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

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  • Risk from regulation and compliance drops from first to seventh place
  • Top opportunities in 2013 – innovation and rapid-growth market demand
  • Shift in corporate mindset – no longer waiting for end to economic uncertainty

Kuala Lumpur 15 March 2013:  Companies are shifting their thinking away from waiting for an upturn and are concentrating on optimising their business by cutting costs and increasing efficiency, according to EY’s recent report; Business Pulse: Exploring the duel perspectives of the top 10 risks and opportunities in 2013.

The report, based on a 2012 survey of senior executives from 641 companies in 21 countries, is the latest 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, Philip Rao, Partner, EY, Malaysia and ASEAN Risk Leader said, “As companies in developed markets continue to perform at low levels amid recession and sovereign debt problems, the world is now looking to new markets for expansion opportunities. Countries in rapid growth markets, including Malaysia, are now becoming the focus for investments and growth as many global organisations rethink their business strategies. While this is encouraging for Malaysia’s economy, Malaysian companies must be alert to these developments and consider the risks and opportunities affecting their own businesses in an increasingly competitive market.”

Innovation and 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. Companies now need 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.

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.

“Innovation and operational agility are the key drivers for organisations, no matter which markets they focus on,” said Philip. “Having a clear vision of what will differentiate their offerings from other competitors, working through commercial and academic partnerships to turn vision into a reality, and constructing a framework to ensure decisions at the top are implemented on the ground  are strategies that must be reviewed in parallel.”

Customer reach: search for new marketing channels and risk balancing

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 – in ninth place, emerging technologies are still considered a top 10 risk.

Susanna Lim, Partner and Malaysia IT Risk Advisory Leader comments: “Recent developments in cloud computing, social media, big data and mobile devices are creating new channels for Malaysian businesses to understand and reach customers. But the danger of overlooking related risks in the pursuit of new innovations still looms ahead. Fundamental IT governance and protection framework , better data privacy, quality measures and stronger cyber security management are foundations companies must not forget as they leverage adoption of these emerging technologies.”

Stakeholder confidence: broader considerations emerging

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 regulations, 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 with government policy and relations, which becomes increasingly important for businesses.

With government involvement, regulation and compliance listed as the seventh-biggest risk facing companies, down from first place in 2011, companies’ need to enhance their image of accountability to strengthen investor confidence. Ranked eight, the need for greater transparency in environment and corporate social responsibility are new risk considerations coming into focus.

Philip comments, “Companies are increasingly being held accountable, not just to shareholders, but by other relevant stakeholders including civil society groups, customers, business partners and employees. Tightening regulations which directly impact their business will also force them to reconsider their governance structure, internal controls and expansion strategies. Rather than treating each case as a special project, companies must look at managing these compliance issues as part of normal business.”

Looking towards 2014 – 2015, Philip concludes: “Companies are reconciling themselves to their increased exposure to a volatile world economy, and are taking steps to not only remain competitive but also to profit from the this new status quo. Companies must actively engage with the emerging risks and opportunities, as waiting for an end to global economic uncertainty is no longer an option.”

For more information and to download the report, visit www.ey.com/businesspulse

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Notes to Editors

Top ten risks and opportunities 2013

Rank Risk 2013 Opportunity 2013
1 Pricing pressure Innovation in products, services and
operations
2 Cost cutting and profit pressure Rapid-growth market demand growth
3 Market risks Investing in process, tools and training to achieve greater productivity
4 Macroeconomic risk: weaker or more
volatile world growth outlook
New marketing channels
5 Managing talent and skill shortages Improving execution of strategy across business functions
6 Expansion of government’s role Investing in IT
7 Regulation and compliance Excellence in investor relations
8 Sovereign debt: impacts of fiscal austerity
or sovereign debt crises
Leveraging CSR and public confidence
9 Emerging technologies Investing in cleantech
10 Political shocks Global optimization and relocation of key functions

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