The biggest risk of all is industry disruption risks. One fine day the competitive landscape of the industry transformed and it caught us by surprise. Ouch, the world changed while we were sleeping. It is a CEO’s recurring nightmare, and the risk managers do not focus on it much. Reason as I mentioned in my recent posts is that risk managers assume they do not have the right or duty to question the strategy or strategic objectives. Let us discuss this in detail.
Andrew Grove in his book “Only the Paranoid Survive” described the strategic inflection point. He said – “An inflection point occurs where the old strategic picture dissolves and gives way to the new, allowing the business to ascend to new heights. However, if you don’t navigate your way through an inflection point, you go through a peak and after the peak the business declines.” The strategic inflection point disrupts the industry completely and can wipe out old companies in a few years.
1. The Intel Story
Fascinatingly, Intel itself missed the strategic inflection point of mobile computing. Intel controls 80% of the world’s PCs chip market. It failed to make a timely dent in the handheld devices. Nvidia, Texas Instruments, Qualcomm and Samsung rule the ARM chips market for smartphones and tablets. Intel is now positioning itself in this market with its x86 chips. With the shrinking in the PC, laptop and server market, let us see whether Intel can re-position itself as the smartphone and tablet chipmaker. IPhones and IPads disrupted the technology industry; and surprisingly the giants of the industry – Intel and Microsoft – both missed the boat.
2. The India FDI Retail Story
Closer home, the opening up of foreign direct investment in retail industry has shaken the complacent industry from its roots. Expected entry of Wal-Mart is causing havoc in the minds of established players. Most of the food retail sector in India comprises of Mom-Pop local stores that supply at low costs. Some organized chains as Reliance, Bharti, Nilgiri’s etc. have started catering to the upper middle class requirements; however have not wiped out the smaller stores. The opening of the retail sector to foreign investment is indicative of industry disruption. The industry is gearing itself to deal with the new risks to retain the competitive advantage.
3. The ERM Perspective
Enterprise Risk Management is a process, effected by an entity’s Board of Directors, management and other personnel, applied in strategy setting and across the enterprise, designed to identify potential events that may affect the entity, and manage risks to be within its risk appetite, to provide a reasonable assurance regarding the achievement of entity objectives.
Going by the definition, identifying industry disruption risks comes under risk managers’ purview. However, we tend to take strategy as given and don’t challenge the strategy and strategic objectives. We need to change our perspective. Building and retaining competitive advantage is a strategic objective. The industry disruption events can wipe that out. Hence, include identifying disruption risks as part of risk assessment.
Industry disruptions occur due to external forces – regulators, competitors, suppliers, customers and society. To identify strategic inflections points risk managers must meticulously track the external environment. Understanding external environment is difficult and requires extensive industry knowledge. Therefore, I know, some of you would be wondering whether it is part of our job. Let us check with the readers.