Pricing pressure and cost cutting: top risks for business in 2013

March 13, 2013

As the global economic outlook remains uncertain, companies have shifted their thinking away from waiting for an upturn and are concentrating on optimizing their business by cutting costs and increasing efficiency, according to a report released by Ernst & Young.

Based on a survey of senior executives from 641 companies in 21 countries; Business Pulse: Exploring the duel perspectives of the top 10 risks and opportunities in 2013 and beyond is the latest report in a series started in 2008 to track the risks and opportunities facing businesses globally.

Pricing pressure is the biggest risk highlighted by companies in 2013, with the C-suite now accepting that they must find new ways to be profitable in response to shrinking developed markets. This is reflected in companies turning to innovation and rapid-growth markets in order to create new opportunities.

This contrasts with 2011 when companies were focused on the risks associated with regulation and compliance, and the most significant opportunity came from the execution of operational strategy.

Commenting on the report’s findings, Randall Miller, Ernst & Young Global Risk Leader says:

“With anemic developed market growth, and fierce price competition, the world has long looked to new markets for expansion opportunities. But to exploit these rapid-growth markets, companies must relate the opportunity directly to their degree of risk tolerance. It is not a question of how companies get into these markets; it is a question of how they win.”

Operational agility: tuning for greater performance

High wages and input costs, as well as significant new regulatory burdens on various sectors, mean that cost cutting and the related pressure on profits is cited by respondents as the second-biggest risk they face, with companies needing to make tough decisions on how to cut costs without damaging product and service standards.

For multinational organizations trying to balance the desire for cost competitiveness in key markets, as well as growth in new markets, rethinking the cost and location of operations from a global perspective can create opportunities. As a result, operational agility is crucial to surviving and flourishing in a volatile world economy, with executives in developed markets citing this as their second-biggest opportunity.

The number one opportunity is innovation, especially within the rapid-growth markets, both in terms of new products or services and within operations. This is reflected in research and development spending in rapid-growth markets growing four times as fast versus developed markets.

Steve Watson, Ernst & Young’s Global Performance Improvement Leader says:

“Innovative organizations drive a culture and set up policies to promote and reward innovation systematically. Having a clear vision of what this means for your business is key. External contributions such as commercial and academic partnerships can help too, as innovation often occurs through networking and critical mass.”

Customer reach: in search of the new

Companies are also embracing the emergence of new marketing channels, such as social media, which is ranked as the fourth-greatest opportunity for business, up from eighth overall in 2011. This was especially true of companies operating in rapid-growth markets, but inevitably, there are risks too, and emerging technologies are still considered a top 10 risk in ninth place, although this is down from fifth place in 2011.

Paul van Kessel, Ernst & Young Global IT Risk and Assurance Leader comments:

“When companies are thinking about emerging technologies, there’s a danger that they will overlook the related risks. For all the steps that companies have taken in virtualization, cloud computing, social media, mobile and other emerging technologies, they continue to fall behind with taking information security measures, creating an information security gap that grows ever larger.”

Stakeholder confidence: broader considerations emerging

Looking at a macro-level, the increasing role played by government in business is now cited as the sixth-biggest risk faced by companies, up from seventh place in 2011. This is driven in part by tightening regulation, notably in the financial sector, but it is also prevalent in rapid-growth markets where governments are playing an increasingly active role.

This can reshape the nature of competition and in China for example some multinationals are required to work in partnership with local firms, as the country seeks to support its local industrial base. As a result, government policy, and maintaining good relations with government, is increasingly important for businesses.

Following on from government involvement, regulation and compliance is listed as the seventh-biggest risk facing companies, down from first place in 2011. However, companies’ broader sense of accountability in the post-crisis world is also reflected in the opportunity to leverage CSR and public confidence.

It is a new entry to the list, ranked eighth, with many institutional investors now demanding greater transparency in areas such as environmental and social issues, which can impact on the viability of long-term investments.

Jonathan Blackmore, Ernst & Young Europe, Middle East, India and Africa (EMEIA) Risk Leader comments:

“On the ground, this shift in thinking is clear enough – shifting from a backwards –looking view of risks to a forward-thinking view. Companies are now seeking to understand what regulations impact their business and working out how they can manage and control those compliance issues within each market as part of a “business as usual” model to keep costs down, as opposed to treating each regulation as a special project.”

Looking towards 2015 and the challenges ahead for companies, Miller concludes:

“As our research highlights, companies are increasingly reconciling themselves not only to a long-term downturn in developed markets, but also to their increased exposure to a volatile world economy and markets. In turn, this new status quo brings with it several emerging risks and opportunities that companies must actively engage with and plan for, as many of these major economies are closely interconnected and waiting for an end to global economic uncertainty is no longer an option.”

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