New risks emerge on the corporate battlefield

When the macro environment in which companies do business changes as rapidly as it has over the past six months, many may find themselves in the unenviable position of driving strategies which are no longer relevant, bringing products to market for which demand has substantially altered or, simply, with overheads that are no longer sustainable. The corporate landscape has, in effect, become a battlefield where competition is heightened, customers are scarcer, disposable income is restricted and sales are tough.

Dealing with this difficult situation is a test of the ability of directors to respond effectively to dramatic change and steer their organisations through turbulence and on to sustainable success, says Mandla Moyo, director: Business Risk Services at Ernst & Young.

“There are dramatic changes taking place in the world which are at the same time very difficult to predict yet in many cases fundamentally important to how businesses operate,” he says.

These changes include fluctuating prices of oil and other commodities, the deepening economic recession, the credit crisis and the changing habits of consumers.

“Company directors need to find a way of looking at this changing world and ascertaining how it affects them in terms of business models, processes and core structures. With these conditions, a whole new range of risks to the business are presented, which requires a re-examination of the value proposition, operating model and perhaps even the company strategy,” says Moyo.

He points out that the classic knee-jerk reaction in such circumstances is to institute cost cutting procedures. However, Moyo cautions against the adage that extreme circumstances require extreme measures: “Where cost-cutting is concerned, there is further risk. There tends to be a dearth of accurate information available to decision-makers; in short, this means the risk of cutting muscle as well as fat – or, in other words, adversely affecting the company value proposition by taking out elements of the structure, personnel or processes which are necessary.”

Moyo advances an approach which has two key responses. The first of these is to examine the business model and assess if it is still appropriate. If not, various avenues are available, such as diversification, changing the way in which the business creates and delivers value, or perhaps addressing customer service.

The second response is indeed to cut costs. However, he says it is of vital importance for directors to enjoy a clear and unemotional view of all elements of the company. “Only if the director is in a position to view the business holistically and make decisions in a measured manner, is the company likely to see lasting benefits from cost cutting.”

Moyo points to Ernst & Young’s forward-looking 2009 Business Risk Report which has just been released. This annual survey presents a snapshot of the top 10 business risks across 11 sectors. “While the top risk is the credit crunch, it comes as no surprise that cost cutting is ranked 6th. Cost containment is critical to ensuring sustainability in a wide range of industries, especially for those hard hit such as automotive, media, consumer products and oil – but if this cost cutting is not handled effectively, it can hurt rather than help.”

Rated 9th, business model redundancy is another top 10 risk exposed by the survey. Simply put, the changes in the market have rendered certain business models obsolete. This is true for many companies but especially those in the automotive, life sciences, media and telecoms industries.

The automotive, consumer products, insurance and media sectors in particular face the threat of radical consumer demand shifts that they will quickly need to react to in less than a year. Moyo highlighted that as a result, the risk of non-traditional entrants is ranked 5th as competitors from adjacent markets catch entrenched businesses napping.

Moyo says Ernst & Young’s Advisory Services has designed tools and strategies which assist its customers in identifying and managing these and other new risks which are emerging. In particular, he points to an assessment which provides a company with a single page overview of the company’s landscape, dubbed ‘Defining the Battlefield.’

“One of the challenges which directors must deal with in assessing and dealing with risk is a contradictory one: whilst there is insufficient accurate and meaningful information, there is also a glut of data which is un-organised and unstructured and can create confusion while still holding the potential to provide enlightenment,” says Moyo.

With the Defining the Battlefield assessment tool all risks and organisational components, from the External Environment, to Regulatory Risk, to Operational and Process risk, are presented. Those which are most pressing are colour coded to rapidly draw the attention of directors to the areas which may require intervention.

“There can be little question that many companies today – in South Africa and globally – are dealing with potentially damaging circumstances. Astute directors know that the game is changing; they also know that just how much change there will be is uncertain. In such a volatile environment, it remains essential to understand and maintain controls to ensure that risk is identifiable and manageable regardless of market conditions,” Moyo concludes.