The top 10 risks for business phần 1 potx

Strategic
business risk 2008
The top 10 risks for business
In collaboration with:
Strategic business risk 2008 — The top 10 risks for business
About this report
Risks are inherent in every forward-looking business decision so successful risk
management should be an integral part of an organization’s strategy and operations —
an important dimension of good management practice.
There has been a great deal of work done in the area of risk management in recent years.
Ernst & Young has been engaged in signicant global activity to clarify stakeholder
perspectives, map management activities and identify leading practice from which all can
benet. Likewise, many companies have invested signicant 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 nance and compliance risk —
to operational and nally, strategic risk.
A different perspective on strategic risk
Our experience, however, suggests that strategic risk has not necessarily beneted from
developments in management practice. Much that has been written about strategic risk
seems to be at such a macroeconomic level that the implications for action by the
management of a specic company can be lost. More signicantly, the different
implications for companies operating in different sectors can be blurred. Someone’s

challenge is frequently someone else’s market opportunity.
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 and capital
markets, biotechnology, consumer products, insurance, media and entertainment, oil and
gas, pharmaceuticals, real estate, telecommunications and utilities. These sector studies
served as the primary source for the overall comparative report of our ndings.
It is never the risk that
causes damage or
creates opportunities —
it is how we respond.
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Strategic business risk 2008 — The top 10 risks for business
Contents
The Ernst & Young strategic business risk radar 2
Scanning the sectors 3
The top 10 risks for business 8
Regulatory and compliance risk 8
 Globalnancialshocks 10
Aging consumers and workforce 12
Emerging markets 12
Industry consolidation/transition 15
Energy shocks 15
Execution of strategic transactions 17
 Costination 17
Radical greening 18
Consumer demand shifts 18
Thenextve  21
Conclusion 26
Contacts 28

Strategic business risk 2008 — The top 10 risks for business
2
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.
To arrive at our ndings, we worked with Oxford Analytica to interview more than 70
analysts from around the world and from over 20 disciplines that shape the business
environment, including law, nance, the sciences, business strategy, geopolitics,
regulation, medicine, economics and demographics. The focus of our interviews was to
identify the emerging trends and uncertainties that will drive the fortunes of leading global
businesses over the next ve 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 identied, 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 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
from the general geopolitical and macroeconomic environment in which we all operate;
(2) sector threats that emerge from trends or uncertainties that are re-shaping the
specic industry; and (3) operational threats that have become so intense that they may
impact the strategic performance of leading rms. 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 rms must manage if they are to maintain their dominant
competitive position.
“Strategic Risk (str-t’jk rsk)—
a risk that could cause severe
nanciallossorfundamentally
undermine the competitive
position of a company.”
The Ernst & Young
strategic business risk radar
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Strategic business risk 2008 — The top 10 risks for business
Risk weighting and
risk prioritization

Phase 1:
• We asked the pool of analysts to list and
to rate (on a scale of one to ten, with
one having the least impact), the 10
most signicant trends or uncertainties
that may impact companies, and to
provide commentary on why these are
important to their industry.
• Analysts were then asked to list the ve
most signicant business risks to rms
within their industries — considering in
particular those of a strategic nature
— that might bring about shifts in the
industry or put leading rms in peril of
losing their position. A numerical rating
was applied from one to ve.
Phase 2:
• 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. Panelists were asked to
assign a numerical severity rating, from
one to ve, based on the likelihood that
a risk issue would lead either to severe
nancial impact or undermine the
competitive standing of the leading
rms in their sector. The ratings

assigned by each sector panelist were
averaged to build the lists of top risks
by sector.
• The risks that were rated as having
the greatest impact across the largest
number of sectors were identied as
the ‘top 10 risks for global business
in 2008.’
Scanning the sectors
We have assumed that a ‘scan’ is or should be the most appropriate
collective noun for the resulting grouping of strategic business risk
radars and present (overleaf) the results of this analysis for each
of the 12 core sectors.
We hope that what is immediately clear is the extent of variation between these 12 radar
snapshots. The most signicant strategic business risk is different for most of them and
the nature of those strategic business risks is varied for all of them.
Variation in risk
Close examination of the radars — individually and collectively — shows that there is no
consistent list of top 10 strategic business risks faced by the sectors. It is not just the
weighting of risk that varies, but the positioning and the nature of risk. Moreover, it is
not just the sector-specic risks that vary, but the macroeconomic and operational risks
as well. This does not surprise us or any who recognize the importance of sector in
determining business challenges.
Variation in signicance of risk
We have highlighted one of the most signicant strategic business risks — regulation and
compliance — in red. This makes it easier to see that for four of the sectors — real estate,
biotechnology (biotech), pharmaceutical (pharma) and oil and gas — this is perceived
as one of the top strategic business risks. Banking and capital markets, insurance and
telecommunications (telecoms) also perceive these risks as having high impact.
Other sectors including automotive (auto), consumer products and utilities believe

that the same issue rates lower in their top 10 strategic risks.
Equally, a fundamental shift in consumer demand (marked in green) is a top risk for
consumer products, asset management and media and entertainment, but rates lower
for many of the other sectors.
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Monitoring
drug safety
Raising capital
Product development
and clinical trials
Strategic
transactions
Accessing talent
Protecting
intellectual

property
Price pressures
and access
Demonstrating
value
Regulatory
compliance
Harnessing
emerging
markets
Biotechnology
Strategic business risk 2008 — The top 10 risks for business
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Indicates regulatory and
compliance related risks
Indicates consumer
demand related risks
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Geopolitical or
macroeconomic
shocks
Global
financial
shocks
Difficulty of
developing retail
competencies
Cost and
pricing controls
Poor execution
of M&A
Changing needs of
an aging population
Polarization between alpha
and beta business models
Growth of
alternatives
Rise of financial
conglomerates as
asset gatherers
Innovation away
from traditional
asset managers
Asset management
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Corporate governance
and internal
controls failures
IT risks
Reputation risks
Credit shocks
and exposures
Global
financial shocks
Geopolitical shocks
Compliance and
regulatory risk
Competition from
non-bank banks
and specialists

Increasing pressure
on margins
Global market
liberalization
and consolidation
Banking and capital markets
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Fuel price
shocks
Compliance
risks
Cost controls and
cash flow pressures
Workforce aging and
escalating legacy costs

Failed product
launches
Environmental
pressures
Emerging markets
Consolidation,
restructuring
and poor execution
of M&A
Consumer demands
Entry of
private equity
Automotive
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Managing

sourcing
strategies
Cutting edge IT
Emerging
markets strategies
Pricing pressures
and input price risks
Strategic alliances
and transactions
Consumer
demand
shifts
Shifting regulatory threats
Marketing
and branding
Supply chain risks
Product
development
and innovation
Consumer products
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Securities
markets
Emerging markets
Regulatory intervention
Geopolitical or
macroeconomic shocks
Channel distribution
Integration
of technology with
operations and strategy
Legal risk
Climate change
Demographic shifts
in core markets
Catastrophic events
Insurance
The Ernst & Young strategic business risk radars
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Strategic business risk 2008 — The top 10 risks for business
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Inability to
control costs
Corporate
governance and
internal controls
Maturation of
key markets
M&A activity
and entry of
private equity
Emerging markets
Asset protection risks
including piracy and digital
intellectual property rights
Consumer demand
shifts
Business model
innovation
Managing the

infrastructure of
new business models
Backlash against
globalization
Media and entertainment
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Fa ilure to
generate sustainable
revenues from new
business models
Inappropriate
processes and
systems to
support new
business strategies

Privacy and
security risks
Inaccuracy in
forecasting returns
from infrastructure
investments
Decline in fixed and
mobile voice ARPU
Competition
from internet
companies
Consolidation
and M&A
Regulatory risks
Te chnological shifts
Globalization of
markets and services
Te lecommunications
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Human capital deficit
Cost controls
Worsening
fiscal terms
Competition for
reserves from NOCs
Political constraints
on access to reserves
Energy
conservation
Climate concerns
Supply shocks
Demand shocks
Uncertain
energy policy
Oil and gas
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Geopolitical shocks
Global economic and
market fluctuations
Rise of
private equity
Increased complexity
of real estate finance
Green
revolution
Shakeout of real
estate finance
Regulatory and
compliance risks
Infrastructure
investment challenges
Volatility in
emerging markets
Inability to find
and exploit global
and non-traditional
opportunities
Real estate
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War for talent
Cost pressure
Product diversion
and parallel trade
Regulatory risk
Possible overriding
of intellectual
property rights
Global pandemic
Price controls and
reimbursement levels
Drug counterfeiting
Product
pipeline
Adverse drug effects
Pharmaceuticals

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Energy
politicization
Entry of infrastructure
and private equity
Inability to
respond to
market
liberalization
Access to
competitively priced
long-term fuel supplies
Compliance and
regulatory risks
Strategic exploitation

of monopoly advantages
by incumbent firms
Damage or
disruption losses
Challenges
of scale
Climate change/
environmental awareness
Cost or
accessibility
of capital
Utilities
Strategic business risk 2008 — The top 10 risks for business
6
Two of the sectors did not perceive a single
macroeconomic threat oil and gas and insurance,
however, perceive that half of their top 10 strategic
business risks are macroeconomic in nature.
Different types of risk
It is also apparent that the nature of risk varies considerably between the sectors.
Analysts in two of the sectors — biotech and consumer products — did not perceive a single
macroeconomic threat as being in the top 10 strategic business risks, but were focused
entirely on operational or sector-specic challenges. By contrast, the oil and gas and
insurance analysts we interviewed indicated a much greater exposure to the global
environment, and at least half of the top 10 strategic business risks for these sectors
are macroeconomic in nature.
Some sectors are undergoing dramatic transformation. Technological advances are driving
change in the basic business models of many rms. In these industries, sector-specic
challenges tend to dominate the risk lists. Particularly notable in this regard is media and
entertainment. In ve other sectors — asset management, biotech, consumer products,

pharma and telecoms — analysts indicated that half of the most signicant strategic
business risks are also specic 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 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 ndings? 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 ndings 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.
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Strategic business risk 2008 — The top 10 risks for business
Identifying the global top 10
By consolidating and aggregating the ndings of our 12 sector studies, it is possible to
form a view of the 10 most important strategic risks across the sectors — concerns that
will be common to leading rms in many industries.
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
inuence 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 and asset management, with four critical
strategic business risks each. Insurance and real estate follow with three of the top 10 risks
rated critical within their sectors. At the other end of the spectrum, for telecoms, none of
the top 10 strategic business risks were marked as critical.

This cannot, however, be used to denitively conclude that one sector is more or less risky
than another. It may be that the unique sector-specic 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.
Critical impact
High impact
Medium impact
Moderate impact
Key
Real
estate
Biotechnology
Oil and gas
Banking and
capital markets
Insurance
Telecommun-
ications
Utilities
Consumer
products
Media and
entertainment
Automotive
Risks
Industries
1 Regulation and compliance
2 Global financial shocks
3 Aging population
4 Emerging markets

5 Consolidation/transition
6 Energy shocks
7 Strategic transactions
8 Cost inflation
9 Radical greening
10 Consumer demand shifts
Pharmaceutical
Asset
management
Strategic business risk 2008 — The top 10 risks for business
8
The top 10 risks for business
1 Regulatory and compliance risk
2 Global nancial shocks
3 Aging consumers and workforce
4 Emerging markets
5 Industry consolidation/transition
6 Energy shocks
7 Execution of strategic transactions
8 Cost ination
9 Radical greening
10 Consumer demand shifts
Top 10 strategic risks
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Energy shocks
Industry consolidation/transition
Regulatory and
compliance risk
Emerging
markets
Radical greening
Consumer
demand shifts
Aging consumers
and workforce
Cost inflation
Global financial shocks
Execution of
strategic transactions
As the greatest strategic challenge facing leading global businesses in 2008, the industry
analysts we polled selected regulatory and compliance risk. This is being driven by an
escalating regulatory burden in many markets, as well as numerous compliance challenges
as companies extend their value chains well beyond Europe, North America, and the BRICs
(Brazil, Russia, India and China).
The possibility of regulatory intervention in sectors such as pharma, biotech, insurance,

telecoms and utilities, is further elevating this risk. Such intervention could shape the
competitive environment and drive fundamental change in business models. One telecoms
analyst wrote, “Regulation has a tremendous effect on the competitive landscape, not only
between incumbents and new entrants, but between countries.” In other sectors, the
continued viability of current business models may be threatened by future
regulatory decisions.

1 Regulatory and compliance risk
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.
Continued on page 10
9
Strategic business risk 2008 — The top 10 risks for business
Jim Fanning
Ernst & Young
Beyond the horizon: forward-looking risk management
There’s never been a more challenging
time for banks and capital markets rms.
The complexities of the business continue
to multiply. The landscape keeps
changing through globalization, the
emergence of new markets, and the
advent of cross-border expansion. Add to
the mix ever-evolving risk management,
regulatory, and compliance requirements
and it’s easy to see why many senior
executives spend their days scrambling
to keep pace and their nights worrying
about whether or not they are fully

compliant and can meet expectations.
The concern is not unfounded.
Many of the largest institutions have
multiple risk governance processes
and infrastructures amongst various
corporate and business units. Because
these operating models have sprung up
over time as needs dictated, they often
operate in silos, leading to substantial
inefciencies.
These models may prove to be
insufcient tomorrow as cross-border
consolidation adds another layer of
complexity. Competing regulatory
regimes and variances in compliance
requirements are just a few of the ways
in which the demands and challenges of
risk management will be compounded.
At the same time, companies will be
expected to provide greater transparency
and more accurate risk and control
information. Institutions can prepare
themselves today to effectively manage
the risks inherent in this future scenario
by aligning or “converging” their current
risk and control processes.
Risk convergence allows organizations
to coordinate the various risk and control
processes, effectively and pragmatically.
In our experience, the result is reduced

redundancy, which drives down costs,
and, perhaps most importantly, allows
more comprehensive, enterprise-wide
risk reporting to senior management
and the board. While risk convergence is
not a minor undertaking, it represents a
major opportunity to more effectively
mitigate current and future risks that
otherwise could impact an institution’s
reputation, bottom-line and ability to
compete globally.
A few, forward-thinking institutions have
recognized this need to streamline risk
and control processes and present a more
consolidated view to senior management
and the board. Consequently, they are
beginning to take steps toward risk
convergence. It’s uncharted territory,
however, so few, if any best practices
have been established. A critical
foundational element is the creation
of a common data structure, common
terminology for risk and control process,
and a common technology architecture.
In addition, the following questions can
also help to guide the process:
Hasthevisionbeenclearlydened?•
It’s not sufcient to focus only on
what’s not working. The future-state
vision should be well-dened and

communicated so that all parties are
clear on what is to be achieved.
Has a responsibility matrix been •
established? A matrix of current roles
and responsibilities helps to visually
identify existing duplication of risk
management resources.
Is there buy-in from the right •
stakeholders? Support from chief
executives is important, but getting
buy-in from key corporate control
groups and business units is critical:
they’re the ones that will make it work.
Canexpectedbenetsbetested?•
The goal here is to support the
future-state hypothesis with empirical
information in order to build a
compelling case to present to senior
management and the businesses.
With an eye on what the future operating
model should look like, it’s possible to
move toward the desired end-state in
incremental steps. As each building block
is put in place, efciencies are gained and
begin to multiply. This approach can
maximize the return-on-investment in
the short term by avoiding large-scale
investment while reducing waste and
process redundancy. Those nancial
institutions that embark on this journey

may be rewarded with a exible, efcient,
and sustainable risk management
framework that effectively meets not
only today’s requirements but those
of the future.
• Jim Fanning is the Global Leader
of Ernst & Young’s Banking and
Capital Markets Center.