“A look at the top 10 risks for global business” by J. Carlitos Cruz (October 4, 2010)

SUITS THE C-SUITE By J. Carlitos G. Cruz
Business World (10/04/2010)

A post-downturn economy can be an exciting yet perilous environment for business.

Companies that have weathered storms well are now looking around for opportunities and bargains; enterprises that suffered have started rebuilding; and governments worldwide are tightening regulations and oversight to avoid the mistakes of the past. Traditional business models and principles are being challenged, leaving many afloat in uncertainty.

Given this environment, strategic risk management becomes even more crucial.

With so many potential risks in the market, how do we evaluate the greatest risks to our respective businesses?

The Ernst & Young Business Risk Report 2010 offers some insights. Distilled from the collected viewpoints of over 70 leading industry executives and analysts and backed by exhaustive research across 14 different sectors, the report identifies the 10 greatest risks facing businesses.

While not all will apply to the Philippine context, the report does provide an overview of the challenges ahead.

1) Regulation and compliance

The most significant worry is that the uncertainty surrounding regulation is stalling business decision-making and planning, and that poorly-designed regulatory responses to the credit crisis can cause conflicting regulations between governments. This may prevent global firms from effectively operating across borders.

To address this, companies should proactively anticipate expected regulations, rather than wait for the regulations to be imposed. They should take the longer view, consider building up reserves, and start developing an integrated road map to address the impact of global reforms on their business models.

2) Access to credit

Rising levels of government debt may have a strong impact on the cost of credit in the future, particularly given the fragile state of indebted Euro zone economies. For many companies, the immediate concern is how to raise and preserve capital to ensure sustainable long-term growth.

3) Slow recovery or double-dip recession

Many executives worry that the current economic recovery may evaporate once stimulus packages are withdrawn. Since governments had to socialize the financial crisis, they are now facing increasing fiscal debt. This has huge implications for the global economy, particularly if the recession returns and governments have exhausted their resources. To prepare for this, companies should consider investing in scenario planning to help the company remain flexible and responsive to changing economic conditions.

4) Managing talent

The global war for human capital continues, particularly in the financial sector, where compensation issues continue to attract criticism. Many companies also anticipate a shortage of talent as the current generation of professionals approach retirement. Critical skills are not being replaced. The growing global environmental consciousness may also make companies engaged in oil, power, mining and similar industries less attractive to potential employees.

5) Emerging markets

With emerging economies likely to dominate global growth, succeeding in these markets has become a strategic imperative. Emerging markets are now seen to be more stable than developed markets, whose level of indebtedness may cause slow or negative growth. There are also concerns that a political backlash may adversely affect globalization strategies and restrict access to emerging markets. One solution is to expand into emerging markets, particularly if there are attractive acquisition or joint venture opportunities. Although strategic risks remain high, effective risk management can help turn this into a long-term direction.

6) Cost cutting

Cost cutting has shifted from cost control for financial viability to dealing with commodity pricing inflation and low-cost competition. The recent doubling of iron ore contract pricing in early 2010 was one such example. Another concern is the threat of price wars. Now that emerging market producers with low cost-bases are entering the fray, margin pressure is becoming more intense.

7) Nontraditional entrants

In several sectors, the global recession increased the threat posed by nontraditional entrants. With the passage of time, many “nontraditional entrants” have become leading players in their sectors. In some sectors, “nontraditional entrants” (such as emerging market multinationals) have achieved a strong presence. In media and entertainment, for example, the market power of new entrants bringing new technology continues to rise. Other sectors also worry about new tech entrants.

However, a new phenomenon this year was a feeling among some executives that big firms, having had some years to adjust to the rise of emerging multinationals, have been able to shore up their positions. Whether this confidence will hold beyond 2010 remains to be seen.

8) Radical greening

Environmental regulation, consumer demand and strategic responses remain a pressing long-term issue, but are seen as a reduced threat. However, companies need to remain focused on environmental consciousness, as future regulations are likely to become even more stringent to combat increasing environmental degradation. Analysts predict that companies that prioritize environmental policy could discover more opportunities to gain market share and sway consumer choices.

9) Social acceptance risk and corporate social responsibility

In the current business climate, firms will need to tread carefully to maintain (or rebuild) public trust. This includes a wide range of issues, from the damaged reputation of financial services to transparency in government to acceptance of radical technologies. Companies should take into account public viewpoints rather than dismiss them, working to build more open dialogue with consumers.

10) Executing alliances and transactions

Rescue mergers are the focus of attention this year. A new issue to address is the potential difficulty of managing transactions triggered by regulatory responses to the financial crisis. Organizations may be forced to shrink or spin off operations, or even refocus their business models in accordance with regulatory agendas. Conversely, some companies may see acquisition as a way of jump-starting their technology convergence plans. Regardless of the reason, mergers and acquisition continue to be a complicated exercise and require strong change management.

Globally, business is generally experiencing an upswing.

However, the challenges facing businesses are likewise increasing, such that companies are inclined to adopt a more aggressive “innovate or die” mentality.

Yet, properly harnessed, synergized and risk-managed, companies may find that the dictates of necessity may just well be the injection of adrenalin they need to reinvent themselves.

Please watch out for future articles in this column that will focus on industry-specific risks.

(As of publication, J. Carlitos G. Cruz is the Deputy Managing Partner and Assurance Head of SGV & Co.)

This article was originally published in the BusinessWorld newspaper. It is for general information only and is not a substitute for professional advice where the facts and circumstances warrant. The views and opinion expressed above are those of the author and do not necessarily represent the views of SGV & Co.