E & Y Spells Out the Top 10 Risks for Global Business

In a recent fascinating study, Ernst and Young spells out their findings on the top strategic risks facing global businesses, based on discussions with 70 top risk analysts.

These Top 10 are:

1. Regulatory and compliance risk
2. Global financial shocks
3. Aging consumers and workforce
4. The inability to capitalize on emerging markets
5. Industry consolidation/transition
6. Energy shocks
7. Execution of strategic transactions
8. Cost inflation
9. Radical greening
10. Consumer demand shifts
    

E&Y looks at risks in three broad categories across multiple industries:

1. macro threats arising from general geopolitical and macroeconomic environments
2. sector threats from trends or uncertainties in a specific industry
3. intense operational impacting the strategic performance of leading firms

We paraphrase E&Y's explanation of these risks:

1. Regulatory and Compliance Risk

Why is this E&Y’s top choice? A growing regulatory burden in many markets, multiplicity of compliance challenges as companies globalize, the heavy impact on pharma, biotech, insurance, telecoms and utilities sectors by changes in the external environment make this risk extremely important as it can cause fundamental change in business models. As companies become more global, compliance is a larger challenge, forcing them to oversee diverse regulations in multiple markets.

2. Global Financial Shocks

Few industries and companies are insulated from major global financial shocks. As the recent credit crunch has proven, biotech and utilities firms would face troubles raising capital; banking, asset management, and insurance companies could have direct losses; and oil & gas companies might face losses if oil prices collapse due to sudden recessions. Disintermediation in financial markets could easily turn off in periods of credit pressures. Systemic financial problems could hurt sustainability of the financial sector growth.

3. Aging Consumers and Workforce

Areas such as asset management and insurance are experiencing dramatic shifts in demand as their consumer age. The auto sector is facing severe competitive challenges as a result of their aging workforces. Numerous industries are experiencing dramatic shifts in demand, often dramatic growth, as average ages rise in Europe, North America, and Japan. To be competitive, companies need to better understand specific needs of these new consumers

4. Emerging Markets

Emerging markets, while great areas for new growth, they also pose great risks. Global companies will need to partner/form networks with firms in many markets. There are also
currency, operational, regulatory, language, and cultural risks in these countries, especially as firms manage outsourced business and supply chains in these markets.


5. Industry Consolidation/Transition

Industry transition would continue to pose a key strategic challenge in 2008 due to changes in
underlying structural trends, such as population growth, GDP growth, consolidation, restructurings and spin-offs, mergers driven by competitive pressure, and need for acquisitions to meet growth targets.

6. Energy Shocks

Shocks in energy prices and access to supplies are challenging to the energy sector; and can also trigger economic shocks that could impact sectors such as insurance, consumer products and real estate; with few companies are immune to this risk.

7. Execution of Strategic Transactions

There is a major risk that transactions undertaken in response to industry consolidation may fail to deliver, not because they are poorly conceived, but because of a failure to meet operational
challenges. Also, new types of strategic transactions, including divestitures in real estate, spin-offs in auto, and separation of telecom companies into utilities and service providers are driving further risk.

8. Cost Inflation

The return of high inflation is a major risk. Demographic changes and the rising costs of health care are creating a serious challenge for US auto manufacturers. The aging workforce at established Western producers leads to costly buy-outs, benefits, and so on. There will be an ongoing decline in employment in the sector in the Western World, with large impacts for
affected economies.

9. Radical Greening

Increasing environmental concerns from the voluntary world of corporate social responsibility – to hard regulatory and economic necessity. Radical greening is a strategic risk, partly driven by the consumer and regulatory responses to climate change, and also by the weather events resulting from climate change.

10. Consumer Demand Shifts
The failure to anticipate and respond to consumer demand shifts driven by
demographic shifts, such as growing consumer aging could be a strategic risk when the
changes are significant, fast or unexpected.

The Next 5

E&Y spells out their next 5, equally critical, yet not making the top 10 list:

1. War for Talent - 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. Especially in emerging marketsw, 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.

2. Possibility of a Disease Pandemic - a major disease outbreak would have a dramatic impact in nearly every sector, especially on the pharma and biotech sectors.

3. Threat of Private Equity’s Rise. Especially in auto, where Private Equity firms are leading
unplanned, hostile takeovers by consolidating, and forcing restructuring and creating spin-offs.

4. Inability to Innovate is significant for business in 2008. Innovation is becoming an increasingly crucial strategic challenge as markets 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.

5. Threat of a China Setback. China might experience volatility as it continues with an
extraordinary pace of development. A growth slowdown in China could leave oil & 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.

To effectively combat these risks, Ernst and Young recommends that company leaderships must:

• Conduct an annual risk assessment that defines key risks and weights probability and
  impact on business drivers.
• Go beyond financial and regulatory risk to consider the wider environment in which the organization operates and the full extent of its operations.
• Conduct scenario planning for the major risks that can be identified and develop a number
  of operational responses.
• Evaluate the organization’s ability to manage the identified risks, specifically that risk management processes are linked to the risks that the business actually faces.
• Effective monitoring and controls processes to provide both earlier warning and
  improved ability to respond.
• Keeping an open mind about where risks can come from.