Companies urged to get faster, leaner
Ernst & Young, as the world’s leading professional services firm, is sending this clear message through the 2011 edition of its annual business risks report “Turn risks and opportunities into results,” which explores both the top 10 risks and top 10 opportunities for global companies.
On top of the business risks come challenges associated with regulation and compliance. Cost cutting and pricing pressure rose significantly from the previous year, though many respondents of the survey indicated steps taken to mitigate these risks have been reasonably effective.
With regard to opportunities, improving execution of strategy across business functions was ranked first overall. Investing in processes, tools and training to achieve greater productivity came next, although individual sectors and countries varied widely in the relative importance they give to this opportunity.
Both the top 10s are the result of a qualitative, opinion-gathering process, designed to identify the key risks and opportunities for businesses in 2011 and beyond. But the definition of risks and opportunities could vary from sector to sector and from firm to firm, depending on a company’s objectives and many other factors.
For this year’s 60-page report, Ernst & Young interviewed more than 750 senior executives including CEOs, CFOs, COOs and others in addition to a survey of more than 75 industry experts and analysts representing seven major industry sectors such as banking; oil and gas; retail and wholesale; power and utilities; and life sciences.
Top 10 risks
1. Regulation and compliance (unchanged from 2010): These risks are the most serious perceived threat to global firms, which was also the case in 2010. In 2009, risks associated with the global credit crunch took the top place.
2. Cost-cutting (up four from 2010): After two years as the sixth risk, the challenges associated with cost control have risen to second place. Much of the pressure driving the rise of cost cutting appears to originate from government austerity programs. The most frequently reported mitigation strategy is process optimization.
3. Managing talent (up one from 2010): Risks associated with the war for talent are continuing to rise for the third consecutive year. While never first, human resources risks rank among top four challenges in almost all sectors. Many of the geographies where the risk is of particular concern are emerging markets.
4. Pricing pressure (up 11 from 2010): Pricing pressures are ranked consistently as being a high-impact challenge across almost all sectors. Organizations are facing mature markets and slow organic growth rates, and thus pressure on prices. Like cost cutting, national austerity programs seem to be a driver.
5. Emerging technologies (up eight from 2010): These risks have risen from below the radar last year to the fifth position in 2011. The most frequently reported drivers of this risk are difficulties in developing an innovation culture and uncertainties inherent in untested technologies.
6. Market risks (new): A new entrant in 2011, these risks combine challenges such as real estate market volatility, commodity price fluctuations and speculative financial attacks, which have become threats to many sectors in the wake of the global financial crisis. Mitigation strategies based on active monitoring are most frequently reported.
7. Expansion of government’s role (new): This is another new addition to the risk radar in 2011. It ranks among the top four concerns of respondents from the world’s two largest economies, the United States and China.
8. Slow recovery/double-dip recession (down five from 2010): Economic risks have fallen, as expectations of recovery have risen. Still, 50 percent of respondents from Germany report concerns related to fiscal tightening, and 50 percent from U.S. report continued weakness in private demand.
9. Social acceptance risk/CSR (unchanged from 2010): While this was a new entrant last year at ninth, it stays in the same position in 2011. Oil and gas, life sciences and public administration respondents are most likely to report a rise in public pressures. The most frequently reported response is the integration of CSR into strategy.
10. Access to credit (down eight from 2010): Concerns about this have abated overall. Still, one in four organizations worldwide report ongoing struggles to obtain the credit they need. Respondents on average expect the impact of these challenges to rise once again by 2013.
Top 10 opportunities
1. Improving execution of strategy across business functions: The most frequently cited successful response to this opportunity is to enhance strategic communication. Respondents located in China are more likely to emphasize the development of the strategic planning function as a key to success.
2. Investing in process, tools and training to achieve greater productivity: The sectors vary in the degree to which cost optimization or staff development are emphasized in seeking higher productivity. Overall, the banking and public administration sectors report the greatest barriers to productivity improvements.
3. Investing in IT: Across Europe and the U.S., investing in IT is typically either the top or second-highest priority for executives. In China, Russia and India, however, IT tends to rank farther down the list.
4. Innovating in products, services and operations: Respondents identified four key barriers to innovation success — lack of focus or investment, excessive conservatism, lack of sufficient expertise and inflexibility. Life sciences firms lead the way in incorporating innovation into core strategy.
5. Emerging market demand growth: One in five organizations surveyed reported scaling back in Asia, following setbacks there. Initial unrealistic expectations are being replaced by long-term commitments.
6. Investing in cleantech: The opportunity from cleantech tends to vary depending on an organization’s country and sector. Respondents from China were the most likely to see the need to adapt corporate cultures and strategies to prioritize cleantech in coming years.
7. Excellence in investor relations: Although not the number one strategic initiative in any sector, banking and power and utilities respondents give particular priority to investor relations.
8. New marketing channels: New marketing channels include social media, web 2.0, e-mail, mobile marketing, search and apps. These channels are notably of interest to executives in the U.S., China and Russia.
9. Merger and acquisition: Lack of experience is the most frequently reported perceived obstacle to success in M&A, while the desire to enter new markets is the strategic goal most frequently pursued via acquisition.
10. Public-private partnership: Increasing government intervention in markets appears not only on our risk radar, but also on our opportunity ladder. This was due in part to significant interest from respondents in the healthcare sector.
This article was contributed by Ernst & Young.