Magazine article Ivey Business Journal Online

Emerging Risks: The Hidden Transformers

Magazine article Ivey Business Journal Online

Emerging Risks: The Hidden Transformers

Article excerpt

As if the challenges facing a business leader today weren't already formidable, along comes one that may be the most difficult and least understood of all. Emerging risks, unanticipated and unplanned for, such as the eruption of a volcano in Iceland earlier this year, are having a serious impact on companies' long-term strategies and earnings. Though a relatively new phenomenon, emerging risks can be managed, and this author describes what leaders can and need to do to prepare their companies for them.

Volatile commodity prices, a shifting political landscape in the United States, and global trade conflicts are all reminders of the economic and regulatory uncertainties that continue to weigh on senior executives. The financial crisis was a wake-up call for all companies to improve their ability to identify and prepare for risks outside of those encountered in their daily business. Unfortunately, much work still needs to be done.

Most companies remain as vulnerable as ever to risks that may initially appear unrelated until an unanticipated event occurs. Emerging risks are risks triggered by unexpected events, such as this year's volcanic eruption in Iceland, and familiar risks in unfamiliar conditions, such as the souring mortgages that triggered the financial crisis. While many senior executives prepare for obvious business threats such as a prolonged global recession, only 10 percent incorporate potential threats related to environmental issues, societal risks and technological concerns into their risk indicators, according to a survey conducted by Oliver Wyman in collaboration with the Financial Times.

Emerging risks are increasingly introducing volatility into companies' earnings. Across industries and geographies, these risks are jeopardizing companies' supply chains, impacting raw material prices, and threatening the security of critical industrial information. In effect, they are transforming the very nature of many companies' business models, while receiving little to no attention in the boardroom or the executive suite.

Companies need to prepare for a new reality in which emerging risks increasingly impact their earnings and long-term strategy. Those that develop the ability to manage emerging risks will gain a significant competitive advantage over rivals who lack this level of sophistication.

EMERGING RISKS EXPLAINED

The inherent unexpectedness of emerging risks is the fundamental reason companies still struggle to identify and assess them. A survey of 650 senior executives we recently conducted with the Financial Times revealed that 90 percent of respondents' organizations have made efforts to increase their capacity to identify emerging risks. Nevertheless, 62 percent of senior managers still consider their firms to be "ineffective" or only "moderately effective" at incorporating these risks into their business decisions.

Companies need to develop the ability to integrate emerging risks into their decision making. Volatile commodity prices are becoming some of the largest and most unpredictable costs for organizations ranging from consumer products manufacturers to transportation companies to food processors. In November, German auto parts supplier Continental AG announced weaker-than-expected quarterly earnings because of rising raw material prices. Food distributor Sysco Corp. missed its earnings estimates because of surges in the prices of dairy, meat and produce. And Archer Daniels Midland Co., the world's largest grain processor, had weaker earnings because of rising commodity prices.

THE NEED TO REDEFINE BUSINESS MODELS

Weaker-than-expected quarterly results are only a small portion of the much larger dilemmas that emerging risks create. In many ways, these risks are altering the essence of many companies' business models.

Highly volatile raw material prices, for example, are rewriting the rules for how companies must conduct business. …

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