RISKS are inherent in every forward-looking business decision. Successful risk management should be an integral part of an organisation's strategy and operations, and many companies have invested significant resources globally in risk and compliance initiatives.

Financial and regulatory risk have been the focus of much of this effort but that is no longer adequate for companies today. To gain performance improvement and competitive advantage, businesses must increasingly look at the extended risk universe, from finance and compliance risk to operational, and finally, strategic risk.

However, much that has been written about strategic risk seems to be at such a macroeconomic level that the implications for action by the management of a specific company can be lost. More significantly, the different implications for companies operating in different sectors tend to be blurred.

To explore the area of strategic risk from a different perspective, Ernst & Young worked with Oxford Analytica to interview more than 70 analysts from around the world and from over 20 business disciplines for its recent study, Strategic Business Risk: 2008 - the Top 10 Risks for Business.

Through these interviews, we identified the top 10 risks that were rated as having the greatest impact across the 12 sectors that we covered. They were: asset management, automotive, banking and capital markets, biotechnology, consumer products, insurance, media and entertainment, oil and gas, pharmaceuticals, real estate, telecommunications and utilities.

The top 10 strategic risks that have emerged from our study are:

1 Regulatory and compliance risk is deemed the greatest strategic challenge facing leading global businesses in 2008. This is driven by an escalating regulatory burden in many markets and numerous compliance challenges as companies extend their value chains abroad. The possibility of regulatory intervention in sectors such as pharma, biotech, insurance, telecoms and utilities is further elevating this risk.

2 Our analysts acknowledged that few sectors would escape the impact of major global financial shocks. This could be in the form of direct losses from market movements or difficulties in raising capital. The US sub-prime mortgage crisis has demonstrated how highly contagious such shocks can be across sectors and continents. Ironically, continued financial innovation - which tends to disperse risks and, as a consequence, makes the detection of potential shocks more difficult - is likely to increase the potential for financial shocks.

3 Sectors facing ageing consumers and workforce also face the risks of dramatic shifts in consumer demand, as well as shrinking manpower coupled with the challenges of expanding pension and healthcare costs. Sectors such as pharmaceutical, biotechnology, consumer products, insurance and asset management in particular need to respond swiftly to the new opportunities presented by the silver population in order to secure a competitive edge.

4 Competition among global firms in emerging markets is strong, and emerging market firms themselves are entering the international stage. Global expansion into emerging markets has always carried with it traditional threats such as currency, operational, regulatory, language and cultural risks.

5 The consolidation phenomenon seen globally has been partly driven by the boom in mergers and acquisitions. Competitive pressures will continue to lead companies to merge. In the media and entertainment sector, for example, M&A is a central feature of many companies' attempts to respond to the Internet's impact on the sector.

6 Energy shocks, such as fluctuations in energy prices and access to supplies, pose a clear challenge to the energy sector. A large swing in prices could also trigger economic shocks that could impact sectors such as insurance, consumer products and real estate.

7 Too often, an execution of a strategic transaction seeks to quickly and significantly respond to an opportunity. This becomes an expensive and long-term risk in its own right. Such transactions may fail to deliver, not because they are poorly conceived, but because of a failure to meet operational challenges. New types of strategic transactions, including divestitures in real estate, spin-offs in auto, and separation of telecom companies into utilities and service providers, drive further risk.

8 Although we have been operating in a low inflation global economy for some time, changes to the fundamental structure of an industry, such as demographic changes and the rising costs of healthcare, can result in cost inflation. Regulation and radically changing business models also make cost a centrepiece of competitive strategy.

9 Radical greening is also becoming a strategic risk given growing consumer and regulatory responses to global climate change. Radical greening refers to the increasing environmental concerns which could be the result of a wide range of pressures - from the voluntary world of corporate social responsibility to hard regulatory and economic necessity. In the short term, the strategic challenge centres on how much 'radical greening' firms should undertake. Going green is expensive, but could pay dividends if consumer tastes and regulation shift quickly to favour 'green' portfolios.

10 Failure to identify and respond to the shifts in consumer demand is deemed a strategic risk, particularly when the changes are fast or unexpected. As consumer power and knowledge expand, aided by technology such as the Internet, this challenge may well rise higher on the radar in the years ahead.

Change is a constant in the market. As such, risks will change over time and so do our perceptions of the criticality of these risks. The top 10 risks today may evolve tomorrow. Yet, effectively understanding and managing them today may be your ticket to tomorrow's strategic opportunities.

The writer is head of risk advisory services, Ernst & Young

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