The holiday season is a time for celebrating — and prognostications for the coming year. I’m typically an optimist, but not this time. Though many factors point to a rosier 2014, every company faces some significant direct and indirect risks, many of which lurk below the surface. Fortunately, these dangers can be alleviated with good analytics and planning.
Recent positive economic news (e.g. the strength of equity markets, low interest rates and the abatement of EU and U.S. debt crises) have given corporate managers some cause for optimism. It would be understandable, but hazardous, for managers to let their guard down. Many risks continue to menace organizations, four of which are:
Stagnating prices
Raising prices is a quick path to higher profits. To wit, a 1% increase in prices with a 30% margin can improve the bottom line by 20%. Just try making it happen. Since the financial meltdown of 2008, it has been difficult to raise prices while maintaining market share. In Canada’s retail sector, for example, the arrival of Target and Marshalls plus recent grocery price wars, is expected to depress industry profitability for some time. Many other sectors like services, manufacturing and communications are finding it difficult to sustain margins due to buyer pressure, global competition and steadily increasing costs.
Mitigating the risk
From a pricing perspective, firms need to more aggressively sell their products in markets that are less price sensitive or that are rapidly growing markets, both locally and in the developing world. Furthermore, those companies with differentiated value should look to take pricing up by better aligning price points to the unique benefits delivered.
Cost pressures
Global consultancy EY estimates that a 1% reduction in costs can produce the equivalent of a 10% increase in sales. Achieving this is another story. In many firms, most of the easy supply chain and headcount rationalization savings have already been tapped. Moreover, the era of low raw material and wage inflation may be coming to an end, tracing to two key drivers — the recent uptick in consumer demand and the possibility that China’s growth engine will reignite, driving up raw material costs. Adding fuel to the fire is continued exchange and interest rates volatility, which can play havoc with costs.
Mitigating the risk
Product and operational innovation is the key to driving margin improvement. On the cost side, it is possible for organizations to further reduce cost without cutting key capabilities. For example, managers can reduce development costs and better target needs by co-creating products with their customers and leveraging rapid experimentation practices. Innovative operational strategies can drive higher efficiencies through the implementation of initiatives that reduce complexity, as well as crowdsourcing and gamification practices.
Supply chain disruptions
As has been shown many times, unforeseen events like natural disasters or political crises can seriously disrupt a firm’s operations, dramatically impacting product supply and revenue. Risks are magnified when a company’s supply chains are regionally concentrated and highly integrated. For example, Japan’s Fukoshima nuclear disaster led to global shortages of spare parts and shuttered assembly plants for Honda and Nissan. A recent report by Swiss Re, a reinsurance company, highlights the ongoing risk of major natural disasters such as flooding, earthquakes and storms. The report identifies above-average risk for many global economic hubs including: Tokyo, Hong Kong-Guangzhou, New York, Los Angeles and Amsterdam-Rotterdam.
Mitigating the risk
Maintaining a low-cost supply chain must be balanced with the need for added production flexibility and agility. Managers can minimize this operational risk by having: multiple supply-chain partners for critical and expensive inputs; close and symbiotic relationships with each vendor; and the internal capability (e.g., engineering, procurement) to quickly shift production if necessary.
Cyber attacks
Computer attacks and viruses represent a clear and present threat to every enterprise and industry. This year, the Securities Industry and Financial Markets Association released a report that showed more than half of the world’s securities exchanges had experienced cyber attacks during the past 12 months. Janet Napolitano, the outgoing U.S. homeland security chief, recently said, "Our country will, at some point, face a major cyber event that will have a serious effect on our lives, our economy, and the everyday functioning of our society." Importantly, these cyber attacks can appear out of the blue. According to software provider Symantec, 40% of all the computers that were impacted by the Stuxnet virus, which allegedly targeted Iran’s nuclear infrastructure, were located outside of Iran.
Mitigating the risk
Reducing the impact of cyber attacks requires an acknowledgement of the threat, an understanding of internal vulnerabilities and the business continuity plans to deal with potential disruptions. Furthermore, IT managers should work together with their industry peers to explore industry early warning systems and safeguards.
Mitchell Osak is managing director of Quanta Consulting Inc. Quanta has delivered a variety of strategy and organizational transformation consulting and educational solutions to global Fortune 1,000 organizations. Mitchell can be reached at mosak@quantaconsulting.com