The Executive Newsletter of TheOfficialBoard

By Bertrand Cristau

At beginning of September, our Chinese suppliers announced delays in delivery because their sub-contractors had unexpected delays in production. More and more announced late deliveries, without reliable new delivery dates. The sub-contractors were in internal provinces where slowdowns weren’t typical. Typhoons were gone, the ongoing labor shortage wasn’t new, the shortage of international containers in August had largely been solved. What was going on?

The delays appeared to be related to electricity shortages. Electricity shortages in September, when the peak consumption of summer was over? Hard to believe! Would the efforts of the central government to force-close the polluting small electric-power plants cause such energy shortages? By October, many provinces that had never suffered from shortages were experiencing shutdowns.

November brought closings and queues at gas stations, and diesel shortages in more developed provinces around Shanghai and Guangdong. Many companies in developed areas turned to the diesel market for powering generators, creating a shortage of diesel. It turns out that local governments are limiting the supply of electricity to reduce emissions and meet the central government’s conservation targets for 2010.

During the 11th Five-Year Plan (2005 – 2010), China sought to reduce energy consumption per unit of GDP by 20%. A 16% consumption reduction was reached in the first 4 years, but consumption did not reduce in the first half of 2010. Now many local governments, rushing to meet regional targets set by the central government, have decided to introduce blackouts in the remaining months. Drivers who could not find diesel in their own stations are going to neighbouring ones, and the shortage is quickly spreading all over the country. Voices are now rising to say that finally the central government policy will run against its initial aim of emission reduction!

Surely the central government was aware of the consequences of its increased pressure. Entrepreneurs and local governments, remembering the decision of the central committee of the Chinese Communist Party in Autumn 2008 that China should turn from quantitative to qualitative development, should plan for further measures to restrict energy consumption in the coming months.

Bertrand Cristau is General Manager of AEC, a consulting firm assisting mid-size companies to source in China with offices in Beijing, Shanghai, Guangzhou and Paris.

By Craig Farris, Accenture

In the aftermath of the financial crisis, companies are waking up to a world of new market realities. Adaptive approaches, sharpened competitive instincts, and the power of enterprise risk management are now necessary for success.

According to a recent Accenture survey, executives expect risk management to have a major impact on sustainable profitability (61%) and competitive advantage (53%). Yet, less than a third indicated they believe their company is effective at managing their risks.

Dissatisfaction with a company’s risk management strategy is due to one or more of the following factors:

• The company finds itself stuck in a risk assessment mold
• Risk management is viewed as an “extra” activity
• The company’s leadership is not sure how to make use of risk management
• Reporting systems do not produce the right information
• Risk management leadership does not have a clear view of the value of this capability

There are clear steps a company can take to move forward:

1. Break out of the value fog – define the value expected from enterprise risk management, holding the program accountable for meeting set goals
2. Establish clear risk governance structures to see how decision-making flows and supports a systematic view of risk
3. Support the company’s risk efforts with timely, insightful reports and information flow
4. Ensure the firm has the right analytics in place to gain a comprehensive understanding of risk and how to leverage it for business advantage
5. Be bold, seize risk management’s potential for adding value to the business.

For companies determined to succeed, enterprise risk management is the tool that takes them down the road towards enhancing the value of their business. A tepid approach to enterprise risk management will concede the future to those who take the bold initiative.

Craig Faris is executive director – Risk Management, Retail and Public Service areas for Accenture Risk Management.  Based in Washington D.C., he has over 25 years of global, corporate and consultancy experience in the retail, consumer products and energy sectors. See more at Accenture 2009 Global Risk Management Survey

By Julian Short, Accenture

A pricing function focused on managing in a downturn is fraught with risk. At best, a company could miss the potential short-term gains offered by an improvement in the economy, and at worst it could damage the long-term price positioning of the overall enterprise. With companies clearly beginning to position themselves for an upturn, now is the time for executives to be sure that their business has the right pricing strategy and execution capabilities.

As companies prepare for an upturn, we see actions in the following areas as key:

• Ensure that your pricing strategy can accommodate a “multi-speed economy”. In an upturn, geographic, product and customer segments recover at different speeds. Companies need to employ micro-segmentation techniques coupled with differentiated pricing strategies to operate in this environment. Micro-segments should be continually re-analyzed and migrated across strategies as required during the recovery.

• Strengthen your analytical capabilities to support better pricing performance measurement and segmentation. A comprehensive set of analytical reports and KPIs is the basis for any pricing capability; especially if the performance of individual micro-segments are to be monitored and results utilized in strategy and execution.

• Increase the efficiency and accuracy of price setting, execution and control. As the recovery takes hold, prices may change rapidly for a specific micro-segment. Companies should utilize standardized price-setting models and processes mapped to the segmented strategies, enabling transparency, control and efficiency in the process. Differentiated price targets and floors should be utilized during sales negotiations, coupled with a clear price policy document to enforce segment-based rules.

• Integrate and automate pricing technology and data to improve decision making and efficiency. As the pricing environment becomes more complex, pricing technology is increasingly critical to driving effective execution. Leading-edge pricing applications provide the required insight and automate rote pricing tasks, freeing skilled pricing resource up to focus on the more complex processes and exceptions.

• Improve the skills and performance of the pricing organization. Processes, policies, technology and data all play key roles in effective pricing, but the human element is the most critical. Several areas will enhance the overall performance of the pricing organization including: revising and documenting clear pricing roles, authorities and accompanying training for the organization; developing an effective performance management system based on the chosen pricing strategies; and exploring ways to bolster the pricing team through selective hiring.

Optimizing pricing can be challenging even during the best of times, but it is particularly difficult during uncertain economic conditions. By creating a robust pricing capability that leverages leading practices and technologies, companies can effectively capitalize on emerging growth opportunities and, as the economy recovers, position themselves for high performance over the long term.

Julian W. Short leads the Accenture Price & Profit Optimization practice across Europe, Africa and Latin America. Mr. Short works across multiple industries to help companies shape and deliver their pricing strategy. He is based in London. Learn more at Accenture.

By Paul Nunes, Accenture

How well positioned is your company to respond effectively to the downturn? The answer is a function of three assessments: relative performance (as measured over recent business cycles and management eras), your own unique circumstances, and overarching global conditions.

From our extensive research over the past six years, we know that on its own, a rising share price tells observers little about whether a company is consistently outperforming its peers.

Accenture’s formula for judging high performance examines company performance by looking at metrics that indicate true competitive strength: strong profitability balanced with strong revenue growth and positioning for the future, all delivered consistently and over time.

The downturn, however, threw a wrench into some of this machinery. Consider relative performance: not all high performers were in strong positions when it hit. Some found themselves cash poor, for example, perhaps because of recent strategic acquisitions. Likewise, some low performers, perhaps because of an inability to identify promising investment opportunities when the economy was strong, had cash on hand.

Once a company has established its relative competitive stance, it should assess its own particular circumstances. Accenture research following previous recessions found that leading companies practice sound, value-based financial management, emphasizing cash flow and strong balance sheets during good times. This approach provides flexibility and financial muscle during bad times. While there is no perfect formula for downturn readiness, some elements are clearly important: cash position, balance sheet strength and the diversity of cash flows.

The key questions to ask about cash reserves are, “Do we have sufficient cash to see us through the crisis?” and “Do we have enough to make long-term investments attractive at this moment?”

For its balance sheet, a company must ask, “Is our balance sheet sufficiently strong that we can credibly take an aggressive stance in the market rather than a defensive position?” And in a broader context, it must ask, “How susceptible is our current position to additional volatility and a worsening of global economic conditions?” The answers to those questions will help companies understand their options.

The third assessment: changes in the global context. The shift to a multi-polar world—one characterized by multiple centers of economic power and business activity—creates new challenges and opportunities distinct from those experienced in a national or regional downturn.

For example, sovereign wealth funds and national governments have become significant bargain-shopping investors as well as sources of bailout funds. Also, large companies in a multi-polar world are almost always part of a dense web of networks, so it’s important to assess not only your own strengths and risks but also those of your partners, customers and suppliers. Their fate can substantially influence yours. A formal, 360-degree risk review, with a focus on worst-case scenarios, should be undertaken.

In total, these three assessments will force companies to look deep inside and far abroad to determine their financial health and their chances of maintaining, achieving, or regaining high performance after the downturn passes. To read more, see “Managing in extraordinary times: New choices for new challenges” (by Paul F. Nunes, Caroline Firstbrook and James M. Ellis).