The Top 10 Risks For Business
The Top 10 Risks For Business
The Top 10 Risks For Business
In collaboration with:
e
q
It is never the risk that About this Report
Risks are inherent in every forward-looking business decision so successful risk management should
causes damage or be an integral part of an organization’s strategy and operations – an important dimension of good
management practice.
creates opportunities –
There has been a great deal of work done in the area of risk management in recent years.
it is how we respond 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.
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 & capital markets, biotechnology, consumer products,
insurance, media & entertainment, oil & gas, pharmaceuticals, real estate, telecommunications
and utilities. These sector studies served as the primary source for the overall comparative report
of our findings.
Conclusion 26
Contacts 28
1
The Ernst & Young Strategic
Business Risk Radar
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.
Strategic Risk (str_-t_‘j_k r_sk) To arrive at our findings, we worked with Oxford Analytica to interview more than 70
– a risk that could cause severe analysts from around the world and from over 20 disciplines that shape the business
environment, including law, finance, the sciences, business strategy, geopolitics, regulation,
financial loss or fundamentally
medicine, economics and demographics. The focus of our interviews was to identify the
undermine the competitive emerging trends and uncertainties that will drive the fortunes of leading global businesses
position of a company. 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
Macro Threats 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
Operatio
from the general geopolitical and macro environment in which we all operate; (2) sector
eats
threats that emerge from trends or uncertainties that are re-shaping the specific industry;
Th r
nal
and (3) operational threats that have become so intense that they may impact the strategic
tor
c hre
Se ats 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.
3
The Ernst & Young Strategic Business Risk Radars
Environmental
pressures
Geopolitical or Workforce aging and Geopolitical shocks
macroeconomic Fuel price escalating legacy costs
Global financial shocks shocks Global financial
Innovation away Difficulty of Global market
shocks developing retail Compliance liberalization shocks
from traditional
asset managers competencies Consolidation, risks and consolidation
Entry of restructuring
private equity and poor execution Cost controls and Credit shocks
of M&A cash flow pressures and exposures
Polarization between alpha
and beta business models Compliance and
Cost and Consumer demands regulatory risk Reputation risks
Opera
Opera
Opera
Rise of financial pricing controls
eats
eats
eats
conglomerates as Changing needs of Emerging markets Increasing pressure
asset gatherers an aging population on margins IT risks
t
t
Thr
Thr
Thr
i
i
o
o
nal
nal
nal T
r
tor
tor
o
Th
Th
ct
hre
Growth of Poor execution
Se
e
re
re
S
at at S at
alternatives of M&A s Failed product s s
launches Competition from
non-bank banks Corporate governance
and specialists and internal
controls failures
Emerging markets
strategies Demographic shifts
Catastrophic events in core markets
Regulatory Monitoring drug safety Supply chain risks
compliance Pricing pressures
Price pressures Raising capital and input price risks Integration
Harnessing and access Managing Climate change of technology with
emerging Product sourcing operations and strategy
markets development strategies Securities
Strategic alliances and innovation markets Emerging markets
and transactions Marketing
Opera
Opera
Opera
eats
eats
Product development
value and clinical trials Regulatory intervention
Consumer
t
t
Thr
Thr
Thr
i
Cutting edge IT
o
Strategic demand
nal
nal
nal T
r
tor
tor
transactions shifts
o
Th
Th
ct
hre
Se
Protecting
re
re
S
at at Channel distribution at
intellectual Accessing talent s s s
property
Shifting regulatory threats
Opera
Opera
M&A activity innovation fiscal terms
eats
s
Inability to Price controls and
reat
reat
and entry of
private equity control costs Possible overriding reimbursement levels
tion
tion
tio
Thr
of intellectual
r Th
r Th
Cost controls
n
Emerging markets property rights
a
a
tor
Political constraints
o
l Th
l Th
l Th
t
t Cost pressure
c
ec
on access to reserves ec
e
re
re
re
Corporate
S
governance and
at
s
at
s S at
s
Maturation of internal controls Drug counterfeiting
key markets
Opera
Opera
Rise of Inaccuracy in
Access to
eats
reat
tion
tio
Thr
r Th
Strategic exploitation
a
a
tor
o
l Th
l Th
l Th
t
of monopoly advantages
c
ec
ec
Competition
e
re
re
re
by incumbent firms
S
at from internet
at at
Infrastructure s Privacy and s Compliance and
s
investment challenges companies security risks regulatory risks
5
Two of the sectors did not perceive a single macroeconomic threat...
oil & gas and insurance, however, perceive that half of their top 10 strategic
business risks are macroeconomic in nature.
Some sectors are undergoing dramatic transformation. In industries such as telecoms and
media & entertainment, sector-specific challenges dominate the risk lists. Technological
advances are driving change in the basic business models of many firms in these industries.
In five other sectors – auto, asset management, biotech, consumer products and pharma –
the analysts indicated that half of the most significant strategic business risks are 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 12 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.
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 (auto) and real estate, with four critical strategic business
risks each. Media & entertainment, utilities, banking & capital markets and biotech follow with
three of the top 10 risks rated critical within their sectors. At the other end of the spectrum,
pharma had only one of the top 10 strategic business risks marked as critical in its top 10 risks.
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.
Industries
Estate
Real
Biotechnology
Pharmaceutical
Insurance
Utilities
Entertainment
Media &
ications
Telecommun-
Oil & Gas
Capital Markets
Banking &
Management
Asset
Products
Consumer
Automotive
3 Aging Population
4 Emerging Markets
5 Consolidation/Transition
Risks
6 Energy Shocks
7 Strategic Transactions
8 Cost Inflation
9 Radical Greening
Key
Critical Impact
High Impact
Medium Impact
Moderate Impact
7
The Top 10 Risks
for Business
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.
Opera
7 Execution of Strategic Transactions Emerging markets
ts
Aging consumers
hrea
tion
T
a
r
cto
Cost inflation
l Th
e
demand shifts
at
s
9
“ The failure of one or more major financial institutions
remains a real worry and could turn the crisis into
systemic failure in the year ahead.”
Jens Tholstrup, Oxford Analytica
As companies become more and more global, compliance becomes A crisis could spread from alternative investment vehicles such
a greater challenge, forcing them to manage diverse regulations as hedge funds or private equity. One analyst wrote, “Financial
in different markets. A specialist in business strategy noted, innovation and structural changes have contributed to the success
“Managing regulations in 10 jurisdictions is one thing. What happens of private equity, but cyclical factors have also played an important
when a firm has significant markets in 30-40 countries at varying part in their over-expansion… High-profile failures of some investee
levels of development and with very different regulatory traditions? companies could lead to a loss of confidence among investors and
This is not to say that global regulatory [diversity] is necessarily lenders.” Another remarked, “A crisis in CDO/structured finance
increasing; but rather, that corporate exposure to existing [diversity] markets could lead to potential systemic problems. Sustainability
is increasing.” The importance of understanding local regulations, of financial sector growth is more fragile than markets realize.
as well as major global industry regulations is crucial to those There is the potential for dramatic fallout from excessive leverage.
companies expanding their global reach. Carry trades are cited as a risk area, but other hedge fund strategies
are exposed to a change in the macroeconomic environment.
There are potential systemic issues in the financial sector.” In the
future, continued financial innovation – which tends to disperse
risks and, as a consequence, makes the detection of potential
shocks more difficult – is likely to increase the potential for
financial shocks.
11
“ Only 41% of developed market companies have a risk strategy
for emerging markets, with more than half (56%) saying that
no strategy is in place.”
Ernst & Young, Risk Management in Emerging Markets study, October 2007
13
“ These [emerging] markets can see growth of up to 40 to 50% per annum.
In such an environment, local entrepreneurs have an advantage,
and right now, a lot of local media companies are beating the global
players in China and India.”
Farokh T. Balsara, Ernst & Young
From Emerging Markets to Surging Markets – The Future of Global Media Growth
films are released, and it is happening in India. The price points in emerging markets are also
At a time when technology is reshaping the often a fraction of what consumers would be
global industry, emerging markets are the charged for similar content in developed
fastest adopters of technology. They provide an markets, often due to regulations, competition
ideal test-bed where global firms can trial new or extensive piracy. However, the huge and fast
technologies, before bringing them out in their growing volumes more than make up for the low
home markets. charges. As a result, a thorough assessment of
Farokh T. Balsara the market and distribution channels is needed
Ernst & Young Winning in Emerging Markets
to appropriately price the content.
Emerging markets are attracting significant To win in these markets, companies need to
localize content and be sensitive to local culture, A final critical success factor is flexibility.
attention because of a surge in demand
rather than automatically dubbing and These markets can see growth of 40 to 50%
for content. With China and India accounting
repurposing. It is possible to sell from media per annum. In such an environment, local
for one-third of humanity, these markets
libraries, but this will not make you a winner entrepreneurs have an big advantage, and right
are the future for global media growth.
in these markets. One major global media now, a lot of local media companies are
Currently, some of the largest global media
player had been in India for seven or eight beating the global players in China and India.
and entertainment companies are making less
years, with a mostly English offering. In 2000, Multinationals will need to have flexible business
than 5% of their global sales from emerging
they invested in 24-hour Hindi programming with plans which do not always need to be approved
markets, but the management within these
local productions and quickly became the largest by the regional office and the head office.
companies are spending a disproportionate
Farokh T. Balsara is the National Sector
amount of their time dealing with these markets. and most profitable channel. Firms that don’t
localize their content can also run higher risks. Leader for Media & Entertainment and
It is partly a lack of both content and a One foreign broadcaster that was in the Indian the Markets Leader for Advisory Services
handle on distribution in Europe and North market showed too much adult-oriented content at Ernst &Young, India.
America that is preventing emerging market in its programming before 11pm and the
companies from moving into developed markets. government took the channel off the air.
More significantly, however, the growth in their
home markets is so fast that they don’t have However, growth in demand for local content by
the bandwidth to think about it. these global players and by local companies
funded by private equity firms could soon
Another important growth factor in these outpace the growth in supply of local production
markets is technology. Broadband connectivity talent. This could lead to super-inflation which
in South Korea is 98%, enabling the push- should be factored into business plans.
through of huge amounts of content. In India,
a global multinational company has recently It is important to understand that even a
conducted the world’s biggest rollout of single emerging market country has multiple
digital cinema through satellite. This means markets within. Southern India is completely
that these companies can control exactly different from the North. To win in a national
where movies are showing and how many times market, investors may need a very different
they are shown. It also means they can control strategy in each region. There will be differences
piracy. And it allows them to release not just in where the demand is, the type of content,
in Delhi or Mumbai, but in the smallest towns, the distribution of content, and how to take
simultaneously. This is a paradigm shift in how out earned revenues.
15
“ New technologies will change the market. The successful utilities of
the future will be those who make the bold decisions to flex their assets,
supply chains, and operating models.”
Tony Ward, Ernst & Young
17
“ This issue of climate change extends beyond just managing regulatory risk.
Climate change and the regulatory and consumer response must be seen
as a fundamental strategic challenge. We can expect a future of carbon
labeling on products, carbon trading worldwide, and tight regulation and
heavy taxes on carbon.”
Jonathan Johns, Ernst & Young
19
“ Advances in technology have enabled improvements in content
delivery at unprecedented levels. Consumers are now in charge,
empowered by technology.”
John Nendick, Ernst & Young
The War for Talent is already having a serious impact in some sectors, notably in
oil & 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.
21
“ In the near future, you will not be able to say you are global unless you are
a major 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 on a global basis.”
Keith Pogson, Ernst & Young
Most manufacturers’ 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
largest markets are mature. 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
Stagnation in mature markets public to private as record amounts of capital continue to flow into real estate. Companies will
means that companies have 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
to innovate to find profit. risen – a risk alluded to in the second ‘on the radar’ risk, global financial shocks.
However, innovation is a The threat of an Inability to Innovate is significant for business in 2008. In a number
substantial risk as nine out of sectors, long-standing patterns of innovation are changing dramatically. In pharma,
“the productivity of pharmaceutical companies continues to decrease as disease targets
of ten new products fail. 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. An Ernst & Young 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 & 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.
23
“ 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
25
Conclusion
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.
Properly approached, 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
the process of risk predictions, but considering them can help companies to prepare.
management can add We acknowledge that this is just a snapshot of the risks that we see at this time. Change is
value even if, fortunately, the 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
event never happens. 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.
27
Contacts
Risk Advisors Name: Telephone: E-mail:
Global Jim Holstein +1 216 583 4001 james.holstein@ey.com
Americas Frank Gori +1 216 583 2981 frank.gori@ey.com
Central Europe Gerd Stuerz +49 211 9352 18622 gerd.w.stuerz@de.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
Singapore Michael Sim +65 6309 6706 michael.sim@sg.ey.com
Japan Takaaki Nimura +81 3 3503 1272 nimura-tkk@shinnihon.or.jp
Oceania Craig M. Jackson +61 2 8295 6551 craig.m.jackson@au.ey.com
Business Risk Services Inge Boets +32 3 270 1223 inge.boets@be.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
Actuarial Services Tim Roff +44 207 951 2112 troff@uk.ey.com
Further information about Ernst & Young and its approach to a variety of business issues
can be found at www.ey.com/perspectives. Ernst & Young refers to the global organization
of member firms of Ernst & Young Global Limited, each of which is a separate legal entity.
Ernst & Young Global Limited does not provide services to clients.
Oxford Analytica
Oxford Analytica is an international consulting firm drawing on over 1,000 senior faculty
members at Oxford and other major universities and research institutions around the world.
It acts as a unique bridge between the world of ideas and the world of enterprise.
Founded in 1975 by Dr. David R.Young, Oxford Analytica has built an international
reputation for seasoned judgement on and analysis of geo-political, macroeconomic and
social developments, and their implications for industries and governments worldwide.
E R N S T & YO U N G www.ey.com