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Market Intelligence for Risk Management

Thomas Rideg, Global Intelligence Alliance

Introduction

We ask Thomas Rideg, a Managing Director at Global Intelligence Alliance and a risk management expert, about the role market intelligence plays in risk management.

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How is market intelligence used for risk management?

“Market intelligence can be very useful when you want to monitor, detect, assess and address the impact of external risks. The whole idea is to prevent external risks from competitors, the economy, regulations or the supply chain from attacking the organization.

Market intelligence for risk management should be conducted consistently and with a preventive mindset.

With preventive market intelligence, you monitor your external environment, detect potential risks, assess the impact and take decisive action to minimize or eliminate the risks. By the time a large company has noticed that thousands of dollars have been ‘leaking’ daily through fraudulent bar codes passed through their accounts payables system, it will still take a while before the source is traced and stopped. During this time, losses will continue to leak out. This is a simple case of where preventive market intelligence on suppliers could have helped.

Another example would be the product recalls by several automotive players, where proper market intelligence on suppliers and suppliers’ suppliers could have identified faults within their supply chain and prevented the fallout from the recalls to their profitability and image.

One should also monitor the competition for unfair competitive practices, such as tax evasion, dumping or illegal hiring. These things take place in several countries and industries, particularly emerging markets, and have a direct impact on the competitiveness of companies that operate above the board.

Environmental and regulatory risks should also be monitored, not only with your own company but those with whom your company does business. As companies grow, they tend to be labelled by their local communities as “the responsible entity”. Increasingly, companies are paying the price of risks that have been exposed by their partners—be it suppliers, distributors, retailers or even consumers and governments. This has been very evident with recycling risks for manufacturers of electronic equipment and wastewater treatment risks for chemical and industrial players.”

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What are some risks that can be addressed with market intelligence?

There are all sorts of risks! Just take a look at the examples—and the table is not even complete! Plus, the risks only increase as you expand into new markets and as competition becomes fiercer.

Competitor Risks

  • New entrants

  • Acquisitions/joint ventures

  • New product launches

  • Aggressive pricing

  • Unfair competitive practices (cartels, lobbying, tax evasion etc.)

  • Uncompetitive OH structure

  • HR profiles

  • Outsourcing processes

  • Substitute products, obsolete technology

  • Counter intelligence

  • Protectionism

  • Small local competition

  • Management buyouts

  • M&A dynamics

  • Environmental legislation

Environmental Risks

  • Accidents

  • Natural disasters

  • Activists

  • Environmental organizations

  • Social media

  • Protectionist policies (taxes, import duties etc.)

  • Nationalization

  • Emission policy

  • EU certifications

  • Waste disposal

  • Lack of take-back/recycling

  • Sourcing

Market Risks

  • Shifting consumer trends

  • Changing demographics

  • Economic changes

  • Political risk

  • New business models or technologies

  • Economic downturn

  • Changes in customer preferences

  • Product competition

  • Bubble economies

Regulatory Risks

  • Taxation/margins

  • Transfer pricing/rules

  • Regulatory changes (especially in emerging markets)

Supply Chain Risks

  • Supplier compliance

  • Quality standards

  • Distribution lobbying/cartels

  • Lack of logistics optimization

  • Unfair or unethical supplier demands with their suppliers

  • Manipulation of bargaining power

  • Theft

  • Inability to fulfill contracts/liabilities

  • Counter intelligence

  • Customer mergers

  • Customer bankruptcy

  • Supplier bankruptcy

  • Price and currency fluctuations

  • Value chain changes (revenue shifts)

  • Natural disasters

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What are a few common mistakes the companies make in risk management?

“Looking at market intelligence as being corrective rather than preventive, is one of the most common mistakes. This may be a result of the lack of awareness about the synergies between risk management and market intelligence. Perhaps we shouldn’t even refer to this as market intelligence, but as “corrective deep dives” or something similar!

Proper market intelligence is continuous. Once risks have attacked the organization, it is important to conduct these deepdives, but they are much more costly than preventive market intelligence for two reasons. Firstly, the risks that have attacked the organization have already caused damage. Secondly, the project will be deep and intense, rather than systematic and continuous.

Preventive market intelligence identifies external factors that may allow risks to enter the organization and enables preemptive action. The return on investment is huge but the irony is that when market intelligence is conducted well, the results are very often not perceived because risks would have been eliminated and become “unperceived risks”.

However, had the risks entered the organization and caused damage, the loss would be measurable and perceived. These losses are always incomparably higher than market intelligence budgets.

Some companies also make the mistake of insisting on having a global head of risk oversee numerous markets. Without keen local market knowledge, the pressures on that global risk executive to pass approval on new operations or suppliers in far-flung markets can backfire.

I once asked an American executive to compare the transport a US factory worker uses to go home verses a Brazilian worker. The executive was shocked to hear from me that the average Brazilian factory worker in his own company’s subsidiary would typically go home in severely overcrowded buses and ride for at least two hours before reaching the destination. With four to five hour return trips each day, productivity, alertness and safety at their plant in Brazil would naturally somehow be affected and should be dealt with by management differently than in Europe or the US. These are soft factors that you would not necessarily beware of without having lived in the country.

Thirdly, in a recession, companies cut their cost and entire value chains shake as result. Budgets and headcounts are slashed. Suppliers are expected to produce more with less. Compliance systems and safety procedures are affected. So unfortunately, in a recession, budgets for market intelligence are also cut at a time when risks are on the rise.”

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What impact does market intelligence for risk management have on corporate decision-making?

“It makes decision making safer, enabling consideration for a more comprehensive set of implications than those that the decisions would otherwise be based upon.

Let’s look at some examples, starting with recruitment.

In some companies, it is much easier to hire employees than others. In some countries, the actual cost to hire an employee is more than twice the employee salary, due to tax and social security system. To make matters more complicated, if we need to dismiss employees, local legislation can demand huge penalties.

Furthermore, some markets are still exposed to currency fluctuations, and could unexpectedly increase wage costs by 10% or 15% in a matter of weeks. Are we taking such factors into consideration when we are approving the recruitment of 200 factory workers for a new plant in an emerging market?

For new market entries, whether in a new continent, new country, new region or just a new city, we need to be fully aware of all the implications. What are the fiscal incentives or barriers that may exist in different territories within the country? What are the tax differences or obligations regarding imports, assembly or integrated manufacturing in different countries? Are we fully cognizant of the competitive environment in our new country, including cultural key success factors for CRM? What can happen to us one year down the road if we later find out that our two main competitors will form a joint venture and dominate more than 60% of the market?

In mergers and acquisitions, did we look at an entire FIT analysis besides Revenues, EBITDA, and product offering? What about cultural synergy? Employee motivation? What is our target partner’s reputation amongst the value chain and our customers? Are we absolutely sure that our partner has no, or has not inherited any legal issues or lawsuits in some remote location that could backfire on us in the next few months or years?

We could also review our distribution methods and strategy. How do we know if our distributors are doing their jobs efficiently? Do they have the regional reach and push that we are expecting or if they are working with the right margins, contracts, delivery times etc.?

Regulations can change, and do change frequently in emerging markets with limited public notice. One simple slip or delay in a specific declaration or notary payment can cost millions in fines.”

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Will risk management get easier or harder?

“I would say it’ll get harder!

Corporations are driven primarily by their mandate to maximize shareholder value. They will continue to squeeze the margins on their suppliers, outsource more operations to third parties and expand overseas. This introduces all sorts of risks into the value chain.

Market intelligence is very correctly associated with opportunities to support strategic planning, marketing and sales or product development. But along with opportunities come risks, and risk managers should leverage the value that market intelligence can bring to their increasingly demanding jobs.”

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Conclusion

Retail banks that partner with social media and social gaming businesses have a great opportunity to capitalize on social media developments.

They can do this through a number of ways: by creating convenient and secure micropayment transactions for social media platforms, by setting up virtual banks, by providing technology and know-how for virtual currencies management and by selling risk and liquidity management solutions to peer-to-peer lending platforms banks.

Retail banks can increase and diversify their revenue sources and enable further growth of social media platforms as they seek to improve their financial infrastructures.

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White Paper details

Original publication date:
August 26, 2010
URL:
www.globalintelligence.com
Copyright:
© 2011 Global Intelligence Alliance. All rights reserved.

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