to grow and

strengthen the companies under its

ownership By focusing on the business

performance and strategies of PE firms

across the largest deals exited

throughout 2006, the study confirmed

that the annual rate of growth in

Enterprise Value (EV) achieved last year

by the largest private equity-backed

businesses significantly outperformed

equivalent public companies in the same

country, industry sector and timeframe

Average annual EV growth rates were

33% in the US and 23% in Europe,

compared to public company equivalents

of 11% and 15% respectively, with over

80% growth in total enterprise value

Private equity ownership creates value

from sustainable improvements in

performance and business growth

Two-thirds of the earnings growth in

PE-owned companies comes from

business expansion, with increases

in organic revenue being the most

significant element This includes the

benefits of investment in sales and

marketing, new product launches,

acquisitions, investment into attractive

industry sectors in the US, and expansion

into new geographies in Europe

Cost reduction, including operational

efficiencies, is also a very important

element of earnings growth in both the

US and Europe, accounting for 23%

and 31% respectively of the total growth

in earnings

What are the secrets of private equity’s success?

The study showed that private equity investors are highly selective and well researched when making the decision

to buy a business and have the ability

to drive real efficiencies through the business plan under their ownership

This finding was true across deals in the

US and all main European countries

Three-quarters of investments resulted from proactive deal origination strategies, including company or sector tracking, building relationships with management, or introductions from established contacts Across almost all deals and ownership strategies, private equity investors were actively involved

in the business after acquisition, making rapid decisions alongside management, challenging progress and making available specialist expertise The intensity

of engagement between private equity investors and management was often stronger than under the previous owners

This rapid growth in the scale and success

of private equity has brought with it increased scrutiny: politicians in many countries are reviewing whether and how to regulate and tax the industry;

corporates are considering how to compete with and learn from the different business model; concerns are being raised about the security of jobs and employment benefits Despite those concerns, the clear advantages of the private equity model are likely to result

in continuing investment and growth

The credit crunch — implications for private equity

Recent developments in the credit markets may have caused concern The liquidity crunch has meant that the debt markets are more or less closed for new large LBO deals resulting in a significant slowdown in transactions Market participants view this as a short term dip in activity prior to returning to

a more rational climate in 2008 There is

a long term belief in the PE model by the market and the long term fundamentals remain strong The recent events may well prompt a more conservative approach by banks, when doing deals This could result in an increasing need for due diligence at acquisition

Although the credit squeeze may reduce the benefits from leverage and enhance the importance of underlying profit growth, private equity will continue to

be an important factor in the world’s financial markets

What are the implications of the continued growth of private equity for corporates? Every company needs to develop a strategy for engaging with private equity, whether partnering with, buying from, selling to or competing with them

• Simon Perry is the Global Head of Private Equity at Ernst & Young

Dr David Shotton

University

of Oxford

Will the pandemic make you or break you?

Pharmaceutical companies are well

accustomed to dealing with frightening

diseases Think of it this way: the ability

of pathogens to evolve rapidly into forms

that can evade the adaptive defenses of

the human immune system is, in a sense,

a biological arms race In any form of

warfare, arms manufacturers stand to

make significant profits In the fight

against infectious diseases that present

a risk of epidemics, pharmaceutical

companies provide the front-line

weapons for the defense of humanity

However, an influenza pandemic is

different It is different because it will

present overwhelming operational

challenges that will cause many

companies, including pharmaceutical

companies, to fail Flu pandemics occur

on average once every 30 years The last

one, the ‘Hong Kong flu’ of 1968, was

relatively mild, killing ‘only’ one million

people The last severe influenza

pandemic was the ‘Spanish flu’ of 1918,

which killed an estimated 40 million

people The most likely candidate for the

next pandemic is the current H5N1 strain

of avian influenza, which is highly

pathogenic to birds

This has spread rapidly (more than half the countries in which it has appeared first reported the disease in 2006), and can infect humans, in whom it is abnormally deadly, killing roughly 60%

of confirmed patients The number of human deaths that might occur if H5N1 became easily transmissible between humans is impossible to estimate, but may far exceed the 67 million deaths caused by the Black Death

A flu pandemic differs in three principle ways from most other forms of natural disaster First of all, it is of extended duration, with two or three successive waves of infection each lasting 10-12 weeks, separated by several months

Secondly, it will disrupt all aspects of society, causing a breakdown of most normal services and, most likely, widespread civil unrest (e.g., looting)

Thirdly, because of its global nature, there will be no ‘outsiders’ to come to the rescue and thus recovery by the survivors will be slow The potential economic cost

of the global recession such a pandemic would trigger is put in trillions of dollars

Individual companies need to consider the potential impact of a global pandemic

on their workforce, infrastructure, supply chains and operational capabilities How will you continue to function when key staff are ill or dead, absenteeism is at 50%, normal travel and trade have been severely curtailed, and there are national shortages of food and energy?

The decision to make adequate preparation for a flu pandemic must come from the highest levels of management and involve every department — this can make the difference between the survival or the collapse of companies Pharmaceutical companies must develop contingency plans detailing what to do in preparation

now, how to cope during the pandemic, and how to survive afterwards during

the long recovery process, where the well-prepared will have large commercial advantages Critical functions must be defined, and plans made for backup, cross-training and working from home, using decentralized IT Essential supplies including emergency generators, fuel and raw materials may need to be stockpiled

if work is to continue Provision must be made for illness and deaths on the work premises, and for the care and quarantine

of those affected Clear criteria are required concerning who will trigger the emergency plan and under what circumstances, and any plan must be tested in reality and refined iteratively

• David Shotton is Reader in Image Bioinformatics within the Department

of Zoology, Mathematical, Physical and Life Sciences Division, University

of Oxford

“Individual companies need to consider the potential

impact of a global pandemic on their workforce,

infrastructure, supply chains and operational capabilities.”

Dr David Shotton, University of Oxford

Keith Pogson

Ernst & Young

Explosive expansion in Asian banking

Three of China’s banks are already

included in the global top 10 banks by

market capitalization Chinese banks

bring a new and decisive competitive

advantage as they have a very different

cost base They have lots of cash, and

with a 40% savings rate in China, that

liquidity isn’t going away These banks are

also able to borrow at 1 to 2% so they can

easily lend at 3 to 4% and make a couple

of hundred basis points

These banks could be concerned about

losses from a revaluation of the renminbi

(currency of the People’s Republic of

China), but these banks are extremely

motivated to go global Eighty to 90% of

their exposure is to the Chinese economy,

so almost anything outside of China

creates diversification and reduces their

risk This makes major global expansion,

including acquisitions likely to happen,

which will have a major impact on global

markets within three years

The risks for global banks entering Asia

If foreign banks enter the Asian market too late, they will be unable to keep up with the competition In the near future, banks will not be able to say they are global unless they have a presence in China, India and a few other countries, because these emerging markets are going to be a major source of financial sector revenue and profit growth

The second major risk is the failure

to manage internal controls This is especially true for a European or American bank, that may have limited knowledge of the fast-paced growth in distant markets The question for many is what to do first, implement their control infrastructure or grow revenues? Foreign banks can find themselves in a situation where they are suddenly managing 50,000 people instead of 50 people

This stresses existing controls and can lead to serious mistakes with global consequences

The third risk for foreign banks is regulation Regulators in Asia have varying degrees of sophistication and regulatory responses can be local or political, which can be difficult to address

Reputation is critical to market entry and

a bad reputation could result in a foreign bank being barred from a market

The top risks for Asian banks

The main threat for Asian banks is that they are transforming very rapidly from government bureaucracies into corporate governance and transparency-driven organizations

This could lead to significant challenges, some of which could threaten their survival For example, Chinese banks have enviable cost-income ratios of 35% But these ratios often rely on cheap, manual labor As China develops and labor costs rise, banks will need to automate to keep costs down Some of these banks have 10,000 or more branches If a system is automated incorrectly, this ‘cost saving’ might cause profitability to collapse

Another major issue is deregulation Some of these banks will make the transition to a deregulated, more competitive environment, and some will not In China, the central bank maintains

a 300 basis point borrowing-to-lending spread When this situation changes, and these banks suddenly need to manage interest rate risks, not all of them will be able to manage these effectively

• Keith Pogson is the Financial Services Leader, Far East Area

at Ernst & Young

This has not been a random selection exercise but, rather, a structured consultation with both sector and subject-matter experts from around the world They have identified trends and uncertainties, and assessed risks and their impact both on individuals and on the markets the conclusions merit attention

Together, we have identified the top 10 risks for business for the coming year and have outlined our view of other major risks that lie just “below the radar.” These are not predictions, but considering them can help companies to prepare

We acknowledge that this is just a snapshot of the risks that we see at this time Change is constant in the market so risks will change over time; so do our perceptions If we had done this exercise 10 years ago, it is fair to question whether climate change would have featured so significantly The climate was already changing, but our awareness of the fact and our perception of its importance was much different

Yet, even as a snapshot and even recognizing the consistency of change, no company should treat this list as applying in totality to them Just as the global market is everywhere and yet, paradoxically, nowhere — each point of contact, each purchase or sale, is both specific and local So it is with strategic business risk We have done the analysis and mapped out our conclusions accurately for the macro-economy Yet, for every sector, and indeed, for each company within a sector, the strategic business risks will vary This was the hypothesis for our research and why we have based the work on the 12 sectors Our studies show tremendous variation in risk and the relative importance of each factor depending on sector

Today’s strategic risk could be tomorrow’s strategic opportunity

So what is the value of such analysis and what, most importantly, should management

do with it? We hope that our work illustrates the range of strategic business risks that companies need to be aware of We have consulted widely, but this is not an exhaustive study and there can be no exhaustive list of risks We hope some of the risks we have identified surprised you and some of the weightings that we have attached to them in the rankings differ from those that you would apply This is an ongoing dialogue and one we believe that you need to have within your organizations You may have in place your own equivalent of a strategic business ‘risk radar’, but how is this kept current, and does it adequately warn you of potential strategic risks in an appropriate manner?

Properly approached, the process of risk management can

add value even if, fortunately, the event never happens.

Properly approached, the process of risk management can add value even if, fortunately, the event never happens One client we worked with was concerned about the impact of avian flu on their business In working through scenarios and impact analysis, the client identified numerous opportunities to tighten processes and controls that have had a beneficial impact despite the non-occurrence of the pandemic that they feared It was the dialogue and management action that delivered the value, not an improved response to the event

Our work with companies around the world suggests that there is a body of leading risk management practice emerging, but that many companies are still doing too little in this

area In our recent study, Companies on Risk: The Benefits of Alignment, 42% of global

companies identified gaps in their risk coverage Our subsequent study found that, overwhelmingly, these gaps were in business and operational areas, rather than financial There is a growing recognition of the problem — indeed 66% of companies in the same study forecast that their investment in risk management was going to increase over the next three years

Company leadership must:

Conduct an annual risk assessment that defines key risks and weights probability and

•

impact on business drivers Many companies undertake some form of risk assessment, but our experience suggests that too many do not do this on a frequent enough basis Our research suggests that one in five do not perform a risk assessment and over one-third conduct a risk assessment less than once a year

Such a risk assessment needs to go beyond financial and regulatory risk to consider the

•

wider environment in which your organization operates and the full extent of its

operations Less than 50% of respondents to our survey, Compliance to Competitive

Edge: New Thinking on Internal Controls, believed that they had effective controls for

M&A, IT implementation, business continuity planning, real estate construction, transaction integration and expanding into new international markets

Conduct scenario planning for the major risks that you identify and develop a number

•

of operational responses — this can be a useful part of the planning cycle and help encourage innovative thinking

Evaluate your organization’s ability to manage the risk that you identify — in particular

•

ensure that your risk management processes are linked to the risks that your business actually faces The responsibility for risk must sit with the business Do you have a ‘risk radar’? Is it current, and how will it warn you of potential risks?

Effective monitoring and controls processes can give you both earlier warning and

•

improved ability to respond There can be value from much of the compliance activity demanded from regulators, but this has to be mined

Keep an open mind about where risks can come from Ours is an increasingly

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interdependent global economy and risks that can damage your business can initiate in markets and sectors a long way from your own High risk mortgage lending in the US to people with limited or no creditworthiness ends up hurting the pension funds of the most cautious saver

Test your corporate

competency in identifying,

assessing, managing and

monitoring strategic risk

Turn today’s strategic

risk into tomorrow’s

strategic opportunity.

Norman Lonergan +44 207 951 6479 nlonergan@uk.ey.com

Continental Western Europe Maxime Petiet +33 1 55 61 3147 maxime.petiet@fr.ey.com

Northern Europe, Middle East, India & Africa Alan McGuinness +44 207 951 4119 amcguinness@uk.ey.com

Financial Services Risk Management Lawrence Prybylski +1 212 773 2823 lawrence.prybylski@ey.com Tax Accounting and Risk Advisory Services Joseph Hogan +41 58 286 3184 joseph.hogan@ch.ey.com

Technology and Security Risk Services Paul van Kessel +31 20 549 7271 paul.van.kessel@nl.ey.com Fraud Investigation and Dispute Services David Stulb +1 212 773 8515 david.stulb@ey.com

Banking and Capital Markets Jim Fanning +1 212 773 3144 james.fanning@ey.com

Media and Entertainment John Nendick +1 213 977 3188 john.nendick@ey.com

Pharmaceutical Carolyn Buck-Luce +1 212 773 6450 carolyn.buck-luce@ey.com

Telecommunications Vincent de La Bachelerie +33 1 46 93 6205 vincent.de.la.bachelerie@fr.ey.com

“ Just as the global market is everywhere and yet, paradoxically, nowhere, each point of

contact, each purchase or sale, is both specific and local So it is with strategic business risk.”