Don’t ignore the bigger picture

Companies focusing on internal controls risk missing changes in external threat profiles.

In the face of disasters, international threats, trade imbalances, and a raft of demoralising corporate scandals in the last several years, many global executives are ill-prepared to deal with an increasingly complex global environment. "Today, many corporations lack policies and plans for understanding and coping with the real risks associated with their global operations, choosing instead to focus on strengthening internal controls while the external world around them continuously shifts out of balance," according to Paul Laudicina, author of a newly released book, ‘World Out of Balance: Navigating Global Risks to Seize Competitive Advantage’ (McGraw-Hill, Hardcover; $27.95; January 2005).

"Understanding vulnerabilities, surveying global risks, and implementing safeguards and contingency plans are not just about avoiding the costs of disaster," says Laudicina. "By integrating risk management into strategic planning, companies can turn smart risk-taking into a competitive advantage."

Drawing on twenty-plus years of experience consulting multinational CEOs across a broad range of strategic and corporate policy issues, Laudicina advises corporate leaders on how to transform their corporations into ‘value-builders’ capable of both avoiding emerging threats as well as identifying and acting on new opportunities located outside their familiar home turf.

In ‘World Out of Balance’, Laudicina identifies five drivers shaping today's business environment:

1) A growing market globalisation evidenced by trade flow increases of 300 percent in the last twenty years. With every passing day, the world is becoming more integrated economically, technologically and socially than ever before.
2) Demographic developments including growing worker shortages in the industrialised world and labour surpluses in the developing world.
3) A dramatic shift in the attitudes and appetites of consumers, and a growing resistance to one-size-fits-all global marketing.
4) Threats to the world's natural resources and growing concerns about the adequate supply of natural resources and the environmental consequences of expanding consumption.
5) Growing activism and regulation. Governments are spending more money and intervening more frequently in the marketplace, creating both opportunities and hurdles for firms.

While global corporations are vulnerable to the challenges these drivers present, each company has a unique risk profile, notes the author. Laudicina proposes the following five essential steps to developing a dynamic risk profile with the potential for both meeting challenges and identifying opportunities:

* Prioritise earnings drivers - The first step is to identify and then map a company's earnings drivers and the factors that would have the biggest impact on earnings if they were disrupted.
* Identify critical infrastructure - The next step is to identify the essential components supporting the firm's ability to generate earnings. These might include processes, relationships, people, regulations, plants and equipment.
* Locate vulnerabilities - Next identify the weakest links and the elements on which all of the others depend.
* Develop responses - After mapping a risk profile, a company will have a detailed knowledge of its operational vulnerabilities and how these relate to strategic goals and earnings. Understanding vulnerabilities will clarify decisions that will have an impact on the company's risk profile and bring to light opportunities to reduce risk while at the same time indicating where value is to be gained.
* Monitor the risk environment - Because a company's risk profile is constantly changing with changing economic and market conditions, consumer tastes, the regulatory environment as well as products and processes, a company's risk map must change in tandem, implementing an early warning system so contingency plans can be quickly activated.

The World Economic Forum has recommended ‘World Out of Balance’ for additional reading for the 2005 meeting.

For more information about ‘World Out of Balance’, go to http://www.atkearney.com/main.taf?p=5,2,1,59

•Date: 27th January 2005 • Region: N.America/World •Type: Article •Topic: BC general
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