Risks in the convergence era
The adoption of new technologies breaks down barriers among companies and sectors and indicates the path to value generation in the 21st century. But there are a number of risks that must be considered in order not to impair the business.September-November | 2018
In 1776, the Scottish philosopher Adam Smith released “The Wealth of Nations”, a work that inaugurated modern economic science. Smith was the first to formulate the concept of production specialization as a driver of productivity. According to this logic, workers and companies should focus on the production of certain products to master the process and, thus, become more efficient. In his work, Smith cites as example the specialization of a pin factory. In the 21st century economy, where the production of goods much more sophisticated than pins is common, this concept, if not completely outdated, undergoes a major transformation.
Phenomena such as globalization and the development of digital technologies, including big data, Internet of Things (IoT), advanced robotics and artificial intelligence (AI) – as well as profound changes in consumers’ habits, preferences and demands – are causing a disruption in the performance of companies from different sectors: they are breaking down barriers among sectors and markets, as well as among input suppliers and final producers. An example: is a factory producing self-driving vehicles a vehicle assembler or a technology company? How about an agribusiness company that controls the entire industry chain, including a technology arm with drones and analytics to evaluate the performance of a crop? An online purchase is only possible because companies specializing in payment methods have integrated with a retailer. And this retailer, to succeed, needs to adopt a number of new technologies to serve its customers.
The convergence era brings countless growth opportunities for companies. But with them, there are also a number of risks that need to be mapped out. The first risk for a business is to become obsolete and lose relevance. In a business environment where innovation cycles are getting shorter, the chance of being “kicked out” of the market is significantly higher. “Whoever does not adapt to the novelties and does not meet the customers’ expectations runs the risk of being overtaken by competitors”, says Alex Borges, Deloitte’s lead partner in the Risk Advisory area.
In the risk assessment engagement of the Makro wholesale network, one of the topics concerns exactly the transformations in the business model resulting from convergence. “Understanding how technological changes impact our customers’ habits is key if we are to deliver the experience that they want. Failing in doing this is a risk to our business that we cannot ignore” says Vivian Bernardi, regional Risks and Controls director at Makro. Today, serving the customer well presupposes having the tools to serve them in different situations. “We need to be efficient and serve the customer in whatever way they want”, says Vivian. “Today, they may want to come to the physical store to walk around and see products. Tomorrow, they may be in a hurry and make purchases via the app, website or phone. They may wish to pick-up the product here or receive it at home. The market is providing new ways to serve customers and we need to be vigilant, because everything may change the next day.”
The speed of technological advances brings another risk: the regulatory risk. This is because the new businesses that are emerging are so advanced that existing laws do not regulate them yet. The result is a mismatch between the law and the private sector. Uber is a classic example. It was only after it emerged that governments from various countries came to discuss how – and if – it could operate. After millions of dollars were invested, Uber was banned or restricted in different countries, such as Italy, Denmark, Japan, Germany and the United States. “Legislation does not usually keep up with market changes”, states Vivian Bernardi, from Makro. “Therefore, we must always be vigilant to follow the law.”
In the regulatory sphere, it is also worth mentioning the issues related to cross-border trade. After an outbreak of globalization, in which trade borders fell down and countries entered into free trade agreements, there is now a new protectionist wave. One of the main weapons is in the regulatory aspect, which appears as a reaction to the movement of convergence of trade territories. Recently, the United States has created rules to reduce steel imports. And the European Union used the legislation to curb the purchase of Brazilian chicken, to name only two examples.
In Adam Smith’s time, information took days to get from one city to another – or months in the case of different countries. Today, information circulates almost in real time. Again, there are opportunities and risks involved. The upside is that distance is no longer a hindrance to the disclosure of a product or service. The downside is that bad news spread just as easily. “The relationship between companies and customers or consumers has changed with social networks”, explains Anselmo Bonservizzi, Deloitte’s partner in the Risk Advisory area and leader of the Strategic and Reputation Risks practice. “Today, reputation risks are very high and any brand may have its image shaken with the spread of negative news”, he adds.
These problems do not only occur in extreme situations, such as an outbreak of infection from eating contaminated food, a fatal automobile accident caused by vehicle system failures, or a gaffe committed by an executive that became viral in social networks and caused a barrage of criticism. When businesses start new activities, they automatically incur reputation risks.
Reputation risks are very high nowadays and any brand can have its image shaken with the spread of negative news. It is necessary to thoroughly assess and minimize these risks., Anselmo Bonservizzi, Deloitte's partner in the Risk Advisory area and leader in the Strategic and Reputation Risks practice.
An example is when a company that acts in the B2B (Business to Business) market decides to open stores, whether physical or online, to serve customers and end consumers. According to Bonservizzi, companies that do this must recognize that they are entering an unknown territory and prepare themselves for the new scenario. “By operating in new businesses, companies need to change their internal structure, that is, to do it differently”, says the Deloitte partner. But few have this care – they do not even assess whether they are prepared for the new challenges. “Many capabilities of the companies, which were efficient in the previous mode of production, are not productive for the new reality”, Bonservizzi adds. One of the possible results of this neglect is the appearance of service failures which, today, cause serious damage to the reputation. “If a customer orders online, we need a system that ensures product availability and fast delivery” says Vivian Bernardi. “If we do not meet the customer’s expectations, we lose their confidence.”
Preparing for changes in the business model is important, but it is only the initial step for risk mitigation. After the change, there is a need to follow up on the customer satisfaction level. “I’ve seen cases of companies launching new products or services and that had no way to measure customer satisfaction, which brought negative consequences”, says the Deloitte partner.
When the problem sets in, it needs to be classified according to impact and complexity. If it is considered small, it will require a process adaptation; if it is of medium impact, it may require structural changes, such as adjustments in the scope of services; if the problem is considered large, it is necessary to manage the crisis. “The vast majority of companies are not prepared to deal with a crisis. In other words: there is no plan to tackle the problem”, says Bonservizzi. “When this happens, companies will learn to deal with the problem as it unfolds, when the ideal is to already know what will be done in the event of a crisis.”
Cyberattacks are incidents with great potential to cause crises capable of shaking a company’s reputation. Attacks can occur in a number of ways and have several targets: data from customers, suppliers, strategies and industry secrets. This is a risk which, it is not chancy to say, only tends to grow. After all, migration to the digital environment is still far from being complete. The more data there is on digital platforms, the greater the risk of its being stolen by criminals. “Having up-to-date security tools is critical because the risk of data theft is increasing” says Vivian Bernardi.
Despite all of these risks, convergence offers numerous opportunities for value creation for companies. “Although it may increase the reputation risk, new technologies counteract to boost reputation and image gains”, Borges says. It makes perfect sense. After all, new technologies open hitherto inaccessible horizons. Just think about the possibilities for businesses with tools like Artificial Intelligence and big data that allow the collection and analysis of a large amount of customer or consumer data.
This is an immense opportunity to understand your target audience and deliver the product or experience they want.
The company that knows how to deal with the risks, will take advantage of the convergence to attain a better position in the market and lead edge performance., Alex Borges, Deloitte's lead partner in the Risk Advisory area.